Whether penalty under service tax is leviable in situations where the payment of tax with interest is made before the issue of show-cause-notice?

The article examines the two most controversial aspects of service tax based on the recent case rulings.

Consulting Engineer – Service Tax liability is on prime consultant not the sub-consultant: Cestat (Appeal No. ST/98/2004)

Southern Railway, awarded works design for Stage-II of the proposed Cable Stayed Bridge on NH-4 at Krishnarajapuram, to be constructed at a total cost of Rs. 2.2245 crores to IRCON.

The scope of the work design was as follows:–

• Preparation of detailed designs, including making drawings for execution of the various items of work involved,
   

• Preparation of methodology of construction,
   

• Preparation of detailed designs and drawings for temporary structures and arrangements required for execution of the work,
   

• Preparation of quality control manual, maintenance manual and safety instructions, and
   

• Visits by foreign experts during finalisation of works design.

For the above work, a lump sum payment of Rs. 222.45 lakhs was to be paid to IRCON.  

IRCON, further sub-contracted the design work to the appellant M/s. B.B.R. (India) Ltd., agents of a foreign company M/s. Bureau BBR Limited, Switzerland in the form of Consultancy contract.

The scope of the consultancy services was as follows:–

• Detailed design and preparation of working drawings for each and every component of the Cable Stayed Bridge viz. detailed geometry reinforcement details, details of BBRV post tensioning cables for the deck, pylon DINA cable stays, counter weight abutments on Madras side and Bangalore side abutment, rock anchors, foundations, anchoring piers, construction methods and sequences in detail for site execution for the 180m long cable stayed bridge and 50m viaduct on Bangalore side.
   

• Carry out detailed design and preparation of working drawings for temporary structures viz,. cantilever construction carriers or any other suitable method of construction proposed for the deck slab, temporary works needed for stay cable erection viz. deviators on deck and on pylon head, temporary platform on pylon for cable erection, fixing of anchors at the fixed end and free end of stay cables and other safety precautions needed to be taken during the course of execution.
   

• Preparation of methodology of construction.
   

• Preparation of manual for quality control, maintenance schedule and procedure and safety instructions.
   

• Arranging the visits of Swiss experts to India during the Design phase as and when required by IRCONIS. Rly.
   

• Training of two engineers of IRCON in Switzerland in similar works at the cost of BBR (India) Ltd. for a period of 2 weeks.
   

• Design services for the Cable Stayed Bridge shall be arranged by M/s. BBR (India) Ltd. as an agency of M/s. Bureau BBR Ltd. of Switzerland.

For the above work, IRCON was to pay a total lump sum fee of Rs. 208 lakhs in various instalments.

Revenue proceeded against the appellants on the ground that they were providing Consultancy services under the category of "Consulting Engineer". They were said to have provided these services as agent of M/s. Bureau BBR Ltd. of Switzerland. The Consultancy fee paid by M/s. IRCON to the appellant have been paid to M/s. Bureau BBR, Switzerland, by the appellant. The original authority, in his order dated 29-12-2003, confirmed a demand of Rs. 5,67,813/- under Section 73 of the Finance Act, 1994. He demanded interest on the delayed payment under section 75. Penalties were imposed under section 75A, 76, 77 and 78 of the Act. The appellants did not succeed with the Commissioner (Appeals) and so is in the Tribunal.

The points of contention before the Tribunal were as follows:–

• Whether the services rendered by the appellant amounts to ‘Consulting Engineer’ services as per Finance Act, 1994?
   

• Whether the appellants are liable to pay service tax being sub-contractors and not the principal contractors?

In relation to the first contention the Tribunal stated that the service rendered by the appellant was in the nature of Consulting Engineer services.

On the second contention, the Tribunal observed as follows:

The appellant is an agent of M/s. Bureau BBR Limited, Switzerland. There is an Agreement between the appellant and M/s. Bureau BBR Ltd., Switzerland dated 29-5-1995. The object of the Agreement is again consulting services for the Phase-2 detailed design of the Krishnarajapuram Cable Stayed Bridge in Bangalore. According to the Agreement, a maximum of four visits of 3 working days each, if required, to Bangalore or elsewhere in India have been considered for the design phase. Further, BBR, Switzerland, is prepared to receive two IRCON Engineers in Switzerland for training. For the above work, the remuneration would be Rs. 510,000 Swiss francs payable in instalments.

The Tribunal further observed that Service Tax on Consulting Engineering services was imposed w.e.f. 7 th July, 1997. In respect of Consulting Engineer, taxable service means any service provided to a client by a consulting engineer. Therefore, there should be a nexus between the client and the service provider. In the present case, even if the service provider is taken as the appellant, the client is Southern Railways and there is no direct nexus between the appellant and the client. The client – service provider relation in the present case is actually between the IRCON and the Southern Railway. It is very clear that the ultimate client who receives the services is the Southern Railway. The organization which actually provides the service is M/s. Bureau BBR Limited, Switzerland. Southern Railway awards the work to IRCON. IRCON in turn sub-contracts the work to the appellant. The appellant who is an agent of BBR, Switzerland gets the actual design/consultancy work, etc. from the foreign company. Therefore, there is force in the contention of the appellant that they are not providing services to the client (Southern Railway) directly. As an agent of the foreign company, service is provided only to the prime consultant who is, IRCON.

So the Tribunal held that the liability to pay Service Tax to the Government is on the prime consultant, who is IRCON and not on the sub-consultant, who is the appellant and the appellant is not liable to pay the Service Tax demanded.

Thus, it can be stated that based on the above decision that sub-contractors will not require to charge service tax to the principal contractors. The service provided in the case referred above is of consulting engineering service. The same principal of exemption to service provided by sub-contractors can also apply to other services viz., Construction services, Rent–A–cab services, Tour-operator services, etc. However, the question, which arises, is whether the above decision will stand the test of time. Hopefully for all the sub-contractors and the principal contractors!!

Machino Montell overruled but penalty only when there is mens rea : High Court

P&H High Court in the case of Commissioner of Central Excise, Delhi-III vs. M/s Machino Montell (I) Ltd. has overruled the celebrated CESTAT Larger Bench order in Machino Montell.

The Tribunal had earlier observed that ‘in the light of the decision of the Karnataka High Court which considered the very same issue placed before us, it may not be possible for us to take a different view as contended by the Departmental representative. It is to be noted that the Karnataka High Court as referred to the fact that the Hon’ble Supreme Court has dismissed the appeal filed by the Revenue from the decision of this Tribunal in Rashtriya Ispat Nigam Ltd. vs. CCE, Visakhapatam [2002 (54) RLT 317 (CEGAT-Ban.) = 2003 (161) ELT 285 (Tribunal-Bang).] where identical issue was considered. In these circumstances, we follow the ratio of the decision of the Karnataka High Court and hold that when the duty amount is paid by the assessee before issuance of show-cause notice, no penalty can be imposed under section 11 AC and interest demanded under section 11AB. Since no other issue is raised in the appeal, at the instance of the Revenue, we dismiss the appeal.

The court observed that:

"A person who has involved himself in outright clandestine removal cannot be permitted to make virtue out of the necessity. It will be gross injustice to a genuine tax-payer if a person who has indulged in fraudulent activities is asked to pay only duty after he was caught red handed and absolved of interest liabilities and penal action. This will lead to a situation where an evader even when he is caught, he has nothing to lose. Evasion will become totally risk free and such a situation is not a healthy but a dangerous situation. In view of the above, the penalties under sec. 11AC is imposable on M/s… and penalty under sec. 114A is imposable on M/s.."

Thus, penalty can be imposed also in cases where the amount of tax and interest is deposited before the issue of SCN.

The same High Court in the case of Commissioner of Central Excise vs. M/s Electrolus Kelvinator Ltd, Gurgaon (CEA No. 47 of 2005) observed that penalty under section 11AC is leviable only if the assessee has requisite mens rea.

The question of law referred to the High Court in the Revenue appeal was, "Whether penalty under section 11AC is liable to be imposed on the assessee and interest under section 11AB can be levied in those cases which fall under the purview of explanation to sub-section (2B) of section 11A of the Central Excise Act, 1944, where duty has been deposited before issue of show cause notice?"

The assessee was clearing parts of washing machines to its own branches/service centres and such parts were being sold on actual cost of spares. Under Rule 8 of Central Excise Valuation Rules, assessable value should be taken at 115% of the cost of goods if the goods are not sold in open market. There was short levy of excise duty. The assessee voluntarily debited the amount of short levy with interest. The assessee was receiving inputs from small scale manufacturers by paying concessional rate of Central Excise duty; i.e., 9.6% though the rate applicable was 12.8%. There was, thus, short levy. The assessee debited the duty with interest voluntarily. The adjudicating authority confirmed the demand of duty with interest and imposed penalty of Rs.1,30,301/-. The Commissioner (Appeals) upheld the view of the adjudicating authority. The Tribunal set aside the penalty holding that duty having been paid prior to issuance of show cause notice, imposition of penalty was not justified.

The High Court observed that:

It is well-settled that penalty under section 11AC is leviable if the assessee has requisite mens rea. Though, mere deposit of duty short levied before show cause notice may not be conclusive but if there was no intention to evade, penalty is not attracted. Reference may be made to judgment of this court in CEA No.13 of 2005 (Commissioner of Central Excise Delhi III vs. M/s Machino Montell (I) Limited & Another, decided on 25-7-2006. From the finding recorded by the adjudicating authority, appellate authority and the Tribunal, learned counsel for the revenue is unable to show that there was any element of mens rea on the part of the assessee. Reference may be made to judgments of the Hon’ble Supreme Court in Hindustan Steel Limited vs. State of Orissa, wherein, it was held that element of mens rea is normally required to be shown for imposition of penalty. Same view was taken in The Commissioner of Income Tax, West Bengal vs. Anwar Ali. View taken by the Tribunal, in the circumstances, cannot be held to be illegal or perverse.

Thus, it can be concluded that though the decision of the CESTAT Larger Bench in the case Machino Montell has been overruled, penalty will not be leviable in absence of mens rea by the assessee. Thus, if the assessee can ascertain that there existed no intention to evade tax, penalty should not be levied.

Recent Circulars and Clarifications

1. No penalty for some procedural delays in e-payment

The Board has clarified vide para No. 2 of Circular No. 88/06/2006- ST, dated: November 6, 2006 that as there are certain problems like procedural delays in opening of account in designated banks and issue of user’s-id and password by banks for internet banking; delays in passing a resolution by the Board of Directors of a company to authorize any person for making e-payment (a requirement stipulated by banks for internet banking); systems failure, particularly at bank’s end, are causing some difficulties to the assessee in complying with the requirement of mandatory e-payment of service tax, the field formation may take a lenient view in such case where there is reasonable cause for failure to make mandatory e-payment and penal action may not be initiated. At the same time, such assesses should expeditiously complete the procedural formalities for availing internet banking facility from designated banks and comply with the requirement of mandatory e-payment

2. DGST no longer authority for granting centralized permission

The Service Tax Rules have been amended vide F. No. 137/50/2005 -CX.4 to simplify the procedure regarding centralised registration. It has now been prescribed that henceforth, in all cases where tax-payer opts for Centralised registration, including those who have applied for such registration but have not been granted such centralised registration, the registration will be granted by the Commissioner of Central Excise/Service Tax having jurisdiction over the premises for which centralized registration is sought (from where centralized billing is done or centralized accounting system is maintained). However, this amendment would not affect centralized registration already issued before 2-11-2006.

3. Are IIMs/IITs liable to pay service tax?

Educational institutes like IITs and IIMs charge a fee from prospective employers like corporate houses/MNCs, who come to these institutes for recruiting candidates through campus interviews. A doubt has arisen as to whether these educational institutes fall in the category of ‘Manpower recruitment or supply agency’ and accordingly, whether service tax is leviable on this fee.

The issue has been examined and clarified by the department vide Circular No. 86/4/2006-ST F. No. 137/71/2006-CX.4 dated 1st November, 2006    

Para 4 of the said circular states that ‘A commercial concern is an institution/establishment that is primarily engaged in commercial activities, having profit as the primary aim. It is not one/few isolated activities which determine whether or not an institution is a commercial concern. It is the totality of its activity and the objective of its existence that determines the commercial nature of an institution as an ‘entity’ or a ‘concern’. The principal activity of institutes like IITs or IIMs is to impart education without the objective of making profit. Therefore, these institutes cannot be called a commercial concern, even if on some of their activities (like holding campus interviews), they charge fee. Accordingly, these institutes were not liable to pay service tax prior to 1-5-2006 under the category of "Manpower recruitment or supply service". As regards the period after 1-5-2006, decision should be taken after taking into account all material facts on case to case basis.