The Chennai Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has held that, under the service tax regime prevailing before July 1, 2012, the mere incurring of expenditure in foreign currency could not attract service tax unless the Department established that the expenditure represented consideration for a specifically identified taxable service.
The bench of Ajayan T.V. (Judicial Member) and Vasa Seshagiri Rao (Technical Member) ruled that the Commissioner (Appeals) could not cure a fundamental defect in the show cause notices by introducing new service classifications for the first time at the appellate stage. It consequently set aside a service tax demand of Rs.27.69 lakh, along with interest and a penalty of Rs.19.54 lakh imposed under Section 78 of the Finance Act, 1994.
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The dispute concerned the company’s alleged liability to pay service tax under the reverse charge mechanism on various expenditures incurred in foreign currency between 2005-06 and 2014-15.
The Department initially issued a show cause notice dated October 18, 2010, covering the period from 2005-06 to 2009-10. It proposed a service tax demand of Rs.25.41 lakh in relation to expenditure incurred on foreign travel, tuition and training fees, and membership fees. Six subsequent show cause notices or statements of demand were also issued for later periods.
According to the company, the expenditure covered several distinct transactions, including foreign travel, tuition and e-learning fees, memberships, subscriptions, publications, leadership programmes, study materials and professional services. The company also claimed that service tax had already been paid on several transactions.
The original adjudicating authority dropped the demands and penalties relating to the period before July 1, 2012. The authority found, among other things, that the notices did not specify the taxable service allegedly received by the company.
The Revenue challenged that decision before the Commissioner (Appeals).
The Commissioner (Appeals) held that the absence of a specific classification in the show cause notices did not invalidate the proceedings. The appellate authority classified the tuition fees as consideration for “Commercial Training or Coaching Service” and the membership fees as consideration for “Club or Association Service.”
On that basis, the Commissioner (Appeals) restored a service tax demand of Rs.27,69,126, along with applicable interest. A penalty of Rs.19,54,482 was also imposed under Section 78 of the Finance Act.
The company approached the CESTAT, contending that the Commissioner (Appeals) had travelled beyond the allegations contained in the show cause notices by introducing taxable service classifications that had never been proposed by the Department.
The company argued that, before July 1, 2012, service tax operated under the positive-list regime. A service could be taxed only when it fell within one of the taxable service categories enumerated under Section 65(105) of the Finance Act.
According to the company, the notices merely referred to foreign-currency expenditure and alleged non-payment of service tax under Section 66A, read with Rule 2(1)(d)(iv) of the Service Tax Rules. They did not identify the precise taxable service allegedly received from abroad.
It was submitted that Section 66A did not independently make every service received from outside India taxable. The Department was first required to establish that the transaction constituted a taxable service under Section 65(105).
The company further argued that the omission was not a minor or technical defect because the expenditure related to several different types of transactions. In the absence of a proposed classification, it was not given an opportunity to respond to the essential ingredients of either Commercial Training or Coaching Service or Club or Association Service.
The Tribunal observed that Section 66A could not operate merely because an assessee had incurred expenditure in foreign currency.
The Department was required to demonstrate that the expenditure represented consideration for a service falling within a taxable category specified under Section 65(105) of the Finance Act.
“In the present case, the notices proceeded essentially on the basis that the Appellant had incurred foreign-currency expenditure and had not discharged service tax under Section 66A read with Rule 2(1)(d)(iv). The notices did not identify the particular taxable service allegedly received,” the Tribunal observed.
The Bench considered this omission significant because the expenditure was not homogeneous. It comprised foreign travel, tuition or e-learning fees, membership and subscription payments, leadership programmes, publications, study materials and professional fees.
The Tribunal noted that the Commissioner (Appeals) subsequently treated the tuition fees paid to University Global Pvt. Ltd. as Commercial Training or Coaching Service and the membership payments as Club or Association Service.
According to the Bench, the Commissioner (Appeals) did not merely correct an incorrect description or classification in an existing charge. Instead, the appellate authority supplied the very taxable categories that were missing from the notices.
The Tribunal drew a distinction between a notice that identifies a taxable service but contains an incorrect description and a notice that does not identify the taxable service at all.
In the present case, the company had not been called upon to defend itself against the statutory requirements of Commercial Training or Coaching Service or Club or Association Service. The subsequent classification by the Commissioner (Appeals), therefore, materially changed the basis of the demand.
“The appellate authority could not cure the foundational defect in the notices by introducing, for the first time, Commercial Training or Coaching Service and Club or Association Service. Such a course effectively created a new basis for the demand,” the Tribunal held.
The department argued that the nature of the transactions itself revealed their appropriate service tax classification. It also contended that the company was aware of the payments it had made and was, therefore, not prejudiced by the omission in the notices.
The Tribunal rejected this argument. It observed that the company’s knowledge of the payments did not mean that it knew which statutory taxable service the Department intended to invoke.
The fact that the Commissioner (Appeals) selected different service classifications for different transactions itself demonstrated that classification was a substantive issue rather than an incidental description.
The Bench reiterated that a show cause notice is the foundation of adjudication. An assessee must be informed of the precise statutory charge it is required to meet, and a new substantive basis for a tax demand cannot ordinarily be introduced at the appellate stage.
The Tribunal relied on the principles laid down in decisions including R. Ramadas v. Joint Commissioner of Central Excise, Thirumurugan Enterprises v. CESTAT, Precision Rubber Industries Pvt. Ltd. v. Commissioner of Central Excise, Hindustan Polymers Co. Ltd. v. Collector of Central Excise and Principal Commissioner, Service Tax v. Shubham Electricals.
The Bench also declined to undertake a fresh classification of each individual transaction. It observed that such an exercise would itself amount to adjudicating a case that had never been proposed in the show cause notices.
The Tribunal clarified that it was not expressing any opinion on whether a particular transaction could have been classified as Commercial Training or Coaching Service or Club or Association Service if such a classification had been properly proposed and adjudicated.
The limited question before the Tribunal was whether those classifications could be introduced for the first time in appellate proceedings. It answered that question in the negative.
The department also relied on the company’s payment of service tax on certain similar transactions after July 1, 2012 to support the disputed taxability.
The Tribunal held that those payments could not establish taxability during the earlier period. It noted that the statutory scheme underwent a fundamental change on July 1, 2012, when the positive-list regime was replaced by the negative-list regime.
Taxability under the post-July 2012 regime could not, by itself, establish that the same transaction was taxable under a particular service category during the earlier regime.
The Bench accordingly held that the demands covered by the four notices relating to the period before July 1, 2012 could not be restored on the basis of classifications that were never proposed in those notices.
The Tribunal further held that once the substantive demand of Rs.27,69,126 was found to be unsustainable, the consequential interest liability could not survive.
It also set aside the penalty of Rs.19,54,482 imposed under Section 78.
The Commissioner (Appeals) had justified the penalty on the ground that the foreign-currency expenditure was detected during an audit and had not been disclosed in the company’s ST-3 returns.
The Tribunal, however, observed that Section 78 required the statutory ingredients for invoking the extended limitation period to be established. Where the demand itself rested on a taxable service classification that was absent from the notices, the necessary foundation for alleging suppression of facts with an intention to evade tax was also absent.
It was not disputed that the company had maintained books of account and produced details of the expenditure and supporting documents.
The company had also raised the plea of revenue neutrality, contending that any service tax paid under the reverse charge mechanism would have been available as CENVAT credit, subject to statutory conditions.
The Tribunal found it unnecessary to decide that plea because the appeals succeeded on the more fundamental defect in the notices. It nevertheless observed that revenue neutrality could reinforce the absence of a basis for alleging deliberate tax evasion, while clarifying that revenue neutrality is a factual issue and cannot be presumed merely from the theoretical availability of credit.
For the period after July 1, 2012, the original adjudicating authority had separately considered the relevant statements of demand. It had taken into account the taxes already paid and distinguished taxable services from expenditure on foreign travel, subscriptions, publications and study materials.
The Tribunal noted that the Department’s appeal before the Commissioner (Appeals) was directed against the dropping of the demands relating to the period before July 1, 2012. The findings concerning the subsequent period could, therefore, not be reopened in the present proceedings.
Accordingly, the CESTAT set aside the appellate order to the extent that it restored the service tax demand of Rs.27,69,126 with interest and imposed a penalty of Rs.19,54,482 under Section 78.
The Tribunal restored the original adjudication order to that extent and directed that the findings concerning the subsequent statements of demand, including the amounts already paid or accepted, would remain undisturbed.
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