"Tribunal Finds No Basis for Service Tax Under Reverse Charge Mechanism on Settlement Amount, Sets Aside Penalties"
In a significant decision, the Customs, Excise, and Service Tax Appellate Tribunal (CESTAT), West Zonal Bench at Ahmedabad, has ruled in favor of Charotar Gas Sahkari Mandali Limited, Anand. The Tribunal set aside the demand for service tax on an amount paid under a settlement deed to Vallabh Vidhyanagar Nagarpalika (VVNA) and dismissed the imposition of penalties.
The case revolved around a settlement agreement dated April 28, 2016, in which Charotar Gas Sahkari Mandali Ltd agreed to pay Rs. 60 lakhs to VVNA for outstanding rent. VVNA had already paid service tax under the category of Renting of Immovable Property Service. However, the Department issued a show cause notice, treating the payment as consideration for tolerating an act, thereby demanding service tax under the Reverse Charge Mechanism (RCM).
The Tribunal, comprising Dr. Ajaya Krishna Vishvesha and Mr. Satendra Vikram Singh, concluded that the amount in question could not be subjected to service tax twice under different categories. The judgment emphasized the absence of any obligation to refrain from an act or to tolerate an act, which are essential elements under the Declared Service category as per Section 66E(e) of the Finance Act, 1994.
The Tribunal further noted that the extended period of limitation could not be invoked as there was no suppression, misstatement, or fraudulent declaration by the appellant. Consequently, the Tribunal also set aside the penalties imposed under Sections 77(2) and 78 of the Finance Act, 1994, citing lack of justification and absence of mens rea to evade tax.
The decision is a crucial precedent in clarifying the application of service tax on settlement agreements and underscores the importance of not imposing double taxation. The Tribunal's ruling reinforces the principle that tax liability should not be duplicated when service tax has already been paid on the same transaction under a specific service category.
Bottom Line:
Service Tax - Amount paid under settlement deed considered as rent and not as consideration for tolerating an act under Declared Service category - Service tax liability under Reverse Charge Mechanism (RCM) cannot be imposed twice on the same amount.
Statutory provision(s): Finance Act, 1994 Section 66E(e), Finance Act, 1994 Section 73(1), Finance Act, 1994 Section 77(2), Finance Act, 1994 Section 78
