Chennai Tribunal Sets Aside Rs.36.77 Crore Demand, Remands Clerical Error Case for Verification
In a significant decision, the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) Chennai has set aside a substantial service tax demand of Rs.36.77 crore against M/s. Intellect Design Arena Limited. The tribunal ruled that the payments made under inter-company agreements were merely cost-sharing adjustments and did not qualify as "consideration" for taxable services under the Finance Act, 1994. The case revolved around service tax liabilities assessed under the Reverse Charge Mechanism (RCM) for transactions between Intellect Design Arena and its subsidiaries located outside India.
The tribunal, comprising Mr. P. Dinesha, Member (Judicial), and Mr. Vasa Seshagiri Rao, Member (Technical), carefully examined the nature of inter-company transactions and the Place of Provision of Services Rules, 2012. It concluded that the alleged activities were performed entirely outside India and thus not taxable under the Indian Finance Act. The tribunal emphasized that the service tax demand was unsustainable due to the absence of any service obligation owed by the subsidiaries to Intellect Design Arena.
Furthermore, the tribunal addressed the issue of extended limitation and penalties, ruling that they could not be invoked in this case. It found that the dispute was interpretational, with no evidence of deliberate suppression or intent to evade tax by Intellect Design Arena. The tribunal also noted the revenue-neutral nature of the transactions, negating any motive to evade tax.
However, the tribunal remanded the issue of a Rs.1.16 crore demand for December 2016 to the adjudicating authority for verification. This demand arose from a clerical error in the ST-3 return filed by Intellect Design Arena, which had reported a lower service tax amount than actually paid. The tribunal instructed the adjudicating authority to verify the tax payment and reconcile it with the company's records.
The tribunal's decision provides significant relief to Intellect Design Arena, which had challenged the original order confirming the service tax demands and penalties. The ruling underscores the importance of proper characterization of inter-company transactions and the application of statutory provisions when assessing service tax liabilities.
Bottom Line:
Service Tax demand under Reverse Charge Mechanism (RCM) on inter-company transactions cannot be sustained if evidence shows that payments are merely internal cost-sharing or price adjustments and not consideration for services rendered.
Statutory provision(s): Finance Act, 1994 Section 65B(44), Section 73(1), Section 75, Section 77, Section 78, Place of Provision of Services Rules, 2012, Section 66B
