CESTAT: Service Tax Can’t be Paid If TDS Already Deducted from Assessee’s Account

The Bangalore Bench of Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) ruled that the Tax Deducted at Source (TDS) amount paid via the appellant to the Income Tax Department cannot be considered as part of the service charges paid to an overseas service provider. Consequently, the tribunal determined that service tax does not apply to the TDS amount paid by the appellant.

FCI OEN Connectors Ltd, the appellant company involved in the manufacturing and sale of electronic connectors, availed ‘IPR services’ and ‘Management Consultancy services from related parties situated outside India. These services were subject to service tax under the reverse charge mechanism according to Section 66A of the Finance Act, 1994.

Following an investigation prompted by suspicions that the appellant had improperly claimed the benefit of exemption under Notification No. 17/2004-ST on 10.09.2004, particularly in terms of research and development cess paid for technology imports under IPR services, and had also received ‘management consultancy services’ from their overseas group companies without paying service tax on the TDS amount from April 2011 onwards.

As a result, a show cause notice was served to the appellant, seeking the recovery of Rs. 1,92,48,984/- under the classification of Intellectual Property other than copyright service. Additionally, an amount of Rs. 51,71,248/- was proposed to be recovered concerning the TDS amount, along with interest and a penalty. Furthermore, Rs. 1,75,23,250/- was suggested to be set off against the demanded amount related to IPR service.

Upon adjudication, the tribunal confirmed a demand of Rs. 1,75,23,250 for unpaid service tax on IPR services imported by the appellant from 2009-10 to 30.6.2012. This confirmed amount was adjusted against the already paid sum. Additionally, a demand of Rs. 51,71,248 was validated for being underpaid on the value of Management Consultancy Services imported between 2011 and 2013. Interest under Section 75 was also confirmed, along with a penalty imposed under Section 78 amounting to Rs. 2,26,94,498 and a penalty of Rs. 10,000 under Section 77 of the Finance Act, 1994.

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The appellant argued that they obtained the right to use a licensed patent from FCI, France, via a license agreement. As part of the agreement, the appellant pays a royalty to FCI, France based on the gross revenue earned. During import, the appellant paid R&D cess at a rate of 5% on the cost of the imported patent.

The appellant contended that they had already paid service tax on the patent cost to FCI as a service recipient under Section 66A of the Finance Act, 1994. This section stipulates that taxable services received by an individual in India from entities outside India shall be treated as taxable services as if the recipient had provided such services in India, and hence all provisions of the Finance Act, 1994 are applicable.

A two-member bench comprising Dr. D. M. Misra, Member (Judicial), and Pullela Nageswara Rao, Member (Technical), observed that the TDS amount paid by the appellant to the Income Tax Department cannot be considered as part of the service charges paid to the overseas service provider.

Consequently, the bench determined that service tax is not applicable to the TDS amount paid by the appellant. Additionally, it was noted that a refund application had been filed upon realizing the erroneous payment of TDS. As a result, the CESTAT overturned the impugned order and permitted the appeal.