Question53: My friend has a manufacturing unit engaged in the manufacture of Ball and Roller Bearing, he had incurred a handsome amount of expense in foreign currency for sales promotion in abroad with a view to enhance and expand the sale territory and accordingly paid to the foreign firm for the task. During conducting of Audit by CERA team, the audit team objected the same and raised revenue Para for payment of service tax on the sum incurred for the same covering the last three year period. Thereafter, he received a demand SCN from the Central Excise Department demanding service tax on the same. On enquiring, the excise department informed him that being an observation by CERA audit; they have to issue the protective demand for service tax along with the levy of interest and penalty. In defense, his tax consultant submitted defense reply mentioning that it does not attract service tax in terms of provisions of Rule 9 of Place of Provisions of Services Rules, 2012, it being provided by the foreign firm in the foreign country and place of provision is the foreign country, which is nontaxable territory. However, they, thereafter, started paying service tax at the appropriate rate on above sales promotion expenses under reverse charge mechanism in the last year period and accordingly availed Cenvat credit of taxes paid thereon as Input service credit. In the meantime, adjudicating authority issued OIO and dropped the Demand SCN considering the submission of defence reply.

Now, CGST Audit team has conducted audit for earlier period up to March 2017 and raised a query stating that since his tax consultant has, vociferously, contested the leviability of service tax on such expenses in defense reply against above SCN, not only this the demand SCN itself has been dropped by the adjudicating authority, then what is the need of payment of service tax on such amount' Further raised an observation and asked them to reverse the cenvat credit of tax already paid on sales promotion expenses in foreign country and availed as input service credit since there is no leviability of service tax in terms of the above provisions and further instructed them to claim refund of the tax already paid in the last year. My query is whether it would be proper to reverse the cenvat credit of the same already availed as I don't think the Deptt. is having any revenue loss. In other words, cenvat credit of tax paid on above expenses as Input services has been taken on sales promotion expenses incurred in foreign currency against the services provided by the nominated foreign agency located in foreign soil. Though, it does not attract service tax as per the above provisions of Place of Provisions of services Rules, 2012.

There is huge probability that the above OIO will be accepted by the Deptt. in view of above provisions of law.

Please solicit your guidance and provide necessary clarification on the matter with supportive Board's circular, instruction or relevant case laws.


Answer We will not suggest you to reverse Cenvat credit because when you will go for refund then the question of time bar will come and your refund will be restricted by the time limit second the reversal may be subject to payment of interest but you will not get interest on refund this amount will be additional cost to you Third after the Excise and service tax is converted into GST your file and adjudicating authorities are changed so you will face problem in processing of refund

Now let us find legal solution the point the question is if there was no liability to pay tax but the tax is paid then whether the credit of the same should be allowed or not In this case you may consider the judgment relating to wire drawing and bright bar industry where this is already decided that if the tax was not leviable but paid then the credit should be allowed So don't reverse the credit go for SCN if required .(REPLY dt. 3/2/2018)