Mandatory pre deposit of 7.5% of demand as per amended section 35F is prospective

Issue before court:

• Whether the receipt of Letter of Credit Margin/Trade margin by the petitioner in convertible foreign exchange for rendering service to various overseas buyers are liable to service tax under the category of Business Auxiliary Services as per Section 65(19) of the Finance Act.
• Whether amendment to section 35F is prospective in nature.

Brief facts:

• Petitioner is engaged in the business of sourcing orders for Foreign Buyers to procure Indian Garments.
• After receiving orders from the buyers from abroad, the petitioner placed orders on different vendors/manufacturers in India and raised proforma invoice on the overseas buyer for the total order and again open Letter of Credit (LC) in their name.
• On receipt of proforma invoice from the Indian vendors/manufacturers, the Letter of Credit would be transferred to the respective vendors/manufacturers, after retaining the margin of the petitioner.
• Once the shipment of the goods was effected, the documents from the vendors would reach the petitioner bank through the vendor’s bank and only thereafter, the petitioner would substitute their invoice and bills of exchange permissible as per UCP and then the documents were sent to the buyers situated abroad.
• Upon receipt of the payment, the petitioner’s bankers would credit the petitioner with the margin in convertible foreign currency and the rest of the amount would be sent to the vendors in convertible foreign currency.
• In the above circumstances a notice to show cause that why service tax amounting to Rs. 1,74,04,550/- for the period October 2011 to September 2012 should not be levied.
• Petitioner submitted his reply and appeared personally but respondent passed an order-in-original levying service tax.

Contention of the revenue:

• The contentions made by the petitioner that he should be allowed to file his appeal before the CESTAT without making the payment of 7.5% of the tax amount confirmed against the petitioner as pre-condition for maintaining the appeal cannot be accepted since neither the Hon’ble High Court of Kerala nor the Andhra Pradesh High Court has dealt with the second proviso to Section 35(F) of the Act.
• Reliance was placed on record the judgment of the Kerala High Court in K.V.RaghunathanPillai .vs. The Commissioner of Central Excise, Customs and Service Tax, Thiruvananthapuram to impress upon this Court that reading of second proviso to Section 35(F) as contained in the Finance Act itself shows that the provision relied on by the learned counsel appearing for the petitioner shall not apply to stay applications and appeals pending before any appellate authority prior to the commencement of the amendment.

Contention of the assessee:

• The Kerala High Court while dealing with almost in a similar and identical issue under Section 35(F) of the Act in the case of M/s. Muthoot Finance Limited (2015-TIOL-632-HC-KERALA-ST)has come to the conclusion that the appellant would not be required to make the pre-deposit amount of 7.5% pursuant to 2014 Amendment.
• The same ratio has been once again reiterated by the Hon’ble Andhra Pradesh High Court in case of M/s K.RamaMohanaRao& Co. UOI(2015-TIOL-511-HC-AP-CX) stated that at the time of filing the appeal, the appellant is not required to make the payment as pre-condition for the hearing of the waiver application by the Tribunal.

Held by the court:

• A close reading of second proviso to Section 35F of the Act makes it abundantly clear that the proviso to this Section shall not apply to stay applications and appeals pending before the appellate authority prior to the commencement of the Finance Act (2 of 2014).
• For the purpose of accrual of the right of appeal, the crucial and the relevant date is the date of initiation of assessment proceedings and not the decision itself.
• The right of appeal becomes vested in the assessee the moment he files his return, which commences the assessment proceedings. In the case of assessees, the returns were filed long before the provisions of Section 31 of the Act was amended by Act 14 of 1999.
• It is not disputed that the aforesaid amendments to the Act have not been given retrospective effect but are prospective. Therefore, the appeals are deserved to be entertained without insisting on pre-deposit of 7.5% of the disputed tax as per the amended provisions of the Act.

Conclusion:

As per second proviso to section 35F it was stated that  provisions of section 35F shall not apply to the stay applications and appeals pending before any appellate authority prior to the commencement of the Finance (No.2) Act, 2014.  The provision is itself clarifactorily in the case of petitioner.