Provisional service tax assessment must be finalised on tax payable in law, not customer collections, with no retrospective interest.
On finalisation of provisional service tax assessment, adjustment was required to be made with reference to the tax finally payable in law, not the tax collected from customers, and the later Section 11D mechanism could not be applied retrospectively to the disputed period. Interest was not leviable for a provisional assessment period governed by an earlier regime, because the interest provision linked to provisional assessment applied prospectively from the later effective date. Where a cheque was deposited within time and not dishonoured, delayed bank clearance did not justify treating the payment as belated for interest purposes. The tax demand and associated interest demands were therefore unsustainable.
Issues: (i) whether, on finalisation of provisional service tax assessment, the adjustment had to be made with reference to tax actually payable in law or tax collected from customers; (ii) whether interest could be levied under the service tax provisions for the provisional assessment period prior to the introduction of the later regime; and (iii) whether interest was leviable for alleged belated payment where the cheque had been presented within time.
Issue (i): whether, on finalisation of provisional service tax assessment, the adjustment had to be made with reference to tax actually payable in law or tax collected from customers.
Analysis: Provisional assessment under Rule 6(4) of the Service Tax Rules, 1994 was held to operate by applying the provisions governing provisional assessment under the Central Excise law. The adjustment on finalisation was to be made on the basis of the duty or tax finally assessed, meaning the amount actually payable in law, and not on the basis of tax collected from customers. Rule 9B(5) of the erstwhile Central Excise Rules, 1944 was treated as the applicable mechanism, and the later introduction of Section 11D could not be used retrospectively for the disputed period.
Conclusion: The adjustment could not lawfully be made on the basis of tax collected from customers, and the demand raised on that method was unsustainable.
Issue (ii): whether interest could be levied under the service tax provisions for the provisional assessment period prior to the introduction of the later regime.
Analysis: Interest under Section 75 of the Finance Act, 1994 was held inapplicable to provisional assessments already ordered in 1996, because the interest mechanism for provisional assessment was treated as prospective and linked to the later Central Excise Rules regime. The Board instructions also stated that the interest clause for provisional assessment applied only to cases ordered on or after 1-7-2001. Since the assessments in question were provisionally ordered much earlier, the interest demand for the disputed period could not stand.
Conclusion: Interest for the provisional assessment period was not leviable.
Issue (iii): whether interest was leviable for alleged belated payment where the cheque had been presented within time.
Analysis: The alleged delay concerned a cheque deposited within the due date, with the bank clearance occurring later. The departmental clarification and the judicial view relied upon treated presentation of the cheque within time, if not dishonoured, as sufficient compliance for payment purposes. On that footing, the delayed realisation of the cheque did not justify charging interest.
Conclusion: Interest on the alleged belated payment was not leviable.
Final Conclusion: The tax demand and all interest demands were held unsustainable, and the appeals were allowed in full.
Ratio Decidendi: On finalisation of provisional tax assessment, the adjustment must be made with reference to the tax finally payable in law, and interest cannot be imposed for a provisional assessment period by applying a later prospective interest regime retrospectively.