Provisional service tax assessment: excess payment must be adjusted and pre-2001 interest on short payment cannot be levied.

Where provisional service tax assessment was finalised and tax had been paid in excess for some periods but short for others within the same dispute period, the excess payment had to be adjusted against the short payment while computing the net liability. Interest on the short payment for April 1997 to March 2000 was not recoverable because the relevant provisional assessment rules did not authorise interest for that period, and the provision introducing such levy took effect only from 1 July 2001. The demand for interest was therefore unsustainable, and the short-payment demand had to be recomputed after giving credit for excess payment.

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Issues: (i) Whether excess service tax paid during the same period could be adjusted against the short payment while finalising provisional assessment; (ii) Whether interest was payable on short payment of service tax for the period April 1997 to March 2000.

Issue (i): Whether excess service tax paid during the same period could be adjusted against the short payment while finalising provisional assessment.

Analysis: The assessment was provisional and, on finalisation, it was found that tax had been paid in excess for some periods and short for others within the same dispute period. In such a situation, the excess payment was required to be taken into account while computing the demand for short payment.

Conclusion: The excess service tax payment was to be adjusted against the short payment.

Issue (ii): Whether interest was payable on short payment of service tax for the period April 1997 to March 2000.

Analysis: For the relevant period, Rule 6 of the Service Tax Rules, 1994 governing provisional assessment did not provide for levy of interest on short payment at the time of finalisation. The provision introducing interest came into force only with effect from 1 July 2001, which was after the period in dispute.

Conclusion: Interest was not payable for the period in dispute and the demand of interest could not be sustained.

Final Conclusion: The appeal succeeded, the short-payment demand had to be recomputed after giving credit for excess payment, and the interest demand was unsustainable for the relevant period.

Ratio Decidendi: Interest on short payment cannot be levied for a period when the governing provisional assessment rules did not authorise such levy, and excess payment within the same assessment period must be adjusted while determining the net liability.

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