2019 (3) TMI 1509 - AT - Service Tax

Service tax liability discharged only when payment made or recorded, not when CENVAT credit balance exists under Section 75

CESTAT Chennai held that service tax liability is discharged only when payment is made or manifested in records, not merely when CENVAT credit balance ... Demand of interest and penalty - service tax paid belatedly by adjustment of the CENVAT account - Held that:- When there was sufficient balance in the CENVAT account for payment of service tax, the appellant cannot be burdened with payment of interest. Undoubtedly, though there was sufficient balance in the CENVAT account, the adjustment of the same by causing a debit entry in the CENVAT account has been made by the appellant only on 21.3.2012 when the department was informed about such adjustment from the CENVAT account. The demand therefore stands discharged fully only on 21.3.2012. Merely because the amount was lying in the CENVAT account, it cannot be said that the demand has been paid or discharged. Appellant has discharged the liability of service tax only on21.3.2012 when they informed the department that they are using the CENVAT credit to pay the service tax demand. Service tax has to be paid by the assessee on due dates as prescribed by statute. Whenever the service tax is not paid within such due dates it becomes belated payment. As per section 75 of Finance Act, 1994, liability to pay interest follows in case of belated payment or short-payment of service tax. Merely because there is some balance lying unutilized in the CENVAT account, it cannot be said that the assessee has discharged the liability to pay service tax. The liability to pay service tax will stand discharged only when such payment is made or manifested in the records - The liability to pay service tax will stand discharged only when such payment is made or manifested in the records. Until such payment, or manifestation in the accounts, the assessee is liable to pay interest on the amount of tax. Section 75 does not state that when there is sufficient balance in the CENVAT account and if utilized for payment of service ax, the assessee need not pay any interest - the claim of the assessee that they are not liable to pay interest when the tax amount is adjusted from credit lying in CENVAT account is without any legal basis. In the case of Nicholas Piramal (India) Ltd. (supra), the issue analysed was whether interest is liable to be paid on differential amount when there is credit available and whether penalty imposable. In the said case, credit was availed on inputs which was already reversed by the assessee and no duty was to be paid. Therefore, the question of payment of interest and imposition of penalty was held in favour of the assessee. Time limitation - penalty - Held that:- The appellant is not contesting the tax liability adjusted from CENVAT account. Taking these facts into consideration, the invocation of extended period requires no interference - The argument of the ld. counsel that sub-section (3) of Section 73 would apply is not tenable for the reason that the appellant has not paid up the demand along with entire interest before issuance of show cause notice. The service tax demand of ₹ 11,01,03,335/- having been fully paid up before issuance of show cause notice and part of the interest relating to the cash payment also having been paid up before issuance of show cause notice, the equal penalty imposed under section 78 is unwarranted. The impugned order is modified to the extent of setting aside the penalty imposed under section 78 without disturbing the remaining portion of the impugned order - appeal allowed in part. The core legal questions considered by the Tribunal in this matter include:1. Whether the appellant was liable to pay interest on the service tax amount adjusted from the CENVAT credit account, given that the payment was not made in cash but by utilizing available credit.2. Whether the extended period of limitation invoked by the department for demanding service tax and interest is sustainable, considering the appellant's compliance history and reliance on Board circulars.3. Whether the penalty imposed under section 78 of the Finance Act, 1994 is justified, especially in light of the appellant having paid the principal tax amount prior to issuance of the show cause notice and the absence of any suppression or deliberate evasion.4. The applicability and interpretation of provisions under the Finance Act, 1994, particularly sections 73, 75, and 78, in the context of service tax payments made through CENVAT credit adjustment.Issue 1: Liability to pay interest on service tax paid by adjustment from CENVAT credit accountThe relevant legal framework includes section 75 of the Finance Act, 1994, which mandates payment of interest on delayed or short payment of service tax. The appellant contended that since the amount was adjusted from the CENVAT credit account-where sufficient credit was available-there was no belated payment, and thus no interest liability arose. The appellant relied on various precedents, including decisions where interest was not imposed when CENVAT credit was reversed or when credit was rightly available and utilized.The Tribunal, however, distinguished these precedents on facts. It noted that in the present case, the adjustment of CENVAT credit was not contemporaneously recorded or manifested in the appellant's accounts. The actual adjustment entry was made only on 21.3.2012, when the appellant informed the department. Until such manifestation, the service tax liability was not considered discharged. Therefore, the Tribunal held that the mere availability of credit in the CENVAT account does not amount to payment of service tax. Payment must be reflected by a debit entry or equivalent accounting manifestation to discharge the liability.The Tribunal emphasized that section 75 does not exempt interest liability merely because credit is available; the liability to pay interest arises on belated payment, which includes delayed adjustment from CENVAT credit. The appellant's argument that no interest should be levied as the credit was available was found to lack legal basis.The Tribunal also analyzed the appellant's reliance on decisions where interest was not imposed due to reversal of wrongly availed credit or other factual distinctions, concluding that those cases were not applicable here since this case involved payment by utilizing credit, not reversal of credit.Issue 2: Sustainability of the extended period of limitationThe appellant argued that their activities were conducted in good faith, relying on Board circulars that initially exempted such residential complex development services from service tax until June 2010. The appellant contended that they had complied with tax payments immediately upon withdrawal of such exemption and that the department was aware of their activities. Therefore, the invocation of the extended period of limitation for demanding service tax and interest was unjustified.The Tribunal noted that the appellant did not contest the principal tax demand itself, which was fully paid before issuance of the show cause notice, but only challenged the interest and penalty. The Tribunal found that the extended period was properly invoked because the non-payment of service tax was discovered during audit and the appellant's conduct did not amount to bona fide compliance throughout. The Tribunal held that the invocation of extended period was justified and did not interfere with it.Issue 3: Imposition of penalty under section 78Section 78 of the Finance Act, 1994, authorizes imposition of penalty equal to the amount of service tax demanded in cases of failure to pay service tax. The appellant argued that since the principal tax demand was fully paid before issuance of the show cause notice, and there was no suppression or intention to evade tax, penalty should not be imposed. They relied on section 73(3), which bars penalty if the tax is paid before notice issuance.The Tribunal observed that the appellant had not paid the entire interest amount before issuance of the show cause notice, only the principal tax and part of the interest relating to cash payments. The Tribunal held that section 73(3) was not applicable in this situation, as the interest on the portion of the tax adjusted from CENVAT credit remained unpaid before the notice.However, considering that the principal demand was fully paid and that the appellant had sufficient credit in their CENVAT account, the Tribunal found the imposition of an equal penalty under section 78 to be excessive and unwarranted. The Tribunal set aside the penalty while upholding the demand for interest and principal tax, balancing the equities of the case.Issue 4: Applicability of Board circulars and legal principles regarding classification of services and tax liabilityThe appellant contended that their initial classification of services and tax payments were in accordance with Board circulars exempting tax on residential complex development services until mid-2010. They argued that this reliance and subsequent compliance negated the department's claim for extended period and interest.The Tribunal acknowledged the appellant's reliance on the circulars and their compliance post-withdrawal of exemption but emphasized that such compliance did not absolve the appellant from liability for interest on belated payment or for interest on amounts adjusted belatedly from CENVAT credit. The Tribunal also noted that the department's audit revealed short-payment and the appellant's switch in classification contravened the Works Contract Rules, 2007, which contributed to the demand.The Tribunal found that the appellant's conduct, while not amounting to deliberate evasion, did not justify exemption from interest or penalty where applicable.Significant holdings and core principles established include:'Merely because the amount was lying in the CENVAT account, it cannot be said that the demand has been paid or discharged.''Service tax has to be paid by the assessee on due dates as prescribed by statute. Whenever the service tax is not paid within such due dates it becomes belated payment. As per section 75 of Finance Act, 1994, liability to pay interest follows in case of belated payment or short-payment of service tax.''Section 75 does not state that when there is sufficient balance in the CENVAT account and if utilized for payment of service tax, the assessee need not pay any interest.''The invocation of extended period requires no interference.''Since the appellant had sufficient balance in their CENVAT account and since they had paid the entire demand and that part of interest in regard to cash payment ... we are of the considered view that imposition of equal penalty for non-payment of interest cannot sustain.'The Tribunal's final determinations were:- The demand of service tax and interest on the amount adjusted from CENVAT credit is valid and sustainable.- Interest is payable on the belated payment of service tax even if paid by adjustment from CENVAT credit, where such adjustment is not contemporaneously recorded.- The extended period of limitation invoked by the department is justified.- The penalty imposed under section 78 of the Finance Act, 1994 is set aside, as the appellant had paid the principal tax and part of the interest before issuance of show cause notice, and there was no deliberate evasion.- The appeal is dismissed except to the extent of setting aside the penalty.