2023 (5) TMI 567 - AT - Service Tax

Tribunal nullifies service tax demand, penalties due to lack of malafide intent. Second notice remanded for review.

The Tribunal set aside the demand for service tax under the first show cause notice due to the revenue-neutral situation and lack of malafide intention, ... Non-payment of Service Tax - Business Auxiliary Service - receiving service of foreign agents - section 66 A of the Finance Act, 1994 read with Section 65 (19) of the Finance Act, 1994 and Section 65 (105) (zzb) of the said act - extended period of limitation - Suppression of facts or not - HELD THAT:- The show cause notice should have been issued during the normal period of demand as show cause notice dated 17.03.2008 has already been issued under the provision of Section 73 (1) of the Finance Act, 1994 alleging suppression of facts with intention to evade payment of service tax and invoking larger period of demand. Tribunal in the case of M/S. MARCK BIOSCIENCE LIMITED VERSUS COMMISSIONER OF CENTRAL EXCISE & ST, AHMEDABAD [2019 (7) TMI 653 - CESTAT AHMEDABAD] held that in case of sales commission to overseas commission agent under reverse charge mechanism, the extended time proviso is not invokable. With regard to the second show cause notice dated 20.03.2009 where under the adjudicating authority has confirmed the demand of Rs. 10,96,848/- also invoking relevant penal provision. In this regard, that show cause notice has been issued on 20.03.2009 demanding the duty for the period April, 2007 to March, 2008 by invoking larger period of limitation under Section 73 (1) of the Finance Act, 1994. Since the first show cause notice has already been issued on 17.03.2008 invoking a period of five years and therefore, the second show cause notice should have been for normal period of demand and department should not have invoked the extended time period for demanding service tax. The second show cause notice dated 20.03.2009 is beyond normal period of limitation and therefore, the matter is remanded back to the original adjudicating authority to re-adjudicate the matter and confirm the service tax for the normal period of demand as provided under Section 73 (1) of the Finance Act, 1994. Appeal allowed in part. ISSUES PRESENTED AND CONSIDERED 1. Whether commission/brokerage paid to overseas agents constitutes a taxable service under the Business Auxiliary Service category (Sections 65(19) and 65(105)(zzb), read with Section 66A, Finance Act, 1994) and taxable value under Section 67. 2. Whether demands for service tax for periods prior to 18.04.2006 are barred because reverse charge provisions came into operation only from 18.04.2006. 3. Whether the extended period of limitation under first proviso to Section 73(1) (invoking a five-year period for suppression/fraud/mis-declaration with intent to evade tax) is invokable where the assessee could avail CENVAT credit for tax payable under reverse charge, producing a revenue-neutral position. 4. Whether a subsequently issued show cause notice invoking the extended period of limitation (for a later year) is maintainable where an earlier SCN invoking the extended period for an earlier period had already been issued. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Taxability of brokerage/commission to overseas agents under Business Auxiliary Service Legal framework: Definitions in Sections 65(19) and 65(105)(zzb) and chargeability under Section 66A read with valuation under Section 67 of the Finance Act, 1994 govern whether services provided by overseas commission agents are taxable as Business Auxiliary Services and the manner of valuation. Precedent treatment: The adjudicating authority applied the statutory definitions to hold such payments taxable from 18.04.2006 onward; the Tribunal did not disturb the characterization on merits and proceeded on the basis that such services fall within the Business Auxiliary Service category for the post-18.04.2006 period. Interpretation and reasoning: The Tribunal accepted the view that brokerage/commission paid to foreign agents constitutes services covered by Business Auxiliary Service and that those payments are includible in taxable value under Section 67 for the period when reverse charge provisions operate. Ratio vs. Obiter: Ratio - Overseas commission payments fall within Business Auxiliary Service and are taxable under the reverse charge mechanism from the date the provisions came into effect (18.04.2006). (This conclusion is applied as operative law in the order.) Conclusions: The demand for tax on such payments is sustainable in principle from 18.04.2006; the Tribunal set aside demands only to the extent linked to limitation issues (see Issues 2-4). Issue 2 - Effect of effective date of reverse charge (18.04.2006) on demands for earlier periods Legal framework: Section 66A (reverse charge) took effect on 18.04.2006; tax liability under reverse charge cannot be imposed for periods before the statutory provision took effect. Precedent treatment: The adjudicating authority had dropped demands prior to 18.04.2006 for that reason; the appellant relied on the same chronological limitation. Interpretation and reasoning: The Tribunal agreed that reverse charge liability cannot be retroactively applied to periods before 18.04.2006; accordingly, demands for periods prior to that date were not sustainable. Ratio vs. Obiter: Ratio - Reverse charge provisions apply only from their notified effective date; demands cannot be sustained for periods antecedent to that date. Conclusions: Demands for periods prior to 18.04.2006 are not sustainble and were appropriately disallowed by the adjudicating authority. Issue 3 - Invokability of extended limitation (first proviso to Section 73(1)) where CENVAT credit was available (revenue-neutral position) Legal framework: Section 73(1) prescribes normal limitation for recovery of service tax; the first proviso extends limitation where suppression, fraud or mis-declaration with intent to evade tax is found. Availability of CENVAT credit (and refund mechanisms, e.g., Rule 5 of CENVAT Credit Rules, 2004, for export) affects the question of gain to the assessee. Precedent treatment: The Tribunal relied on an earlier tribunal decision and the decision of a High Court (as interpreted in the impugned judgment) holding that where CENVAT credit for tax payable on overseas commission under reverse charge was available to the assessee, the situation was revenue neutral and therefore absence of malafide/suppression precluded invocation of the extended period. The Tribunal applied that reasoning and set aside extended-period demands and associated penalties for the affected period. Interpretation and reasoning: The Tribunal reasoned that the extended period requires an element of suppression, fraud or mis-declaration with intent to evade tax - i.e., a culpable element leading to wrongful gain. If CENVAT credit (or refund for export) was legitimately available to the assessee for tax paid under reverse charge, there was no gain to the assessee from non-payment; hence, the statutory threshold for invoking the extended period is not met. The Tribunal observed that significant trade confusion and litigation existed on reverse charge applicability, reinforcing the absence of malafide intent. Ratio vs. Obiter: Ratio - Where payment of tax under reverse charge would have been revenue neutral to the recipient by reason of legitimately available CENVAT credit (or refund entitlement), the conditions for invoking the extended limitation under the first proviso to Section 73(1) (suppression/fraud/mis-declaration with intent to evade tax) are not satisfied; extended period cannot be invoked. (This holding is applied to set aside extended-period demands and penalties.) Conclusions: Extended period under the first proviso to Section 73(1) is not invokable in respect of the period where the assessee could legitimately avail CENVAT credit for the tax payable under reverse charge; consequential penalties under Sections 76 and 78 imposed for that period are accordingly unsustainable and liable to be set aside. Issue 4 - Validity of subsequent SCN invoking extended limitation when an earlier SCN invoking the extended period had been issued Legal framework: Section 73(1) prescribes time limits for issuance of SCNs; normal period applies unless extended period is invoked with factual basis of suppression/fraud. Principles of limitation and multiplicity of proceedings constrain retrospective invocation of extended limitation across overlapping notices. Precedent treatment: The Tribunal considered that once an earlier SCN invoking an extended period was issued for an earlier timeframe, a later SCN covering a subsequent year that again invoked the extended period should not have invoked that extended period where the earlier notice could and should have been confined appropriately; the Tribunal remanded for re-adjudication on normal limitation principles. Interpretation and reasoning: The Tribunal held that the second SCN dated 20.03.2009 (for April 2007-March 2008) invoked the extended five-year period improperly because an earlier SCN dated 17.03.2008 had already been issued invoking the extended period. Given that the first SCN covered a five-year span, the department ought to have confined the second SCN to the normal period of limitation; issuance of the second SCN invoking extended limitation rendered it beyond normal limitation and required re-adjudication. Ratio vs. Obiter: Ratio - A later show cause notice invoking the extended period of limitation is not maintainable where an earlier notice invoking extended limitation has already been issued and the later notice is thus beyond the normal period; the matter must be re-adjudicated for the normal limitation period. Conclusions: The second show cause notice invoking the extended period was held to be beyond the normal period of limitation; the matter was remanded for de novo adjudication limited to the normal period of demand under Section 73(1).