2023 (5) TMI 894 - AT - Service Tax

Tribunal rules in favor of jute manufacturer in service tax dispute, emphasizing exemption fulfillment and competitive trade promotion.

M/s. Kariwala Industries Limited Versus Commr. of CGST & CX, Kolkata North Commissionerate

M/s. Kariwala Industries Limited Versus Commr. of CGST & CX, Kolkata North Commissionerate - TMI ISSUES PRESENTED AND CONSIDERED 1. Whether the assessee was liable to pay service tax under the reverse charge mechanism for Goods Transport Agency (GTA) services used in connection with export of goods, when statutory notifications exempt such transport services for export but prescribed procedural formalities (EXP-1/EXP-2) that were not complied with. 2. Whether failure to comply with procedural conditions prescribed in exemption notifications (filing of EXP-1 and EXP-2) amounts to a substantive bar to availing the exemption, or is a technical/procedural lapse that can be condoned; 3. Whether demand of service tax, interest and imposition of penalty under the Finance Act and Cenvat Credit Rules can be sustained where the substantive fact of export and rendering of exempted service is not disputed but prescribed procedural formalities were not fulfilled; 4. Whether the adjudicating/appeal authorities correctly invoked extended period/penal consequences in view of the above factual and legal matrix. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Liability for GTA service tax on transport connected with export when notification exempts such services Legal framework: Service tax liability under the reverse charge mechanism for GTA services is governed by the Finance Act and associated notifications which exempt transport of goods by road for export when certain conditions are fulfilled; compliance procedures (including filing EXP-1 and EXP-2) were prescribed by the Board for verification of claims. Precedent treatment: The Court recognized established authorities that distinguish substantive conditions from procedural formalities and endorse a liberal approach to exemptions connected with exports; earlier appellate and high court rulings have treated non-filing of verification forms as procedural lapses susceptible to condonation. Interpretation and reasoning: The Tribunal found that the rendering of GTA services for export purposes was not in dispute. The conditions in the notification requiring filing of EXP-1/EXP-2 were characterized as procedural/verification requirements rather than substantive pre-conditions to the grant of exemption. The Board's circular describing the procedure confirmed the intended verification role of these forms. Denial of the exemption on account of non-fulfillment of such procedural conditions would frustrate the substantive benefit intended by the exemption and unduly restrict a beneficial provision. Ratio vs. Obiter: Ratio - where export of goods is admitted and the only deficiency is non-compliance with prescribed procedural verification (EXP-1/EXP-2), the substantive exemption cannot be denied purely on that ground and the exemption should be allowed. Obiter - policy remarks on international competitiveness of exports and broader desirability of a liberal approach. Conclusion: The assessee was eligible for the exemption for GTA services used in relation to export; the demand on account of these services cannot be sustained solely for non-filing of the procedural forms. Issue 2 - Condonability of procedural non-compliance (EXP-1/EXP-2) Legal framework: Notifications granting exemptions may contain procedural conditions for verification. Judicially recognized principle: a substantial substantive exemption cannot be defeated by mere non-observance of technical procedural requirements. Precedent treatment: The Tribunal followed higher court authority that distinguishes substantive and procedural conditions and permits condonation of technical procedural lapses; it also applied prior Tribunal decisions holding non-filing of EXP forms to be a procedural lapse. Interpretation and reasoning: The conditions in clauses (a) and (c) of the exemption notifications were held to be for verification only. The assessee candidly admitted unawareness and non-fulfillment; on facts there was no dispute the services were for export. Given the verification purpose of the procedural conditions and the absence of any substantive dispute, the procedural lapses were condonable and could not be used to deny the exemption. The Tribunal emphasized that an interpretation unduly restricting beneficial provisions is to be avoided. Ratio vs. Obiter: Ratio - technical procedural conditions required only for verification can be condoned where substantive entitlement to exemption is otherwise established; Obiter - remarks on the non-mandatory character of certain conditions as evident from departmental circulars. Conclusion: The procedural non-compliances (non-submission of EXP-1 and EXP-2) were condonable and did not disentitle the assessee from the exemption for export-related GTA services. Issue 3 - Validity of demand, interest and penalty where substantive entitlement exists but procedural formalities omitted Legal framework: Statutory provisions impose service tax liability, interest and penalties for non-payment; however, the application of penalties is contingent on existence of tax liability and culpability when exemptions legitimately apply. Precedent treatment: Authorities have held that when substantive exemption applies and non-compliance is merely procedural/technical, penal consequences should not follow; tribunal and courts have set aside penalties in comparable contexts. Interpretation and reasoning: Since the Tribunal concluded that the GTA services were exempt by virtue of export and the incompliance was procedural and condonable, the imposition of penalty and sustained demand could not be justified. Interest where tax was voluntarily paid after being pointed out may be appropriate, but the confirmed demand and corresponding penalty for the exempt portion could not stand. Ratio vs. Obiter: Ratio - penalties predicated on non-payment cannot be sustained where the underlying tax was not due because of an applicable exemption and the only failings were procedural lapses susceptible to condonation; Obiter - comments on appropriation of amounts already paid and separable treatment of interest appropriately paid. Conclusion: The demand and penalty in respect of the exempt GTA services were unsustainable and liable to be set aside. Issue 4 - Invocation of extended period and related appellate findings Legal framework: Extended period provisions permit reassessment/demand in specified circumstances; appellate scrutiny requires establishment of requisite conditions for extended period invocation. Precedent treatment: Where substantive entitlement negates tax liability, extended period invocation cannot salvage demands based on procedural lapses; appellate bodies have set aside extended period demands when the foundational facts do not support tax liability. Interpretation and reasoning: The Tribunal observed that the appeal authority did not provide valid legal basis to sustain extended period consequences in light of the conceded export use of services and the procedural nature of non-compliance. As the essential fact (export) was undisputed, extended period invocation could not justify sustaining the demand or penalty. Ratio vs. Obiter: Ratio - extended period cannot be used to uphold a demand where substantive exemption applies and non-compliance relates only to procedural verification requirements; Obiter - none beyond prior discussion. Conclusion: The extended period invocation and resulting adverse conclusion in the impugned order lacked merit and could not be maintained. Overall Disposition Because the rendering of GTA services for export was not disputed and the unmet conditions were procedural in nature (intended for verification), the Tribunal concluded that the exemption should be allowed, the demand and penalty in respect of the exempted GTA services were unsustainable, and the appellate order confirming those demands was set aside. The appeal was allowed.