2024 (1) TMI 1214 - AT - Service Tax

Service tax liability discharged by recipient doesn't constitute willful suppression for extended limitation period

CESTAT Allahabad allowed the appeal in a service tax dispute involving main contractors and sub-contractors. The tribunal held that extended limitation ... Levy of service tax - services on which service recipients have discharged tax liability - main contractors have already paid the tax on their behalf - time limitation - HELD THAT:- The Tribunals / Courts have been accepting tax payment by the service recipient as valid payment as the same was revenue neutral exercise till 2020, thereafter, the issue stands settled and it is service provider / sub-contractor to pay tax even if the main contractor / service recipient has discharged the tax liability on his behalf (Appellant) - this was a legal dispute which involved interpretation of law and mala-fide intention or suppression with intent to evade payment of service tax cannot be attributed to the Appellant. Extended period of limitation - HELD THAT:- The Court has observed that extended period of 5 years is not invokable when there is no willful misstatement or suppression involved. Mere failure to pay duty without any collusion, fraud or willful misstatement not sufficient to invoke extended period of limitation. Thus matter was in the knowledge of the department in 2010 when the first audit was conducted and thereafter regular audit was conducted every year, but the show-cause-notice was issued in 16.10.2014 without carrying out any investigation and without adducing any new corroborative evidence for invoking any suppression in the show-cause-notice in as much as service tax was also demanded on the exempted services valued at Rs.11,67,04,375/- pertaining to construction of PMGSY roads. The impugned order holding that the extended period has been correctly invoked, therefore, cannot be sustained and is set aside. It would, in such circumstances, not be necessary to examine the issues on merits that have been raised by the learned counsel for the Appellant. Appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether a subcontractor/service provider remains liable to pay service tax on services where the main contractor/service recipient has discharged service tax on the subcontractor's behalf. 2. Whether the demand raised by revenue invoking the extended period of limitation is tenable where the assessee's records were regularly audited by the department and no specific finding of willful suppression or fraud was recorded. ISSUE-WISE DETAILED ANALYSIS - I. Liability where main contractor/service recipient has discharged tax on behalf of subcontractor Legal framework: Service tax law requires levy on taxable services provided by the service provider; principles of tax liability and acceptance of payment by third parties are to be examined under the statutory scheme and applicable circulars. Precedent Treatment (as considered by the Court): Tribunal and High Bench decisions have been divergent. Earlier Tribunal/Benches treated payment by another (main contractor/service recipient) as valid discharge of tax liability of the service provider (i.e., treated payment by main contractor as payment by subcontractor). Later decisions of other Tribunals and the Supreme Court have held that a subcontractor remains liable to pay service tax even if the main contractor discharged tax on the subcontractor's activity. Interpretation and reasoning: The Court noted the historical confusion and evolving jurisprudence: while revenue-neutral arrangements previously led some benches to accept third-party payment as discharging the subcontractor's liability, more recent authoritative pronouncements establish that the statutory liability lies on the service provider/subcontractor and that discharge by the main contractor does not absolve that liability. The tenor of recent higher authority confirms that liability of the subcontractor to pay service tax is not negated merely because the main contractor paid tax on the entire contract value. Ratio vs. Obiter: The exposition of law regarding evolving precedents is ratio insofar as it identifies the current legal position that a subcontractor remains liable to pay service tax despite payment by the main contractor. Prior contrary tribunal views are treated as superseded in effect by later authoritative rulings; discussion of older revenue-neutral practice is obiter/contextual where not determinative of current legal position. Conclusion: The Court recognizes settled position in recent higher authority that a subcontractor/service provider remains liable to pay service tax even if the main contractor/service recipient has discharged tax on their behalf. However, the Court also observed that where the dispute concerns interpretation of law rather than mala fide suppression, that aspect bears on other issues (notably limitation), but it does not negate the general principle of subcontractor liability. ISSUE-WISE DETAILED ANALYSIS - II. Extended period of limitation where department conducted regular audits Legal framework: Extended period of limitation for demanding service tax may be invoked where there is willful misstatement or suppression of facts with intent to evade tax; ordinary tax shortfalls without fraud/collusion are not sufficient. Proviso to the limitation provision requires specific conditions to be met for the extended period to apply. Precedent Treatment (as considered by the Court): The Court relied on apex and tribunal precedents holding that extended limitation cannot be invoked in absence of willful suppression or fraud, and that regular departmental audits of the assessee's records undercut any claim of suppression. Multiple tribunal benches consistently held that where the department has audited assessee records and was aware of facts, invoking extended limitation is improper; apex authority similarly held that repeated audits negate the presumption of suppression. Interpretation and reasoning: The Court reviewed the factual matrix: the assessee had regularly filed returns and its records were subject to annual audits by the department; audit reports and compliance documents were on record; the adjudicating authority did not make any specific finding of willful suppression or fraud nor adduce fresh corroborative evidence to justify invoking extended limitation. The show-cause notice issuing after multiple audits, without investigation or fresh material indicating suppression, failed to meet the threshold for extended limitation. The Court applied the legal standard that mere discrepancy between returns and accounts does not automatically establish suppression; where the department knew (through audits) of the relevant facts, extended limitation is not sustainable. Ratio vs. Obiter: The holding that extended period of limitation cannot be invoked in the absence of willful misstatement/suppression and where records were repeatedly audited is ratio and dispositive of the appeal. Observations on how evolving liability jurisprudence affects the merits were obiter insofar as the Court did not adjudicate merits after deciding limitation. Conclusion: The extended period of limitation was improperly invoked; in absence of findings or evidence of willful suppression and given repeated departmental audits and compliance, the demand issued under extended limitation could not be sustained. Because the extended-period invocation was set aside, the Court found it unnecessary to decide the substantive merits of the tax demand. FINAL CONCLUSION AND RELIEF (AS PER COURT'S DECISION) Given the failure of the adjudicating authority to establish willful suppression or new corroborative material despite regular audits, the extended period of limitation was not properly invoked and the impugned extended-period demand was set aside. Consequential relief was granted to the appellant; substantive issues on tax liability were not adjudicated in view of the limitation conclusion.