2024 (3) TMI 456 - AT - Service Tax

Service tax demand notice set aside as extended limitation period invalid without deliberate evasion or fraud

The CESTAT Hyderabad set aside a service tax demand notice invoking extended period of limitation against a construction company. The tribunal found no ... Invocation of extended period of limitation - shortage in payment of service tax - appellants did not pay service tax properly and further, not made proper disclosures to the department - construction of Subansiri Dam/Tunnel for the period 2012-13 - HELD THAT:- The appellant was under the impression that they had already suffered the service tax by way of deduction at source, by the main contractor on the said activity. Thus, there does not appear to be any deliberate attempt or intention on the part of the appellant to evade service tax in the facts of the case. Demand with respect to construction of elevated structure for BMRCL - HELD THAT:- Admittedly, when the project was awarded to the appellant, the same was exempt from service tax under Notification No. 25/2012-ST. During execution of project, the said exemption was withdrawn w.e.f. 01.03.2016. Thereafter, admittedly, this appellant was pursuing with the Principal BMRCL for release of funds towards payment of service tax, which took some time and upon release of such funds, admittedly, appellant had deposited such tax with interest. Hence, SCN is bad and is hit by the provisions of Sec 73(3) of the Finance Act, which provides that in such cases where tax and interest are paid without dispute, no SCN needs to be issued. Payment of service tax under RCM on Royalty paid to State Government - HELD THAT:- Evidently, the matter is sub-judice before the Apex Court (9 Judges Bench). Whereas, earlier the 7 Judges Bench of the Apex Court in the case of India Cements Ltd & Others vs State of Tamil Nadu & Others [1989 (10) TMI 53 - SUPREME COURT] have held that Royalty is Tax and set aside the cess imposed on such Royalty. Admittedly, no service tax is leviable on the amount of tax. In this view of the matter, the demand is only by change of opinion or interpretation of Statute. There is no case of fraud or mis-statement, etc., on the part of the appellant. The issue involved is wholly interpretational in nature. In this view of the matter, we hold that the SCN issued invoking extended period of limitation is bad - impugned order set aside - appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether the proviso to the limitation provision permitting issuance of show-cause notices beyond the normal period (extended period) is invokable where a prior audit/SCN on the same operative facts was issued earlier. 2. Whether invocation of the extended period is permissible to recover service tax from a sub-contractor where the principal contractor had deducted/paid service tax in respect of the same works. 3. Whether a show-cause notice is maintainable, and penalty attracted, where the taxpayer deposited tax and interest before issuance of the SCN, particularly where payment resulted from contractual efforts to obtain reimbursement from the principal and delay was not deliberate suppression. 4. Whether recovery of service tax under reverse charge mechanism on amounts characterized as 'royalty' payable to State authorities is exigible while the question is sub judice before a larger constitution bench and prior conflicting apex-court decisions exist. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Invokability of extended period where department had earlier audit/SCN on same subject-matter Legal framework: The proviso to the limitation provision allows extended-period adjudication where tax has been evaded or not disclosed, subject to established principles limiting re-opening where revenue was aware of the activity. Precedent Treatment: The Court relied on binding appellate precedents of the Supreme Court establishing that a second SCN on the same issue, after earlier audit/SCN/decision showing departmental awareness, cannot be used to invoke the extended period. Interpretation and reasoning: The Tribunal examined the audit history: an earlier audit in respect of the same project resulted in an SCN adjudicated to hold the activity taxable from a prior date. A subsequent audit covering later periods raised no para on the project. Given the departmental knowledge of the activity from the earlier audit/SCN and the fact that RA bills reflected deduction of service tax by the main contractor, the Tribunal found no material to treat the later default as deliberate suppression or fraud. The extended period is intended for cases of concealment or evasion, not for cases where revenue has contemporaneous notice or the matter is one of interpretation. Ratio vs. Obiter: Ratio - where revenue had earlier audit/SCN/decision on the same facts and no fresh concealment is shown, extended period cannot be invoked to re-open the issue. Obiter - ancillary observations on the nature of departmental audits. Conclusion: The SCN issued under extended limitation for the large demand relating to the dam/tunnel project is time-barred and not sustainable. Issue 2 - Invocation of extended period against sub-contractor when principal contractor has paid/deducted service tax Legal framework: Extended limitation requires existence of evasion/suppression; allocation of liability between principal and sub-contractor depends on the statutory scheme and factual deductions/payments recorded in RA bills. Precedent Treatment: The Tribunal referred to appellate authority holding that where the principal contractor has paid or deducted service tax, revenue cannot invoke extended limitation against the sub-contractor merely by treating the matter as a later default; conflicting views of tribunals exist but the cited reasoning was applied to the facts. Interpretation and reasoning: The RA bills prepared by the main contractor demonstrated deduction towards service tax, and the subcontractor reasonably believed that the service tax liability was discharged by such deduction. There was no evidence of deliberate attempt by the subcontractor to evade tax. The issue was interpretational - whether liability rested with principal or sub-contractor - and not a case of suppression that would justify extended limitation. Ratio vs. Obiter: Ratio - extended limitation cannot be invoked where the principal has paid/deducted service tax and the sub-contractor can show belief or record of payment; such disputes of interpretation do not constitute concealment. Obiter - observations on intra-contractual reimbursement mechanics. Conclusion: Extended period invokation against the sub-contractor on the ground of non-payment is not justified where main contractor deductions/payments exist and no suppression is proved. Issue 3 - Effect of tax and interest payment before issuance of SCN; applicability of penalty Legal framework: The adjudicatory scheme contemplates that where tax and interest are paid before issuance of SCN in circumstances not involving suppression/fraud, issuance of a SCN and imposition of penalty may be barred by the statutory provision that excludes show-cause requirements in such situations. Precedent Treatment: The Tribunal applied established authority holding that payment of tax and interest before initiation of adjudication, where no suppression is shown, disentitles revenue to levy penalty and negates need for an SCN under the relevant provision. Interpretation and reasoning: For the metro-rail project the contract initially attracted exemption; when exemption was withdrawn, the appellant pursued reimbursement from the principal and ultimately deposited tax and interest before issuance of the SCN. The delay in payment was shown to be due to contractual and factual difficulties rather than deliberate concealment. Given payment prior to SCN, and absence of suppression, penalty under the extended-period regimen was not attracted and the SCN was bad in law insofar as it sought further consequences. Ratio vs. Obiter: Ratio - where tax and interest are paid before issuance of SCN and no suppression/fraud is shown, statutory bar applies and penalty/SCN is not maintainable. Obiter - factual comment that contractual reimbursement delays may justify late payment. Conclusion: The SCN relating to the metro-rail project is invalid to the extent it seeks penalties or relies on extended limitation, because tax and interest were paid prior to notice and no suppression was proved. Issue 4 - Recoverability of service tax under reverse charge on amounts described as 'royalty' payable to State and effect of pending higher-bench adjudication Legal framework: Liability to tax under reverse charge depends on whether the payment is within the taxable ambit (e.g., consideration for a service) and whether amounts characterized as 'royalty' are taxable; where higher judicial consideration is pending, revenue action may be stayed or inappropriate. Precedent Treatment: Conflicting superior-court decisions have addressed whether royalty is a tax or a service; a larger bench reference is pending on the point. Multiple high courts and apex-court interim orders have stayed recovery in similar matters. Interpretation and reasoning: The Tribunal observed that the question whether royalty paid to State authorities attracts service tax under reverse charge is presently pending before a larger bench of the apex court and that prior authoritative pronouncements treated royalty as a tax such that service tax would not be exigible on tax amounts. Since the matter is a point of statutory interpretation under active adjudication at the highest level, invoking extended limitation or enforcing recovery would amount to altering settled or still-contested interpretational positions; no fraud or deliberate suppression was established in respect of the royalty payments. Ratio vs. Obiter: Ratio - where the question of taxability is sub judice before a larger bench and prior authoritative views support non-taxability, extended-period action is inappropriate; recovery should await final resolution. Obiter - references to stays granted by various courts on similar demands. Conclusion: The demand under reverse charge on royalty payments is not maintainable at this stage; extended limitation does not properly apply while the interpretive question is pending before a larger bench. Collective Conclusion The Tribunal held that, on the facts, the issues in dispute were primarily interpretational, there was no evidence of fraud or deliberate suppression, and the revenue's reliance on extended limitation was unjustified in respect of the challenged demands (dam/tunnel project, metro-rail project where tax and interest were paid pre-SCN, and royalty reverse-charge demand pending higher-court resolution). Accordingly, the impugned order confirming demands under extended limitation and imposing penalties was set aside, and consequential reliefs were directed to follow law.