2025 (2) TMI 1163 - AT - Service Tax

Penalty under Section 78 Finance Act 1994 set aside for Service Tax short-payment and irregular Cenvat credit

CESTAT Hyderabad set aside penalty imposed under section 78 of Finance Act, 1994 for short-payment of Service Tax under Reverse Charge Mechanism and ... Confirmation of demand - imposition of penalty under section 78 of the Finance Act, 1994 - short-payment of Service Tax under Reverse Charge Mechanism (RCM) against import of certain services - irregular availment of Cenvat credit of input services - levy of penalty. Levy of penalty - HELD THAT:- It is an admitted fact that the moment audit pointed out, they have paid the Service Tax along with interest. Therefore, the department was aware that they have already paid the Service Tax and interest as it was even recorded in the SCN. Further, on going through various grounds taken including revenue neutrality, it would be obvious that there were certain interpretational issues, which the appellant would have had while considering the payment of Service Tax or otherwise - in the absence of any cogent and positive evidence by the department about deliberate and intentional suppression or misstatement, the ground for invoking extended period cannot be sustained and on the same ground, the penalty can also be not imposed. Further, since these conditions are not established, therefore, the benefit under Section 73(3) cannot be denied and once the amount has been paid along with interest, there was no need to issue SCN. Therefore, on this count, the Order of the Commissioner imposing penalty, in the facts of the case, cannot sustain and accordingly, the penalty imposed by the Adjudicating Authority is set aside. Short payment of Service Tax under Business Support Service by wrongly claiming deduction under Pure Agent clause - HELD THAT:- During the material time, Rule 5 provided for inclusion of reimbursable activities as part of service provided. As per Rule 5(1), as it existed during the material time, whether any expenditure or costs are incurred by the service provider in the course of providing taxable service, all such expenditure or costs were to be treated as consideration for taxable service provided or to be provided and shall be included in the value for the purpose of charging Service Tax on the said service. Therefore, irrespective of the fact whether the expenditure or costs are incurred on reimbursable basis or otherwise, it was required to be included in the gross value in terms of Rule 5(1). However, Rule 5(2), which was subject to the provisions of Rule 5(1), certain expenditure and costs incurred by the service provider as pure agent of the recipient of service was required to be excluded from the value of taxable service, subject to fulfillment of certain conditions. The Adjudicating Authority has examined these conditions and came to the conclusion that the appellants have not fulfilled all the conditions enumerated under Rule 5(2) to justify the claim of deduction as pure agent. The issue regarding inclusion of reimbursable expenditure or costs in the gross value of consideration received for providing taxable service or otherwise is no longer res integra in view of the judgment in the case of Union of India Vs Intercontinental Consultants and Technocrats Pvt Ltd [2018 (3) TMI 357 - SUPREME COURT]. Hon’ble Supreme Court at Para 21, inter alia, observed that Rule 5 brings within its sweep the expenses which are incurred while rendering the services and are reimbursed i.e., for which the service recipient has made payment to the assessee and as per these Rules, these reimbursable expenses also forms part of the gross amount charged. Conclusion - The reimbursable expenses should not be included in the taxable value. Penalty imposed on the appellants for short payment of Service Tax and Cenvat credit demand set aside, as there was no evidence of willful misstatement or suppression. The impugned order is set aside - appeal allowed. ISSUES PRESENTED and CONSIDEREDThe Tribunal considered the following core legal issues: Whether the penalty imposed for short payment of Service Tax under the reverse charge mechanism (RCM) and irregular availment of Cenvat credit was justified, given that the appellant had paid the tax and interest before the issuance of the Show Cause Notice (SCN). Whether the short payment of Service Tax under the category of Business Support Service (BSS) by claiming deduction under the Pure Agent clause was valid, especially in light of the reimbursement received by the appellant.ISSUE-WISE DETAILED ANALYSISIssue 1: Short payment of Service Tax under reverse charge mechanism and irregular availment of Cenvat creditThe appellant argued against the imposition of penalties, having already paid the Service Tax and interest before the SCN was issued. The relevant legal framework is found in Section 73(3) of the Finance Act, 1994, which allows taxpayers to pay the due tax and interest before the issuance of an SCN, potentially avoiding penalties unless fraud, collusion, or willful misstatement is involved.The Tribunal noted that the Adjudicating Authority's decision to impose penalties was based on the appellant's alleged suppression of facts. However, the Tribunal found these claims to be general observations without substantive evidence of intentional suppression or misstatement. The Tribunal emphasized that the appellant had paid the due amounts promptly upon being notified by the audit, indicating no fraudulent intent.The Tribunal concluded that the conditions for invoking the extended period and imposing penalties were not met. Consequently, the penalties imposed by the Adjudicating Authority were set aside, as the appellant had complied with Section 73(3) by paying the tax and interest before the SCN was issued.Issue 2: Short payment of Service Tax under Business Support Service by wrongly claiming deduction under Pure Agent clauseThe appellant claimed that reimbursements received from M/s BSG Services India Pvt Ltd should not be included in the gross value for Service Tax purposes, citing Rule 5(2) of the Service Tax (Determination of Value) Rules, 2006. The Adjudicating Authority had denied this claim, asserting that the appellant failed to meet the conditions for deduction as a pure agent.The Tribunal examined the legal framework under Rule 5, which mandates that reimbursable expenses should be included in the taxable value, except when specific conditions are met. However, the Tribunal highlighted the Supreme Court's ruling in Union of India Vs Intercontinental Consultants and Technocrats Pvt Ltd, which declared Rule 5 ultra vires for the period before May 14, 2015. This judgment established that reimbursable expenses should not be included in the taxable value for that period.Given the Supreme Court's decision and the lack of evidence from the Revenue to counter the appellant's claim of reimbursement, the Tribunal concluded that the demand for Service Tax on reimbursable expenses was unsustainable. As a result, the Tribunal set aside the impugned order on this ground.SIGNIFICANT HOLDINGSThe Tribunal's significant holdings include: The penalties imposed for short payment of Service Tax under RCM and irregular availment of Cenvat credit were unjustified, as the appellant had paid the tax and interest before the SCN was issued, and there was no evidence of willful suppression or fraud. Reimbursable expenses should not be included in the taxable value for Service Tax purposes for the period before May 14, 2015, as per the Supreme Court's ruling in Union of India Vs Intercontinental Consultants and Technocrats Pvt Ltd.In conclusion, the Tribunal allowed the appeal, setting aside the penalties and the demand for Service Tax on reimbursable expenses, based on the legal interpretations and precedents discussed.