Service tax demand barred by limitation as department issued SCN after thirty months without proving fraud

CESTAT Chennai held that the service tax demand was wholly barred by limitation. The department issued SCN on 25-06-2020 for periods up to June 2017, exceeding the normal thirty-month limitation period. Extended limitation was not invokable as the appellant had declared export service amounts in ST-3 returns, making it departmental knowledge. The tribunal found no evidence of fraud or willful mis-statement, only erroneous claims which cannot invoke extended period. Department's failure to scrutinize filed returns despite mandatory responsibilities cannot prejudice the appellant. The impugned order was set aside and appeal allowed.

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The core legal questions considered in this judgment are:

1. Whether the demand for service tax raised against the appellant is barred by limitation under Section 73(1) of the Finance Act, 1994, including the applicability of the extended limitation period under the proviso to that section.

2. If the demand is not barred by limitation, whether the appellant qualifies as an intermediary under Rule 2(f) of the Place of Provision of Services Rules, 2012, and consequently whether the services rendered by the appellant to the foreign associated enterprise can be treated as export of services under Rule 6A of the Service Tax Rules, 1994.

Issue-wise detailed analysis:

Issue A: Limitation for recovery of service tax demand

The legal framework governing limitation is Section 73(1) of the Finance Act, 1994, which provides a normal limitation period of thirty months from the relevant date for issuing a show cause notice for recovery of service tax not levied or paid. The proviso to this section extends the limitation to five years where the non-payment arises from fraud, collusion, wilful misstatement, suppression of facts, or contravention of provisions with intent to evade tax.

The relevant date is defined under Section 73(6) as the date of filing of the return showing particulars of service tax paid or payable.

Precedents including the Supreme Court's decision in Uniworth Textiles Ltd. v. Commissioner of Central Excise, Raipur, and various High Court rulings establish that invocation of the extended limitation period requires proof of deliberate intent to evade tax, not merely non-payment or error. The terms "wilful misstatement" and "suppression of facts" imply deliberate acts with intent to evade tax.

In the present case, the appellant had regularly filed ST-3 returns declaring the amounts received as export of services and the corresponding tax payable. The adjudicating authority found that the appellant suppressed facts with intent to evade tax, but this finding was not supported by evidence of mala fide or deliberate evasion. The appellant's bona fide belief that the services were export of services was evidenced by the consistent declaration in returns and GST refund orders granted subsequently.

The Tribunal held that the failure of the jurisdictional officers to scrutinize the returns and raise queries in the normal period cannot be attributed as suppression by the appellant. The extended period of limitation was therefore not invokable. The show cause notice issued in June 2020, for the dispute period ending June 2017, was beyond the normal limitation period of thirty months and hence barred.

Further, the Tribunal cited authoritative decisions that once limitation is held to bar the demand, the adjudicatory body must not proceed to decide the merits of the demand. The extended limitation period was not applicable, and the demand was therefore wholly barred by limitation.

Issue B: Whether the appellant is an intermediary and whether the services qualify as export of services

The appellant provided procurement-related services to its associated enterprise located abroad, under service agreements. The department contended that the appellant acted as an intermediary, merely facilitating services between the foreign enterprise and vendors or shipping lines, and thus the services were taxable in India and not export of services.

The appellant argued that it rendered services on a principal-to-principal basis, providing procurement and data management services independently to the foreign enterprise, which in turn used these services to provide ship management services to shipping lines. The appellant contended that the services were not intermediary services as defined under the statutory rules, relying on judicial precedents including the Supreme Court decision affirming the SNQS International Socks Private Ltd. case, which held that cost-plus pricing and independent service provision negates intermediary status.

The appellant further submitted that the appellant and the foreign enterprise are separate legal entities, not merely establishments of a distinct person as per Explanation 3(b) of clause (44) of Section 65B of the Finance Act, and thus satisfy the conditions for export of services under Rule 6A of the Service Tax Rules.

The department relied on the interpretation that the appellant and the foreign enterprise are "merely establishments" of the same persons, guided by the same management, and that the appellant acted on behalf of the foreign enterprise, performing functions as an agent or intermediary. The department emphasized contractual clauses indicating the appellant acted "on behalf of" the foreign enterprise, and that the place of provision of intermediary services is the location of the service provider (India), making the services taxable in India.

The Tribunal noted the conflicting interpretations but declined to decide on merits due to the finding that the demand was barred by limitation. However, the Tribunal observed that the appellant's submissions were supported by GST refund orders and circulars clarifying the scope of intermediary services, indicating a bona fide interpretation by the appellant.

Significant holdings include:

"The appellant has duly indicated the amounts charged against export of service provided in the appropriate place provided for such declaration in the ST-3 returns filed regularly. The extended period of limitation was not invokable as there was no evidence of wilful suppression or intent to evade tax."

"Failure on the part of the jurisdictional officers to scrutinize returns and raise queries within the prescribed period cannot be attributed as suppression or mala fide on the part of the appellant."

"Once the demand is held barred by limitation, the adjudicating authority must not proceed to decide the merits of the demand."

"The appellant and the foreign enterprise are separate legal entities and not merely establishments of a distinct person, thus satisfying conditions for export of services under Rule 6A of the Service Tax Rules, 1994."

The Tribunal set aside the impugned order confirming the service tax demand, interest, and penalty, allowing the appeal with consequential relief.

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