2024 (4) TMI 334 - HC - Service Tax

Revenue's service tax appeal dismissed - no liability for construction services before July 2010

The Karnataka HC dismissed the Revenue's appeal regarding service tax liability for construction services. The Appellate Tribunal correctly held that the ... Time limitation - Construction of Residential Complex - Construction of Villas - suppression of facts or not - construction of complexes other than Villas for the period of 01.04.2011 to 31.03.2012 - Consulting Engineer’s Service’- waiver of penalty u/s 78 - HELD THAT:- Considering the aspect of suppression the Appellate Tribunal has noticed that the assessee was issued with show cause notice dated 02.07.2007 for the period 16.06.2005 to 31.12.2006. The said show cause notice was confirmed by order in original Sl. No. 3/2011 dated 31.01.2011. Vide M/S. ADARSH DEVELOPERS VERSUS THE COMMISSIONER OF CENTRAL EXCISE AND SERVICE TAX BANGALORE SERVICE TAX- I, COMMISSIONER OF CENTRAL TAX, BANGALORE NORTH [2018 (8) TMI 1009 - CESTAT BANGALORE], the Appellate Tribunal decided in favour of the Respondent/Assessee and held the Respondent was not required to pay service tax for construction service before 01.07.2010. The appellant has failed in demonstrating that the said finding recorded by the Appellate Tribunal is contrary to any specific material on record. The Appellate Tribunal has considered the aspect of suppression from the proper perspective and noticing the settled position of law, has rightly held that the aspect of suppression cannot be attributed to the Assessee. The substantial questions of law are answered in the affirmative i.e., in favour of the Assessee and against the Revenue - appeal dismissed. 1. ISSUES PRESENTED AND CONSIDERED 1. Whether the extended period of limitation (on account of suppression) can be invoked where an earlier show cause notice covering similar transactions was already issued and known to revenue, i.e., whether alleged nondisclosure of correct value in subsequent period amounts to 'suppression' within the proviso to Section 73(1) of the Finance Act, 1994 (as applied) permitting extended limitation. 2. Whether penalty under Section 78 (Finance Act, 1994) can be sustained in respect of the construction-of-residential-complex service where the demand for the extended period was held time-barred for want of suppression (i.e., whether the setting aside of extended period demand impacts validity of penalty under Section 78). 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Extended limitation and 'suppression' where prior SCN covered similar facts Legal framework: The proviso to Section 73(1) (Finance Act, 1994) permits invocation of an extended period of limitation where the assessee has suppressed facts with intent to evade payment of service tax. The question is whether non-disclosure of correct value in a later assessment period constitutes suppression when earlier proceedings / an earlier show cause notice dealing with similar activities/transactions had already been issued and considered by revenue. Precedent treatment: The Appellate Tribunal relied on the Supreme Court precedent that where an earlier show cause notice placed all relevant facts in the knowledge of the authorities, similar facts in subsequent notices cannot be treated as suppression by the assessee; accordingly extended period cannot be invoked. The Court followed this precedent (the Tribunal's reliance was expressly approved). Interpretation and reasoning: The Court examined the sequence of SCNs and orders and noted that an earlier show cause notice had been issued and decided in favour of the assessee in respect of the relevant activity for the earlier period. The Tribunal specifically found that the Department was aware of the activities and transactions while issuing the first show cause notice and therefore could not be said to have been kept in ignorance such as to constitute 'suppression' in later periods. The Court found no material that contradicted the Tribunal's factual finding that revenue had prior notice of the relevant transactions and values. Given that the extended period had been invoked in the earlier SCN itself, the Tribunal's holding that extended period could not be invoked again in the subsequent SCN was treated as consistent with settled legal position. Ratio vs. Obiter: The holding that suppression cannot be imputed where the revenue had prior knowledge of the same facts (thus precluding invocation of extended limitation for subsequent periods) was treated as ratio decidendi for the instant substantial question. Any discussion of the content of books or valuation was ancillary and therefore obiter to the extent it did not underpin the factual finding of prior knowledge. Conclusion: The Court affirmed the Tribunal's conclusion that suppression could not be imputed and that demands for the extended period (for the construction-of-residential-complex service for the relevant earlier years) are time-barred. The substantial question on suppression/limitation is answered in favour of the assessee and against revenue. Issue 2 - Consequence for penalty under Section 78 where extended demand is time-barred Legal framework: Section 78 (Finance Act, 1994) prescribes penalty for certain offences relating to service tax. The validity of penalty often depends on the underlying demand/liability and on the mens rea element (e.g., suppression or fraud) required for invocation of extended limitation or enhanced consequences. Precedent treatment: The Tribunal set aside penalty under Section 78 in relation to the subject demand while sustaining penalty under Section 76 in part; the Court treated the question of Section 78 penalty as consequential upon the finding on suppression/limitation and relied on the Tribunal's reasoning and applicable precedents concerning the interrelationship between time-barred demand (or absence of suppression) and the imposition of penalty under Section 78. Interpretation and reasoning: Because the Tribunal found that the Department had prior knowledge of the activities and therefore no suppression had occurred, the basis for invoking the extended limitation and the aggravating circumstance underpinning a Section 78 penalty was absent. The Court observed that the appellant (revenue) failed to demonstrate any specific material contradicting the Tribunal's factual finding on prior knowledge and suppression. Consequently, the Tribunal's decision to set aside the Section 78 penalty was accepted as a proper consequence of the finding on suppression/limitation. Ratio vs. Obiter: The conclusion that penalty under Section 78 cannot be sustained where the finding of suppression is negatived (and extended limitation thus cannot be invoked) is treated as ratio for the interrelated legal questions decided. Any separate discussion on Section 76 penalty (which was sustained by the Tribunal) is collateral and did not attract reversal; such remarks are obiter to the extent not necessary to the determination of the substantial questions framed. Conclusion: The Court answered the substantial question on penalty in the affirmative for the assessee (i.e., against revenue) and held that the Tribunal correctly set aside penalty under Section 78 as consequential to its finding that suppression was not established and extended limitation could not be invoked. Cross-reference: The determination on Issue 2 is directly consequential on Issue 1; the negation of suppression (Issue 1) removes the legal basis for invoking extended limitation or imposing the Section 78 penalty (Issue 2), a link expressly recognized by the Tribunal and affirmed by the Court. Disposition: The Court affirmed the Appellate Tribunal's order on the time-bar/ suppression point and the related setting aside of penalty under Section 78; the appeal by revenue was dismissed as devoid of merit. No costs were awarded.