2025 (1) TMI 1211 - AT - Service Tax

CESTAT sets aside Rs. 1,347 crore tax demands citing time-barred proceedings and invalid service tax charges

Tenormac Enterprises Pvt. Ltd. Versus Commissioner of CGST & CE, Belapur

CESTAT Mumbai allowed the appeal, setting aside demands totaling over Rs. 1,347 crores against the appellant. The tribunal held proceedings were ... CENVAT Credit - input services used for providing assistance in trading of the goods - applicability of provisions of sub-rule (7) of Rule 4 of Cenvat Credit Rules, 2004 - SCN issued without allocation of mind - extended period of limitation - penalties. Extended period of limitation - HELD THAT:- The original authority nor the show cause notice indicates as to which information was required by Revenue in accordance with which provision of law that was not filed or submitted by the appellant and how there was wilful misstatement or suppression of fact to invoke extended period of limitation. In the absence of any such finding by the original authority, the present proceedings are hit by limitation and that ground alone is enough for setting aside the impugned order. Disallowance of CENVAT Credit on the ground that cenvat credit was not admissible since the appellant was engaged in trading of the goods - HELD THAT:- There is no finding that the appellant has not received the input services on the basis of which the appellant has taken the cenvat credit nor there is any finding that the said input services did not suffer service tax. Therefore the appellant had received input services from various input service providers. The provisions of Cenvat Credit Rules do not have any provision wherein the cenvat credit availed lapses. There is no examination as to how the said input services were not eligible for providing output services such as colocation services, hosting services etc. Therefore, the finding of the original authority that cenvat credit of Rs.634.05 crores were not admissible to the appellant has no basis and, therefore, the said finding is set aside. The appellant had received input services from various input service providers. The provisions of Cenvat Credit Rules do not have any provision wherein the cenvat credit availed lapses. There is no examination as to how the said input services were not eligible for providing output services such as colocation services, hosting services etc. Therefore, the finding of the original authority that cenvat credit of Rs.634.05 crores were not admissible to the appellant has no basis and, therefore, the said finding is set aside. Demand on the advances received from customers - HELD THAT:- It is noted that by the time the show cause notice was issued, on 04.04.2017 the said amount was paid back. Therefore, it was not available with the appellant as advances from customers as on the date of issue of show cause notice. Therefore, the demand on account of the same amounting to Rs.78.08 crores confirmed by the original authority does not sustain. Demand of service tax of Rs.583.26 crores under proviso to sub-section (1) of Section 73 of Finance Act, 1994 - HELD THAT:- The issue of valuation and taxability both are involved in the present issue. As can be seen from the record, the current liability which stood as on 31.03.2018 was Rs.3888.40 crores. The operation of Chapter V of Finance Act, 1994 which included charging section for charging of service tax and Section 67 for determination of value for assessment of service tax ceased to exist prospectively with effect from 01.07.2017. Therefore, both the provisions, viz. charging section i.e. Section 66B and Section 67 on valuation of taxable services for charging service tax were not operational for levy and collection of service tax as on 31.03.2018 and, therefore, confirmation of demand of Rs.583.26 is not sustainable. Recovery of interest on payment of service tax - HELD THAT:- On the basis of Rule 3 of Point of Taxation Rules which provides that point of taxation shall be the date of invoice or the date of payment whichever is earlier, the original authority has ordered for recovery of interest on payment of service tax of Rs.52.45 crores which was paid during the year 2016-17. An adjustment was made in balance of unsecured loans amount availed from M/s. Reliance Infocom Engineering Pvt. Ltd. for receipt of payment in respect of the invoices raised for provision of servie and the said loan was received by the appellant in 2014 and, therefore, learned original authority ordered for recovery of interest from the earlier period - the provisions of Rule 3 of Point of Taxation Rules are not applicable in the present case. Therefore, the order by the original authority for recovery of interest on payment of service tax of Rs.52.45 crores does not sustain. Interest and penalties - HELD THAT:- Since no part of the order-in-original either disallowing cenvat credit or confirming the demand of service tax sustains the order for recovery of interest on the same and imposition of penalties does not sustain. Conclusion - CENVAT credit cannot be denied without substantial evidence of misuse or non-compliance with the Cenvat Credit Rules. The advances incorrectly classified due to accounting errors, and subsequently rectified, do not attract service tax Demand of interest and penalties do not sustain. The present proceedings are hit by limitation and that ground alone is enough for setting aside the impugned order. Appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether the show cause notice issued invoking the proviso to sub-section (1) of Section 73 (extended period) was barred by limitation in absence of specific finding of suppression, fraud, wilful misstatement or collusion. 2. Whether cenvat credit availed on input services (colocation, hosting, marketing, consultancy and other business support services) was inadmissible under Rule 2(l)/Rule 14 Cenvat Credit Rules, 2004 on the ground that such services were used for trading of goods. 3. Whether amounts reversed by the assessee under sub-rule (7) of Rule 4 (non-payment within 90 days) prior to issuance of show cause notice could be appropriated or included in demand. 4. Whether cenvat credit voluntarily reversed and carried forward/transitioned to GST could be appropriated against the demand raised in show cause notice. 5. Whether service tax paid by debiting cenvat credit during the period formed a valid basis for recovery (and whether such recovery would amount to double taxation) where opening balances available could have covered such payments. 6. Whether amounts shown as 'advances from customers' and 'other current liabilities' in audited financials could be treated as assessable value under Section 67 for levy of service tax, including tax and interest, for the show cause period. 7. Whether interest under Point of Taxation Rules/Section 75 is recoverable on service tax paid relating to invoices adjusted against earlier loans (i.e., whether such receipts constituted advances). 8. Whether penalties under Sections 77/78 and Rule 15 are sustainable where primary demands/interest are not established and on facts of the record. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Limitation (extended period under proviso to s.73) Legal framework: Proviso to sub-section (1) of Section 73 permits extended limitation where suppression of facts, fraud, wilful misstatement or collusion is established; normal limitation for the relevant period was 30 months. Precedent treatment: The Tribunal examined whether reliance on filed statutory returns (ST-3) and documents relied upon in the show cause notice could support invocation of extended period. Interpretation and reasoning: The adjudicating authority and Revenue did not identify specific information withheld or particular provisions breached that would sustain a finding of suppression or wilful misstatement; the show cause notice itself relied on ST-3 returns which were filed by the assessee. Absent articulation of what was suppressed or wilfully misstated, extended limitation cannot be lawfully invoked. Ratio vs. Obiter: Ratio - invocation of extended period requires clear, specific finding of suppression/fraud; general allegations insufficient. Conclusion: Proceedings are time-barred; show cause notice issued under the proviso to s.73 is not maintainable on limitation grounds (sufficient to set aside the impugned order). Issue 2 - Admissibility of cenvat credit alleged to be used for trading Legal framework: Cenvat Credit Rules provide for admissibility; Rule 14 and Rule 2(l) govern recovery of wrongly availed credit; Cenvat Rules contain no automatic lapse of credit; no statutory provision mandates one-to-one correlation between specific input service and specific output service. Precedent treatment: Revenue asserted trading use justified denial; assessee relied on contractually provided services and CA certification that credits pertained to eligible input services. Interpretation and reasoning: Record established receipt of input services and no finding that input services did not attract service tax or were not received. Neither show cause notice nor adjudication produced specific evidence of trading transactions corresponding to the impugned credits; sales register and other documents relied upon did not disclose telecom equipment sales during period except scrap. Legal position and CBIC circulars indicate cenvat credit does not lapse and can be utilized across outputs within a single registration; no statutory requirement for strict matching between input and output services. Ratio vs. Obiter: Ratio - mere allegation of trading without demonstrable link between credits availed and trading output is insufficient to disallow cenvat credit; obiter - commentary on CBIC circulars supporting non-lapsing of credit. Conclusion: Disallowance of Rs.634.05 crores cenvat credit on the ground of use for trading is without basis and set aside. Issue 3 - Reversals under Rule 4(7) and appropriability Legal framework: Sub-rule (7) of Rule 4 mandates reversal where consideration not paid within 90 days; Section 73(3) bars show cause where duty/amount already paid before notice except where extended limitation invoked. Precedent treatment: Revenue sought to appropriate amounts reversed under Rule 4(7) prior to notice; Revenue argued appropriation follows confirmation of demand. Interpretation and reasoning: Amounts reversed under Rule 4(7) were reversed prior to issuance of notice. There is no statutory provision permitting confirmation/appropriation of sums already reversed absent invocation of extended limitation; since extended period could not be validly invoked, inclusion/appropriation of such reversed amounts in demand is impermissible. Ratio vs. Obiter: Ratio - amounts voluntarily reversed under Rule 4(7) before issuance of show cause notice cannot be appropriated in demand where extended limitation is not established. Conclusion: Appropriation of Rs.299.81 crores reversed prior to the show cause notice is not sustainable and is set aside. Issue 4 - Appropriation of credit reversed and transitioned to GST Legal framework: Credits reversed by assessee before issuance of notice and entries in GST Tran-1 fall within Section 73(3) protection absent extended limitation. Interpretation and reasoning: The Rs.122.05 crores reversed and carried to GST were reversed before show cause notice; without specific grounds to invoke extended limitation, those amounts could not be included in demand or appropriated by adjudicating authority. Ratio vs. Obiter: Ratio - pre-notice voluntary reversals transited to GST cannot be appropriated in subsequent demand where extended period conditions are not met. Conclusion: Appropriation of Rs.122.05 crores is not sustainable. Issue 5 - Service tax paid by debiting cenvat credit and alleged double recovery Legal framework: Recovery of tax paid by debiting cenvat credit depends on establishing that such credited amounts were inadmissible; accounting and opening balances are relevant to trace utilization. Interpretation and reasoning: Opening cenvat balance of Rs.93.19 crores existed and there is no evidence that the service tax payments (Rs.49.26 crores) were necessarily debited out of the disallowed credits rather than opening balance. Absent evidentiary tracing, confirming recovery constitutes double recovery risk. Ratio vs. Obiter: Ratio - Revenue must show that specific disallowed credits funded the tax payments before recovering amounts as tax; absent such proof, recovery not sustainable. Conclusion: Demand of Rs.49.26 crores as service tax is not sustainable. Issue 6 - Advances and other current liabilities as assessable value under s.67 Legal framework: Section 67 defines value for services; Point of Taxation Rules and rule-based tests determine when receipts constitute advances; charging provisions ceased prospectively on 01.07.2017 for transactions after that date. Interpretation and reasoning: The bulk amount (Rs.515 crores) booked under advances was shown to be an unsecured loan, later repaid on 04.04.2017, and was not supported by evidence of receipt for services; by the time of show cause notice the amount had been repaid. Other current liabilities relied upon were as of 31.03.2018 (post-cessation date for service tax charging) and therefore could not be the basis for assessing service tax for the show cause period up to June 2017. The Tribunal found no sustainable link to treat these ledger balances as assessable value for the relevant period. Ratio vs. Obiter: Ratio - ledger classification and subsequent repayment, combined with lack of documentary nexus to service provision, negate treating such entries as taxable advances; liabilities arising or disclosed after cessation date cannot be used to charge service tax for prior period. Conclusion: Demands based on advances (Rs.78.08 crores) and on other current liabilities (Rs.583.26 crores) are unsustainable and set aside. Issue 7 - Interest under Point of Taxation Rules on Rs.52.45 crores Legal framework: Point of Taxation Rules determine timing; interest under Section 75 arises where tax liability is established and recoverable. Interpretation and reasoning: Prior adjudication held the relevant receipts were unsecured loans and not advances; accordingly the Point of Taxation Rules did not apply to convert those receipts into earlier tax points. Without a finding that the receipts were advances, recovery of interest on Rs.52.45 crores is not maintainable. Ratio vs. Obiter: Ratio - interest under the Point of Taxation Rules cannot be imposed where receipts are adjudicated to be loans and not advances for services. Conclusion: Interest demand on Rs.52.45 crores does not sustain. Issue 8 - Penalties Legal framework: Penalties under Sections 77/78/Rule 15 are consequential upon establishing levy, demand or culpability. Interpretation and reasoning: Because primary demands (disallowance of cenvat credit, service tax, interest and appropriation) do not survive on limitation and merits, penalties predicated on those findings are unsustainable. Ratio vs. Obiter: Ratio - penalties cannot be sustained where underlying demands and findings are set aside. Conclusion: Imposed penalties are not sustainable and are set aside. OVERALL CONCLUSION The Tribunal held the impugned adjudication unsustainable primarily because extended limitation was not properly established and, on merits, Revenue failed to demonstrate that input services/cenvat credits were ineligible or used for trading, that reversals made prior to notice could be appropriated, or that advances/other liabilities could be validly treated as assessable value for the show cause period; consequently demands, interest and penalties were set aside. The appeal was allowed with consequential relief. (Order pronounced in open court.)