Government contractor's service tax demand quashed due to exemption under Notification 25/2012 and limitation period expiry

The HC quashed a service tax demand notice and consequent order against a government contractor. The petitioner's services were exempted under Mega Exemption Notification No. 25/2012, making no service tax leviable. The department failed to issue required invoices under Rule 4A of Service Tax Rules, 1994, which would have informed the petitioner of any tax obligations. The court found no fraud or intention to evade tax by the petitioner, ruling the show cause notice was barred by limitation. The extended five-year limitation period under Section 73 of Finance Act, 1994 was not applicable, and the normal thirty-month period had expired.

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1. ISSUES PRESENTED and CONSIDERED

- Whether the demand-cum-show cause notice and subsequent order demanding service tax on royalty deducted by the Government from the petitioner's bills for the financial year 2016-17 are legally sustainable.

- Whether the petitioner, a Government contractor, is liable to pay service tax on the royalty amount deducted by the Government under the Reverse Charge Mechanism (RCM) as per the Finance Act, 1994 and related notifications.

- Whether the extended period of limitation under Section 73(1) proviso of the Finance Act, 1994 (read with Section 174 of CGST Act, 2017) can be invoked in this case for recovery of service tax on the ground of fraud, suppression, or wilful mis-statement.

- Whether the absence of issuance of an invoice by the Government department for the royalty deducted affects the liability or the validity of the demand.

- Whether the petitioner's conduct amounts to deliberate suppression of facts or wilful mis-statement warranting invocation of extended limitation and imposition of penalty.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Liability to pay service tax on royalty deducted by Government under RCM

Relevant legal framework and precedents include the Finance Act, 1994, specifically provisions relating to service tax levy, Reverse Charge Mechanism, and notifications issued thereunder. Notification No. 25/2012-ST exempted certain government contracts from service tax. However, Notification No. 22/2016-ST dated 13.04.2016 inserted serial no. 61 in Notification No. 25/2012, exempting only those services provided by Government by way of assignment of right to use natural resources before 01.04.2016. Services provided on or after 01.04.2016 became taxable.

The Court observed that the petitioner's activity of construction and maintenance of roads was exempt under the Mega Exemption Notification No. 25/2012-ST. However, the royalty deducted by the Government was for assignment of right to use natural resources and hence classified as a taxable service under Notification No. 22/2016-ST effective from 01.04.2016. The liability to pay service tax on such services provided by the Government lies with the service recipient under the Reverse Charge Mechanism as per Notification No. 30/2012-ST, as amended by Notification No. 18/2016-ST.

The Court accepted that the petitioner, as the service recipient, was liable to pay service tax on the royalty amount deducted by the Government.

Issue 2: Validity of invoking extended period of limitation under Section 73(1) proviso

Section 73(1) of the Finance Act, 1994 prescribes a limitation period of thirty months from the relevant date for issuance of a show cause notice demanding service tax. However, the proviso extends this period to five years if the non-payment or short payment of service tax is due to fraud, collusion, wilful mis-statement, suppression of facts, or contravention of provisions with intent to evade tax.

The petitioner contended that the show cause notice dated 19.04.2022 was barred by limitation as it was issued beyond the prescribed period for the financial year 2016-17. The petitioner further argued that there was no fraud, suppression or wilful mis-statement on their part to justify invocation of extended limitation.

The Court examined the timeline and noted that the last date for filing the ST-3 return for the second half of 2016-17 was 25.04.2017. The show cause notice was issued on 19.04.2022, which falls within the five-year extended period if invoked. However, invocation of extended limitation requires proof of deliberate wrongdoing.

Reliance was placed on the Supreme Court judgment in Pushpam Pharmaceuticals Co., which held that suppression means a deliberate act of withholding correct information with intent to evade tax, and mere omission or lack of knowledge does not constitute suppression.

The Court found no material to establish that the petitioner deliberately suppressed facts or wilfully mis-stated information. The petitioner's activity was exempt under the Mega Exemption Notification, and the petitioner was unaware of the taxable nature of the royalty payment due to absence of invoice.

Issue 3: Absence of issuance of invoice by Government department as per Rule 4A of Service Tax Rules, 1994

Rule 4A mandates that every person providing taxable service must issue an invoice, bill, or challan within thirty days of completion of service or receipt of payment, containing details such as name, address, registration number, description and value of service, and service tax payable.

The petitioner argued that no invoice was issued by the Government department for the royalty deducted, which prevented the petitioner from knowing the taxable nature and rate of service tax.

The Court noted that the respondent Executive Engineer admitted that no invoice was issued for the royalty deducted. This failure to issue an invoice is a breach of mandatory statutory requirement under Rule 4A.

The Court held that the absence of invoice deprived the petitioner of the knowledge and opportunity to comply with service tax obligations, thus negating any presumption of wilful suppression or fraud.

Issue 4: Whether the petitioner's conduct amounted to deliberate suppression or wilful mis-statement

The petitioner contended that they had no intention to evade service tax and that the omission to declare service tax liability was not deliberate but due to lack of knowledge and absence of invoice.

The Court referred to the Pushpam Pharmaceuticals judgment emphasizing that suppression must be deliberate and not mere omission. Since the petitioner's main contract activity was exempt and no invoice was issued for royalty, the Court found no evidence of deliberate suppression or wilful mis-statement.

Accordingly, the Court concluded that the extended limitation period could not be invoked in the absence of fraud or suppression.

Issue 5: Limitation and validity of demand and penalty imposed

The Court observed that the show cause notice and demand order were issued invoking extended limitation on grounds of suppression and evasion. However, since the petitioner's conduct did not amount to suppression or fraud, the extended limitation period was not applicable.

Therefore, the demand and penalty confirmed by the Assistant Commissioner were barred by limitation and unsustainable.

3. SIGNIFICANT HOLDINGS

"The act must be deliberate. In taxation, it can have only one meaning that the correct information was not disclosed deliberately to escape from payment of duty. Where facts are known to both the parties the omission by one to do what he might have done and not that he must have done, does not render it suppression." (Paragraph 26)

"Rule 4A casts a duty upon every person providing taxable service to issue an invoice, a bill or a challan signed by such person or a person authorized by him in respect of taxable service provided or agreed to be provided. In this case, admittedly, the respondent no. 4 did not issue any invoice, bill or challan." (Paragraph 27)

"It is not one of those cases in which the petitioner may be said to have committed a fraud or acted with an intention to evade the service tax. The show cause (Annexure 'P/2') is barred by limitation. The benefit of extended period of limitation would not be available to the respondent no. 2." (Paragraph 28)

The Court established the principle that invocation of extended limitation under Section 73(1) proviso requires clear evidence of deliberate suppression, fraud, or wilful mis-statement, which was absent here.

The Court held that absence of issuance of invoice by the Government department, a mandatory requirement under Rule 4A, negates any presumption of wilful suppression by the petitioner.

Finally, the Court quashed the demand-cum-show cause notice and the order confirming the demand as barred by limitation and lacking jurisdiction.

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