Franking machine postal stamp trading deemed non-taxable under Section 66D negative list provisions

CESTAT New Delhi held that appellant's activity of selling and purchasing postal stamps through franking machines constituted trading of postal stamps, which is covered under negative list sub-clause (e) of Section 66D of Finance Act, 1994, making it non-taxable. The certificate from postal authorities carried presumption of correctness, which the department failed to rebut. The tribunal also found that the extended period of limitation was wrongly invoked as the activity was not taxable service, and non-filing of ST-3 returns could not constitute suppression. The show cause notice was deemed vague, being based solely on third party information. Appeal was allowed.

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1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in the judgment are:

(a) Whether the activity undertaken by the appellant-sale and purchase of postal stamps through a franking machine-constitutes a taxable service under the Finance Act, 1994, or is covered under the negative list of services specified under Section 66D of the Finance Act, 1994;

(b) Whether the appellant's failure to file service tax returns and pay service tax for the financial year 2012-13 amounts to suppression warranting invocation of the extended period of limitation under Section 73 of the Finance Act, 1994;

(c) Whether the show cause notice issued invoking the extended period of limitation is legally valid, particularly when based on third party information from the Income Tax Department;

(d) Whether the documentary evidence submitted by the appellant, specifically the franking machine license issued by postal authorities, was properly considered and whether it negates the service tax liability;

(e) Whether the demand for service tax for the financial year 2012-13 is barred by limitation, given the period of issuance of the show cause notice;

(f) Whether the denial of small scale exemption benefits by the department was justified;

(g) The correctness of the adjudicating authority and appellate authority's treatment of the appellant's submissions and evidence.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a): Taxability of the appellant's activity under the Finance Act, 1994

The relevant legal framework includes Section 66D of the Finance Act, 1994, which lists services that are excluded from service tax liability under the negative list. Sub-clause (e) of Section 66D specifically excludes "sale and purchase of goods" from taxable services.

The appellant contended that their activity-sale and purchase of postal stamps via a franking machine-is a trading activity and thus falls within the negative list, exempting them from service tax liability. They produced a franking machine license issued by the Senior Superintendent of the Post Office, Jaipur City, which was a government-issued certificate confirming the nature of their activity.

The Court took judicial notice of the nature of franking machines as stamp vending or stamping machines licensed by postal authorities. The license was held to carry a presumption of correctness, and the department failed to rebut this presumption with any contrary evidence.

The Court found that the activity was indeed trading of postal stamps, which is covered under the negative list of services under Section 66D(e). The Commissioner (Appeals) had erroneously gone beyond the scope of the show cause notice by considering unrelated issues such as TDS deductions, which were not alleged in the notice.

Therefore, the Court concluded that the service tax liability was wrongly fastened on the appellant for the said activity.

Issue (b) and (e): Invocation of extended period of limitation and bar by limitation

The extended period of limitation under Section 73 of the Finance Act, 1994, can be invoked in cases of suppression or fraud. The show cause notice was issued on 25.04.2018 for the financial year 2012-13.

The department argued that since the last date for filing ST-3 returns for October 2012 to March 2013 was extended to 31.08.2013, the issuance of the show cause notice within five years was valid.

The Court observed that the demand related to the entire financial year 2012-13, which falls beyond the five-year limitation period from the date of issuance of the notice. The department failed to provide any cogent reason or evidence to justify invocation of the extended period for the entire period.

Additionally, since the appellant's activity was not a taxable service, the non-filing of returns and non-payment of service tax could not be treated as suppression warranting extended limitation.

Hence, the show cause notice was held to be barred by limitation and invalid for the period in question.

Issue (c): Reliance on third party information for issuance of show cause notice

The show cause notice was issued based on third party data received from the Income Tax Department indicating income earned by the appellant.

The Court relied on precedent from the Hon'ble Supreme Court and this Tribunal, which held that confirmation of demand solely on the basis of third party information without independent verification or corroboration cannot sustain.

Therefore, the demand based solely on third party information was held to be unsustainable.

Issue (d): Consideration of documentary evidence submitted by the appellant

The appellant submitted the franking machine license and a Chartered Accountant certificate as evidence that their activity was trading and not a taxable service.

The adjudicating authority and Commissioner (Appeals) failed to consider these documents or rejected them without reasoned explanation.

The Court emphasized that the license issued by postal authorities carries a presumption of correctness and must be given due weight unless rebutted by cogent evidence, which was absent.

Thus, the failure to consider the documentary evidence was a significant infirmity.

Issue (f): Denial of small scale exemption benefits

The department denied small scale exemption benefits due to lack of supporting documents.

The Court did not extensively analyze this issue but noted that the denial was based on absence of evidence.

Issue (g): Treatment of appellant's submissions and procedural fairness

The appellant had filed written submissions and appeared before the adjudicating authority. However, the submissions were not properly dealt with in the impugned orders.

The Court noted that the appellate authority had remanded the matter for a speaking order, but even after remand, the submissions and evidence were not adequately considered.

This procedural lapse contributed to the erroneous confirmation of demand.

3. SIGNIFICANT HOLDINGS

"The said document produced sufficiently proves that the activity of the appellant was trading of postal stamps and the said activity is covered under negative list, sub clause (e) of Section 66D of Finance Act, 1994."

"The Commissioner (Appeals) is observed to rather have gone beyond the scope of show cause notice where he records in Para 8.2 that the TDS was deducted as apparent from Form 26AS, however, there is no such allegation in the show cause notice."

"I hold that the service tax liability has wrongly been fasten upon the appellant."

"The demand for the period beyond five years cannot sustain."

"The show cause notice has wrongly invoked the extended period of limitation and has been vague being solely based on third party information."

"Confirmation of demand of duty cannot sustain solely on the basis of third party evidence."

"The order passed based on the such show cause notice is therefore liable to be set aside."

The Court established the core principle that activities falling under the negative list of services are not subject to service tax, and that government-issued licenses or certificates carry a presumption of correctness unless rebutted by evidence. It also reinforced that the extended period of limitation under Section 73 cannot be invoked without clear evidence of suppression or fraud, and that demands based solely on third party information without independent verification are unsustainable.

Consequently, the Court set aside the show cause notice and all consequential orders, allowing the appeal and holding that no service tax liability arises on the appellant for the period in question.

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