Service tax demand for October 2014-June 2017 barred by limitation as department failed to invoke extended period under Section 73

CESTAT Chennai held that service tax demand against appellant for period October 2014 to June 2017 was wholly barred by limitation. The department failed to invoke extended limitation period as appellant regularly filed returns declaring income under export of services, and jurisdictional officers failed to scrutinize returns despite mandatory responsibilities. Since appellant's declarations were known to department and no evidence of suppression existed, extended period under Section 73 Finance Act was not applicable. Normal limitation period had expired before show cause notice issued in June 2020. Appeal allowed without examining merits due to limitation bar.

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The primary legal issues considered by the Tribunal in this appeal are twofold: (A) whether the demand for service tax raised against the appellant is barred by limitation, and (B) if not barred by limitation, whether on merits the appellant's services qualify as intermediary services under the relevant statutory provisions and whether the services rendered by the appellant can be treated as export of services under the Service Tax Rules, 1994.

Regarding issue (A) on limitation, the Tribunal examined the provisions of Section 73(1) of the Finance Act, 1994, which governs recovery of service tax not levied or paid. The section prescribes a limitation period of thirty months from the relevant date for issuance of a show cause notice, with an extended period of five years applicable only where non-payment arises due to fraud, collusion, wilful misstatement, suppression of facts, or contravention of the provisions with intent to evade payment. The "relevant date" is defined in Section 73(6), primarily as the date of filing of the return showing particulars of service tax paid.

The Tribunal carefully analyzed judicial precedents, including a detailed review of the Supreme Court's interpretation of similar limitation provisions under the Customs Act and Central Excise Act, emphasizing that invocation of the extended limitation period requires proof of deliberate intention to evade tax, such as wilful misstatement or suppression of facts. Mere non-payment or omission does not suffice. The Tribunal further noted that the appellant had regularly filed service tax returns during the disputed period, consistently declaring the amounts received as export of services, and had responded to departmental inquiries in prior years, thereby negating any claim of suppression or wilful misstatement.

Moreover, the Tribunal underscored the statutory responsibility of departmental officers to scrutinize returns filed by assessees and to initiate timely inquiries if discrepancies are suspected. The failure of the department to scrutinize the appellant's returns or to raise queries within the prescribed period undermined the justification for invoking the extended limitation period. The Tribunal relied on several authoritative decisions holding that when the department neglects its duty to scrutinize returns, extended limitation cannot be invoked against an assessee who has made full disclosures.

Consequently, the Tribunal concluded that the show cause notice issued in June 2020, relating to the period October 2014 to June 2017, was beyond the normal limitation period of thirty months from the date of filing of the last return for that period (August 2017). Since the extended period was not invokable due to lack of evidence of wilful suppression or intent to evade tax, the entire demand was barred by limitation and unsustainable.

Turning to issue (B) on merits, the Tribunal noted that since the demand was barred by limitation, it was not necessary to adjudicate the substantive questions. However, the matter involved whether the appellant's services constituted intermediary services and whether they qualified as export of services under Rule 6A of the Service Tax Rules, 1994.

The appellant contended that it rendered accounting and payroll services on a principal-to-principal basis to its foreign associated enterprise, which was a separate legal entity and not merely an establishment of the same person. The appellant relied on the service agreements, which detailed the scope of services, and submitted that these services were independent and not mere facilitation or arrangement of services, thus not meeting the definition of intermediary services under Rule 2(f) of the Place of Provision of Services Rules, 2012. The appellant further argued that the services were provided outside the taxable territory and consideration was received in foreign convertible currency, fulfilling the conditions for export of services under Rule 6A.

The appellant supported its position by citing judicial precedents, including a recent Supreme Court decision affirming that services rendered on a cost-plus basis without direct nexus to the underlying supply do not constitute intermediary services. It also relied on various GST regime decisions and circulars clarifying the concept of intermediary services, emphasizing that sub-contracting for a service is not intermediary service. The appellant highlighted that the department had accepted refund claims under the GST regime for similar services, reinforcing their export of services claim.

The department, on the other hand, argued that the appellant acted as an intermediary, facilitating services between the foreign service recipient and vendors or ship owners. It pointed to contractual clauses indicating that the appellant acted "on behalf of" the foreign entity, and submitted that the appellant and the foreign enterprise were merely establishments of the same persons, thus falling within the ambit of "distinct persons" under Explanation 3(b) of Clause (44) of Section 65B of the Finance Act. The department maintained that the place of provision of intermediary services was in India, making the services taxable and not exportable.

The Tribunal noted the conflicting interpretations but refrained from deciding on merits due to the limitation bar. It emphasized that the appellant's bona fide belief, supported by consistent declarations in returns and prior departmental correspondence, negated any wilful misstatement or suppression of facts. The Tribunal also observed that the appellant's submissions and cited precedents presented a tenable legal view on the nature of services and export classification.

In conclusion, the Tribunal held that the impugned order upholding the demand, interest, and penalty was unsustainable as the entire demand was barred by limitation. The Tribunal set aside the demand along with the interest and penalty. It declined to adjudicate the merits of intermediary classification and export of services given the overriding limitation issue and the changes in law with the advent of GST. The appeal was allowed with consequential relief.

Significant holdings from the judgment include the following verbatim excerpt emphasizing the limitation principle:

"We find that the appellant has duly provided all the information sought in the mandatory returns prescribed... When the knowledge of the fact that the appellant has been claiming the said amounts received as towards export of service duly reflecting them in the returns, was already known to the Department, we are of the view that the learned adjudicating authority has egregiously erred in finding that the invoking of the extended period of limitation was tenable."

And further:

"When the appellant held a bona fide belief that its services were not liable to tax being export of services and had in fact declared the amounts received as towards export of service provided, there cannot be a finding of wilful misstatement or suppression of facts with intent to evade payment of duty attributable to the Appellant."

Also, the Tribunal adhered to the principle that once a demand is held barred by limitation, adjudication on merits is unnecessary and impermissible, citing:

"Once it is held that the demand is time barred, there would be no occasion for the Tribunal to enquire into the merits of the issues raised by the Revenue."

Core principles established include:

• The extended limitation period under Section 73(1) proviso applies only when there is clear evidence of fraud, collusion, wilful misstatement, or suppression of facts with intent to evade tax.
• Regular filing of returns with declarations of export of services and absence of departmental scrutiny negates the applicability of extended limitation.
• Failure of the department to scrutinize returns or initiate timely inquiry cannot be used to the detriment of the assessee by invoking extended limitation.
• Bona fide interpretation of taxability and classification of services, supported by consistent declarations and absence of malafide, precludes invocation of extended limitation and penalty.
• Once a demand is barred by limitation, the adjudicatory authority must refrain from deciding on merits.

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