2025 (9) TMI 335 - AT - Service Tax

Partial appeal allowed: tax recovered and remitted; interest upheld; penalty under Section 78 set aside for lack of mens rea

CESTAT allowed the appeal in part, holding that the appellant bona fide believed reverse charge applied and, after a show cause notice, recovered and ... Non-payment of correct amount of service tax under manpower recruitment services - contravention to provisions of Sections 68 & 70 of the Finance Act, 1994 read with Rules 6 & 7 of the Service Tax Rules, 1994 - invocation of extended period of limitation - liability of interest and penalty - HELD THAT:- The appellant provided the manpower supply services to Markfed and was under the bona fide belief that they are not liable to pay the service tax as Markfed is liable to pay the service tax under reverse charge being a ‘body corporate’ and this is the reason that they did not pay the service tax, but when the issue was raised by the department and show cause notice was issued, the appellant raised the issue with Markfed and demanded the service tax payable on manpower supply services; thereafter, Markfed paid an amount of Rs.23,50,356/- as service tax to the appellant for the period July 2012 to January 2015 in the month of December 2017, which was immediately deposited to the government account by the appellant. Further, it is found that the appellant has voluntarily deposited substantial amount of service tax within 20 days of the show cause notice and small balances before the adjudication along with interest which was computed as per the Notifications 14/2011-ST and 12/2014-ST which were in force when the service tax was due. Liability of interest - HELD THAT:- The contention of the appellant that interest should be computed under Notification 13/2016-ST, is not tenable in law because interest is to be paid when the interest/service tax fell due as held by the Division Bench of the Tribunal in the case of Jeevan Diesels & Electricals Ltd [2016 (3) TMI 438 - CESTAT CHENNAI] - the interest is rightly charged. Penalty u/s 78 - HELD THAT:- It is found that when the appellant has not intentionally suppressed the facts with intent to evade the payment of service tax and has immediately paid the service tax along with interest after receiving the same from Markfed, which shows that the appellant had a bona fide belief, then in the facts and circumstances of the case, penalty under Section 78 is not sustainable. It is also found that the Division Bench of the Tribunal in the case of Jeevan Diesels & Electricals Ltd has also dropped the penalty imposed on the assessee under Section 11AC of the Central Excise Act by holding that there is no mens rea on the part of the assessee to evade payment of duty - penalty u/s 78 set aside. Appeal allowed in part. ISSUES PRESENTED AND CONSIDERED 1. Whether receipts from supply of manpower and transportation of goods by road (GTA) rendered to a cooperative society registered under the Co-operative Societies Act are exigible to service tax under forward charge when the supplier bona fide believed the recipient to be a 'body corporate' liable under reverse charge. 2. Whether the department was justified in invoking the extended period of limitation under Section 73(1) for recovery of service tax for the relevant years. 3. Whether interest on delayed payment of service tax is to be computed with reference to the date when tax became due or the date of actual payment, and which statutory/notification regime governs computation of interest. 4. Whether penalty under Section 78 is sustainable where the assessee had a bona fide belief about reverse charge liability, collected taxes from the recipient only after notice, and deposited tax and interest promptly thereafter (i.e., whether mens rea to evade tax is established). ISSUE-WISE DETAILED ANALYSIS Issue 1: Exigibility of service tax on manpower supply and GTA to a cooperative society versus reverse charge belief Legal framework: Service tax liability arises under relevant provisions of the Finance Act, 1994 and Service Tax Rules, 1994; reverse charge mechanism applies to specified recipients where the recipient (e.g., a 'body corporate') is liable to discharge tax. Precedent Treatment: The record contains no binding contrary precedent on classification of a cooperative society vis-à-vis 'body corporate' for reverse charge; the Tribunal proceeded on factual determination of status of recipient. Interpretation and reasoning: The Tribunal accepted the factual finding that the recipient was a cooperative society registered under the Co-operative Societies Act and not a 'body corporate.' Therefore the supplier's initial bona fide belief that reverse charge applied was factually incorrect. The appellant provided manpower supply (and GTA) services to the cooperative and thus remained liable to discharge service tax under forward charge for the relevant period. Ratio vs. Obiter: Ratio - Where recipient is a cooperative society not constituting a 'body corporate,' reverse charge does not operate and supplier remains liable; bona fide belief about recipient's status does not convert the substantive liability. Conclusion: Service tax was exigible on the appellant's receipts from manpower supply (and GTA) to the cooperative society under forward charge; the supplier's earlier belief does not negate the underlying tax liability. Issue 2: Invocation of extended period of limitation under Section 73(1) Legal framework: Section 73(1) permits extended period of recovery where tax has not been paid or has been short paid, erroneously refunded or erroneously not levied; applicability depends on factual finding of tax having been collected/short paid and whether conditions for extended period are satisfied. Precedent Treatment: The Tribunal noted the department invoked extended period in the show cause and the Adjudicating Authority confirmed demand under extended limitation; no specific separate precedent was overruled or followed solely on this point in the judgment. Interpretation and reasoning: The Revenue contended extended period was justified because tax had been collected by the appellant and subsequently paid to the exchequer. The appellant argued bona fide belief prevented earlier payment and that immediately after notice it obtained tax from the recipient and deposited it. The Tribunal recorded that substantial tax was deposited voluntarily within 20 days of the show cause notice and remaining small balances before adjudication. The adjudication thereby proceeded on the basis that tax was due for the earlier period and demand was confirmed under extended period. Ratio vs. Obiter: Obiter/limited ratio - The Tribunal's reasoning accepts the factual finding that tax was collected and ultimately paid; it did not set aside the invocation of Section 73(1) in the operative result, implicitly upholding the Adjudicating Authority's exercise of extended limitation given the facts. Conclusion: Extended period of limitation under Section 73(1) was invoked and the demand for service tax for the period in question was confirmed on the facts; the Tribunal did not disturb that aspect of the demand. Issue 3: Computation of interest - date of accrual and applicable notification Legal framework: Interest on delayed payment of service tax is chargeable as per statutory provisions in the Finance Act, 1994; notifications issued from time to time may prescribe modalities but interest liability ordinarily accrues from the date tax became due, unless law provides otherwise. Precedent Treatment: The Tribunal relied on the Division Bench decision in Jeevan Diesels & Electricals Ltd (Tri. Bench) which upheld that interest is payable from the date the service tax became due and not from the date of actual payment. The appellant relied on a High Court writ decision (Bala Ji Manpower Services) to contend interest should be computed under a later notification applicable at time of payment; the Tribunal distinguished or declined to apply that authority for the present adjudicatory context. Interpretation and reasoning: The Tribunal held that interest must be computed with reference to when the service tax fell due and that Notifications 14/2011-ST and 12/2014-ST (in force when tax was due) govern computation of interest for the relevant period. The submission that Notification 13/2016-ST (in force at time of payment) should apply was rejected because the statutory position is that interest liability attaches when tax is due, as held by the Division Bench precedent relied upon by the Revenue. Ratio vs. Obiter: Ratio - Interest on delayed service tax is to be calculated from the date the tax became due, applying the notification in force on that date; subsequent notifications at time of payment do not alter retrospective accrual of interest where the statutory provision governs accrual. Conclusion: The Tribunal upheld interest charged as computed under the Notifications applicable when the service tax fell due; interest as charged by lower authorities was sustained. Issue 4: Sustainability of penalty under Section 78 where assessee had bona fide belief and promptly deposited tax and interest after receipt from recipient Legal framework: Penalty under Section 78 requires satisfaction of statutory criteria, including culpability; penalties are not ordinarily sustainable where there is absence of mens rea or intentional suppression to evade tax. Precedent Treatment: The Tribunal followed the Division Bench decision in Jeevan Diesels & Electricals Ltd, where penalty under a related provision was dropped for lack of mens rea. The appellant's reliance on the High Court decision (Bala Ji Manpower Services) was noted but not determinative. Interpretation and reasoning: The Tribunal found that the appellant had a bona fide belief that reverse charge applied; when the Department raised the issue and issued show cause notice, the appellant approached the recipient, obtained payment of tax from the recipient, and promptly deposited that sum into Government account. The appellant had also deposited substantial amounts within 20 days of the show cause and remaining small balances before adjudication. These facts indicated absence of intentional suppression or evasion. Applying the reasoning in the Division Bench precedent, the Tribunal concluded there was no mens rea to sustain penalty under Section 78. Ratio vs. Obiter: Ratio - Penalty under Section 78 is not sustainable where the assessee lacked mens rea, acted under bona fide belief about tax liability, and promptly remitted tax and interest upon becoming aware of liability. Conclusion: Penalty imposed under Section 78 was set aside by the Tribunal on the ground of absence of mens rea and in view of prompt compliance once the issue was raised; the demand of service tax and interest, however, was upheld. Overall Disposition (as per Court's conclusions) The Tribunal upheld the tax demand and the interest charged (computed with reference to when tax was due under earlier notifications) but set aside the penalty under Section 78 for lack of mens rea given the appellant's bona fide belief and prompt deposit of tax and interest after notice. The extended period invocation and confirmed demand were not disturbed on the facts before the Tribunal.