2025 (9) TMI 756 - AT - Service Tax

Extended limitation cannot reopen service tax assessment; Rs.85,659 demand set aside and penalties under Sections 77, 78 cancelled

CESTAT held that the extended period of limitation could not be invoked to reopen the service tax assessment despite discrepancies between ST-3 returns ... Invocation of extended period of limitation to reopen service tax assessment where a discrepancy exists between ST-3 returns and Income Tax Return figures discovered through audit - willful and deliberate suppression of the facts - Levy of penalty - HELD THAT:- A similar matter of limitation had come up for consideration before the Division Bench of this Tribunal in the case of G. D. Goenka Pvt. Ltd. [2023 (8) TMI 995 - CESTAT NEW DELHI]. - In the said case also, the demand had been raised consequent to the audit. The extended period of limitation was invoked on the ground that under self assessment, the Appellant assessee was required to assess its own tax due on the services provided by it and file returns under Section 70. By claiming the wrong Cenvat credit, the Appellant willfully and deliberately suppressed the facts from the Department. It is found that Appellant’s case on limitation is squarely covered by aforesaid order of the Tribunal in the case of G. D. Goenka Pvt. Ltd., the demand of service tax amounting to Rs.85,659/- could not have been raised by invoking extended period of limitation. As the demand itself is being set aside, penalties under Section 78 as well as Section 77 are also set aside. The Appellant is allowed on merits as well as on limitation. ISSUES PRESENTED AND CONSIDERED 1. Whether the extended period of limitation can be invoked to reopen service tax assessment where a discrepancy exists between ST-3 returns and Income Tax Return figures discovered through audit. 2. Whether operating under a self-assessment regime and filing ST-3 returns, by itself, constitutes wilful suppression of facts or intent to evade so as to justify invocation of the extended period of limitation. 3. Whether penalties under the Finance Act can survive when the underlying demand made by invoking the extended period of limitation is set aside. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Invoking Extended Period of Limitation for Service Tax Demand Legal framework: The statutory scheme examined includes the self-assessment and return provisions (Section 70 of the Finance Act, 1994), best-judgment assessment powers (Section 72), time-barred recovery provisions (Section 73) and penalty provisions (Sections 77 and 78), read with relevant provisions of the CGST Act employed administratively to support procedure. The Tribunal also considers Rule 6(1)(ii) of the Service Tax Rules, 1994 regarding payment on receipt basis where relevant to taxability. Precedent treatment: The Tribunal relied on an earlier Division Bench decision of the Tribunal addressing substantially similar facts and reasoning, which in turn relied on the decision of the Supreme Court in Pushpam Pharmaceuticals. That precedent was followed with detailed adoption of its reasoning that mere discovery by audit does not automatically validate invocation of the extended limitation period. Interpretation and reasoning: The Court reasoned that the statutory scheme entrusts the Central Excise/Tax Officer with the primary responsibility to scrutinise returns and, where necessary, make best-judgment assessments under Section 72 within the normal limitation period. If the officer fails to do so and tax escapes assessment until after the normal period, the loss of revenue is attributable to non-scrutiny rather than to the assessee. Invocation of the extended period requires positive evidence of one of the statutory grounds (fraud, collusion, wilful misstatement or suppression or other violation with intent to evade) and cannot be presumed merely because an assessee has filed returns under a system of self-assessment or because an audit later reveals a discrepancy. Ratio vs. Obiter: The holding that extended limitation cannot be invoked absent evidence of fraud, collusion, wilful suppression or intent to evade is treated as the ratio decidendi for this issue. Observations about the officer's duty to scrutinise returns and the policy implications of CBEC/CBIC instructions are treated as integral to the ratio, though some historical and policy remarks are ancillary. Conclusion: The extended period of limitation was improperly invoked in the absence of evidence of fraud, collusion or wilful suppression; the demand raised under the extended period is therefore barred by limitation and must be set aside. (Cross-reference: reasoning in Issue 2 regarding self-assessment.) Issue 2 - Effect of Self-Assessment on Presumption of Wilful Suppression or Intent to Evade Legal framework: The self-assessment regime permits taxpayers to compute and remit tax via returns (Section 70), while the statute provides for officer-led scrutiny and corrective assessment (Section 72). Extended limitation is available only upon proof of specified culpable conduct. Precedent treatment: The Tribunal followed the Division Bench reasoning which cited Pushpam Pharmaceuticals holding that self-assessment alone cannot be equated with deliberate suppression warranting extended limitation. That approach was adopted rather than distinguished or overruled. Interpretation and reasoning: The Court rejected the proposition that because every assessee self-assesses, extended limitation should routinely follow any later discovery of under-reporting. The Tribunal emphasised that the statutory remedy for potential incorrect self-assessment is officer scrutiny and best-judgment assessment; such responsibility cannot be shifted to presume malafide on the part of the assessee. Wilful suppression or intent to evade must be proved; it cannot be inferred merely from discrepancy or from the fact that an audit revealed a shortfall. Ratio vs. Obiter: The statement that wilful suppression cannot be presumed from self-assessment is part of the binding ratio. Policy statements about the risk being assumed by the Board when officers do not scrutinise are explanatory and supportive but operate as practical judicial guidance binding in context. Conclusion: Filing ST-3 returns under self-assessment does not, without further evidence, amount to wilful suppression or intent to evade; therefore extended limitation cannot be invoked on that ground. (Cross-reference: Issue 1 - both address limitation doctrine.) Issue 3 - Consequence for Penalties When Principal Demand Is Disallowed on Limitation Grounds Legal framework: Penalty provisions (Sections 77 and 78 of the Finance Act, 1994) are statutory sanctions contingent on the validity of the underlying demand and the culpability findings on which penalties are imposed. Precedent treatment: The Tribunal applied the logical consequence of setting aside the substantive demand on limitation grounds by extending relief to associated penalties, following the Division Bench's approach in similar facts. Interpretation and reasoning: Because the substantive demand raised under the extended period of limitation was held to be invalid, the legal foundation for penalties imposed under the same assessment order falls away. Without a valid demand predicated on proven culpability (fraud/collusion/wilful suppression), corresponding penalties cannot be sustained. Ratio vs. Obiter: The conclusion that penalties tied to an invalid time-barred demand must be set aside is part of the operative ratio applied to the facts; related commentary on consequential relief is consequential to that ratio. Conclusion: Penalties imposed under Sections 77 and 78 were set aside as consequential relief because the underlying demand was not maintainable when extended limitation was improperly invoked. Additional Observations and Ancillary Findings - The Tribunal accepted the factual matrix that the assessee had filed ST-3 returns and paid certain amounts earlier; specific disputes regarding discrete components of demand (e.g., amounts related to services to educational institutions or payments already made on receipt basis under Rule 6(1)(ii)) were noted but did not alter the limitation analysis. - The Tribunal emphasised the administrative responsibility of revenue officers to scrutinise returns and issue SCNs within the normal limitation period; failure to do so cannot be remedied by invoking extended limitation absent statutory grounds. - The Tribunal followed prior authoritative pronouncements rather than distinguishing them; the treatment of precedent was affirmatory and controlling for the instant facts.