2025 (10) TMI 736 - AT - Service Tax

Revenue appeal dismissed where paper firm issued bogus invoices; service tax demand beyond Section 73A proven collections quashed

CESTAT held that the respondent was a paper entity issuing bogus invoices but had not actually rendered taxable services, so service-tax demands premised ... Liaility of appellant to pay service tax, collected and not deposited in the government account - CENVAT credit - Respondent has fabricated ST-3 returns and availed CENVAT credit on paper without actual receipt of input service - HELD THAT:- It is found that the investigation conducted by the Department established that the Respondent company existed only on papers. It generated bogus invoices which could help interested business entities managing their Service Tax liability and books of accounts. The company has no establishment at the addresses declared to the various Government authorities. Also, they have no staff, no expertise or no infrastructure even to run an office. Thus, it is observed that the entire transactions recorded by the Respondents are only sham transactions and the Respondent was accommodating entries for various clients against commission charges. Now, the Department is presuming that the Respondent has actually provided services to the client and therefore, there are required to pay Service Tax for the services rendered. The Service Tax demand cannot be confirmed against the Respondent unless it is established that the Respondent had actually rendered taxable services and not paid Service Tax. Since the investigation themselves admitted that the Respondent is only a fake entity and has not actually rendered the service, we are of the view that the demand of Service Tax cannot be sustained against the Respondent in this case. In the present case, the provision of Section 73A(2) of the Finance Act has been invoked to demand Service Tax from the Respondent. The said section reads, “where any person who has collected any amount which is not required to be collected from any other person, in any manner representing service tax, such person shall forthwith pay the amount so collected to the credit of the Central Government”. From a plain reading of the said sub-section, it clearly transpires that for raising demand on the basis of the said sub-section, it requires to be proved that the Respondent has collected an amount representing Service Tax on the basis of documents viz. invoices/challans issued in terms of Rule-4A of Service Tax Rules, 1994 - any demand of service tax over and above the amount paid by the Respondent under the provision of Section 73A(2) of the Finance Act, is only based on assumptions and presumptions. Hence, the rest of the demand of Service Tax as raised in the Show Cause Notice, only on an assumption and presumption basis, is not sustainable. In the present case, the Department has initiated action by writing to the Chief Commissioner of 16 zones about passing of fake credit by the Respondents and to initiate recovery action at the end of the Clients. This is evident from the findings of the Ld. adjudicating authority in the impugned order. The demand of Service Tax from the Respondent in respect of the credit passed on by them by issuing fake invoices, is against the clarification issued by Board in the said Circular. Thus, there will be no service tax liability in the hands of the Respondents. The application of provision of Section 11D of the Central Excise Act, which is pari materia with the provision of Section 73A of the Finance Act, would be warranted only when it is established that Service Tax has been collected by the company, but not paid to the exchequer. In the instant case, it is an admitted fact that Service Tax of Rs.1,53,40,510/- as collected by the Respondent has been paid to the exchequer. There is no other evidence available on record to establish that the Respondent has collected any amount over and above the amount of Rs.1,53,40,510/- already paid by them. Thus, by relying upon the decision, it is held that the demand of service tax over and above this amount already paid by the Respondent is not sustainable under Section 73A of the Finance Act. The Ld. adjudicating authority has rightly dropped the demand Rs.16,52,11,235/- and therefore, there are no infirmity in the dropping of the said demand in the impugned order. Irregular availment of CENVAT Credit - HELD THAT:- The Respondent has availed the fake credit only to make payment of their service tax liability. In view of the discussions the preceding paragraphs, it is established that there is no Service Tax liability on the part of the Respondent other than those collected by them and paid as per the provisions of Section 73A(2) of the Finance Act, 1994. Thus, the irregular credit availed by the Respondent is of no use, as they cannot use the said credit for payment of their Service Tax liability, which is not there - the irregular credit availed by the Respondent has been discussed in the Notice, but there is no demand of recovery of the said credit in the final portion of the Notice raising the demand on the Respondents. Thus, the Notice is in error in not demanding the recovery of the CENVAT credit in the final recovery portion of the Notice. It is clear the Respondent cannot use the credit and they are not required to use the credit for discharging their service tax liability. Hence, the allegation on this count by the Revenue in the Grounds of Appeal does not have any merit. The dropping of the demand of Service Tax in the impugned order is upheld - appeal of Revenue dismissed. 1. ISSUES PRESENTED AND CONSIDERED 1. Whether a demand under Section 73A(2) of the Finance Act can be sustained against an entity found to be a paper/fake company when the investigation does not establish that the entity actually collected service tax beyond amounts disclosed and paid in ST-3 returns. 2. Whether two sets of invoices (one showing service tax and one not) allegedly recovered at recipients' premises, without corroborative evidence tying those invoices to the issuer, suffice to establish collection of service tax by the issuer and attract liability under Section 73A(2). 3. Whether recovery of service tax can be pursued from the issuer of fake invoices where recipients have availed/used CENVAT credit on those invoices (i.e., interplay between issuer liability and recipient's fraudulent credit use), and the effect of Board clarification applicable to analogous GST cases. 4. Whether alleged irregular/fabricated availing/utilisation of CENVAT credit by the issuer, in the absence of a corresponding service tax liability (because no actual supply was rendered), gives rise to a recoverable demand or requires separate recovery proceedings. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Sustainment of demand under Section 73A(2) against a paper/fake entity when investigation does not prove collection beyond amounts disclosed and paid Legal framework: Section 73A(2) requires proof that a person has collected an amount representing service tax and has not paid such collected amount to the Government; liability attaches only where collection is established on the basis of documents (e.g., invoices/challans) issued in terms of applicable rules. Precedent Treatment: The Tribunal's earlier ratio in the decision applying Section 11D (pari materia) was followed: demand under a provision akin to Section 73A can be sustained only if it is established that the taxpayer collected tax amounts which were not remitted to the exchequer. Interpretation and reasoning: The Court accepted departmental evidence that the company was a paper entity and transactions were sham; but reasoned that a finding of sham transactions undermines the premise for treating the issuer as having collected tax for supply of services. Where ST-3 returns and payment records show only Rs.1,53,40,510 was collected and paid, and no further evidence proves additional collections, demands beyond that admitted-and-paid amount are premised on assumption and speculation. The provision's textual requirement that the amount be 'collected' is strictly applied; mere recovery of invoices at recipients' ends without chain-of-custody/corroboration does not establish collection by the issuer. Ratio vs. Obiter: Ratio - Demand under Section 73A(2) cannot be confirmed absent proof that the assesssee actually collected the tax amount alleged and failed to remit it; admission in returns and payment shown in ST-3 limits recoverable liability. Obiter - Observations about the credibility weaknesses in investigation are persuasive but ancillary to the statutory proof requirement. Conclusion: The demand beyond the admitted-and-paid amount is unsustainable; the adjudicating authority rightly dropped the remaining demand. Issue 2: Sufficiency of alleged dual-set invoices recovered at recipients' premises to prove collection by the issuer Legal framework: Proof of collection under Section 73A(2) depends on documentary evidence traceable to the issuer and compliance with invoicing rules; mere presence of invoices at recipient premises requires corroboration linking them to the issuer's books/records or other admissible evidence of collection. Precedent Treatment: The Court relied on principles applied in comparable authority holding that issuance of invoices without evidence of receipt of payment or supply does not permit presuming collection for purposes of tax demand. Interpretation and reasoning: The adjudicating authority found discrepancies between invoice data at clients' premises and records said to be recovered from the issuer; investigation did not produce tangible evidence (e.g., matching ledger entries, original signed delivery/acceptance, bank receipts tying the alleged tax collections to the issuer) to establish that invoices discovered at recipients were issued by the respondent. The Court emphasized that quantification based on recipient-side documents, without proof of issuance and collection by the putative issuer, rests on conjecture. The principle that bills cannot be assumed bogus or genuine merely by omission/mention of service tax was noted but applied to require positive proof linking the two sets of documents. Ratio vs. Obiter: Ratio - Dual sets of invoices recovered from recipients are insufficient, by themselves, to establish collection by the alleged issuer; corroborative evidence is necessary. Obiter - Comments on investigative lapses and the specific numeric discrepancies are explanatory. Conclusion: The allegation that two sets of invoices demonstrate collection by the issuer was not substantiated; therefore such evidence cannot support additional demand. Issue 3: Liability of issuer of fake invoices where recipients availed CENVAT credit; applicability of Board clarification (GST-era Circular) to pre-GST cases Legal framework: Under the statutory scheme, recovery of tax and penal consequences depend on whether a person actually made a taxable supply and collected tax; where recipients fraudulently avail/ utilise input credit, separate recovery and penal action may lie against recipients. Administrative clarifications (Board Circular) address allocation of recovery between issuer and recipient in fake-invoice scenarios. Precedent Treatment: The Court applied the principle from the Board's Circular (though issued under GST) by analogy to pre-GST/service tax cases: issuers of fake invoices, without underlying supply, are not to be treated as having tax liability under collection provisions; recovery should be targeted at recipients who availed/used irregular credit. Interpretation and reasoning: The Circular's reasoning-that issuance of tax invoice without supply does not constitute 'supply' and therefore does not give rise to tax liability against the issuer under tax-recovery provisions-was treated as a persuasive administrative exposition applicable by analogy. The Court observed that the Department had taken action against recipients in multiple zones, consistent with the Circular's approach. Given the admitted sham nature of transactions and absence of proof of collection by the issuer beyond amounts already paid, imposing liability on the issuer would conflict with the Circular's principle and statutory text. Ratio vs. Obiter: Ratio - Recovery of tax in fake-invoice situations should be directed at the ultimate recipient who availed/used the irregular credit; administrative clarification treating issuer as not liable for tax under collection provisions is applicable by analogy to the facts. Obiter - Remarks on policy and cross-regime applicability are persuasive but grounded in administrative guidance rather than binding authority. Conclusion: Demand of service tax from the issuer in respect of fake credits is contrary to the Board's clarified position and not sustainable; recovery should be pursued against recipients who utilized the credit. Issue 4: Effect of alleged irregular CENVAT credit availed by the issuer where no service tax liability exists Legal framework: CENVAT credit improperly availed is generally recoverable; however, recoverability and quantification depend on the existence of an underlying tax liability against which credit could lawfully be used. Precedent Treatment: The Tribunal treated irregular credit allegations in the factual matrix where issuer had no actionable tax liability as rendering the credit irrelevant to discharge non-existent liability; additionally, notice-demand drafting errors (failure to include recovery claim in final demand) were considered. Interpretation and reasoning: The Court held that where no service tax liability exists (except the admitted-and-paid amount), the irregularly availed credit could not be applied to discharge any liability and thus is 'of no use' to the issuer. Separately, the Show Cause Notice did not pursue recovery of the alleged irregular credit in its final demand, a procedural deficiency the Court noted as fatal to that aspect of the claim. Consequently, the Revenue's ground on irregular credit lacked merit in the present proceedings. Ratio vs. Obiter: Ratio - Irregular CENVAT credit is not a basis for recovery if there is no service tax liability to be discharged and the demand notice does not specifically quantify/demand recovery of such credit. Obiter - Observations on the interplay between credit misuse and separate recovery actions are explanatory. Conclusion: Allegation of fabricated CENVAT credit does not sustain a recoverable demand in the instant proceedings; absence of a recovery prayer in the notice compounds the Revenue's deficiency. Overall Conclusion The admitted-and-paid service tax stands discharged; demands under Section 73A(2) beyond the amounts shown in ST-3 returns are unsupported by evidence and unsustainable; the adjudicating authority correctly dropped the remaining demand, and the appeal by Revenue is rejected. The decision follows the principle that proof of actual collection by the issuer is a prerequisite for invoking collection provisions and that recovery of tax in fake-invoice schemes should focus on recipients who availed fraudulent credit.