2025 (11) TMI 126 - AT - Service Tax

Appeal partly allowed: tax reduced by Rs.3,73,977 (pre-1.7.2011); Rs.10,75,681 demand upheld; Rs.14,84,423 payable; Sections 77,78,80 FA 1994

M/s. Operational Energy Group India Pvt. Ltd. Versus Commissioner of GST and Central Excise, Chennai

CESTAT CHENNAI - AT partly allowed the appeal: reduction of Rs.3,73,977 from the tax demand (pre-1.7.2011 invoices) was allowed, while the demand of ... Impact of POTR 2011 on the Bills raised and credit Note issued for the deficiency in service - service Tax amount shown in the Credit Note is liable for deduction from the original billed amount. after 1.7.2011 or not - extended period of limitation - levy of penalty - waiver of penalty u/s 80 of FA, 1994 - HELD THAT:- There is no dispute in respect of Rs.3,73,977/-as it is squarely covered by Rule 6(1) of Central Excise Rules 2002 i.e. prior to POTR Period. In respect of Rs.10,75,681/-, it is covered by POTR for which the Adjudicating Authority has given detailed/well-reasoned findings. The averment of the assessee that he could not pay the tax dues within the stipulated time due to financial crisis cannot be considered as a reasonable cause as the tax payment is mandated by the Law. Even if the tax is held to be in excess due to realization at a later date, the excess paid tax can be adjusted against the tax liability for the succeeding month. Therefore, once the Invoice is raised, the assessee should have paid the due tax on the due date and later on they should have adjusted any excess payment in the tax liability of the succeeding month. There is no issue regarding the Invoices raised prior to 01.07.2011. Therefore, the reduction of value based on actual basis for an amount of Rs.3,73,977/- is in order and has to be allowed and reduced from the Tax demand. As regards, the balance amount of Rs.10,75,681/-, we are in agreement with the findings by the Commissioner in his impugned order. Here it is found that the tax if paid can be adjusted subsequently as has been held in the impugned order. It is clear that it is a revenue neutral situation in both the periods i.e. pre and post 01.07.2011 for the Appellant. However, the postulates laid down post 01.07.2011 is very clear, that it should be on accrual basis only. Therefore, the demand of Rs.10,75,681/- upheld. The Appellant is given a partial relief Rs.3,73,977/-. The appellant has referred to the Letter dated 19.12.2012 which has been reportedly submitted to the Audit Team. However, there is no evidence that such a Letter was addressed to the Adjudicating Authority. It appears that there is no proof to verify CENVAT reversal by the Appellant, and no proof submitted of having debited the same in the CENVAT Credit Ledger nor abstracted copy of the same has been placed before the Adjudicating Authority for verification. So, we are unable to agree to the contention of the Appellant on this issue. There is a mention of Availment of CENVAT Credit, but no proof of debit. Therefore, this amount of service tax of Rs.14,84,423/- is payable by the Appellant. On perusal of the judgement in the case of CCE Vs. Adecco Flexione Workforce Solutions Ltd. [2011 (9) TMI 114 - KARNATAKA HIGH COURT] relied upon by the Appellant which is about applicability of penalty when tax and interest have been paid in full before the issue of SCN. In the present case, it is found that a small part of the Tax still remains to be paid even after the issue of the impugned Order and therefore the cited case is not applicable to the facts of this appeal. The question is answered partly in favour of the Department as well as the Appellant. Invocation of extended period - penalties - HELD THAT:- The SCN was issued on 13.06.2013, invoking the Proviso to Section 73(1) of FA 1994 and the same was upheld by the Adjudicating Authority except for allowing the reduction of the Tax duplicated in the demand. The period of demand in this case is 1.7.2011 to 30.11.2012. It is found that on and after May 28, 2012, the normal period was extended to 18 months from the relevant date. In this case, the demand came to be issued after Audit Scrutiny and the Appellant paid major portion of the demand before the SCN was issued indicating high level of Tax compliance soon after Audit proceedings which is noteworthy despite the reported financial hardship. It is found that the Appellant is also registered and filing ST-3 RETURNS in time. The Appellant have raised Invoices and credit notes and the provision for bad debts and the high level of receivables were disclosed to the Department during the Audit. It has been held by various courts including the Supreme Court that invocation of larger period is a draconian provision and has to be invoked with caution. This is a case of interpretation of Law after the POTR rules have come into effect w.e.f. 1.7.2011. It has been frequently held by Courts/Tribunals that in any interpretation issue, there cannot find any suppression /misstatement warranting invocation of larger period. There has neither been any suppression of facts nor any wilful mis-statement warranting invocation of Larger period and that sufficient grounds do not exist in this case to sustain the allegation of willful misstatement or the suppression of facts, and therefore, the extended period cannot be invoked. The show cause notice in this case was issued on 13.06.2013 and the period of demand involved is 01.07.2011 to 31.03.2012. and therefore, the demand is within the 18 months period (normal period) during the relevant period and the demand is sustainable in the normal period also - the invocation of extended period is not justified. Consequently, it follows that the imposition of Penalty under Section 78 of FA 1994 i.e. penalty equal to demand will automatically fails to sustain - the penalty under Section 77 of FA 1994 is not imposable as the Appellant has obtained registration, filed returns, raised Invoices and Credit Notes indicating Service Tax and paid a large portion of the Tax before issue of SCN along with interest and as such the penalty under Section 77 is not imposable and is ordered to be set aside. On the question of waiver of penalty framed, it is found that as the penalties under Section 77 and 78 have been set aside on merits and so, there is no necessity for visiting the Provisions of Section 80 of FA 1994. The appeal is partly allowed confirming the demand of Rs.14,84,423/- plus Rs.10,75,681 along with interest but setting aside the penalties imposed under Section 77 and Section 78 of the Finance Act, 1994. ISSUES PRESENTED AND CONSIDERED 1. Whether the Point of Taxation Rules, 2011 (POTR 2011) altered liability from receipt basis to accrual/billed basis for invoices issued on or after 01.07.2011, and whether credit notes issued for deficiency in service after that date permit deduction of service tax from the original billed amount. 2. Whether invocation of the proviso to Section 73(1) of the Finance Act, 1994 (extended period for assessment) was justified on the facts-i.e., whether there was suppression or wilful mis-statement warranting the larger period. 3. Whether penalties under Section 78 (penalty equal to tax) and Section 77 (penalty for failure to register/evade tax) of the Finance Act, 1994 were properly imposed, and whether waiver under Section 80 is appropriate. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Effect of POTR 2011 on invoices and credit notes; deductibility of service tax shown in credit notes. Legal framework: POTR 2011 fixes point of taxation at the earliest of service completion, invoice issuance, or receipt of payment; Rule 3 (invoice-driven accrual) applies from 01.07.2011. Rule 6 and pre-POTR Rule 6(1) CER 2002 govern adjustments/credit for amounts not realized prior to POTR. Precedent treatment: The Tribunal treated POTR as effectuating a shift from cash/collection basis to accrual basis and applied established principles that invoice issuance triggers tax liability post-POTR; prior-period rules apply to pre-POTR invoices. Interpretation and reasoning: The Court examined invoices/credit notes and segregated amounts attributable to services rendered prior to 01.07.2011 (covered by pre-POTR rules) from those after 01.07.2011 (covered by POTR). For sums squarely pre-POTR, reduction under Rule 6(1) CER 2002 is allowable (ratio). For post-POTR invoices, once invoice issued the tax liability accrues and any later non-receipt is a matter of adjustment but does not negate initial liability; subsequent adjustment by way of credit note/adjustment is permissible only if properly recorded and reconciled in CENVAT/returns and ledgers (interpretative ratio). Ratio vs. Obiter: Ratio - POTR 2011 made accrual (invoice) the relevant trigger for tax liability from 01.07.2011; credit note/adjustment for pre-POTR invoices allowable under prior Rule 6(1). Observational/obiter - administrative convenience and revenue-neutral comments about post-payment adjustments. Conclusion: Partial relief to assessee allowed - amounts attributable to pre-POTR period (Rs.3,73,977/-) held deductible; amounts attributable to post-POTR invoices (Rs.10,75,681/-) upheld as payable, subject to adjustment rules if properly substantiated and accounted for in CENVAT/ledgers. Issue 2 - Validity of invoking extended period under proviso to Section 73(1) (suppression/wilful mis-statement). Legal framework: Proviso to Section 73(1) permits extended limitation where there is suppression or wilful mis-statement; normal limitation period applicable otherwise. Self-assessment regime; role of audits and scrutiny acknowledged in statutory scheme. Precedent treatment: The Tribunal relied on established jurisprudence that invocation of larger period is 'draconian' and must be exercised with caution; interpretation issues ordinarily do not amount to suppression. The appellant relied on authority (Adecco) concerning waiver when tax and interest paid prior to SCN, which the Tribunal considered but distinguished on facts. Interpretation and reasoning: The record showed that returns (ST-3), invoices and credit notes were filed/raised, the Department derived the discrepancies from those returns and from audit, and the taxpayer paid a substantial portion (>92%) of assessed tax with interest before issuance of SCN. No unaccounted turnover, parallel books, or deliberate concealment were found. The remaining contested amounts involved interpretative questions (application of POTR and reconciliation of CENVAT entries) rather than deliberate suppression. On this basis, invocation of extended period was not justified. Ratio vs. Obiter: Ratio - Extended period under proviso to Section 73(1) cannot be invoked where the matter involves bona fide interpretation and where no suppression or wilful mis-statement is established; reliance on audit-derived returns does not by itself prove suppression. Obiter - policy observations on fostering voluntary compliance and discouraging harsh penalties in interpretation cases. Conclusion: Invocation of extended period set aside; demand confined to normal limitation period and thereby sustainability of demand within normal period confirmed (i.e., demand could have been raised within normal period irrespective of proviso invocation). Issue 3 - Imposition and waiver of penalties under Sections 77 and 78; applicability of Section 80. Legal framework: Section 78 prescribes penalty equal to tax where extended period invoked for suppression; Section 77 penalises failures such as non-registration/evading tax; Section 80 permits waiver of penalty in certain circumstances. Precedent treatment: Tribunal applied the settled position that penalties predicated on invocation of extended period or willful suppression cannot stand where extended period is incorrectly invoked or suppression not proved. The Tribunal considered but distinguished precedents relied upon by the appellant (authority on waiver where tax and interest paid before SCN) on facts-since some tax remained unpaid/discrepant, cited precedent not fully applicable. Interpretation and reasoning: Because the extended period invocation was set aside (Issue 2), penalty under Section 78 (which flows from extended period findings) cannot be sustained. Section 77 penalty was also held unsustainable: taxpayer had valid registration, filed ST-3 returns, raised invoices and credit notes indicating service tax, and paid major part of tax with interest before SCN, evidencing compliance rather than evasion. Given penalties set aside on merits, the question of invoking Section 80 for waiver became unnecessary. Ratio vs. Obiter: Ratio - Penalties under Sections 77 and 78 cannot be levied where there is no suppression or wilful mis-statement and where the demand arises from an interpretative issue resolved within the normal period; payment of substantial tax and interest before SCN is a strong factor against imposition of penalty. Obiter - observations on policy of encouraging voluntary compliance. Conclusion: Penalties under Sections 78 and 77 set aside; no need to consider Section 80 waiver once penalties quashed. Ancillary findings on interest and CENVAT reconciliation Legal framework and reasoning: Interest under Section 75 is attracted on confirmed unpaid tax; CENVAT credit claimed by assessee must be substantiated by ledger debits and documentary proof to be allowed against demand. Conclusion: Interest on the balance confirmed demand is upheld; CENVAT claim of Rs.14,84,423/- was not substantiated by documentary proof of debit in CENVAT credit ledger and therefore held payable; total confirmed demand reduced by amounts allowed but interest on balance maintained. Cross-references Issues 1 and 3 are interlinked: correct application of POTR 2011 (Issue 1) determined whether the matter was a pure interpretation (affecting Issue 2) and therefore whether penalties under Sections 77/78 could be sustained (Issue 3). The Tribunal's finding that the matter involved interpretation and substantial voluntary compliance underpinned conclusions on limitation and penalties.