2025 (11) TMI 128 - AT - Service Tax

Appeal allowed: Rule 5 (2006) bars expense deduction but no intent to evade, extended period demand disallowed

Shri Devendra Kumar Pandey Versus Commissioner of Central Excise & CGST, Agra

CESTAT, Allahabad allowed the appeal. The Tribunal upheld the tax demand on merits, finding that after the 2006 Rule 5 amendment the disputed expenses ... Levy of penalty u/s 77(1)() 77(1)(b) and 77(2) of the Finance Act, 1994 - non-payment of service tax - failure to discharge due service tax liability by not filing statutory returns and declaring the table assessable value therein - suppression of facts - extended period of limitation - HELD THAT:- After examining the provisions of Rule 5 (1) of Service Tax (Determination of Value) Rules, 2006 impugned order concluded that these values could not have been excluded itself in the present case after the amendments were made in Rule 5, subsequent to the decision of Hon’ble Supreme Court in the case of M/s Intercontinental Consultants and Technocrats Pvt. Ltd. [2018 (3) TMI 357 - SUPREME COURT] - After amendment made these expenses could not have been deducted from the gross value for determination of eligibility of threshold exemption limit. Accordingly, on the merits of the case, I do not find any merit in the challenge made to the demand. It is not found that finding with regards to the facts of suppression with intent to evade payment of taxes in the impugned order. The only finding recorded is that appellant who have gross turnover of services of only Rs.14,49,434/- would not be so well conversant with the provisions of service tax law and would have entertained a bonafide belief in this regard that the fees charge was within the threshold exemption limit. Such bonafide belief could not have been excluded from the facts of the present case. Hon’ble Supreme Court in the case of Uniworth Textiles Ltd. [2013 (1) TMI 616 - SUPREME COURT] has held that 'on account of the fact that the burden of proof of proving mala fide conduct under the proviso to Section 28 of the Act lies with the Revenue; that in furtherance of the same, no specific averments find a mention in the show cause notice which is a mandatory requirement for commencement of action under the said proviso; and that nothing on record displays a willful default on the part of the appellant, we hold that the extended period of limitation under the said provision could not be invoked against the appellant.' The demand merits but the same cannot be upheld on the ground of limitation and extended period of limitation would not have been invoked in the present case - Appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether amounts shown separately as 'reimbursements' in bills can be excluded from assessable value for service-tax threshold exemption under Rule 5(1)/(2) of the Service Tax (Determination of Value) Rules, 2006 (pure agent doctrine) for the period before/after statutory amendment. 2. Whether the demand of service tax (and consequential interest and penalty under Sections 73, 75 and 78/77 of the Finance Act, 1994) is sustainable where reimbursements have been included in value and gross receipts exceed the Rs.10 lakh SSI threshold. 3. Whether penalty for failure to file periodical returns and maintain/produce records under Section 77(2) and Section 77(1)(b)/(c) (Finance Act, 1994) is sustainable where assessee did not file ST-3 returns for specified half-years. 4. Whether the extended period of limitation (proviso to the relevant assessment provision) invoking fraud, collusion, willful misstatement or suppression of facts can be applied where the show-cause notice lacks specific averments and the assessee demonstrates bona fide belief/ conduct. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Exclusion of reimbursements from assessable value (pure agent doctrine under Rule 5) Legal framework: Rule 5 of the Service Tax (Determination of Value) Rules, 2006 provides that expenditure or costs incurred by the service provider in the course of providing taxable service are includible in value, except where incurred by the service provider acting as a 'pure agent' and eight prescribed conditions (including contractual agency, separate invoice entry, recovery only of actual amount paid, recipient's knowledge and authority) are satisfied. Precedent treatment: The Tribunal relies on the decision of the Apex Court in the Intercontinental/Technocrats matter which addressed inclusion of reimbursements and noted statutory amendment (Finance Act, 2015 w.e.f. 14.05.2015) clarifying that consideration includes reimbursement. The Tribunal treats that precedent as applicable to the legal regime governing the relevant period and for interpretation of Rule 5. Interpretation and reasoning: The Tribunal examines the statutory language of Rule 5(1) and (2) and concludes that the respondent/appellant failed to produce documentary evidence establishing the contractual and factual prerequisites of acting as a pure agent (e.g., contractual agreement to act as pure agent, separate invoice indication, recipient's authorization and non-use by service provider). In light of Rule 5 and the Apex Court's reasoning regarding the post-amendment inclusion of reimbursements in 'consideration', the Tribunal holds that reimbursements were properly included in assessable value. Ratio vs. Obiter: Ratio - reimbursements cannot be excluded unless all conditions of Rule 5(2) are strictly satisfied and, absent evidentiary proof of pure-agent relationship, such amounts must be included in value. Obiter - discussion of the legislative amendment timeline insofar as contextualizing the Intercontinental decision. Conclusion: Tribunal confirms inclusion of reimbursements in assessable value for service-tax computation; exclusion under the pure agent exception was not available on facts because requisite documentary proof was not furnished. Issue 2 - Demand of service tax, interest and penalty consequent to inclusion of reimbursements and SSI threshold Legal framework: Proviso to Section 73(1) (demand for service tax based on best judgment/other data), Section 75 (interest on delayed payment), and Section 78 (penalty for suppression/contravention) of the Finance Act, 1994 (read with Section 174 CGST Act for transitional application) govern demand, interest and penalty. Precedent treatment: The Tribunal applies Intercontinental on valuation and Uniworth (and related Apex Court authority) on the standard for treating conduct as bona fide vs. willful suppression, and on burden of proof for mala fide alleged by revenue. Interpretation and reasoning: Having held reimbursements are includible, the Tribunal accepts the Original Authority's calculation of service-tax liability on gross receipts exceeding the SSI threshold (demand of Rs.65,168). The Tribunal also accepts imposition of interest under Section 75. However, the Tribunal scrutinizes whether penalty for suppression/intent (Section 78/proviso invoking extended period) is sustainable - see Issue 4. Ratio vs. Obiter: Ratio - inclusion of reimbursements leads to assessable value exceeding SSI threshold and justifies demand and interest on the included value. Obiter - extent of penalty recoverable where bona fide belief exists (addressed further under Issue 4). Conclusion: Demand of service tax of Rs.65,168 and interest is sustained on merits of valuation; imposition of penalty under Section 78 was confirmed by the adjudicating authority but later assessed against limitation/intent issues (see Issue 4 and final relief). Issue 3 - Penalties for failure to file ST-3 returns and failure to maintain/produce records (Sections 77(2), 77(1)(b)/(c)) Legal framework: Section 77(2) imposes penalty for failure to file returns; Section 77(1)(b)/(c) penalizes failure to maintain prescribed records and failure to provide information/documents as required. Section 78 provides penalties for suppression or contravention relating to tax non-payment. Precedent treatment: No novel precedent dispute; Tribunal applies statutory prescription and factual finding of non-filing for specified half-years. Interpretation and reasoning: The record shows ST-3 not filed for April-Sept 2015 and Oct 2015-Mar 2016, attracting separate penalty amounts under Section 77(2). The Original Authority imposed penalties under Sections 77(1)(b) and 77(1)(c)(ii) for failure to maintain records and produce documents. Tribunal does not disturb findings of failure to file/maintain/produce where supported by record. Ratio vs. Obiter: Ratio - penalties under Sections 77(2), 77(1)(b) and 77(1)(c)(ii) are sustainable where statutory defaults (non-filing, non-maintenance, non-production) are established. Obiter - none beyond application of facts to statutory provisions. Conclusion: Penalties for failure to file returns and to maintain/produce records are sustainable on the factual record, subject to any mitigation or statutory concessions (e.g., reduced penalty on deposit) provided by the adjudicating authority. Issue 4 - Applicability of extended period of limitation and requirement of specific averments of suppression/intent in show-cause notice; burden of proof and bona fide belief Legal framework: Proviso to the limitation provisions (as interpreted in decisions concerning extended limitation periods) requires that show-cause notices must specifically allege fraud, collusion, willful misstatement or suppression of facts with intent to evade tax before the extended limitation can be invoked; burden of proving mala fide lies on the Revenue. Precedent treatment: The Tribunal follows Apex Court authority (Uniworth and Aban Loyd Chiles Offshore and related decisions) holding (i) burden of proving mala fide is heavy on Revenue; (ii) show-cause notice must contain explicit averments of the particular statutory mischief relied upon to invoke extended limitation; and (iii) bona fide conduct and demonstrable steps taken by assessee weigh against finding of willful suppression. Interpretation and reasoning: On facts the Tribunal finds no specific finding of suppression with intent in the impugned order and notes absence of explicit averments in the show-cause notice invoking the proviso. The Tribunal finds evidence of bona fide belief by the appellant regarding threshold applicability (billing segregating fees and reimbursements) and that no material shows deliberate concealment. Consequently, the Tribunal holds extended period of limitation is not attractable and penalty predicated on suppression/intent cannot be sustained. Ratio vs. Obiter: Ratio - extended limitation/proviso cannot be invoked without specific averments in the show-cause notice and proof of mala fide; bona fide belief by assessee negatives finding of willful suppression and negates the extended period. Obiter - remarks on general difficulty of proving state of mind and the protective purpose of requiring specific allegations in notices. Conclusion: The Tribunal sets aside the impugned order solely on limitation grounds related to absence of specific averments and lack of proof of suppression/intent; as a consequence, penalty/extended action based on suppression is not sustainable though liability on merits for included reimbursements and related interest (and certain record/return penalties) were otherwise supported by law and facts.