2025 (11) TMI 507 - AT - Service Tax

Service tax demand time-barred where bona fide belief of exemption and Rule 2A(ii) valuation issues reduced liability

CESTAT-AT held that appellants, who provided work-contract services to the Railways, bona fide believed their services were exempt and had not registered ... Non-payment of service tax - providing work contract services to Railways - Declared Service or exempted services as per S. No.12 and S. No.14 of Notification No.25/2012-ST dated 20.06.2012 - valuation of work contract services has not been done in accordance to Rule 2A(ii) of the Service Tax (Determination of Value) Rules, 2006 - recovery of service tax with interest and penalty - invocation of extended period of limitation - HELD THAT:- From the facts as recorded in the impugned order, it is not disputed that appellants were providing the services to the Indian Railways. They entered in a bonafide belief that the services provided by them were exempt from payment of service tax and for that reason they did not take registration or paid service tax in respect of these services. It is also evident that it is not the case that any of the contracts provided for service tax to be paid in respect of these services. It is also observed that in respect of Work Contract Services the liability to pay service tax on the service provider is limited to 50% of the tax value as per N/N. 30/2012. It is not the case that the Railways were paying service tax on the part payable by them in terms of this notification under reverse charge mechanism. All these facts cleared point out that appellant entertained a bonafide belief that no service tax was payable by them. Invocation of extended period of limitation - HELD THAT:- Neither show cause notice nor Order-in-Original or the impugned order records any finding in respect of the bonafide belief which appellant would have entertained for the reason of nature of services provided to the railways after going through all the work contracts the demand made in the show cause notice has been substantiate reduced from Rs.32,82,750/- to Rs.12,55,776/-. Number of contracts has been found to be under the category of exempted contracts, as the appellant entertained a bonafide belief with regards to his liability to pay service tax and the issue involved was in nature of interpretation. Accordingly, there are no merits in the invocation of extended period of limitation for making this demand. As the show cause notice has been issued beyond the normal period of limitation, the entire demand is time bared. There are no merits in the impugned order - appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether payments received by the assessee during FY 2016-17 pertain to exempted services under Notification No.25/2012-ST (entries S. No.12, 12A and 14) or are taxable. 2. Whether the service portion of work-contract services is to be valued under Rule 2A(ii) of the Service Tax (Determination of Value) Rules, 2006 (i.e., abatement of 70% for maintenance/repair contracts) or under Rule 2A(i) (40% for original works). 3. Whether the extended period of limitation (proviso to Section 73(1) of the Finance Act, 1994) is correctly invoked by the adjudicating authority on the ground of suppression of facts/intent to evade payment of service tax. 4. Whether penalties and interest imposed under Sections 75, 77, 78 and late fee under Section 70 are sustainable in light of findings on exemption, valuation and limitation. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Exempted nature of payments under Notification No.25/2012-ST (S. No.12, 12A, 14) Legal framework: Notification No.25/2012-ST (S. No.12, 12A, 14) exempts specified construction/repair/maintenance/original works when conditions as to nature of recipient (Government), nature of work and temporal limits (e.g., contract entered prior to 01.03.2015 for S. No.12A) are satisfied. Precedent treatment: The impugned order and adjudicating authority applied the statutory criteria to individual work orders; appellate reasoning refers to established principles that exemptions are not general and require fulfillment of specified conditions. Interpretation and reasoning: The Tribunal examined the work orders and payment reconciliation supplied at appellate stage. It categorized multiple contracts: some classified as original railway works eligible under S. No.14(a); several contracts were annual repair/maintenance executed prior to 01.03.2015 and held to fall under S. No.12A(i) (exempt), while two contracts executed on 18.09.2015 and 27.10.2016 fell beyond the 01.03.2015 cut-off and were held taxable. The Tribunal accepted documentary linkage between Form 26AS, work orders and payment receipts to the extent provided; where documentary evidence matched exempt contracts, exemption was allowed. Ratio vs. Obiter: Ratio - exemption depends on meeting the specific conditions of the notification (nature of work, recipient, and temporal condition); application requires contract-wise documentary analysis. Obiter - none significant beyond applied reasoning. Conclusion: Certain payments were correctly held to be exempt (work orders executed prior to 01.03.2015 or of original nature), while payments under contracts executed after the temporal cut-off were not exempt and are taxable. Issue 2 - Valuation of service portion under Rule 2A(ii) (70% abatement) vs Rule 2A(i) (40% abatement) Legal framework: Rule 2A of the Service Tax (Determination of Value) Rules, 2006 prescribes alternative methods: (A) 40% taxable portion for original works; (B) 70% abatement (i.e., 30% taxable) for works contracts not covered under (A) including maintenance/repair services. Precedent treatment: Adjudicating authority and appellate order apply Rule 2A by classifying the contracts into category (A) or (B) based on the nature of the contract (original versus maintenance/repair) and compute taxable value accordingly. Interpretation and reasoning: The Tribunal found that the two non-exempt contracts (dated 27.10.2016 and 18.09.2015) were maintenance/repair and supply of materials and thus fall within category (B) of Rule 2A, attracting abatement of 70% (i.e., service tax on 30% of gross). The taxable amounts were recomputed after applying the appropriate abatement for these contracts; other taxable receipts (balance unexplained receipts) were treated at full value where not attributable to exempt/non-taxable heads. Ratio vs. Obiter: Ratio - classification of a works contract into categories under Rule 2A determines the proportion of taxable service portion; application depends on factual nature of the contract. Obiter - emphasis that documentary evidence is necessary to classify a contract. Conclusion: Rule 2A(ii) (category B) applies to the identified maintenance/repair contracts executed post cut-off; taxable value is determined after 70% abatement on those contracts; residual unexplained receipts are taxable at full value. Issue 3 - Invocation of extended period of limitation under proviso to Section 73(1) (suppression of facts/intent to evade) Legal framework: Proviso to Section 73(1) permits extended period where tax escaped assessment by reason of suppression of facts, willful misstatement, fraud, collusion or contravention with intent to evade. Jurisprudence requires proof of deliberate, willful suppression or positive act indicating intent to evade; mere non-payment or omission without mala fide is insufficient. Precedent treatment (followed/distinguished): The Tribunal reviews Supreme Court authority (e.g., Pushpam Pharmaceuticals, Sarabhai, UNIWORTH TEXTILES, Aban Loyd Chiles and Allied decisions) establishing that suppression/misstatement must be wilful and with intent to evade, and that the show-cause notice must specifically aver the grounds relied on to invoke the proviso. Madras and Kerala High Court observations to similar effect are cited. Interpretation and reasoning: The adjudicating authority invoked the proviso on the basis that returns (ST-3) were not filed and values were suppressed. The Tribunal noted the appellant's bonafide belief (services to Railways were exempt), absence of contractual stipulation requiring service tax payment, absence of evidence that Railways paid tax under reverse charge, and that many contracts were genuinely ambiguous/interpretable - all pointing to bonafide belief rather than deliberate evasion. The Tribunal observed that neither the show-cause notice nor the O-O recorded any finding addressing the appellant's bona fide belief. Applying precedents, the Tribunal held that mere non-payment or non-registration, without evidence of positive acts showing intent to evade, does not satisfy the proviso's requirement. Further, the show-cause notice must specify which limb of proviso is alleged; that requirement was not met sufficiently. Ratio vs. Obiter: Ratio - invocation of extended limitation requires specific, substantiated allegation of wilful suppression or intent to evade; bona fide belief and interpretative disputes negate invocation. Obiter - reference to burden of proof and necessity of specific averments in show-cause notice. Conclusion: Extended period under proviso to Section 73(1) was not available; the demand insofar as based on extended limitation is time-barred insofar as it relied on that proviso, and the Tribunal found no merits in invoking the extended period given the appellant's bonafide belief and interpretative nature of dispute. Issue 4 - Sustainability of demand, interest and penalties (Sections 68, 75, 77, 78, Section 70 late fee) Legal framework: Section 68 levies service tax on taxable services; Section 75 prescribes interest for delayed payment; Section 78 prescribes penalty for contravention; Sections 77(1)(a),(c),(d) and 77(2) permit penalties for failure to furnish information/produce documents; Section 70/Rule 7(c) provides late fee for non-filing of returns. Precedent treatment: Authorities computed demand after re-quantifying taxable value (taking exemptions and Rule 2A abatements into account). Supreme Court precedent distinguishes ordinary default from willful evasion for penal consequences tied to extended limitation; penalties for failure to file/produce documents may still survive where defaults are established. Interpretation and reasoning: The Tribunal accepted that a portion of receipts (Rs.12,65,776 original computation) represented taxable services after deducting exempt receipts and applying valuation rules; the adjudicating authority's quantification was accordingly reduced. The Tribunal found that interest under Section 75 is payable on confirmed liability. Regarding penalty under Section 78, the adjudicating authority imposed penalty equal to demand on ground of suppression with intent to evade; the Tribunal found that suppression with intent to evade was not established to justify invocation of extended limitation, and noted appellant's bonafide belief; accordingly, the Tribunal allowed the appeal (operative part) and set aside demand based on extended period. However, the adjudicating authority's findings that some acts (non-filing, non-production) occurred could sustain penalties under Sections 77 and late fees under Section 70 to the extent such defaults are established as statutory breaches (distinct from wilful evasion). Ratio vs. Obiter: Ratio - tax and interest may be confirmed to the extent taxable receipts are proved; penalty under Section 78 tied to intent to evade requires positive finding of mala fide; penalties for failure to furnish returns/documents (Section 77, Section 70) are sustainable where non-compliance proved irrespective of bona fide belief. Obiter - extent of reduction in penalties is guided by findings on bonafide belief and limitation. Conclusion: Tax liability re-quantified and reduced after allowing exemptions and abatements; interest under Section 75 remains payable on confirmed liability. Extended period for recovery invoking proviso was not sustainable due to absence of proof of wilful suppression/intent to evade; penalties predicated on such intent are unjustified, while penalties/late fees for non-furnishing of returns/documents may be maintainable to the extent defaults are proven.