2025 (12) TMI 521 - AT - Service Tax

Extended limitation under Section 73(1) held inapplicable; partial relief with remand on short-paid service tax and penalties.

CESTAT allowed the appeal in part. It held that the dispute on taxability under Notification 25/2012-ST was purely interpretational; therefore, the ... Invocation of extended period of limitation for making this demand - interpretation of the entries 12, 12A, 13 & 14 in the N/N. 25/2012-ST - services provided are exempt from payment of service tax or not - Short payments made by the appellant during 2015-16 in respect of the admitted liability as per the ST-3 return. Invocation of extended period of limitation for making this demand - interpretation of the entries 12, 12A, 13 & 14 in the N/N. 25/2012-ST - services provided are exempt from payment of service tax or not - HELD THAT:- The issue being interpretational in nature the invocation of extended period of limitation for making the demand cannot be justified. Hon’ble Supreme Court has in the case of International Merchandise [2022 (12) TMI 556 - SUPREME COURT] held that 'Tribunal having come to the conclusion that the issue turned upon an interpretation of the provisions of Section 65(68) and Section 65(86b) of the Finance Act, 1994, there was no warrant to allow the invocation of the extended period of limitation and to direct the determination of the penalty following the re-quantification of the demand. The extended period of limitation would clearly not stand attracted in respect of the first show cause notice dated 20 October, 2009. The show cause notice shall hence have to be confined to the normal period of limitation excluding the extended period.' The demand made in respect of receipts from M/s UPPCL and M/s Krishi Utpadan Mandi Samiti are barred by limitation, as extended period of limitation as per proviso to Section 73 (1) could not have been invoked for making these demands. Short payments made by the appellant during 2015-16 in respect of the admitted liability as per the ST-3 return - HELD THAT:- The short payment vis a vis admitted liability as per ST-3 is for the period 2015-16 appellant has claimed that revenue has failed to give them the credit of the amount of Rs 4,89,669/- deposited by them during the period 2017-18. They have also furnished the details of challan along with challans. However the availability of challan only is an evidence of payment made to exchequer. Without proper reconciliation of the challans with the ST-3 returns there cannot be any merits in the submissions. Payment made during 2017-18 be appropriated to the short payments made during the period 2015-16 only after due verification of the challans and there reconciliation with ST-3 returns for the corresponding period. The end of justice will be met if matter is remanded to the original authority for reconciliation of the challans with the ST-3 returns for the corresponding period. If on such reconciliation it is still found that appellant has short paid the admitted service tax liability as per their ST-3 returns, the amount short paid need to be recovered from them along with the interest for the delay in payment from the due date. Penalty to the extent of unreconciled amount under Section 78 of Finance Act, 1994 is also upheld - Penalties under Section 77 (1) (b) and 77 (1) (c) are also set aside. Appeal allowed in part. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether the extended period of limitation under the proviso to Section 73(1) of the Finance Act, 1994 could be validly invoked to demand service tax on works claimed as exempt under Notification No. 25/2012-ST, specifically in relation to receipts from a state project corporation and an agricultural market authority. 1.2 Whether the assessee could, at the second appellate stage, challenge the demand of service tax on 'material cost for provision of taxable services' for a past period when that component of demand had not been disputed before the first appellate authority. 1.3 How the short payment of admitted service tax liability for the period 2015-16, as per ST-3 returns, should be determined and adjusted against tax payments made in subsequent periods, and the consequential liability to interest. 1.4 The sustainability and scope of penalties imposed under Section 78 and under Section 77(1)(b) and 77(1)(c) of the Finance Act, 1994 in the facts of the case. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Invocation of extended period of limitation for demands based on interpretation of exemption Notification No. 25/2012-ST Legal framework 2.1 The demand was raised under the proviso to Section 73(1) of the Finance Act, 1994, alleging suppression with intent to evade payment of service tax. The underlying substantive dispute related to the applicability of exemptions under Entries 12, 12A, 13 and 14 of Notification No. 25/2012-ST to works such as construction of check dams and electrification/high mast lighting for government-related entities. 2.2 The Tribunal noted that the lower authorities had examined the scope of 'Government', 'local authority' and 'governmental authority', as defined in the Finance Act and in Notification No. 25/2012-ST, and had undertaken a detailed analysis of whether the recipients of services qualified for such status to enable the exemption. Interpretation and reasoning 2.3 The Tribunal found, from the impugned order, that the dispute regarding taxability of services rendered to the state project corporation and the agricultural market authority turned entirely on interpretation of the entries in Notification No. 25/2012-ST, namely whether the particular works and the status of the service recipients fell within Entries 12, 12A, 13 and 14. 2.4 Relying on judicial precedents, the Tribunal held that where the issue is essentially interpretational-relating to the proper construction of statutory provisions or exemption notifications-invocation of the extended period of limitation is not justified in the absence of a positive act of suppression, deception, or malpractice. 2.5 The Tribunal referred to decisions explaining that 'suppression' under the extended limitation provisions requires deliberate withholding of information with intent to evade, and that mere incorrect interpretation or omission without such intent does not suffice. It also endorsed the principle that, in disputes turning on interpretation, the extended period and consequential penalties are generally not attracted. Conclusions 2.6 The Tribunal held that the demands of service tax made in respect of receipts from the state project corporation and the agricultural market authority, which were founded on differing interpretations of Notification No. 25/2012-ST, were barred by limitation, as the extended period under the proviso to Section 73(1) could not be validly invoked in such circumstances. Issue 2 - Challenge to demand on 'material cost for provision of taxable services' not raised before first appellate authority (constructive bar) Legal framework 2.7 The Tribunal examined whether an assessee, having not disputed a particular component of demand before the first appellate authority, could raise that challenge for the first time in second appeal. The Tribunal relied on principles analogous to constructive res judicata and the requirement that all available grounds on the same subject in dispute be taken at the earliest stage. Interpretation and reasoning 2.8 From the impugned order, the Tribunal noted that the assessee had not challenged, before the first appellate authority, the demand of Rs. 24,528/- for 2014-15 raised towards 'Material Cost for provisions of Taxable Services (Amount claimed as supply of goods without any evidence)'. There was no discussion or whisper regarding this component in the order of the first appellate authority. 2.9 Relying on precedent, the Tribunal held that once a component of demand has been allowed to attain finality at an earlier stage-by not being challenged-it cannot be reopened in a subsequent appeal confined to other issues. The principles underlying Order II Rule 1 and Section 11 of the Code of Civil Procedure, including constructive res judicata, bar piecemeal or repeated challenges on the same subject which could and ought to have been raised earlier. Conclusions 2.10 The Tribunal held that the assessee was precluded from challenging the said demand of Rs. 24,528/- at this stage. The demand on 'material cost for provision of taxable services' for 2014-15 was accordingly upheld. Issue 3 - Determination and adjustment of short-paid admitted service tax liability for 2015-16 and claim of set-off against later payments Legal framework 2.11 The original authority had found a short payment of Rs. 4,31,646/- in 2015-16 vis-à-vis the assessee's own admitted liability as per ST-3 returns. The assessee claimed that additional payments of service tax made in 2017-18, aggregating Rs. 4,89,669/-, should be adjusted against this short payment. Interpretation and reasoning 2.12 The Tribunal observed that the confirmed short payment pertained to the period 2015-16, whereas the assessee sought to adjust tax payments made during 2017-18, producing challan details in support. 2.13 The Tribunal found that the existence of challans, by itself, only establishes that payments were made to the exchequer, but does not show the precise tax period, liability or return against which such payments were appropriated. Without reconciliation with ST-3 returns for the corresponding period, it could not be ascertained whether those amounts related to the admitted short payment of 2015-16. 2.14 The Tribunal did not accept the lower authorities' outright rejection of the assessee's claim solely for want of earlier verification, but also did not accept that the challans alone were sufficient to mandate automatic adjustment. It held that a proper verification and reconciliation exercise was necessary to determine whether and to what extent the 2017-18 payments could be appropriated towards the 2015-16 shortfall. Conclusions 2.15 The Tribunal upheld, in principle, the demand of service tax for short payment vis-à-vis the admitted liability for 2015-16 along with interest, but directed that the sum be adjusted against tax payments evidenced by challans, subject to reconciliation with the corresponding ST-3 returns. 2.16 For this limited purpose, the matter was remanded to the original authority to verify the genuineness of the challans, reconcile them with the returns, and determine the net short payment, if any, recoverable along with applicable interest. Issue 4 - Sustainability and scope of penalties under Sections 78 and 77 of the Finance Act, 1994 Legal framework 2.17 Penalty under Section 78 was imposed for non-payment/short payment of service tax by reason of suppression of facts, and penalties under Section 77(1)(b) and 77(1)(c) were imposed for contraventions relating to maintenance of records and non-compliance with summons/requirements. Interpretation and reasoning 2.18 In light of its finding that the main demands relating to services provided to the state project corporation and the agricultural market authority were barred by limitation, the Tribunal acknowledged that these demands, being interpretational in nature, could not form the basis for invoking the extended period or for sustaining penalties premised on suppression with intent to evade. 2.19 With respect to the residual demand arising from short payment of admitted tax liability for 2015-16, the Tribunal held that any penalty under Section 78 could only survive to the extent of the final unreconciled short payment established after remand. The Tribunal considered that, while self-assessment requires correct declaration and payment, the precise quantum of final short payment was yet to be conclusively ascertained pending reconciliation. 2.20 As to penalties under Section 77(1)(b) and 77(1)(c), the Tribunal, in the overall factual context and in view of the partial setting aside of substantive demands and limitation findings, considered it inappropriate to sustain these penalties. Conclusions 2.21 Penalty under Section 78 was upheld only to the limited extent of any unreconciled amount of short-paid admitted tax liability ultimately found payable for 2015-16 after verification by the original authority. 2.22 Penalties imposed under Section 77(1)(b) and 77(1)(c) of the Finance Act, 1994 were set aside. 2.23 The appeal was thus partly allowed: demands relating to receipts from the state project corporation and agricultural market authority were held time-barred; the small demand on material cost for 2014-15 was upheld; the admitted short-payment issue for 2015-16 was remanded for reconciliation and consequential determination of tax, interest and limited penalty under Section 78.