2025 (12) TMI 714 - AT - Service Tax

Extended limitation u/s 11A invalid without mens rea; mere negligence or legal error not enough for demand

The CESTAT set aside the impugned demand raised by invoking the extended period under Section 11A of the Central Excise Act, 1944. It held that extended ... Time limitation - suppression or misstatement of facts or not - Reversal of pro rata/ proportionate CENVAT Credit in terms of the formula provided under Rule 6(3)(II) of the CENVAT Credit Rules, 2004 - requirement to take into account total input credit before 01.04.2016, when the word “common input” was introduced in the said rule (6) or not - HELD THAT:- It has been held in many cases that the conditions for invoking the extended period as given under Section 11A of the Central Excise Act,1944 are specific and put heavy burden on the revenue; “Fraud” and “collusion” denote a deliberate deception or a secret agreement to defraud the exchequer, implying a high degree of culpability and a concerted effort to mislead; “Willful misstatement” refers to a deliberate and intentional false statement made with the knowledge of its untruth, or with reckless disregard for its veracity, specifically aimed at evading duty; an incorrect statement, if made without such deliberate intent, does not automatically constitute a wilful misstatement. “Suppression of facts” the most frequently litigated ground, implies a deliberate failure to disclose full and correct information with the specific intent to evade payment of duty; crucially, mere omission, negligence, or inadvertence, without this underlying intent, does not constitute suppression. Lastly, “contravention with intent to evade duty” is a broader category encompassing any violation of the Act or Rules, but it is the accompanying intent to evade duty that is paramount for the extended period to apply. Further, it was held that mens rea is central to all grounds for invoking the extended period; a consistent judicial and strict stance has been taken in interpretation of the mens rea to prevent the authorities from invoking extended period as a default for any non-declaration. It has been consistently held that to establish ‘mens rea’ the assessee must have actively concealed, misrepresented, or taken affirmative steps to hide facts, rather than just failing to declare something they might have genuinely overlooked or misunderstood. Hon’ble Supreme Court has repeatedly held that mere negligence, bona fide mistakes, or divergent interpretations of law are insufficient grounds for invoking the extended period, a deliberate intent to evade duty must be conclusively proven by the revenue. Revenue has not made any case for invoking the extended period. It is found that, on this count alone, the impugned order is liable to be set aside - appeal allowed. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether the extended period of limitation under the provisions pari materia to Section 11A of the Central Excise Act, 1944 (as applicable to service tax) could be validly invoked for demanding reversal of CENVAT credit on common input services under Rule 6 of the CENVAT Credit Rules, 2004. 1.2 Consequentially, whether the demand of CENVAT credit reversal, interest and penalty for the period 2014-15 to 2015-16 is barred by limitation. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 & 2: Invocation of extended period of limitation and validity of demand Legal framework (as discussed by the Tribunal) 2.1 The Tribunal examined the conditions for invoking the extended period of limitation as contained in Section 11A of the Central Excise Act, 1944, applicable to service tax demands, namely: 'fraud', 'collusion', 'wilful misstatement', 'suppression of facts', or 'contravention of any provisions of the Act or Rules with intent to evade duty'. 2.2 The Tribunal noted settled jurisprudence, including the decision in Pushpam Pharmaceuticals Company v. Collector of Central Excise, Bombay, holding that: (a) 'fraud' and 'collusion' denote deliberate deception or secret agreement to defraud the exchequer; (b) 'wilful misstatement' requires a deliberate, intentional false statement made with knowledge of its untruth or reckless disregard of truth, aimed at evasion; (c) 'suppression of facts' requires deliberate non-disclosure with specific intent to evade; and (d) 'contravention with intent to evade' also requires demonstrable intent to evade duty. 2.3 Mens rea is central to all the above grounds; mere omission, negligence, bona fide mistakes or divergent interpretations of law are insufficient. The burden lies heavily on the Revenue to establish deliberate intent to evade. 2.4 The Tribunal also relied on the principle that prior knowledge of the department, or its ability to obtain such knowledge through returns, audits or inquiries, negates an allegation of suppression. Reference was made to a decision of the Principal Bench in G.D. Goenka (Final Order No. 51088/2023) holding inter alia that: (i) the assessee's obligation is to file statutory returns; (ii) it is for the department to scrutinize returns, call for records and, if necessary, issue show cause notice within limitation; (iii) failure of officers to scrutinize returns or act within time cannot be converted into a ground to invoke the extended period; and (iv) extended period cannot be invoked in the absence of demonstrable fraud, collusion, wilful misstatement, suppression or contravention with intent to evade. Interpretation and reasoning 2.5 The Commissioner had invoked the extended period on the basis that the assessee failed to disclose that they were computing the amount to be reversed under Rule 6(3A) on the basis of 'common credit' instead of 'total credit', and that the short payment came to light only after investigation. 2.6 The Tribunal rejected this reasoning. It found that the assessee had regularly filed statutory returns disclosing the amounts of CENVAT credit taken and reversed; the department could have verified the correctness of the computation by scrutinizing these returns and, if required, by calling for supporting information. 2.7 The Tribunal held that the omission of the department to scrutinize returns cannot be used against the assessee to allege suppression or wilful misstatement. The department's failure to exercise its powers of scrutiny and assessment within the normal period is a policy and administrative risk assumed by the Board, and cannot justify extended limitation. 2.8 The Tribunal noted that there was no evidence on record of any positive act by the assessee amounting to fraud, collusion, wilful misstatement or deliberate suppression of facts, nor any material showing contravention with intent to evade payment of service tax. The dispute arose from the method of computation under Rule 6(3A) and interpretation of 'total credit' versus 'common credit', which is essentially an interpretational issue. 2.9 In light of the established jurisprudence, the Tribunal reiterated that extended limitation cannot be invoked in the absence of clear proof of mens rea, and that mere disagreement on legal interpretation or non-detection by the department within the normal period does not constitute suppression or wilful misstatement. Conclusions 2.10 The Tribunal held that the Revenue failed to establish any of the statutory ingredients required for invoking the extended period of limitation. There was no demonstrable fraud, collusion, wilful misstatement, suppression of facts or contravention with intent to evade. 2.11 Consequently, the extended period was held to be inapplicable and the entire demand raised in the show cause notice dated 28.09.2020 for the period 2014-15 to 2015-16 was held to be barred by limitation. 2.12 On this ground alone, the impugned order confirming demand of CENVAT credit reversal, interest and penalty under Section 78 of the Finance Act, 1994 was set aside, and the appeal was allowed with consequential relief as per law. 2.13 Having decided the matter in favour of the assessee on limitation, the Tribunal expressly declined to examine or decide the merits of the case, including the substantive contentions on the interpretation of Rule 6 of the CENVAT Credit Rules, 2004, the characterization of trading and activities under the negative list, treatment of export turnover and correctness of quantification.