Service Tax collected but not deposited-SCN issued but wrong classification

[Sumeet Tholle]

Dear Sir,

My client registered with Service Tax department under Erection, Installation Service and collected Service Tax.

But since last 7 years he has not deposited Service Tax and not filed returns also.

Now, department issued SCN for recovery of Tax for 7 years and imposed penalties also. But department issued SCN under " Manpower Supply Service".

Our activity no where related with manpower.

Now my question is

1. Can department issue SCN for 7 years ?

2. Is SCN valid as classification is not correct ?

Again Pl. note, My client collected Service Tax but not paid.

Pl. reply.

Pl. quote case laws also.

Thanks.

Sumeet C. Tholle,

CA,

Aurangabad.

[Akash Deep]

Dear Sir,

Please note that department even after invoking proviso to section 73(1) can not issue notice for 7 years. maximum they can issue notice for 5 years.

If SCN is demanding service tax under wrong category, it is null and voids and no tax can be demanded including any penalty. demanding tax under correct category of service is the most basic thing.

Regards

Akash deep

[Rakesh Chitkara]

No way he can escape. Classification can be contested but he would find it extremely difficult to overcome mens rea (guilty mind) : He registered to collect tax but then never filed returns and suppressed from the Department. Not only this, he collected tax but pocketed but never deposited.

Yes, 7 years is disputable as demand can only be for 5 years (now 5 1/2 years) counted from the date when return was due.

No Court will grant relief on technical grounds (like classification) to a dis-honest assessee. Better go to Settlement Commission to save himself.

It is a fit case for prosecution, and that is a continuing offence. He can not hide behind prospective application of law. How did he save himself from arrest ? He must have made a hefty deposit during investigations or simply done 'Happy Diwali'.

[Akash Deep]

Dear sir,

first of all classification of the serv ice under dispute is not a technical ground. it is the most substantive ground going to the root of the case. howsoever strongly department may establish the evasion of duty but it has to point out the correct taxable category of service. one it is failed to point out the correct classification of service. no tax can be collected. I personally do not think that classification of disputed service is a technical ground. every court will give benefit if you are able to prove that department is asking tax under wrong category of service.

Indeed it is a happy diwali for your client. For department every assessee is dishonest one. if if it is proved on the face that assessee has pocketed crores in the name of tax., department has to satisfy requirement under law to recover such tax.first is it has to raise demand under 5 years or with 18 months as the case may be. and second it has to point out under what category services provided by the assessee isa correctly classifiable. if the services provided by the assessee is not classifiable as suggested by the department in SCN, Notice itself becomes futile. NO tax can be collected where services of the assessee is not classifiable under the category as alleged by the department.

Akash Deep

[Rakesh Chitkara]

Fraud nullifies everything and you can not approach courts with unclean hands, are the established principles of law. Section 73(1) alone is sufficient to make this assessee disgorge his unjust gains. No court will grant him substantive relief. He can escalate matters upto Supreme Court. It is not a case worth fighting for to win but to limit damage. Settle at the first available forum and seek relief. Settlement Commission is established for such type of cases. A good adviser, keeping the long term relationship with client, will advise him to litigate, only if there is a strategy to gain time. With 30% interest, that option is costly now. What my Ld. friend Akash Deep stated is a generalisation and we lawyers have won many a cases on the ground of classification alone in the past in CESTAT. But this case has specific facts and circumstances. Mind you, due process of law also means spending huge amounts in litigation which any lawyer or CA would be happy to encourage. I am doubtful whether a mere a demand show cause notice has been served without the threat of arrest. It does not appear to be a demand arising out of audit or at the initiative of the Range but more likely by Anti-Evasion, which means the matter is in the knowledge of officers upto Commissioner. First ascertain from the querist, what course did the assessee actually adopt : has he paid up already? Let the querist share rest of the details with Mr. Akash Deep whether this demand notice is for appropriation of the amount already deposited.

I am presuming that the stand of assessee on classification is correct and is not debatable. With the introduction of Negative list where classification concept has been completely dispensed with, the source of easy money for consultants to question classification and quash demands, is now gone.

[Mahir S]

1) Department can always issue Corrigendum to the show cause notice already issued.

Mistake in the show cause notices can be rectified before adjudication - CESTAT BANGALORE BENCH, Cauvery Iron and Steel (India) Ltd. v/s Commissioner of Central Excise, Hyderabad.

2) It is on recrod that the assessee is not registered under Manpower Supply Service not carrying out any such activites; but registered under Erection, Installation Service for which service tax is collected but not deposited. Hence, even without corrigendum, the show cause notice is valid and legal as it is issued for non-deposit of service tax collected and with reference to the Erection and Installation Service provided by assessee; who is not registered norcollected any service tax under Manpower Supply Service, hence it is nothing but a simple typing/clerical mistake, not having any bearing on the scn issued.

3) Instead of pointing to such mistakes, the consultant of the aseesee should guide him to pay up the service tax immediately and also inform the department about the typing mistake in the scn.

4) Section 74 also allows for rectification of mistakes, (though herein there are no such mistakes).

5) Income tax department should open assessment for tthe last 7 years period based on the scn issued to the assessee and without waiting for the outcome of the service tax order.

[YAGAY and SUN]

Dear Sumeet,

Charging and collection of Service Tax from service recipients but not depositing/paying back to exchequer tantamount to unjust enrichment which is even not allowed in the Constitution of India. Further, indulging in such activities is crime for which attachment of property, issuance of arrest warrant and publication of names can be initiated by the Department. Provisions of IDT laws are now very stringent and we all know the consequences for non compliance.

Regards,

YAGAY and SUN

(Management and Indirect Tax Consultants)

[Rakesh Chitkara]

Mr. Surender Gupta of TMI needs to be reprimanded for mischievously posting a query in discussion forum and simultaneously posting a case law to heavily influence the debate. Refer latest  [CCE. and ST. Ludhiana Versus Ajay Kumar Gupta] = 2014 (9) TMI 649 - CESTAT NEW DELHI passed by Delhi CESTAT last week on September 12, 2014. Issue was collecting tax but not depositing it. Plea taken was that tax was collected prior to enactment of that classification-category and therefore Department can not demand tax prior to levy came in force. SCN, Adjudication Order and CESTAT, while accepting the fact cited by assessee, rejected the contention that Revenue has no legal authority to demand the tax he had collected without authority of law and pocketed. It upheld the demand with interest and 100% penalty. My question : Can the department demand tax for the period before levy under a specific classification was notified ? (In fact, this SCN was also defective in citing legal provisions.) Can a dishonest assessee thumb his nose both on Revenue and his clients and retain unlawful collection, is the basic issue ? Any amount collected as tax has to be deposited with Revenue and can not be retained by an assessee, regardless of defects in the demand notice. Law of equity is bigger than law of technicality. My question to the main querist has still not been answered : how did he save himself from being arrested and bailed out without pre-depositing the tax ? SCN seems to be a follow-up exercise to appropriate the amount already deposited and to further seek interest and imposition of penalty. If that has already been done, then this assessee should further escalate the fight in High Court, and if he wins, file a claim for refund of tax. But will he be able to cross the hurdle of "unjust enrichment" and save the money from being transferred under Section 12C of CEA, 1944 to Consumer Welfare Fund, even if he wins in the Supreme Court on appeal ? It is a no win situation, except to save himself by seeking protection of lower penalty plus prosecution by rushing to Settlement Commission before the case is adjudicated. I am sure Mr. Sumeet C. Tholle will guide him to minimize his damage and let his client not fall into the hands of unscrupulous CAs or lawyers like me who will bluff him with unachievable.

AI Summary

Unpaid collected service tax exposes the collector to recovery, penalties and enforcement despite classification disputes.
Collecting service tax without depositing it exposes the provider to recovery, penalties and prosecution; limitation for issuing demands is governed by statute and may restrict the period for which a show cause notice can be issued. Misclassification in a show cause notice affects the legal basis of the demand: it may be a substantive flaw that nullifies the notice if the service is not taxable under the alleged category, or it may be corrected by departmental corrigendum or statutory rectification before adjudication. Despite technical defences, retention of collected tax raises unjust enrichment concerns, and prompt compliance or use of settlement mechanisms is advised to limit exposure.