2014 (4) TMI 505 - HC - Service Tax

Confirmation of demand by the tribunal on merit after concluding that extended period of limitation cannot be invoked - valuation - tribunal concluded that that since storage of goods in the cold storage was an essential part of the clearing and forwarding operations of the assessee cold storage charges are required to be added in the taxable value of services rendered. - Held that - the Supreme Court has held that the burden of proof of proving mala fide conduct under the proviso to Section 28 of the Customs Act 1962 which is an equivalent provision is on the Revenue and specific averments must be made in the show cause notice for initiation of an action under the proviso. In the present case the Tribunal was justified in coming to the conclusion that the facts had been duly disclosed by the assessee to the Department and were within the knowledge of the Department in 2002. - Decided against Revenue. Tribunal having came to the conclusion that the extended period of limitation could not have been validly applied acted outside its jurisdiction in entering upon the merits of the dispute on whether the demand for duty should be confirmed. Once it is held that the demand is time barred there would be no occasion for the Tribunal to enquire into the merits of the issues raised by the Revenue. - Decided in favor of assessee.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court were:

(a) Whether the extended period of limitation of five years under Section 73(1) of the Finance Act, 1994 could be invoked by the Revenue for demanding service tax on cold storage charges received by the assessee, given the facts and circumstances of the case.

(b) Whether the show cause notice issued by the Revenue was barred by limitation under the provisions of the Finance Act, 1994.

(c) Whether, having held that the proceedings were barred by limitation, the Tribunal committed an illegality by proceeding to decide the matter on merits.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Validity of invoking the extended period of limitation under Section 73(1) of the Finance Act, 1994

Relevant legal framework and precedents: Section 73(1) of the Finance Act, 1994 provides a limitation period of one year for issuance of a notice where service tax has not been levied or paid or has been short-levied or short-paid. An extended period of five years is applicable only if the service tax was not levied or paid due to fraud, collusion, wilful mis-statement, suppression of facts, or contravention of provisions with intent to evade payment.

Supreme Court precedents clarified the meaning and application of "suppression of facts" and the conditions for invoking extended limitation. In Nizam Sugar Factory, it was held that if the relevant facts were known to the authorities at the time of the first show cause notice, subsequent proceedings cannot be based on suppression. Similarly, in Anand Nishikawa Co. Ltd., suppression requires deliberate concealment of facts. Mere failure to declare or pay does not amount to suppression or wilful misstatement. The Court in Uniworth Textiles Ltd. emphasized that non-payment alone cannot be equated with collusion or suppression to invoke extended limitation.

Court's interpretation and reasoning: The Court examined the facts and found that the Department was aware of the fixed cold storage charges as early as September 2002 through official correspondence. The agreement between the assessee and Hindustan Lever Limited (HLL) clearly stipulated fixed monthly charges for cold storage as part of the clearing and forwarding services. The assessee had replied to the Department's letter disputing the applicability of service tax on cold storage charges but did not conceal the fact of these charges.

The Court reasoned that since the Department had knowledge of the facts and the agreement, there was no suppression of facts by the assessee. Therefore, the extended period of limitation could not be invoked. The Court relied on the principle that extended limitation applies only where there is fraud, collusion, or deliberate suppression, none of which were present here.

Key evidence and findings: The letter dated 27 September 2002 from the Department to the assessee explicitly mentioned the fixed cold storage charges and directed payment of service tax. The assessee's reply dated 8 November 2002 acknowledged the charges but disputed their taxability. This exchange established that the Department had full knowledge of the facts well before the issuance of the show cause notice in 2006.

Application of law to facts: Since the Department had knowledge of the facts and the assessee did not conceal any information, the extended limitation period under Section 73(1) could not be invoked. The demand beyond one year was thus time-barred.

Treatment of competing arguments: The Revenue contended that the extended period was valid because the assessee failed to furnish information indicating the fixed charges were part of the clearing and forwarding agreement. The Court rejected this, pointing to the Department's prior knowledge and correspondence, which negated any claim of suppression.

Conclusion: The Tribunal's finding that the extended period of limitation could not be invoked was upheld. The demand beyond one year was barred by limitation.

Issue 2: Whether the show cause notice was issued within the original period of limitation

Relevant legal framework: Section 73(6) defines the "relevant date" for issuing a notice. For taxable services where returns are filed periodically, the relevant date is the date of filing the return or the last date for filing. The limitation period of one year runs from the relevant date.

Court's interpretation and reasoning: The assessee was required to file half-yearly returns by the 25th of the month following the half year. For the period ending 31 March 2005, the return was due by 25 April 2005. The show cause notice was issued on 21 July 2006, which was beyond the one-year limitation period.

Application of law to facts: Since the notice was issued after the expiry of one year from the relevant date, it was barred by limitation.

Conclusion: The show cause notice was not issued within the original limitation period, reinforcing the time-barred nature of the demand.

Issue 3: Legality of the Tribunal deciding the merits after holding the demand was time-barred

Relevant legal framework and precedents: The Supreme Court in State Bank of India Vs. B.S. Agricultural Industries held that if a complaint or proceeding is barred by limitation, the adjudicating authority must not proceed to decide the matter on merits. Doing so amounts to illegality.

Court's interpretation and reasoning: The Tribunal, after concluding that the demand was barred by limitation, proceeded to examine whether cold storage charges were taxable. The Court held that this was beyond the Tribunal's jurisdiction because once limitation is established, there is no occasion to decide the merits.

Treatment of competing arguments: The assessee argued that the Tribunal erred in entering into merits after holding the demand time-barred. The Court agreed, citing the binding precedent that limitation bars the entire proceeding, including merits.

Conclusion: The Tribunal's decision on the merits was held to be an illegality and was set aside. The matter was to be disposed of on the ground of limitation alone.

3. SIGNIFICANT HOLDINGS

"Extended period based on suppression of fact cannot be invoked in the present case and therefore demand beyond period of one year is time-barred in the present case."

"Allegation of suppression of facts against the appellant cannot be sustained. When the first SCN was issued all the relevant facts were in the knowledge of the authorities... We hold that there was no suppression of facts on the part of the appellant assessee."

"Mere non-payment of duties is not equivalent to collusion or willful misstatement or suppression of facts... Something more must be shown to construe the acts of the Appellant as fit for the applicability of the proviso."

"If the complaint is barred by time and yet, the consumer forum decides the complaint on merits, the forum would be committing an illegality and, therefore, the aggrieved party would be entitled to have such order set aside."

Core principles established include:

• The extended limitation period under Section 73(1) of the Finance Act, 1994 applies only in cases of fraud, collusion, wilful mis-statement, or suppression of facts with intent to evade tax, not mere non-payment or failure to pay.
• Knowledge of facts by the Department negates suppression of facts and bars invocation of extended limitation.
• Show cause notices must be issued within the prescribed limitation period calculated from the relevant date as defined under the Act.
• Once a proceeding is held barred by limitation, the adjudicating authority must not proceed to decide the matter on merits.

Final determinations:

• The extended period of limitation could not be invoked in the present case as there was no suppression of facts.
• The show cause notice issued was beyond the original limitation period and thus time-barred.
• The Tribunal erred in deciding the merits after holding the demand time-barred; that part of the decision was set aside.
• The appeals by the Revenue were dismissed, and the appeal by the assessee was allowed on the ground that the demand was barred by limitation.