2025 (5) TMI 1910 - AT - Service Tax

Violation of principles of natural justice - demand of service tax merely on the basis of income reflected in the Balance Sheet - HELD THAT - From perusal of the notice it is noted that there are 14 RUDs based on which the said notice has been issued and the demand has been calculated. Without giving an opportunity to the appellant to agitate all these issues the adjudicating authority has proceeded to adjudicate the matter which amounts to denial of principle of natural justice. Matter remanded to the adjudicating authority with a direction to supply the copies of all the relied upon documents to the appellant giving him sufficient opportunities to reply to the notice and personal hearing before passing a fresh order in this regard. Appeal allowed by way of remand.

Summary

Issues Presented and Considered

1. Whether the demand of service tax on the "Supply of Tangible Goods Service" provided by the assessee for the period 2009-10 to 2012-13 was correctly confirmed by the adjudicating authority, including the applicability of extended period of limitation.

2. Whether the assessee was liable to pay service tax on job work services related to construction of roads and tunnels, considering the exemption provisions under section 65(25b) of the Finance Act, 1994 and subsequent notifications.

3. Whether the adjudicating authority was justified in denying the benefit of CENVAT credit claimed by the assessee.

4. Whether the demand was properly computed on the basis of income reflected in the Balance Sheet without bifurcation of taxable and non-taxable income.

5. Whether the extended period of limitation could be invoked given the nature of documents and the assessee's compliance with statutory filing requirements, including ST-3 returns.

6. Whether the principles of natural justice were violated by not providing the assessee with copies of all relied upon documents before adjudication.

Issue-wise Detailed Analysis

1. Demand of Service Tax on "Supply of Tangible Goods Service" and Extended Period of Limitation

The relevant legal framework includes the Finance Act, 1994 provisions relating to service tax, particularly the definition and taxable scope of "Supply of Tangible Goods Service." The extended period of limitation under section 73(1) of the Finance Act was also invoked by the Department to recover alleged tax dues.

The Court noted that the demand was based largely on the assessee's own records, specifically the Balance Sheet and other financial documents. The assessee contended that service tax liability cannot be computed merely on the basis of income reflected in the Balance Sheet unless the revenue establishes that such income relates to taxable services. This position was supported by precedents emphasizing the need for clear linkage between income and taxable service to sustain demand.

Regarding the extended period, the assessee argued that since the documents (Profit and Loss Account, Balance Sheet) were public and accessible, and the assessee had filed ST-3 returns, the extended period could not be invoked. The Court referenced the Tribunal's decision that extended period cannot be triggered solely on the basis of the assessee's own records or public documents. Further, the assessee demonstrated compliance with filing ST-3 returns, mitigating the Department's claim of suppression or concealment.

The Court found that the invocation of extended period was unwarranted, particularly as the assessee had furnished all relevant documents during investigation and the alleged delay was due to the proprietor's ill health. The Supreme Court's ruling in a recent case was relied upon to reinforce that extended period demands require clear evidence of concealment or fraud, which was absent here.

2. Taxability of Job Work Services in Road and Tunnel Construction

The legal framework includes section 65(25b) of the Finance Act, 1994, which exempted job work related to construction of roads and tunnels from service tax till 30.06.2012, and subsequent Notification No. 25/2012 ST dated 20.06.2012 extending the exemption.

The assessee submitted that the major part of the services rendered fell within this exemption, and the show cause notice erroneously limited the exemption to a small part of the job work. The Court noted that the show cause notice itself admitted that the services were provided on a job work basis in relation to exempted activities.

The adjudicating authority's rejection of the exemption claim was challenged on the ground that the authority did not consider the facts on record, particularly the exemption notifications. The Court observed that the Department failed to adequately address the exemption claim and that the impugned order did not properly adjudicate on this issue.

3. Denial of CENVAT Credit Benefit

The Department appealed against the impugned order allowing the assessee to adjust CENVAT credit of Rs. 1,03,93,955/-. The Court did not elaborate extensively on this issue but noted the Department's contention. Since the matter was remanded for fresh adjudication, the question of CENVAT credit would be reconsidered by the adjudicating authority in light of the submissions and documents.

4. Computation of Demand Based on Balance Sheet Without Bifurcation

The assessee argued that the demand was computed on total income reflected in the Balance Sheet, which included income from non-taxable sources, without bifurcation. The Court acknowledged the settled legal principle that service tax demand cannot be sustained on gross income figures without segregating taxable and non-taxable income streams.

The Court noted that the show cause notice and impugned order did not demonstrate any effort to bifurcate the income or establish that the entire income was from taxable services. This omission was a significant flaw in the Department's case.

5. Compliance with Filing of ST-3 Returns and Effect on Limitation

The assessee produced a detailed table showing timely filing of ST-3 returns for the disputed period, with only minor delays explained by health issues of the proprietor. The Court found that this demonstrated good faith and compliance, undermining the Department's allegation of suppression or non-cooperation.

Accordingly, the Court held that the extended period of limitation could not be invoked, reinforcing the principle that extended limitation applies only in cases of concealment or fraud.

6. Violation of Principles of Natural Justice

The Court found that the adjudicating authority proceeded to pass the impugned order without providing the assessee copies of 14 relied upon documents (RUDs), including the Balance Sheet on which the demand was based. The Department conceded that these documents were not supplied at the time of the show cause notice.

The Court held that this amounted to denial of the principles of natural justice, as the assessee was deprived of the opportunity to effectively contest the demand and produce relevant evidence. The Court emphasized that without furnishing the relied upon documents and providing opportunity for reply and personal hearing, the adjudication was flawed.

Consequently, the Court set aside the impugned order and remanded the matter to the adjudicating authority with directions to supply all relied upon documents to the assessee, allow sufficient time for response, and conduct a personal hearing before passing a fresh order.

Significant Holdings

"Without giving an opportunity to the appellant to agitate all these issues, the adjudicating authority has proceeded to adjudicate the matter, which amounts to denial of principle of natural justice."

"The invocation of extended period under section 73(1) was completely un-warranted in the facts and circumstances of the case, particularly when the assessee had furnished all relevant documents including ST-3 returns and the delay was due to proprietor's ill health."

"Service tax cannot be demanded merely on the basis of income reflected in the Balance Sheet, unless revenue establishes that such income is related to the taxable services."

"The show cause notice had erroneously considered exemption only to a small part of the job work, whereas the services were exempted under section 65(25b) of the Finance Act, 1994 and subsequent notifications for the entire period."

"The matter is remanded to the adjudicating authority with a direction to supply copies of all relied upon documents to the appellant, give sufficient opportunity to reply, and conduct personal hearing before passing a fresh order."