2025 (6) TMI 9 - AT - Service Tax

Taxability - amounts paid by the appellant to its foreign counterparts as Business Auxiliary Services received under reverse charge mechanism - Non-appropriation of the amounts paid by the appellant on the foreign income received in respect of the second SCN - invocation of extended period of limitation under the proviso to section 73(1) of FA - Imposition of penalties under sections 76, 77 and 78 of the Act. Time limitation - whether the proviso to section 73(1) was correctly applied in the first SCN? - HELD THAT - If the assessee does not pay service tax or short pays it a notice under section 73 can be issued. According to the Revenue in the first SCN the extended period of limitation was correctly invoked and according to the appellant it was not correctly invoked as none of the elements necessary to invoke extended period of limitation viz. fraud or collusion or wilful misstatement or suppression of facts or violation of act or rules with an intent to evade payment of service tax were present in the case - The reasons for invoking extended period of limitation given in the first SCN are that the appellant had violated Sections 69 70, 71A 73 66 66A and 91 of the Act inasmuch as they failed to pay service tax correctly and hence it appears that the appellant had intentionally and wilfully suppressed the facts of providing and receiving taxable services and therefore extended period of limitation was correctly invoked. The grounds to invoke extended period of limitation while raising a demand under service tax are similar to the one under section 11A of the Central Excise Act 1944. The question is whether the intent to evade has to be established or it can be presumed. If the appellant had not paid tax and had also violated some provisions of the Act or Rules can it be presumed that the violation was with the intent to evade or the intent has to be established. A plain reading of the proviso to section 73 and numerous decisions make it clear as crystal that the intent has to be established - While it is the duty of the assessee to file the returns it is the duty of the officer receiving the return to scrutinise them and it is his prerogative to call for any records and accounts to check if the service tax is correctly paid. If it is not correctly assessed or paid he can raise a demand under section 73. In Pushpam Pharmaceuticals Company 1995 (3) TMI 100 - SUPREME COURT the Supreme Court examined whether the department was justified in initiating proceedings for short levy after the expiry of the normal period of six months by invoking the proviso to section 11A of the Central Excise Act. The proviso to section 11A of the Excise Act carved out an exception to the provisions that permitted the department to reopen proceedings if the levy was short within six months of the relevant date and permitted the Authority to exercise this power within five years from the relevant date under the circumstances mentioned in the proviso one of which was suppression of facts. It is in this context that the Supreme Court observed that since suppression of facts has been used in the company of strong words such as fraud collusion or wilful default suppression of facts must be deliberate and with an intent to escape payment of duty. It would also be appropriate to refer the decision of the Delhi High Court in Mahanagar Telephone Nigam Ltd. vs. Union of India and others 2023 (4) TMI 216 - DELHI HIGH COURT . The Delhi High Court observed that merely because MTNL had not declared the receipt of compensation as payment for taxable service does not establish that it had willfully suppressed any material fact. The Delhi High Court further observed that the contention of MTNL that receipt was not taxable under the Act is a substantial one and no intent to evade tax can be inferred by non-disclosure of the receipt in the service tax return. In the present case as noticed above the Principal Commissioner held that there was violation of Act or Rules which would not have come to light but for the audit and hence larger period of limitation could be invoked. In this connection it may be pertinent to refer to the decision of the Supreme Court in Commissioner of C. Ex. Customs versus Reliance Industries Ltd. 2023 (7) TMI 196 - SUPREME COURT The Supreme Court held that if an assessee bonafide believes that it was correctly discharging duty then merely because the belief is ultimately found to be wrong by a judgment would not render such a belief of the assessee to be mala fide. If a dispute relates to interpretation of legal provisions the department would be totally unjustified in invoking the extended period of limitation. The Supreme Court further held that in any scheme of self-assessment it is the responsibility of the assessee to determine the liability correctly and this determination is required to be made on the basis of his own judgment and in a bona fide manner. Extended period of limitation was wrongly invoked in the first SCN in this case. However as already discussed above this only affects the remedy available to the Revenue but does not alter the charge of the service tax. Therefore the undisputed charge of service tax on the commission received by the appellant from M/s. Cathay Pacific remains and the amounts paid by the appellant stand appropriated in the impugned order. The appellant cannot claim any refund of this amount. Taxability under Reverse charge of the amounts paid by the appellant to its foreign counterparts - HELD THAT - There are no manner of doubt that the appellant received business auxiliary services from its counterparts abroad and paid for such services. Therefore the appellant was liable to pay service tax on the same. While the packets were received or delivered outside India by the counterparts the service in doing so was rendered to the appellant in India - Revenue neutrality does not remove any charge of tax. It is not part of any section or Rule. This concept evolved through judicial pronouncements only to determine if it can be presumed that the assessee had an intent to evade payment of tax and invoke extended period of limitation. The logic is if the assessee is entitled to CENVAT credit there could not have been any intention to evade payment of tax and hence extended period of limitation could not invoked. As already held in favour of the appellant on the question of limitation Revenue neutrality is irrelevant to this case as the demand is being upheld only within the normal period. Non-appropriation of the amounts paid by the appellant on the foreign income received in respect of the second SCN - HELD THAT - The appellant submits that the service tax which it had paid was not appropriated in the impugned order. It is found that this fact must be verified by the Commissioner and if any tax has been paid it must be appropriated. Demand of interest under section 75 of the Act - HELD THAT - The charge of interest under section 75 applies automatically consequent upon the confirmation of demand. To the extent the demands are confirmed the appellant is liable to pay appropriate interest. Imposition of penalties under sections 76 77 and 78 of the Act - HELD THAT - The penalties were imposed under section 76 77 and 78 of the Act. The requirement for imposing penalty under section 78 is the same as that for invoking extended period of limitation. Since we found in favour of the appellant on the question of extended period of limitation it is found that penalty under section 78 is not imposable. The appellant had albeit wrongly believed some tax was not payable and had not paid. When pointed out on two of the three disputed services the appellant had paid service tax. The appellant s failure in paying tax and complying with the provisions of the Act or Rules were due to reasonable cause viz. it s incorrect understanding of the law. The Range officer could have taken corrective steps by scrutinising its returns and records and carrying out best judgment assessment under section 72 but the officer did not do so. It is deemed fit to set aside all penalties invoking section 80 of the Act. Conclusion - i) The demand of service tax on the amounts received from M/s. Cathay Pacific is undisputed and is upheld and the amount already paid has been appropriated. ii) The demand of service tax under reverse charge mechanism on the amounts paid by the appellant to its foreign counterparts is upheld but only within the normal period of limitation. iii) The demand of service tax on the amounts received in foreign currency from the foreign counterparts is upheld within the normal period. iv) All amounts paid by the appellant must be appropriated towards the demand. v) Interest is payable on the amounts of service tax payable as above if the interest is not already paid. vi) All penalties are set aside invoking section 80 of the Act. Appeal allowed - The matter is remanded to the Commissioner for the limited purpose of calculation and appropriation of any amounts already paid as tax or interest.

Summary

Three core legal questions were considered by the Tribunal: (i) whether the appellant was liable to pay service tax on commission received from a foreign airline under the category of business auxiliary services; (ii) whether the appellant was liable to pay service tax under the reverse charge mechanism on payments made to foreign counterparts for courier-related services; and (iii) whether the appellant was liable to pay service tax on income received in foreign currency for services rendered to foreign counterparts, particularly focusing on the applicability of limitation periods and the invocation of extended limitation under the proviso to section 73(1) of the Finance Act, 1994. Additionally, issues concerning the demand of interest under section 75 and imposition of penalties under sections 76, 77, and 78 were also examined.

Regarding the first issue-the taxability of commission received from the foreign airline-the appellant did not dispute the demand. The services rendered were classified as 'business auxiliary services' under sections 65(19) and 65(105)(zzb) of the Finance Act. The appellant had paid the service tax along with interest, and the amounts were appropriated in the impugned order. Thus, this issue was resolved in favor of the Revenue, with no further contest.

The second issue concerned the taxability under reverse charge of payments made by the appellant to foreign courier counterparts for services such as picking up and delivering parcels outside India. The Revenue contended that these services constituted 'business auxiliary services' chargeable under section 65(105)(zzb), and since the service providers were located outside India, the appellant, as the recipient, was liable to pay service tax under the reverse charge mechanism prescribed by section 66A. The appellant argued that the foreign counterparts acted on a principal-to-principal basis, not as agents, and that the services were rendered entirely outside India, thus not attracting service tax under the earlier Taxation of Services Rules, 2006, and subsequently under the Place of Provision of Services Rules, 2012.

The Tribunal analyzed the nature of the contractual relationships in the courier business, noting that the client contracts only with the appellant courier company, which in turn contracts with foreign counterparts to perform part of the service. The foreign counterparts do not have any direct contractual or payment relationship with the client. Hence, the foreign counterparts render services to the appellant, not independently to the clients. The service is rendered to the appellant in India, even though the physical acts of picking up or delivering parcels occur outside India. Consequently, the Tribunal held that the appellant received business auxiliary services from foreign counterparts and was liable to pay service tax under reverse charge. The appellant's argument regarding revenue neutrality-that payment of service tax under reverse charge would be offset by CENVAT credit-was found irrelevant to the question of liability, as revenue neutrality does not negate the charge of tax but only affects the question of intent to evade tax for limitation purposes.

The third issue involved the taxability of income received in foreign currency by the appellant for services rendered to foreign counterparts and, more critically, the question of limitation, specifically whether the extended period of limitation under the proviso to section 73(1) was rightly invoked. The appellant disputed the invocation of the extended limitation period for the first SCN covering 2007-2012, contending that the normal limitation period applied and that the extended period was wrongly invoked. The appellant also contested the non-appropriation of tax paid for the amounts demanded in the second and third SCNs.

The Tribunal undertook a detailed examination of the limitation provisions under section 73 of the Finance Act, which allows recovery of service tax not levied or paid within thirty months from the relevant date, but permits an extended period of five years where non-payment is due to fraud, collusion, willful misstatement, suppression of facts, or contravention of provisions with intent to evade tax. The Tribunal emphasized that invocation of the extended period requires proof of deliberate intent to evade tax, not merely a failure to pay or an omission. It reviewed authoritative Supreme Court decisions interpreting similar provisions under the Central Excise Act, notably Pushpam Pharmaceutical Co., Anand Nishikawa, Easland Combines, Uniworth Textiles, and Continental Foundation Joint Venture, which collectively establish that "suppression of facts" must be deliberate and with intent to evade tax, and mere non-payment or omission does not suffice.

The Tribunal further relied on recent High Court decisions, including Bharat Hotels and Mahanagar Telephone Nigam Ltd., which reinforced that extended limitation applies only where there is clear evidence of willful suppression or intent to evade tax, not where the assessee acts under a bona fide belief or misunderstanding of the law. The Tribunal highlighted that the appellant had been registered, filing returns, and the non-payment was discovered only upon audit, which the Revenue argued demonstrated intent to evade. However, the Tribunal found that mere failure of the department to detect non-payment earlier does not establish such intent on the part of the appellant. The appellant's bona fide belief and compliance with filing requirements negated the applicability of the extended limitation.

Accordingly, the Tribunal held that the extended period of limitation was wrongly invoked in the first SCN. The demand for service tax stands confirmed only within the normal limitation period. The appellant's payments of service tax on commission and foreign income were to be appropriated accordingly, and no refund was permissible.

On the question of interest under section 75, the Tribunal held that interest liability arises automatically upon confirmation of the service tax demand. Since the demands were upheld, interest was payable unless already discharged.

Regarding penalties under sections 76, 77, and 78, the Tribunal found that the imposition of penalty under section 78, which requires the same conditions as the extended limitation (i.e., intent to evade), was not sustainable given the finding against invocation of extended limitation. The appellant's failure to pay tax was due to reasonable cause-an incorrect understanding of the law-and the departmental officers' failure to scrutinize returns and conduct best judgment assessments under section 72. Invoking section 80, which exempts penalty where reasonable cause is proved, the Tribunal set aside all penalties.

In conclusion, the Tribunal upheld the service tax demand on commission received from the foreign airline and on payments made to foreign counterparts under reverse charge within the normal limitation period. It also upheld the demand on foreign income received within the normal limitation period. The Tribunal directed appropriation of all amounts paid by the appellant and confirmed interest liability. Penalties were set aside due to the appellant's reasonable cause. The matter was remanded for calculation and appropriation of amounts paid.

Significant holdings include the following verbatim legal reasoning:

"A perusal of the above framed provisions of Section 73 (1) of the Act, evidences inter-alia that where any service tax has not been levied or paid by reason of (a) fraud; or (b) collusion; or (c) willful mis-statement; or (d) suppression of facts; or (e) contravention of any of the provisions of this Chapter or of the rules made thereunder with intent to evade payment of service tax, SCN may be served upon a person chargeable with the service tax within five year from the relevant date."

"Suppression of facts must be deliberate and with an intent to escape payment of duty. ... Mere omission does not amount to suppression. The act must be deliberate."

"The mere fact that the belief was ultimately found to be wrong by the judgment of this Court does not render such belief of the assessee a mala fide belief particularly when such a belief was emanating from the view taken by a Division Bench of Tribunal."

"Failure to pay tax is not a justification for imposition of penalty. ... Invocation of the extended limitation period under the proviso to Section 73(1) does not refer to a scenario where there is a mere omission or mere failure to pay duty without intention."

"Revenue neutrality does not remove any charge of tax. It is not part of any section or Rule. This concept evolved through judicial pronouncements only to determine if it can be presumed that the assessee had an intent to evade payment of tax and invoke extended period of limitation."

Core principles established are that the extended period of limitation under section 73(1) can only be invoked upon proof of deliberate suppression or intent to evade tax; mere non-payment or omission does not suffice. The reverse charge mechanism applies to business auxiliary services received from foreign entities, even if the physical service is rendered outside India, when the service is effectively received in India. Penalties require proof of intent or reasonable cause; bona fide belief negates penalty liability. Interest follows confirmed demand automatically.

The Tribunal's final determinations on each issue are:

(i) The service tax demand on commission received from the foreign airline is valid and upheld.

(ii) The service tax demand under reverse charge on payments to foreign counterparts is valid within the normal limitation period.

(iii) The service tax demand on foreign income received is valid within the normal limitation period.

(iv) Extended period of limitation was wrongly invoked; only normal limitation applies.

(v) Interest is payable on confirmed demands.

(vi) Penalties are set aside due to reasonable cause and absence of intent to evade.

(vii) Appropriation of amounts paid by the appellant must be verified and effected by the Commissioner.