REVENUE NEUTRALITY EXTENDED PERIOD OF LIMITATION AND PENALTY

[jayaprakash gopinathan]

Service Tax liability under Reverse Charge and invocation of extended period of limitation do have unique position in the litigation history of Indirect Taxation. Both are an extended version of the related issue. Normally Tax is imposed on an activity carried out by a person, service provider, situated in the taxable territory to another, service recipient, in the same territory. In the Reverse Charge Mechanism, the tax liability is shifted from the service provider to the service recipient and also for services provided in a non taxable territory and received in a taxable territory. Normally, a short payment/ non payment of tax can be recovered within the normal period of limitation prescribed in the Statute.  Extended period is allowed to demand Tax not paid/ short paid  is permitted beyond normal period if such non payment / short payment are the result of the reasons such fraud, collusion etc with intent to evade tax as prescribed in the proviso to Section 73(1).

This paper is to analyse whether a short payment /non payment of the Tax under Reverse Charge can still be confirmed and recovered by invoking extended period of limitation. This issue is being fought for some time before different Original / Appellate Authorities by arguing the impropriety of a demand under proviso to Section 73(1) of the Act for demanding Tax under Reverse Charge.

The permissibility of invoking extended period of limitation was one of the issue on which there was a difference of opinion and referred to another member M/S BRITISH AIRWAYS VERSUS COMMISSIONER (ADJN), CENTRAL EXCISE, DELHI   2014 (6) TMI 626 - CESTAT NEW DELHI (LB). The   member (T) held that  the question of longer limitation period under proviso to Section 73(1) of the Finance Act, 1994 is not available to the Revenue , as no intention to contravene the provisions of Finance Act, 1994 and of the rules made there under can be attributed to the appellant for the reason that even if they are required to pay Service Tax on the service, in question, provided by CRS/GDS Companies, the entire Service Tax paid would be immediately available to them as Cenvat Credit and collection of Service Tax from the appellant would be a revenue neutral exercise.

The 3^rd member supported the above findings of   Revenue neutrality  by citing  the  Apex Court’s decision in the case of FORMICA INDIA DIVISION VERSUS COLLECTOR OF CENTRAL EXCISE  1995 (3) TMI 98 - SUPREME COURT , wherein the Hon’ble Supreme Court  approved an alternative plea of availability of  Cenvat credit  leading to Revenue neutral situation. It was also held that mere Non Registration and non filing of return   cannot be a reason to dismiss the plea of bonafide belief of non taxable nature of the activity of the appellant in that case.

The case in JET AIRWAYS (I) LTD. VERSUS COMMISSIONER OF SERVICE TAX MUMBAI -  2016 (8) TMI 989 - CESTAT MUMBAI followed the judgment in Re: British Airways and reiterated that the extended period cannot be invoked due to applicability of Revenue neutrality.  

The  issue is now further reiterated by the Hon’ble CESTAT  Hyderabad by explaining in detail the inapplicability of extended period of limitation in CCCE & ST, HYDERABAD-I VERSUS PARKER MARKWEL INDUSTRIES PVT. LTD. (VICE-VERSA) 2019 (1) TMI 826 - CESTAT HYDERABAD .   On non payment of tax on Management Consultancy services and export sales commission, the Tribunal found eligibility of CENVAT credit on the tax payable on the two services and the situation will be revenue neutral.  Hence there was no intention to evade service tax and accordingly the demand under extended period of limitation is hit by limitation.

The order inter alia laid down the law that even if payment is made through CENVAT for GTA services, which is impermissible, it cannot be stated that the assessee had misstated or suppressed any information or evaded tax in as much as the details of the payment were available in the return.

     The same order has also determined the applicability of Penalty in case where an assessee failed to pay the due tax  under Reverse Charge which is an eligible credit  for further payment of Tax for output services. If an Assessee fails to discharge tax liability under the bonafide belief that no tax need be paid due to Revenue neutrality, then as the judgement states “ Since the issue involved in this case was purely of interpretation, we hold that no penalty is leviable on the Appellant..

The Tribunal also reiterated the inapplicability of Service Tax on services rendered by one Unit to another of the same Assessee if both the Units are within the ambit of one Balance Sheet.

            On the basis of the above judgments; whether the findings that when no tax liability arises due to exclusions, exemptions and availability of input credit will be equally applicable in the case of a manufacturing unit which failed to obtain registration and follow procedures prescribed. For example a unit manufacturing Paper cartons whose tax liability will be NIL due to exports of the cartons as a packing material and due to eligible CENVAT Credit on raw materials failed to obtain registration and to follow attendant procedures. Whether the above decision will be applicable if the manufacturer failed to follow the procedure and obtain registration.  If the manufacturer followed the procedure they would have been even eligible for the refund of CENVAT due to export.

Experts comments are solicited..

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G.Jayaprakash  

Advocate