2018 (2) TMI 23 - HC - Service Tax

Extended period of limitation - Penalty for non-compliance with the provisions of FA 1994 - whether the Appellate Tribunal fell into error in holding that invocation of the extended period under proviso to Section 73(1) of the Act in respect of two services i.e. management maintenance and repair services and mandap keeper services is justified in the facts and circumstances of the case? Held that - it is evident that failure to pay tax is not a justification for imposition of penalty. Also the word suppression in the proviso to Section 11A(1) of the Excise Act has to be read in the context of other words in the proviso i.e. fraud collusion wilful misstatement - there must be deliberate suppression of information for the purpose of evading of payment of duty. It connotes a positive act of the assessee to avoid paying excise duty. The terms mis-statement and suppression of facts are preceded by the expression wilful . The meaning which has to be ascribed is deliberate action (or omission) and the presence of an intention. Thus 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 or take out a license without the presence of such intention. In the present case the revenue argues that appellant wilfully suppressed the value of taxable services and thus did not discharge its liability of paying the service tax on same. The contention of the appellant is that the appellant was under a bona fide belief that the appellant was not liable for payment of Service Tax for the Mandap Keeping and Management Maintenance and Repair Services. The Revenue has not been able to prove an intention on the part of the appellant to evade tax by suppression of material facts. In fact it is clear that the appellant did not have any such intention and was acting under bona fide beliefs. For these reasons it is held that the revenue cannot invoke the proviso to Section 73(1) of the Finance Act to extend the limitation period for issuing of SCN. The SCN was issued on 24.10.2008. The undischarged liability for payment of service tax with respect to Mandap Keeper Service and Management Maintenance and repair services alleged in the SCN is for the period 2004-06 and 2005-08 respectively. Since the proviso to Section 73(1) cannot be invoked the SCN had to be served within one year from the relevant date. Therefore the SCN with respect to short-payment of service tax for Mandap Keeper Service for the years 2004-2006 is barred by limitation. The SCN with respect to short- payment of service tax for Management Maintenance and Repair Services for the years 2005-2007 is also barred by limitation. The SCN for the year 2007-2008 is however not barred by the limitation period of one year and the assessee is liable to pay service tax on the same. Appeal allowed - decided in favor of appellant.

Summary

The core legal question considered by the Court was whether the extended limitation period under the proviso to Section 73(1) of the Finance Act, 1994, could be invoked for the recovery of service tax in respect of management, maintenance and repair services and mandap keeper services provided by the appellant. Specifically, the Court examined if the Appellate Tribunal erred in upholding the invocation of the extended period and imposition of penalty for non-compliance with service tax provisions.

Another important issue was whether the appellant had wilfully suppressed facts or committed fraud or collusion with intent to evade service tax, thus justifying the extended limitation period and penalties. The Court also considered the applicability of Section 80 of the Finance Act, which provides exemption from penalty if the assessee proves reasonable cause for failure.

Further, the Court examined the legal interpretation of terms such as "wilful misstatement" and "suppression of facts" in the context of extended limitation periods, relying on precedents under similar provisions in the Customs Act and Central Excise Act.

Regarding the first issue of limitation period and invocation of the extended period under Section 73(1), the Court analyzed the relevant statutory provisions. Section 73(1) provides a one-year limitation period for issuance of a show cause notice for recovery of service tax not levied or short-paid. The proviso extends this to five years if such non-payment is due to fraud, collusion, wilful misstatement, suppression of facts, or contravention of provisions with intent to evade tax.

The Court referred extensively to Supreme Court precedents interpreting analogous provisions under Section 28 of the Customs Act and Section 11A of the Central Excise Act. These judgments clarified that for the extended limitation period to apply, there must be proof of deliberate or wilful conduct with intent to evade tax. Mere non-payment or omission does not suffice. The words "wilful misstatement" and "suppression of facts" require a positive act or deliberate omission with intent to evade duty.

In applying this legal framework, the Court found that the appellant had acted under bona fide belief that certain services, particularly mandap keeper services and management, maintenance and repair services, were not liable to service tax during the relevant periods. The appellant relied on a government notification and judicial pronouncements to justify non-payment of service tax on certain components such as food, beverages, liquor, and mineral water included in mandap keeper services.

The appellant had also voluntarily paid service tax with interest during the enquiry period once it became aware of the liability, and amended its registration to comply with tax obligations for management, maintenance and repair services from 2006-07 onwards. The Court noted that the appellant's conduct demonstrated absence of intent to evade tax and no wilful suppression of facts.

The revenue's contention that the appellant, being a large corporate entity, could not claim ignorance or bona fide belief was rejected on the basis that the burden of proving wilful suppression or intent to evade lies on the revenue. The Court emphasized that mere failure to pay service tax or delay does not automatically amount to suppression or fraud warranting extended limitation.

Consequently, the Court held that the extended limitation period under the proviso to Section 73(1) could not be invoked for the periods in question (2004-05 and 2005-06 for mandap keeper services, and 2005-07 for management, maintenance and repair services). The show cause notice issued in 2008 was thus barred by limitation for these periods. However, service tax liability for the year 2007-08 was not time-barred and remained payable.

On the issue of penalty, the Court applied Section 80 of the Finance Act, which precludes penalty if the assessee proves reasonable cause for failure. The appellant's bona fide belief, prompt payment of service tax upon awareness, and lack of intent to evade tax constituted reasonable cause. The Court therefore held that penalty could not be imposed.

The Court also scrutinized the allegations in the show cause notice and adjudication orders that the appellant wilfully suppressed material facts, particularly regarding separate invoicing practices, non-inclusion of service charge in taxable value, and non-payment of service tax on certain components. It found that these allegations were not substantiated by evidence of intent to evade tax. The appellant's explanation that it did not recover service tax on service charge as an administrative policy, and that it paid service tax on amounts it considered taxable, was accepted as reasonable.

In sum, the Court concluded that the invocation of the extended limitation period and imposition of penalty were not justified in the facts and circumstances of the case. The appellant was liable to pay service tax only for the period not barred by limitation (2007-08 for management, maintenance and repair services). The appeal was allowed accordingly.

Significant holdings include the Court's detailed exposition of the interpretation of "wilful misstatement" and "suppression of facts" in the context of extended limitation for tax recovery, relying on binding Supreme Court precedents. The Court emphasized that:

"Mere non-payment of duties is not equivalent to collusion or wilful misstatement or suppression of facts. The proviso contemplates a smaller, specific and more serious niche of cases where there is deliberate intent to evade payment of duty."

Further, the Court stated:

"Suppression means failure to disclose full information with the intent to evade payment of duty. When the facts are known to both the parties, omission by one party to do what he might have done would not render it suppression."

It was also held that the burden of proving wilful suppression or intent to evade tax lies on the revenue and mere allegations in the show cause notice are insufficient.

On penalty, the Court reaffirmed the principle under Section 80 of the Finance Act that no penalty should be imposed if the assessee proves reasonable cause for failure, including bona fide belief and prompt compliance upon knowledge of liability.

Thus, the Court established that in tax recovery proceedings under Section 73(1) of the Finance Act, the extended limitation period and penalties can only be invoked upon clear proof of deliberate evasion, not mere omission or delay, and bona fide belief and conduct of the assessee are relevant considerations.