2025 (4) TMI 245 - AT - Service Tax

Inclusion of compensation received by the appellant for Lost-in-Hole (LIH) items during drilling services in the value of taxable service for the purpose of calculation of service tax - invocation of extended period of limitation - HELD THAT - In view of the decision of the Tribunal in Balaji Enterprises 2020 (3) TMI 17 - CESTAT NEW DELHI the compensation amount cannot be included in the assessable value for the purpose of payment of service tax. Thus the amount received towards accidental damages due to unforeseen actions are not relatable to the provisions of services and would have to be excluded from the value of taxable services. The provisions of the CBEC Education Guide explain the scope of the exclusion entry relating to accidental damages due to unforeseen actions not relatable to the provisions of service in the context of the 2006 Rules. It has been clarified that accidental damages are not to be included in the value of service provided the damages are due to unforeseen actions and are not related to the provisions of service. The example of an insurance company that has been referred to in the CBEC Education Guide is in connection with compensation paid to a client due to unforeseen action like an accident. It clarifies that the compensation paid by the insurance company to the client in such circumstances is not to be included in the value of taxable service as it is not relatable to the provision of service but is only in the nature of consequence of provisions of insurance service - Likewise compensation that is paid by the customers to the appellant for the LIH items will not be included in the value of taxable service as it is not relatable to the provision of service but is only in the nature of consequence of provisions of drilling service. Whether the Additional Director General was justified in holding that the extended period of limitation was correctly invoked? - HELD THAT - 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. In Easland Combines Coimbatore vs. Collector of Central Excise Coimbatore 2003 (1) TMI 107 - SUPREME COURT the Supreme Court observed that for invoking the extended period of limitation duty should not have been paid because of fraud collusion wilful statement suppression of fact or contravention of any provision. These ingredients postulate a positive act and therefore mere failure to pay duty which is not due to fraud collusion or wilful misstatement or suppression of facts is not sufficient to attract the extended period of limitation. Thus the extended period of limitation could have been invoked only if there was suppression of facts with intent to evade payment of service tax. In the present case the records of the appellant for the period 2010 to 2014 were also audited by CERA. A finding has been recorded by the Additional Director General that the extended period of limitation could still be invoked because there was no documentary evidence to establish that the relevant documents were placed before CERA and further there was no evidence that these documents were also examined by CERA. This view of the Additional Director General cannot be accepted. When an audit is carried out it is for the officers to properly scrutinize all the records and it is not open to the department to take a plea that there could be a possibility that all the records were not produced or the documents were not examined by the audit. The extended period of limitation under Section 73 of the Finance Act could not be invoked as there was no willful suppression or intent to evade tax. Conclusion - i) The compensation received for LIH items is not part of the taxable value for service tax purposes as it is not consideration for any service provided. ii) The extended period of limitation under Section 73 of the Finance Act could not be invoked as there is no willful suppression or intent to evade tax. The demand confirmed for the extended period cannot be sustained and would have to set aside. However the demand confirmed for the entire period cannot be sustained as on merits also the demand could not have been confirmed - Appeal allowed.

Summary

ISSUES PRESENTED and CONSIDERED

The primary issues considered in this appeal were:

• Whether the compensation received by the appellant for "Lost-in-Hole" (LIH) items during drilling services should be included in the value of taxable service for the purpose of service tax.
• Whether the extended period of limitation was correctly invoked under the circumstances of the case.

ISSUE-WISE DETAILED ANALYSIS

Compensation Inclusion in Taxable Value

• Legal Framework and Precedents: The appellant argued that the compensation for LIH items was not for any service provided but was an indemnity for lost equipment. The appellant relied on precedents such as Bhayana Builders and Balaji Enterprises to argue that such compensation should not be included in the taxable value.
• Court's Interpretation and Reasoning: The Court found that the compensation received for LIH items was not for any service provided but was a result of an indemnity contract. The term "consume" used by the Directorate General of Hydrocarbons was interpreted in the context of customs duty exemption and not service tax liability. The Court emphasized that the compensation was not a consideration for a taxable service.
• Key Evidence and Findings: The contracts with customers specified that compensation for LIH items was for unforeseen circumstances and not due to any service provided. The Directorate General of Hydrocarbons' certification that LIH items were "consumed" was for customs purposes and not relevant to service tax.
• Application of Law to Facts: The Court applied the principles from Balaji Enterprises and Bhayana Builders to conclude that the compensation was not part of the taxable value as it was not related to the provision of a service.
• Treatment of Competing Arguments: The Department argued that the compensation should be included as the LIH items were "consumed" during service provision. The Court rejected this, clarifying that "consumed" in the customs context did not equate to service provision.
• Conclusions: The Court concluded that the compensation for LIH items should not be included in the taxable value for service tax purposes.

Extended Period of Limitation

• Legal Framework and Precedents: The extended period of limitation under Section 73 of the Finance Act can be invoked in cases of fraud, collusion, willful misstatement, or suppression of facts with intent to evade tax.
• Court's Interpretation and Reasoning: The Court held that suppression of facts must be willful and with intent to evade tax. The appellant's belief that compensation for LIH items was not taxable was found to be bona fide.
• Key Evidence and Findings: The appellant had disclosed relevant information in returns, and the records were audited by CERA. The Court found no evidence of willful suppression or intent to evade tax.
• Application of Law to Facts: The Court applied precedents such as Pushpam Pharmaceuticals and Uniworth Textiles to determine that the extended period of limitation was not applicable as there was no willful suppression or intent to evade tax.
• Treatment of Competing Arguments: The Department argued that the extended period was justified due to non-disclosure. The Court disagreed, citing the appellant's bona fide belief and lack of intent to evade tax.
• Conclusions: The Court concluded that the extended period of limitation could not be invoked, and the demand for this period was not sustainable.

SIGNIFICANT HOLDINGS

• The Court held that compensation received for LIH items is not part of the taxable value for service tax purposes as it is not consideration for any service provided.
• The Court emphasized that "consumed" in the context of customs duty does not equate to service provision for service tax purposes.
• The Court concluded that the extended period of limitation under Section 73 of the Finance Act could not be invoked as there was no willful suppression or intent to evade tax.
• The Court set aside the order of the Additional Director General, allowing the appeal in favor of the appellant.