2025 (5) TMI 67 - AT - Service Tax

Demand to pay service tax - failure to file ST-3 returns - imposition of late fee under Section 70(1) of the Finance Act 1994 read with Rule 7C of the Service Tax Rules 1994 - service recipient under Reverse Charge Mechanism - HELD THAT - The findings are absolutely erroneous rather vague. As per Notification No. 10/2014 the appellant is not the person liable to pay service tax. Section 70 of Finance Act read with Rule 7C of Service Tax Rules as invoked by the department does not apply on the appellant. Also when Circular dated 23.08.2007 doesn t require the Return when the assessee is entitled for some exemption. The present appellant the provider of service also is exempted from paying service tax as Notification No. 10/2014 requires tax from recipient of service under Reverse Charge Mechanism. The appellant also gets covered under the said circular and thus is not liable to file the Service Tax Returns. The circulars are binding as the departmental authorities the impugned order is contrary to the clarification in the said circular hence is hereby set aside. Consequent thereto the appeal is hereby allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal are:

• Whether the appellant, who provides taxable services but under Notification No. 10/2014-ST dated 11.07.2014 has the entire service tax liability shifted to the service recipient under the Reverse Charge Mechanism (RCM), is required to file service tax returns (ST-3) under Section 70 of the Finance Act, 1994 read with Rule 7 of the Service Tax Rules, 1994.
• Whether failure to file ST-3 returns by the appellant for the period April 2016 to June 2017 attracts imposition of late fee under Section 70(1) of the Finance Act, 1994 read with Rule 7C of the Service Tax Rules, 1994.
• The correctness of the adjudicating authority and Commissioner (Appeals) in confirming the late fee demand despite the appellant's contention of exemption from filing returns due to the liability being on the service recipient under RCM.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Liability to file ST-3 returns when service tax liability is shifted to service recipient under Notification No. 10/2014-ST (RCM)

Relevant legal framework and precedents:

Section 70 of the Finance Act, 1994 mandates that every person liable to pay service tax shall assess and furnish returns in the prescribed manner, with late fees applicable for delay. Rule 7 of the Service Tax Rules, 1994 prescribes the form and procedure for filing ST-3 returns. Notification No. 10/2014-ST dated 11.07.2014 shifts the entire service tax liability from the service provider to the service recipient under the Reverse Charge Mechanism.

CBIC Circular No. 97/8/2007 dated 23.08.2007 clarifies that only persons liable to pay service tax are required to file returns under Section 70. Persons exempt from service tax, including those covered by turnover-based exemptions, are not required to file returns.

Court's interpretation and reasoning:

The Tribunal noted that the appellant had submitted that the service tax liability was shifted to the service recipient under Notification No. 10/2014-ST, and thus the appellant was not liable to pay service tax. The Tribunal examined Section 70 and observed that it applies to persons liable to pay service tax. It further noted the CBIC circular which explicitly exempts persons not liable to pay service tax from filing returns.

Key evidence and findings:

The appellant's reply dated 01.09.2021 during investigation stage acknowledged the applicability of Notification No. 10/2014-ST. The adjudicating authority and Commissioner (Appeals) acknowledged this notification but held that since the appellant's liability was shifted under RCM, the appellant was still required to declare income and relevant details in ST-3 returns.

Application of law to facts:

The Tribunal found the Commissioner (Appeals)'s reasoning erroneous and vague. It held that since the appellant was not liable to pay service tax, the obligation to file returns under Section 70 and Rule 7C did not apply. The appellant was effectively exempted from filing returns by virtue of the RCM notification and the CBIC circular.

Treatment of competing arguments:

The department argued that the appellant must file returns declaring the income and RCM notification details despite not paying service tax, to maintain transparency and compliance. The Commissioner (Appeals) supported this view. The Tribunal rejected this, emphasizing the plain language of the statute and binding circulars which exempt persons not liable to pay tax from filing returns.

Conclusions:

The Tribunal concluded that the appellant was not required to file ST-3 returns under Section 70 read with Rule 7C when the entire tax liability was shifted to the service recipient under Notification No. 10/2014-ST.

Issue 2: Imposition of late fee under Section 70(1) read with Rule 7C for non-filing of ST-3 returns

Relevant legal framework and precedents:

Section 70(1) of the Finance Act, 1994 provides for imposition of late fee up to Rs. 20,000 for delayed furnishing of returns. Rule 7C of the Service Tax Rules prescribes the procedure for levy and recovery of late fees for delay in furnishing ST-3 returns.

Court's interpretation and reasoning:

The Tribunal observed that since the appellant was not liable to file returns, no obligation arose to furnish returns within the prescribed time. Consequently, there was no default in filing returns and no basis for imposing late fees.

Key evidence and findings:

The appellant did not file ST-3 returns for April 2016 to June 2017. The department issued a Show Cause Notice proposing recovery of late fee of Rs. 60,000/- which was confirmed by the adjudicating authority and upheld by the Commissioner (Appeals). The appellant did not appear before the Tribunal despite opportunities.

Application of law to facts:

The Tribunal applied the principle that penalty or late fee can only be imposed if there is a legal obligation to file returns. Since the appellant was exempt from filing returns, the late fee demand was not sustainable.

Treatment of competing arguments:

The department contended that non-filing of returns attracts late fee irrespective of the shifting of tax liability. The Tribunal rejected this argument as contrary to the statutory scheme and CBIC circular.

Conclusions:

The Tribunal set aside the late fee demand under Section 70(1) read with Rule 7C, holding that no late fee was payable by the appellant in the absence of a legal obligation to file returns.

3. SIGNIFICANT HOLDINGS

"Perusal clarifies that one who is not liable to pay tax is not supposed to file returns."

"Persons not liable to pay service tax because of an exemption including turnover based exemptions are not required to file ST-3 returns."

"Once as per Notification No. 10/2014 the appellant is not the person liable to pay service tax, Section 70 of Finance Act read with Rule 7C of Service Tax Rules as invoked by the department does not apply on the appellant."

"The circulars are binding as the departmental authorities, the impugned order is contrary to the clarification in the said circular hence is hereby set aside."

The Tribunal established the core principle that the obligation to file service tax returns under Section 70 of the Finance Act, 1994 and the consequent liability to pay late fees under Rule 7C arises only when the person is liable to pay service tax. In cases where the entire tax liability is shifted to the service recipient under the Reverse Charge Mechanism as per Notification No. 10/2014-ST, the service provider is not liable to file returns or pay late fees for non-filing.

Accordingly, the Tribunal allowed the appeal, set aside the impugned order confirming late fee, and clarified that the appellant was not required to file ST-3 returns for the relevant period.