2025 (6) TMI 1811 - AT - Service Tax

Non-payment of service tax during the period January 2013 to March 2016 - Non-inclusion of value of free supply of diesel by M/s SCCL to VMICPL for rendering site formation services during the period April 2014 to March 2016 - Irregular Availment of Cenvat Credit - Irregular availment of Cenvat credit without producing relevant documents - Service Tax on transportation activity under RCM - levy of penalty. Non-payment of service tax during the period January 2013 to March 2016 - mining of ore - negative listed service or not - HELD THAT - In view of nature of contract it was observed that the activity carried out was that of mining of iron ore and not manufacture thereof. Here the mining of ore is being treated as production of ore and the term production is also covered within the purview of section 2(f) of the Central Excise Act apart from manufacture and the same term has been used in the negative list and therefore applying the ratio of Sesa Goa Ltd 2004 (11) TMI 14 - SUPREME COURT the said activity would tantamount to production of ore. Therefore on merit no service tax can be levied on the amount received towards extraction of baryte ore. Since on merit itself there is no chargeability of service tax it is not required to examine the issue on limitation for this demand. Non-inclusion of value of free supply of diesel by M/s SCCL to VMICPL for rendering site formation services during the period April 2014 to March 2016 - HELD THAT - It is very categorical assertion that a value which is not part of the contract between the service provider and service recipient will have no relevance in the determination of the value of taxable service provided by the service provider. In this case it is apparent that department has not been able to specify that they have charged much more than the contract value entered between VMICPL and SCCL. It is noted that in this case it is obvious that they have discharged service tax on the gross value in terms of contract entered between VMICPL and SCCL and therefore free supply of diesel cannot be considered as additional consideration for including the same in the gross value. Moreover there is no evidence that they have collected any excess amount or any service tax in respect of said free supply. The department s appeal to the extent of non-inclusion of free supply of diesel is not correct and the grounds taken by VMICPL in their cross objections are sustainable and therefore the impugned order to this extent is also sustainable. Irregular Availment of Cenvat Credit - HELD THAT - There were only limited grounds taken in the SCN for denying the credit and no other grounds were taken and therefore when it is no longer res integra that the said inputs can also be allowed under various other categories including as parts components etc. used for manufacturing/fabricating/repairing of capital goods or as inputs used for providing output services the conclusion drawn by the adjudicating authority on the basis of limited grounds taken in SCN for denial of credit is correct and therefore there are no infirmity in the impugned order on this count. Irregular availment of Cenvat credit without producing relevant documents - HELD THAT - It is found that in any case the issue of availment of credit etc. was also subject matter of earlier SCNs and therefore the department was well aware that they were taking certain credits in respect of certain inputs however despite that they have not raised the demand within the normal period. Therefore on both these counts there is no merit in the grounds taken by the department to oppose the dropping of demand to the extent dropped by the adjudicating authority in respect of Cenvat credit taken on certain inputs as capital goods. Therefore impugned order to this extent is also upheld and the appeal of Revenue is held as not tenable. Insofar as the input or input service credit taken without appropriate documents it is found that the adjudicating authority was already satisfied and has allowed only to the extent he was satisfied with the documents. The VMICPL has not been able to adduce any further tangible evidence that they were having sufficient documents to prove that they had taken credit only on the strength of eligible documents. Therefore there are no merit in the objection of VMICPL as regards denial of credit where the documents were not produced before the adjudicating authority. To that extent their appeal is not sustained on merit and appeal of Revenue is upheld. Service Tax on transportation activity under RCM - HELD THAT - It is not found that the grounds taken by the department are sustainable on the ground that extended period is rightly invokable. Since it is already discussed the issue of limitation based on prior knowledge of department it is held that extended period cannot be invoked and we do not find any fault in the reasoning given by the adjudicating authority for dropping part of demand on the grounds of limitation while upholding the part of demand. It is also noted that VMICPL has not contested this issue on merit however they have only taken ground of revenue neutrality that had they paid this tax they would have been eligible to take credit and therefore demand is not sustainable. The demand upheld by the adjudicating authority is correct except to the extent of wrong application of rate of service tax prevailing during the relevant period which needs to be cross-checked and the confirmed demand can be reduced to that extent of mistaken calculation on account of wrong rate of service tax applied and thereafter remaining amount shall be payable by VMICPL. Therefore for this limited purpose the matter remanded back to the adjudicating authority to re-determine the amount of service tax payable. Levy of penalty - HELD THAT - As the entire demand being set aside being a small amount on the grounds of non-payment of service tax on transportation and ineligible credit and the fact that no sufficient evidence on record to hold Mr. Ch. Vijay Sekhar Reddy responsible for all the non-compliance penalty under section 78A on him is also not justifiable and is therefore liable to be set aside. Conclusion - The appeal filed by the appellant is allowed except to the extent of computation of demand on denial of ineligible credit on input/input service due to non-production of eligible documents. Appeal disposed off.

Summary

The core legal questions considered by the Tribunal in this appeal arising from a service tax demand and penalty order include:

1. Whether the activities undertaken by the appellant company during the period January 2013 to March 2016, involving excavation, removal of overburden, extraction, and transportation of barytes ore, are liable to service tax or fall under the negative list exemption as production/manufacture of goods.

2. Whether the value of free supply of diesel provided by the service recipient to the appellant for site formation services should be included in the taxable value for service tax purposes.

3. The validity and extent of irregular availment of Cenvat credit on inputs, capital goods, and input services, including issues related to production of invoices and documentary evidence.

4. The applicability of service tax on transportation of goods by road under the Reverse Charge Mechanism (RCM) and the correctness of the demand raised thereon.

5. The question of limitation and whether the extended period for raising demand under section 73 of the Finance Act, 1994, is invokable given prior knowledge of the department.

6. The justification for imposition of penalty on the Managing Director under section 78A for alleged non-compliance.

Issue-wise Detailed Analysis

(A) Liability to Service Tax on Mining and Related Activities (January 2013-March 2016)

The legal framework involves the Finance Act, 1994, specifically sections 65B(44), 66B, and 66D(f), which define taxable services and the negative list of services exempt from tax. The negative list under section 66D(f) exempts services by way of carrying out any process amounting to manufacture or production of goods.

The department contended that the appellant's mining-related activities were taxable services under section 65B(44), relying on prior classification of mining services before the negative list regime commenced on 1 July 2012. The appellant argued that their activities amounted to production of barytes ore, which falls under the negative list exemption and thus is not taxable.

The Tribunal examined the contract and found it to be a comprehensive contract for excavation, removal of overburden, extraction, sizing, screening, and transportation of barytes ore. Relying on dictionary definitions of "produce" and the Supreme Court's ruling in the context of Income Tax in CIT vs. Sesa Goa Ltd, the Tribunal held that extraction and processing of ore constitute production.

The Tribunal distinguished the department's reliance on a prior Tribunal decision involving iron ore mining, noting that in that case the activity was held to be mining service and not manufacture. Here, the term "production" as used in the negative list and Central Excise Act was found applicable. Consequently, the Tribunal concluded that the appellant's activities amounted to production of ore and thus fall under the negative list exemption, making them not liable to service tax.

On limitation, the adjudicating authority had held that demands for periods prior to 2014-15 were time-barred, but the Tribunal did not examine limitation on merit for this issue, since no service tax was leviable on the mining activity itself.

(B) Inclusion of Value of Free Supply of Diesel in Taxable Value

Section 67 of the Finance Act, 1994, governs valuation of taxable services, including consideration in non-monetary form. The department sought to include the value of diesel supplied free of cost by the service recipient to the appellant as non-monetary consideration, thus increasing taxable value.

The Tribunal relied on the Larger Bench decision in Bhayana Builders vs. CST, affirmed by the Supreme Court, which held that free supply of goods/materials by the service recipient to the service provider, which does not constitute monetary or non-monetary consideration flowing to the provider, is not includible in the gross amount charged for service tax valuation.

The department's contention that the appellant had raised invoices including diesel value and collected service tax on it was found unsupported by evidence of actual receipt of consideration beyond the contract value. The Tribunal noted that accounting treatment as "direct income" does not convert free supply into taxable consideration. Further, the demand was raised under section 73 and not section 73A, and the adjudicating authority could not go beyond the scope of the SCN.

The Tribunal held that the free supply of diesel did not form part of taxable value and upheld the adjudicating authority's order rejecting the demand on this ground.

(C) Irregular Availment of Cenvat Credit on Inputs and Capital Goods

The department challenged the admissibility of Cenvat credit on MS angles, sheets, and squares used for repairing tippers and dumpers, arguing these were not capital goods but construction materials.

The adjudicating authority accepted that dumpers and tippers are capital goods and that the inputs used for their repair qualify as components or parts eligible for credit, relying on Supreme Court and Tribunal precedents. The department's grounds in the SCN were limited to classification under Chapter 72 and did not cover other possible grounds.

The Tribunal found no infirmity in the adjudicating authority's decision to allow credit on merit and on limitation grounds. Regarding credit claimed without proper documents, the adjudicating authority allowed credit only to the extent supported by documents and denied the rest. The Tribunal upheld this approach, rejecting the appellant's appeal on this limited denial.

(D) Service Tax on Transportation of Goods by Road under Reverse Charge Mechanism

The adjudicating authority confirmed a demand of Rs.3,03,081/- for transportation services under RCM and dropped part of the demand as time-barred. The appellant did not contest the demand on merit but argued revenue neutrality, contending that payment of tax would entitle them to credit.

The Tribunal rejected the revenue neutrality argument, citing several precedents that service tax liability cannot be avoided on this ground. However, the Tribunal found merit in the appellant's contention regarding incorrect calculation of tax due to application of wrong rates. The matter was remanded to the adjudicating authority to recalculate the demand correctly.

(E) Limitation and Invocation of Extended Period

The department invoked extended period provisions under section 73, alleging suppression and wilful misstatement by the appellant. The adjudicating authority examined prior SCNs and orders, noting the department's prior knowledge of the appellant's activities and held extended period invocation was not justified.

The Tribunal agreed, emphasizing that in self-assessment regimes, the department's knowledge from earlier SCNs and returns precludes repeated invocation of extended period without fresh evidence of suppression. The appellant's bona fide belief in non-liability based on legal interpretations further negated intent to evade tax. The department failed to produce cogent evidence of deliberate suppression or misstatement.

(F) Penalty on Managing Director

The penalty under section 78A imposed on the Managing Director was challenged. The Tribunal found no sufficient evidence to hold the individual responsible for non-compliance given the setting aside of major demands. The penalty was therefore set aside as unjustified.

Significant Holdings

"Once it is held that extraction of baryte ore from the mines is an activity, which would amount to production of baryte ore, it would obviously be covered in the negative list and therefore, not liable to service tax in terms of section 66B of the Finance Act."

"Value of goods and materials supplied free of cost by a service recipient to the provider of the taxable construction service, being neither monetary or non-monetary consideration paid by or flowing from the service recipient, accruing to the benefit of service provider, would be outside the taxable value or the gross amount charged."

"In the regime of self-assessment, the department comes to know about the facts of service rendered and payment made only during the scrutiny of the statutory returns and therefore, it places greater onus on the assessee to conform to higher standards of disclosure of information in their statutory returns."

"Absence of cogent and strong evidence of deliberate withholding of information or intent to evade payment of tax precludes invocation of extended period."

The Tribunal's final determinations are as follows:

1. The appellant's mining-related activities constitute production of goods and fall under the negative list exemption; thus, no service tax is leviable on these activities.

2. The value of free supply of diesel by the service recipient is not includible in the taxable value for service tax as it does not constitute consideration.

3. Cenvat credit on inputs used for repair of capital goods is allowable on merit and limitation grounds; credit without proper documents is rightly denied.

4. Service tax on transportation under RCM is payable, but demand calculation requires correction; revenue neutrality argument is rejected.

5. Extended period for demand is not invokable due to prior knowledge and lack of evidence of suppression.

6. Penalty on the Managing Director is not justified and is set aside.