FILING AND SCRUTINY OF SERVICE TAX RETURNS

[Mr. M. GOVINDARAJAN]

Filing of service tax returns

Section 70 of Chapter V of Finance Act, 1994 (‘Act’ for short) provides for filing of service tax returns.   Section 70(1) of the Act and Rule 7 and of Service Tax Rules, 1994 provides the method of filing service tax return as detailed below:

• Every person liable to pay the service tax shall himself assess the tax due on the services provided by him and shall furnish the same to the Superintendent of Central Excise a half yearly return in Form – ST-3;
• The return shall be submitted on or before 25^th of the following particular half year-

• For the period from April to September the return is to be filed on or before 25^th October of that year;
• For the period from October to  March the return is to be filed on or before 25^th April of that year

• The Central Board of Excise and Customs may, by an order extend the period by such period as deemed necessary under circumstances of special nature to be specified in such order;
• Every assessee shall submit the return electronically with effect from 01.10.2011.

Section 70(2) of the Act provides that the person or class of persons notified under Section 69(2) of section 69, shall furnish to the Superintendent of the Central Excise, a return in such form and in such manner and at such frequency as may be prescribed.

Late fee

Section70 (1) read with Rule 7C provides for the late fee payable in case of the return is filed after the due date as detailed below:

• fifteen days from the date prescribed for submission of such return – ₹ 500/-
• beyond fifteen days but not later than thirty days from the date prescribed for submission of such return – ₹ 1000/-
• beyond thirty days from the date prescribed for submission of such return  - ₹ 1000 + ₹ 100/- for every day from the thirty first day till the date of furnishing the said return:
• The maximum late fee payable is ₹ 20,000/-

Where the assessee has paid the amount as prescribed under this rule for delayed submission of return, the proceedings, if any, in respect of such delayed submission of return shall be deemed to be concluded.

‘NIL’ return

During any half year where the gross amount of taxable service is NIL, a ‘NIL’ return is to be filed within the prescribed time limit.   NIL return shall be filed after the cessation of a particular service and up to the date of surrender of registration certificate.   If there is delay in filing the NIL return, the Central Excise officer may, on being satisfied that there is sufficient reason for not filing the return, reduce or waive the penalty.

Revision of return

Rule 7B provides for the revision of ST – 3 returns already filed.  The said Rule provides that an assessee may submit a revised return, in Form ST-3, in triplicate, to correct a mistake or omission, within a period of ninety days from the date of submission of the return under Rule 7.

Statistics on filing of returns by assessees

Table 1 – Registrations and returns filed

Year	No. of Service tax registrations	No. of assessees who filed returns
FY 09	1226100	7641
FY 10	1339812	55405
FY 11	1494449	179344
FY 12	1676105	706535
FY 13	1871939	608013
FY 14	1276861	1004812

Source: CAG Report 2014 & 2015

The above table shows that the number of service tax returns filed is on the increase except for the financial year 2013-14.  Still many of the assessees who registered have not filed service tax returns.

Penalty for non filing return

Section 77(2) of the Act provides that any person, who contravenes any of the provisions of this Chapter or any rules made there under for which no penalty is separately provided in this Chapter, shall be liable to a penalty which may extend to ten thousand rupees.  According to this section non filing of return would attract penalty under this section.  In ‘K. Madhavan Kamath Brother & Co V. Commissioner’ – 2014 (9) TMI 214 - CESTAT BANGALORE it was held by the Tribunal that the imposition of penalty for non filing of service tax return was justified as the appellant had not challenged the demand for the extended period of limitation and there had conceded suppression of fact with intent to evade payment of service tax.   The tax though paid prior to issuance of show cause notice but the same was paid only after the investigation was launched by the Department.  The High Court, Karnataka also dismissed the appeal filed by the appellant against the order of Tribunal.

Payment of service tax

The Department introduced the concept of self assessment in respect of service tax in the year 2001.   As such it is the bounden duty of the assessee to assess the tax by himself and pay the service tax within the prescribed time limit.  In ‘Commissioner of Central Excise, Raigad V. Maersk India Private Limited’ – 2014 (9) TMI 596 - CESTAT MUMBAI it was held that the appellant is operating under self assessment regime and therefore it is his responsibility to correctly assess and discharge the returns filed.   If there is any material change in the nature on terms and conditions of the transaction the same should have been brought to the notice of the department which the appellant has failed to do in the instant case.   The Tribunal upheld the demand of service tax and interest.

Recovery of service tax

Section 73 of the Act provides for the recovery of service tax not levied or not paid or short levied or short paid or erroneously refunded.  Section 73(1) provides that in such cases the Central Excise Officer may issue show cause notice to the assessee within 18 months from the relevant date requiring him to pay the demand as specified in the notice.   The said period of 18 months limitation may be extended to five years if the non levy or nonpayment or short levy or short payment or erroneously refunded is by reason of-

• fraud; or
• collusion; or
•  willful mis-statement; or
• suppression of facts; or
• contravention of any of the provisions of this Chapter or of the rules made there under

with intent to evade payment of service tax.

Section 73 (6) of the Act defines the term ‘relevant date’ as-

•  in the case of taxable service in respect of which service tax has not been levied or paid or has been short-levied or short-paid-

•  where under the rules made under this Chapter, a periodical return, showing particulars of service tax paid during the period to which the said return relates, is to be filed by an assessee, the date on which such return is so filed;
• where no periodical return as aforesaid is filed, the last date on which such return is to be filed under the said rules;
• n any other case, the date on which the service tax is to be paid under this Chapter or the rules made there under;

• in a case where the service tax is provisionally assessed under this Chapter or the rules made there under, the date of adjustment of the service tax after the final assessment thereof;
• in a case where any sum, relating to service tax, has erroneously been refunded, the date of such refund.

In case the return is revised as per Rule 7C, then the relevant date is the date of filing of the revised return.   Thus filing return is considered as the criteria for taking action by the Revenue to recover the tax by invoking the extended period of limitation.   Here some case laws discussed on invoking the extended period of limitation:

In ‘M.P. Laghu Udyog Nigam Limited V. Commissioner of Central Excise, Bhopal’ – 2014 (8) TMI 707 - CESTAT NEW DELHI it was held that non registration, non filing of ST-3 returns or non payment of service tax are not sufficient for sustaining the allegation of suppression of facts for invocation of extended period.

In ‘Star India Private Limited V. Commissioner of Central Excise, Thane-I’ – 2014 (10) TMI 66 - CESTAT MUMBAI it was held that the appellant failed to declare in ST-3 return the complete particulars with regard to services rendered to foreign advertisers.  The appellant was operating under Self assessment procedure during the relevant period.   Invocation of extended period of time to confirm the tax demand cannot be faulted at all.

Recovery of tax without show cause notice                      

Section 112 (i) of the Finance Act, 2015 inserted Section 73(1B) with effect from 14.05.2015.   The said section provides that notwithstanding anything contained in sub-section (1), in a case where the amount of service tax payable has been self-assessed in the return furnished under Section 70(1), but not paid either in full or in part, the same shall be recovered along with interest thereon in any of the modes specified in section 87, without service of notice under Section 70(1).

ST-3A return

Rule 6(4) provides that where an assessee is, for any reason, unable to correctly estimate, on the date of deposit, the actual amount payable for any particular month or quarter, as the case may be, he may make a request in writing to the Assistant Commissioner of Central Excise or the Deputy Commissioner of Central Excise, as the case may be, giving reasons for payment of service tax on provisional basis and the Assistant Commissioner of Central Excise or the Deputy Commissioner of Central Excise, as the case may be, on receipt of such request, may allow payment of service tax on provisional basis on such value of taxable service as may be specified by him and the provisions of the Central Excise Rules, 2001, relating to provisional assessment, except so far as they relate to execution of bond, shall, so far as may be, apply to such assessment.

Rule 6(5) provides that where an assessee under sub-rule (4) requests for a provisional assessment he shall file a statement giving details of the difference between the service tax deposited and the service tax liable to be paid for each month in a memorandum in Form ST-3A accompanying the quarterly or half yearly return, as the case may be.

Scrutiny of the returns

Dr. Kelkar in his report on Indirect Taxation observed that the assessments should be the primary function of the Central Excise Officers.   Self assessment on the part of the tax payer is only a facility and cannot and must not be treated as a dilution of the statutory responsibility of the Central Excise Officers in ensuring the correctness of duty payment.   No doubt, audit and anti-evasion have their roles to play, but assessment or confirmation of assessment should remain the primary responsibility of the Central Excise Officers.

Vide Circular No. 113/07/2009-St, dated 23.04.2009 the Revenue proposed for the scrutiny of ST-3 returns.  For this purpose the Revenue brought out a manual called ‘Return Scrutiny Manual for Scrutiny of ST-3 Returns’ (RSMST).  The scheme proposed to bifurcate the scrutiny into two parts, preliminary scrutiny and detailed scrutiny.  While the preliminary scrutiny would cover all the returns and could be done even online, detailed scrutiny would cover selected returns, identified on the basis of risk parameters, developed from the information furnished in the returns submitted by the tax payers.

Preliminary scrutiny

The purpose of preliminary scrutiny would be to ensure-

• completeness of the information furnished such as PAN No., description of the service tax category including the service tax accounting code and registration details of the units including details of centralized registration;
• timely submission of the return;
• timely payment of duty;
• arithmetic accuracy of the amount computed as duty in the return; and
• identification of non filers and stop filers.

The following table will depict the performance of the Revenue in carrying out the preliminary scrutiny of the returns:

Table.2 – Details of preliminary scrutiny of service tax returns

Year	No. of returns filed in ACES	No. of returns marked for R&C	% of returns marked for R&C	No. of returns cleared after R&C	No. of returns pending for R&C	% of marked returns pending correction
FY11	139431	112302	80.54	22	112280	99.9
FY12	909718	700066	76.95	83664	616397	88.05
FY13	2242332	1842137	82.15	367256	1474874	80.06
FY14	2297335	795581	34.63	84944	710637	89.32

Source: CAG Report 6/2014 and 4/2015

After the introduction of ACES a very high percentage of cases have been scrutinized by ACES each year for review and correction (R&C).  The percentage of returns marked for R&C by ACES have come down drastically to 34.63% in FY 14 which is a healthy sign and indicate stabilization of ACES and it needs to be taken further.   C&AG observed that 89.32% of returns marked for R&C were pending as on 31.03.2014.  It is further observed that the main intention behind introducing preliminary scrutiny online was to release manpower for detailed manual scrutiny, which could then become the core function the Range/Group.

Detailed scrutiny

The purpose of detailed scrutiny is to-

• establish the validity of the information furnished in the tax return;
• ensure correctness of the assessment by-

• ensuring correctness of classification of the services adopted and appropriateness of the effective rate of duty availed after taking into account the admissibility of the exemption notification availed, if any;
• determining the correct value of taxable services in terms of the Finance Act, 1994 read with Service Tax Valuation Rules; and
• ensuring correct availment of CENVAT credit on input, capital goods and input services in terms of the CENVAT Credit Rules, 2004.

Only 2% of returns are needed to be examined in detailed scrutiny.  There are nearly 2272 ranges all over India.   The detailed scrutiny selected are other than the cases of fraud etc.,

The following table will depict the performance of the Revenue in carrying out the detailed scrutiny of the returns:

Table.3 – Details of detailed of service tax returns

Year	No. of returns marked for detailed scrutiny	No. of returns where detailed scrutiny was carried out	No. of returns where detailed scrutiny was pending	Age wise analysis of pendency
				Between six month to one  year	Between one and two years	Over 2 years
FY 12	11425	3380	8045	5667	1959	419
FY 13	23838	2743	21095	19791	934	370
FY 14	44045	16201	27844	12974	5174	17636

Source: CAG Report 04/2015

The C&AG observed that in the selection of large number of detailed scrutiny there will be no scope for issue a demand notice to an assessee beyond 18 months from the date of filing of returns by assessee.

Revised procedure for scrutiny of ST returns

The CBE&C issued revised manual scrutiny of service tax returns with effect from 01.08.2015.  In this manual it is indicated that a Return Scrutiny Cell should be created in the Commissionerate’s Headquarters, which will maintain the records of the assessees and the returns which are selected for detailed scrutiny and also the results thereof.  The detailed scrutiny would be conducted in respect of such assessees whose total tax paid is below ₹ 50 lakhs.  Detailed scrutiny of returns must be conducted by the Service Tax Range headed by the Superintendent and assisted by a complement of Inspectors.   However, the Divisional DC/AC shall be responsible for the overall supervision of this business in respect of the Division.   Before return scrutiny is initiated, the assessee must be given prior intimation of at least 15 days and the purpose of the exercise must be spelt out in an intimation letter.

One of the important objectives of return scrutiny is to ensure validation of the information furnished in the self assessed ST-3 return.  The validation exercise would require reconciling information furnished in the ST-3 return with ITR Form Nos.4, 5, 6 and 26AS and any third party information made available.   In addition to this, the scrutiny exercise must also look at the correctness of self-assessment with respect to taxability, availability of abatement and eligibility for exemption, valuation and CENVAT credit availed/utilized.

Conclusion

It is mandatory for the assessees to file service tax returns in time in the prescribed manner.  Since the return is the basic document for the purpose of paying tax as well as for the scrutiny by the Department the assessees are to take much care in assessing the tax and making the payment as assessed in the specified time limit so as to avoid unnecessary litigations with the department.

Discussions to this article

[v SRINIVASAN]

Dear Sir,

Good analytical report. It is useful to understand about the assessment and other details.

[MARIAPPAN GOVINDARAJAN]

Thank you, Sir,

[MANASH MUKHERJEE]

How validation of ST 3 Returns will be done , in a case where ITR is not filed or ITR is filed against a corporate office but ST 3 Return is project specific.