2025 (4) TMI 1115 - AT - Service Tax

Correctness in issuing SCN - appellant had made payment of service tax with interest prior to the issuance of the SCN - HELD THAT - A bare perusal of sub-section (3) of section 73 of the Finance Act shows that where any service tax has not been paid the person chargeable with the service tax may pay the amount of service tax chargeable on the basis of his own ascertainment before service of notice on him under sub-section (1) in respect of such service tax and inform the central excise officer of such payments in writing who on receipt of such information shall not serve any notice under sub-section (1) of section 73 in respect of the amount so paid. Sub-section (4) of the section 73 of the Finance Act however provides that nothing in sub-section (3) shall apply to a case where any service tax has not been paid by reason of fraud; or collusion; or wilful mis-statement; or suppression of facts; or contravention of any of the provisions of the Chapter or of the with intent to evade payment of service tax. Applicability of sub-section (4) of section 73 of the Finance Act - HELD THAT - The reasons for invoking the extended period of limitation under the proviso to section 73(1) of the Finance Act and the reasons for denying the benefit of sub-section (3) of section 73 of the Finance Act as contained in sub-section (4) are same. The appellant in response to the show cause notice clearly pointed out that the provisions of sub- section (4) of section 73 of the Finance Act could not have been invoked to deny the benefit of sub-section (3) of section 73 of the Finance Act. The Commissioner (Appeals) has denied the benefit of sub-section (3) of section 73 of the Finance Act to the appellant. The Commissioner (Appeals) placed much emphasis on the fact that investigation was initiated against the appellant after the information was gathered by the Directorate General of Intelligence. The Commissioner (Appeals) also observed that since the appellant was working under a self-assessment scheme it was essential for the appellant to work out the tax liability appropriately and pay the same. It is for this reason that the Commissioner (Appeals) held that the provisions of sub-section (4) of section 73 of the Finance Act would not apply. This view taken by the Commissioner (Appeals) cannot be countenanced. The Supreme Court and the Delhi High Court have held that suppression of facts has to be wilful and there should also be an intent to evade payment of service tax - In Pushpam Pharmaceutical Co. vs. Commissioner of Central Excise Bombay 1 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. The provisions of sub-section (4) of section 73 of the Finance Act would not apply in the present case - The provisions of sub-section (3) of section 73 of the Finance Act would therefore apply. It is not in dispute that the appellant had deposited the entire amount of service tax with interest on 25.07.2014 much before the issuance of the show cause notice on 31.01.2017 and had intimated the department. In such a situation the show cause notice under sub-section (1) of section 73 of the Finance Act could not have been issued to the appellant in view of the provisions of sub- section (3) of section 73 of the Finance Act. The impugned order that adjudicates the show cause notice and confirms the demand would therefore have to be set aside - It would therefore not be necessary to examine the contention raised by the learned counsel for the appellant that the extended period of limitation could not have been invoked in the facts of the present case. Conclusion - The SCN issued u/s 73(1) after the appellant had paid service tax and interest and informed the department is not maintainable under section 73(3). The impugned order is set aside - appeal allowed.

The core legal question considered by the Tribunal is whether a show cause notice could be validly issued under section 73(1) of the Finance Act, 1994, when the appellant had already paid the service tax along with interest prior to the issuance of the notice, specifically in light of the provisions of section 73(3) and section 73(4) of the Finance Act. Connected to this primary issue is the question of whether the extended period of limitation under the proviso to section 73(1) could be invoked on the grounds of fraud, suppression, or willful mis-statement, thereby denying the appellant the benefit of section 73(3). Additionally, the Tribunal considered the imposition of penalties under sections 77 and 78 of the Finance Act and the applicability of the self-assessment scheme in relation to the alleged suppression or evasion of service tax.

The appellant had availed External Commercial Borrowings (ECBs) from foreign banks and paid certain processing/structuring fees in foreign currency, which were later found to be liable to service tax. Upon inquiry initiated by the Directorate General of Central Excise Intelligence (DGCEI), the appellant voluntarily paid the due service tax and interest before any show cause notice was issued and informed the department accordingly, invoking section 73(3) of the Finance Act. Despite this, the department issued a show cause notice invoking the extended limitation period under the proviso to section 73(1) and denied the benefit of section 73(3) by relying on section 73(4), alleging willful suppression and intent to evade service tax. The appellant challenged this in appeal.

Issue-wise detailed analysis is as follows:

1. Applicability of Section 73(3) of the Finance Act when service tax and interest are paid prior to issuance of show cause notice

The legal framework under section 73(3) states that if a person liable to pay service tax voluntarily pays the tax and informs the Central Excise Officer in writing before the issuance of a show cause notice under section 73(1), no such notice shall be served in respect of the amount so paid. Section 73(4) carves out exceptions where section 73(3) shall not apply, specifically in cases involving fraud, collusion, willful mis-statement, suppression of facts, or contravention of provisions with intent to evade tax.

The Court examined the facts that the appellant had deposited the entire service tax and interest amount on 25.07.2014, well before the show cause notice dated 31.01.2017, and had also informed the department in writing. The show cause notice itself admitted this payment. The adjudicating authority and Commissioner (Appeals) denied the benefit of section 73(3) relying on section 73(4), alleging willful suppression and intent to evade tax based on the DGCEI's investigation.

The Tribunal rejected the artificial distinction drawn by the adjudicating authority that the notice was issued due to investigation and not on the basis of returns filed, holding that the show cause notice was indeed issued under section 73(1) and that the provisions of section 73(3) and (4) apply irrespective of the source of information leading to issuance of the notice. The Tribunal emphasized that mere non-payment or delay in payment does not automatically amount to suppression or intent to evade tax.

Relevant precedents were extensively relied upon, including the Supreme Court's ruling in Pushpam Pharmaceutical Co. which held that "suppression of facts" must be deliberate and with intent to escape payment of duty, not mere omission. The Delhi High Court's decisions in Bharat Hotels Limited and Mahanagar Telephone Nigam Ltd. further clarified that invocation of extended limitation and denial of section 73(3) benefit requires proof of wilful suppression or intent to evade tax, which cannot be presumed merely because the tax was unpaid or because the assessee was under self-assessment.

The Tribunal also referred to several decisions of the Tribunal itself (e.g., Raydean Industries, G.D. Goenka Private Limited, India Glycols Limited, Sunshine Steel Industries) which consistently held that operating under self-assessment does not ipso facto establish suppression or intent to evade tax, and that the department is duty-bound to scrutinize returns and call for documents before invoking extended limitation or penalties.

Applying these principles, the Tribunal found no evidence on record to substantiate the allegation that the appellant had wilfully suppressed facts or intended to evade service tax. The appellant had voluntarily paid the tax and interest promptly upon detection and had cooperated with the department. The mere fact that the DGCEI initiated an investigation did not establish suppression or fraud. Therefore, section 73(4) was held inapplicable, and the benefit of section 73(3) was rightly claimed by the appellant.

2. Invocation of the extended period of limitation under proviso to section 73(1)

The extended period of limitation under the proviso to section 73(1) applies only where service tax has not been paid or short paid due to fraud, collusion, wilful mis-statement, suppression of facts, or contravention of provisions with intent to evade tax. The Tribunal observed that the requirements for invoking the extended period and the conditions under section 73(4) are identical.

The Tribunal found that the department failed to produce any material evidence to prove that the appellant had any intention to evade tax or had suppressed facts wilfully. The appellant had disclosed all relevant transactions and paid the tax voluntarily. The department's reliance on the fact that the appellant was under self-assessment or that the information came to light only after investigation was insufficient to invoke the extended limitation period.

The Tribunal reiterated the settled legal position that mere non-payment or delay in payment, or difference of opinion on taxability, does not amount to suppression or evasion. The extended period can only be invoked if the department establishes one of the specified elements, which was not done here.

3. Imposition of penalties under sections 77 and 78 of the Finance Act

The Commissioner (Appeals) upheld penalties on the ground that the appellant had suppressed facts with intent to evade tax. However, the Tribunal held that since the extended limitation period and section 73(4) were not applicable, the basis for imposing mandatory penalties under section 78 also fell away. The Tribunal cited the Karnataka High Court decision in Adecco Flexione Workforce Solutions Ltd. that payment of service tax and interest before issuance of show cause notice precludes initiation of penalty proceedings under section 76.

The Tribunal further noted that if there was any doubt regarding taxability, the appellant could have sought clarification, but this did not amount to evasion. The appellant's bona fide belief and voluntary payment negated any wilful default or suppression.

4. Role of self-assessment scheme and departmental scrutiny

The Tribunal emphasized that self-assessment does not absolve the department of its duty to scrutinize returns and conduct inquiries. The department cannot rely solely on the fact that an assessee operates under self-assessment to presume suppression or evasion. The Tribunal referred to departmental instructions and rules mandating officers to scrutinize and verify self-assessment returns and to call for documents as necessary.

The Tribunal rejected the department's contention that because the appellant was under self-assessment, it was automatically liable for extended limitation and penalties. Such a view would render the self-assessment scheme meaningless and unjustly burden the assessee.

Conclusions:

The Tribunal concluded that the show cause notice issued under section 73(1) after the appellant had paid service tax and interest and informed the department was not maintainable under section 73(3). The department failed to prove any element of fraud, collusion, wilful mis-statement, or suppression of facts with intent to evade tax necessary to invoke section 73(4) or the extended period of limitation. Consequently, the penalties imposed under sections 77 and 78 were not justified.

Significant holdings and core principles established include:

"A bare perusal of sub-section (3) of section 73 of the Finance Act shows that where any service tax has not been paid, the person chargeable with the service tax may pay the amount of service tax chargeable on the basis of his own ascertainment before service of notice on him under sub-section (1) in respect of such service tax and inform the central excise officer of such payments in writing, who on receipt of such information, shall not serve any notice under sub-section (1) of section 73 in respect of the amount so paid."

"Suppression of facts must be deliberate and with an intent to escape payment of duty. It does not mean any omission. The act must be deliberate. In taxation, it can have only one meaning that the correct information was not disclosed deliberately to escape from payment of duty."

"Mere non-payment or delay in payment of service tax, or operating under self-assessment, does not ipso facto amount to suppression of facts with intent to evade tax."

"The department cannot invoke extended period of limitation merely because the case arose from investigation and not from returns filed."

"Payment of service tax and interest before issuance of show cause notice precludes initiation of penalty proceedings under section 76."

"It is the duty of the proper officer to scrutinize the correctness of the duty assessed by the assessee and, if necessary, call for records and documents, but failure to do so does not justify invocation of extended limitation or penalties."

Accordingly, the Tribunal set aside the impugned orders confirming service tax demand, interest, and penalties, allowing the appeal with consequential relief.

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