2025 (4) TMI 1339 - AT - Service Tax

Invocation of extended period of limitation under the proviso to section 73(1) of the Finance Act 1994 - only reason for invoking extended period of limitation is that the audit had discovered that the appellant had availed CENVAT credit without first paying its sub-contractor - violation of Rule 4(7) of the CENVAT Credit Rules 2004 (CCR) by availing CENVAT credit without first making payment for the input services received from its sub-agent. Extended period of limitation - HELD THAT - The service tax Returns need to be scrutinized by the Range Officer. Had the Range Officer done so the alleged irregularity in filing CENVAT credit would have been noticed. The fact that the Range Officer had not done his job and the audit had pointed out the discrepancies would only show that the Range officer was negligent in his duty. It does not show that the appellant had suppressed any facts. The Range Officer had the duty to scrutinize the Returns and the power to call for any documents or records for the purpose. What is evident from the records is that the audit had done what the Range Officer should have done. If at all there is any irregular availment of CENVAT credit and the demand was not issued within the normal period of limitation it is purely on account of the negligence by the Range Officer - the entire demand needs to be set aside on the ground of limitation itself. Violation of Rule 4(7) of the CENVAT Credit Rules 2004 (CCR) by availing CENVAT credit without first making payment for the input services received from its sub-agent - HELD THAT - Rule 4 (7) of CCR only requires the payment to be made before availing the CENVAT credit and it does not indicate that the payment should be made in any particular manner by cheque or through cash or through account adjustments. It is a normal practice when two business have a continuing relationship to maintain a running account with each other and make adjustments instead of paying cash or drawing a cheque every time. Since the show cause notice alleged that the appellant had availed CENVAT credit without actually paying the sub-agent it was for the show cause notice to have examined the records and establish this fact with evidence. The show cause notice did not establish with any evidence that the appellant had not paid its sub-agent before availing CENVAT Credit. The appeal needs to be allowed and the impugned order is not sustainable either on merits or on limitation - the impugned order is set aside - appeal allowed.

Summary

The core legal questions considered by the Appellate Tribunal (AT) in this matter are as follows:

1. Whether the extended period of limitation under the proviso to section 73(1) of the Finance Act, 1994, was correctly invoked for the demand of service tax and penalties related to the alleged irregular availment of CENVAT credit.

2. Whether the appellant violated Rule 4(7) of the CENVAT Credit Rules, 2004 (CCR) by availing CENVAT credit without first making payment for the input services received from its sub-agent.

3. Whether the appellant's contention that payments were made through adjustments and not solely by cheque or cash negates the allegation of non-payment under Rule 4(7) of CCR.

4. Whether the penalty imposed under sections 76 and 78 of the Finance Act, 1994, is sustainable in light of the appellant's submissions and the facts of the case.

5. The correctness of the quantification of the CENVAT credit wrongly availed as alleged in the show cause notice and the impugned order.

Issue-wise Detailed Analysis

1. Invocation of Extended Period of Limitation

Legal Framework and Precedents: Section 73(1) of the Finance Act, 1994, provides for a normal limitation period of one year for issuing a demand notice for service tax. However, the proviso to section 73(1) allows for an extended period of limitation up to five years if there is suppression of facts or willful misstatement to evade payment of service tax. The burden lies on the department to establish such suppression or willful misstatement.

Court's Interpretation and Reasoning: The Tribunal observed that the appellant was duly registered and regularly filed service tax returns. The only basis for invoking the extended period was the audit's discovery of alleged irregular availment of CENVAT credit without payment to the sub-agent. The Tribunal emphasized that the scrutiny of returns and verification of payments was the responsibility of the Range Officer, who had the power to call for documents and conduct investigations. The audit's detection of irregularities was essentially filling the gap caused by the Range Officer's negligence.

Key Findings: There was no evidence of suppression or willful misstatement by the appellant. The appellant had not concealed any facts; rather, the alleged irregularity was a matter of procedural compliance that could have been detected within the normal limitation period had the Range Officer performed his duties diligently.

Application of Law to Facts: The Tribunal held that invoking the extended period of limitation was unjustified in the absence of any suppression or willful misstatement. The extended period is not to be invoked merely because an irregularity was detected late due to departmental oversight.

Treatment of Competing Arguments: The department contended that the appellant's failure to pay the sub-agent before availing credit amounted to suppression and evasion, justifying extended limitation. The Tribunal rejected this, clarifying that negligence of the Range Officer cannot be attributed to the appellant.

Conclusion: The entire demand was barred by limitation and had to be set aside on this ground alone.

2. Alleged Violation of Rule 4(7) of CENVAT Credit Rules, 2004

Legal Framework: Rule 4(7) mandates that CENVAT credit on input services shall be allowed only on or after the day payment is made for the value of the input service and the service tax payable, as indicated in the invoice or bill. The rule does not prescribe the mode of payment.

Court's Interpretation: The Tribunal noted that the appellant had a continuous business relationship with its sub-agent and made payments through multiple methods: cheques, adjustments against commission, security deposits, and outstanding amounts payable to the principal manufacturer. The rule requires payment to be made, but does not restrict the mode of payment to cash or cheque only.

Key Evidence and Findings: The show cause notice alleged non-payment before availing credit but failed to establish this with documentary evidence. The appellant's explanation that payments were made through adjustments was credible and consistent with normal commercial practices.

Application of Law to Facts: Since Rule 4(7) does not prescribe the mode of payment and the appellant had made payments through legitimate adjustments, the alleged violation was not established.

Treatment of Competing Arguments: The department argued that book adjustments were not permissible under Rule 4(7), but the Tribunal rejected this narrow interpretation, emphasizing the absence of express prohibition in the rule.

Conclusion: The appellant did not violate Rule 4(7) of CCR as payments were made prior to availing CENVAT credit, regardless of the mode of payment.

3. Quantification of CENVAT Credit Wrongly Availed

Legal Framework: The quantification of credit wrongly availed must be based on verified records and evidence.

Court's Reasoning: The Commissioner (Appeals) had remanded the issue to the Assistant Commissioner for verification of the correct amount of CENVAT credit availed. However, the Tribunal did not find it necessary to delve into this issue in detail because the entire demand was barred by limitation and the appellant's payments were established.

Conclusion: The question of quantification became moot in light of the Tribunal's findings on limitation and payment.

4. Penalties under Sections 76 and 78 of the Finance Act, 1994

Legal Framework: Section 76 imposes penalty for failure to pay service tax, and section 78 penalizes for wrongful availment of CENVAT credit. Both require proof of culpability such as suppression or misstatement.

Court's Interpretation: Since the Tribunal found no suppression or willful misstatement and held that the extended period of limitation was wrongly invoked, the basis for penalties under sections 76 and 78 was also undermined.

Conclusion: Penalties imposed under these provisions were not sustainable.

Significant Holdings

"The appellant was registered with the service tax department and was filing returns regularly. The only reason for invoking extended period of limitation is that the audit had discovered that the appellant had availed CENVAT credit without first paying its sub-contractor. We find that the service tax Returns need to be scrutinized by the Range Officer. Had the Range Officer done so the alleged irregularity in filing CENVAT credit would have been noticed."

"The fact that the Range Officer had not done his job and the audit had pointed out the discrepancies would only show that the Range officer was negligent in his duty. It does not show that the appellant had suppressed any facts."

"Rule 4 (7) of CCR only requires the payment to be made before availing the CENVAT credit and it does not indicate that the payment should be made in any particular manner by cheque or through cash or through account adjustments."

"Since the show cause notice alleged that the appellant had availed CENVAT credit without actually paying the sub-agent, it was for the show cause notice to have examined the records and establish this fact with evidence. The show cause notice did not establish with any evidence that the appellant had not paid its sub-agent before availing CENVAT Credit."

"In view of the above, the entire demand needs to be set aside on the ground of limitation itself."

"In view of the above, the appeal needs to be allowed and the impugned order is not sustainable either on merits or on limitation."

Core principles established include:

• The extended period of limitation under section 73(1) proviso cannot be invoked merely due to departmental negligence or delayed detection of irregularities; there must be clear evidence of suppression or willful misstatement by the assessee.
• Rule 4(7) of CCR requires payment to be made before availing CENVAT credit but does not prescribe the mode of payment; adjustments in accounts between parties are acceptable modes of payment.
• The burden of proof lies on the department to establish non-payment before availing credit and to justify invocation of extended limitation and penalties.
• Negligence or failure on the part of departmental officers does not justify penalizing the assessee beyond the normal limitation period.

Final determinations:

• The demand for service tax, interest, and penalties was barred by limitation and was set aside.
• The appellant did not violate Rule 4(7) of CCR as payments were made prior to availing CENVAT credit.
• Penalties under sections 76 and 78 of the Finance Act were not sustainable and were quashed.
• The impugned order was set aside and the appeal was allowed with consequential relief to the appellant.