On 11 November, the Chennai Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT), on 11 November, held that the extended period of limitation cannot be invoked without establishing fraud, wilful misstatement, suppression of facts or intent to evade service tax.
A Bench of Judicial Member Ajayan T.V. and Technical Member Vasa Seshagiri Rao also held that capitalisation of expenditure does not, by itself, convert services into capital goods, and allowed Shriram Automall India Limited's appeal against the order of the Commissioner of Service Tax. It observed:
“Mere detection during audit of discrepancies arising from records maintained by the appellant, particularly where payments and reversals had already been made and the dispute substantially involved interpretation, cannot by itself establish the requisite ingredients of the extended period.”
Shriram Automall operates Automalls and facilitates trading in used commercial vehicles. The Department issued a show cause notice dated 23 January 2015 following an audit of its records.
The notice proposed recovery of Rs. 17,43,459 towards alleged short reversal of CENVAT credit attributable to trading under Rule 6 of the CENVAT Credit Rules, 2004. It also proposed denial of Rs. 88,309 towards allegedly ineligible input services and recovery of Rs. 23,68,320 towards credit treated as relating to capital-goods expenditure, along with interest and penalty.
Confirming the demands, the adjudicating authority imposed a penalty under Section 78 of the Finance Act, 1994, read with Rule 15 of the CENVAT Credit Rules. The Commissioner (Appeals) upheld the trading-related demand for 2010-11, remanded the issue for recomputation for 2011-12, sustained part of the input-service credit denial and treated the capital-goods issue as academic since Shriram Automall had already reversed the amount.
The Tribunal noted that the Department detected the discrepancies during an audit of records maintained by Shriram Automall. It also noted that the company had paid Rs. 11,66,784 along with interest in January 2013 and claimed further reversals through its ST-3 returns, well before the Department issued the show cause notice.
It held that the question of whether Shriram Automall had to reverse the credit was distinct from the requirement to establish fraud, wilful misstatement, suppression of facts or contravention with intent to evade service tax. It found that the Department had failed to establish these ingredients and consequently held the entire demand time-barred.
Regarding the trading-related demand of Rs. 17,43,459, the Bench noted that the Explanation treating trading as an exempted service came into effect only on 1 April 2011.
It also observed that the Department had to calculate the demand for the subsequent period in accordance with the statutory formula introduced from that date. However, since the demand was time-barred, the Tribunal did not decide the substantive tax liability.
Then, the Tribunal examined the denial of Rs. 88,309 in input-service credit. The disputed services included property-valuation services provided by CBRE for Shriram Automall's leased Automalls, professional services provided by a practising company secretary, expenditure relating to the launch of the Panvel Automall and group critical-illness insurance.
It found that the property-valuation and company-secretarial services had a discernible business nexus. It observed that the Department had not established that these services were wholly unrelated to Shriram Automall's business.
However, the Bench found that Shriram Automall had not established that its group critical-illness insurance policies fell outside the statutory exclusion applicable to life or health insurance used primarily for employees' personal use or consumption. It therefore did not disturb the denial of this component on merits, while holding that limitation barred its recovery in the present proceedings.
Moreover, it examined the Department's treatment of Rs. 23,68,320 as credit relating to capital-goods expenditure. The underlying documents covered engineering and design, installation, communication and rental-related services used to establish and operate the Automalls. It held:
“Capitalization of expenditure in the books of account is only an accounting treatment and does not, by itself, convert a service into 'capital goods' within the meaning of Rule 2(a) of the CENVAT Credit Rules, 2004.”
The Tribunal also observed that the Department had to examine the eligibility of the services with reference to the applicable definition of input service. The Department had failed to establish that the disputed amount represented specified goods falling within the statutory definition of capital goods. Therefore, the Bench held that the finding treating the amount as inadmissible capital-goods credit was unsustainable.
It held that the interest under Section 75 of the Finance Act, 1994, and the penalty under Section 78 of the Act read with Rule 15 of the CENVAT Credit Rules could not survive once it had held the entire demand time-barred.
Accordingly, the CESTAT set aside the impugned order to the extent challenged and allowed the appeal with consequential relief, directing appropriate treatment of amounts already paid or reversed without double recovery.
Counsel for Appellant: Mathangi G., Advocate
Counsel for Respondent: K. Vijaya Sree, Authorised Representative