CESTAT New Delhi Bars Extended Limitation Where RCM Liability Is Revenue-Neutral

On 3 September, the Delhi Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) observed that the extended period of limitation cannot be invoked where service tax payable under the Reverse Charge Mechanism (RCM) would have been available as CENVAT credit, as such a revenue-neutral situation does not establish an intention to evade tax.

A Bench comprising Technical Member P.V. Subba Rao partly allowed an appeal filed by Kaps Advertising, restricting the service tax demand to the normal period of limitation and setting aside the penalty imposed under Section 78 of the Finance Act, 1994. The Tribunal observed:

“If the appellant is required to pay with one hand and could take credit with the other, he could not have an intent to evade. For this reason, the demand for the extended period of limitation deserves to be set aside.”

The dispute arose after the Service Tax Department initiated proceedings against Kaps Advertising, which was registered for providing advertising agency services. The Department alleged that certain expenses incurred by the appellant attracted service tax under the RCM, including business promotion, conveyance, legal and freight expenses.

The original authority confirmed a total service tax demand of Rs.2.03 crore. On appeal, the Commissioner (Appeals) set aside a demand of about Rs.1.76 crore but upheld service tax of Rs.27.27 lakh, along with interest and penalties.

Before CESTAT, Kaps Advertising argued that the demand had been raised based on figures appearing in its balance sheet without properly identifying or classifying the services allegedly received. It also contended that the Department could not raise a demand merely by comparing figures in the balance sheet, Form 26AS or Income Tax Returns with the service tax returns.

The Tribunal rejected these contentions on merits. It observed that the Commissioner (Appeals) had examined the nature of the expenses and classified the services. It further held that the Department was entitled to compare the service tax returns with the appellant's books of accounts and Form 26AS while examining whether the correct amount of service tax had been paid.

On limitation, however, the Bench found merit in the appellant's case. It noted that any service tax paid under the RCM would have been available to the appellant as CENVAT credit. Thus, payment under reverse charge would increase the appellant's RCM liability while correspondingly reducing the amount required to be paid in cash under forward charge.

It held that the extended period under the proviso to Section 73(1) of the Finance Act, 1994, which permits recovery beyond the normal limitation period in cases involving fraud, collusion, wilful misstatement, suppression of facts or contravention with intent to evade tax, could be invoked only when the ingredients specified in the provision were established. 

In the present revenue-neutral situation, the Tribunal held that an intention to evade payment of service tax could not be attributed to the appellant.

It further observed that the ingredients required for imposing penalty under Section 78 were the same as those required for invoking the extended period of limitation. Since the extended period could not be invoked in the absence of an intention to evade tax, the penalty under Section 78 was also set aside.

The Bench upheld the service tax demand only for the normal period of limitation and remanded the matter to the original authority for calculation of the tax and interest payable for that period.

Accordingly, the CESTAT partly allowed the appeal.

For the Appellant: Shaubhik Gupta, Advocate

For the Department: Rohit Issar, Authorized Representative