Service Tax Payment Can't Create Liability Where Tax Is Not Payable: CESTAT Delhi

The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Delhi has held that merely because a taxpayer wrongly collects or pays service tax, it does not make an otherwise non-taxable activity liable to tax.

“However, the fact that some amount was collected and deposited does not create a charge of service tax and no service tax will become payable and no exemption which is otherwise available will become unavailable,” the tribunal observed.

The bench comprising Judicial Member Binu Tamta and Technical Member P.V. Subba Rao was hearing two appeals filed by Sun Bright Manpower Solutions Pvt. Ltd. against a service tax demand and rejection of its refund claim for an amount deposited during investigation.

Sun Bright provided manpower services to its clients. Under its agreements, it recovered the actual cost of wages, Employees' State Insurance (ESI), provident fund (PF), and Labour Welfare Fund, besides charging 5% to 10% as service charges. It paid service tax on the service-charge portion but not on the reimbursed expenses.

For some clients, however, Sun Bright had agreements to manufacture goods on a job-work basis rather than supply manpower. The Commissioner found that these activities amounted to manufacture and were therefore not liable to service tax under Notification No. 25/2012-Service Tax, except for the manufacture undertaken for Sandhar Automach.

In Sandhar Automach's case, the Commissioner confirmed the service tax demand on the ground that Sun Bright had collected service tax from the client.

The tribunal disagreed. It observed that once an activity is found to be non-taxable or exempt, service tax cannot be demanded merely because an amount was collected from the customer as service tax. Under Section 73A of the Finance Act, 1994, such an amount still has to be deposited with the Central Government. But that does not create a separate service tax liability where no tax was legally payable.

The tribunal therefore set aside the service tax demand relating to the manufacture undertaken by Sun Bright for Sandhar Automach.

It also considered the Department's demand on reimbursable expenses such as wages, PF and ESI for the period before the relevant amendment to Section 67.

The Commissioner had referred to the Supreme Court's ruling in Union of India v. Intercontinental Consultants and Technocrats Ltd., which held that service tax could not be charged on reimbursable expenses during the relevant period. However, the Commissioner declined to follow that ruling because Sun Bright had paid service tax, after self-assessment, on reimbursable expenses in some invoices.

The tribunal rejected that reasoning. It observed that if Sun Bright had wrongly paid service tax on reimbursable expenses in some invoices, that did not give the Department the right to impose the same tax on other invoices.

“The charge does not come from the fact that the assessee has self-assessed tax in a particular fashion,” the tribunal observed.

It further held that neither the Commissioner nor any other officer had the power to confirm service tax on amounts which were admittedly not taxable during the relevant period, as held by the Supreme Court in Intercontinental Consultants and Technocrats.

A separate issue concerned ₹1.38 crore deposited by Sun Bright during investigation for the period April 2014 to September 2014. The amount was later appropriated by the Commissioner towards service tax, interest and penalties.

The tribunal noted that the show-cause notice did not demand service tax for April-September 2014 or propose appropriation of the amount deposited for that period. Despite this, the Commissioner appropriated the deposit in the adjudication order.

The tribunal held that the appropriation could not be sustained. It noted that the appropriation formed part of the adjudication proceedings and held that those proceedings could not extend beyond the permissible five-year period. “The short answer is NO,” it observed, setting aside the appropriation.

In the separate refund appeal, Sun Bright challenged the rejection of its claim for refund of ₹1.29 crore out of the ₹1.38 crore deposited during the investigation.

The tribunal noted that no show-cause notice had demanded service tax for April-September 2014 or proposed appropriation of the amount deposited for that period. It held that the appropriation in the adjudication order was therefore beyond the scope of the show-cause notice.

“Since no SCN was issued either demanding the duty or proposing to appropriate the amount paid during investigation, Revenue was bound to refund the amount so deposited,” the tribunal observed.

It directed that the amount deposited by Sun Bright be refunded with interest as per law and allowed both appeals with consequential relief.

For Appellant: Advocate Amit Jain

For Respondent: Authorised Representative Shashank Yadav, Department