Service Tax Paid by Mistake Not Eligible For Suo Motu Adjustment: CESTAT Chennai In TVS Motor Case

The Chennai Bench of the Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) has ruled against TVS Motor Company Ltd., holding that service tax paid under a mistaken belief of law cannot be adjusted suo motu against future service tax liability in the manner adopted by it.

The ruling was delivered by Judicial Member Ajayan T.V., dismissing the appeal filed by TVS Motor against an order confirming a service tax demand of Rs 41.97 lakh along with applicable interest.

The tribunal held that the proper procedure for claiming a refund of tax paid by mistake is laid down in the statute and does not permit unilateral adjustment by a taxpayer.

It observed that “the correct and proper procedure has been prescribed in the statute and it involves applying for a refund through the prescribed statutory mechanism under Section 11B as made applicable to the Finance Act, 1994, by Section 83 of the Finance Act, 1994, during which proceedings the competent authority would then make such determination”.

TVS Motor, a manufacturer of motorcycles and mopeds, was also registered as a service provider under various taxable service categories. During 2002–03, from November 2002 to November 2003, the company paid service tax on technical consultancy services received from foreign service providers, including services rendered both in India and outside India. The tax paid in respect of services performed outside India.

Upon realising that service tax was not leviable, under the law prevailing at the relevant time, on services performed outside India, the company took corrective steps. Service tax liability on services received from abroad was held to be tenable only after the introduction of a specific charging mechanism in 2006.

On this basis, TVS Motor adjusted the amount paid towards such services against its service tax liability for the subsequent period from November 2003 to September 2004, invoking Rule 6(3) of the Service Tax Rules, 1994.

The department objected to the adjustment and issued a show cause notice, stating that the Rules did not allow such a suo motu adjustment and that TVS Motor should have applied for a refund through the prescribed statutory process. It alleged that by making the adjustment, the company had effectively not paid service tax.

The adjudicating authority accepted this view and confirmed the demand along with interest. This was upheld by the Commissioner (Appeals), prompting TVS Motor to approach the Tribunal.

Before the Tribunal, TVS Motor contended that the service tax had been paid under a mistaken understanding of the law on non-taxable services and that Rule 6(3) allowed adjustment of excess tax paid It was further contended that the requirement under the Rule to refund the value of service and tax to the service recipient was inapplicable since the company was a service recipient deemed to be a service provider and could not refund tax to itself.

Rejecting these contentions, the bench held that Rule 6(3) is meant to apply only in cases where a service provider has received advance payment for a taxable service, paid service tax on it, and later did not provide the service, either in full or in part.

The tribunal observed that the rule presupposes the existence of a taxable service and mandates a refund of the service value and tax to the service recipient as a precondition for adjustment.

The tribunal observed that the rule cannot be applied selectively by ignoring its mandatory conditions, and the very fact that TVS was unable to comply with the requirement of refund demonstrated that the provision had no application to its case.

“Rule 6(3) cannot be selectively bisected and applied as the appellant desires to do. In view of the analysis of Rule 6(3) stated above, this Tribunal is of the firm opinion that the said Rule 6(3) would have no application with respect to the payment of service tax by oversight made by the appellant as a deemed service provider,” the tribunal held.

It further held that payment of tax by oversight or mistake does not automatically entitle an assessee to make a suo motu adjustment against future liabilities.

Dismissing the appeal, the bench stated that “misplaced sympathy is a largesse that this Tribunal can ill afford. Hence, the suo motu adjustment undertaken by the appellant having resulted in short payment of the appellant's subsequent service tax liability, has therefore been correctly demanded by the original authority ”.

Accordingly, the tribunal concluded that the demand confirmed against TVS Motor was legally sustainable.

For Appellant: Raghav Rajeev

For Respondent: Rajani Menon