No Intent To Evade Where Reverse Charge Service Tax Was Immediately Available As CENVAT Credit: CESTAT Delhi

The Customs, Excise, and Service Tax Appellate Tribunal (CESTAT), New Delhi, has held that the extended limitation period could not be sustained in a service tax dispute after finding that the assessee had no intention to evade tax because any amount paid under the reverse charge mechanism would have been immediately available as CENVAT credit.

On that basis, the tribunal set aside a service tax demand raised by invoking the extended limitation period.

A division bench of Judicial Member Dr. Rachna Gupta and Technical Member P.V. Subba Rao observed, "As per section 73 of the Act demand can be raised only within the normal period of limitation of thirty months. Notices invoking extended period of limitation can be issued only if the non-payment of service tax is by reason of fraud or collusion or wilful mis-statement or suppression of facts or violation of the Act or Rules with an intent to evade payment of service tax in a case where demand is on reverse charge and the assessee could have immediately taken CENVAT credit of the service tax paid and utilized the entire demand is Revenue neutral and it cannot be alleged that the assessee had any intention to evade."

Makin Developers Pvt. Ltd. challenged three orders confirming service tax demands under the reverse charge mechanism. The first show cause notice covered the period from July 2012 to March 2016 and invoked the extended limitation period. Two subsequent notices covered the period from April 2016 to June 2017.

The company argued that even if service tax were payable under the reverse charge mechanism, it would have been entitled to avail CENVAT credit of the same amount immediately.

The case was therefore revenue neutral, leaving no incentive to evade tax. It also contended that the demands relating to manpower supply, works contract, and goods transport agency (GTA) services had been raised merely on the basis of accounting entries without examining the underlying transactions.

The tribunal accepted the contention. It held that the extended limitation period can be invoked only where non-payment of service tax is attributable to fraud, suppression, wilful misstatement or similar conduct coupled with an intention to evade tax. Since the tax, if paid, would have been available as CENVAT credit, no such intention could be inferred.

Accordingly, the tribunal held that the demand for the period from July 2012 to March 2016 was barred by limitation. It set aside the impugned order arising from that show cause notice and allowed the connected appeals.

The tribunal then examined the demands relating to the later period. It noted that the Finance Act, 1994 had been repealed after the introduction of GST and CENVAT credit was no longer available. However, it observed that any service tax found payable under the earlier law would be refundable in cash under the transitional provisions of the CGST Act.

The tribunal observed, "Thus, if it is decided that appellant was liable to pay any service tax under reverse charge during the relevant period, such liability and the consequential admissibility of CENVAT credit must be examined as per the Finance Act, 1994 and CENVAT credit Rules and since there is no CENVAT credit any longer, the assessee must be refunded the entire amount in cash. In short, it will be a case where the assessee will have to pay with one hand and receive refund of the entire amount with the other hand. The entire exercise is pointless."

On merits, the tribunal held that payments made to contractors for carrying out work such as earthwork, brickwork, and flooring could not be treated as payments for manpower supply services.

It observed that the contractors had been engaged to execute specified work. They had not been engaged to supply manpower.

The tribunal also set aside the demand under the works contract service. It accepted the Chartered Accountant's certificate explaining the nature of the expenditure and found that the demand could not be sustained.

The tribunal further held that service tax under the reverse charge mechanism could not be levied on GTA services in the absence of a consignment note issued by a goods transport agency.

However, the tribunal found that one limited issue required fresh examination. It noted that, in certain instances, payments due to several labourers had been received by a single individual. The Commissioner was directed to verify whether that individual had in fact acted as a manpower supplier.

If so, the Commissioner would determine the service tax and interest payable under the reverse charge mechanism.

The tribunal clarified that any amount of service tax ultimately determined and paid in the remanded proceedings would be refundable in cash under the CGST Act. It allowed the first two appeals in full. The third appeal was partly remanded for verification of the limited manpower supply issue, while the remaining demands and penalty were set aside

For Appellant: Advocates B.L. Narasimhan and Shri Ashutosh Choudhary

For Respondent: Aejaz Ahmad, Authorized Representative for the Department