The Principal Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT), New Delhi, has held that where service tax payable under the reverse charge mechanism would have been immediately available as CENVAT credit, the situation is revenue neutral and cannot justify invocation of the extended period of limitation on the allegation of intent to evade tax. 

The bench of Dr. Rachna Gupta (Judicial Member) and P.V. Subba Rao (Technical Member) has observed that pure purchase of goods does not constitute a taxable service and that contracts involving only repairs do not amount to works contracts liable to reverse charge. The demand of approximately ₹1 lakh under this head was held unsustainable. 

The dispute arose from three show cause notices issued by the Service Tax Department covering the period from July 2012 to June 2017. The department alleged that Makin Developers had failed to discharge service tax under the reverse charge mechanism (RCM) on services such as Manpower supply services; Security services; Legal services; Works contract services; and Goods Transport Agency (GTA) services.

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The first show cause notice covered July 2012 to March 2016, raising a service tax demand of ₹3.82 crore, along with interest, penalty of ₹2.15 crore under Section 78 of the Finance Act, 1994, and personal penalties on the Managing Director. The subsequent notices covering April 2016 to June 2017 demanded an additional ₹1.29 crore. 

The principal issue before the Tribunal was whether the department could invoke the extended limitation period under the proviso to Section 73(1) of the Finance Act, 1994.

The assessee argued that it was a registered service tax assessee entitled to avail CENVAT credit. Therefore, even if service tax had been paid under reverse charge, the entire amount would have been immediately available as credit for payment of output service tax, making the exercise completely revenue neutral.

Accepting this contention, the Tribunal observed that extended limitation can be invoked only where non-payment of tax is attributable to fraud, suppression, wilful misstatement or other conduct accompanied by an intention to evade payment of tax.

The Tribunal held that in a revenue-neutral situation, such intention cannot ordinarily be alleged because payment of tax would have simultaneously generated equivalent CENVAT credit for the assessee. Since the entire demand under the first show cause notice pertained to a period beyond the normal limitation period, the order confirming the demand was unsustainable and liable to be set aside. 

For the subsequent demands relating to April 2016 to June 2017, the Tribunal considered the effect of the introduction of GST.

It observed that although the Finance Act, 1994 had been repealed after GST came into force, Section 142(7)(b) of the CGST Act, 2017 specifically provides that any amount found admissible under the existing law is to be refunded in cash.

The Tribunal remarked that if service tax under reverse charge were ultimately held payable for the pre-GST period, the assessee would simultaneously become entitled to a cash refund because the CENVAT credit mechanism no longer existed after GST.

Accordingly, the Bench described the exercise as one in which the assessee would effectively “pay with one hand and receive refund with the other,” making the dispute largely academic. Nevertheless, it proceeded to examine the merits of the individual demands. 

The largest component of the demand related to alleged manpower supply services amounting to approximately ₹1.28 crore.

The company explained that several payments reflected in its financial statements were payments made to petty contractors executing civil works such as brickwork, flooring and earthwork; payments to regular employees; and wages paid to temporary labourers.

The Tribunal held that payments to contractors for execution of specified work cannot automatically be treated as consideration for manpower supply. It observed that where a contractor is engaged to complete a particular work and is paid for execution of that work, the relationship is one of execution of contract and not supply of manpower.

Similarly, payments made directly to regular or temporary labourers employed by the company could not be regarded as consideration for manpower supply services.

However, the Tribunal noticed that in some instances wages relating to several labourers had been received by a single individual. The Revenue contended that such person could in fact have acted as a manpower supplier.

Finding that this factual aspect required verification, the Tribunal remanded the matter to the Commissioner only to determine whether any such person had actually supplied manpower and, if so, to quantify the service tax liability on that limited component. It also clarified that any service tax so determined and paid would have to be refunded under Section 142(7)(b) of the CGST Act. 

The Tribunal also set aside the demand relating to works contract services.

It noted that a Chartered Accountant’s certificate established that the expenditure booked under “Repair and Maintenance” included purchase of maintenance items; services received from body corporates; services on which service tax had already been discharged; and pure repair jobs.

With respect to the demand under Goods Transport Agency (GTA) services, the Tribunal observed that service tax under reverse charge can arise only where transportation is undertaken by a GTA issuing a consignment note.

Since no evidence of issuance of consignment notes had been produced, the Tribunal held that the demand under GTA services could not be sustained and accordingly set it aside. 

Allowing the appeals in part, the CESTAT set aside the entire order relating to the first show cause notice covering July 2012 to March 2016, allowing the appeals of both the company and its Managing Director; partially remanded the later proceedings only for verification of the limited manpower supply issue involving payments received by a single individual on behalf of labourers; set aside the remaining service tax demands, including those relating to works contract and GTA services, as well as the penalty imposed under Section 76; and directed that any service tax eventually found payable after remand shall be refundable in cash under Section 142(7)(b) of the CGST Act, 2017. 

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