The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), New Delhi, has held that the extended period of limitation cannot be invoked to recover service tax under the reverse charge mechanism when the tax paid would have been available to the assessee as Cenvat credit.

The bench of P.V. Subba Rao (Technical Member) observed that such a revenue-neutral arrangement, where an assessee effectively “had to pay with one hand and could take credit with the other,” negated the allegation that the assessee intended to evade service tax.

Accordingly, the Principal Bench restricted a service tax demand of ₹27,27,316 to the normal limitation period and set aside the penalty imposed under Section 78 of the Finance Act, 1994. The matter was remanded to the original authority for recalculating the tax and interest attributable to the normal period.

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The appellant was registered with the Service Tax Department for providing advertising agency services taxable under the Finance Act, 1994.

On the basis of intelligence, officers of the Anti-Evasion Branch investigated the appellant’s records and found that it had incurred expenses for several services allegedly attracting service tax under the reverse charge mechanism in terms of Notification No. 30/2012-ST dated June 20, 2012.

A show-cause notice dated April 24, 2019, was issued for the financial years 2012-13 to 2016-17. A statement of demand dated June 17, 2020, was subsequently issued for the financial year 2017-18.

The two proceedings were decided through a common adjudication order dated March 14, 2024. The original authority confirmed an aggregate service tax demand of ₹2,03,56,222.

On appeal, the Commissioner (Appeals) granted substantial relief by setting aside a demand of ₹1,76,28,906. However, the appellate authority sustained the remaining demand of ₹27,27,316, along with applicable interest and penalties.

The Revenue did not challenge the relief granted by the Commissioner (Appeals). Consequently, the deletion of the ₹1.76 crore demand attained finality.

The surviving demand related primarily to expenses recorded under the heads of business promotion, conveyance, legal services and freight.

In relation to business promotion expenses, the appellant contended that the amounts represented expenses incurred by its partners and employees for meeting clients, obtaining contracts and developing business. It claimed that the expenses were related to sales promotion and not the sponsorship of events.

The Commissioner (Appeals), however, found that the appellant had furnished ledger accounts but had not produced the supporting bills, vouchers or journal entries required to establish the nature of the expenditure. A service tax demand of ₹19,68,024 was consequently sustained under this head.

Regarding conveyance expenses, the appellant claimed that the amounts were reimbursements paid to employees for commuting from the office for business purposes and did not involve the contractual hiring of motor vehicles.

The appellate authority noted that the claim was not supported by documentary evidence and upheld a demand of ₹6,89,363 on this account.

The legal expenses included both advocates’ fees and other professional charges. After examining the ledgers, invoices, vouchers and bills, the Commissioner (Appeals) held that professional charges were not taxable under the reverse charge mechanism. Only advocates’ fees amounting to ₹1,70,500 were found taxable, resulting in a service tax demand of ₹21,074.

The Commissioner (Appeals) also accepted the appellant’s case concerning insurance expenses. Since the payments were made to an insurance company for insuring its office and motor vehicles, the authority held that the expenses did not attract service tax under the reverse charge mechanism.

In respect of freight expenses, the appellant contended that the amounts were charged by vendors for delivering goods through private conveyances. However, the documents did not clarify whether the goods had been transported through a goods transport agency or a private vehicle. A demand of ₹48,855 was therefore sustained under this head.

The appellant argued that the demand had been raised solely on the basis of figures appearing in its balance sheet, without properly identifying and classifying the services allegedly received by it.

It contended that the tax department was required to establish the nature and classification of every taxable service before demanding service tax under the reverse charge mechanism.

The appellant also argued that a tax demand could not be sustained merely because of differences between the figures appearing in its balance sheet and Form 26AS or Income Tax Returns and those disclosed in its ST-3 service tax returns.

According to the appellant, the Commissioner (Appeals) had merely affirmed the findings of the adjudicating authority without independently addressing these questions.

The Revenue opposed the appeal and submitted that the services had been properly identified and classified. It argued that the impugned order clearly explained the applicability of the reverse charge mechanism to the relevant expenses.

The Department further alleged that the appellant had not correctly disclosed the services provided and received during the relevant period. Despite several letters and summons, it allegedly failed to furnish complete information. The Revenue therefore maintained that the appellant had suppressed material facts with the intention of evading service tax, justifying the extended limitation period.

The Tribunal rejected the appellant’s contention that the services had not been identified or classified.

It noted that the findings of the Commissioner (Appeals) specifically dealt with business promotion, conveyance, legal and freight expenses. The tax payable under each head for the respective financial years had also been calculated.

CESTAT further held that the Department was entitled to compare the figures disclosed in the assessee’s ST-3 returns with its books of account, balance sheets and Form 26AS.

The Tribunal observed that Form 26AS was generated by the Income Tax Department on the basis of TDS returns filed by persons making payments to the appellant. It found no reason to doubt the figures appearing in the appellant’s own financial records.

Where an assessee’s service tax returns did not reconcile with its accounts, the Department could call for further information. If the assessee failed to respond to letters and summons or did not submit the relevant details, the Department was entitled to determine the liability on the basis of the records available to it, the Tribunal said.

CESTAT therefore found no merit in the appellant’s substantive challenge to the classification and taxability findings.

Despite affirming the demand on merits, the Tribunal found that the extended period of limitation had been incorrectly invoked.

It noted that the appellant was itself a service tax assessee. Any service tax paid by it under the reverse charge mechanism would have been available as Cenvat credit.

Consequently, the payment of reverse-charge tax would have increased the appellant’s liability under the reverse charge mechanism but correspondingly reduced the amount payable in cash on its output services under the forward charge mechanism.

“The appellant had to pay with one hand and could take credit with the other,” the Tribunal observed while explaining the revenue-neutral nature of the transaction.

The Tribunal held that the extended period under the proviso to Section 73(1) of the Finance Act could be invoked only when non-payment or short payment resulted from fraud, collusion, wilful misstatement, suppression of facts or violation of statutory provisions with an intention to evade tax.

Since the disputed tax was available as credit to the appellant, the Tribunal concluded that the appellant could not have intended to evade payment of service tax. The demand covering the extended limitation period was consequently set aside.

CESTAT noted that the ingredients required for imposing a penalty under Section 78 were the same as those necessary for invoking the extended limitation period under the proviso to Section 73(1).

As the element of intent to evade tax was absent, the penalty under Section 78 could not survive.

The Tribunal nevertheless upheld the service tax demand to the extent falling within the normal period of limitation. It also upheld the other penalties imposed in the proceedings, except the penalty under Section 78.

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