CESTAT Chennai Quashes Service Tax Demand as Time-Barred, Declines Merits Examination

RND Softech Private Limited Vs Commissioner of GST & Central Excise (CESTAT Chennai)

Summary: The Customs, Excise & Service Tax Appellate Tribunal, Chennai, allowed the appeal filed by RND Softech Pvt. Ltd., a 100% Export Oriented Unit engaged in providing transcription services to doctors in the USA. The dispute concerned service tax allegedly payable under the reverse charge mechanism on services received from Ecostentel, a US-based “dial and Dictate” recording company, during 2009-10 to 2011-12. The adjudicating authority had invoked the extended period of limitation, confirmed the service tax demand with interest and imposed an equivalent penalty under Section 78 of the Finance Act, 1994. The Commissioner (Appeals-I), Coimbatore, upheld that order.

The appellant explained that some doctors in the USA recorded dictation over the telephone into Ecostentel’s server at their own cost. Other doctors requested the appellant to remit the charges to Ecostentel and obtain the recordings so that the appellant could undertake transcription work. The appellant recovered those charges from its US clients as part of its transcription charges. The Department, however, took the view that because the recordings were received in India through the internet and could be accessed after payment to Ecostentel, Ecostentel was rendering a service to the appellant. The Department classified the alleged service as “Business Auxiliary Service” and considered it taxable under Section 66A through the reverse charge mechanism.

The appellant principally contested the demand on limitation. It submitted that the transactions were duly recorded in its books, payments were made through normal banking channels, and there was no agreement for provision of services between the appellant and Ecostentel. According to the appellant, the payments were made to Ecostentel on behalf of the doctors and reimbursed by the doctors abroad. It therefore contended that there was neither suppression nor misstatement and that the demand was beyond the normal limitation period. On merits, the appellant also argued that the activity was in the nature of telecommunication service and relied upon Section 65(109a) of the Finance Act, 1994 and CBEC Circular F.No. 137/21/2011-ST dated 19.12.2011.

The Tribunal first examined limitation, observing that the question of limitation goes to the root of the matter and involves the jurisdiction to raise the demand. It reproduced Section 73(1) of the Finance Act, 1994 as applicable during the relevant period, under which the normal limitation period was eighteen months, while the extended period of five years could apply in specified circumstances such as fraud, collusion, wilful misstatement, suppression of facts or contravention with intent to evade payment of service tax.

The Tribunal found that the appellant’s contention regarding limitation had not been addressed by the appellate authority. It also noted that the appellant’s contention regarding reimbursable expenses not being includible as consideration under Section 67, in view of Intercontinental Consultants and Technocrats Pvt. Ltd. v. UOI, had not been controverted.

On the substantive allegations in the show cause notice, the Tribunal held that the Revenue bore the burden of establishing that Ecostentel was a service provider rendering Business Auxiliary Service to the appellant. Although the show cause notice alleged that Ecostentel had rendered Business Auxiliary Service under Section 65(105)(zzb), it did not put the appellant to notice of the statutory definition of Business Auxiliary Service under Section 65(19), nor identify the particular limb of that definition under which the alleged service fell. The Tribunal considered this omission sufficient to render the demand untenable on that count.

The Tribunal further observed that the show cause notice did not rely on any inculpatory statement or agreement establishing the alleged relationship or the nature of the service. It found the notice bereft of evidence substantiating the relationship between the appellant and the purported service provider. It also found no evidence of any positive act of fraud, suppression or wilful misstatement with intent to evade payment of service tax sufficient to justify invocation of the extended limitation period.

In reaching its conclusion on limitation, the Tribunal referred to the Supreme Court decisions in CCE v. H.M.M. Ltd., Pushpam Pharmaceuticals Company v. CCE, Bombay, Stemcyte India Therapeutics Ltd. v. CCE & ST, Ahmedabad III and Uniworth Textiles v. CCE, Raipur, as well as the Delhi High Court decision in Bharat Hotels Ltd. v. Commissioner of Chex (Adjudication). The Tribunal concluded that the Revenue had failed to establish wilful or deliberate suppression of material facts or any intention on the appellant’s part to mislead the authorities or evade service tax.

The Tribunal therefore held that the service tax demand was wholly barred by limitation and that the impugned order was unsustainable. It then considered the judicial principle that once a demand is found to be time-barred, the appellate forum should not proceed to adjudicate the merits. For this proposition, it referred to the Allahabad High Court decision in Commissioner of Customs, Central Excise & Service Tax v. Monsanto Manufacturer Pvt. Ltd., which relied upon State Bank of India v. B.S. Agricultural Industries, and to the Supreme Court decision in Commissioner of Customs, Mumbai v. B.V. Jewels. It also noted that B.V. Jewels had been followed in Commr of Service Tax, Mumbai IV v. Rochem Separations (I) P Ltd and referred to the jurisdictional Madras High Court decision in E.T.A General Pvt Ltd v. Additional Commissioner of C.Ex., Chennai.

Adhering to those precedents, the Tribunal expressly refrained from examining the merits of the alleged Business Auxiliary Service liability. Since the demand itself was found unsustainable on limitation, the consequential interest and penalty were also held untenable.

The Tribunal accordingly allowed the appeal and set aside the impugned Order in Appeal. The appellant was held entitled to consequential relief in law, if any. Thus, the Tribunal’s decision rests on limitation and the absence of evidence justifying the extended period; it did not render a final finding on the substantive taxability of the disputed activity on merits.

Cases Discussed

• Union of India v. Intercontinental Consultants and Technocrats Pvt. Ltd., 2018 (10) GSTL 401 (SC) — referred to in connection with the appellant’s contention concerning reimbursable expenses and consideration under Section 67.
• Collector of Central Excise v. H.M.M. Limited, 1995 (76) ELT 497 (SC) — referred to on the requirements for invoking the extended period of limitation.
• Pushpam Pharmaceuticals Company v. CCE, Bombay, 1995 (78) ELT 401 (SC) — referred to on the statutory requirements for invoking extended limitation.
• Stemcyte India Therapeutics Ltd. v. CCE & ST, Ahmedabad III, 2025 (394) ELT 3 (SC) — referred to among the Supreme Court decisions concerning limitation and suppression.
• Uniworth Textiles v. CCE, Raipur, 2013 (288) ELT 161 (SC) — referred to on the requirement of circumstances justifying invocation of the extended limitation period.
• Bharat Hotels Ltd. v. Commissioner of Chex (Adjudication), 2018 (12) GSTL 368 (Del.) — referred to in support of the Tribunal’s conclusion concerning extended limitation.
• Commissioner of Customs, Central Excise & Service Tax v. Monsanto Manufacturer Pvt. Ltd., 2014 (35) STR 177 (All.) — considered on the principle that once a demand is held time-barred, the Tribunal should not proceed to decide the merits.
• State Bank of India v. B.S. Agricultural Industries (I), (2009) 5 SCC 121 — quoted and relied upon in the discussion concerning adjudication of a time-barred proceeding on merits.
• Commissioner of Customs, Mumbai v. B.V. Jewels, 2004 (172) ELT 3 (SC) — referred to for the proposition that an appeal may be disposed of on limitation without examining the merits.
• Commr. of Service Tax, Mumbai IV v. Rochem Separations (I) P Ltd., 2019 (366) ELT 103 (Bom.) — noted as following the decision in B.V. Jewels.
• E.T.A General Pvt. Ltd. v. Additional Commissioner of C.Ex., Chennai, 2016 (44) STR 409 (Mad.) — referred to as the jurisdictional High Court decision applying the principle that merits should not be examined after holding the proceeding time-barred.

FULL TEXT OF THE JUDGMENT/ORDER OF CESTAT CHENNAI

RND Softech Pvt. Ltd, a 100% EOU, the appellant herein, has assailed the Order in Appeal No.CMB-CEX-000-APP-258-16, dated 22.11.2016 (impugned order) passed by the Commissioner (Appeals-I), Coimbatore whereby the Appellate Authority has upheld the Order Sl.No.01/2016-AC dated 18.01.2016 (OIO) passed by the Adjudicating Authority. The Adjudicating Authority vide the said OIO had upheld the invoking of the extended period of limitation and confirmed the demand of service tax on the appellant for the “Business Auxiliary Service” received from outside India during the period 2009-10 to 2011-12 under proviso to Section 73(1) of the Finance Act, 1994 (Act) along with appropriate interest and imposed an equivalent penalty under Section 78 of the Act.

2. Relevant facts, as gleaned from the appeal records, are that the appellant is a 100% EOU having central excise and service tax registration engaged in providing ‘Transcription Service’ to Doctors in USA. Some of the Doctors in USA who use appellants’ Transcription Service, record their dictation over phone into the server of Ecostentel, a ‘dial and Dictate’ recording Company in USA by bearing the cost on their own to make dictation faster and easier. Other doctors who have made such recording request the appellant to make the remittance to Ecostentel and collect the recordings to carry out the transcription work. The appellant in turn collects these charges including it in their ‘Transcription charges’ from their clients in USA. The Department was of the view that since these recordings reach appellants’ Server in India from M/s Ecostentel Server via Internet and can be accessed only after making remittance to M/s. Ecostentel on behalf of the Doctors who had requested the appellant to make such payment, Ecostentel is providing a service as a service provider to the Appellant and such service rendered by Ecostentel appears to be classifiable under “Business Auxiliary Service” and the said service is chargeable to service tax under Section 66A under reverse charge mechanism. On such premise, a Show Cause Notice was issued to the appellant invoking the extended period of limitation and proposing to demand the service tax along with applicable interest and to impose penalty. After due process of law, the adjudicating authority held that the extended period is invokable and confirmed the demand of service tax along with interest besides imposing penalty under Section 78 ibid. The appeal preferred by the appellant came to be rejected vide the impugned order. Hence this Appeal.

3. Shri. P. Aravind Thangam, Ld. Consultant appearing for the appellant, emphasized that the demand is wholly barred by limitation. The SCN dated 28.08.2014 covers the period 01.04.2012 to 31.03.2012. During the relevant period Section 73 of the Act prescribed a normal limitation period of 18 months. The extended limitation of 5 years under the proviso to Section 73(1) can be invoked only in cases involving Fraud, Collusion, Wilful mis-statement, Suppression of facts with intent to evade service tax.

4. Ld. Consultant contended that in the present case the transactions were fully recorded in the books of accounts, Payments were made through normal banking channels. It was also argued that there was no contract for any service that the appellant had entered into with Ecostentel and the Appellant paid the charges to Echo Sten-Tel on behalf of the doctors, and the same amount was reimbursed by the doctors abroad, which was nothing but mere reimbursements from the doctors abroad. There was no suppression or misstatement whatsoever and hence the entire demand is time barred.

5. On merits it was argued by the Ld. Consultant that the activity involved is actually telecommunication services since they relate to dial and dictate communication services and under Section 65(109a) of the Finance Act, 1994, Telecommunication Service includes services provided through transmission of voice, signals, or data through telecommunication systems and such services are taxable only when provided by a person licensed under the Indian Telegraph Act, 1885. In the present case Echo Sten-Tel is a foreign entity and the Department has not alleged that the provider holds a licence under the Indian Telegraph Act. It is argued that therefore the service falls outside the tax net. Reliance is placed on the Central Board of Excise and Customs clarification vide Circular F.No. 137/21/2011-ST dated 19.12.2011.

6. Shri M. Selvakumar, Ld. Authorised Representative appearing on behalf of the Respondent reiterated the findings in the impugned order.

7. We have heard both sides and perused the materials available on record.

8. The issues that arise for our determination are:

A. Whether the Demand is wholly barred by limitation as contended by the Appellant?

B. If the demand is not barred by limitation, then on merits whether the demand confirmed along with applicable interest and imposition of penalty is tenable?

9. The appellant has contested the demand strenuously urging that the demand is wholly barred by limitation. When a plea that the demand is wholly barred by limitation is raised at the outset, we too find it appropriate to deal with the said contention at first. The question of limitation goes to the root of the matter and involves a question of jurisdiction to raise the demand itself in the first instance. This in turn is premised on the provisions of law that prescribe the situations as well as the attendant ingredients thereto that attract its application. The findings of fact on the question of jurisdiction would be a jurisdictional fact. Such a jurisdictional question therefore needs to be examined and is to be determined having regard to both the facts and law involved therein.

10. To appreciate whether the demand is wholly barred by limitation, it would therefore be appropriate to reproduce section 73(1) of the Finance Act,1994 as it stood at the relevant time. This section deals with recovery of service tax not levied or paid or short levied or short paid or erroneously refunded. It is as follows:

“73.Recovery of service tax not levied or paid or short-levied or short-paid or erroneously refunded. —

(1) Where any service tax has not been levied or paid or has been short-levied or short-paid or erroneously refunded, Central Excise Officer may, within eighteen months from the relevant date, serve notice on the person chargeable with the service tax which has not been levied or paid or which has been short-levied or short-paid or the person to whom such tax refund has erroneously been made, requiring him to show cause why he should not pay the amount specified in the notice :

Provided that where any service tax has not been levied or paid or has been short-levied or short-paid or erroneously refunded by reason of —

(a) fraud; or

(b) collusion; or

(c) wilful mis-statement; or

(d) suppression of facts; or

(e) contravention of any of the provisions of this Chapter or of the rules made thereunder with intent to evade payment of service tax,

by the person chargeable with the service tax or his agent, the provisions of this sub-section shall have effect, as if, for the words “eighteen months”, the words “five years” had been substituted.”

11. Thus, from a perusal of sub-section (1) of section 73 of the Finance Act, it can be seen that where any service tax has not been levied or paid, the Central Excise Officer may, within eighteen months from the relevant date, serve a notice on the person chargeable with the service tax which has not been levied or paid, requiring him to show cause why he should not pay amount specified in the notice.

12. The proviso to section 73(1) of the Finance Act stipulates that where any service tax has not been levied or paid by reason of fraud or collusion or wilful mis-statement or suppression of facts or contravention of any of the provisions of the Chapter or the Rules made there under with intent to evade payment of service tax, by the person chargeable with the service tax, the provisions of the said section shall have effect as if, for the word “eighteen months”, the word “five years” has been substituted.

13. The “relevant date‟ has been defined in section 73 (6) of the Finance Act as follows:

“ 73 (6) For the purposes of this section, “relevant date” means, —

(i) in the case of taxable service in respect of which service tax has not been levied or paid or has been short-levied or short-paid—

(a) where under the rules made under this Chapter, a periodical return, showing particulars of service tax paid during the period to which the said return relates, is to be filed by an assessee, the date on which such return is so filed;

(b) where no periodical return as aforesaid is filed, the last date on which such return is to be filed under the said rules;

(c) in any other case, the date on which the service tax is to be paid under this Chapter or the rules made thereunder;

(ii) in a case where the service tax is provisionally assessed under this Chapter or the rules made there under, the date of adjustment of the service tax after the final assessment thereof;

(iii) in a case where any sum, relating to service tax, has erroneously been refunded, the date of such refund.”

14. We find that the contention of the appellant that the demand was wholly barred by limitation has not been addressed by the appellate authority and the contention that the reimbursable expenses are not includible as consideration as per section 67 since Rule 5 has been struck down in the Intercontinental Consultants and Technocrats Pvt Ltd v. UOI & Anr, 2012-TIOL-966-HC-DEL-ST was not controverted.

15. Revenue is alleging that Ecostentel is a service provider a service classifiable under “Business Auxiliary Service” to the Appellant and the said service is chargeable to service tax under Section 66A under reverse charge mechanism. It is the Revenue who is making the allegation and as such, the burden to prove said allegation lies very heavily upon the Revenue who has to bring home the charges with sufficient evidence. It is seen that while the SCN alleges that the Ecostentel has rendered BAS under Section 65(105)(zzb), it does not put the appellant to notice of the statutory definition of Business Auxiliary Service as provided in Section 65(19) and as to under which limb of the said definition the appellant would fall. The incontrovertible fact that is evident from the appeal records is that neither the SCN nor the orders of the lower authorities have deemed it fit to put the appellant to notice as to the statutory provisions that are attracted and in violation of which, and as a consequence thereof, the demand of service tax has become payable. Such a demand is decidedly untenable on this count alone.

16. Be that as it may, we find that the SCN does not rely on any inculpatory statement, much less any agreement that would bring out the relationship or the nature of service as falling under Business Auxiliary Service and if so under which limb, given the definition of Business Auxiliary Service as provided in Section 65(19). We find that the Show Cause Notice is thus bereft of any evidence substantiating the relationship alleged between the Appellant and the purported service provider. We further notice that the SCN also has not let in any evidence of any positive act of fraud, suppression or wilful misstatement of facts with intent to evade payment of duty on the part of the Appellant and is thus bereft of reasons justifying the invoking of the extended period of limitation.

17. Therefore, we find merits in the appellant’s contest of the demand being barred by limitation. The Revenue has failed to adduce any evidence or establish that the respondent engaged in wilful or deliberate suppression of material facts, and there is nothing on record to suggest that the appellant acted with any intention to mislead the authorities or evade payment of service tax. Decisions abound, and a reference to the Judgements of the Apex Court in CCE v. H.M.M. Ltd, 1995 (76) ELT 497, Pushpam Pharmaceuticals Company v CCE, Bombay, 1995 (78) ELT 401 (SC), Stemcyte India Therapeutics Ltd v. CCE & ST, Ahmedabad III, 2025 (394) ELT 3 (SC), Uniworth Textiles v CCE, Raipur, 2013 (288) ELT 161 (SC) and the Delhi High Court decision in Bharat Hotels Ltd v. Commissioner of Chex (Adjudication), 2018 (12) GSTL 368 (Del.) would amply suffice. Given the above, we are of the considered view that the demand of service tax is wholly barred by limitation, and thus the impugned order is unsustainable and liable to be set aside on this count.

18. Furthermore, we find that the Honourable High Court of Allahabad, in Commr of Cus, C.Ex & S.Tax v. Monsanto Manufacturer Pvt Ltd, 2014 (35) STR 177 (All), has held as under:

“20. Though in the appeal by the assessee several questions of law have been framed, the following question has been pressed at the hearing :

“Whether the Tribunal having held that proceedings were barred by limitation and proceedings were liable to be quashed on the ground of limitation, the Tribunal committed an illegality in deciding the question on merits. Hence is the finding of Tribunal on merits liable to be set aside?”

21. The appeal is admitted on the following question of law and is by consent taken up for final hearing.

22. The Tribunal came to the conclusion that the demand by the Revenue was beyond the period of limitation of one year prescribed under Section 73(1) of the Finance Act, 1994 and that the period of five years could not have been invoked. That part of the judgment of the Tribunal has been confirmed in the companion appeal. Once that be the position and the Tribunal having come to the conclusion that the extended period of limitation could not have been validly applied, the Tribunal, in our view, acted outside its jurisdiction in entering upon the merits of the dispute on whether the demand for duty should be confirmed. Once it is held that the demand is time barred, there would be no occasion for the Tribunal to enquire into the merits of the issues raised by the Revenue.

23. In State Bank of India v. B.S. Agricultural Industries (I)-(2009) 5 SCC 121, the Supreme Court dealt with a situation where the consumer forum had held that the complaint was barred by limitation but had nonetheless proceeded to decide the issue on merits. Holding that this would amount to an illegality, the Supreme Court observed :

“12. As a matter of law, the consumer forum must deal with the complaint on merits only if the complaint has been filed within two years from the date of accrual of cause of action and if beyond the said period, the sufficient cause has been shown and delay condoned for the reasons recorded in writing. In other words, it is the duty of the consumer forum to take notice of Section 24A and give effect to it. If the complaint is barred by time and yet, the consumer forum decides the complaint on merits, the forum would be committing an illegality and, therefore, the aggrieved party would be entitled to have such order set aside.”

24. Consequently, since the Tribunal was justified, as we have held, in coming to the conclusion that the demand was time barred, there was no occasion for the Tribunal to enter upon the merits of the dispute. We, accordingly, answer the question of law as framed by the assessee in the affirmative and in favour of the assessee.

25. The appeal by the assessee shall stand disposed of in the aforesaid terms.” (Emphasis supplied)

19. We also find that the Honourable Supreme Court in Commissioner of Customs, Mumbai v B.V. Jewels, 2004 (172) ELT 3 (SC), has observed that “ If, in reality, the CEGAT found that the action taken by the departmental authorities was beyond the period of limitation, it could have disposed of the appeals before it only on that ground without examining the merits”. This decision of the Apex Court in B.V. Jewels ibid is noticed to have been followed in Commr of Service Tax, Mumbai IV v. Rochem Separations (I) P Ltd, 2019 (366) ELT 103 (Bom). It is also seen that the jurisdictional High Court in E.T.A General Pvt Ltd v Additional Commissioner of C.Ex, Chennai, 2016 (44) STR 409 (Mad) has held as under:

“11. In Commissioner of Customs, Central Excise & Service Tax v. M/s. Monsanto Manufacturer Pvt. Ltd., reported in 2014-TIOL-550-HC-ALL-ST, while declaring the demand as beyond the period of one year, the Tribunal, entered into the merits of the appeal filed by the assessee and passed an adverse order. Before the Allahabad High Court, one of the substantial questions of law raised by the assessee, was when the Tribunal having held that proceedings were barred by limitation, has committed any illegality in deciding the question on merits. Whether the finding of the Tribunal on merits, is liable to be set aside?”

12. While addressing the above said substantial question of law, decision of the Hon’ble Supreme Court in State Bank of India v. B.S. Agricultural Industries reported in (2009) 5 SCC 121, has been pressed into service, wherein, the Hon’ble Supreme Court had an occasion to deal with a situation, where the consumer forum held that the complaint was barred by limitation, but nonetheless had proceeded to decide the issue on merits. Dealing with the issue, which is similar to the case on hand, at Paragraph 12, the Hon’ble Supreme Court in State Bank of India’s case (cited supra), held as follows :-

“12. As a matter of law, the consumer forum must deal with the complaint on merits only if the complaint has been filed within two years from the date of accrual of cause of action and if beyond the said period, the sufficient cause has been shown and delay condoned for the reasons recorded in writing. In other words, it is the duty of the consumer forum to take notice of Section 24A and give effect to it. If the complaint is barred by time and yet, the consumer forum decides the complaint on merits, the forum would be committing an illegality and, therefore, the aggrieved party would be entitled to have such order set aside.”

Applying the ratio of the Supreme Court in State Bank of India v. B.S. Agricultural Industries reported in (2009) 5 SCC 121, the Allahabad High Court in Commissioner of Customs, Central Excise & Service Tax v. M/s. Monsanto Manufacturer Pvt. Ltd., reported in 2014-TIOL-550-HC-ALL-ST, answered the question of law in favour of the assessee.

13. Judgment of the Supreme in State Bank of India’s case (cited supra), followed in Commissioner of Customs’s case (cited supra), squarely applies to the facts on hand, wherein, CESTAT, Madras, while dismissing the appeal as time-barred, has entered into the merits of the case and dismissed the same, on merits. In the words of the Hon’ble Supreme Court, that would be an illegality.

14. Though Mr. A.P. Srinivas, learned counsel appearing for the Revenue submitted that the correctness of the order impugned before us, can be decided in an appeal before the CESTAT and prayed to sustain the order, dated 15-2-2016 in W.P. No. 5501 of 2016, in the light of the above discussion and the decision in State Bank of India’s case (cited supra), we are not inclined to accept the said contention. When the Hon’ble Supreme Court has described the manner of disposal of an appeal, as illegality, the same can be corrected by this Court, in exercise of the powers under Article 226 of the Constitution of India and no useful purpose would be served in relegating the appellants to approach the alternative remedy. Courts have held that a writ petition is maintainable, when the act committed is per se illegal, and contrary to the statute.

15. In the light of the above discussion and decisions, we are inclined to interfere with the order of the Writ Court as well as the Order-in-Appeal No. 349/2015 (STA-II), dated 30-11-2015, passed by the Commissioner of Service Tax (Appeals-II) and the same are set aside.”

20. Given our findings that the demand is wholly barred by limitation for the reasons stated above, adhering to judicial discipline and respectfully following the binding judicial precedents of the Honourable Apex Court and High Courts cited supra, we refrain from delving into the merits of the matter and rendering a finding on merits. Inasmuch as we have found the demand unsustainable and liable to be set aside, the consequential demand of interest and penalty imposed is also found to be untenable and liable to be set aside.

21. For the reasons stated above, we allow the appeal and set aside the impugned Order in Appeal. The appellant is entitled to consequential relief in law, if any.

(Order pronounced in the open court on 21.08.2026)