Invocation of limitation period without wilful attempt to evade payment of duty invalid

Mec Shot Blasting Equipment P Ltd. Vs Commissioner of Central Goods And Service Tax (CESTAT Delhi)

CESTAT Delhi held that mere suppression of facts not enough, for invocation of extended period of limitation, there must be deliberate and wilful attempt to evade payment of duty. Thus, held that invocation of limitation period unjustified in absence of wilful attempt to evade payment of duty.

Facts- The appellant is engaged in manufacturing of excisable goods falling under chapter 84 and are availing Cenvat credit of duty and tax paid on inputs and input services and are also registered u/s. 69 of the Finance Act, 1994 for discharging their service tax liability.

Following the audit of the records of the appellant, the department issued a show cause notice dated 20.01.2016 stating that as the appellant had remitted a sum of Rs. 37,69,247/- for import of various taxable services during the period from 01.04.2011 to 31.03.2014, the appellant was liable to deposit service tax of Rs. 4,49,046/- by reverse charge mechanism on such payment as per Section 66A of the Finance Act, 1994.

Vide Order-in-Original, the demand of service tax of Rs. 4,49,046/- with interest u/s. 75 of the Finance Act, 1994 was confirmed and penalty of Rs. 4,49,046/- was imposed u/s. 78. Commissioner (Appeals) rejected the appeal. Being aggrieved, the present appeal is filed.

Conclusion- It is settled law that mere failure to declare does not amount to wilful suppression. There must be some positive act from the side of the assessee to find wilful suppression. In the instant case, it is an admitted fact that all the transactions were declared in the financial records and the objection arose on scrutiny of such financial documents by the audit team. The Department has not been able to establish any positive act of the appellant with an intent to evade. As that there was no deliberate intention on the part of the appellant not to disclose the correct information or to evade payment of duty, it was not open to the Central Excise Officer to proceed to recover duties in the manner indicated in proviso to Section 11A of the Act.

Held that mere suppression of facts is not enough and there must be a deliberate and wilful attempt on the part of the appellant to evade payment of duty. In the absence of any intention to evade payment of service tax, which intention should be evident from the materials on record or from the conduct of the appellant, the extended period of limitation cannot be invoked.

FULL TEXT OF THE CESTAT DELHI ORDER

The present appeal has been filed by M/s Mec Shot Blasting Equipment Private Limited¹ to assail the Order-in-Appeal No. 302/CKJ/ST/UDR/2018 dated 29.06.2018 wherein the Commissioner (Appeals) has confirmed the demand of Rs. 2,80,483/- along with interest and reduced the penalty to the extent of Rs. 1,40,242/- under Section 78 of the Act.

2. The brief facts of the case are that the appellant is engaged in manufacturing of excisable goods falling under chapter 84 and are availing Cenvat credit of duty and tax paid on inputs and input services and are also registered under Section 69 of the Finance Act, 1994 for discharging their service tax liability. Following the audit of the records of the appellant, the department issued a show cause notice dated 20.01.2016 stating that as the appellant had remitted a sum of Rs. 37,69,247/- for import of various taxable services during the period from 01.04.2011 to 31.03.2014, the appellant was liable to deposit service tax of Rs. 4,49,046/- by reverse charge mechanism on such payment as per Section 66A of the Finance Act, 1994. The said notice proposed penalty and interest while invoking the extended period. Vide Order-in-Original No. 51/2016-ST Dt. 24.01.2017, the demand of service tax of Rs. 4,49,046/- with interest under Section 75 of the Finance Act, 1994 was confirmed and penalty of Rs. 4,49,046/- was imposed under Section 78. Aggrieved by the said order, the appellant filed an appeal before the Commissioner (Appeals) who in-turn, rejected their appeal. Hence, the appellant has filed the present appeal.

3. Learned Counsel for the appellant submitted that on merits the exhibition and advertisement services, services of research and development and consultancy were also provided out of India and also consumed out of India, therefore, service tax was not payable. In case of exhibition and advertisement services, the appellant is benefited in the long run and it helps in marketing of appellant’s goods and the same is applicable to R&D and consultancy services as well. He contended that even otherwise the entire demand is hit by limitation. The payment for research and development services and consultancy services were made in the financial year 2011-12 and 2012-13 only and notice was issued on 20.01.2016, therefore, entire demand is for extended period. The appellant did not deposit service tax under the bona fide belief that since services were consumed out of India, therefore, no tax was payable. The entire transactions were duly recorded in the books of accounts and remittances were made in foreign currency through banking channel. The non-payment of tax was also noticed during the course of conducting audit of records of the appellant. The Ld. Counsel further contended that as the transaction were part of their audited books of accounts, therefore, suppression with intent to evade payment of tax cannot be alleged. Consequently, it was merely a case of non-payment of tax under bonafide belief. Imposition of 50% penalty (instead of 100%) under Section 78 by the appellate authority also supports the appellant’s case. Even otherwise, the appellant were eligible for Cenvat credit of the tax demanded (as both the services are input services for the appellant), therefore, in view of decision given by Hon’ble Supreme Court in the case of Amco Batteries Ltd. Vs. CCE², there was no reason for the appellant to suppress and therefore, extended period limitation is not invocable. Since the appellant himself was eligible for Cenvat credit, therefore, entire exercise is revenue neutral and extended period is not available to revenue in view of decision given by five-member bench of the Hon’ble Tribunal in the case of Jav Yushin Ltd. Vs. CCE³. In the case of Texvard International Vs. CCE⁴ service tax was payable under reverse charge but since the appellant were eligible for Cenvat credit, therefore, demand was dropped on the grounds that the entire exercise was revenue neutral. Reliance was placed on Supreme Court decision in the case of CCE Vs. Coca Cola India Pvt. Ltd⁵ in which it was held by SC that when appellant is eligible to Modvat credit, the situation becomes revenue-neutral. In view of above, learned counsel has prayed that the appeal of the appellant may be allowed.

4. Learned Authorized Representative for the Department while reiterated the findings in the impugned order, submitted that he appellant had never informed the department about the remittance made in convertible foreign currencies to their service provider for import/obtaining the service of taxable services. The appellant had failed to declare the receipt of the above taxable services to the jurisdiction officer and suppressed the correct nature of taxable service received by them with a blatant intention to evade payment of service tax on the value of taxable services. The appellant as services recipient has wilfully, deliberately suppressed the correct nature and value of taxable service received by them form the company/ service providers based outside India and failed to determine and pay the service tax with an intention to evade payment of service tax in contravention of the various provisions of the finance Act.1994 and rules. Therefore, the extended period invoked.

5. We have heard the Ld Counsel for the appellant and the Ld AR for the Department. The admitted facts of the case are as follows:

i. The appellant was registered under service tax and central excise and was subjected to audit by the department.

ii. The appellant had paid Rs. 37,69,247 in foreign currency to the service providers but had not paid service tax under Reverse Charge Mechanism.

iii. All the transactions were recorded in their financial statements.

6. As far as merits of the demand is concerned, we note that the findings in the impugned order is that the demand for R&D and Consultancy services are liable to be taxed as the same received and consumed in India. In this context, we note the appellant is engaged in the manufacture of blasting machineries and any service related to its research and development or consultancy services received in this regard is for their commercial activity in India. Therefore, we agree with the findings that these were services for consumption in India. Therefore, on merit we hold that service tax was payable under RCM by the appellant. However, as regards the invocation of the extended period, we note that the Ld Counsel has submitted that notice was issued on 20.01.2016 and the entire demand fell under the extended period. He has contended that the appellant did not deposit service tax under the bonafide belief that since services were consumed out of India, therefore, no tax was payable. The entire transactions were duly recorded in the books of accounts and remittances were made in foreign currency through banking channel. The Ld Counsel further contended that as the transaction were part of their audited books of accounts, therefore, suppression with intent to evade payment of tax cannot be alleged. Consequently, it was merely a case of non-payment of tax under bonafide belief. It has also been submitted that imposition of 50% penalty under Section 78 by the appellate authority also supports the appellant’s case, more so when the appellant was eligible for availment of the Cenvat credit of the said tax.

7 In this context, we note that the non-payment of tax was detected during the audit of the records of the appellant. This evidences the fact that the appellant was registered and was filing his returns with the department. We note that the impugned order has held that as the appellant did not inform the department regarding the remittances made in convertible foreign currencies to their service provider, and had suppressed the correct nature of the taxable service provided by them with an intent to evade payment of service tax. Such a finding recorded that suppression of facts is enough to invoke the extended period of limitation under the proviso to section 73 (1) of the Finance Act and there is no necessity of any intent to evade payment of service tax, is against the well settled principles. Even if one assumes that there was suppression, it has to be examined whether suppression was wilful and with an intent to evade payment of service tax. We note that the Hon’ble Supreme Court has held that suppression of facts has to be “wilful‟ and there should also be an intent to evade payment of service tax. In this context, we are of the opinion that it would be useful to reproduce the proviso to section 11A of Central Excise Act, 1944, as it stood when the Supreme Court explained “suppression of facts” in Pushpam Pharmaceutical Co. vs. Commissioner of Central Excise, Bombay [1995 (78) E.L.T. 401 (SC)], which is as follows:

“11A: Where any duty of excise has not been levied or paid or has been short-levied or short-pain or erroneously refunded, by the reason of-

a. fraud; or

b. collusion; or

c. any wilful misstatement; or

d. suppression of facts; or

e. contravention of any of the provisions of this Act of the rules made thereunder with intent to evade payment of duty by any person chargeable with the duty,

the Central Excise Officer shall, within five years from the relevant dated, serve notice on such person requiring him to show cause why he should not pay the amount specified in the notice along with interest payable thereon under Section 11AA and a penalty equivalent to the duty specified in the notice.”

8. The Hon’ble Supreme Court in Pushpam Pharmaceuticals Company, examined whether the Department was justified in initiating proceedings for short levy after the expiry of the normal period of six months by invoking the proviso to section 11A of the Excise Act. The Hon’ble Court observed that the proviso to section 11A of the Excise Act carved out an exception to the provisions that permitted the Department to reopen proceedings if the levy was short within six months of the relevant date and permitted the Authority to exercise this power within five years from the relevant date under the circumstances mentioned in the proviso, one of which was suppression of facts. It is in this context that the Supreme Court observed that since “suppression of facts‟ has been used in the company of strong words such as fraud, collusion, or wilful default, suppression of facts must be deliberate and with an intent to escape payment of duty. The relevant para is reproduced hereinafter:

“4. Section 11A empowers the Department to re- open proceedings if the levy has been short-levied or not levied within six months from the relevant date. But the proviso carves out an exception and permits the authority to exercise this power within five years from the relevant date in the circumstances mentioned in the proviso, one of it being suppression of facts. The meaning of the word both in law and even otherwise is well known. In normal understanding it is not different that what is explained in various dictionaries unless of court the context in which it has been used indicates otherwise. A perusal of the proviso indicates that it has been used in company of such strong words as fraud, collusion or wilful default. In fact it is the mildest expression used in the proviso. Yet the surroundings in which it has been used it has to be construed strictly. It does not mean any omission. The act must be deliberate. In taxation, it can have only one meaning that the correct information was not disclosed deliberately to escape from payment of duty. Where facts are known to both the parties the omission by one to do what he might have done and not that he must have done, does not render it suppression.” (emphasis supplied)

9. The above decision was referred by the Hon’ble Supreme Court in Anand Nishikawa Company Ltd. vs. Commissioner of Central Excise [2005 (188) E.L.T. 149 (SC)] which observed as follows:

“26 ……………. This Court in the case of Pushpam Pharmaceutical Company v. Collector of Central Excise, Bombay, while dealing with the meaning of the expression “suppression of facts” in proviso to Section 11A of the Act held that the term must be construed strictly. It does not mean any omission and the act must be deliberate and wilful to evade payment of duty.

The Court, further, held:-

“In taxation, it (“suppression of facts”) can have only one meaning that the correct information was not disclosed deliberately to escape payment of duty. Where facts are known to both the parties the omission by one to do what he might have done and not that he must have done, does not render it suppression.”

10. It is settled law that mere failure to declare does not amount to wilful suppression. There must be some positive act from the side of the assessee to find wilful suppression. In the instant case, it is an admitted fact that all the transactions were declared in the financial records and the objection arose on scrutiny of such financial documents by the audit team. The Department has not been able to establish any positive act of the appellant with an intent to evade. As that there was no deliberate intention on the part of the appellant not to disclose the correct information or to evade payment of duty, it was not open to the Central Excise Officer to proceed to recover duties in the manner indicated in proviso to Section 11A of the Act. We also note that these two decisions in Pushpam Pharmaceuticals and Anand Nishikawa Company Ltd. were followed by the Supreme Court in the subsequent decision in Uniworth Textile Limited Commissioner of Central Excise, Raipur [2013 (288) E.L.T. 161 (SC)] and the observation were as follows:

“18. We are in complete agreement with the principal enunciated in the above decisions, in light of the proviso to section 11A of the Central Excise Act, 1944.”

11. Further, the Supreme Court in Continental Foundation Joint Venture Holding Commissioner of Central Excise, Chandigarh [2007 (216) E.L.T. 177 (SC)] also held:

“10. The expression “suppression” has been used in the proviso to Section 11A of the Act accompanied by very strong words as ‘fraud’ or “collusion” and, therefore, has to be construed strictly. Mere omission to give correct information is not suppression of facts unless it was deliberate to stop the payment of duty. Suppression means failure to disclose full information with the intent to evade payment of duty. When the facts are known to both the parties, omission by one party to do what he might have done would not render it suppression. When the Revenue invokes the extended period of limitation under Section 11-A the burden is cast upon it to prove suppression of fact. An incorrect statement cannot be equated with a wilful misstatement. The latter implies making of an incorrect statement with the knowledge that the statement was not correct.”

12. We also take note that the Delhi High Court in Mahanagar Telephone Nigam Ltd. vs. Union of India and others [W.P. (C) 7542 of 2018 dated 06.04.2023], observed as follows:

“28. In terms of the proviso to Section 73(1) of the Act, the extended period of limitation is applicable only in cases where service tax has not been levied or paid or has been short-levied or short-paid or erroneously refunded by reason of fraud, or collusion, or wilful misstatement, or suppression of facts, or contravention of any provisions of the Act or the Rules made thereunder with an intent to evade payment of service tax. However, the impugned show cause notice does not contain any allegation of fraud, collusion, or wilful misstatement on the part of MTNL. The impugned show cause notice alleges that the extended period of limitation is applicable as MTNL had suppressed the material facts and had contravened the provisions of the Act with an intent to evade service tax. Thus, the main question to be addressed is whether the allegation that MTNL had suppressed material facts for evading its tax liability, is sustainable.

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41. In the facts of this case, the impugned show cause notice does not disclose any material that could suggest that MTNL had knowingly and with a deliberate intent to evade the service tax, which it was aware would be leviable, suppressed the fact of receipt of consideration for rendering any taxable service. On the contrary, the statements of the officials of MTNL, relied upon by the respondents, clearly indicate that they were under the belief that the receipt of compensation/financial support from the Government of India was not taxable. Absent any intention to evade tax, which may be evident from any material on record or from the conduct of an assessee, the extended period of limitation under the proviso to Section 73(1) of the Act is not applicable. The facts of the present case indicate that MTNL had made the receipt of compensation public by reflecting it in its final accounts as income. As stated above, merely because MTNL had not declared the receipt of compensation as payment for taxable service does not establish that it had willfully suppressed any material fact. MTNL‟s contention that the receipt is not taxable under the Act is a substantial one. No intent to evade tax can be inferred by non-disclosure of the receipt in the service tax return.” (emphasis supplied) 20. It would transpire from the aforesaid decisions that mere suppression of facts is not enough and there must be a deliberate and wilful attempt on the part of the assessee to evade payment of duty. In the absence of any intention to evade payment of service tax, which intention should be evident from the materials on record or from the conduct of the assessee, the extended period of limitation cannot be invoked. Thus, mere non-disclosure of the receipts in the service tax return would not mean that there was an intent to evade payment of service tax.”

13. The sum and substance of the aforesaid discussion is that mere suppression of facts is not enough and there must be a deliberate and wilful attempt on the part of the appellant to evade payment of duty. In the absence of any intention to evade payment of service tax, which intention should be evident from the materials on record or from the conduct of the appellant, the extended period of limitation cannot be invoked. Thus, mere non-disclosure of the receipts in the service tax return would not mean that there was an intent to evade payment of service tax. In the instant case, we note that the alleged short payment was noticed during the audit of the records of the appellant. It is also noted that the appellant was of the bonafide belief that no tax was payable. This belief is upheld by the fact that the impugned order has dropped the demand on two of the services on which the payment had been made in foreign currency by the appellant. We are of the opinion that the intent to evade is not established.

14. The Miscellaneous Application for change in the cause title filed by the Department is allowed and the cause title shall be read as “Commissioner of Central GST & Central Excise, G-105, New Industrial Area, Basni, Near Diesel Shed, Jodhpur-342003.

15. The impugned order is set-aside, and the appeal is allowed.

(Order pronounced in the open Court on 13.12.2024)

Notes:

¹ the appellant

² 2003 (153) ELT 7 (SC)

³ 2000 (119) ELT 718 (Tribunal LB.)

⁴ 2015 (40) STR 322 (Tribunal)

⁵ 2007 (123) ELT 490 (SC)