The Customs, Excise & Service Tax Appellate Tribunal has delivered a pivotal ruling clarifying that the extended period of limitation under the Finance Act, 1994 cannot be invoked merely on the basis of non-payment or procedural irregularities. The judgment reinforces that intent to evade tax must be specifically alleged and proven, not inferred from silence or incomplete documentation.
Background & Facts
The Dispute
The appellant, M/s Protectwell Security Services, was registered under the Finance Act, 1994 and provided manpower and security services. The Department, relying on Income Tax data, identified a discrepancy of Rs. 69,06,201 in gross receipts reported in the appellant’s ITR versus its ST-3 returns for FY 2016-17. Based on this, the Department issued a show cause notice demanding service tax of Rs. 10,35,930, along with interest and penalty, invoking the extended five-year limitation period under Section 73(1) of the Finance Act, 1994.
Procedural History
- 2021: Show cause notice (SCN No. 486/AC/ST/Div-IV/Noida/2021) issued on 21.10.2021, alleging suppression of taxable value.
- 2023: Assistant Commissioner passed Order-in-Original dated 19.12.2023, confirming demand and imposing penalty under Section 78 and Section 77(2).
- 2025: Commissioner (Appeals) dismissed the appeal ex parte, holding that the appellant failed to produce sufficient documentary evidence.
- 2026: Appeal filed before the Tribunal, challenging the invocation of extended limitation and the penalty.
Relief Sought
The appellant sought quashing of the demand, interest, and penalty on the grounds that:
- The services were covered under the reverse charge mechanism, making the recipient liable for tax.
- There was no willful suppression or intent to evade tax.
- The show cause notice lacked specific allegations required to invoke the extended period.
- The demand was time-barred under the ordinary limitation period.
The Legal Issue
The central question was whether the extended period of limitation under Section 73(1) of the Finance Act, 1994 can be invoked solely on the basis of a discrepancy between ITR and ST-3 returns, or whether specific allegations of fraud, collusion, wilful misstatement, or suppression of facts with intent to evade tax are mandatory.
Arguments Presented
For the Appellant
The appellant relied on Uniworth Textiles Ltd. and Padmini Products to argue that:
- The burden of proving intent to evade lies on the Department.
- The show cause notice failed to allege any specific act of suppression or fraud, rendering the extended period inapplicable.
- The appellant had a bonafide belief that tax liability lay with the service recipient under the reverse charge mechanism, as per Notifications 30/2012 and 7/2015.
- The Department had access to the appellant’s records and was aware of the nature of services since 2013, yet delayed issuance of notice.
- Mere non-filing of complete returns or failure to produce invoices does not constitute suppression.
For the Respondent
The Department contended that:
- The appellant failed to file ST-3 returns for the relevant period and did not respond to notices.
- The discrepancy between ITR and ST-3 returns indicated deliberate concealment.
- The appellant’s failure to maintain records and produce invoices justified the penalty under Section 78.
- The extended period was rightly invoked due to non-disclosure of material facts.
The Court's Analysis
The Tribunal conducted a rigorous analysis of the statutory framework and binding precedents. It emphasized that Section 73(1) permits invocation of the extended limitation only where the non-payment is due to fraud, collusion, wilful misstatement, suppression of facts, or contravention with intent to evade.
"The show cause notice must put the assessee to notice which of the various omissions or commissions stated in the proviso is committed to extend the period from six months to five years. Unless the assessee is put to notice, the assessee would have no opportunity to meet the case of the department."
The Court noted that the show cause notice contained no specific averment of intent, wilful suppression, or fraudulent conduct. It merely stated that the appellant had "willfully suppressed" taxable value, without identifying any act, document, or communication that demonstrated such intent.
The Tribunal further held that the appellant’s conduct was consistent with a bonafide belief that tax liability rested with the service recipient under the reverse charge mechanism. The appellant had submitted partial documents, including challans and notifications, and had not concealed its business operations. The Department had been aware of the nature of services since 2013, yet delayed action for over four years.
The Court distinguished this case from those involving active concealment or false declarations. It cited Padmini Products and CCE v. Chemphar Drugs to affirm that "mere failure to pay duty or take out a licence is not necessarily due to fraud or collusion or wilful misstatement or suppression of facts." The absence of invoices or complete returns, without evidence of deliberate concealment, cannot trigger the extended period.
The Tribunal also rejected the Department’s reliance on the ITR-ST-3 discrepancy as conclusive proof of suppression, noting that such discrepancies may arise from differing accounting treatments, misclassification, or administrative errors - not necessarily fraud.
The Verdict
The appellant prevailed. The Tribunal held that the extended period of limitation under Section 73(1) of the Finance Act, 1994 was not applicable, as the Department failed to allege or prove any intent to evade tax. The demand, interest, and penalty were set aside. The order was quashed on the ground that the notice was time-barred under the ordinary one-year limitation period.
What This Means For Similar Cases
Intent Must Be Specifically Alleged
- Practitioners must scrutinize show cause notices for explicit references to fraud, collusion, or wilful suppression.
- If the notice lacks such allegations, the extended limitation period cannot be invoked, regardless of the quantum of tax involved.
- A generic assertion of "willful suppression" without factual particulars is legally insufficient.
Bonafide Belief Shields Against Extended Limitation
- Taxpayers acting on a reasonable interpretation of law, even if later found incorrect, cannot be penalized under the extended period.
- Reliance on notifications, circulars, or prior departmental guidance constitutes bonafide conduct.
- The burden of proving mala fides rests entirely on the Department.
Reverse Charge Mechanism Requires Careful Documentation
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Service providers under reverse charge must retain:
- Contracts or agreements with recipients
- Invoices clearly indicating reverse charge applicability
- Evidence of recipient’s tax payment (e.g., GSTR-3B filings)
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Failure to produce these may lead to demand, but not to extended limitation unless intent is proven.
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Service providers should proactively file clarificatory applications if uncertain about liability.
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The Tribunal’s recognition of bonafide belief provides a strong defense against punitive measures in complex tax classifications.
