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Litigation and Penalties under Service Tax Law
CA. ASHISH CHAUDHARY
S K Patodia & Associates
• Service tax is self assessment tax. Unlike Income Tax, there is no
compulsory assessment of service tax assessee.
• Onus is on the assessee to calculate the tax liability, pay the tax
and file periodical Returns.
• Scope of service tax law widening day by day. Estimated revenue
from service tax likely to surpass revenue collection from Excise &
Customs in next two years.
• With increasing coverage and widening of assessee base, the
dispute between assessee and department also increasing.
Litigation
• There are almost 20,000 reported case laws under service tax law
and approximately 1,00,000 cases pending at different level as on
date.
• Increasing tax dispute is one of the threats to the business.
• This is for the reason that for assesses in tax disputes which is
leading to litigation, there is nothing to gain and only to lose.
• This proposition goes with the proverb “in litigation the winner
assessee loses and the loser assessee dies”.
• Efforts should be made to avoid/minimize the dispute with
department.
Litigation
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Bird Eye View of Litigation Process
Investigation
Summons
Statements
Show Cause Notice
Audit by Department
Audit Note
Reply to Audit Note
SCN
Jurisdictional Commissionerate
Enquiry letter/reply
Summons
Show Cause Notice
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Investigation
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• Investigation may be carried out by investigation wing of departmentor by Director General of Central Excise Vigilance (DGCEI) based onintelligence information.
• Section 14 of Central Excise Act, 1944 (‘CEA’) made applicable toservice tax per Section 83 of the Finance Act 1994 (‘Act’), authorizesany ‘central excise officer’ empowered by the Central Government to
Issue summons to any person
in respect of any enquiry related to service tax
• CEO given powers to summon person, whose attendance heconsiders necessary either to give evidence or produce documentsor any other thing in any enquiry which such officer is making
• Department may also search the premise of the assessee and mayseize the documents/ records which have been secreted. (Sec. 82)
Investigation / Search and Seizure
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• Check whether the summons issued by the authorized officer
• Check whether summon issued for documents / evidences / inquiry
• For documents asked – submit the same
• Seek additional time in writing – if required
• Analyze the possible issue arising out of summons and possible questions
from the officer
• Be prepared in advance – normally time would be very less
• Discuss the preparation with consultant - Also can authorize consultant or
any other person if required
How to handle “Summons/Statement”
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• Don’t accept the liability – at the first instance
• Use – As per our understanding not liable – with reasons – Bona fide
belief creation
• For surprise questions – Diplomatic answer
• Check the statement before signing the same – Ensure accuracy &
completeness
• After providing stmt.– if found any point wrong / not adequate – intimate
the correct information in writing within 24 hours
How to handle “Summons/Statement”
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Departmental Audit
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• Undertaken to ensure that there is no revenue leakage
• Carried out periodically and the frequency of such audits would depend
on annual service tax payment (including cash and CENVAT).
Departmental Audit
Service Tax Payment (Cash + Cenvat) Frequency of Audit
Above Rs. 3 Crores Every Year
Between Rs.1 Crore and Rs.3 Crores Once every two years
Between Rs.25 Lakhs and Rs.1 Crore Once every five years
Upto Rs.25 Lakhs 2% of taxpayers audited every year
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• Timely filing of returns & timely pmt of taxes
• Intimation to the dept of litigatable issues/ decision taken by virtue of
decision of SC / HC
• Seek power to audit letter
• Reply to the dept letter in time (many assessee would not give much
importance to this)
• Pay Taxes with interest if found liable –Avoid low hanging fruits during audit
Dispute Avoidance- Pre Audit
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• Submission of complete information in the assessee profile – reduction of
depth and frequency of audits
• Replying all the queries to the audit team in writing
• Be clear in facts and documentation during the audit - Right man for
handling audit
• Avoid long conversation – Ego problem – Explain in brief & submit in writing
– Mention as view as per our consultant – Show opinions if taken
Dispute Avoidance- During Audit
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• Receipt of audit note (many assessee would not ask for the same)
• Reply to the audit note in time submitting facts, legal provisions along with
supporting legal view undertaken in court’s decision
• Pay Taxes with interest – if audit observations genuine
Other points
• Submit case laws and legal understanding to the audit team
• Expert opinion / confirmation from senior for reversing / paying duty during
audits
• Adjustment of available credits, credits missed out in relevant period
• Option of pmt. under protest
Dispute Avoidance- After Audit
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• Assessee applied for VCES and got VCES-2. Paid the tax due. Based on the
documents submitted, department started audit. What should be done??
• Department wrote letter for audit for the period of 2 years but conducted
for 5 years. Whether correct?
• Audit conducted for period 2010-11. Department tried to cover same
period during next audit of period also.
• Whether department has right to do the audit… Recent judgment in case
of ACL Education Centre Pvt Ltd (2014-TIOL-120-HC)
Case study…Audit
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Show Cause Notice
Reply to SCN
Personal Hearing
Order in Original
Commissioner Level
Appeal to CESTAT
Below Commissioner Level
Appeal to Commissioner (Appeals)
Order in Appeal
Appeal to CESTAT
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• In order to materialize any demand, a Show Cause Notice (SCN) is a must
U/s 73 of Finance Act, 1994. Without a Show Cause Notice no demand
can sustain.
• Demands under section 73 of Finance Act 1994, arise as a result of:
The desk review information of the assessee
On the basis of vigilance report,
Internal Audit Party audit,
Review of returns filed by the assessee or
on the basis of the information sought by the department from
the assessee
Show Cause Notice
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• When any service tax-
Has not been levied or paid or
Has been short-levied or short-paid or
erroneously refunded,
• How - By issue of Notice (show cause notice) by Central Excise Officer
within 18 months from relevant date
It should ask why he should not pay the amount specified in thenotice which is said to have been not paid, short paid etc.,
Where the service of the notice is stayed by an order of a court,the period of such stay shall be excluded in computing theaforesaid period of 18 months or five years, as the case may be.
Show Cause Notice
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• If non-payment, short payment etc., is for the following reasons, 18
months gets extended to 5 years:
fraud; or
collusion; or
wilful mis-statement; or
suppression of facts; or
contravention of any of the provisions of this Chapter or of therules made there under with intent to evade payment ofservice tax.
Demand Extended Period
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• The relevant date for computing limitation
In case of short payment, non-payment
o Date of actual filing of the ST-3 return or
o Due date for filing return if not filed or
o Where no return required to be filed date of payment of tax or
o In other case date of payment
Date of adjustment after provisional assessment is finalized or
Date of erroneous refund.
Relevant Date
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• By making payment of service tax due before issue of SCN, chances of
receiving an SCN can be eliminated under following provisions:
• U/s 73 (3): where the assessee
Can voluntarily pays such service tax+ Interest which is not paid or
short paid or erroneously refunded by him,
and informs the Central Excise Officer of such payment in writing,
Then no notice shall be served and no penalty shall be demanded
from the assessee in respect of the amount so paid.
• Not possible to take benefit in cases of fraud, suppression etc.
How to Avoid SCN
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• Section 73 (4A) provides
In cases of fraud, suppression etc.
where in any audit/investigation/verification
it is found that the assessee has not discharged his service taxdues but details of transactions are available in specified records
And, if subsequent to such investigation he deposits service tax +interest + penalty 1% p.m. subject to maximum 25% of taxdemand
Then no notice shall be served upon an assessee,
For the amount paid by him
• however, it can issue notice for the unpaid part of service tax dues.
• If it is being paid u/s 73(4A), be careful as you or your customer may notbe eligible for credit in terms of Rule 9(1)(bb) of Cenvat Credit Rules, 2004
How to Avoid SCN
Penalties imposed in SCN-Section 76• Service tax is not paid or belatedly paid
• The penalty is higher of:
• Rs. 100 per day of default or 1% p.m.
• Penalty from the due date till actual date of payment.
• Maximum penalty 50% of service tax payable.
• Where penalty is levied u/s 78, no penalty shall apply u/s 76. these
sections are mutually exclusive.
• Not to be paid suo moto.
• Mens rea not required to be proved.
• May be condoned u/s 80.
Penalty in Case of Fraud, Collusion, Suppression Etc (Section 78)
• Deals with penalty for non-payment, short payment etc., in cases of –
Fraud; or collusion; or willful misstatement; or suppression of fact;or contravention of any of the provisions with intent to evade thetax
in terms of Section 73(2), in addition to the service tax andinterest, the person shall pay following penalty:
• Penalty equal to ST.
• If true and complete details of transaction is available in specified
records - 50% of service tax as penalty.
• No penalty under Sec. 76 when penalty u/s 78.
Penalty in Case of Fraud, Collusion, Suppression etc (Section 78)
• Where the service tax and interest payable is paid within 30 days (90
days in case the taxable value is less than 60 lakh in PY) of
communication of Order-in-Original of Adjudicating Authority.
• the amount of penalty be reduced to 25% of service tax.
• The amount of reduced penalty also to be paid within the 30 days.
Comparative chart of penalty under different scenarios
Situation Position in Records
Penalty & Provision
Mitigation Complete waiver
No fraud,suppression,etc
Captured 1% of tax orRs 100 perday upto50% of taxamount (Sec76)
Totallymitigated iftax andinterest ispaid beforeissue ofnotice (73)(3)
On showingreasonablecause undersection 80
Situation Position in Records
Penalty & Provision
Mitigation Complete waiver
Cases offraud,suppressionetc
Captured trueand completeposition inrecords
50% of the taxamount(proviso tosection 78)
(a) 1% P.M: maxof 25% if alldues paidbefore issueof notice(73)(4A)
(b) 25% of tax ifall dues paidwithin 30days (90days forsmallassessee)
On showingreasonablecause undersection 80
Cases offraud,suppressionetc
Not socaptured
Equal amountsection 78
No mitigation Not possible
Comparative Analysis of 73(3), 73(4A) and 2nd
Proviso to Section 78 (1)
• If tax along with interest paid before issuance of SCN, no SCN and hence
no penalty. (73) (3)
• During the course of investigation, verification or audit, if tax+ interest+
penalty equal to 1% p.m. subject to maximum 25% of tax paid, no notice
be issued (73)(4A)
• If tax + interest+ 25% penalty paid within 30 days of passing of Order in
Original, penalty proceedings conclude.
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• Demand of Rs. 60 lac + interest + penalty raised by Assistant Commissioner,Whether correct?
• Demand is proposed by classifying the services provided under the categoryof Business Auxiliary Service or Business Support Service.
• SCN dated 14th April 2014 issued raising demand for the period October2008 to 31st March, 2014. Return for Oct to March 2009 filed on 18th April
• Larger period invoked without invoking proviso to section 73 (1).
• Demand raised merely based on department circular/clarification, withoutdiscussing statutory provisions of definition of service.
• Demand proposed under construction service but confirmed under Workscontract service by adjudicating authority.
• Noticee avail wrong credit and did not intimate the department regardingthe nature of credit. Hence, larger period invoked…
Flaws in SCN.. Few example…
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• Reply to be filed under following main heading:
Facts of the case
Submission in reply to allegations:
o Based on Merit
o Based on Limitation
Interest & Penalty
• Ascertain the authority of the officer issuing the SCN
• Ascertain whether the SCN is for the period beyond 18 months from the
relevant date or within 18 months from the relevant date
Reply to Show Cause Notice
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• If it is beyond 18 months check whether
Proviso to section 73(1) is invoked or not
Proper reasons is given in the SCN to show that there were
ingredients set out in proviso to sec. 73(1)
The facts of the case was known to the department prior to
enquiry or investigation.
• Whether the activity is taxable as sales under sales tax law
• Whether the category in which the service is classified is correct; Or any
other alternative category which has come later is covering the nature of
activity more specifically
Reply to Show Cause Notice
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• Whether the Valuation is adopted properly & the computation of tax isgiven in the SCN.
If yes, then check it’s correctness Cum-tax benefit is given? Credit which is not taken is considered?
• Whether the provisions invoked in SCN for demand of Interest & Penaltyare proper
reasoning given in SCN to levy penalty is appropriate• Whether the default in payment is due to technical lapse without intention
to evade the payment of tax
• Whether there are any circular issued to clarify the doubt.
• SCN issued whether after successful completion of detailed investigation.Without investigation, No SCN as held in case of Kirlosker Pneumatic andCo Ltd.
Reply to Show Cause Notice
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• Along with the reply to SCN provide all the relevant evidences in support
of the grounds taken in the SCN.
• If there are any certificates required to establish the facts, the same
should be obtained and enclosed.
• Copies of earlier correspondences may also be enclosed.
• In the covering letter take a proper acknowledgement which gives the
details of the documents and evidences given.
Reply to Show Cause Notice
Waiver of Penalty-Section 80• If the failures/defaults leading to imposition of penalties set out under
Section 76,
Section 77
& first proviso to Section 78(1)
is due to cause which is ‘Reasonable Cause’, then no penalty is imposableunder the said Sections 76, 77 & 78(1).
• Following penalties cannot be waived under section 80:
Penalty imposed under section 78 and transactions not recorded inbooks of account
Penalty imposed under section 78A
Reasonable Cause
• What is Reasonable Cause?
The levy was introduced newly and confusion exists as to the
applicability of the same to the person concerned.
Board issued a clarification that it is not taxable and later changed its
view.
There are decisions which were rendered holding that no service tax
is payable and later the said decision was reversed.
Reasonable Cause
• Clarification sought from the department or board to explain the
applicability, which was not replied or delayed to be replied.
• Due to initial confusion in the levy the service receivers who are required
to bear the service tax refuse to pay service tax due to which there will
be financial crunch leading to delay in making payment of service tax.
• The levy is challenged before the courts and the delay is caused due to
delay in outcome of the decision.
• Similar practice was followed in entire industry.
• The matter was already in knowledge of department during audit carried
out in preceding period.
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• The nature of activities, manner of maintain of books of account etc.
should be communicated to department at the time of registration.
• Clarification should be sough for any matter involving interpretation of law.
If not replied, our understanding should be communicated by way of RPAD.
• Returns should be filed properly. Allegation of suppression can be avoided
most of the time by making all disclosures in returns.
• Practice followed by all people in industry.
• Mere non disclosure cannot be called as suppression. There should be
positive mis-declaration.
Tips for avoiding / submission against invocation of larger period
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• If notice is issued invoking extended period of limitation,
• Later it is found that extended period was not invokable by appellate
authority,
• The amount can be determined for 18 months as though the notice was
issued for normal period.
• Amendment made to nullify the decision of SC in case of Alcobex Metals
Ltd.
Conversion of extended period to Normal period
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• Section 73(1A) empowers issue of a statement, containing the details of
service tax not levied or paid or short levied or short paid or erroneously
refunded for the subsequent period.
• Such statement shall be deemed to be service of notice on such person.
• Condition : The grounds relied upon for the subsequent period are same
as are mentioned in the earlier notices
• Period of 18 months is applicable
Periodical demands
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• Maximum 3 adjournment allowed for Personal hearing.
• All relied upon documents should be submitted during PH. Any additional
case law, grounds submitted should be noted in PH sheet.
• The Adjudicating authority, will determine the amount of service tax due
from, or erroneously refunded
• The amount determined shall not be in excess of the amount specified in
the notice.
Personal Hearing and Adjudication
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• As a conclusion of adjudication proceedings O-I-O will be passed.
• Though there is a time limit for passing the orders by way of circular, it is
not followed.
• The same will be served on to the assessee also sometimes to the Counsel.
• If the assessee feels that the case is not fit for further fighting he can pay
tax + int + 25% of tax as penalty if any u/s 78. Only if information is available
on records.
Order-in-Original
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• Any order passed by adjudicating authority subordinate to commissioner
may be examined by the Commissioner as to legality or properity of order.
• If found incorrect, may ask the CEO to file appeal before Commissioner (A).
• Order should be issued by commissioner within 3 months from the date of
communication of order by adjudicating authority.
• Appeal shall be filed within one month from the date of communication of
order of Commissioner.
Revision of O-I-O by Commissioner
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• Appeal shall be -
in Form ST-4 (a detailed submissions to rely upon)
along with stay application,
within 2 months from the date of the communication of order.
Delay can be condoned maximum one month.
• First stay hearing. If pre-deposit order, pay it for regular hearing. If do not
wish to pay, file appeal before CESTAT against order of pre-deposit.
• Final hearing and passing of Order in Appeal.
Appeal before Commissioner of Central Excise (Appeals)
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• Any of the aggrieved parties, by the order of Commissioner (Appeals)
• shall file an appeal before CESTAT in Form ST-5
• along with stay application,
• within three months from the date of the communication of order.
• The respondent would have a time limit of 45 days from the date receipt of
notice to file cross objection memorandum.
Appeal to Tribunal
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• On submission of ST-5 application, a hearing would be called for, wherein,
• on the basis of the merits of the case, the matter would be decided
whether the matter is to be stayed or not.
• In case the matter is stayed, then the appellant would not be liable to pay
any demand until the disposal of the case.
• In the case the stay application is rejected the appellant would be required
to pay an ‘x’ amount as directed by the tribunal as pre-deposit and need to
report the compliance.
Stay Hearing
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• On final hearing of the matter,
the detailed analysis of the case would be studied,
evidences would be verified and
other relied upon documentations would be looked into
and decide the matter considering relevant judgments made in
this regard
and also the relevant provisions of the Act would be looked into.
• On the basis of the said analysis the matter would be decided. CESTAT
would be the final fact finding authority.
Final Hearing
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Interest & other Penalties
Interest On Service Tax Not Paid
• Interest u/s 75 is levied in cases of short payment or non payment of
ST.
• Rate is 18% p.a. [ earlier 13%]
• If the value of taxable service is less than 60L, then 15% p.a
• Interest shall be calculated from the due date till the actual date of
payment.
• Unlike penalty, payment of interest is voluntary and mandatory even
if the evasion of duty is not mala fide or intentional.
Interest on Wrong Credit
Excess Credit Availed
• Interest on CENVAT Credit taken and utilized wrongly– If availed
but not utilised, no penalty…. held to be applicable even before
amendment – Madras HC
• Interest as per section 75
Wrong Credit Availed
• Up to amount of wrong credit of ST or 2000/- whichever is higher.
• Penalty in terms of Section 78.
General Penalty –Section 77 (No need of SCN)
Nature of Default Amount of PenaltyFailure to take registration Up to Rs. 10, 000/-Failure to pay tax electronically (above 1 lac) Rs. 10, 000/-Failure to maintain proper records and books ofaccounts
Rs. 10, 000/-
Issue incorrect invoice/ fails to account invoice Rs. 10, 000/-
Failure to furnish information/documentsFailure to appear before CEO when issuedsummons
Rs 200 per day ofdefault or a sum of Rs.10,000 which ever ishigher
Other cases Rs. 10,000
Penalty – Section 78A• Introduced by the Finance Bill 2013, the section imposes of penalty up
to Rs.1,00,000/-
• Takes into ambit the director, manager, secretary and every other officerof the company, who are knowingly concerned with the specifiedcontraventions; those being:
• Evasion of service tax
• issuance of invoice, bill or a challan without providing any taxableservice
• Taking and utilizing credit of taxes/ duty without actually receiving anytaxable input service or excisable goods
• Amount collected as service tax but not paid (up to 6 months from thedue date)
Penalty for Late Filing of Return• Rule 7C read with Section 70 prescribes payment of late fee for delayed
filing of service tax return.
For first 15 days of delay: Rs. 500
If default continues for next 15 days: Rs. 1000
Beyond 30 days: Rs. 1000 + Rs. 100 per day of default
Maximum penalty leviable: Rs. 20,000 (earlier Rs. 2000/-)
• If Nil Return, CEO has discretionary power to waive penalty under Rule 7C.
• Similar view held in case of AMRAPALI BARTER PVT. LTD. 2013 (32) S.T.R.
456 (Tri. - Kolkata)
• No notice shall be served in respect of such belated return if penalty has
been duly paid.
Recovery u/s 87
• Recovery can be made from the person who is liable to pay any amount
to Noticee.
• Before payment to government, should discuss with the vendor
regarding such notice.
• Amount payable under the Act shall be first charge on property of
Assessee or any other person. (Except under section 529A of the
Companies Act, 1956 Recovery of Debts Due to Banks and the Financial
Institutions Act, 1993, and the Securitization and Reconstruction of
Financial Assets and the Enforcement of Security Interest Act, 2002)
Prosecution (Sec 89)Offence Penalty Remarks
Knowing Evade Service Tax payment Imprisonment• Minimum: 6 months• Maximum 3 Years
• Offence exceeds Rs. 50 L• Treated as non cognizable
and bailable offence
Availing or utilizing credit withoutactual receipt of goods or taxableservice
Same as above Same as above
maintain false books of accounts/non supply or false supply ofinformation
Same as above Same as above
Failure to pay collected ST within 6months from the due date of suchpayment.
Imprisonment• Minimum: 6 months• Maximum 7 Years
• Offence exceeds Rs. 50 L• Treated as cognizable
offence and non bailable
Section - 91 Power to Arrest
• Commissioner of Central Excise has the powers to direct the arrest
of any person if he has reasons to believe that the person has
committed an offence u/s 89 of the act.
• Commissioner of Central Excise can authorize any officer for this
purpose but not below the rank of Superintendent.
