Extended limitation and Section 78 penalty cannot apply where reverse-charge tax was fully creditable and evasion intent is absent.

M/s Kaps Advertising, registered for providing advertising agency services under the Finance Act, 1994, was investigated by the Anti-Evasion Branch regarding alleged non-payment of service tax under the reverse charge mechanism on certain expenses incurred during 2012–2013 to 2016–2017.

A show-cause notice dated 24 April 2019 and a subsequent statement of demand dated 17 June 2020 for 2017–2018 were issued under Notification No. 30/2012-ST.

The Joint Commissioner confirmed a total service-tax demand of ₹2,03,56,222 by order dated 14 March 2024.

The Commissioner (Appeals) set aside demand of ₹1,76,28,906 but upheld ₹27,27,316 relating principally to business promotion, conveyance, legal and freight expenses, along with interest and penalties.

Kaps Advertising appealed, contending that the demand was based merely on balance-sheet and Form 26AS figures without proper identification and classification of the taxable services.

1. Whether the service-tax demand under the reverse charge mechanism was sustainable when it was determined from the appellant’s books of account and Form 26AS, and whether the relevant expenses had been properly identified and classified as taxable services?

2. Whether the extended period of limitation under the proviso to Section 73(1) of the Finance Act, 1994 could be invoked on the basis of alleged suppression or non-disclosure by the appellant?

3. Whether the penalty under Section 78 of the Finance Act, 1994 was imposable in the absence of an intent to evade service tax?

4. What consequential service-tax, interest and penalty liability remained payable by the appellant?

The Tribunal applied the Finance Act, 1994 provisions governing levy and recovery of service tax, including the proviso to Section 73(1), under which the extended limitation period requires fraud, collusion, wilful misstatement, suppression of facts or contravention with intent to evade tax.

It also applied Section 78, holding that the ingredients for imposing the penalty under that provision correspond to those required for invoking the extended limitation period.

Notification No. 30/2012-ST dated 20 June 2012, as amended, governed the specified services taxable under the reverse charge mechanism.

The Tribunal further relied on the principle that a registered service-tax assessee could generally avail Cenvat credit of service tax paid under reverse charge; consequently, payment under reverse charge and availment of credit could substantially neutralise the tax effect and negate an intention to evade.

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

The Commissioner (Appeals) had separately considered business promotion, conveyance, legal, insurance and freight expenses and quantified the service-tax liability under each head.

The Tribunal held that the department was entitled to verify the correctness of ST-3 returns by comparing them with the appellant’s own balance sheets and Form 26AS records, particularly where the appellant failed to provide adequate supporting documents despite letters and summons.

On merits, the Tribunal therefore sustained the demand relating to the taxable expenses upheld by the Commissioner (Appeals).

However, the Tribunal distinguished the issue of limitation.

Since the appellant was a service-tax payer and could have availed Cenvat credit of tax paid under reverse charge, the tax would effectively have been payable “with one hand” and creditable “with the other.”

This circumstance negated the necessary intention to evade payment of service tax.

Accordingly, the extended limitation period under the proviso to Section 73(1) was held inapplicable, and the corresponding penalty under Section 78 was also set aside.

The Tribunal upheld the service-tax demand confirmed by the Commissioner (Appeals) on merits but restricted it to the normal limitation period.

Interest was also upheld insofar as it related to the recomputed demand.

The penalty under Section 78 was set aside, while other penalty liability was upheld.

The matter was remanded to the original authority solely to recalculate the service-tax demand for the normal period and the consequential interest.