Whether issuance of SCN valid when matter already disclosed by assessee in VCES?

CASE STUDY

Prepared by: CA Neetu Sukhwani &
Monika Tak

Introduction:- M/s Prompt Financial Services, Jodhpur are engaged in providing the recovery agent’s service. However, due to ignorance about their service tax liability on the services provided by them, they had not obtained Service Tax Registration and have not paid service tax on the services provided by them during the Period 2008-09. Thereafter, with the introduction of amnesty scheme named as “Voluntary Compliance Encouragement Scheme”, known as VCES, the assessee availed the benefit of the said scheme so as to come out clean and get immunity from interest and penal provisions. Meanwhile, the service tax department gathered information from third party sources like banks and issued a show cause notice to the assessee for non-payment of service tax on recovery agent services provided by them and on the commission of Rs. 50,523/- received from Kotak Mahindra Bank. The outcome of the show cause notice is the subject matter of this case study.

M/S PROMPT FINANCIAL SERVICES V/S ASSISTANT COMMISSIONER, CENTRAL EXCISE & SERVICE TAX DIVISION, JODHPUR
[ORDER IN ORIGINAL – 43/2014-(ST) DATED 10.12.2014]

Relevant Legal Provisions:
·         Provision of section 68, 69 & 70 of the chapter V of the Finance Act, 1994
·         Rule 4, 5, 6 & 7 of the Service Tax Rules, 1994.
·         Provisions of section 76, 77 & 78 of the chapter V of the Finance Act, 1994

Issue Involved:-

The following issue was involved in this case before the adjudicating authority:-
Whether issuance of SCN valid when matter already disclosed by assessee in VCES?

Brief Facts:-
M/s Prompt Financial Services, Jodhpur (hereinafter referred to as “assessee or service provider”), are engaged in providing the recovery agent’s service. They have not obtained Service Tax Registration and have not paid service tax on the services provided by them. However, they have availed the benefit of amnesty scheme called as “Voluntary Compliance Encouragement Scheme”, VCES so as to get immunity from levy of interest and penalties. Meanwhile, the service tax department obtained information from third party sources like banks and levelled allegation against the assessee for not paying service tax on the commission of Rs. 50,523/- received from Kotak Mahindra Bank. Consequently, show cause notice was issued to the assessee for not paying service tax amounting to Rs. 6,245/- (including all cesses) during the Period 2008-09 in contravention of the provisions of section 68, 69 & 70 of the Finance Act, 1994 read with Rule 4, 5, 6 & 7 of Service Tax Rules, 1994.

Assessee’s Contention:- The following submissions were made before the adjudicating authority by the assessee-
1)            The assessee submitted that they are engaged in providing the recovery agent’s service and are holder of Service Tax Registration no. BKUPS2602DSD002. They submit that the impugned show cause notice issued to them is wholly and totally erroneous and is liable to be set aside because they have already discharged their 50% service tax liability on the commission received on account of providing the services of the recovery agent by availing the benefit of Voluntary Compliance Encouragement Scheme, 2013.

2)            They further submit that the demand of service tax on the commission earned from Kotak Mahendra to the extent of 50% has already been paid by them in the VCES declaration filed by them. They submit that the alleged amount of Rs. 50,523/- was included in the VCES declaration filed by them for the financial year 2008-09. The bifurcation of the taxable value of service disclosed in the VCES application makes it very clear that the service tax demand that has been proposed by them has been voluntarily declared by them and moreover, 50% of the service tax was already paid by them. In order to substantiate their contention, they are hereby producing the relevant details of the indirect incomes ledger account for the financial year 2008-09:-

DATE	PARTICULARS	AMOUNT (Rs.)
12.07.2008	KOTAK MAHINDRA BANK	25,721
21.08.2008	KOTAK MAHINDRA BANK	88,262
02.09.2008	COMMISSION RECEIVABLE	3,915
15.09.2008	KOTAK MAHINDRA BANK	24,648
16.09.2008	KOTAK MAHINDRA BANK	1,02,500
01.10.2008	KOTAK MAHINDRA BANK	39,875
06.10.2008	COMMISSION RECEIVABLE	12,500
21.10.2008	KOTAK MAHINDRA BANK	25,875
23.10.2008	KOTAK MAHINDRA BANK	21,280
23.10.2008	KOTAK MAHINDRA BANK	11,700
04.11.2008	COMMISSION RECEIVABLE	7,650
20.01.2009	KOTAK MAHINDRA BANK	17,120
TOTAL		3,81,046

They submit that of the above amounts, the commission dated 15.09.2008 amounting to Rs. 24,648/- and commission dated 21.10.2008 amounting to Rs. 25,875/- totalling to Rs. 50,523/- was already part of the VCES declaration filed by them. They submit that for the financial year, in the VCES declaration chart enclosed with their application for the financial year 2008-09, the said amounts were included. They submit that the amount of taxable value of service for the month of September, 2008 shown in the VCES Declaration chart enclosed was amounting to Rs. 1,16,646/- and the total service tax inclusive of cess was Rs. 14,417/-. They submit that the amount of service tax has been calculated by treating the receipts as inclusive of service tax. Accordingly, the total amount received as commission inclusive of service tax for the September month was depicted in the VCES declaration was Rs. 1,31,063/-. Now, the bifurcation of the said amount is as follows:-

DATE	PARTICULARS	AMOUNT (Rs.)
02.09.2008	COMMISSION RECEIVABLE	3,915
15.09.2008	KOTAK MAHINDRA BANK	24,648
16.09.2008	KOTAK MAHINDRA BANK	1,02,500
TOTAL		1,31,063

Similarly, they submit that the amount of taxable value of service for the month of October, 2008 shown in the VCES Declaration chart enclosed was amounting to Rs. 98,994/- and the total service tax inclusive of cess was Rs. 12,236/-. They submit that the amount of service tax has been calculated by treating the receipts as inclusive of service tax. Accordingly, the total amount received as commission inclusive of service tax for the October month was depicted in the VCES declaration was Rs. 1,11,230/-. Now, the bifurcation of the said amount is as follows:-

DATE	PARTICULARS	AMOUNT (Rs.)
01.10.2008	KOTAK MAHINDRA BANK	39,875
06.10.2008	COMMISSION RECEIVABLE	12,500
21.10.2008	KOTAK MAHINDRA BANK	25,875
23.10.2008	KOTAK MAHINDRA BANK	21,280
23.10.2008	KOTAK MAHINDRA BANK	11,700
TOTAL		1,11,230

In view of the above details provided, it is very much clear that the service tax demand proposed against them has already been declared by them by availing the VCES benefit and 50% of the service tax has also already been paid by them vide challan no. 00053473112201308804 dated 31.12.2013. Moreover, the balance 50% would be paid by them till 30.06.2014. As such, the show cause notice is not tenable at the outset and deserves to be quashed. A copy of the indirect taxes ledger account, VCES declaration filed by them and the challan evidencing 50% payment of service tax was also enclosed with the reply for reference.

3)            In continuation to the above, they also submitted that the section 108 of the Service Tax Voluntary Compliance Encouragement Scheme, 2013 pertains to Immunity from penalty, interest and other proceeding wherein it has been stated that:-

(1) Notwithstanding anything contained in any provision of the Chapter, the declarant upon payment of the tax dues declared by him under sub section (1) of section 107 and the interest payable under the proviso to sub section (4) thereof, shall get immunity from penalty, interest or any other proceeding under the Chapter.

(2) Subject to the provisions of section 111, a declaration made under sub section (1) of section 107 shall become conclusive upon issuance of acknowledgement of discharge under sub section (7) of section 107 and no matter shall be reopened thereafter in any proceedings under the Chapter before any authority or court relating to the period covered by such declaration.

On perusal of the above provisions, it is very much clear that once an application of VCES is being filed with respect to service tax payable for a particular period, the declaration shall become conclusive and no proceedings shall be initiated against the assessee for recovery of the interest, penalty etc. They submit that as the VCES declaration filed by them was duly accepted, and they have already deposited 50% of the service tax declared by them. They will deposit the remaining dues till 30.06.2014. As such, the impugned show cause notice that is issued ignoring the fact that they have filed VCES application for the commission under consideration is totally void and deserves to be quashed.

4)            Aligning with the above, they also submitted that as per section 111 of the VCES scheme, only Commissioner has the power to issue show cause notice with respect to the declaration filed under VCES. The said section is produced for the sake of convenient reference as follows:-

“Section 111 Failure to make true declaration

(1) Where the Commissioner of Central Excise has reasons to believe that the declaration made by a declarant under this Scheme was substantially false, he may, for reasons to be recorded in writing, serve notice on the declarant in respect of such declaration requiring him to show cause why he should not pay the tax dues not paid or short-paid.

(2) No action shall be taken under sub-section (1) after the expiry of one year from the date of declaration.

(3) The show cause notice issued under sub-section (1) shall be deemed to have been issued under section 73, or as the case may be, under section 73A of the Chapter and the provisions of the Chapter shall accordingly apply.

On perusal of the above provisions, they submit that under the VCES scheme, only the Commissioner has been empowered to issue show cause notice but the present show cause notice has not been issued by the prescribed authority and is as such, beyond the powers of the issuing authority. Moreover, the fact that the show cause notice can be issued by the Commissioner only is clear as where the scheme intends to give powers to Assistant Commissioner, the term “designated authority” has been used. Therefore, if at all the power to issue show cause notice vested with the Assistant Commissioner, the language of the section would have been “Where the designated authority has reasons to believe..”. The definition of the designated authority has been given as “designated authority” means an officer not below the rank of Assistant Commissioner of Central Excise as notified by the Commissioner of Central Excise for the purposes of this Scheme. Accordingly, the impugned show cause notice that has been issued by authority other than that prescribed in the scheme is non-est and deserves to be set aside.

5)            They also submit that the impugned show cause notice is proposing to levy interest under Section 75 of the Finance Act, 1994. In this respect, they submit that on the basis of the above mentioned submissions, when the proposed service tax demand itself is not sustainable and therefore, the impugned show cause notice proposing interest is also not tenable and is liable to be quashed.

6)            It is further submitted that the show cause notice is also barred by the clause of limitation as it has been issued after expiry of normal period allowed to issue the show cause notice. It is submitted that the extended period is invokable only if there is some fraud, collusion, willful misstatement or suppression of facts, none of which is present here. They submit that for invoking the extended period, the fraud, collusion or wilful misstatement should be there. However, on the contrary, they have already deposited 50% of the service tax by treating their receipts as “cum tax” and have duly availed the benefit of the Service Tax Voluntary Compliance Encouragement Scheme, 2013. As such, there was no suppression of facts or willful misstatement so as to invoke the extended period of limitation. It was held in the case of Rainbow Industries v/s. CCE [1994 (74) ELT 3 (SC)] that for invoking the extended period, two ingredients are essential – (i) Willful suppression, mis-declaration, etc. and (ii) Intention to evade payment of duty. In absence of both of these extended period cannot be invoked. This has also been held in the case of Chemphar Drug & Limits reported in (2002-TIOL-266-SC-CX) wherein Hon’ble Supreme Court held as under:-

“Demand – Central Excise – Limitation –Invoking extended period of five years – something positive other than mere inaction or failure on part of the manufacturer or producer or conscious or deliberate withholding of information when the manufacturer knew otherwise, is required before it is saddled with any liability, before the period of six months.”

Thus, in the light of above decision, extended period cannot be invoked blindly in every case. Where the assessees have been acting in the boundaries of law, the extended period cannot be invoked. Similar decision is given in the following cases:-

·         PADMINI PRODUCTS vs. CCE[1989 (43) ELT 195 (Supreme Court)]

·         LARSEN & TOUBRO LTD. Versus COMMISSIONER OF C. EX., PUNE-II [2007 (211) ELT 513(S.C.)]

In the above cases, it was held that there must be a valid ground for invoking the extended period of limitation. There should be deliberate withholding of information with an intent to evade payment of duty without which extended period is not invokable. In their case also, they have already declared their service tax liability with respect to commission income by availing the benefit of the Service Tax Voluntary Encouragement Scheme, 2013 and have already deposited 50% of the service tax demand. As such, there is no suppression of facts from their side and the extended period of limitation is not invokable. Thus, it has not been proved that there was any suppression of facts or intention to evade payment of service tax. Without proving the same, the extended period is not invokable and the impugned show cause notice is not viable and is liable to be quashed.

7)            They further submit that as they have already voluntarily declared their service tax liability and also paid 50% of the tax dues, no penalty should be imposed on them. The impugned show cause notice on the other hand has mechanically proposed penalties under section 76, 77 and 78 of the Finance Act, 1944 even when the allegation that they have not taken registration and not paid service tax are totally wrong. They submit that as they have taken registration and have already discharged 50% of their service tax liability, the imposition of penalty is not at all sustainable and the same deserves to be quashed. Moreover, as stated above, none of the ingredients of invoking the extended period of limitation and that of imposition of penalty under section 78 of the Finance Act are present. As such, no penalty is imposable on them and the impugned show cause notice is liable to be set aside.

8)            They also submit that in view of proviso inserted in Section 78, w.e.f. 10.05.2008, it is specifically stated that :

“Provided further that if the penalty is payable under this section, the provisions of section 76 shall not apply.”

Therefore, in view of the specific provision in the Act w.e.f., 10.05.2008, simultaneous imposition of penalties under section 76 & 78 is not warranted. It has been held by hon’ble Punjab & Haryana High Court in the case of Commissioner of Central Excise, Chandigarh-I Vs M/s Cool Tech Corporation, Chandigarh [2011-TIOL-23-HC-P&H-ST] that the penalty under section 76 & 78 are mutually exclusive and cannot be imposed simultaneously. Similar decision has been given in following cases:-
·         M/s Anand Agencies v/s CCE (Service Tax), Coimbatore [2010-TIOL-364-CESTAT-MAD](ANNEXURE - )-

Service Tax – Penalty – Section 76 and 78 are mutually exclusive – Penalty under Section 76 set aside: CHENNAI CESTAT;

·         M/s Safe Test Enterprises v/s CCE, Salem [2010-TIOL-355-CESTAT-MAD](ANNEXURE - ) -
Service Tax – Penalty under Section 76 and Section 78 are mutually exclusive – penalty under Section 76 set aside and penalty under Section 78 reduced to 25% in terms of Section 73 (2) as the assessee has paid the service tax prior to the issue of show cause notice: CHENNAI CESTAT;
·         M/s AR AS PV PV Motors Erode (P) Ltd v/s CCE, Salem [2010-TIOL-1241-CESTAT-MAD](ANNEXURE - )-
Service tax – Penalty under Section 76 and 78 – Since the provisions of Section 76 and 78 are mutually exclusive, penalty under Section 76 is set aside and penalty under Section 78 reduced to 25% of the service tax demanded: CHENNAI CESTAT;
            In the light of above decisions, it is ample clear that the penalties cannot be imposed            simultaneously under the provisions of section 76 and 78 of the Finance Act, 1994. Thus,   extending the ratio of above decisions, the impugned show cause notice should be quashed and proceedings initiated against them should be dropped.

Reasoning of the Adjudicating Authority:- The Assistant commissioner viewed that the contention of the assessee was considerable. The assessee have submitted in their reply as well during the course of personal hearing that the service tax proposed to be recovered in the impugned show cause notice is included in the VCES declaration. The impugned demand of service tax is in respect of the amount of Rs. 50,523/- received by the assessee from M/s Kotak Mahindra Bank for providing Recovery Agent Services. The assessee have submitted a copy of the ledger account of the indirect incomes for the period 01.04.2008 to 31.03.2009 showing receipt of, among others, Rs. 24,648/- on 15.09.2008 and Rs. 25,875/- on 21.10.2008. Sum of the two entries of receipt makes Rs. 50,523/-. The assessee also submitted copy of their VCES declaration in Form VCES-I dated 30.12.2013 submitted to the department on 31.12.2013. The assessee has already paid service tax involved in their VCES declaration which also includes Service tax due on the value of taxable service. As there is no un-discharged liability of payment of service tax, the question of liability of interest or penalties do not arise in view of immunity from penalty. Furthermore, it was observed that Acknowledgment of Discharge in Form VCES-3 was issued to the assessee under section 107(7) of the Finance Act, 2013.

It was also found that the show cause notice and VCES declaration, both involve the issue of service tax on provision of recovery agent’s services and the period involved is also common, i.e., Financial Year, 2008-09 and the value of service involved in the impugned show cause notice is less than what has been shown in the calculation sheet enclosed with the VCES declaration. Therefore, there was no reason to believe anything otherwise than the declaration being true.

In view of the above discussion, the proceedings initiated vide the impugned show cause notice were dropped as there remained no liability of payment of service tax due on any value of taxable service beyond the same that has been declared and discharged under Service Tax Voluntary Compliance Encouragement Scheme, 2013. As there is no un-discharged liability of payment of service tax, the question of liability of interest or penalties do not arise in view of immunity from penalty, interest and other proceeding as proposed under section 108 of the Finance Act, 2013.

Decision:- The proceedings initiated vide the show cause notice were dropped.

Conclusion:- The analogy of this case is that as the assessee had already discharged the service tax liability on the commission received on account of providing the services of the recovery agent by availing the benefit of Voluntary Compliance Encouragement Scheme, 2013, the impugned show cause notice was not tenable. Moreover, the acknowledgment of Discharge in Form VCES-3 was also issued to the assessee which confirmed discharge of liabilities on the part of the assessee. As such, the benefit of amnesty scheme was extended to the assessee, the show cause notice raising demand for the same period on same issue was dropped.

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PJ/Case Study/2014-15/97
20 December 2014

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PJ/Case Study/2014-15/97
20 December 2014