Service Tax on R&D and Consultancy under RCM: CESTAT sets aside Extended Limitation due to Lack of Willful Suppression [Read Order]

The Delhi Bench of Customs, Excise, and Service Tax Appellate Tribunal ( CESTAT ) set aside the extended limitation period for service tax demand on Research and Development ( R&D ) and consultancy services received under the Reverse Charge Mechanism (RCM), citing a lack of willful suppression.

Mec Shot Blasting Equipment P Ltd., appellant-assessee, manufactured excisable goods under Chapter 84 and availed Cenvat credit on inputs and input services. It was also registered under Section 69 of the Finance Act, 1994, for service tax compliance.

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After an audit, the department issued a show cause notice on January 20, 2016, stating that the appellant-assessee had imported taxable services worth ₹37,69,247 between April 1, 2011, and March 31, 2014, but had not paid ₹4,49,046 in service tax under the RCM. The notice proposed interest and penalties while invoking the extended period.

Through an order dated January 24, 2017, the department confirmed the tax demand with interest and imposed an equal penalty. The Commissioner (Appeals) later upheld this order.The assessee appealed before the tribunal.

The assessee's counsel argued that service tax was not payable as the services were provided and consumed outside India. The demand was claimed to be time-barred since payments were made in 2011-12 and 2012-13, while the notice was issued in 2016. All transactions were recorded in audited books, with payments made through banking channels, showing no intent to evade tax. Cenvat credit eligibility made the demand revenue-neutral, and suppression was not applicable.

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The department contended that the assessee failed to disclose remittances for imported services and deliberately suppressed details to evade tax, justifying the extended period.

The two member bench comprising Rachna Gupta(Judicial Member) and Hemambika R.Priya(Technical Member) examined the appeal concerning service tax liability under the Reverse Charge Mechanism. The assessee, engaged in manufacturing blasting machinery, had paid ₹37,69,247 in foreign currency for R&D and consultancy services but did not pay service tax, believing the services were consumed outside India. These transactions were recorded in the financial statements.

Read More:CESTAT upholds Service Tax Demands: Extended Limitation u/s 73 Invoked for Misrepresentation under RCM on Foreign Services and Sponsorship

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On merits, the appellate tribunal upheld the tax demand, agreeing that the services were consumed in India. However, regarding the extended limitation period, it noted that the assessee had disclosed all transactions in audited financial records, and the non-payment was identified during an audit.

Citing Supreme Court rulings, the tribunal held that suppression must be willful and aimed at evading tax, which was not established in this case. Since the assessee had acted under a bona fide belief and the department failed to prove intent to evade tax, the extended limitation period was not applicable.

In short,the appeal filed by the the assessee was allowed.

To Read the full text of the Order CLICK HERE

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