No Extended Limitation allowable without Mens Rea: CESTAT Quashes ₹18.95 Crore Service Tax Demand [Read Order]

The Customs, Excise and Service Tax Appellate Tribunal, Chandigarh ( CESTAT ), has held that the extended period of limitation cannot be invoked in the absence of mens rea and a positive act of evasion, setting aside the ₹18.95 crore service tax demand, interest, and equal penalty confirmed in the Order-in-Original.

M/s KEC International filed an appeal before the Tribunal challenging the Order-in-Original passed by the Commissioner, CGST, Panchkula. The proceedings arose from a show cause notice following an investigation by the Directorate General of Goods and Services Tax Intelligence.

The department alleged that the appellant had incorrectly calculated the reversalof CENVAT credit under Rule 6(3A) of the CENVAT Credit Rules, 2004 by considering only common input service credit and not total credit for the period prior to 01.04.2016. Based on this interpretation, a demand of ₹18,95,15,237 was confirmed along with interest and an equal penalty under Section 78 of the Finance Act, 1994.

The appellant represented by Advocates Bharat Raichandani and Deepak Kumar Khokhar, argued that the issue was settled in their favour by earlier Tribunal rulings, including Reliance Industries Ltd. (2019). They submitted that “total CENVAT credit” in the formula under Rule 6(3A) refers only to common input service credit and does not include exclusive credits.

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They contended that trading, export transactions, and services rendered in Jammu & Kashmir could not be treated as exempted services. The appellant also argued that the demand was entirely time-barred since the show cause notice covered the period 2014-15 and 2015-16 as it was issued only in late 2020. They stressed that there was no suppression, wilful misstatement, or intention to evade service tax, as all details were routinely disclosed in statutory returns, and the issue was purely interpretational.

The department was represented by Siddharth Jaiswal and S. K. Meena, argued that the appellant was providing both taxable and exempted services and that trading was an exempted service falling within the negative list under Section 66D ofthe Finance Act, 1994. The department contended that proportionate reversal of credit was mandatory and that the appellant’s methodology was incorrect.

The department further justified invoking the extended period, asserting that the short-payment came to light only during investigation, as the appellant did not correctly declare the basis of its credit computations.

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The Bench consisted of S. S. Garg, Judicial Member and P. Anjani Kumar, Technical Member held that none of the statutory conditions for invoking the extended period under Section 11A of the Central Excise Act, 1944 were met.

The Bench stressed that terms such as “fraud,” “collusion,” “wilful misstatement,” and “suppression of facts” require deliberate action and clear intent to evade payment of duty. Mere errors, interpretational differences, or omissions without intent cannot justify extended limitation.

The Tribunal observed that the appellant had consistently filed statutory returns disclosing its credit reversals. If the computation method was questionable, the department could have verified it through routine scrutiny. The failure of departmental officers to examine the returns could not be converted into an allegation of suppression.

The Bench reiterated the importance of mens rea, and ruled that extended limitation is impermissible without a positive act of evasion. Since the demand was time-barred, the Tribunal set aside the impugned order without entering into the merits of the credit computation.

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