The entire Tax system stands on the foundations of mutual trust between tax payers and the assessing officer. Likewise, the provisions of service tax are too, based on trust. The assessee filing returns are expected to do self-assessment of taxes and pay appropriate service tax accordingly. No doubt honesty pays, but it doesn't seem to pay enough to suit some people. Therefore, the officers of the service tax department are vested with powers to recover service tax when there is a non-payment or under-payment of tax.
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The short payment may be detected either on verification of returns submitted by the assessee, on account of audit performed by the audit party, or on the basis of intelligence gathered by the officer. In cases, where the assessing officer suspects non-payment or short-payment of service tax, he will issue a show-cause notice within the specified period.
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Beyond such period, law of limitation applies and recovery can't proceed. It is pertinent to note that general law of limitation don't apply to service tax provisions vide Section 96 of the Finance Act 1994; which specifies that likewise central excise, service tax provisions are falling under the Economic Offences (Inapplicability of Limitation) Act, 1974. Thus, specific timeframes are prescribed under service tax provisions itself. Ironically, there is no time limit prescribed for finalising the assessment, the limitation period is only for the service of the notice for assessment and demand of service tax.
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Initially, in case of central excise, there usual time period prescribed was six months form the relevant date. Later period for issuing show-cause notice was extended to one year under service tax provisions in accordance with Section 73 of the Finance Act, 1994. Recovery of service tax can be done by issuing show-cause notice to the concerned person requiring him to show cause why he should not pay the amount specified in the notice. This normal time duration of one year for issue of show-cause notice may be extended in certain cases up to 5 years. This is termed as invoking larger period or invoking extended period for issue of show-cause notice.
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Only in special circumstances, demands for extended period are to be invoked. But, contrary to this provision, it has been observed that the department very conveniently issues show-cause notice invoking larger period of 5 years, with a common allegation of suppression of facts and intention to evade payment of service tax. This attitude of the department results in issuing huge tax evasion demands and demoralises the service providers, though in many cases, factually there might not be any deliberate suppression.
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Allegations of suppression can be invoked only if the assessee has deliberately done an action with an intention to hide certain facts form the department. In majority of cases, such serious allegations are levied very casually by the department, though there have been standing instructions in this regards issued by the board and an internal check list is also prescribed. There are the judicial rulings of various courts, the assessee has won plethora of cases on issue of time-bar / limitation.
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The courts have observed that department should have issued periodical notice to recover the amount rather than invoking larger period. In case of Aditya College of Competitive Examinations?STO 2009 CESTAT 994?it was held that show cause notices was issued based on some audit objection. There is no justification for invoking the longer period. Therefore, the demand is also hit by time bar. In Ajinkyatara Sahakari Krishi Audyogik OTVS Ltd.?STO 2010 CESTAT 138?it was held that subsequent show cause notice is barred by limitation as the department was having the knowledge of activities undertaken by the appellant.
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Over a period of time, innumerous times, it has been held by all the judicial forums that larger / extended period cannot be invoked if assessee's actions were bonafide.
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The courts have taken a view that when an assessee is disclosing facts in returns or audit has been conducted or earlier show-cause notice have been issued, then department can't invoke larger period in guise of suppression of facts. It is advised that the service providers should make sure that in case, an extended period is invoked and a service tax demand is issued for a period beyond the usual one year, any past correspondence and interaction with the department in form of audit, visits or checks, where the service provider has disclosed the facts before the officers, should be highlighted during the adjudication proceeding in order to establish their bonafides.
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