The Principal Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT), New Delhi, has quashed Rs. 2.31 crore service tax demand on legal services.

The bench of  Dr. Rachna Gupta (Member-Judicial) and Mrs. Hemambika R. Priya (Member-Technical) has observed that the show cause notice was barred by limitation and that the department failed to establish any deliberate suppression of facts or intention to evade tax.

The dispute arose from an audit conducted by the department, which found that the Federation had allegedly failed to discharge service tax under the Reverse Charge Mechanism (RCM) on legal services received from advocates during the period October 1, 2014 to June 30, 2017.

According to the department, legal services worth ₹16.22 crore had been received by the Federation, attracting a service tax liability of ₹2.31 crore under Entry No. 5 of Notification No. 30/2012-ST. Consequently, a show cause notice dated December 10, 2020 was issued demanding service tax along with interest and penalties, which was later confirmed by the adjudicating authority.

Before the Tribunal, the Federation submitted that it is a society representing leading scheduled airlines, including major domestic carriers, and has been regularly paying service tax on membership subscriptions received from its members.

It argued that even if service tax was payable under reverse charge on legal services, the entire amount would have been immediately available as CENVAT credit. During the disputed period, the Federation had already discharged substantial output service tax in cash, significantly exceeding the disputed liability. Since any tax paid under RCM could have been availed as credit by the same assessee, the entire exercise was revenue neutral, eliminating any motive to evade tax. The show cause notice had been issued beyond the legally permissible period and therefore deserved to be quashed.

The Tribunal first examined the issue of limitation before considering the merits of the demand.

It noted that the show cause notice issued on December 10, 2020 sought to recover tax for the period beginning in October 2014. After examining the statutory limitation prescribed under Section 73 of the Finance Act, 1994, the Bench observed that a substantial portion of the demand relating to October 2014 to September 2015 had been issued beyond even the extended five-year limitation period, making that part of the demand legally unsustainable.

For the remaining period from October 2015 to June 2017, the Tribunal observed that although the notice was within five years, it was still beyond the normal limitation period. Therefore, the department was required to establish fraud, wilful misstatement, collusion or suppression of facts to justify invoking the extended period.

Rejecting the department’s case, the Tribunal found that the only allegation in the show cause notice was that the non-payment would not have been detected had the audit not been conducted.

The Bench held that such an allegation, by itself, was insufficient to invoke the extended period of limitation.

The Tribunal further observed that the Federation had consistently discharged its output service tax liability in cash and that the tax paid during the relevant period exceeded the disputed reverse charge liability. Being a registered society representing the aviation industry, there was no material on record suggesting any fraudulent intent or deliberate suppression of facts. The department had failed to produce any evidence indicating a positive act of concealment by the appellant.

While interpreting the expression “suppression of facts,” the Tribunal relied extensively on several landmark judgments of the Supreme Court, including: Pushpam Pharmaceutical Co. v. CCE, Anand Nishikawa Co. Ltd., Uniworth Textiles Ltd., Pahwa Chemicals Pvt. Ltd., Continental Foundation Joint Venture Holding.

The Bench reiterated the settled legal principle that suppression of facts must involve a deliberate act coupled with an intention to evade tax, and mere omission or non-payment cannot automatically justify invocation of the extended limitation period.

The Tribunal also referred to decisions of the Delhi High Court, including Bharat Hotels Ltd. and MTNL, reiterating that the burden lies upon the Revenue to establish deliberate suppression with intent to evade tax before extending the limitation period.

Having concluded that the entire show cause notice was barred by limitation, the Tribunal held that there was no necessity to examine the substantive merits of the tax demand.

Relying on its earlier decision in Delhi Airport Metro Express Pvt. Ltd., the Bench observed that once the proceedings fail on limitation, adjudication on merits becomes unnecessary.

Allowing the appeal, the CESTAT held that the show cause notice was time-barred, set aside the Order-in-Original confirming the demand of ₹2.31 crore, and granted consequential relief to the Federation of Indian Airlines.

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