The Mumbai Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has set aside a service tax demand of ₹90,625 along with interest, equal penalty and an additional penalty of ₹20,000, holding that the show cause notice (SCN) was issued beyond the statutory limitation period and, therefore, the entire proceedings were legally unsustainable. 

The bench of Dr. Suvendu Kumar Pati (Judicial Member) has observed that  the relevant service tax return had been filed on 24 October 2015, and even after taking into account the extended limitation period granted under the COVID-19 Ordinance up to 31 December 2021, the notice covering the disputed period had been issued beyond the prescribed period of limitation.

The appeal was filed against the Order-in-Appeal dated 25 March 2025 passed by the Commissioner (Appeals), CGST & Central Excise, Nashik, which had upheld the demand raised on the basis of discrepancies between the assessee’s VAT returns and ST-3 service tax returns. 

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The appellant was engaged in providing construction of residential complex services. During the financial year 2015-16, the department noticed that the assessee had declared receipts of ₹24.55 lakh in its ST-3 returns, whereas its Profit & Loss Account reflected receipts of ₹49.55 lakh. After adding 1% VAT of ₹49,550, the department treated the taxable value as ₹50.04 lakh and alleged short payment of service tax.

Based on this differential value, the department issued a show cause notice seeking recovery of service tax along with interest and penalties. Both the adjudicating authority and the Commissioner (Appeals) confirmed the demand, prompting the assessee to approach the Tribunal. 

Before the Tribunal, the appellant primarily argued that the entire proceedings were barred by limitation.

The assessee submitted that although the show cause notice was signed on 31 December 2020, evidence obtained from the postal department established that it was actually dispatched only on 15 January 2021. According to the appellant, even after considering the limitation extensions granted during the COVID-19 pandemic, the notice had been issued beyond the permissible statutory period for the relevant tax period from April 2015 to September 2015.

It was further argued that since the notice relating to the earlier period itself was invalid, the entire show cause notice became legally unsustainable. The appellant also pointed out that this specific plea had been raised before the Commissioner (Appeals) through written submissions but had not been addressed in the appellate order. 

The appellant also disputed the department’s reliance on the difference between VAT returns and service tax returns.

It explained that service tax was paid under the Point of Taxation Rules upon issuance of invoices, whereas VAT became payable upon execution of the agreement and completion of the residential project. Consequently, the same transaction appeared in different financial periods under the two taxation regimes.

According to the appellant, an amount of ₹25 lakh, which was reflected in the financial statements for FY 2015-16, had already been disclosed as service receipts in the ST-3 return for the preceding period (October 2014 to March 2015). Therefore, the department had wrongly treated the same amount as additional taxable turnover merely because it appeared differently in VAT records.

The appellant further contended that even the computation of differential service tax was erroneous because the department applied a tax rate of 14.5%, whereas the applicable rate during the relevant period was 12.36%. 

The departmental representative supported the order of the Commissioner (Appeals), arguing that the appellate authority’s reasoning was proper and that the assessee had not effectively raised the limitation issue before the Commissioner (Appeals). Therefore, according to the department, there was no reason for the Tribunal to interfere with the confirmed demand. 

After examining the records, the Tribunal noted that although the show cause notice bore the signature date of 31 December 2020, the postal department’s letter dated 12 June 2025 clearly established that the notice was actually booked for dispatch only on 15 January 2021.

The Bench relied upon the earlier decision in Naresh Kumar & Co. Pvt. Ltd. v. Union of India, observing that proceedings initiated through a time-barred show cause notice cannot be sustained in law. 

Apart from the limitation issue, the Tribunal also observed that the appellant’s explanation regarding the accounting treatment of receipts deserved acceptance.

The Bench noted that the payment details reflected in the ST-3 returns for two different financial periods substantially matched the figures appearing in the VAT returns and the Order-in-Original itself. This supported the assessee’s contention that the apparent difference arose because of the differing taxability provisions under the service tax and VAT laws rather than suppression of taxable value. 

Accordingly, the Tribunal held that the show cause notice itself was legally unsustainable as it had been issued beyond limitation. Consequently, the entire proceedings were quashed.

The CESTAT allowed the appeal and set aside the Order-in-Appeal dated 25 March 2025, granting consequential relief to the appellant.

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