The Allahabad Bench of Customs, Excise & Service Tax Appellate Tribunal (CESTAT) has set aside a service tax demand of Rs. 12,11,451 along with interest and penalty, holding that works contract services involving the repairing and painting of shops of Mandi Samiti were covered by the exemption under Entry No. 60 of Notification No. 25/2012-ST dated June 20, 2012.
The bench of Justice P. K. Choudhary (Judicial Member), and K. Anpazhakan (Technical Member) that the extended period of limitation could not be invoked in the absence of any evidence of suppression, fraud or wilful misstatement.
The appellant was engaged in providing works contract services and, during the relevant period, primarily undertook construction, repair and painting work for Rajya Krishi Utpadan Mandi Parishad, Uttar Pradesh, and Mandi Samiti, Lakhimpur.
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The appellant did not discharge service tax on these services on the bona fide belief that services provided to Governmental Authorities were exempt under Entry No. 60 of Notification No. 25/2012-ST. The entities concerned had been constituted under the Uttar Pradesh Krishi Utpadan Mandi Adhiniyam, 1964.
The Department subsequently issued a show cause notice demanding ₹48,33,913 in service tax, invoking the extended period under the proviso to Section 73 of the Finance Act, 1994, along with interest and penalties.
Following adjudication, the original authority dropped a substantial portion of the demand but confirmed ₹17,30,644, together with interest, holding that services supplied to the Mandi Samiti and Mandi Parishad were not exempt.
The Commissioner (Appeals) subsequently reduced the demand to ₹12,11,451, after allowing 30% abatement in respect of repair work, while sustaining the penalty under Section 78 of the Finance Act, 1994.
Before the Tribunal, the disputed amount comprised two components.
The first and principal component was ₹11,83,101 relating to painting and repair work carried out for Rajya Krishi Utpad Mandi Parishad, Lakhimpur, against a service value of ₹1,12,67,624.
The second component was ₹28,350 on ₹2,70,000 of rental income received from Allahabad Bank, Lakhimpur. The total demand confirmed at the appellate stage was therefore ₹12,11,451.
A central issue before the Tribunal was whether the Mandi Samiti and Rajya Krishi Utpadan Mandi Parishad qualified as “Governmental Authorities” for purposes of the service tax exemption.
S. A. Khan, Consultant for the Appellant pointed out that the Mandi Samiti had been constituted under Section 12 of the Uttar Pradesh Krishi Utpadan Mandi Adhiniyam, 1964, while the State Agricultural Produce Market Board was constituted under Section 26A of the same legislation.
The Tribunal’s order records that the Mandi Samiti was a body corporate and was deemed to be a local authority for specified statutory purposes. Likewise, the Mandi Parishad was constituted as a body corporate and was also deemed to be a local authority.
The definition of “Governmental authority” under Notification No. 25/2012-ST covered a board, authority or other body set up by an Act of Parliament or a State Legislature, or established by government with the prescribed level of participation or control, for carrying out specified functions.
The principal legal question before CESTAT was whether the repairing and painting of Mandi shops, undertaken for the Mandi Samiti, could be regarded as an activity in relation to a function entrusted to a Panchayat under Article 243G of the Constitution, thereby qualifying for exemption under Entry No. 60 of Notification No. 25/2012-ST.
Entry No. 60 exempts services provided by the Government, a local authority or a governmental authority by way of an activity relating to a function entrusted to a Panchayat under Article 243G.
The appellant argued that the Mandi Samiti facilitated the marketing of agricultural produce brought by farmers, and that such activity fell within the functions relating to agriculture and agricultural extension listed in the Eleventh Schedule to the Constitution.
An important procedural aspect of the ruling was that the appellant had not initially claimed the exemption under Serial No. 60 before the lower authorities.
The Tribunal nevertheless held that the claim could be raised before it because the eligibility for exemption involved a legal issue. It observed that where an assessee is otherwise eligible for an exemption, the benefit cannot be denied merely because the particular exemption entry was not relied upon at an earlier stage.
This enabled the Tribunal to directly examine whether the works contract services fell within Entry No. 60.
After examining Entry No. 60 and the functions assigned to Panchayats under the Eleventh Schedule, CESTAT found that activities relating to promoting agriculture, including agricultural extension, are functions entrusted to Panchayats under Article 243G.
The Tribunal then connected this constitutional function with the statutory role performed by the Mandi Samiti and Mandi Parishad in facilitating the marketing of agricultural produce.
It held that the works contract services involving repairing and painting of shops belonging to the Mandi Samiti were connected with the marketing activity of agricultural produce by farmers. Consequently, the services fell within the ambit of Article 243G.
The Tribunal therefore concluded that the works contract services were exempt from service tax under Entry No. 60 of Notification No. 25/2012-ST. The service tax demand raised by denying this exemption was consequently held to be unsustainable.
The department relied on an earlier Allahabad CESTAT decision in M/s Ganpati Mega Builders India Pvt. Ltd., where exemption under Notification No. 25/2012-ST had been denied on similar services.
The Tribunal, however, distinguished that decision. It noted that in the earlier case, the specific eligibility of the services under Serial No. 60 had not been examined because the assessee had not claimed exemption under that entry.
Accordingly, CESTAT held that the earlier decision did not govern the present dispute and was distinguishable on facts and on the exemption provision examined.
The Tribunal also independently found the demand unsustainable on limitation.
The issue involved interpretation of the statutory exemption contained in Notification No. 25/2012-ST. CESTAT observed that where the dispute is essentially about interpretation of a notification, an allegation of suppression with intent to evade tax cannot automatically be attributed to the assessee.
Importantly, the Tribunal found that the Department had produced no evidence of suppression, fraud, collusion or misstatement. The appellant had also been regularly filing ST-3 returns and disclosing the relevant information.
The show cause notice was issued on October 21, 2021, covering the period 2016-17, and therefore the entire demand had been raised by invoking the extended period of limitation. Since suppression with intent to evade tax had not been established, the Tribunal held that the demand was barred by limitation.
The CESTAT relied upon the Supreme Court’s decision in Uniworth Textiles Ltd. v. CCE, Raipur.
The Tribunal referred to the Supreme Court’s observation that where the extended limitation period is sought to be invoked, the show cause notice must specifically put the assessee to notice regarding the alleged omission or commission falling within the statutory grounds for extending limitation.
The Supreme Court had emphasized that the Revenue bears the burden of establishing the requisite mala fide conduct and that merely failing to pay duty, without the necessary ingredients such as fraud, wilful misstatement or suppression with intent to evade, is insufficient for invoking the extended period.
Applying this principle, CESTAT held that the extended period could not be sustained. Consequently, the demand was liable to be set aside on limitation as well.
The Tribunal separately examined the ₹28,350 service tax demand on ₹2.70 lakh of rental income received from Allahabad Bank.
It found that the appellant’s gross taxable value for FY 2016-17 was only ₹2.70 lakh, since the other receipts were exempt and therefore could not be included for determining the taxable value for the threshold exemption.
As the taxable value was below the ₹10 lakh threshold, CESTAT held that the appellant was entitled to the threshold exemption for FY 2016-17. The demand of ₹28,350 on the rental receipts was therefore also set aside.
Having concluded that the principal service tax demand was unsustainable both on the exemption issue and limitation, the Tribunal held that the consequential demands of interest and penalty under Section 78 could not survive.
The Tribunal accordingly set aside the impugned appellate order in its entirety and allowed the appeal with consequential relief, if any, in accordance with law. The order was pronounced in open court on August 11, 2026.
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