The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), New Delhi, has set aside a service tax demand raised against Rajasthan government-owned Public Sector Undertaking (PSU), holding that the department could not invoke the extended period of limitation to recover tax under the reverse charge mechanism (RCM) on payments made to government departments and local authorities.

While the bench of Binu Tamta (Judicial Member) and Hemambika R. Priya (Technical Member) has agreed that the monetary exemption under Notification No. 22/2016-ST was unavailable because the payments exceeded the prescribed threshold, it ruled that the entire demand nevertheless failed as it had been confirmed solely by invoking the extended limitation period without any evidence of fraud, suppression, or wilful misstatement.

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The appeal arose from an Order-in-Appeal dated March 30, 2022, which had upheld a service tax demand of ₹51.29 lakh along with interest and penalties on services received from government departments such as the Public Works Department (PWD), Municipal Councils, Nagar Nigams and other authorities during the period from April 2016 to May 2017. The department alleged that RajCOMP, being the recipient of taxable services from government or local authorities, was liable to discharge service tax under the reverse charge mechanism in terms of Section 68(2) of the Finance Act, 1994.

RajCOMP Info Services Ltd., a wholly owned undertaking of the Government of Rajasthan, functions as the nodal agency for implementing information technology projects across the State. During the execution of optical fibre cable projects in rural areas, the company incurred expenditure towards road-cutting charges, electrical inspection fees, VSAT licence fees and similar statutory charges payable to various government authorities. The department treated these payments as consideration for taxable services and issued a show cause notice in May 2020 invoking the extended limitation period under Section 73 of the Finance Act, 1994.

Before the Tribunal, the appellant contended that many of the services were exempt under the Mega Exemption Notification No. 25/2012-ST. It specifically relied upon Entry 13, which exempts services relating to construction, repair, maintenance or alteration of roads for public use, and Entry 60, which exempts services provided by government or local authorities in relation to functions entrusted to Panchayats under Article 243G of the Constitution. The appellant also argued that the issue involved interpretation of exemption notifications and therefore the extended limitation period could not be invoked against a government undertaking in the absence of any mala fide intention.

The Revenue, however, maintained that Notification No. 22/2016-ST had amended the exemption scheme by introducing a monetary threshold of ₹5,000 for services provided by government or local authorities. Since RajCOMP had made payments aggregating ₹3.41 crore during the relevant period, the department argued that the exemption was unavailable and service tax under the reverse charge mechanism was rightly demanded.

The Tribunal first examined whether the activities were otherwise covered by the Mega Exemption Notification. It noted that road-cutting activities squarely fell within the scope of Entry 13 relating to alteration and maintenance of public roads. Relying upon its earlier decision in MP Audyogik Kendra Vikas Nigam Ltd., the Bench reiterated that road-cutting charges connected with public roads qualify for exemption and cannot be subjected to service tax merely because they involve payments to government authorities.

The Bench further held that the services also satisfied the conditions prescribed under Entry 60 of the exemption notification. It observed that the services had admittedly been provided by government departments and local authorities, while the projects related to rural roads and rural electrification—subjects specifically entrusted to Panchayats under Article 243G of the Constitution. Accordingly, the Tribunal concluded that the nature of the activities fell within the scope of the exemption notification.

However, while dealing with Notification No. 22/2016-ST, the Tribunal accepted the department’s contention that the amendment restricted the exemption where the gross amount charged by government or local authorities exceeded ₹5,000. Since RajCOMP had made payments amounting to over ₹3.41 crore, the monetary exemption could not be extended. The Bench therefore clarified that the amended notification limited the availability of the exemption notwithstanding the otherwise exempt character of the services.

Despite this finding, the Tribunal ultimately ruled in favour of the appellant on the issue of limitation. It observed that the dispute was entirely interpretational and revolved around the applicability of exemption notifications. There was no allegation or evidence establishing fraud, collusion, wilful suppression of facts or deliberate intent to evade tax. 

The Tribunal also noted that RajCOMP was a government undertaking and referred to earlier judicial precedents, including its own decisions involving the same appellant, which consistently held that the extended period could not be invoked in the absence of positive evidence of mala fide conduct.

Holding that the entire demand had been confirmed exclusively by invoking the extended period of limitation, the Tribunal declared the demand legally unsustainable and set aside the impugned order. 

The Bench clarified that its order was subject only to its observations regarding the applicability of Notification No. 22/2016-ST, while granting consequential relief to the appellant.

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