Hotels Can’t Claim Service Tax Abatement After Availing CENVAT Credit On Maintenance, Internet & Courier Services: CESTAT

The Hyderabad Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has held that hotels cannot claim the benefit of service tax abatements under conditional exemption notifications after availing CENVAT credit on input services such as maintenance and repair services, internet services and courier services. The bench of Angad Prasad (Judicial Member) and A.K. Jyotishi (Technical Member) has observed that these services have a direct nexus with hotel operations and therefore their availment disentitles an assessee from claiming exemption benefits where the notifications prohibit such credits. The ruling came while dismissing an appeal filed by M/s Lemon Tree Hotel, a unit of Fleur Hotels Pvt. Ltd., against an order passed by the Commissioner of Customs, Central Excise and Service Tax. The appeal challenged a service tax demand confirmed by the adjudicating authority in relation to restaurant and accommodation services. The dispute originated after the department noticed that the hotel operator had availed abatement benefits under Notification No. 01/2006-ST, as amended through Notification No. 34/2011-ST, while simultaneously availing and utilizing CENVAT credit. Under these notifications, the benefit of reduced taxable value was available only if the service provider did not avail CENVAT credit on inputs, capital goods or input services used for providing such taxable services. The department issued a show cause notice alleging violation of these conditions and proposed recovery of service tax. Out of a total demand of approximately Rs.1.27 crore, the adjudicating authority granted relief in certain portions relating to accommodation services and restaurant services for specific periods, ultimately confirming a demand of Rs.33.54 lakh along with penalties under Sections 76 and 77(2) of the Finance Act, 1994. During the proceedings, the adjudicating authority examined the changes brought through Notification No.26/2012-ST and amendments introduced after July 1, 2012. It observed that post-amendment conditions governing abatements differed from earlier provisions. For some later periods, the authority accepted that the assessee had complied with the conditions regarding non-availment of credit on specified inputs and capital goods and therefore dropped certain demands. However, for the earlier period, the authority found that the appellant had availed credit on input services and therefore became ineligible for the abatement benefits claimed. Lemon Tree Hotel argued that the adjudicating authority had incorrectly presumed that services such as maintenance and repair, internet and courier services were used for providing restaurant and accommodation services. The appellant contended that these services were not exclusively procured for those taxable activities and therefore their availment should not automatically lead to denial of the notification benefits. The hotel also relied upon earlier decisions passed in its own favour by coordinate benches of the Tribunal. The department opposed the submissions and argued that the issue was not whether the services were used exclusively for restaurant or accommodation services, but whether they had a nexus with such services. According to the Revenue, the admitted position was that these services formed part of the hotel's operations and therefore availing credit on them violated the notification conditions. After examining the matter, the Tribunal held that the notifications in question were conditional exemption notifications issued under Section 93(1) of the Finance Act, 1994 and therefore required strict interpretation. It noted that records showed availment of CENVAT credit and that later attempts to characterize entries as clerical errors did not change the factual position. The Bench made an important observation regarding the operational realities of hotel businesses. It stated that maintenance services are intrinsically connected with accommodation facilities and restaurant operations, while services like internet and courier services also support and facilitate hotel activities. The Tribunal observed that it was “inconceivable” for a hotel to claim that maintenance services bear no relation to accommodation or restaurant operations. It further held that in the absence of substantive evidence proving that such services had no connection with the taxable services, the assessee could not claim the benefit of the notifications. The Bench also declined to rely upon earlier decisions cited by the appellant, observing that the factual circumstances in those cases were distinguishable. It additionally referred to the Supreme Court's principles on strict interpretation of exemption notifications in the decision of CC (Import), Mumbai Vs Dilip Kumar & Company. The CESTAT dismissed the appeal and upheld the demand and penalties confirmed by the adjudicating authority, reinforcing the principle that taxpayers seeking benefits under conditional exemption notifications must strictly comply with all prescribed requirements. Case Details Case Title: M/s Lemon Tree Hotel Versus Commissioner of Central Tax Citation: JURISHOUR-1288-CES-2026(HYD) Case No.: Service Tax Appeal No. 22099 of 2015 Date: 15.05.2026 Counsel For Appellant: Sameer Sood, Advocate Counsel For Respondent: V.R. Pavan Kumar, AR Click Here To Read Order Read More: License Fee, Technical Assistance Charges Not Includible In Customs Value Unless They Are a Condition of Sale: CESTAT

Hotels Can’t Claim Service Tax Abatement After Availing CENVAT Credit On Maintenance, Internet & Courier Services: CESTAT

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