Invalid Invocation of S. 73 for GTO Service Recipients Leads to Quashing of Service Tax Demand: CESTAT

The Customs, Excise & Service Tax Appellate Tribunal (CESTAT), Chennai Bench has held that the show cause notice (SCN) issued under the wrong statutory provision is legally unsustainable. The bench of Ajayan T.V. ( Judicial Member) and M. Ajit Kumar (Technical Member), ruled that the demand raised on freight payments made to Goods Transport Operators (GTOs) during the period from November 16, 1997 to June 1, 1998 cannot be sustained, as the recovery mechanism adopted by the department was fundamentally flawed. The appellant, a manufacturer of cotton yarn, had engaged goods transport operators for transportation of its products across India and for exports. During the relevant period, service tax was levied on GTO services, with liability cast on specified recipients, including companies, under the reverse charge mechanism. A show cause notice dated March 22, 2002 was issued to the appellant under Section 73 of the Finance Act, 1994, proposing recovery of service tax along with interest and penalties for non-payment and failure to file returns. While the original adjudicating authority confirmed the tax demand, penalties were dropped. The Commissioner (Appeals) later upheld the demand, relying primarily on the Supreme Court’s ruling in Gujarat Ambuja Cements Ltd. The central question before the Tribunal was whether a service tax demand raised through an SCN issued under Section 73—pertaining to failure to file returns under Section 70—could be sustained against a recipient of GTO services, whose obligations arose under a distinct provision, namely Section 71A. The Tribunal closely examined the interplay between Sections 70, 71A, and 73 of the Finance Act, particularly in light of retrospective amendments introduced through the Finance Acts of 2000 and 2003. It noted that while the Supreme Court in Gujarat Ambuja Cements Ltd. upheld the constitutional validity of the levy on GTO services, a separate line of judgments, including L.H. Sugar Factories Ltd., clearly established that recovery proceedings must follow the correct statutory route. The bench emphasized that recipients of GTO services were required to file returns under Section 71A—a special provision introduced to address such cases—rather than under Section 70, which applies to service providers. Consequently, proceedings under Section 73, which are triggered by non-compliance with Section 70, could not be invoked against such recipients. “The show cause notice issued under Section 73 was directed at the wrong class of assessee and is therefore not maintainable,” the Tribunal observed. The Tribunal relied heavily on the Supreme Court’s affirmation of the decision in L.H. Sugar Factories Ltd., which held that SCNs issued under Section 73 against GTO service recipients for the relevant period were procedurally invalid. It also referred to a coordinate bench decision in CCE Raipur v. Jaiswal Equipment & Holdings Pvt. Ltd., which dealt with a similar issue and held that failure to issue a revised SCN under the correct provision—post amendments—renders the demand unsustainable. A key factor in the Tribunal’s decision was the department’s failure to issue a revised show cause notice after the statutory framework evolved. The law had provided an extended timeline—up to November 30, 2003—for filing returns under Section 71A, but no fresh notice was issued alleging non-compliance with this revised requirement. The Tribunal held that without such a revised SCN aligned with the amended provisions, recovery proceedings could not be legally pursued. The appellant had also argued that the demand was time-barred, as the SCN was issued in 2002 for a period ending in 1998. While the Tribunal noted that the contention appeared to have merit—especially in the absence of fraud or suppression—it refrained from ruling on limitation, having already found the demand unsustainable on merits. Allowing the appeal, the Tribunal set aside the impugned order and quashed the service tax demand in entirety, granting consequential relief to the appellant. Case Details Case Title: Sri Lakshmi Saraswati Textiles (Arni) Ltd. Versus Commissioner of GST & Central Excise Citation: JURISHOUR-487-CES-2026(CHEN) Case No.: Service Tax Appeal No. 41855 of 2017 Date: 24.03.2026 Counsel For Appellant: N. Isewarya, Advocate Counsel For Respondent: G. Krupa, Authorized Representative Click Here To Read Order Read More: Service Tax Demand on Limitation Grounds Quashed, Holds No Suppression Without Intent to Evade: CESTAT

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