The Customs, Excise & Service Tax Appellate Tribunal (CESTAT), New Delhi Principal Bench, has held that service tax could not be demanded on activities which were actually in the nature of manufacture, nor could reimbursable expenses be included in the taxable value for the relevant period when the Supreme Court had held such inclusion impermissible.
The bench of Binu Tamta (Judicial Member) and P.V. Subba Rao (Technical Member) set aside the appropriation of amounts deposited during investigation for a period falling beyond the permissible limitation period and directed refund of the amount with applicable interest.
The dispute arose from two proceedings involving the same underlying issue. In the first appeal, Sun Bright Manpower Solutions challenged an Order-in-Original dated October 28, 2020, passed by the Principal Commissioner, CGST, Delhi South.
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A show cause notice dated January 6, 2020 had proposed a service tax demand of approximately ₹5.99 crore. The adjudicating authority ultimately confirmed a demand of ₹2,71,24,723, along with applicable interest and penalties. The assessee had also deposited certain amounts during the course of investigation, part of which was appropriated by the Commissioner.
The second appeal arose from rejection of the assessee’s refund claim of ₹1,29,04,999, representing an amount deposited during investigation but not, according to the assessee, validly liable to appropriation.
The Tribunal identified three principal disputes in the service tax appeal.
First, the Department had sought to levy service tax on activities which, according to the contractual arrangements, amounted to manufacture undertaken on a job-work basis.
Second, the Department sought to include reimbursable expenses such as wages, provident fund and ESI in the taxable value of manpower supply services for the period prior to the statutory amendment concerning such expenses.
Third, the assessee challenged the appropriation of amounts deposited during investigation towards a period which was beyond the extended five-year limitation period.
Sun Bright Manpower Solutions was engaged in manpower supply services. Under its manpower contracts, it received the actual cost of wages, ESI, PF and Labour Welfare Fund, along with service charges ranging between 5% and 10%. Service tax was paid on the service-charge component, while the reimbursable expenses were treated separately.
However, in relation to certain clients, the assessee had entered into contracts not for supplying manpower but for manufacturing goods on a job-work basis. Payment under these contracts was made on a per-piece basis.
The assessee argued that these activities constituted manufacture and therefore did not attract service tax. After examining the agreements, the Commissioner himself found that the assessee had, in fact, manufactured goods under these contracts.
The Commissioner accordingly accepted that such activities were not liable to service tax under the applicable exemption framework, except in relation to work undertaken for M/s Sandhar Automach, where the assessee had collected service tax from the client.
The Tribunal made an important distinction between service tax legally payable and an amount wrongly collected from a customer as service tax.
CESTAT observed that once an activity is found to be outside the charge of service tax or exempt from service tax, the Department cannot create a service tax liability merely because an amount had been collected as representing service tax.
The Tribunal referred to Section 73A of the Finance Act, 1994, under which an amount collected from a customer as service tax, even when not legally payable as service tax, is required to be deposited with the Central Government.
However, the Tribunal stressed that this provision does not transform the underlying activity into a taxable service.
According to the Tribunal, if an assessee wrongly collects ₹100 from a customer as service tax when no service tax is payable, the assessee may be required to deposit that ₹100 under Section 73A. But the Department cannot demand an additional amount as service tax when there is no substantive charge of service tax on the activity.
The Tribunal therefore held that the fact of collection and deposit of an amount as service tax does not create a fresh charge of service tax or take away an otherwise available exemption.
Consequently, the demand relating to the manufacturing activity undertaken for Sandhar Automach was set aside.
The second major issue concerned the treatment of reimbursable expenses.
For certain manpower supply contracts up to May 13, 2015, the assessee recovered actual wages, PF, ESI and other expenses from its clients along with a separate service charge. The Department sought to levy service tax on the reimbursable component as well.
The Commissioner had noted the Supreme Court’s decision in Union of India v. Intercontinental Consultants and Technocrats Ltd., which held that reimbursable expenses could not be included in the taxable value under the service tax regime as it then stood.
However, the Commissioner declined to follow the Supreme Court ruling on the ground that the assessee itself had, while self-assessing service tax in certain invoices for 2013-14 and 2014-15, included reimbursable expenses in the taxable value.
The Tribunal categorically rejected this reasoning.
It held that if the assessee had wrongly paid service tax on reimbursable expenses in certain invoices, that fact could not confer a legal power on the Department to demand the same tax on other invoices where it was not legally payable.
The Tribunal emphasised that the liability to pay service tax flows from the charging provision and the statutory valuation mechanism, and not merely from the manner in which an assessee may have self-assessed tax in an earlier transaction.
Thus, an assessee’s erroneous payment of tax cannot itself become the legal foundation for creating a tax liability that does not otherwise arise under the statute.
The Tribunal further observed that the officers did not possess the statutory power to confirm service tax on amounts which were admittedly not chargeable to service tax during the relevant period, particularly in view of the Supreme Court’s ruling in Intercontinental Consultants and Technocrats.
The assessee also submitted that certain amounts of service tax already paid had not been properly reflected or adjusted.
One such amount was ₹10,36,367, which the assessee claimed had been paid for June to August 2014 but was not reflected in the relevant ST-3 returns. Since this was a factual matter requiring verification, CESTAT remanded the issue to the Commissioner for verification and appropriate recalculation.
Similarly, the assessee claimed that ₹10,14,332 had been paid in excess as service tax during April to June 2017 and ought to have been adjusted against the confirmed demand. The Tribunal again directed the Commissioner to verify the claim and recalculate the liability accordingly.
A significant part of the ruling concerned ₹1.38 crore deposited during investigation for the period April 2014 to September 2014.
The assessee argued that this amount had been deposited during investigation and was subsequently appropriated by the Commissioner towards service tax, interest and penalty even though that period was beyond the permissible extended limitation period.
The show cause notice dated January 6, 2020 covered certain periods between April 2013 and September 2013 and October 2014 to June 2017. It did not propose a service tax demand for April 2014 to September 2014. Nevertheless, the Commissioner appropriated the amount deposited during investigation for that period.
CESTAT observed that when the show cause notice was issued in January 2020, the extended limitation period of five years under the proviso to Section 73(1) could reach only up to January 2015.
Accordingly, a demand covering a period beyond that limitation window could not be sustained.
The Tribunal rejected the Department’s argument that the amount could nevertheless be appropriated because the assessee had voluntarily deposited it during investigation.
CESTAT held that the Department’s position would have been acceptable only if the payment had remained outside the adjudication order. In the present case, however, the amount was brought into the adjudication proceedings through appropriation even though the show cause notice had not proposed such appropriation.
The Tribunal therefore concluded that the answer was clearly no: the adjudication proceedings could not extend beyond the applicable five-year period.
The appropriation of the amount deposited by the assessee was consequently set aside.
The second appeal concerned the rejection of the assessee’s refund claim of ₹1,29,04,999, being part of the ₹1.38 crore deposited during investigation.
The refund had earlier been rejected on the ground that the amount had already been appropriated under the adjudication order and that refund could not be granted unless that order was modified.
CESTAT found this reasoning unsustainable.
The Tribunal noted that the show cause notice did not demand service tax for April 2014 to September 2014 and did not contain any proposal to appropriate the amount deposited for that period. The subsequent appropriation in the adjudication order was therefore beyond the scope of the show cause notice.
The Tribunal further noted that it was not clear from the record why service tax had been deposited for this particular period. However, this uncertainty could not justify retaining the amount when there had been no valid demand or proposal for appropriation in the show cause notice.
CESTAT held that where no show cause notice had been issued either demanding the tax or proposing appropriation of the amount deposited during investigation, the Revenue was bound to refund the amount.
The rejection of the refund claim was therefore held to be incorrect, and the Tribunal directed that the service tax deposited by the assessee be refunded along with interest as per law.
CESTAT ultimately allowed both appeals with consequential relief to Sun Bright Manpower Solutions.
The Tribunal found in favour of the assessee on the substantive issues concerning taxation of manufacturing activity as manpower supply service and inclusion of reimbursable expenses in taxable value for the relevant period. In view of its findings on merits, the Tribunal considered it unnecessary to separately examine the challenges relating to invocation of the extended limitation period and penalties in respect of the principal demand.
The order was pronounced in open court on August 11, 2026.
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