The Rajasthan High Court has held that mere classification of services under an incorrect taxable category does not amount to fraud, wilful misstatement, or suppression of facts unless the Revenue establishes a deliberate intent to evade tax. 

The Bench of Justice Arun Monga and Justice Maneesh Sharma dismissed the Central Excise Department’s appeal and upheld the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) order that had quashed a service tax demand of over ₹2.54 crore on the ground of limitation. 

The dispute arose after the Department conducted an audit of a construction company registered under the categories of Commercial or Industrial Construction Services (CICS) and Works Contract Services (WCS). During the audit, officials concluded that the company had continued paying service tax under the CICS category even after the introduction of WCS as a separate taxable service from 1 June 2007.

Buy Now: 70+ Judgements Indirect Tax – July 2026 | E-Magazine

According to the Department, the assessee was executing composite contracts involving both supply of goods and provision of services, making the activities taxable under the WCS category. It alleged that the assessee had not opted for the Works Contract Composition Scheme and had consequently short-paid service tax amounting to ₹2.54 crore for the period October 2010 to June 2012. A show cause notice issued on 30 September 2015 sought recovery of differential tax along with interest and penalties. 

The adjudicating authority confirmed the entire service tax demand along with interest and imposed a penalty. However, on appeal, the CESTAT held that although the Department’s classification argument may be correct on merits, the demand itself was time-barred because the Department had failed to establish fraud, suppression of facts, or wilful misstatement necessary to invoke the extended limitation period.

The Tribunal noted that the assessee had consistently filed service tax returns, openly classified its activities under CICS, and there was no evidence suggesting any deliberate attempt to evade tax. Consequently, it set aside the demand and penalties solely on the ground of limitation. 

The department challenged the Tribunal’s decision before the Rajasthan High Court, raising the substantial question of law as to whether the CESTAT was justified in setting aside the demand merely by holding that the ingredients of fraud, suppression, or wilful misstatement were absent without adequate reasoning. 

The Department argued that the service tax regime is founded on self-assessment and casts a duty on taxpayers to make accurate disclosures. It contended that after the introduction of Works Contract Service as a separate taxable category, the assessee deliberately continued classifying its activities under CICS despite amending its registration to include WCS.

According to the Revenue, this conduct amounted to suppression of material facts with intent to evade payment of tax, thereby justifying invocation of the extended limitation period. 

Sanjay Jhanwar, Sr. Advocate with Adv Aditya Sharma and Adv Wilson Joy, appearing for the assessee maintained that there was never any intention to evade tax since both classifications attracted the same rate of service tax and the dispute was purely one of classification.

It further argued that the law regarding classification of composite construction contracts remained unsettled until the Supreme Court’s decision in Commissioner of Central Excise & Customs v. Larsen & Toubro Ltd., making the extended limitation provisions inapplicable.

Counsel for the Assessee also emphasized that the burden of proving suppression or wilful misstatement rested on the Department, which had failed to produce any such evidence. 

The High Court agreed with the Tribunal and observed that the controversy was confined to whether the extended limitation period could be invoked in the absence of evidence showing deliberate tax evasion.

The Bench noted that the assessee had regularly filed returns under the CICS category and that the Department was fully aware of this classification for several years. Importantly, the Department had conducted an audit in 2013, during which it had already raised objections regarding classification. Despite this knowledge, it failed to issue a show cause notice within the normal limitation period and instead waited until September 2015 to initiate proceedings for the period between 2010 and 2012. 

The Court held that these facts clearly demonstrated that the Department possessed all the necessary information well within the normal period of limitation and therefore could not subsequently invoke the extended period merely because it disagreed with the classification adopted by the assessee.

The Division Bench reaffirmed the settled legal principle that mere omission, incorrect classification, or failure to declare something does not automatically amount to suppression of facts. For the extended limitation period to apply, the Revenue must establish a positive and deliberate act demonstrating an intention to evade tax.

The Court relied upon several Supreme Court decisions, including Chemphar Drugs, Pushpam Pharmaceuticals, H.M.M. Ltd., Easland Combines, and Lipi Boilers, all of which consistently hold that suppression must involve deliberate concealment rather than a mere error or omission. 

The Bench observed that when the relevant facts are already within the knowledge of the Department, a later allegation of suppression cannot be sustained. Likewise, an incorrect statement cannot automatically be equated with a wilful misstatement unless it is shown to have been made knowingly and with the intention of avoiding tax.

The High Court concluded that the Department had failed to discharge its burden of proving fraud, collusion, wilful misstatement, or suppression of facts.

The court upheld the Tribunal’s findings, answered the substantial question of law in favour of the assessee, and dismissed the department’s appeal. Since the extended limitation period itself was held to be inapplicable, the Court also held that the service tax demand and associated penalties could not survive.

Membership Required to Access Case Details & Order Copy

To view the complete Case Details and Download Order Copy, you must have an active membership. Please subscribe to continue.

Read More: No Right To Representation Against Anti-Dumping Findings: Delhi High Court