Engineering India Vs Commissioner (CESTAT Delhi)
Ignorance of an Exemption Amendment Does Not Excuse Service Tax Default: CESTAT Upholds Demand and Penalty
Background: Differences Between Returns and Financial Records
The appellant, Engineering India, Bhopal, was registered with the Service Tax Department. Scrutiny of its ST-3 returns, compared with Form 26AS and profit and loss statements, revealed differences between the service tax paid and the liability indicated by its receipts.
A show-cause notice dated 20 August 2019 proposed recovery of ₹14,39,930 as service tax for financial years 2014–15 to 2017–18, up to June 2017. It also proposed interest, penalties under sections 76, 77 and 78 of the Finance Act, 1994, and a late fee of ₹15,800.
After considering the appellant’s explanations, the adjudicating authority substantially reduced the demand to ₹2,82,438. It imposed interest, a penalty of ₹10,000 under section 77, an equivalent penalty under section 78, and the late fee.
The Commissioner (Appeals) further reduced the service tax demand to ₹2,81,183, with an equivalent penalty under section 78. The appellant challenged the surviving liability before CESTAT.
Exemptions and Abatement Were Examined by the Authorities
The disputed services had been provided to the Airports Authority of India, the Government of Madhya Pradesh and the appellant’s sister concerns.
The appellant claimed exemption for services supplied to the Airports Authority of India and the State Government under Notification No. 25/2012-ST dated 20 June 2012, referring to entries 14 and 14A.
The adjudicating authority accepted the exemption for the relevant services before 1 March 2015 and reduced the demand accordingly. However, the appellant could not furnish documents establishing continued exemption for the disputed services after that date.
The authorities also considered the applicability of reverse charge under Notification No. 30/2012-ST and allowed admissible abatement for original works contracts during financial years 2015–16 and 2016–17.
Thus, the surviving demand followed an examination of the available exemptions, reverse-charge provisions and abatement, rather than adoption of the entire amount initially proposed.
Appellant’s Defence: Non-Payment Was an Innocent Error
Before the Tribunal, the appellant’s principal contention was that it had been unaware of the amendment withdrawing exemption for its services to the Airports Authority of India after 1 March 2015.
Counsel submitted that the failure resulted from human error and lack of knowledge, without any intention to evade service tax. On that basis, the appellant challenged recovery beyond the normal limitation period under the proviso to section 73(1), together with the penalty under section 78.
The Revenue argued that the lower authorities had already granted the exemptions and abatement supported by the record. No further material had been produced to establish exemption from the remaining demand.
According to the Revenue, ignorance of the change in law could not justify the admitted non-payment or short-payment of tax.
Tribunal: An Exemption Claim Requires Tracking Its Continued Applicability
CESTAT rejected the appellant’s explanation, holding that ignorance of law cannot be an excuse.
The Tribunal reasoned that an assessee aware that its services were taxable, but covered by an exemption notification, was also required to keep track of changes to that notification. This included amendments affecting the exemption’s continued availability during the relevant period.
The Tribunal further observed that the lower authorities had fairly reduced the demand wherever exemption or abatement was available. The appellant’s sole contention concerning ignorance of the amendment did not persuade it to interfere with the remaining liability.
Consequently, the challenge to the demand, including the objection based on the extended limitation period, failed.
Penalty Relief Under Former Section 80 Was Unavailable
The Tribunal referred to former section 80 of the Finance Act, 1994, which had provided protection against specified penalties where an assessee established reasonable cause for the failure.
It held that section 80 was unavailable for the disputed period, which it treated as falling after 2015. On that basis, it sustained the penalty under section 78.
CESTAT accordingly upheld the impugned order and dismissed the appeal, leaving the confirmed demand and associated consequences undisturbed.
Author’s Comments
The practical message is clear: an exemption requires monitoring throughout the period of supply. Once its conditions or scope change, continuing the earlier treatment without verification can create tax, interest and penalty exposure.
However, tax liability, extended limitation and penalty involve distinct statutory enquiries. The proposition that ignorance does not excuse non-payment should not, by itself, be presented as a universal finding that every mistaken exemption claim establishes deliberate suppression or intention to evade.
The order rejects the appellant’s ignorance-based explanation but contains limited separate analysis of the ingredients supporting extended limitation. Likewise, the unavailability of former section 80 removes that particular reasonable-cause protection; it should not be read as dispensing with the statutory conditions for imposing section 78 penalty.
For practitioners, the decision reinforces the need to support a bona fide-error defence with contemporaneous evidence and specific submissions addressing limitation and penalty, rather than relying solely on lack of awareness of an amendment.
FULL TEXT OF THE CESTAT DELHI ORDER
M/s Engineering India, Bhopal1 was registered with the service tax department during the relevant period. Scrutiny of their ST-3 returns and comparison with Form 26AS and profit and loss account statements showed that there was a difference between the service tax paid by the appellant and service tax that should have been paid as per the receipts indicated in Form 26AS and other books of accounts. Accordingly, the Assistant Commissioner issued a show cause notice dated 20.08.20192 proposing recovery of Rs. 14,39,930/- as service tax under section 73 of the Finance Act, 19943 for the period 2014-2015 to 2017-2018 (upto June). It was also proposed to recover interest under section 75 of the Act and to impose penalties under section 76, 77 and 78 of the Act and to levy a late fee of Rs. 15,800/- under Rule 7C of the Service Tax Rules, 19944.
2. The appellant resisted the proposals and after considering the submissions made by the appellant, the Assistant Commissioner passed order dated 25.08.2020 confirming a service tax demand of only Rs. 2,82,438/- (of the Rs. 14,39,930/- proposed in the SCN) along with interest. He also imposed penalties of Rs. 10,000/- under section 77 and penalty of Rs. 2,82,438/- under section 78 of the Act. He also imposed late fee of Rs. 15,800/- under section 70 of the Act read with the Service Tax Rules.
3. Aggrieved, the appellant appealed to the Commissioner (Appeals) who, by the order dated 20.07.20215 further reduced the service tax amount to Rs. 2,81,183/- with an equal amount of penalty under section 78 of the Act. Hence this appeal.
4. We have heard Shri Z.U. Alvi, learned counsel for the appellant and Shri Dhirendra Singh Garbyal, learned Authorized Representative for the Revenue and perused the records.
5. We find that the SCN covered the period April 2000 to June 2018, but the demand in this case is only confirmed for the period March 2015 to June 2017. The disputed services were rendered by the appellant during the period from 2014-2015 upto June 2017 to the Airport Authority of India, Government of Madhya Pradesh and its own sister concerns. The appellant had claimed exemption from the payment of service tax in respect of the services provided to Airport Authority of India and the Government of Madhya Pradesh under Notification No. 25/2012-ST dated 20.06.2012 (Sl. No. 14/14A). These services were exempted before 01.03.2015 and accordingly the demand was reduced by the Assistant Commissioner. However, the appellant could not produce any document to show that the services were exempted after 01.03.2015 also. During 2014-2015 the appellant had provided works contract services to the Government of Madhya Pradesh but had not paid the service tax. After considering the applicability of reverse charge under Notification No. 30/2012-ST dated 20.06.2012, the liability on the taxable portion was held sustainable as the appellant had not produced any documents to claim exemption. For the year 2015-2016 and 2016-2017 the Adjudicating Authority allowed admissible abatement in respect of original works contract. The net effect of all these was the reduction of the demand of service tax to Rs. 2,82,438/-.
6. The Commissioner (Appeals) had further dropped the demand of Rs. 53,226/- and reduced the demand of service tax to Rs. 2,81,183/-.
7. The submission of the learned counsel for the appellant is that after 01.03.2015 the services rendered by the appellant to Airport Authority of India were not exempt because of an amendment in the notification but the appellant was not aware of the amendment in the notification and for that reason failed to pay the service tax. This was purely on account of human error and lack of knowledge and appellant had no intention to evade payment of service tax. He submitted that for that reason the demand confirmed beyond the normal period of limitation under the proviso to section 73 (1) of the Act is not sustainable and needs to be set aside along with penalty under section 78.
8. Learned Authorized Representative for the Revenue took us through the facts of the case and asserted that there is no reason to drop the demand confirmed by the Commissioner (Appeals) in the impugned order. He also brought to our notice that although the SCN had initially proposed demand of service tax of Rs. 14,39,930/-, it was reduced to the extent the appellant was entitled to exemption notification and abatement. The Commissioner (Appeals) has further reduced the demand by an amount Rs. 53,226/- to Rs. 2,81,183/-. He submits that the appellant has not brought on record anything to show that it was entitled to the benefit of exemption from this demand. The sole contention of the appellant before this Tribunal is that the appellant was ignorant of the changes in the law. This is not an acceptable excuse. Service tax was clearly not paid or short paid on the services which the appellant had rendered. For this reason, the demand of service tax needs to be upheld along with interest and penalties.
9. We have considered the submissions advanced by both sides and we find that the sole contention of the learned counsel for the appellant is that the appellant was not aware of the changes to the exemption notification and hence had not paid service tax. Therefore, it is his submission that the appellant had no intention to evade or suppress the value of the taxable services rendered.
10. We find that ignorance of law cannot be an excuse. If the appellant was aware that it was rendering taxable services and that it was entitled to the benefit of exemption notification, it was incumbent upon the appellant to also keep track of any changes to such notification including its non-applicability during any period. We also note that in this case, the lower authorities have been very fair in dropping the demands to the extent that the appellant was entitled to the benefit of any exemption or an abatement.
11. So far as the penalties are concerned, before 2015, section 80 of the Act provided that if the assessee proves that there was reasonable cause for failure, no penalty shall be imposed under section 76, 77 or 78 of the Act. The disputed period is after 2015 and therefore section 80 would also not apply. Section 80 is reproduced below:- ―80. Penalty not to be imposed in certain cases. — Notwithstanding anything contained in the provisions of section 76, section 77, section 78 or section 79, no penalty shall be imposable on the assessee for any failure referred to in the said provisions if the assessee proves that there was reasonable cause for the said failure‖.
The mandatory penalty under section 78 would necessarily have to be imposed for that reason.
12. In view of the above, we uphold the impugned order and dismiss the appeal. (Order pronounced in open court on 05/10/2026.)
Notes:
1 the appellant
2 SCN
3 the Act
4 Rules
5 impugned order
