On 21 August, the Chandigarh Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) held that a taxpayer's bona fide belief on the applicability of a service tax valuation scheme to ongoing projects can constitute reasonable cause for non-payment of differential tax, warranting waiver of penalties.

Judicial Member S.S. Garg and Technical Member P. Anjani Kumar set aside the penalties imposed on DLF Projects Ltd. under Sections 76 and 77 of the Finance Act, 1994, while upholding the service tax and interest liability already discharged by the company. The Tribunal held:

“We also find that the learned Commissioner has properly considered: (i) The CENVAT Register, (ii) GAR-7 challans and the reversal of CENVAT credit, and (iii) The reconciliation charts submitted by the Assessee along with the CA certificate dated 14.01.2014 issued by M/s PRA & Co., Chartered Accountants. By considering these records, the learned Commissioner has effectively clarified every doubt raised by the Revenue”, the Tribunal observed.

The dispute arose during the financial year 2011-12 when DLF was engaged in construction of residential and commercial projects, some of which had commenced before 1 June 2007. The Department took the view that the Composition Scheme introduced from 1 June 2007 could not apply to such ongoing projects and proposed recovery of differential service tax.

Following the Supreme Court's judgment in Nagarjuna Construction Company Ltd. v. Union of India, DLF paid Rs. 3.57 crore towards differential service tax and Rs. 1.49 crore as interest before the adjudication order was passed. It also reversed CENVAT credit of Rs. 74.19 lakh along with applicable interest.

The Commissioner confirmed the service tax and interest liability and appropriated the amounts already paid by DLF. However, the Commissioner imposed penalties under Sections 76 and 77 of the Finance Act.

DLF challenged the penalties before the Tribunal, contending that there was uncertainty over the valuation mechanism applicable to ongoing projects and that it had acted under a bona fide belief that the Composition Scheme applied to those projects.

The Tribunal accepted the contention and held that the dispute concerned the interpretation and applicability of the valuation scheme, with the legal position attaining clarity only after the Supreme Court's decision in Nagarjuna Construction.

The Bench held that DLF had reasonable cause for the initial non-payment of differential tax and was therefore entitled to the benefit of Section 80 of the Finance Act, 1994, which permits waiver of penalties where the taxpayer proves reasonable cause for the failure. It therefore, set aside the penalties imposed under Sections 76 and 77. It also dismissed the Revenue's cross-appeal challenging the Commissioner's acceptance of DLF's computation of service tax liability.

The Revenue had questioned the treatment of Rs. 43.39 crore of income, the project-wise computation and an alleged difference of Rs. 30.25 lakh between the figures reflected in DLF's Chartered Accountant certificate and its ST-3 returns.

The Bench found that the Commissioner had examined the relevant records, including the CENVAT Register, GAR-7 challans, CENVAT reversal details and reconciliation charts. It also took note of an additional Chartered Accountant certificate furnished by DLF explaining the nature of the disputed income.

Accordingly, the CESTAT allowed DLF Projects' appeal and dismissed the Revenue's appeal.

For Appellant: Anubhav Goel and Preeti Goel, Advocates

For Respondent: Maheswar Maji and Shantanu Kumar Meena, Authorized Representatives

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Case Title :  M/s DLF Projects Ltd. v. Commissioner of Central Excise, Goods & Service Tax, GurugramCase Number :  Service Tax Appeal No. 54780 of 2014CITATION :  2026 LLBiz CESTAT(CHA)526
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