Delhi High Court Upholds CESTAT Order Allowing Verification Of Tax Exemption On Services To Foreign Embassies

The Delhi High Court has recently upheld an order passed by the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) permitting verification of certificates for claiming service tax exemption on services rendered to foreign embassies and diplomatic missions.

A Division Bench of Justices Nitin Wasudeo Sambre and Ajay Digpaul held that no substantial question of law arose from the CESTAT's decision, which had remanded the matter to the adjudicating authority for the limited purpose of verifying the exemption certificates submitted by the assessee.

The dispute pertained to service tax demands raised against the Respondent-assessee for services provided to foreign embassies and diplomatic missions.

Respondent had claimed exemption under the relevant notification, contending that the services were rendered to diplomatic missions and were therefore exempt from service tax.

The adjudicating authority denied the exemption on the ground that the requisite certificates had not been produced at the appropriate stage and proceeded to confirm the demand along with penalties.

On appeal, the CESTAT noted that the nature of services rendered to diplomatic missions was not in dispute and held that the assessee ought to be granted an opportunity to produce the necessary certificates. The Tribunal accordingly remanded the matter for verification of the certificates, directed that exemption be granted to the extent found admissible, extended the benefit of cum-duty wherever applicable, and set aside the penalties.

Before the High Court, the Revenue argued that exemption notifications must be strictly construed and that compliance with the certification and documentation requirements under the notification was mandatory. It was contended that the CESTAT erred in granting a fresh opportunity to the assessee.

Rejecting the contention, the High Court observed that while exemption notifications are to be interpreted strictly, procedural requirements cannot defeat substantive benefits, especially when the fact that services were rendered to foreign embassies or diplomatic missions was not disputed.

“Once an assessee demonstrates that it falls within the ambit of the notification, the conditions therein must be applied in accordance with their tenor. The principle does not justify denial of exemption where substantive compliance is shown, and the matter merely requires factual verification,” it said.

The Court further noted that CESTAT had only directed factual verification of certificates and had not granted the exemption outright. Such a remand, the Bench observed, was well within the Tribunal's powers and did not suffer from any legal infirmity.

As such, the Revenue's appeal was dismissed.

For Appellant: Monica Benjamin, SSC with Advocates Nancy Jain

For Respondent: Advocates Ruchir Bhatia, Sumit Bhatia, Lopamadura Mahapatra