2025 (5) TMI 1020 - AT - Service Tax

Levy of service tax - professional fees received by an advocate on a reverse charge basis - rental income received from the residential property rented to a business entity - HELD THAT - The adjudicating authority has dropped the demand on profession income but confirmed the demand on rental income received from the residential property. Further it is found that on appeal the learned Commissioner (Appeals) has dropped the demand on rental income received from the residential property. Hence once both the demands have been dropped one by the adjudicating authority and another by the appellate authority then confirming the demand on the basis of figures shown in the C.A. certificate is not sustainable in law. The Commissioner (Appeals) has gone beyond the show cause notices because in the show cause notices demand was raised on lower amount whereas in the impugned order demand has been confirmed on higher amount which is not permissible in law - the department has not produced any evidence to establish the invocation of extended period of limitation as the appellant has not suppressed any facts from the department and has been filing the returns regularly. Conclusion - i) Service tax on professional fees of advocates is payable on reverse charge basis and demand cannot be confirmed if liability is duly discharged. ii) Rental income from residential property is exempt from service tax even if rented to a business entity. The impugned order is not sustainable in law - appeal allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal in this appeal are:

• Whether service tax is leviable on professional fees received by an advocate on a reverse charge basis, and whether the demand for such tax was validly confirmed or rightly dropped by the adjudicating authority.
• Whether service tax is payable on rental income received from residential property rented to a business entity.
• Whether the Commissioner (Appeals) was justified in confirming the service tax demand on rental income by relying on figures from a Chartered Accountant's certificate, which were higher than those mentioned in the show cause notices.
• Whether the Commissioner (Appeals) exceeded the scope of the show cause notices by confirming demand on amounts higher than those originally proposed.
• Whether the department established the invocation of extended period of limitation for recovery of service tax.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Liability for Service Tax on Professional Fees of an Advocate

Relevant Legal Framework and Precedents: The service tax law applicable during the relevant period mandated payment of service tax on professional services, including those provided by advocates, generally on a reverse charge basis. The adjudicating authority accepted this legal position and accordingly dropped the demand for service tax on professional fees, recognizing that the appellant had discharged the liability under reverse charge.

Court's Interpretation and Reasoning: The Tribunal noted that the adjudicating authority correctly accepted the appellant's contention that service tax on professional fees was payable on reverse charge basis and thus dropped the demand. This finding was not disturbed on appeal.

Key Evidence and Findings: The appellant had filed returns and discharged service tax liability on professional fees as per law. The department did not produce evidence to contradict this.

Application of Law to Facts: Since the appellant complied with the reverse charge mechanism, no demand was sustainable.

Treatment of Competing Arguments: The department did not challenge this finding and accepted the correctness of the adjudicating authority's decision.

Conclusion: The demand for service tax on professional fees was rightly dropped and confirmed as non-leviable.

Issue 2: Service Tax on Rental Income from Residential Property

Relevant Legal Framework and Precedents: Under the service tax law, renting of immovable property is taxable only if the property is commercial in nature. Residential property rented out is generally exempt unless used for commercial purposes. The department's contention was that the residential property rented to a business entity attracted service tax.

Court's Interpretation and Reasoning: The adjudicating authority initially confirmed the demand on rental income from residential property. However, on appeal, the Commissioner (Appeals) held that no service tax was leviable on rental income from residential property, effectively dropping the demand on this ground.

Key Evidence and Findings: The appellant submitted a Chartered Accountant's certificate detailing bifurcation of income from residential and commercial rentals along with professional fees. The Commissioner (Appeals) accepted that rental income from residential property is not taxable.

Application of Law to Facts: The Tribunal found that the Commissioner (Appeals) correctly applied the exemption for residential property rental income and dropped the demand accordingly.

Treatment of Competing Arguments: The department maintained its demand but failed to produce evidence to rebut the exemption claim.

Conclusion: No service tax was payable on rental income from residential property; the demand was rightly dropped on appeal.

Issue 3: Confirmation of Demand Based on Higher Figures from C.A. Certificate

Relevant Legal Framework and Precedents: A show cause notice must specify the amount on which demand is proposed. The adjudication and appeal authorities cannot confirm demand on amounts higher than those specified in the show cause notice, as it violates principles of natural justice and statutory requirements.

Court's Interpretation and Reasoning: The Tribunal observed that the Commissioner (Appeals) confirmed demand on figures higher than those mentioned in the show cause notices, relying on the C.A. certificate submitted by the appellant. This was contradictory because the Commissioner did not accept the C.A. certificate but still used its figures to confirm demand.

Key Evidence and Findings: The show cause notices proposed demand on certain amounts; the C.A. certificate showed higher income figures. The Commissioner (Appeals) did not clarify the basis for ignoring the certificate yet relying on its figures.

Application of Law to Facts: Confirming demand on higher amounts than those in the show cause notices is impermissible. The Tribunal held that such confirmation is unsustainable in law.

Treatment of Competing Arguments: The appellant argued that the Commissioner (Appeals) went beyond the scope of the show cause notices and failed to properly appreciate the evidence. The department did not provide justification for reliance on higher figures.

Conclusion: The confirmation of demand based on higher figures than those in show cause notices was not legally permissible and was set aside.

Issue 4: Whether the Commissioner (Appeals) Exceeded the Scope of Show Cause Notices

Relevant Legal Framework and Precedents: The principle of natural justice and statutory provisions require that a show cause notice must specify the demand amount and grounds clearly. Authorities cannot enhance the demand beyond the notice without issuing a fresh notice.

Court's Interpretation and Reasoning: The Tribunal found that the Commissioner (Appeals) confirmed demand on amounts exceeding those stated in the show cause notices, thereby exceeding the scope of the notices.

Key Evidence and Findings: The show cause notices demanded service tax on lower amounts; the impugned order confirmed demand on higher amounts.

Application of Law to Facts: Such action is not permissible under law and violates procedural fairness.

Treatment of Competing Arguments: The appellant challenged this excess; the department did not justify it.

Conclusion: The Commissioner (Appeals) exceeded the scope of the show cause notices, rendering the demand confirmation invalid.

Issue 5: Invocation of Extended Period of Limitation

Relevant Legal Framework and Precedents: Extended period of limitation for service tax recovery can be invoked only if the assessee has suppressed facts or committed fraud. Regular filing of returns and no suppression negates this.

Court's Interpretation and Reasoning: The Tribunal noted that the department did not produce any evidence to establish suppression or fraud by the appellant. The appellant had been regularly filing returns.

Key Evidence and Findings: No material was produced to justify extended limitation period.

Application of Law to Facts: The extended period of limitation could not be invoked.

Treatment of Competing Arguments: The department failed to substantiate its claim.

Conclusion: The extended period of limitation was not applicable.

3. SIGNIFICANT HOLDINGS

"Once both the demands have been dropped, one by the adjudicating authority and another by the appellate authority, then confirming the demand on the basis of figures shown in the C.A. certificate, is not sustainable in law."

"The Commissioner (Appeals) has gone beyond the show cause notices because in the show cause notices, demand was raised on lower amount, whereas in the impugned order, demand has been confirmed on higher amount, which is not permissible in law."

"The department has not produced any evidence to establish the invocation of extended period of limitation as the appellant has not suppressed any facts from the department and has been filing the returns regularly."

Core principles established include:

• Service tax on professional fees of advocates is payable on reverse charge basis and demand cannot be confirmed if liability is duly discharged.
• Rental income from residential property is exempt from service tax even if rented to a business entity.
• Demand confirmation cannot be based on figures exceeding those specified in the show cause notices.
• Authorities cannot exceed the scope of show cause notices without issuing fresh notices.
• Extended limitation period for service tax recovery requires proof of suppression or fraud, absent which it cannot be invoked.

Final determinations on each issue were in favor of the appellant, resulting in setting aside the impugned order and allowing the appeal with consequential relief as per law.