CESTAT Delhi Holds Interest on FDs and Inter-Corporate Deposits Non-Taxable; Sets Aside Service Tax Demand
Sangeetha Prathap
The Delhi Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has held that interest earned on fixed deposits and inter-corporate deposits is not liable to service tax, as such income falls squarely within the Negative List under Section 66D(n)(i) of the Finance Act, 1994. The Tribunal further noted that the department’s rejection of the Chartered Accountant’s certificate—on the ground that bank statements were not produced—had no legal basis because the income in question is categorically exempt.
The appeal arose from a service tax demand of ₹1,71,61,578, along with interest and penalties, relating to the period from October 2016 to June 2017. The demand was founded primarily on the disallowance of the entire cenvat credit allegedly availed by M/s Hindustan Tin Works Ltd., with the show-cause notice citing an incorrect figure of ₹1.44 crore taken from ST-3 returns, though the actual credit as per the Cenvat Credit Register was ₹1.26 crore. The appellant challenged the demand before the Commissioner (Appeals), who, by order dated 3 June 2024, affirmed the demand except for a limited relief of ₹70,760. Aggrieved, the appellant approached the Tribunal.
Before the Tribunal, it was submitted that the appellant had produced its Cenvat Credit Register, sample invoices, audited financial statements and the Chartered Accountant’s certificate before the adjudicating authority on 15 December and 19 December 2023. These documents included details of cenvat credit availment, tax paid under reverse charge, and credit carried forward through TRAN-I. However, the Order-in-Original was passed on 19 December 2023 itself, without considering any of the documents or conducting verification. The Tribunal observed that such an order passed “in haste” amounted to a violation of the principles of natural justice.
On the question of taxability of interest income amounting to ₹78,56,612, the Tribunal referred to Section 66D(n)(i), which places within the Negative List all services “by way of deposits, loans or advances, in so far as the consideration is represented by way of interest or discount.” The Tribunal found that the Chartered Accountant’s certificate was based on audited accounts filed with statutory authorities and rejected the department’s contention that absence of bank statements could negate the exemption. It held that the demand on this count was “contrary to the provisions of the Act” and unsustainable.
The Tribunal next dealt with taxability of balances written back. It accepted the appellant’s reliance on decisions such as Grey Worldwide (India) Pvt. Ltd. v. CST, Mumbai and DSP Merrill Lynch Ltd. v. CST, Mumbai, in which it was held that amounts written back in accounts—such as bad debts recovered or credit balances reversed—are financial adjustments and cannot be treated as consideration for any service. Following these precedents, the Tribunal concluded that the demand on written-back balances was unsustainable in law.
On the issues relating to profit on sale of fixed assets and taxability of expenses under reverse charge, the Tribunal noted that the authorities had ignored the Chartered Accountant’s certificate and failed to verify sample invoices submitted by the appellant. These matters, it held, required proper factual verification. Since the adjudicating authority had passed the order without considering the evidence submitted on the very same day, the Tribunal found that a de novo examination was necessary.
The Tribunal set aside the demand of service tax on interest income and balances written back, holding them to be exempt and non-taxable. As for the remaining issues—including cenvat credit, profit on sale of assets, and reverse-charge expenses—the Tribunal remanded the matter to the adjudicating authority for fresh consideration, directing that all documents submitted by the appellant be duly examined. The appeal was accordingly allowed by way of remand.
Appearance
Counsel For Appellant: R. Krishnan, Advocate
Counsel For Respondent: Rakesh Kumar, Authorized Representative
Cause Title: M/s Hindustan Tin Works Ltd. Versus Commissioner of CGST
Case No: Service Tax Appeal No. 52180 Of 2024
Coram: Hon’ble Ms. Binu Tamta, Member (Judicial), Hon’ble Mr. P.V. Subba Rao, Member (Technical)
