CESTAT sets aside Service Tax Demand on Interest on Delayed Income Tax Refund Citing no Connection with Taxable Services or Service Tax Obligations [Read Ordeer]

The Customs, Excise & Service Tax Appellate Tribunal ( CESTAT ), New Delhi, has set aside the service tax demand on interest received from delayed income tax refunds, asserting that such interest has no connection with taxable services.

This decision came as part of M/s Divine Autotech Private Limited’s appeal against the Commissioner of Central Tax, Delhi.

The appellant, M/s Divine Autotech Private Limited, represented by Shri Atul Gupta and Anmol Gupta contended that the interest received on the delayed refund of income tax is not related to any service provided and, therefore, should not be subject to service tax.

It was also argued that this interest income is purely compensatory for the delay in refund and not linked to any taxable service.

The respondent revenue, Commissioner of Central Tax, represented by Shri Anand Narayan argued that any income, including interest on delayed income tax refunds, should be scrutinised for its service tax applicability.

The revenue claimed that the interest could be considered as part of the appellant's revenue and thus subject to service tax unless explicitly exempted or shown to be unrelated to taxable services.

The two-member bench of the CESTAT comprising Ms. Binu Tamta (Judicial Member) and Mr. P. V. Subba Rao (Technical Member) clarified that interest received from delayed income tax refunds is purely compensatory and not related to the provision of any taxable service. The Commissioner had incorrectly included this interest amount in the service tax demand, which the Tribunal found unjustifiable.

The CESTAT stressed that such compensatory interest falls outside the scope of service tax obligations, aligning with established tax principles.

The judgment provides a clear directive that compensatory interests, such as those from delayed tax refunds, should not be conflated with taxable service receipts, ensuring that businesses are not unduly taxed on such income.

In result, the CESTAT set aside the service tax demand on the interest received from delayed income tax refunds, concluding that such interest is not related to any taxable service and, therefore, not subject to service tax. The tribunal acknowledged that this interest is compensatory and unrelated to service provisions.

To Read the full text of the Order CLICK HERE

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