Refundable Loans Not Taxable as Service Advances under Finance Act: CESTAT Allows Appeal [Read Order]

The appeal arose from an Order dated 19.01.2017, issued by the Commissioner of Service Tax Audit, Kolkata, confirming a demand of ₹2,41,78,784 against Forum Projects Pvt. Ltd., for the period 2010–11 to 2013–14, along with interest and penalties.

The department alleged that appellant Forum Projects Pvt. Ltd., engaged in construction of commercial complexes, failed to pay service tax on advances received from clients, and import of services under the Reverse Charge Mechanism (RCM).

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Represented by Tarun Chatterjee, assisted by Sneha Das, the appellant contended that the so-called “advances” were actually refundable short-term loans, received from various parties including directors and their relatives. These were interest-bearing loans, reflected as current liabilities in the books under “advance,” with TDS duly deducted on interest as per the Income Tax Act. Chartered Accountant’s certificates, loan agreements, and bank statements proved that these were loan transactions and not consideration for taxable services.

Regarding the demand on imported services, the appellant argued that even if service tax under RCM was payable, the same was available as CENVAT credit immediately, making it a revenue neutral exercise. Further, the issue was already settled in their favour in Final Order dated 02.04.2024 by the same Bench.

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After examining the documents and hearing both sides, the Tribunal comprising K. Anpazhakan (Technical Member) and R. Muralidhar (Judicial Member) observed that the amounts recorded in the “Advance Ledger” were refundable loans and not advances against taxable services; the adjudicating authority erred in treating them as service-related advances. On RCM liability of ₹16.44 lakh, the Tribunal held that the entire transaction was revenue neutral, since any tax paid was simultaneously available as credit.

Relying on its own decision in the appellant’s earlier case and the Supreme Court’s ruling in Jet Airways (India) Ltd., the Bench observed that extended limitation cannot be invoked in revenue-neutral situations. Further, since the appellant’s activities and records were already scrutinized in previous proceedings, invocation of the extended period for a third show cause notice was legally unsustainable.

The CESTAT conclusively held that refundable loans cannot be equated with taxable advances, and revenue neutrality bars extended limitation and penalty.

Accordingly, the appeal was allowed partly, with substantial relief granted to the assessee.

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