Ignorance of Exemption Amendment Cannot Shield Assessee from Service Tax Liability: CESTAT Delhi Rules in Engineering India Case

Overview of the Dispute

The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Delhi, recently delivered a significant ruling in Engineering India Vs Commissioner (CESTAT Delhi) [Service Tax Appeal No. 51667 of 2021, decided on 05/10/2026], holding that an assessee who claims benefit under an exemption notification bears the ongoing responsibility of monitoring any amendments to that notification. Failure to track such changes — even if attributable to a genuine lack of awareness — cannot constitute a valid defence against a confirmed service tax demand or the penalties arising therefrom.

This ruling carries important practical implications for service providers who operate under exemption notifications and who may assume that an exemption, once applicable, continues without interruption.

Background: How the Dispute Originated

Engineering India, Bhopal, held registration with the Service Tax Department during the relevant period. The department's scrutiny involved a comparative analysis of the assessee's ST-3 returns against data reflected in Form 26AS and the profit and loss account statements. This exercise revealed a discrepancy between the service tax actually deposited and the amount that ought to have been paid based on receipts reflected in the books of accounts and Form 26AS.

Acting on these discrepancies, the Assistant Commissioner issued a show-cause notice dated 20.08.2019, proposing recovery of ₹14,39,930 as service tax under Section 73 of the Finance Act, 1994, covering the period 2014–2015 to 2017–2018 (up to June). The notice also proposed:

  • Recovery of interest under Section 75 of the Act
  • Imposition of penalties under Section 76, Section 77, and Section 78 of the Act
  • Levy of a late fee of ₹15,800 under Rule 7C of the Service Tax Rules, 1994

Adjudication: Demand Substantially Reduced After Considering Exemptions

Upon receipt of the assessee's reply and after evaluating the submissions, the Assistant Commissioner passed an order dated 25.08.2020. While the original show-cause notice had proposed recovery of ₹14,39,930, the adjudicating authority confirmed a service tax demand of only ₹2,82,438, having granted the benefit of applicable exemptions and abatement wherever the assessee was entitled. Along with interest, the following penalties and fees were imposed:

  • Penalty of ₹10,000 under Section 77 of the Act
  • Penalty of ₹2,82,438 under Section 78 of the Act
  • Late fee of ₹15,800 under Section 70 of the Act read with the Service Tax Rules

Aggrieved by this order, the assessee filed an appeal before the Commissioner (Appeals), who provided further relief by dropping an additional ₹53,226 from the confirmed demand, thereby reducing the service tax liability to ₹2,81,183, along with an equivalent penalty under Section 78 of the Act. The assessee then approached CESTAT, challenging the surviving demand and penalties.

Nature of Services and Exemption Claims

The services in question were rendered during the period from 2014–2015 up to June 2017 to three categories of recipients:

  1. Airports Authority of India
  2. Government of Madhya Pradesh
  3. The assessee's own sister concerns

The assessee had claimed exemption from service tax in respect of services rendered to the Airports Authority of India and the Government of Madhya Pradesh by relying on Notification No. 25/2012-ST dated 20.06.2012 (Serial Nos. 14 and 14A).