2025 (7) TMI 640 - AT - Service Tax

Non-payment of service tax - Business Auxiliary Services - recovery of service tax with interest and penalty - Demand based on TDS Statement / Form 26AS - HELD THAT - The Original Authority has taken cognizance of the contentions raised by the Appellant and copies of the contracts submitted by the Appellant. He has also made note of the exemptions admissible to the Appellant. However without taking all the submissions and admissibility into consideration he has simply confirmed the demand that was raised on the basis of information received from Income Tax Department in Form 26AS. It is noted that it was held by this Tribunal in the case of Sharma Fabricators Erectors Pvt. Ltd.V/s CCE Allahabad 2017 (7) TMI 168 - CESTAT ALLAHABAD that it was the responsibility of the executive to examine the records and examine the audit objection raised with reference to the records and facts of the case and take a view whether there is a sustainable case for issue of show cause notice and that charges in the SCN have to be on the basis of books of account and records maintained by the assessee and the other admissible evidence and the transactions recorded in the books of account cannot be held to be contrary to the facts. It was further held by this Tribunal in the case of Kush Construction V/s CGST NACIN Kanpur 2019 (5) TMI 1248 - CESTAT ALLAHABAD that without examining the reasons for difference in the figures reflected in Form 26AS and ST-3 returns Revenue cannot raise demand on the basis of such difference without establishing that the entire amount received by the Appellant as reflected in the said returns and Form 26AS being consideration for services provided and without examining whether the difference was because of any exemption or abatement. The charging Section 66B of Finance Act 1994 provides for levy of service tax at a specified percentage on the value of service. Section 67 of Finance Act provides that where service tax is chargeable on any taxable service with reference to its value and such value shall be consideration in money charged by the service provider. Therefore it is primarily important to determine the value on which service tax shall be levied at a specified percentage and such value should be the value of taxable service. Clause (44) of Section 65B of Finance Act 1994 has provided for definition of service and it has elaborately dealt with a list of activities which shall not be included in such definition. Further Section 66D of Finance Act 1994 has provided for negative list of services where the activities provided covered by such negative list do not qualify to be a taxable service. Therefore it is clear that while determining the value of taxable service under Section 67 ibid such aspect as to the activities which are covered by negative list and activities which are mentioned in the definition of service as those which are not covered by such definition become important. Thus for arriving at the amount of service tax not paid or not levied and arriving at correct value of taxable service which has not suffered service tax needs to be determined as the first step. Further there are services where entire or part of service tax is to be paid by service recipient. In addition mega exemption Notification No. 25/2012-ST dated 20.06.2012 has provided exemption to various activities from the levy of service tax. Therefore unless the data is examined with reference to all the above stated aspects no one can come to a conclusion about the exact value which has not suffered service tax. Such exercise has not been undertaken in the present case. The impugned order is not sustainable - Appeal allowed.

Summary

The core legal questions considered in this appeal relate to the validity and correctness of the demand of service tax, interest, penalties, and late fees raised against the appellant under various provisions of the Finance Act, 1994 and Service Tax Rules, 1994. Specifically, the issues include:

(i) Whether the demand of service tax, including education cess and secondary and higher education cess, based on figures in the Show Cause Notice (SCN) is sustainable, given discrepancies with figures in Form 26AS and service tax returns;

(ii) Whether interest under section 75 and penalty under sections 77, 77(1)(c), 78, and 77 of the Finance Act can be imposed on the appellant for alleged non-payment, suppression, non-maintenance of records, and non-submission of documents;

(iii) Whether late fees under Rule 7C of Service Tax Rules, 1994 for delayed filing of ST-3 returns are correctly levied;

(iv) The correctness of the methodology adopted for determination of taxable value and consequent service tax liability, including the applicability of exemptions, abatements, and negative list services;

(v) The legality of raising demand based on third-party information from the Income Tax Department without adequate verification of records and books of accounts maintained by the appellant.

Issue-wise Detailed Analysis

1. Validity of Service Tax Demand Based on SCN Figures Versus Form 26AS and Returns

The SCN issued alleged non-payment of service tax for the financial years 2014-15 to 2017-18 (up to June 2017) with specific demand figures. However, it was noted that the figures in the SCN did not tally with those in Form 26AS except for the year 2016-17. The appellant challenged the demand on the ground that the SCN was based on incorrect figures, rendering it illegal.

The learned Commissioner (Appeals) accepted the appellant's contention and recalculated the service tax liability based on correct figures from Form 26AS, as tabulated in the impugned order, reducing the demand from Rs. 8,77,645 to Rs. 5,05,143. The late fee was also reduced accordingly.

The Department contended that the discrepancies were inadvertent and had been addressed by the First Appellate Authority. They maintained that the appellant had filed ST-3 returns and deposited part of the tax, and the balance was rightly demanded.

The Court referred to precedents where it was held that the Revenue must examine records and audit objections before issuing SCNs and that demands cannot be raised solely on third-party information or differences between Form 26AS and returns without establishing the taxable value. Specifically, the Tribunal in Sharma Fabricators & Erectors Pvt. Ltd. emphasized the necessity of basing SCN charges on the assessee's books and admissible evidence. Similarly, in Kush Construction, it was held that the Revenue must investigate reasons for discrepancies and exemptions before raising demands.

The Court observed that the original authority confirmed the demand without adequately considering the appellant's submissions, contracts, and admissibility of exemptions. The demand was therefore held to be unsustainable as the correct value of taxable services was not determined with reference to all relevant aspects.

2. Applicability of Interest and Penalties under Sections 75, 77, 77(1)(c), 78 and Late Fees under Rule 7C

The SCN proposed interest and penalties for failure to pay service tax, suppression of facts, non-maintenance of records, and non-submission of documents, along with late fees for delayed filing of returns.

The Commissioner (Appeals) reduced the penalties and late fees but upheld their imposition in part. The appellant challenged the imposition on grounds including the flawed demand and incorrect calculation basis.

The Court held that since the fundamental demand itself was not sustainable due to lack of proper valuation and verification, the consequential imposition of interest, penalties, and late fees could not stand. The Court emphasized that penalties and interest are contingent upon the correctness of the underlying tax demand, which was not established here.

3. Determination of Taxable Value and Applicability of Exemptions and Negative List Services

The Court analyzed the relevant legal framework under the Finance Act, 1994, particularly Section 66B (levy of service tax on value of taxable services), Section 67 (determination of value as consideration charged), Section 65B(44) (definition of service excluding certain activities), and Section 66D (negative list of services exempt from tax).

The Court underscored that the first step in assessing service tax liability is to correctly determine the value of taxable services after excluding activities covered by the negative list or exemptions. The Court noted that mega exemption Notification No. 25/2012-ST exempts various activities from service tax. The appellant's case involved 'Business Auxiliary Services' which may attract exemptions or abatements.

The Court found no evidence that the Revenue undertook this comprehensive examination of the nature of services, exemptions, or abatements before confirming the demand. This failure to consider the correct taxable value rendered the demand unsustainable.

4. Legality of Raising Demand Based on Third-Party Information Without Adequate Verification

The SCN was issued based on third-party information from the Income Tax Department. The Court referred to the principle that the Revenue must verify and corroborate such information with the assessee's records before raising demands.

The Court cited precedents emphasizing that raising a demand solely on differences between Form 26AS and returns, without examining the reasons for discrepancies or the nature of services, is impermissible. The Court held that the Revenue's failure to examine the appellant's books and contracts before issuing the SCN was a procedural lapse.

Treatment of Competing Arguments

The appellant argued for setting aside the SCN and demand on grounds of incorrect figures, lack of proper valuation, and non-consideration of exemptions. The Department argued that discrepancies were minor and addressed by the appellate authority, and the appellant had admitted liability by filing returns and depositing part of the tax.

The Court found merit in the appellant's submissions, particularly the need for a proper valuation exercise and examination of records prior to demand confirmation. The Department's reliance on third-party information without verification was rejected.

Conclusions

The Court concluded that the impugned order confirming the demand and penalties was unsustainable due to failure to base the demand on verified and correct taxable value and failure to consider exemptions and abatements. Consequently, the appeal was allowed, and the impugned order was set aside.

Significant Holdings

"It was held by this Tribunal in the case of Sharma Fabricators & Erectors Pvt. Ltd. that it was the responsibility of the executive to examine the records and examine the audit objection raised with reference to the records and facts of the case and take a view whether there is a sustainable case for issue of show cause notice and that charges in the SCN have to be on the basis of books of account and records maintained by the assessee and the other admissible evidence."

"Charging Section 66B of Finance Act, 1994 provides for levy of service tax at a specified percentage on the value of service. Section 67 provides that such value shall be consideration in money charged by the service provider. Therefore, it is primarily important to determine the value on which service tax shall be levied."

"Unless the data is examined with reference to all the above stated aspects, no one can come to a conclusion about the exact value which has not suffered service tax. Such exercise has not been undertaken in the present case."

"The impugned order is not sustainable. The impugned order is set aside and the Appeal filed by the Appellant is allowed."

Core principles established include the necessity of:

• Examining the assessee's books and admissible evidence before issuing SCNs;
• Determining the correct taxable value after considering exemptions, abatements, and negative list services;
• Not relying solely on third-party information or discrepancies between Form 26AS and returns without investigation;
• Recognizing that penalties and interest are contingent upon a valid tax demand.

Final determinations were that the demand of service tax and consequential penalties and late fees were not sustainable and were set aside, allowing the appellant's appeal.