Reverse charge service tax demand failed where authorities relied on balance-sheet differences without transaction-wise invoice verification.

A demand for service tax under reverse charge mechanism could not be sustained on the basis of a broad comparison between balance-sheet expenses and ST-3 returns alone. CESTAT noted that RCM liability had to be verified transaction-wise and invoice-wise, including the nature of the service, the status of the service provider, and whether tax had already been charged and collected. Because the show cause notices did not set out a proper RCM computation or undertake record co-relation, they were held vague and misconceived. The demand was therefore unsustainable and the appeal was allowed.

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Issues: Whether the demand of service tax under reverse charge mechanism could be sustained on the basis of a comparison between balance-sheet expenses and ST-3 returns without transaction-wise and invoice-wise verification.

Analysis: The demand was founded on an apparent difference in figures reflected in the balance sheet and the ST-3 returns. The issue required verification of each transaction and invoice, including the nature of the service, the status of the service provider, and whether tax had already been charged and collected by the provider. The show cause notices did not disclose the gist of a proper RCM computation and no proper co-relation of the records was undertaken. A demand under service tax reverse charge mechanism cannot be raised merely on broad assumptions drawn from accounting entries; it has to be worked out on a transaction-wise and invoice-wise basis. In the absence of such exercise, the notices were held to be vague and misconceived.

Conclusion: The demand under reverse charge mechanism was unsustainable and the appeal was allowed.

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