2025 (1) TMI 310 - AT - Service Tax

Court Invalidates Service Tax Demand: Show Cause Notice u/s 73(1) Lacked Investigation and Factual Basis.

The court found that the demand for service tax based on discrepancies between ST-3 Returns and Income Tax Returns was unsustainable due to the lack of ... Levy of service tax - discrepancies identified between the values reported in the ST-3 Returns and Income Tax Returns filed by the Appellant for the year 2016-17 - demand raised without examination of the books of accounts - time limitation - HELD THAT:- The Revenue should have established that the said transactions were in respect of provision of services. Further, it is found that the Authorities knowing well about the activities of the Appellant since 2012, Appellant filed returns for the year 2012-13 onwards. In the circumstances, there is no reason to invoke extended period of limitation in the absence of any ingredient with an intention to evade payment of service tax. Thus, show cause notice issued under the provisions of Section 73(1) of Finance Act, 1994 is unsustainable in law. Accordingly, the notice is hit by bar of limitation. Further, it is found that this Tribunal and other Co-ordinate Benches, in catena of decisions continuously hold that solely on the basis of Income Tax Returns, demand cannot be sustainable. Therefore, it is essential to establish that the value on which such service tax is calculated is the value under Section 67 and the same is derived from the consideration received by the appellant out of the activity which has to satisfy definition of service under sub-section (44) of Section 65B of Finance Act, 1994. Such type of examination of the facts and arriving at the prima facie view that the appellant had received the consideration by providing service is missing in the show cause notice. Thus the said show cause notice dated 12.10.2021 is not sustainable in law. Conclusion - Demands based solely on discrepancies in tax returns without examining books of accounts are unsustainable; show cause notices require a factual basis. Appeal allowed. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered in this judgment are:Whether the demand for service tax based on discrepancies between ST-3 Returns and Income Tax Returns is legally sustainable.Whether the show cause notice issued under Section 73(1) of the Finance Act, 1994, is valid given the alleged lack of investigation and examination of books of accounts.Whether the extended period of limitation can be invoked in this case.Whether the demand based solely on Income Tax Returns without establishing provision of services is valid.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Sustainability of Demand Based on DiscrepanciesRelevant Legal Framework and Precedents: The demand was issued under the Finance Act, 1994, which governs the service tax regime. The appellant cited several precedents where demands based solely on Income Tax Returns were deemed unsustainable.Court's Interpretation and Reasoning: The court found that the demand was based solely on discrepancies without examining the appellant's books of accounts. The court emphasized the necessity of establishing that the transactions involved the provision of services.Key Evidence and Findings: The evidence presented included Income Tax Returns, ST-3 Returns, and invoices. The appellant argued that the demand was based on unsubstantiated discrepancies.Application of Law to Facts: The court applied the principles from previous cases, emphasizing the need for a factual basis to establish that services were provided, which was lacking in this case.Treatment of Competing Arguments: The appellant argued against the demand's validity, while the Department contended that the appellant failed to respond to inquiries. The court sided with the appellant, noting the lack of proper investigation by the Department.Conclusions: The court concluded that the demand was unsustainable as it was not supported by a proper examination of the appellant's financial records.Issue 2: Validity of the Show Cause NoticeRelevant Legal Framework and Precedents: Section 73(1) of the Finance Act, 1994, allows for the issuance of show cause notices for service tax demands. However, it requires a basis for such notices.Court's Interpretation and Reasoning: The court found that the show cause notice was issued without proper verification of facts, as required by CBIC instructions.Key Evidence and Findings: The court noted that the Department did not examine the appellant's books of accounts or establish that the transactions involved service provision.Application of Law to Facts: The court held that the lack of factual investigation rendered the show cause notice invalid.Treatment of Competing Arguments: The Department argued that the appellant did not respond to communications, justifying the notice. The court disagreed, emphasizing the need for a factual basis for the notice.Conclusions: The show cause notice was deemed unsustainable due to the absence of a factual basis and proper investigation.Issue 3: Invocation of Extended Period of LimitationRelevant Legal Framework and Precedents: The extended period of limitation under the Finance Act, 1994, can be invoked in cases of willful misstatement or suppression of facts.Court's Interpretation and Reasoning: The court found no evidence of willful misstatement or suppression by the appellant, making the invocation of the extended period unjustified.Key Evidence and Findings: The appellant's consistent filing of returns since 2012 was noted, with no evidence of intent to evade taxes.Application of Law to Facts: The court applied the legal standards for invoking the extended period, finding them unmet in this case.Treatment of Competing Arguments: The Department's lack of evidence for willful misstatement led the court to reject the invocation of the extended period.Conclusions: The extended period of limitation could not be invoked due to the absence of requisite conditions.Issue 4: Validity of Demand Based Solely on Income Tax ReturnsRelevant Legal Framework and Precedents: The court referenced multiple precedents where demands based solely on Income Tax Returns were found unsustainable.Court's Interpretation and Reasoning: The court emphasized that service tax demands must be based on the value of services provided, not merely on income reported for tax purposes.Key Evidence and Findings: The court found no evidence that the reported income represented consideration for services provided.Application of Law to Facts: The court held that the Department failed to establish a connection between the reported income and service provision.Treatment of Competing Arguments: The appellant's reliance on precedents was upheld, while the Department's arguments were dismissed due to lack of evidence.Conclusions: The demand was unsustainable as it was not based on the value of services provided.3. SIGNIFICANT HOLDINGSPreserve verbatim quotes of crucial legal reasoning: 'The Revenue should have established that the said transactions were in respect of provision of services.'Core principles established: Demands based solely on discrepancies in tax returns without examining books of accounts are unsustainable; show cause notices require a factual basis.Final determinations on each issue: The appeal was allowed, the impugned order was set aside, and the show cause notice was deemed unsustainable.