2025 (9) TMI 935 - AT - Service Tax

Adjudication order set aside; appeal allowed as manpower supply demands unsustainable; Section 77(1) and 78 penalties and interest quashed

Shri Gurbachan Singh Versus Commissioner of Central Excise & CGST, Ghaziabad

CESTAT set aside the adjudication order and allowed the appeal. The tribunal held that demand relating to manpower-supply services was unsustainable ... Failure to discharge service tax liability on differential value - partial reverse charge mechanism - provision of manpower supply service - applicability of N/N. 30/2012-ST dated 20.06.2012 - HELD THAT:- Once there was due disclosure of provision of manpower supply services in the returns, it was open for the revenue to disbelieve the same and issue SCN on this count. However, not disputing the returns submitted by the Appellant at any point of time and by not issuing SCN on this count, the revenue cannot be permitted to make out a new case in the adjudication proceedings. It is found that though the Appellant was required to disclose the entire value of manpower supply services in returns and pay tax at the rate of one fourth of the applicable rate of tax but the Appellant disclosed 25% of the value of services and paid tax at full rate on the same. However, since the net tax payable in both the cases being the same, no adverse inference can be drawn against the Appellant on this count. Therefore, the demand against the Appellant in so far it relates to provision of manpower supply services is clearly not sustainable and is therefore set-aside. So far as remaining demands on the amount of Rs.1,79,148/- is concerned, the same has been confirmed in the adjudication order on the ground that the Appellant has not submitted any documents in respect of the said amount. However, I find from the reply to SCN that the Appellant submitted that amount of Rs.91,400/- represents consideration towards transportation services provided to M/s Good Faith Dealers Private Limited in respect of which Appellant submitted copy of its ledger A/c. Thus, it was not a case where the Appellant had not submitted any document but was a case where the Appellant discharged primary onus showing provision of GTA services for a company, which service was taxable under complete reverse charge mechanism. The revenue failed to discharge this burden in the present case and the demand on this amount is also not sustainable. Once the demand of service tax is not found sustainable, the demand of interest and penalty under Section 78 also cannot be sustained. Further, since the disclosure made in returns does not affect net service tax liability of the Appellant, hence it is also found that no case of penalty under Section 77(1) is made out against the Appellant. The impugned order along with demands confirmed therein is set-aside - Appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether a demand for service tax can be sustained solely on a numerical difference between amounts reported in Income Tax data (Form 26AS) and service tax returns without the Revenue first discharging the onus to show that the differential represents consideration for taxable services. 2. Whether the Adjudicating Authority/Revenue may raise and decide a ground in adjudication proceedings that was not the basis of the Show Cause Notice (SCN), specifically by disputing the nature and disclosure of services already declared in returns. 3. Whether benefit of partial reverse charge (Notification No.30/2012-ST) and related mode of disclosure can be denied in adjudication where the nature of services and reliance on the notification were disclosed in returns and not challenged in the SCN. 4. Whether demand confirmed in adjudication for amounts explained in the SCN reply (transportation services subject to complete reverse charge; amounts corresponding to higher TDS withholding) is sustainable where the Revenue has not adduced evidence proving such amounts are consideration for taxable services. 5. Whether interest and penalties (equivalent penalty under Section 78 and penalty under Section 77(1)) can be sustained where the primary tax demand is not established. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of demand based on difference between Form 26AS and service tax returns Legal framework: The Revenue must establish that receipts shown in external data (e.g., Form 26AS) constitute consideration for taxable services and that corresponding tax has not been discharged. Burden of proving existence of taxable event and tax liability rests on the Revenue. Precedent treatment: Followed earlier Tribunal authority holding Revenue cannot raise demand merely on unexplained difference in returns and Form 26AS without examining reasons for difference (cited Kush Constructions v. CGST NACIN, ZTI, Kanpur). Interpretation and reasoning: The Court examined the SCN and found it was predicated solely on the numerical discrepancy between Income Tax data and service tax returns. The Appellant had furnished specific explanations for the discrepancy (partial RCM disclosure, complete RCM transportation services, higher TDS). Revenue did not prove that the differential was consideration for taxable services nor countered the explanations with evidence. The Tribunal emphasized it is not permissible to treat the existence of a numerical difference as conclusive proof of undisclosed taxable receipts without independent proof. Ratio vs. Obiter: Ratio - Revenue cannot sustain a demand solely on difference between Form 26AS and service tax returns without discharging the burden to prove the differential is taxable consideration. Obiter - Remarks on prudence of verifying records before issuing SCN. Conclusions: Demand founded only on such a difference is not sustainable; the Revenue must establish the taxable nature of the differential amount. Issue 2 - Raising a new case in adjudication beyond the SCN Legal framework: Principles of natural justice and limits of adjudicatory proceedings require that the case agitated in adjudication must conform to the grounds set out in the SCN. The Revenue cannot in adjudication travel beyond the scope of the SCN to raise fresh allegations not put to the party earlier. Precedent treatment: Followed and applied decisions holding Revenue cannot make out a new case in adjudication when not set out in the SCN (referred to decisions analogous to CCE v. Brindavan Beverages and CCE v. Shital International). Interpretation and reasoning: The adjudication rejected partial RCM benefit citing absence of supporting documents to show supply to a body corporate - a contention that was not in the SCN which was premised solely on numeric differential. The Tribunal held that where the Appellant had disclosed provision of manpower supply services and reliance on the notification in returns (and the Revenue did not issue an SCN challenging those assertions), the Revenue could not resurrect or create a new ground in adjudication and deny the benefit without having made that allegation earlier and allowing opportunity to meet it. Ratio vs. Obiter: Ratio - Adjudication cannot proceed on new grounds absent their inclusion in the SCN; Revenue cannot be permitted to make out a new case beyond SCN. Obiter - Accepting disclosures in returns does not foreclose the Revenue from issuing a fresh SCN if it disputes the disclosures, but it must do so properly. Conclusions: The Adjudicating Authority erred in travelling beyond the SCN to disallow partial RCM benefit by disputing the nature/disclosure of services; such findings are unsustainable. Issue 3 - Application of partial reverse charge notification where disclosure was made in returns Legal framework: When a taxable person discloses the nature of services and reliance on a statutory notification in returns, the question of entitlement to the statutory mechanism (partial RCM) requires the Revenue to affirmatively disprove that entitlement with evidence; mere absence of documentary proof in adjudication is insufficient where the SCN did not challenge the disclosure. Precedent treatment: The Court applied principles and prior decisions cited above that protect the appellant from after-the-fact recharacterisation of disclosures unless the SCN raises that issue. Interpretation and reasoning: The Tribunal noted returns disclosed 25% value and payment of tax accordingly, invoking partial reverse charge. Even if disclosure modality was imperfect (i.e., should have declared full value and paid one-fourth), the net tax paid was the same; hence no additional tax liability arose. Moreover, subsequent acceptance of similar service classification by Revenue for a later period buttressed the Appellant's position. The adjudication's contrary finding was discretionary and beyond the SCN's scope. Ratio vs. Obiter: Ratio - Disclosure in returns accompanied by explanation (and absence of contrary allegation in SCN) precludes denial of partial RCM benefit in adjudication unless Revenue proves otherwise. Obiter - Distinction between form of disclosure and substance (net tax effect) noted; bona fide inadvertent errors that do not increase tax cannot attract adverse inferences. Conclusions: Demand insofar as it relates to manpower supply services and partial RCM is unsustainable and is set aside. Issue 4 - Demands for amounts separately explained (transportation services under complete RCM; amounts corresponding to higher TDS) Legal framework: For amounts alleged to be consideration for taxable services, Revenue must prove the link between the receipts and provision of taxable services. Passive reliance on data differences without evidentiary proof is inadequate. When the taxpayer pleads that specific amounts relate to transactions taxable under complete RCM or are not consideration (e.g., represent TDS adjustments), the Revenue bears the onus to rebut. Precedent treatment: Followed the Tribunal's earlier holding (Kush Constructions) that difference cannot be presumed to be consideration for services without examination of exemptions/abatements/other reasons. Interpretation and reasoning: The Appellant produced ledger entries/ledgers and contended amounts related to transportation services (complete RCM) and to higher TDS. The Adjudicating Authority confirmed demand stating no documents were submitted, but records show primary onus discharged by the Appellant and no evidence produced by Revenue to prove those amounts were consideration for taxable services. The Tribunal held that placing the onus on the appellant to disprove the taxable nature is incorrect; the Revenue must prove the taxable event. Ratio vs. Obiter: Ratio - Demands for amounts explained by the taxpayer (and supported by primary records) cannot be sustained absent evidence by the Revenue proving they constitute consideration for taxable services. Obiter - Ledger extracts can discharge primary onus and trigger duty on Revenue to investigate further. Conclusions: Demands confirmed in respect of Rs.91,400 and Rs.87,748 are unsustainable for want of evidence by Revenue and are set aside. Issue 5 - Sustenance of interest and penalties where primary tax demand is unsustainable Legal framework: Interest and penal consequences (Section 78 and Section 77(1)) flow from established tax deficiency or contravention; if the primary demand is unsustainable, corresponding interest and penalties cannot stand. Precedent treatment: Applied the legal principle that penalty and interest cannot be sustained when principal tax demand fails. Interpretation and reasoning: Since the Tribunal set aside the tax demand in full (both manpower supply related portion and other amounts), the concomitant interest and equivalent penalty under Section 78 cannot be sustained. Similarly, no case for penalty under Section 77(1) was made out because the disclosure in returns did not affect net tax liability and there is evidence of bona fide explanation. Ratio vs. Obiter: Ratio - Interest and penalties dependent on a valid tax demand fall when that demand is quashed. Obiter - Bona fide inadvertent errors that do not change net tax do not attract penalty under Section 77(1). Conclusions: Interest and penalties confirmed below are not sustainable and are set aside along with the primary demand.