2025 (11) TMI 1023 - AT - Service Tax

Recovery of service tax, interest and penalty quashed where discrepancies alone cannot prove consideration under s.65B(44)/s.67

M/s H.R Real Value (Mr. Pradeep Kumar Mittal) Versus Commissioner of Central Excise & CGST, Noida

CESTAT allowed the appeal, setting aside recovery of service tax, interest and penalty where the demand was founded solely on discrepancies between ... Recovery of service tax with interest and penalty - demand based on differences between amounts shown in Income-Tax/26AS records and ST-3 returns - case of appellant is that demand cannot have been made by invoking the extended period of limitation as the same is based on the appellant’s own records and have relied upon the series of decisions in this regard - HELD THAT:- It is now settled in law that demand could not be made only on the basis of differences between ITR/TDS and ST3 returns. It is necessary to investigate the causes of differences and then arrive at a finding with regards to the differences in the two. In the present case, it is not found that any such exercise being undertaken. This Tribunal in the case of M/s Sri Consultants Vs CCE, Hyderabad-I [2025 (1) TMI 310 - CESTAT HYDERABAD] have held 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.' Tribunal in the case of M/s Sarvatra Integated Management Services Pvt. Ltd. Vs CCE, Gurgaon [2024 (9) TMI 1028 - CESTAT CHANDIGARH] has held that 'the case is made by the Department on the ground that there is discrepancy between the figures reflected in balance sheets etc. and the service tax Returns. No effort to co-relate the income/ receipt shown in the balance sheet to any particular service rendered by the appellants to any particular entity appears to have been made. It is not open for the Department to allege evasion of service tax on this count. The onus to prove the nexus between consideration and the service is on the Department who have made the allegations and issued the Show Cause Notice. Moreover, it is not open for the Revenue to invoke extended period under such circumstances. When no positive act, with intent to evade payment of duty, on the part of the appellant has been shown, has been evidenced.' There are no merit in the impugned order - appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether a service-tax demand based solely on differences between amounts shown in Income-Tax/26AS records and ST-3 returns is sustainable without investigation linking the differential to taxable services under Section 65B and valuation under Section 67 of the Finance Act, 1994. 2. Whether the extended period of limitation (proviso to Section 73(1) Finance Act, 1994) can be invoked where the demand is founded on discrepancies between third-party/statutory records (ITR/26AS) and ST-3 returns, absent evidence of a positive act or intention to evade service tax. 3. Whether, assuming a sustainable demand, interest under Section 75 and penalty under Section 78 (and penalty under Section 77(1) where applicable) are properly leviable on the confirmed shortfall. ISSUE-WISE DETAILED ANALYSIS Issue 1: Sustainability of demand based solely on discrepancies between ITR/26AS and ST-3 returns Legal framework: Recovery of unpaid/short-paid service tax is governed by Section 73(1) (and its proviso for extended period) of the Finance Act, 1994; exigibility and valuation for service tax depend on the definition of 'service' (Section 65B) and value under Section 67. Precedent Treatment: The Tribunal and coordinate Benches have consistently held that demands cannot be sustained merely by comparing figures in ITR/26AS/balance sheets with ST-3 returns without establishing that the amounts reflected in those records are consideration for taxable services rendered by the assessee (cited multi-bench decisions summarized in the judgment). Interpretation and reasoning: The Tribunal reiterates that the Department must investigate causes of discrepancy and establish nexus between the receipts shown in third-party records and provision of taxable services - identification of service provider, service recipient, service rendered and consideration is essential. A prima facie examination to connect the differential amount to taxable activity is a precondition to raising a show-cause notice under Section 73(1). Merely relying on ITR/26AS figures, which may reflect receipts on a cash/receipt basis or other non-service items, is inadequate to establish exigibility under the Service Tax code. Ratio vs. Obiter: Ratio - A demand premised only on numerical differences between ITR/26AS and ST-3, without establishing that the differential is consideration for taxable services, is not sustainable. Obiter - Observations on the nature of 26AS as a cash/receipt record vis-à-vis mercantile accounting are supportive but not the primary holding. Conclusion: The impugned demand, insofar as it rests solely on disparities between ITR/26AS and ST-3 returns without factual linkage to taxable services, is unsustainable and cannot be confirmed. Issue 2: Invocation of extended period of limitation where demand is based on such discrepancies Legal framework: The proviso to Section 73(1) permits invocation of extended limitation where tax has not been levied or paid due to fraud, suppression, or mis-statement, etc.; extension requires establishment of ingredients justifying extended period. Precedent Treatment: Multiple Tribunal rulings referenced establish that the extended period cannot be invoked in cases where there is no evidence of a positive act or mens rea to evade tax and where the Department has not conducted an enquiry to link differential amounts to taxable services. Interpretation and reasoning: The Tribunal finds that invocation of extended limitation requires demonstration of deliberate mis-declaration or intention to evade. When the demand arises merely from mismatched figures in returns and third-party records without investigation or proof of evasion, extended period is not rightly invoked. The appellate authority in the present matter did not perform the requisite examination to satisfy the statutory threshold for extending limitation. Ratio vs. Obiter: Ratio - Extended limitation under the proviso to Section 73(1) is improperly invoked where demand is based solely on unexplained differences in statutory records and absence of evidence of deliberate evasion. Obiter - References to factual indicators that would justify extension (e.g., positive acts, concealment) are explanatory. Conclusion: The extended period could not properly have been invoked for demands premised only on discrepancies between ITR/26AS and ST-3 returns without establishing ingredients of suppression or evasion; accordingly, reliance on extended limitation in such circumstances is improper. Issue 3: Liability for interest (Section 75) and penalties (Sections 78 & 77(1)) where a differential is established Legal framework: Section 75 imposes interest on amounts confirmed as unpaid/short-paid; Section 78 authorizes equal penalty where tax is confirmed; Section 77(1) permits penalty for non-compliance with other provisions. Precedent Treatment: Where a demand is validly established on merits, ancillary charges of interest and penalty follow statutory prescription; however, such charges presuppose a lawful demand. Interpretation and reasoning: The Tribunal notes that if a lawful shortfall is proved (i.e., the differential is established as taxable consideration and not otherwise explained), interest and equal penalty flow as per statute. In the present matter, the appellate authority earlier computed a specific remaining liability (Rs.65,548) for the second half of 2015-16 and imposed interest and equal penalty; however, given the Tribunal's conclusion that demands based solely on unexplained discrepancies are unsustainable, the foundational premise for those ancillary charges collapses. The adjudicatory record in the instant case lacked the necessary factual nexus and examination; hence imposition of interest and penalties on that basis is not supportable. The Tribunal also acknowledges that, where properly established, Section 75/78/77(1) consequences would be ratio decidendi to the extent tax is lawfully confirmed. Ratio vs. Obiter: Ratio - Interest and equal penalty are consequential on a lawful confirmation of tax; absent lawful confirmation (see Issues 1-2), such impositions cannot stand. Obiter - Acceptance that where a specific shortfall is lawfully established, statutory interest/penalty apply. Conclusion: In absence of a sustainable underlying demand, interest under Section 75 and penalties under Sections 78/77(1) cannot be upheld; if a lawful tax shortfall is otherwise proved by proper investigation, these consequences would be exigible. Cross-references and final disposition Cross-reference: Issues 1 and 2 are interdependent - failure to establish nexus between receipt figures and taxable services both renders the demand unsustainable (Issue 1) and negates justification for invoking the extended period (Issue 2); Issue 3 depends on resolution of Issues 1-2. Disposition: Applying the settled principle that departmental action cannot rest solely on unexplained differences between statutory records and service-tax returns, and following the consistent precedents cited, the Tribunal finds no merit in the impugned order and allows the appeal.