2026 (1) TMI 391 - AT - Service Tax

Service tax demand from ITR vs ST return receipt mismatch and Railways works sub-contract exemption; demand quashed, appeal allowed

Service tax demand based solely on a mismatch between receipts disclosed in the assessee's income tax return and service tax return was held unsustainable ... Short payment of service tax - recovery with interest and penalty - Appellant filed any delay condonation application before the Commissioner (Appeals) or not - entire case of the revenue was based on information received from the Income Tax Department - revenue failed to adduce any evidence to show that the consideration received was consideration towards provision of taxable services. Whether the Appellant filed any delay condonation application before the Commissioner (Appeals)? - HELD THAT:- The appeal paper book is a delay condonation application bearing stamp dated 03.03.2023, which is identical to the stamp affixed on the appeal memo in Form ST-4 filed before the Commissioner (Appeals). Thus, the application appearing at page 23 of the appeal paper book is an application seeking condonation of delay of two days in filing of appeal on 03.03.2023 with specific averment of order dated 09.12.2022 served on the assessee on 02.01.2023. The reason assigned for delay is that the counsel for the Appellant was busy in some other official work. Demand of service tax based on information received from the Income Tax Department - HELD THAT:- The demand of Service Tax in the present case is based on the income tax return of the Appellant wherein the Appellant has disclosed the receipts of Rs.30,12,405/-. Merely there was a mismatch in figures disclosed in Income Tax return and Service Tax return, the same by itself cannot form the basis for initiating proceedings unless the revenue is in possession of some evidence showing that the amount disclosed in income tax return represents consideration against taxable services. This is more so when the burden to prove taxable event i.e. provision of taxable services is on the revenue and the Appellant is duly registered under the Act. However, it is found from the adjudication and the impugned order that there is neither any evidence nor any material on record to suggest that the amount disclosed in income tax return represents consideration against taxable services. In the adjudication order as well as the impugned order, the burden of proving taxable event has been reversed on the Appellant and the revenue has proceeded on an assumption that the Appellant has provided taxable services against consideration and has failed to substantiate the claim of exemption. There are also force in the submission of the Counsel for the Appellant that the Appellant acted as a sub-contractor in providing works contract services of construction, renovation to the main contractor i.e. M/s EMC Limited, who in-turn provided such works contract services to Railways. I find that clause 14(a) of Notification No.25/2012-ST dated 20.06.2012 exempts services by way of construction, erection, commissioning or installation of original works pertaining to Railways. Thus, once the main service provided by M/s EMC Limited to Railways is exempted under the said notification, then the services provided by the Appellant as a sub-contractor is also exempted under clause 29(h) of N/N.25/2012-ST dated 20.06.2012 which exempts services provided by a sub-contractor by way of works contract to another contractor providing works contract services which are exempt. The demand of Service Tax is therefore not sustainable in law. The impugned order is set-aside and the appeal filed by the Appellant is allowed. 1. ISSUES PRESENTED AND CONSIDERED (i) Whether the appellate authority was correct in dismissing the appeal as time-barred on the ground that no application for condonation of delay was filed, despite a stated short delay of two days. (ii) Whether a service tax demand can be sustained solely on the basis of a mismatch between receipts reflected in income tax data/returns and the NIL service tax returns, without evidence establishing that the receipts were consideration for identifiable taxable services. (iii) Whether works contract services provided as a sub-contractor, where the main contractor's works contract to Railways is exempt, are themselves exempt under the applicable exemption notification clauses relied upon by the Court. 2. ISSUE-WISE DETAILED ANALYSIS (i) Dismissal on limitation for non-filing of condonation application Interpretation and reasoning: The Court examined the record and found a delay condonation application bearing the same stamp date as the appeal papers before the appellate authority. The application specifically sought condonation of a two-day delay and stated the date of service of the adjudication order. The Court held that the appellate authority's finding that no such application was filed was contrary to the record and appeared to have resulted from the application escaping attention. Conclusions: The Court held the short delay was satisfactorily explained, condoned the delay, and found that dismissal on limitation was unsustainable. (ii) Sustainability of demand based only on income tax data mismatch Interpretation and reasoning: The Court held that mere mismatch between figures in income tax disclosures and service tax returns cannot, by itself, justify initiation and confirmation of service tax demand. It emphasized that the burden to establish the taxable event-provision of taxable services-rests on the revenue. On the record, there was neither evidence nor material demonstrating that the disclosed receipts represented consideration for taxable services. The Court further noted that the adjudication did not even identify the nature of taxable services allegedly provided, and that the authorities had improperly shifted the burden onto the assessee to disprove taxability and to substantiate exemption. Conclusions: The Court concluded that, in absence of evidence establishing provision of taxable services and without specifying the taxable service, the service tax demand could not be sustained. (iii) Exemption for sub-contractor's works contract linked to exempt works for Railways Legal framework: The Court applied the exemption provisions discussed in the judgment, namely clause 14(a) of the relevant exemption notification for specified works pertaining to Railways, and clause 29(h) exempting works contract services provided by a sub-contractor to a contractor providing exempt works contract services. Interpretation and reasoning: The Court accepted that the assessee provided works contract services as a sub-contractor to a main contractor, and that the main contractor provided works contract services to Railways. Since the main service to Railways was held exempt under clause 14(a), the Court held that the sub-contractor's services were also exempt under clause 29(h) as they were provided to a contractor whose output works contract service was exempt. Conclusions: The Court held the service tax demand was not sustainable in law; consequently, interest and penalty were also unsustainable and were set aside. The impugned order was set aside and the appeal was allowed with consequential relief.