2026 (1) TMI 714 - AT - Service Tax

Service tax demands based on accounting differences set aside as unsustainable; reverse-charge and advance demands quashed, penalties removed

Dominant issue - validity of service tax demands premised on accounting differences: the Department failed to identify the taxable service, service ... Scope of SCN - SCN issued has not specified as to under which taxable category Service Tax is being demanded - demand raised simply on the basis of the difference between Profit & Loss Accounts, Trial Balance and S.T.-3 Returns - Demand raised on the advances received - Demand of Service Tax of Rs.2,24,73,978/- under reverse charge - Denial of CENVAT Credit - time limitation - penalty. Scope of SCN - SCN issued has not specified as to under which taxable category Service Tax is being demanded - demand raised simply on the basis of the difference between Profit & Loss Accounts, Trial Balance and S.T.-3 Returns - HELD THAT:- For the period prior to 01st July, 2012, the charge of Service Tax under Section 66 of the Finance Act was on services falling under the various subclauses of Section 65(105). It was therefore necessary for the Department to establish that the alleged differential income pertained to rendering of taxable services falling under one of the sub-clauses of Section 65(105) of the Act. The burden is cast upon the Department to prove that Service Tax is leviable under the charging provision, which the Department has failed to do in the instant case. Hence, the demand of Service Tax confirmed cannot be sustained. A similar view has also been taken by this Bench in the case of M/s. Nirman Construction Versus Commissioner of Central Excise, Service Tax and Customs, Durgapur Commissionerate, Burdwan (West Bengal) [2025 (8) TMI 6 - CESTAT KOLKATA] wherein it has been held that no Service Tax can be demanded merely on the basis of difference between Balance Sheet and S.T.-3 Returns. Even for the period after 01st July, 2012, Service Tax can be levied only when there is a clear identification of service provider, service rendered, service recipient and consideration paid for the same, to analyse the nature of service rendered and the liability to Service Tax on the part of the appellant thereon. Since no such exercise has been done in the Show Cause Notice, we agree with the submission made by the appellant that the demand confirmed in the impugned order cannot sustain. There are merit in the submission made by the appellant that the demand of Rs.4,28,99,373/- confirmed in the impugned order merely on the basis of difference between Profit & Loss Accounts, Balance Sheets and S.T.-3 Returns, is not sustainable. Accordingly, the demand of Rs.4,28,99,373/- confirmed in the impugned order is set aside. Demand raised on the advances received - HELD THAT:- By taking into account the balance of advances received as mentioned in the trial balance sheet of the appellant for the respective Financial Years. However, it is found that the ld. adjudicating authority has not adduced any reasons to justify the demand of Service Tax confirmed in this regard. For levy of Service Tax, identification of the underlying service is the mandatory requirement, which has not been done in the present case. It was incumbent upon the Department to specify the taxable service being provided by the appellant and in the absence of any specific taxable service being pointed out in the impugned Show Cause Notice, the demand raised against the appellant cannot sustain. The same issue came up for consideration before the Tribunal in the case of Commr. of Service Tax, Kolkata Versus M/s. Haldia Logistics Pvt. Ltd and vice-versa [2025 (5) TMI 2187 - CESTAT KOLKATA], wherein the appeal filed by the Revenue has been dismissed, as service wise quantification was not done in that case. Demand of Service Tax of Rs.2,24,73,978/- under reverse charge - HELD THAT:- The said demand, under reverse charge, has been confirmed simply by taking into account the figures reported in the annual audited accounts under the head “expenditure in foreign currency” and comparing the same with ST-3 Returns where import of service figure was reported and the corresponding Service Tax paid by the appellant, without specifying the nature of taxable service for which the appellant has allegedly short paid the Service Tax - It is a settled position of law that no demand of service tax can be made simply based on the difference between the Balance Sheet and the ST-3 returns without providing any explanation about the nature of service on which service tax is payable. Accordingly, the demand of Service Tax of Rs.2,24,73,978/- confirmed under ‘reverse charge' in the impugned order is not sustainable and hence we set aside the same. Denial of CENVAT Credit to the tune of Rs.1,67,768/- - HELD THAT:- The appellant’s submission is noted that they have already reversed the credit and therefore, are not contesting the said issue. Accordingly, the denial of CENVAT Credit of Rs.1,67,768/- in the impugned order is upheld. Time limitation - HELD THAT:- As no suppression of facts with intention to evade the tax has been established against the appellant in this case, the demands confirmed by invoking the extended period of limitation are not sustainable. Thus, the demands confirmed by invoking the extended period is not sustainable on the ground of limitation also. Imposition of penalty under Section 78 of the Act and Rule 15(3) of the Rules - HELD THAT:- it is well settled that penalty under Section 78 or under Rule 15(3) can only be imposed in a situation where Service Tax is not paid by reason of fraud, collusion or wilful mis-statement or suppression of facts or contravention of any provisions of the law, with the intent to evade payment of Service Tax. However, in the present case, it is found that the appellant has never suppressed any facts regarding the activities undertaken by them. In fact, the entire demand has been computed solely on the basis of the figures provided by the appellant, sourced from its audited annual accounts and S.T.-3 Returns filed during the relevant period. The Department has failed to adduce any evidence to establish suppression of facts on the part of the appellant with the intent to evade payment of Service Tax in the instant case. In fact, in this case, the appellant has reversed the CENVAT Credit from their CENVAT Credit account prior to utilization of the same and much before passing of the Order-in-Original. Considering the above, we do not find any reasons to sustain the penalties imposed on the appellant under Section 78 and Rule 15(3) in the impugned order and therefore, the same are set aside. Penalty u/s 77(2) of the Act for failure to assess their Service Tax dues - HELD THAT:- Since no Service Tax is payable by the appellant in this case, there are no reason to sustain the penalty imposed under Section 77(2) ibid. and accordingly, the same is set aside. Appeal disposed off. Issues: (i) Whether the demands of Service Tax of Rs.8,18,77,300/- (comprising Rs.4,28,99,373/- on P&L/Trial balance-ST3 differences, Rs.1,65,03,949/- on advances, and Rs.2,24,73,978/- under reverse charge) are sustainable where the Show Cause Notice did not specify the category/nature of taxable service; (ii) Whether the denial of CENVAT credit of Rs.1,67,768/- is liable to be set aside; (iii) Whether penalties imposed under Section 77 and Section 78 of the Finance Act, 1994 and Rule 15(3) of the CENVAT Credit Rules, 2004 are sustainable; (iv) Whether demands confirmed invoking the extended period of limitation are sustainable.Issue (i): Whether Service Tax demands confirmed merely on differences between Profit & Loss/Trial Balance and ST-3 returns or on unexplained advances/expenditure in foreign currency without specifying the taxable service/category are sustainable.Analysis: The Tribunal examined the Show Cause Notice and the impugned order and found that the demands were computed by comparing accounting figures (balance sheet/P&L/Trial Balance/S.T.-3 returns and Schedule of expenditure in foreign currency) without specifying the category of service, identifying service provider/recipient or analysing the nature of services rendered. For the pre-1.7.2012 (positive list) period the charging section requires establishment that the income pertains to services under specific sub-clauses of section 65(105). For the post-1.7.2012 period identification of service provider, service rendered, service recipient and consideration is necessary. Tribunal relied on earlier consistent decisions holding that demand cannot rest solely on differential figures and that departmental burden to prove levy under the charging provision was not discharged.Conclusion: The demands of Service Tax of Rs.4,28,99,373/-, Rs.1,65,03,949/- and Rs.2,24,73,978/- (total Rs.8,18,77,300/-) confirmed in the impugned order are not sustainable and are set aside. This conclusion is in favour of the Assessee.Issue (ii): Whether denial of CENVAT credit of Rs.1,67,768/- should be sustained.Analysis: The appellant admitted reversal of the disputed CENVAT credit prior to utilization and did not contest the disallowance. The Tribunal took note of appellant's reversal and absence of challenge to the denial.Conclusion: The denial of CENVAT credit of Rs.1,67,768/- as recorded in the impugned order is upheld. This conclusion is against the Assessee.Issue (iii): Whether penalties under Section 78 and Rule 15(3) (and Section 77(2)) are sustainable where no suppression with intent to evade is established.Analysis: Penalties under Section 78/Rule 15(3) can be imposed only where non-payment arises from fraud, collusion, wilful mis-statement or suppression with intent to evade tax. The Tribunal found that the demands were derived from figures furnished by the appellant (audited accounts and S.T.-3 returns), no evidence was produced to establish suppression with intent, and the appellant had reversed the CENVAT credit prior to utilization and before the adjudication. For Section 77(2) penalty for failure to assess, Tribunal found no tax payable; hence no justification for penalty.Conclusion: The penalties imposed under Section 78, Rule 15(3) and Section 77(2) are not sustainable and are set aside. These conclusions are in favour of the Assessee.Issue (iv): Whether demands confirmed by invoking the extended period of limitation are sustainable in absence of suppression with intent to evade.Analysis: The Tribunal observed that since no suppression with intent to evade was established, invocation of extended limitation period to sustain the demands was not justified.Conclusion: Demands confirmed by invoking the extended period of limitation are not sustainable. This conclusion is in favour of the Assessee.Final Conclusion: The appeal is partly allowed: the Tribunal set aside the total Service Tax demand of Rs.8,18,77,300/- with interest and quashed the penalties, but upheld the denial of CENVAT credit of Rs.1,67,768/-, resulting in a partly favourable outcome for the Assessee.Ratio Decidendi: A demand of service tax cannot be sustained solely on differences between accounting returns (balance sheet/P&L/Trial balance/ST-3) or unexplained aggregates; the Department must identify the specific taxable service (charging provision), and where applicable identify service provider, service recipient and consideration; absent such identification and proof, and absent suppression with intent to evade, demands and penalty cannot be sustained.