Recovery of service tax mismatch between ST-3 and ITR rejected; demand and penalty set aside after sales allocation upheld

Recovery of alleged unpaid service tax was contested on the ground that a substantial receipt represented sale of lubricants treated as non-VAT goods and not provision of taxable services. The appellant relied on trading and profit and loss accounts and a VAT assessment to show Rs.46,13,896 towards sale of non-VAT goods and Rs.23,49,468 as sale of services, with tax paid on the latter; the demand for additional service tax was therefore held unsupported and set aside, and the penalty imposed was also rescinded.

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Issues: Whether the value of services for FY 2016-17 is Rs. 23,49,468 (as declared in ST-3 returns) or Rs. 69,63,364 (as reflected in ITR), and whether the demand and penalties based on the higher figure are sustainable.

Analysis: The Tribunal examined ST-3 returns, ITR/26AS data, the trading and profit & loss account, and a VAT assessment order. The Tribunal considered whether the appellant provided adequate documentary substantiation (sale invoices, authenticated ledgers, VAT assessment) to establish that a portion of the ITR figure related to sale of goods (lubricants) and not taxable services. The Tribunal analysed the effect of third-party data from the Income Tax records against the appellant's declared ST-3 turnover and the requirement that material relied upon to enhance taxable turnover be supported by credible documents. The Tribunal also considered the consequential penalties under the Finance Act (Sections 77 and 78) and the appropriateness of confirming demand when the classification of receipts as goods or services was shown to be supported by the trading account and VAT assessment.

Conclusion: The Tribunal concluded that Rs. 46,13,896 of the amount shown in the ITR pertains to sale of lubricants (non-VAT goods) and cannot be included in the value of taxable services; the taxable service turnover for FY 2016-17 is Rs. 23,49,468 as declared in ST-3 returns and tax paid on that amount; the demand and penalties based on the higher ITR figure are without merit and are set aside. Appeal allowed in favour of the assessee.

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