Service tax demand based on Income Tax data quashed for lack of independent verification and missing pre-SCN consultation

Service tax demand premised solely on unverified Form 26AS/CBDT data without independent verification was found procedurally unsustainable, resulting in setting aside the demand. Failure to comply with the Board's instruction requiring pre-Show Cause Notice consultation for demands exceeding the prescribed threshold rendered the SCN invalid, and the SCN was quashed on that ground. On merits, absence of corroborative evidence that services were taxable and not covered by the stated exemption led to dismissal of the demand. Consequentially, interest, penalty and late fee levies were held inapplicable and set aside as there was no surviving service tax liability.

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Issues: (i) Whether a Service Tax demand raised and confirmed solely on the basis of Form 26AS / CBDT data without independent verification is sustainable; (ii) Whether the Show Cause Notice issued without following the mandatory pre-Show Cause Notice consultation (for demands above Rs.50 lakhs) is sustainable; (iii) Whether interest, penalty under Section 78, penalty under Section 77(1)(c) and late fee under Rule 7(C) can be sustained once the primary tax demand is set aside.

Issue (i): Whether a Service Tax demand raised and confirmed solely on the basis of Form 26AS / CBDT data without independent verification is sustainable.

Analysis: The demand and adjudication relied exclusively on Form 26AS / CBDT data without independent enquiry or corroborative evidence to establish rendition of taxable services; prior Tribunal decisions cited apply the principle that entries in income-tax records do not by themselves establish liability under the Finance Act, 1994. The facts include issuance of notice within a week of seeking documents and absence of supporting work orders or other corroboration showing taxable transactions outside exempted government/local authority works.

Conclusion: The demand confirmed solely on the basis of CBDT / Form 26AS data without independent verification is not sustainable and is set aside (in favour of the assessee).

Issue (ii): Whether the Show Cause Notice issued without following the mandatory pre-Show Cause Notice consultation (for demands above Rs.50 lakhs) is sustainable.

Analysis: Board instructions and Circulars required pre-show cause consultation with Principal Commissioner/Commissioner for demands above Rs.50 lakhs except in specified offence/suppression cases; the Show Cause Notice was issued on 28.04.2021 for a demand exceeding Rs.50 lakhs without conducting the mandated pre-consultation and without awaiting the appellant's documentary response. The subsequent Circular making exceptions was issued later and cannot be given retrospective effect to validate pre-existing non-compliance.

Conclusion: The Show Cause Notice issued without the mandated pre-show cause consultation is legally unsustainable and vitiates the proceedings (in favour of the assessee).

Issue (iii): Whether interest, penalties under Section 78 and Section 77(1)(c) and late fee under Rule 7(C) can be sustained once the primary Service Tax demand is set aside.

Analysis: The challenged interest and penalties arise solely from the confirmed Service Tax demand; with the primary demand and liability set aside on substantive and procedural grounds, the foundational basis for interest and statutory penalties vanishes. The appellants lack of registration and non-filing of returns was held to flow from the bona fide view of exemption once liability is negated.

Conclusion: Interest and penalties under Section 78, Section 77(1)(c) and late fee under Rule 7(C) are not sustainable and are set aside (in favour of the assessee).

Final Conclusion: The impugned order confirming Service Tax demand, interest and penalties is set aside and the appeal is allowed, with consequential reliefs as per law.

Ratio Decidendi: A Service Tax demand cannot be sustained solely on Form 26AS / income-tax data without independent verification or corroborative evidence of taxable services, and a Show Cause Notice issued in breach of mandatory pre-show cause consultation required for demands exceeding Rs.50 lakhs renders the proceedings legally untenable.

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