2026 (1) TMI 1015 - AT - Service Tax

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 ... Service tax demand on the basis of the unverified data received from the Income Tax department - SCN issued without following the mandatory pre-Show Cause Notice consultation - violation of principles of natural justice - levy of interest and penalty as well - HELD THAT:- It is found that the Revenue has not conducted any independent verification of the nature of the services rendered by the appellant and its Service Tax liability. Evidences available on record indicate that an e-mail dated 16.04.2021 was sent to the appellant seeking some documents. Subsequently, another later dated 21.04.2021 was also sent seeking documents. However, without waiting for the appellant to submit any document, the impugned Show Cause Notice was issued on 28.04.2021, i.e., within a week from the letter dated 21.04.2021, solely on the basis of the data available in Form 26AS received from the Income Tax department. It is found that the Revenue has not conducted any independent enquiry to ascertain the nature of services rendered, prior to issue of the Notice. A perusal of the said Show Cause Notice clearly reveals that the demand has been raised solely on the basis of the CBDT data, without any independent verification being conducted - the CESTAT is agreed with the submission made by the appellant that the Show Cause Notice has been issued merely on the basis of the data received from the Income Tax Department, without conducting any independent enquiry, for levy of Service Tax, which is legally not sustainable. The demand confirmed in the impugned order, solely on the basis of the CBDT data, without conducting any independent verification to ascertain the nature of the services rendered, is not sustainable - the demand of Service Tax confirmed in the impugned order is liable to be set aside on this ground itself. From the impugned order, it is found that the Ld. adjudicating authority has given the finding that the works rendered by the appellant are related to construction of civil structures and other original works in relation to road and irrigation related work, to government bodies / local authorities / governmental authorities, which were exempted from payment of service tax as provided under N/N. 25/2012-S.T. dated 20.06.2012 as amended by N/N. 09/2016S.T. dated 01.03.2016. In view of the above findings, there are no merit in the contention of the Revenue that the appellant has rendered taxable services which are not eligible for the benefit of exemption as provided under Notification No. 25/2012-S.T. dated 20.06.2012 as amended by Notification No. 09/2016-S.T. dated 01.03.2016. As the Revenue has failed to substantiate the allegation of the appellant rendering any taxable services which were not exempted and not discharging Service Tax thereon with corroborative evidence, we hold that the demand of Service Tax confirmed in the impugned order is not sustainable on merits also - Thus, in the absence of any corroborative evidence to substantiate the said allegation of non-payment of Service Tax, the demand of Service Tax confirmed in the impugned order is not legally sustainable and hence, the same is set aside. Further, as per the Board’s Instruction vide Board’s instruction under F. No. 1080/09/DLA/MIS/15 dated 21.12.2015 and subsequent clarificatory Circular issued vide F No. 1053/02/2017-CX dated 10.03.2017, a Pre-Show Cause Notice consultation with the Principal Commissioner / Commissioner was mandatory prior to the issue of Show Cause Notices in cases where the demand of duty was above Rs. 50 lakhs. In the present case, it is found that even though the demand is clearly more than Rs.50 lakhs, no such pre-Show Cause Notice consultation was conducted by the Revenue. In fact, a letter was issued to the appellant on 21.04.2021 and the Show Cause Notice was issued on 28.04.2021 without even waiting for the reply from the appellant. Thus, the authorities have not followed the mandatory instruction laid down in the Board’s Circular dated 21.12.2015 before issue of the instant Show Cause Notice. The Show Cause Notice issued without following the above said Circular is thus legally not sustainable. The Show Cause Notice issued without following the requirement of pre-Show Cause Notice consultation as mandated in the above Circular, is legally not sustainable - the demand of Service Tax, as confirmed vide the impugned order, is not sustainable and hence, the same is set aside - As the demand of Service Tax itself does not survive, the question of demanding interest or imposing penalty under Section 78 of the Finance Act, 1994 does not arise - Further, as there is no liability to Service Tax on the part of the appellant in this case, there was no need to take registration or file returns. Therefore, there are no justification in the imposition of penalty under Section 77(1)(c) of the Finance Act 1994 or the levy of late fee under Rule 7(C) of the Service Tax Rules, 1994 and accordingly, the said penalties are also set aside. The impugned order is set aside - Appeal allowed. 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.