2026 (1) TMI 1074 - AT - Service Tax

Short payment of service tax and CENVAT credit denial demands and penalties set aside; credit allowed, revenue appeal rejected

Short payment of service tax demands premised solely on unexplained differences between audited financial statements and ST-3 returns cannot be sustained ... Short payment of service tax - demand based on the difference between the Balance Sheet and the ST 3 returns without providing any explanation - demand of Service Tax as ‘declared service’ on account of penalty received for breach of contracts - Demand of Service Tax under Section 66A of the Act on account of consultancy services received from foreign companies - Recovery of CENVAT Credit of Rs.10,03,651/- availed by the appellant-assessee during the relevant period - Demand alongwith penalty. Demand raised and confirmed by comparing the audited profit & loss account and the corresponding year’s Service Tax Return (ST-3) filed by the appellant-assessee, but without analysing the nature of service to determine whether a taxable service liable to Service Tax has been rendered or not - HELD THAT:- Admittedly, the appellant-assessee herein is primarily engaged in the business of purchase and sale of various goods through e-commerce route. The income generated from its business operations are reported in the Profit and Loss Account. The various sources of income of the assessee includes sale of goods; sale of services (domestic and export); Interest on deposits with Banks and others; Dividend from Investment; Profit on sale of investments etc. - it is found that all these incomes are not generated from rendering of any taxable services. It is found that the ld. adjudicating authority, in the impugned order, has construed the difference between the amount shown in the balance sheet and the ST-3 returns as a taxable amount without giving any reason for coming to such conclusion. If the Department wants to demand Service Tax on this amount, then the onus lies on the Department to establish that these amounts have been received towards rendering of taxable service, which has not been done in this case. It is a settled position of law that no demand of Service Tax can be made simply based on the basis of the difference between the Balance Sheet and the ST 3 returns without providing any explanation - the demand raised and confirmed simply on the basis of the difference between the Balance Sheet and the ST 3 returns in the present case, without providing any explanation, is not sustainable and hence, the same is set aside. Demand of Service Tax as ‘declared service’ on account of penalty received for breach of contracts - HELD THAT:- The appellant-assessee has agreed to the said liability and paid the said amount along with applicable interest much before the issue of the impugned Show Cause Notice. Hence, the imposition of penalty in respect of this amount is not warranted and accordingly, the same is set aside. Demand of Service Tax under Section 66A of the Act on account of consultancy services received from foreign companies - HELD THAT:- It is observed that the assessee has already paid the said amount along with applicable interest much before the issue of the impugned Show Cause Notice. Therefore, no penalty can be imposed in respect of this amount as well and accordingly, the same is set aside. Recovery of CENVAT Credit of Rs.10,03,651/- availed by the appellant-assessee during the relevant period - Convention Services - General Insurance Service - Premium paid for Group Accidental Insurance policy taken for the employees - various business support services in the form of fees paid for participating in the conference & seminar organised by various Chamber of Commerce and Industry Bodies - denial on the ground that the amendment brought in the definition of ‘input service’ w.e.f. 01.04.2011 vide Notification No. 3/2011-CE (NT), dated 01.03.2011 has deleted the words “activities relating to business” in the inclusive part of the said definition - HELD THAT:- The word 'include' in the statutory definition is generally used to enlarge the meaning of the preceding words and it is by way of extension, and not with restriction. Any service cannot be considered to be outside the ambit of input services simply because it is not covered by the inclusive part. Hence, till any service is covered by the first limb, it is sufficient enough to consider as an input service only - there is no dispute in this case that those input services were used for provision of output services. As the utilisation of these services in providing output service is not in dispute, the appellant/assessee is eligible for availing CENVAT credit on all those input services. Hence, the denial of CENVAT Credit confirmed in the impugned order set aside. As the appellant is found to be eligible for the CENVAT Credit, the question of demanding interest or imposing penalty does not arise and hence the same is set aside. Demand alongwith penalty - HELD THAT:- The demand had been raised in the impugned Show Cause Notice simply by comparing the audited profit & loss account and the corresponding years’ service tax return (ST-3) without analysing the nature of service to determine whether a taxable service liable to service tax has been rendered or not. From a perusal of the impugned order, it can be observed that the ld. adjudicating authority has dropped the demand based on the explanation and Chartered Accountant’s certificate provided by the Appellant. The Ld. adjudicating authority has given a categorical finding for dropping the said demands - the dropping of the demands in the impugned order upheld and appeal filed by Revenue rejected. Appeal disposed off. Issues: (i) Whether the demand of service tax confirmed by comparing the Balance Sheet and ST-3 returns without analysing nature of receipts is sustainable; (ii) Whether penalty can be imposed where the assessee paid tax and interest before issuance of show cause notice (demands of Rs.9,26,876 and Rs.1,73,900); (iii) Whether CENVAT credit of Rs.10,03,651 availed on various input services is liable to denial after amendment to definition of 'input service'; (iv) Whether the Revenue's appeal against dropping demands of Rs.90,47,708 merits interference.Issue (i): Whether demand of Service Tax of Rs.15,80,135 confirmed on basis of difference between Balance Sheet and ST-3 returns is sustainable.Analysis: The adjudicating authority confirmed the demand by mere reconciliation between audited profit & loss account and ST-3 returns without examining the nature of receipts to establish they were consideration for taxable services. The assessee demonstrated that several entries in profit & loss are not receipts for taxable services. The Tribunal applied established precedent that a demand cannot rest solely on such reconciliation without explanation and proof that amounts were for taxable services.Conclusion: The demand of Rs.15,80,135 confirmed on the basis of difference between Balance Sheet and ST-3 returns is set aside in favour of the assessee.Issue (ii): Whether penalty can be imposed in respect of amounts (Rs.9,26,876 and Rs.1,73,900) where tax and interest were paid before issue of show cause notice.Analysis: The assessee admitted liability and paid the tax and applicable interest prior to issuance of the SCN. The Tribunal held that where tax and interest are paid before notice, imposition of penalty on those amounts is not warranted.Conclusion: Penalty imposed in respect of Rs.9,26,876 and Rs.1,73,900 is set aside; the underlying tax demands are upheld as appropriate where admitted and paid.Issue (iii): Whether denial of CENVAT credit of Rs.10,03,651 for services such as convention services, insurance and business support is sustainable after deletion of words in the inclusive part of the definition of 'input service'.Analysis: The definition of 'input service' under Rule 2(l) has a primary limb covering any service used for providing an output service, an inclusive limb, and exclusions. The Tribunal observed that the inclusive clause enlarges scope but does not restrict the primary limb. As the impugned services were used in relation to provision of output services (not disputed), they fall within the first limb and are eligible for CENVAT credit; denial based on deletion in the inclusive part is not sustainable.Conclusion: Denial of CENVAT credit of Rs.10,03,651 is set aside in favour of the assessee; consequent interest and penalty are also set aside.Issue (iv): Whether Revenue's appeal against dropping demands of Rs.90,47,708 and reduction of penalty warrants interference.Analysis: The adjudicating authority dropped those demands after considering the assessee's explanations and Chartered Accountant's certificates and recorded categorical findings. The Tribunal found no reason to differ from the adjudicating authority's reasoned conclusion.Conclusion: The Revenue's appeal is rejected and the dropping of the demands is upheld in favour of the assessee.Final Conclusion: The appeal proceedings are partly allowed in favour of the assessee by setting aside demands based on mere reconciliation and denial of CENVAT credit, penalties on amounts paid pre-SCN are set aside, and the Revenue's appeal against dropping certain demands is rejected.Ratio Decidendi: A demand of service tax cannot be sustained merely by reconciling Balance Sheet figures with ST-3 returns; the Department must establish that the amounts represent consideration for taxable services, and services used in providing output service fall within the primary limb of the definition of 'input service' under Rule 2(l) of the CENVAT Credit Rules, 2004.