2026 (2) TMI 396 - AT - Service Tax

Service tax demand based on ITR/Form26AS entries requires independent verification of services and receipts; demand set aside.

Service tax demands premised solely on ITR/Form 26AS entries are impermissible without independent verification that services were rendered and ... Service tax demand based on ITR/Form 26AS without independent verification - Levy of service tax on IT-enabled services / BPO services - Requirement that a show cause notice specify the precise service and basis of demand - Reliance on bank statements and contemporaneous records to determine receipt of consideration - CBIC instruction to reconcile ITR-TDS data before issuing show cause notices - Imposition of penalty u/s 78 as statutory consequence of confirmed tax liability - Imposition of penalties u/s 77 for record-keeping, furnishing information and return defaults - HELD THAT:- In the present case, show cause notice itself admits that no amount has been received by the appellant during the period of dispute on which TDS has been deducted in terms of Section 194C, 194Ia, 194Ib, 194J, 194H and as per Forms 26AS of the appellant. The amount in respect of which demand has been made is reflected towards sale of service. In the ITR no information with regards to the nature of service or even invoices etc. has been found or relied upon to ascertain whether any services were being provided by the appellant against such receipts. It is evident that the total receipts of the appellant during the Financial Year 2016-17 as per this statement is Rs 2,27,346.51 and not Rs 69,60,560/- as declared by them in their ITR. The difference in the amounts received as per bank statement and ITR can be a matter of investigation for the income tax authorities or other concerned authorities. However the same cannot be reason for demanding service tax, in respect of services which have never been provided and no consideration has been received. No merits in the impugned order and the same is set aside. Appeal is allowed. Issues: (i) Whether a service tax demand confirmed solely on the basis of ITR/26AS/TDS data without a determination of the nature of receipts and without proper verification is sustainable; (ii) Whether penalties imposed under Section 78 and various sub-sections of Section 77 are sustainable.Issue (i): Whether a service tax demand based on ITR/26AS/TDS data without independent determination of the nature of receipts and without proper verification can be confirmed.Analysis: The Tribunal examined the departmental reliance on Form 26AS/ITR and noted the absence of any finding as to the actual nature of services or receipts. It referred to Board instructions requiring reconciliation of ITR-TDS data and observed that demand cannot be issued indiscriminately on the basis of third-party data. The Tribunal considered bank statements showing receipts much lower than declared ITR turnover and held that the difference could be subject to investigation by appropriate authorities but cannot alone sustain a service tax demand. The Tribunal also relied on authorities emphasising that a show cause notice must communicate specific allegations and the basis for tax demand so that the assessee can meet the case.Conclusion: The service tax demand confirmed solely on the basis of ITR/26AS/TDS data without determination of the nature of receipts and without proper verification is not sustainable; the impugned demand is set aside in favour of the assessee.Issue (ii): Whether penalties under Section 78 and under various sub-sections of Section 77 are sustainable.Analysis: The Tribunal accepted that penalty under Section 78 is a statutory penalty tied to tax liability and therefore could not be wholly set aside on that ground. However, it found that penalties under various sub-sections of Section 77 were imposed without adequate basis given the defective demand confirmation and absence of proper inquiry, and therefore were not warranted.Conclusion: Penalty under Section 78 is not interfered with and stands; penalties under Section 77 are set aside in favour of the assessee.Final Conclusion: The appeal is allowed; the impugned order confirming the service tax demand is set aside for lack of proper verification and particulars, and certain penalties under Section 77 are quashed while the statutory penalty under Section 78 is upheld.Ratio Decidendi: A service tax demand cannot be sustained merely by reliance on ITR/26AS/TDS data without a prior determination of the nature and receipt of taxable services and without furnishing specific allegations in the show cause notice; reconciliation and verification are necessary before issuing a demand.