2026 (2) TMI 784 - AT - Service Tax

Sale versus Service: MLM kit transactions treated as sales, and service tax demands based solely on income tax records are unsustainable.

Multi level marketing transactions supplying business kits were characterised as sale of goods rather than provision of a Business Auxiliary Service where ... Business Auxiliary Service - sale of goods under multi-level marketing (MLM) model - reliance on Form 26AS/Income Tax Returns as sole basis for service tax demand - requirement of corroborative evidence to establish rendition of taxable service - extended period of limitation not invocable where demand is based solely on third party data - HELD THAT:- The Show Cause Notice dated 08.10.2015 has been issued for the period 2010–11 to 2011–12. It is also evident that the notice was issued primarily on the basis of Income Tax Returns and Form 26AS, wherein the amount was reflected as service income. In respect of demands made based on the Form 26AS and IT Returns. The Tribunal in the case of Tabassum Enterprises vs. C, CGST & CX [2019 (6) TMI 684 - CESTAT NEW DELHI] has clearly held that extended period of limitation is not invocable where the Show Cause Notice is issued solely on the basis of third-party data without proper verification and without establishing suppression or willful misstatement. In the present case, there is no cogent evidence brought on record to establish suppression of facts or intent to evade payment of tax so as to justify invocation of the extended period. Therefore, the demand is also hit by limitation. Thus, the impugned order is set aside both on merits as well as on account of limitation. Appeal is allowed with consequential relief, if any, in accordance with law. Issues: (i) Whether activities undertaken under a multi-level marketing (MLM) scheme constitute a taxable 'Business Auxiliary Service' or amount to sale of goods; (ii) Whether a service tax demand raised solely on the basis of income tax records/Form 26AS without independent corroborative evidence is sustainable and whether the extended period of limitation is invokable.Issue (i): Whether MLM activities constitute Business Auxiliary Service or are sales of goods.Analysis: The issue turns on the true nature of the transactions under the MLM model - whether consideration received was for provision of service or for sale of goods. Authority was applied holding that where a business kit comprising goods is sold and VAT/sales tax is paid thereon, the transaction is primarily a sale of goods and not a business support/service to distributors. The analysis focuses on the commercial character of the receipts and the presence of taxation as sale rather than evidence of provision of a separate service.Conclusion: The activities under the MLM scheme are sale of goods and do not constitute a taxable Business Auxiliary Service. This conclusion is in favour of the assessee.Issue (ii): Whether a demand based solely on Income Tax returns/Form 26AS without corroborative evidence is sustainable and whether extended limitation applies.Analysis: The question requires examination of whether third-party data (Income Tax returns/Form 26AS) can by itself establish service tax liability. Precedents were applied holding that entries in income tax records, including Form 26AS, do not substitute for evidence proving rendition of taxable services, identification of service provider, service recipient and consideration, and that mechanical reliance on such data without independent verification is impermissible. On limitation, the extended period cannot be invoked where the notice is based solely on such third-party data and there is no evidence of suppression or willful misstatement.Conclusion: The service tax demand based solely on Income Tax records/Form 26AS is unsustainable and the extended period of limitation is not invokable. This conclusion is in favour of the assessee.Final Conclusion: The impugned demand is set aside on merits and on limitation; the appeal is allowed and consequential relief, if any, shall follow in accordance with law.Ratio Decidendi: Transactions effected under a multi-level marketing model that involve sale of business kits/goods (with applicable sales tax/VAT paid) are sales and not taxable services, and a service tax demand cannot be sustained solely on the basis of Income Tax returns/Form 26AS without independent corroborative evidence demonstrating rendition of a taxable service and identification of service recipient and consideration.