2026 (3) TMI 656 - HC - Service Tax

Service Tax Exemption Threshold - demands based solely on income tax returns unsustainable; fresh adjudication from show cause stage required.

Petition contests service tax demands and recovery on the ground that liability does not arise where the value of services falls within the statutory ... Liability to pay service tax - exemption threshold - Validity of demand imposed on the basis of inputs received from Central Board of Direct Taxes (CBDT) Or on the basis of declaration made in the Income Tax Returns - Application of exemption threshold to determine service tax liability. Liability to pay service tax - HELD THAT:- The Court noted the coordinate decision in W.P. No. 11154/2023 and held that proceedings under the Finance Act seeking to impose service tax liability cannot be sustained if they rest solely on inputs derived from income tax returns or CBDT information without independent adjudication. The High Court extended those observations to the present matter where the Order in Original had been upheld on the ground that the petitioner did not appear and place records; the appellate order therefore did not undertake full adjudication on merits and cannot be allowed to stand. [Paras 5] The Court set aside the Orders in Original and Appeal insofar as they depended on such inputs and remitted the matter for fresh consideration. Remand for fresh adjudication with opportunity to reply to show cause notice - application of exemption threshold to determine service tax liability - HELD THAT:- Relying on the directions and observations in W.P. No. 11154/2023 (para 10 as extracted), the Court directed that the adjudicating authority consider whether the petitioner falls within the statutory definitions and exemption/negative lists and whether the claimed liability is barred by limitation. The petitioner was granted an opportunity to appear and file a fresh reply to the show cause notice and to demonstrate that the value of services rendered falls within the exemption threshold, which, if established, would negate service tax liability. Other contentions were expressly kept open for decision by the authority on reconsideration. [Paras 6, 7] Accordingly, the Order in Original at Annexure-A is set aside, the Order in Appeal at Annexure-B is also set aside. Final Conclusion: The High Court set aside the impugned Orders in Original, the appellate order and the recovery notice, and remitted the matter to the adjudicating authority to be reconsidered from the stage of reply to the show cause notice, permitting the petitioner to file fresh pleadings and to establish whether the exemption threshold negates any service tax liability; other contentions remain open. Issues: (i) Whether the petitioner is liable to pay service tax where the value of services rendered falls within the exemption threshold of Rs. 10,00,000/- and whether the impugned adjudication and recovery can be sustained where proceedings were ex parte and demands were based on inputs from income tax returns.Analysis: The petition challenges the Order-in-Original, the appellate order and consequential recovery on the ground that service tax liability would not arise if the value of services rendered is within the statutory exemption threshold. The Court applied the framework reflected in the earlier decision remanding W.P. No. 11154/2023, which directs consideration of (a) qualification under Section 65B(44) of the Finance Act, 1994, (b) applicability of the negative list, (c) applicability of Notification No. 25/2012-ST dated 28.06.2012 or other exemptions, (d) liability under Rule 2(1)(d) read with applicable notifications, and (e) limitation. The impugned appellate order did not undertake full adjudication because the petitioner did not appear below and the Order-in-Original had been upheld without addressing the grounds urged in appeal. The Court extended the approach in W.P. No. 11154/2023 and held that demands or adjudication based solely on inputs from income tax returns or without affording an opportunity to file replies or place evidence are not sustainable; the matters must be reconsidered from the stage of reply to the show-cause notice so that the petitioner can demonstrate whether the value of services falls within the exemption threshold and invoke applicable negative list or notifications.Conclusion: The Order-in-Original at Annexure-A is set aside; the Order in Appeal at Annexure-B is set aside; the recovery at Annexure-C is set aside; the matter is remitted to the stage of reply to the show-cause notice for fresh consideration in accordance with the observations noted, and the petitioner is permitted to file a fresh reply and place evidence.Final Conclusion: The petition is allowed by setting aside the impugned orders and recovery and remitting the matter for fresh adjudication from the stage of reply to the show-cause notice to determine liability in light of the exemption threshold, negative list and applicable notifications.Ratio Decidendi: An order demanding service tax cannot be sustained if based solely on inputs from income tax returns without affording the assessee an opportunity to reply and place evidence; matters must be reconsidered from the stage of show-cause notice to determine applicability of the exemption threshold, negative list and relevant notifications.