Service Tax Demand Upheld for Mismatch Between Income Tax Receipts & ST-3 Returns: CESTAT Allahabad

The appellant was registered with the Service Tax Department and had been filing ST-3 returns. Based on third-party information received from the Income Tax Department, the Revenue observed that the gross receipts from services declared in the appellant’s income-tax return for FY 2014-15 amounted to ₹1,03,73,100, whereas the gross value of services disclosed in the ST-3 returns was ₹55,58,583. Treating the difference as an indication of suppression of taxable receipts, the Department initially calculated a service tax shortfall of ₹11,48,709, after adjusting the amount already paid. Summons dated 4 December 2020 and 14 December 2020 were issued seeking income-tax returns, financial statements, TDS/Form 26AS details and ST-3 returns. The Department recorded that the appellant had not furnished the requested documents. Consequently, a show cause notice dated 30 December 2020 proposed recovery of service tax with interest and penalties, invoking the extended limitation period under Section 73(1) of the Finance Act, 1994.

The Assistant Commissioner, through Order-in-Original No. 63/AC/D-SML/2021-22 dated 6 July 2022, confirmed the original demand of ₹11,48,709, interest under Section 75, an equivalent penalty under Section 78 and a penalty of ₹10,000 under Section 77(2). On appeal, the Commissioner (Appeals), by Order-in-Appeal No. MRT-EXCUS-000-APPL-MRT-201-2023-24 dated 29 December 2023, examined the underlying transactions and reduced the confirmed service tax liability to ₹6,14,638. The appellate authority nevertheless sustained the extended limitation period, interest, equivalent penalty under Section 78 and the separate penalty under Section 77(2). Jain & Company challenged this appellate order before CESTAT, maintaining that the demand was legally and factually unsustainable.

The appellant submitted that substantial receipts related to works contract activities undertaken for electricity distribution projects, including services involving Paschimanchal Vidyut Vitran Nigam Ltd. and Technocraft Construction Pvt. Ltd. It argued that certain work had been performed during FY 2013-14, although payment was received in FY 2014-15. In particular, the appellant contended that Technocraft Construction Pvt. Ltd., acting as the main contractor, had discharged the entire service tax liability on the relevant works contract. According to the appellant, the contractual arrangement placed responsibility for service tax, VAT and labour tax upon the main contractor. It therefore claimed that a further demand against the subcontractor would result in duplicate taxation. The appellant also referred to Rule 2A of the Service Tax (Determination of Value) Rules, 2006 and Notification No. 30/2012-ST dated 20 June 2012.

Another disputed receipt concerned ₹90,240 received from NKG Infrastructure. The appellant maintained that this amount represented a refund of security deposit connected with earlier works contract activities rather than consideration for services provided during FY 2014-15. It argued that the mere reflection of a payment in Form 26AS could not conclusively establish the nature of the transaction or create a service tax liability. More generally, the appellant submitted that income-tax information and Form 26AS could not be substituted for an independent determination of taxable turnover under service tax law. It relied upon Quest Engineers & Consultant Pvt. Ltd. Vs Commissioner, CGST & Central Excise, Allahabad, 2022 (58) GSTL 345 (Tri.-All.), wherein the Tribunal had distinguished the basis of Form 26AS reporting from the determination of service tax liability.

The appellant further challenged the extended limitation period, arguing that the show cause notice had been issued on 30 December 2020 for transactions relating to FY 2014-15. It maintained that the normal limitation period had expired long before issuance of the notice and that the Department had failed to establish wilful suppression or an intention to evade service tax. The appellant also asserted that the demand was based on information already available in income-tax records and that no sufficient independent investigation had been conducted. It claimed a bona fide belief that service tax was not payable by it where the main contractor had already discharged the liability. The appellant therefore sought cancellation of the demand, interest and penalties.

CESTAT first considered whether the demand could be rejected merely because it originated from a comparison of income-tax records with ST-3 returns. The Tribunal distinguished the decision in Quest Engineers & Consultant Pvt. Ltd., observing that the demand in that case had been founded on a comparison between Form 26AS and ST-3 returns. In the present proceedings, the Tribunal noted that the Department had also relied upon the gross receipts declared by the appellant in its income-tax return. It referred to the Point of Taxation Rules, 2011 and the movement towards accrual-based determination of service tax liability. The Tribunal consequently rejected the proposition that the demand was necessarily invalid because income-tax information had been used to identify discrepancies.

The Tribunal examined Section 67 of the Finance Act, 1994, governing valuation of taxable services, together with the prescribed ST-3 return format. It observed that an assessee was required to disclose gross amounts charged or received towards taxable services and thereafter claim applicable abatements, exemptions or deductions in the relevant fields. In the Tribunal’s view, the appellant could not disclose only a reduced taxable value without properly reporting the underlying gross receipts. It relied on judicial principles requiring statutory procedures to be followed in the manner prescribed, including the Supreme Court’s decision in Chandra Kishore Jha v. Mahavir Prasad, (1999) 8 SCC 266. The Tribunal treated the failure to declare the relevant gross receipts in the prescribed return format as a material compliance failure.

On the question of limitation, CESTAT found that the appellant had not properly disclosed the gross amounts received towards taxable services and had also failed to respond adequately to the Department’s requests for supporting documents. The Tribunal rejected the contention that no investigation had been undertaken, noting that summons had been issued before the show cause notice. It further observed that an assessee could not derive an advantage from its own failure to comply with statutory obligations. In this connection, the Tribunal referred to the Supreme Court’s decision in Machhindranath S/O Kundlik Tarade Vs Ramchandra Gangadhar Dhamne & Others, decided on 2 June 2025, concerning the principle that a person cannot benefit from their own wrong.

The Tribunal also considered the appellant’s objection that the show cause notice was issued beyond the extended five-year limitation period. During the hearing, arguments arose concerning the effect of the Supreme Court’s COVID-19 limitation-extension orders. CESTAT noted that this particular ground had not been raised before the lower authorities or in the original appeal submissions. Although the appellant’s counsel was given an opportunity to furnish further submissions and supporting authorities, no additional material was filed within the time allowed. The Tribunal referred to the Telangana High Court’s decision in Brunda Infra Pvt. Ltd., 2025 (95) GSTL 43 (Telangana), which had examined the applicability of the Supreme Court’s pandemic-related limitation orders. Considering the statutory provisions, judicial authorities and circumstances of the case, CESTAT rejected the limitation challenge and sustained invocation of the extended period.

Regarding the appellant’s claim that service tax had already been paid by Technocraft Construction Pvt. Ltd., CESTAT relied upon the Larger Bench decision in Melange Developers Private Limited, 2020 (33) GSTL 116 (Tri.-LB). The Tribunal noted that the Larger Bench had clarified the independent service tax liability of subcontractors and that payment of tax by a main contractor did not automatically discharge the subcontractor’s statutory obligation. It also referred to Om Sai Fabricators, (2023) 6 Centax 208 (Tri.-Bom.), in which the Mumbai Bench had followed Melange Developers. The Tribunal recorded that the decision in Om Sai Fabricators had subsequently been affirmed by the Supreme Court. Applying these authorities, CESTAT rejected the appellant’s contention that payment by the principal contractor, by itself, eliminated the appellant’s liability.

The Tribunal separately examined the appellant’s explanation concerning the ₹90,240 received from NKG Infrastructure. The appellant described the receipt as a security deposit refund, but the Tribunal noted that tax had been deducted at source under Section 194C of the Income-tax Act, 1961. Having considered the available records and the findings of the Commissioner (Appeals), it found insufficient grounds to accept the appellant’s explanation. The Tribunal therefore declined to interfere with the treatment of the receipt adopted in the impugned order. It also found no reason to disturb the Commissioner (Appeals)’ computation of the remaining works contract receipts and the resultant service tax liability.

With respect to penalties, CESTAT upheld the penalty under Section 78 of the Finance Act, 1994, having sustained the finding of suppression and the extended limitation period. It referred to the Supreme Court’s decision in Union of India Vs Rajasthan Spinning & Weaving Mills Ltd., 2009 (238) ELT 3 (SC), concerning statutory penalty provisions. The Tribunal also upheld the penalty under Section 77(2), referring to Gujarat Travancore Agency v. Commissioner of Income Tax, 1989 (42) ELT 350 (SC), and the Gujarat High Court’s decision in Synergy Fertichem Pvt. Ltd., 2020 (33) GSTL 513 (Guj.), while discussing the nature of civil penalties and statutory compliance obligations. Since the underlying service tax demand was sustained, interest under Section 75 was also upheld as a consequential liability.

In conclusion, CESTAT Allahabad held that the appellant had failed to establish grounds for interference with the Commissioner (Appeals)’ order. The Tribunal found that the mismatch between declared gross receipts and ST-3 returns, failure to furnish the requisite information, and non-compliance with the prescribed return requirements supported the findings against the appellant. It rejected the arguments that the demand was invalid merely because income-tax records had been used, that payment by the main contractor automatically relieved the subcontractor of liability, and that the demand was barred by limitation. Accordingly, by Final Order No. 70216/2026 dated 2 July 2026, the appeal was dismissed, leaving intact the confirmed service tax demand of ₹6,14,638, applicable interest under Section 75, an equivalent penalty under Section 78 and a penalty of ₹10,000 under Section 77(2) of the Finance Act, 1994.