Notice based on difference in ST 3 vs. 26AS – All you need to know

Introduction

In the recent times, it has been observed that CGST department has been issuing show-cause notices (SCN) in bulk mainly w.r.t FY 15-16 & 16-17 seeking to demand service tax on the differential amounts as determined based on the turnover/receipts disclosed in the ST 3 i.e., service tax returns and the receipts reported in Form 26AS under Income Tax without any due diligence or fulfilling mandate as given under law and departmental circulars. In many instances, these SCN’s are being issued:

• to avoid time barred limitations w.r.t FY 15-16 i.e., 5 years thereby invoking grounds of extended period of limitation.
• without proper examination and investigation and merely based of differences in ST 3 vs 26AS.
• on the presumption that the differential receipts/amounts are taxable under Service tax for provision of taxable services.

In this article, the author would examine the legality of such notices and thereby try to determine its fate which may not be in favor of Department and further may not survive the judicial test of higher forums.

Common reasons for differential amount

Let us first analyze the major or common reasons for the differences in turnover disclosed in ST 3 vs 26AS which would support the professional or the officer conducting the verification which may have escaped tax. Some of the common reasons for issuance of SCN are mentioned below:

i. ITR/Form 26AS has PAN India figures whereas ST-3 are registration wise.

ii. Different accounting norms adopted in revenue recognition results in difference in taxable turnover.

iii. Difference in principles of levy and valuation under service tax is different from income tax which may result in differences. In case of works contract service, where deduction is available for supply of goods i.e., 40%/70% is only taxable under service tax whereas in income tax there is no such deduction.

iv. Output services may be exempted under various exemption notifications and thus, may not be disclosed in Form ST-3. Common instance – Service providers engaged in providing exempted services to Government departments, which are covered under mega exemption notification 25/2012-ST, as amended from time to time vis-à-vis income reported under income tax returns, results in difference.

v. Abatement and RCM provisions under Service Tax Law may alter Service Tax liability.

vi. Some service providers follow cash basis of accounting i.e., receipt basis under service tax law in terms of 3rd proviso to Rule 6 of Service tax Rules whereas income tax returns are filed on accrual basis, resulting in difference in taxable receipts.

vii. In case any amount is paid to director by the company, other than as salary, would be subjected to reverse charge in the hands of company, under service tax law. Wherein the director would have to disclosed this as an income under income tax law, which would result in difference between service tax law and income tax law.

viii. Assessments for periods prior to July 2017 is yet to be completed under VAT laws. Which could result in change of turnover between the VAT laws and income tax laws.

ix. In case of goods transport agencies providing services to companies, service tax is paid by the recipient of service, i.e., companies, whereas the income is disclosed under income tax return, resulting in difference of income.

x. Service provider is engaged in providing multiple services wherein few services are taxable while few services are conditionally exempted. However, for the purpose of income tax full value is reported, resulting in difference and requires careful examination.

Possible Grounds for Defence

The Show cause notices (SCN’s) are being issued in large number with common reasons/findings/language for initiation of proceedings. Further all SCN’s will have following similarities:

• Merely on the basis of differences in turnover in 26AS vs ST3.
• Where ST returns not filed or no ST registration has taken, then demand is based on data reflected in IT returns /26AS.
• SCN fails to discharge the burden of proof as to the taxability of the amount proposed to be demanded.
• SCN proposes a demand without determining classification / category of service.
• SCN would be issued invoking extended period of limitation saying that it appears that assessee have deliberately suppressed facts with an intent to evade payment of Service tax.

The notice seeks explanation for discrepancy and reconciliation. However, what is relevant to be answered and addressed is whether recovery can be sought for activities that in terms of the third-party information or rather data collected from CBDT that appears to be “services” to the authorities is analysed further. The various possible grounds of defence that could be taken in reply to SCN are discussed below-

A. No demand can be raised merely relying on data of IT returns/Form 26AS

It is a settled law that data of Form 26AS cannot be used for determining Service Tax liability unless there is there is any evidence shown that it was due to a taxable service. Relied on the order of the Tribunal in Kush Constructions vs CGST NACIN 2019 (34) GSTL 606 (Tri – All). Similar view was taken recently in judgment by CESTAT Kolkata in case Luit Developers Private Limited Vs Commissioner of CGST & Central Excise.

It is a settled position of law that income shown in the income tax returns/Form 26 AS is not proper basis to determine the service tax without establishing the taxability of service. Supreme Court in Faquir Chand Gulati vs. Uppal Agencies Pvt Ltd 2008 (12) S.T.R 401 (S.C) has settled the law that nomenclature of an instrument or document cannot be determinative of the nature or character of activity. Therefore, under such circumstances, the SCN fails to discharge the burden of proof as to taxability of activity. Further plethora of judgments have settled the law; reliance can be placed on Synergy Audio Visual Workshop Pvt Ltd versus Commissioner of Service Tax Bangalore 2008 (10) STR 578; Alpa Management Consultant P. Ltd Vs CST 2006 (4) STR 21 (Tri.Bang) and CCE Ludhiana vs Deluxe Enterprises 2011 (22) STR 203.

B. SCN is invalid if proposed demand is without determining classification / category of service

The SCN would generally presume that the difference in turnover is towards provision of service It is a settled law that no service tax liability can be fastened on any asseseee without determining the classification of service further, once there is no allegation in the Show Cause Notice based on which the demand is proposed then the demand cannot be sustained. In this regard, one could refer Supreme court decision in case of CCE v. Brindavan Beverages (2007) 213 ELT 487(SC) and further refer Deltax Enterprises vs. CCE, Delhi 2018 (10) GSTL 392 (Tri – Del) which held that no service tax liability can be fastened on an unidentified service. There is no provision for such summary assumption under the Finance Act, 1994.

C. No recovery on assumption and presumption

It is settled law that SCN cannot be issued based on more assumptions and presumptions – Oudh Sugar Mills Limited v. UOI, 1978 (2) ELT 172 (SC). Further, in this regard, an issue wherein the department justified the issuance of SCN based on the presumption that in absence of availability of data from the taxpayer, the differential figure needs to be subjected to tax. The Hon’ble Tribunal in the case of Shubham Electricals v. CCE 2015 (40) S.T.R. 1034 (Tri. – Del) held that “the failure to gather relevant facts for issuing a proper show cause notice cannot provide justification for a vague and incoherent show cause notice which has resulted in a serious transgression of the due process of law”

D. Demand invoking extended period of limitation

Since the demand is primarily based on IT returns and form 26AS, the information of provision of service is well within the knowledge of the Department. As IT returns and information therein forms part of the government records, alleging suppression is not proper.

i.Meaning and scope of “suppression”

The concept of “suppression” amounts to that which one is legally to state but one intentionally or deliberately or consciously does not state. Therefore, where there was no deliberate action on the part of the assessee to hide the facts from departmental authorities and at each stage of enquiry, if the assessee discloses all material facts and extends co-operation, all requisite details as required are submitted to department from time to time as and when called for, there is no question of invocation of extended period of limitation- Lakshmi Engineering Works vs. Collector of C. Ex. 1989 (44) ELT 353 (Tri.) maintained by Supreme Court reported in 1991 (55) ELT A33 (SC).

ii. Burden of proof is on the department

The apex court has in the case of M/s. Cosmic Dye chemical Vs Collector of Cen. Excise, Bombay [1995 (75) E.L.T. 721 (S.C.) held that the burden is on the revenue to prove any of the above elements to uphold validity of an extended period of 5 years. It also held that detailed verification must be made prior to issuing SCN and complete details be provided to the person in the SCN.

Power to issue notice for extended period is restricted by presence of active ingredients which indicate an intent to evade duty as explained above. Indiscriminate use of such restricted powers leads to fruitless adjudications, appeals and reviews, inflates the figures of outstanding demands and above all causes unnecessary harassment of the assessee. Therefore, before invoking extended period, it must be ensured that the necessary and sufficient conditions to invoke extended period exists – Master Circular No. 1053/2/2017-CX dated 10.03.2017

iii. Apex court landmark decisions on extended period of limitation-

• the proviso of Section 73(1) being an exception to the main section it has to be construed strictly- Pushpam Pharmaceuticals Company v. CCE, 1995 (78) ELT 401 (SC)
• To invoke extended period of limitation, positive action betraying negative intention of wilful/deliberate default is mandatory prerequisite – Uniworth Textiles Ltd. vs. Commissioner of Central Excise, Raipur 2013 (288) ELT 161 (SC)
• If there was enough scope for entertaining doubt about the view to be taken, extended period of limitation is not invokable – Continental Foundation Jt. Venture vs. Commr. Of C. Ex., Chandigarh-I 2007 (216) ELT 177 (SC)*

iv. The Balance Sheet and P& L are public document and notice issued relying on the information disclosed in said public documents with allegation of suppression with intent to duty is illegal and not sustainable. Reliance can be placed on the judgments in the case of Mega Trends Advertising Ltd. 2020 (38) G.S.T.L. 57 (Tri. – All.); Rama Paper Mills Vs Commissioner of Central Excise, Meerut, [2011 (22) S.T.R. 19 (Tri.-Del) and Hindalco Industries Ltd. Vs. CCE, Allahabad 2003 (161) ELT 346 (Tri-Del).

v. If Assessee is already subject to audit (service tax or scrutiny of accounts) and facts are already in the knowledge of the parties, notice invoking extended period cannot be issued and no demand can be confirmed as held by Supreme Court in Anand Nishikawa Company Ltd. vs. Commissioner of Central Excise’ – 2005 (9) TMI 331 wherein it was held that where facts are known to both the parties the omission by one to do what he might have done and not that he must have done, does not render it suppression. When facts were known to both the parties, the omission by one to do what he might have done not that he must have done would not render it suppression.

vi. One may also refer to the unreported decision of Hon’ble CESTAT in the case of Pappu Crane Service v. Commissioner (Service Tax Appeal No.70707 of 2018-[DB]) wherein the Tribunal while allowing the appeal has rejected the invocation of the extended period when the revenue’s case was solely based on the figures in Form 26AS.

vii. Also, the notice is to mandatorily be issued invoking proviso to Section 73(1) and not merely giving reference to Section 73 for invocation of extended period of limitation or else the SCN would be invalid as held in Satish Kumar & Co. vs. CCE Nagpur -2019 (22) G.S.T.L. 269 (Tri. – Mumbai).

viii. Other noted decisions –

• Element of fraud, collusion etc is must. Therefore, is entire data is disclosed in ST-3 the extended period cannot be invoked- Scott Wilson Kirkopatrick (I) Pvt Ltd. Vs. CST Banglaore (2007) 8 STJ 358 (CESTAT Bangalore)
• Extended period cannot be invoked where the department itself is not clear about the facts – Nexcus Computers Pvt Ltd Vs. CCE (2008) 9 STR 34 Chennai Tribunal.
• Extended period cannot be invoked where the department was aware about the facts as the assessee provided the requisite information – Gujarat Ambuja Exports Ltd. Vs. UOI (2012) 26 STR 165 (Gujarat HC)
• Mere failure to declare would not amount to wilful suppression since for wilful suppression the positive act from the side of the assessee shall be found – Infinity Infotech Parks Ltd. Vs. UOI & Others 2012 – TIOL – 987 (Delhi High Court)

E. Re-quantification of demand-

1) Application of Service Tax (Determination of Value) Rules, 2006- For instance, in case of works contract services, demand in the SCN is usually raised on 100% valuation without giving impact of Rule 2A of Rules ibid.

2) Benefit of cum-tax under Section 67 – in case demand stands confirmed same shall be re-quantified after allowing the benefit of cum-tax u/s. 67(2) of Finance Act,1994 in cases where no service tax is collected from customers. Reliance can be placed on Commissioner of Central Excise, Delhi v. Maruti Udyog Limited 2002 (141) E.L.T. 3 (S.C.)

F. Demand notices not be issued indiscriminately based on the difference between the ITR-TDS turnover –Instructions provided by CBIC to field formations dated 26th October 2021-

1) While analysing ITR-TDS data received from Income Tax, a reconciliation statement has to be sought from the taxpayer for the difference and whether the service income earned by them for the corresponding period is attributable to any of the negative- list services specified in Section 66D of the Finance Act, 1994 or exempt from payment of Service Tax, due to any reason

2) To issue show cause notices only after proper verification of facts and Pr. Chief Commissioner/Chief Commissioner (s) may devise a suitable mechanism to monitor and prevent issue of indiscriminate show cause notices.

3) in all such cases where the notices have already been issued, adjudicating authorities are expected to pass a judicious order after proper appreciation of facts and submission of the notice.

Conclusion

Therefore, readers may agree that SCN issued merely on the basis of difference in turnover in ST 3 vs Form 26AS may not be able to pass the judicial test of higher forums and department is likely to lose on majority of the cases. Such notices are being issued arbitrarily without due diligence and prior inspection or verification. There are plethora landmark judgments in favour of assessee and higher forums have provided relief to the assessee time and again on this matter. However, the department is still turning a blind eye as usual and issuing SCN’s on the pretext of protection of interest of revenue. Thus, taxpayers have no option other than to contest the SCN with detailed reconciliation and legal arguments; further they are suggested to provide an exhaustive reply to SCN challenging validity of the SCN on various grounds as discussed above. In case of unfavourable order from adjudicating authorities, it is advised to file appeal to higher forums and alternatively, filing a writ petition in High court could also be an option.

Special thanks to CA Ashish Chaudhary for vetting this article and Adv. Manoj Meena for contribution in compilation. Request you to give your feedback to the author at – mannu@hiregange.com.