CESTAT quashes Differential Service Tax Demand against Tax Consultant using Turnover Info from Income Tax Dept [Read Order]

In a recent decision, the Customs, Excise & Service Tax Appellate Tribunal ( CESTAT ) of Delhi has set aside a service tax demand against a consultant, ruling that the tax assessment was based solely on turnover information from income tax data that lacked proper investigation.

The case arose after the Central Goods & Service Tax ( CGST ) department initiated an inquiry against the appellant ,M/s. Joshi Tax Consultancy & Services, regarding discrepancies between their income tax returns ( ITRs ) and the taxable value declared in their service tax ( ST-3 ) returns for the financial year 2016-17.

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The department alleged that the appellant-consultancy had received taxable income amounting to ₹59,12,145, but had not appropriately reported this in their service tax filings. Later on, a show cause notice dated October 21, 2021 was issued to the appellant, proposing a tax recovery of ₹8,86,822, including penalties and interest.

Aggrieved, the appellant, represented by R.M. Saxena, challenged the show cause notice on several grounds before the Commissioner (Appeals)

Before the Commissioner (Appeals), the appellant argued that the tax demand was based entirely on a letter from the Directorate General System & Data Management ( DGS & DM ) and income tax records, without any independent investigation into the nature of services provided by the consultancy.

In its defense, the department, represented by Mr Arun Sheoran, maintained that the discrepancy between the income tax return and the service tax declaration warranted the demand.

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The Commissioner (Appeals), after considering both sides, upheld the tax demand, citing the consultancy’s failure to provide adequate evidence to counter the taxability of their services.

Aggrieved again, the appellant- consultancy appealed before CESTAT. Before CESTAT, both parties maintained their respective arguments that they presented before the lower authorities.

After hearing both sides, the single bench of Dr.Rachna Gupta observed critical flaws in the department’s approach. The tribunal noted that the show cause notice did not include any specific reference to the nature of services provided by the appellant-consultancy, nor did it examine whether those services were indeed taxable.

The tribunal highlighted that the demand was solely based on third-party information from the Income Tax Department, which, as per several judicial precedents, cannot be the sole basis for a tax levy.

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Citing the Supreme Court’s judgment in Jaiprakash Industries Ltd. v. Commissioner of Central Excise (2002) and a similar ruling in Calving Wooding Consulting Ltd. v. Commissioner of Central Excise, the tribunal further stressed that demands based on income tax data, without a thorough inquiry into the nature of the service provided, were unsustainable.

CESTAT also noted that the burden of proof lay with the department, who had failed to demonstrate any clear evidence of taxable services or provide necessary investigation into the transactions. Furthermore, it was observed that documents used to raise the demand, such as those from the DGS & DM, were not obtained from the appellant’s premises and thus were not admissible under the Central Excise Act.

In the result, CESTAT set aside the service tax demand, stating that the department had not followed due diligence in the case. Thus the appeal filed was allowed, bringing relief to the consultancy firm.

To Read the full text of the Order CLICK HERE

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