CESTAT raises Contradictions in VCES Compliance; Remands 34.68 lakhs Service Tax Demand against Sun Direct Distributor [Read Order]

The Chennai Bench of the Customs, Excise & Service Tax Appellate Tribunal (CESTAT) has remanded a ₹34.68-lakh service tax dispute involving M. Viswanathan, a Sun Direct Distributor, after finding major inconsistencies in the payments claimed under the Voluntary Compliance Encouragement Scheme (VCES). The Tribunal held that conflicting challan records and incomplete verification by the lower authorities rendered the earlier orders unsustainable.

The appellant, functioning as an authorized distributor of Sun Direct DTH services, was engaged in selling recharge vouchers, earning commission/margin, and performing installation/activation activities for subscribers.

The show cause notice covering April 2008 to March 2013 demanded service tax, interest, and penalties under Sections 77 and78 Finance Act, 1994, invoking the extended period of limitation for alleged suppression. The Order-in-Original recorded service tax demand of ₹34,68,116 (excluding cesses).

Further,during adjudication, the appellant produced several challans claiming payment under VCES, stating that he had made a voluntary disclosure and discharged the tax liability under the 2013 amnesty scheme. It was also contended that Sun Direct had already discharged service tax on full MRP of recharge vouchers; therefore, distributor’s margin was already embedded in the tax computation.

The appellant contended that no service tax was independently payable on his commission from Sun Direct because the DTHoperator had already discharged service tax on the full MRP of the recharge vouchers, which necessarily subsumed the distributor’s margin, eliminating the scope for a second levy.

He further asserted that he had opted for the Voluntary Compliance Encouragement Scheme (VCES) and produced several challans showing payments made under the scheme, but the lower authorities failed to verify these records and instead proceeded on incomplete information.

The appellant maintained that the discrepancies in challan figures could only be resolved through factual verification, which was never undertaken. He also argued that he operated under a bona fide belief that his activities were not separately taxable, especially given judicial precedents such as Kumar’s Electronics, Zippy , and MCC TV, where CESTAT had held that distributors were not liable when the principal service provider had already paid service tax.

The Revenue insisted that the appellant had not fully discharged his VCES obligations, pointing to conflicting challan dates and amounts. It argued that the appellant had not fully discharged VCES dues, pointing to contradictory challans and unclear payment records, and maintained that the services were squarely taxable.

The Tribunal comprising Justice P. Dinesha [Judicial Member] and Vasa Seshagiri Rao[Technical Member] found that the orders of the lower authorities were unsustainable because they failed to properly verify the appellant’s claim of payments made under the Voluntary Compliance Encouragement Scheme (VCES).

CESTAT noted contradictions between the challans produced by the appellant, the figures recorded in the VCES declaration, and the amounts relied upon by the Commissioner, observing that such discrepancies could not be resolved without detailed factual verification.

It further held that the Commissioner erred in dismissing the VCES plea on the ground that it was not raised at the adjudication stage, emphasising that once a declaration is filed under the scheme, the Department cannot ignore it without verification.

The Bench also highlighted that no inquiry had been undertaken into the appellant’s contention that Sun Direct had already paid service tax on the full MRP of recharge vouchers, a factor that could materially affect the distributor’s tax liability.

The Tribunal concluded that the matter involved mixed questions of fact requiring thorough examination of all VCES challans, payment records, tax computations, and contractual arrangements. Accordingly, it set aside the order of the Commissioner and remanded the case to the adjudicating authority for de novo consideration with directions to provide the appellant a full opportunity of hearing and to pass a fresh order in accordance with law.