CESTAT says Income Tax Data Alone Insufficient, Excludes Value of Goods from Taxable Service while quashing Service Tax Demand, Penalties [Read Order]

M/s S.I. Enterprises, a registered service provider under the erstwhile service tax regime, was engaged in works contract services, particularly in the erection, commissioning and installation of industrial equipment such as boilers and electrostatic precipitators. Based on third-party information shared by the Income Tax Department, the Central GST Division in Bijnore initiated proceedings, asserting that the appellant had received ₹57,68,440 during the financial year 2014–15 for providing taxable services but had failed to discharge service tax. A Show Cause Notice was issued, and an ex parte order was passed confirming the demand along with interest and equal penalty under Section 78, as well as late fees and residual penalties under Section 77(2) of the Finance Act, 1994.

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The appellant contested the allegations by submitting copies of invoices, work contracts, and a Chartered Accountant’s certificate clearly segregating amounts received for goods and services. It was emphasized that except for one invoice, the remaining transactions during the year pertained solely to the sale of materials, which are not liable to service tax. The sole composite invoice for ₹24,67,790 included both goods and services and was squarely covered under the definition of “works contract” under Section 65B(54) of the Finance Act, 1994. The appellant further clarified that they had already paid the applicable service tax liability under the partial reverse charge mechanism before the issuance of the Show Cause Notice.

The Tribunal, presided over by Judicial Member Mr. P.K. Choudhary, observed that the reliance placed by the Department on the 26AS statement and the income tax filings was misplaced and insufficient. The Tribunal held that for purposes of service tax, the Department must clearly identify the nature of services rendered and determine the value of the service component as per the specific valuation rules. Referring to precedents such as Kush Construction, Arpit Advertising, and M. Sugandhi, the Tribunal reaffirmed that no tax can be levied in the absence of specific findings regarding the taxable nature of a transaction, and that financial data alone cannot suffice.

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Upon examining the invoices, the Tribunal found that goods worth ₹33,00,650 were supplied under distinct sale transactions supported by work orders and not linked to any service obligations. These were, in effect, pure trading transactions and squarely fell under the negative list category under Section 66D(e) of the Finance Act, 1994, which exempts trading of goods from service tax. The Tribunal also rejected the Commissioner (Appeals)’ argument that service tax could be imposed in the absence of VAT payment, holding that actual payment of VAT is not essential if the transaction is otherwise leviable to VAT under law. The law requires only that the transaction be capable of being taxed as a sale, not that tax must actually have been paid.

With respect to the composite invoice involving both goods and services, the Tribunal held that the proper method for determining service tax liability was through Rule 2A(ii)(A) of the Service Tax (Determination of Value) Rules, 2006. Accordingly, only 40 percent of the gross amount under the works contract was taxable. Applying this, the total service tax payable came to ₹1,22,008, of which the appellant, being an individual firm, was liable to pay 50 percent i.e., ₹61,004 under Notification No. 30/2012-ST dated 20.06.2012. The Tribunal noted that this amount had already been discharged along with interest well before the issuance of the SCN.

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Since there was no short payment of service tax, the Tribunal held that no penalty under Section 78 could be imposed, as the provision applies only in cases where tax has not been levied, paid, or has been short-paid. Likewise, the Tribunal found no justification for penalty under Section 77(2), as the order lacked any discussion or findings on the necessity of invoking this residual penalty clause. As regards the late fees for delayed filing of ST-3 returns for October 2014 to March 2015, the Tribunal accepted the appellant’s argument that since no tax liability existed during that period, the requirement to file returns did not arise, as clarified by CBEC Circular No. 97/08/2007-ST. The Tribunal also cited earlier decisions such as Suchak Marketing Pvt. Ltd. and Amrapali Barter Pvt. Ltd., which held that no penalty is imposable for non-filing of nil returns.

In conclusion, the Tribunal allowed the appeal in full, set aside the Order-in-Appeal dated 31.01.2023, and quashed the service tax demand along with all associated penalties and late fees.

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