Higher Turnover in Books of Accounts Can Be Considered for Service Tax Liability, But Only if Figures Reflect Value of Taxable Services: CESTAT [Read Order]

The Customs, Excise & Service Tax Appellate Tribunal ( CESTAT ), New Delhi held that higher turnover shown in books of accounts can be considered for determining service tax liability, but only if such figures actually represent the value of taxable services. Authorities must first verify whether the amounts reflected in financial accounts pertain to taxable services, and cannot blindly adopt them over statutory return figures.

Kalpakaaru Projects Pvt Ltd, the appellant engaged in multiple services such as interior design, architecture, manpower supply, and works contracts, was subjected to audit scrutiny for FY 2015-16 to June 2017.

The department raised a demand exceeding ₹3.63 crore in service tax along with interest and equal penalty, partly on the basis of differences between revenue as per the company’s financial accounts and the ST-3 returns.

The adjudicating authority held that higher turnover reflected in the books could be adopted for service tax liability.

The appellant’s counsel argued that 61.23% of the contract value related to goods and components, leaving only 38.73% attributable to services under Rule 2A(i). Instead of this detailed calculation, it opted for the simpler abatement under Rule 2A(ii)(A) and paid service tax on 40% of the contract price.

The works executed covering electricity, plumbing, air conditioning, flooring, ceiling, and partitions to convert bare structures into usable showrooms constituted original works and not mere finishing services. Hence, service tax demand on 70% of the contract value was unjustified, said the counsel.

The counsel of appellant also contended that extended limitation under Section 73 was inapplicable, since it regularly filed returns, its activities were already scrutinized in earlier audits (which classified the works as original), and no suppression or fraud could be alleged. The later show cause notice arose only because a subsequent audit team took a different view.

The Tribunal observed that while authorities are entitled to consider figures from financial accounts if they are higher than those reported in returns, such figures can be adopted only if they represent taxable services.

The appellant had pointed out that its financial statements included not just taxable services but also other income streams, such as trading of goods, interest, and miscellaneous receipts. Since the department had not established that the entire turnover in the books related solely to taxable services, the Tribunal held that the demand on this count could not be sustained.

The bench of Binu Tamta and P V Subba Rao said that before substituting financial account figures for return figures, it is necessary to verify whether the higher turnover actually corresponds to the value of taxable services. Mere differences in reconciliation cannot automatically lead to higher service tax liability.

Accordingly, the Tribunal set aside most of the service tax demand, except a limited reversal of CENVAT credit under Rule 6(3) of the CENVAT Credit Rules, 2004 for the normal period of limitation. All penalties were also dropped.

P.K. Sahu, Advocate appeared for the appellants and Anand Narayan, Authorised Representative appeared for the respondents.

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