Service Tax Demand Based only on ITR–ST-3 Mismatch Unsustainable: CESTAT Holds Revenue must Establish Taxable Value before Levy [Read Order]

The Allahabad Bench of Customs, Excise andService Tax Appellate Tribunal (CESTAT) set aside a Service Tax demand and ruled that the Revenue Department cannot raise a demand solely based on a mismatch between the figures in the Income Tax Return (ITR) data and the ST-3 returns without properly establishing the taxable nature of the entire differential amount.

Ajay Kumar Agarwal (appellant) who is engaged in the accommodation business, was availing an exemption under Entry No. 18 of Mega Exemption Notification No. 25/2012 (S.T.), which exempted services by a hotel for residential or lodging purposes where the declared tariff of a unit of accommodation was below one thousand rupees per day.

The dispute arose when the Department, relying on Third Party/ITR data for 2014-15, observed a significant difference between the total receipts shown in the ITR data ₹35,28,443 and the taxable value declared in the ST-3 return ₹95,052.

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The department issued a Show Cause Notice (SCN) on 15.12.2020 for a Service Tax demand of ₹4,24,367 on the differential amount of ₹34,33,391.

The appellant contended that their room rent/tariff rate was less than ₹1,000 per day and hence exempted. Tax was paid only in cases where the room rent exceeded ₹1,000 per day due to extraordinary conditions like providing extra beds or amenities.

The Assistant Commissioner, in the Order in Original (OIO) dated 29.09.2022, confirmed a demand of ₹2,35,361 and held that documents were only available for a small non-taxable amount, but not for the balance.

This was subsequently remanded by the Commissioner (Appeals) on 26.12.2023 for re-determination of the tax liability for the period from October 2014 to March 2015. The Deputy Commissioner requantified the taxable value as ₹20,01,528 for the October 2014 to March 2015 period (out of total receipts of ₹20,96,580) and confirmed a Service Tax demand of ₹1,48,433.

In the subsequent appeal, the Commissioner (Appeals) reduced the taxable value to ₹17,41,833 (after deducting an amount already held as non-taxable in earlier proceedings) and finally reduced the Service Tax demand to ₹1,29,174.

The Commissioner (Appeals), however, rejected the full exemption claim, stating the appellant failed to submit documents to establish the declared tariff was below ₹1,000 per day. The matter was finally brought before the CESTAT.

The Bench, comprising P.K. Choudhary, Member (Judicial), found that the Service Tax Department raised the demand based merely on the discrepancy between the ST-3 returns and the Form 26AS statement (ITR data).

The Tribunal observed that revenue has compared the figures reflected in the ST-3 returns and figures reflected in Form 26AS statement and raised the demand without further examining the reasons for the difference in the two statements.

The tribunal observed that revenue cannot raise the demand on the basis of such difference without examining the reasons for the said difference and without establishing that the entire amount received by the appellant as reflected in the Form 26AS statement.

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The tribunal set aside the Service Tax demand of Rs. 1,29,174/- and all penalties imposed under Sections 78 and 77(1)(c) of the Finance Act, 1994. The appeal was allowed.