Service Tax Demand Cannot be Raised Merely on Accounting Differences Without Identifying Taxable Service: CESTAT [Read Order]

The Kolkata Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) held that service tax demand cannot be raised merely based on differences in accounting records unless the department clearly identifies the taxable service and establishes its taxability under law.

Outotec India Private Limited challenged a service tax demand raised by the department primarily on the ground that figures reflected in the Profit and Loss Account, Trial Balance, and ST-3 returns did not match. Based on these differences, the department alleged short payment of service tax and confirmed a substantial demand along with interest and penalties.

The appellant argued that the show cause notice did not specify any taxable service category under which the demand was raised. They argued that service tax cannot be levied simply by comparing accounting figures without examining the nature of services rendered. According to the appellant, differences in financial statements by themselves do not prove that any taxable service was provided.

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The Revenue argued that discrepancies between the financial records and service tax returns indicated suppression of taxable value and justified the demand. The department relied on the figures appearing in the audited accounts to support its case.

The two-member bench comprising Shri Ashok Jindal (Judicial Member) and Shri K.Anpazhakan (Technical Member) observed that the burden to establish taxability rests entirely on the department. The Tribunal observed that service tax is a levy on specified services and not on accounting entries.

It observed that without identifying the taxable service and examining its nature, a service tax demand cannot be sustained. Mere differences between balance sheets, trial balances, and ST-3 returns do not automatically result in tax liability.

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The tribunal pointed out that the department failed to link the alleged differences in accounts to any specific taxable service. In the absence of such identification and analysis, the demand lacked legal basis.

On this reasoning, the CESTAT set aside the service tax demand raised solely on the basis of accounting differences and allowed the appeal in favour of the appellant.

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