Service Tax Demand Based Solely On Third-Party TDS, ITR Data Unsustainable Without Inquiry: CESTAT Delhi

The Customs, Excise & Service Tax Appellate Tribunal (CESTAT) at New Delhi has recently held that the tax department cannot sustain a service tax demand by invoking the extended limitation period solely on the basis of discrepancies between service tax returns and third-party TDS/ITR data.

The tribunal held the department must independently verify whether taxable services were actually rendered before raising such a demand. It accordingly set aside a ₹7.67 lakh demand against Vikash Security Services.

A bench of Judicial Member Ajay Sharma held that third-party tax data could only trigger an inquiry and could not conclusively establish tax liability.

“It is, at best, a starting point for inquiry. It is not, by itself, conclusive proof of taxable service rendered or of service tax liability incurred. Once the department had access to such TDS data, including the PAN and TAN of the paying parties, it was well within its power and, indeed, its duty, to conduct independent verification from those very parties to ascertain whether taxable services had in fact been provided. That exercise was conspicuously absent here."

The dispute arose after the department compared the appellant's ST-3 returns (semi-annual service tax returns) with ITR/TDS data for FY 2016-17 and alleged that taxable receipts amounting to ₹98.97 lakh had not been disclosed in the service tax returns. Based on this, a show cause notice was issued demanding service tax, interest, and penalties.

Before the tribunal, the appellant argued that the department had invoked the extended limitation period solely on the basis of third-party TDS and ITR data without conducting any independent inquiry or establishing fraud, wilful suppression, or concealment.

The appellant also contended that certain services rendered to animal husbandry and veterinary centers, educational institutions, and the district election office were exempt or related to sovereign functions. It further argued that the receipts in question had already been disclosed in its books of account and income tax returns.

The tribunal relied significantly on its recent ruling in Homeopathic Medical Publishers v. Commissioner CGST & Central Excise, Mumbai, where it held that income disclosed under the Income Tax Act cannot automatically be treated as consideration for taxable services. The Tribunal in that case had also held that authorities must independently investigate before raising demands based merely on return mismatches.

It also referred to the Gujarat High Court's ruling in Nimeshbhai Gunvantbhai Patel, where the Court held that show cause notices based solely on Form 26AS data without properly examining the assessee's explanation were unsustainable.

The Tribunal further cited Commissioner of CGST & Central Excise, Mumbai East v. Modern Road Makers Pvt Ltd, which held that differences between income tax and service tax returns cannot automatically be presumed to represent taxable turnover.

On limitation, the tribunal underscored that the burden squarely rested on the department to justify invoking the extended period.

“Invocation of the extended period of limitation is not a matter of course. It is a penal exception to the normal period, and must be founded upon clear evidence of fraud, collusion, wilful mis-statement, or suppression of facts with intent to evade payment of tax.”

The tribunal further held that a bona fide belief regarding exemption or non-taxability could not amount to wilful suppression. This was particularly so where the receipts had already been disclosed in the appellant's books and income tax returns.

Accordingly, the tribunal set aside the impugned order and allowed the appeal.

For Appellant: Advocate Dr. Arvind Singh Chawla, 

For Respondent: Shri Ram Parvesh Prasad, Authorised Representative