Arbitrary Turnover Projections Cannot Support Best-Judgment Service Tax Assessment: CESTAT New Delhi

The New Delhi Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) on 21 August held that best-judgment assessment under Section 72 of the Finance Act, 1994 cannot rest on arbitrary percentage growth or earlier-year turnover when actual financial records are available.

A Bench of Judicial Member Ashok Jindal and Technical Member K. Anpazhakan set aside an order confirming Service Tax and CENVAT credit liabilities of about Rs. 60 crore against Twenty Four Guarding Private Limited and remanded the case for fresh adjudication. It observed:

“Section 72 empowers the Department to make an assessment to the best of its judgment where the statutory conditions prescribed therein are fulfilled. However, such power is circumscribed by the material available and the requirement of a rational determination. It cannot be employed to replace actual financial data with an artificial mathematical projection without first demonstrating why the primary records were incapable of being relied upon or verified.”

The dispute arose from eight Show Cause Notices covering the period from Financial Year 2005-06 to June 2017. For several periods, the Department determined the taxable value using assumed growth rates, pro-rata calculations and turnover figures from earlier years.

The Tribunal found that audited financial statements and other financial records were available. It held that the Department could not replace this actual data with mathematical projections without first showing why the primary records could not be relied upon or verified.

It further held that taxable value cannot be determined by applying arbitrary percentage growth, pro-rata enhancement or the highest turnover from an earlier period without establishing a rational nexus with the taxable services actually rendered and the consideration received.

The Bench also held that a receipt appearing in the books of account does not automatically attract Service Tax. The nature of the receipt must first be examined to determine its taxability.

On limitation, it held that mere non-filing or delayed filing of returns, without evidence of deliberate concealment or suppression with an intent to evade tax, cannot justify invocation of the extended period of limitation.

Accordingly, the CESTAT set aside the impugned order and remanded all eight Show Cause Notices for de novo adjudication. It directed the adjudicating authority to consider eligible exemptions, non-taxable receipts, reimbursable expenses and admissible CENVAT credit while recomputing the liability.

For the Appellant: Shri Anurag Mishra, Advocate and Ms. Sanya Bhatia, Chartered Accountant.

For the Revenue/Respondent: Shri Rajeev Kapoor, Authorized Representative.