Service Tax Demand Requires Proper Comparison Of Audited Accounts And ST-3 Returns: CESTAT Allahabad

On Thursday, 29 October, the Allahabad Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) held that a service tax demand cannot be raised merely on the basis of differences between figures recorded in financial statements and tax returns without properly examining the records.

A Bench comprising Technical Member Sanjiv Srivastava allowed an appeal filed by My Car Pvt. Ltd. against a service tax demand, holding that the department could not selectively rely on discrepancies in CENVAT credit figures while ignoring other details relating to tax liability and payments. The Tribunal observed:

“The demand made without proper verification and complete comparison of the Audited Financial Statements and ST-3 returns is obnoxious and bad in law.”

My Car Pvt. Ltd., an authorised Maruti Suzuki dealer engaged in the sale and servicing of vehicles, faced the demand after the department noticed differences between its financial records and service tax returns during an audit. The department subsequently alleged excess utilisation of CENVAT credit and non-payment of service tax on certain receipts.

The company challenged the demand, arguing that the differences arose from accounting adjustments and that the department had failed to examine its complete financial records before raising the demand.

The Tribunal found that the department had relied on discrepancies in CENVAT credit figures while ignoring financial statements that also reflected higher tax liability and higher tax payments. It held that the demand could not be sustained without proper verification and comparison of the relevant records.

Further, it held that income from the sale of old and used vehicle parts and scrap could not be subjected to service tax where the transactions involved the sale of goods on which VAT had already been paid. It also held that logistic and handling charges forming part of vehicle sales could not be treated as consideration for a separate taxable service.

However, the Bench upheld the taxability of certain other receipts, including cancellation charges and some reimbursements, after examining the nature of the transactions.

On limitation, it held that the dispute involved the interpretation of legal provisions and that the department could not invoke the extended period of limitation to recover the tax.

Accordingly, the CESTAT set aside the demand relating to CENVAT credit and the penalties imposed on My Car Pvt. Ltd. and allowed the appeal.

For the Appellant: Advocate Amit Awasthi.

For the Revenue: Surendra Ram, Authorised Representative.