The Allahabad Bench of CESTAT has set aside a service tax demand raised against a proprietary concern, holding that a mere difference between ST-3 returns and Income Tax Returns cannot automatically explain a service tax demand without proper examination of the books of accounts and the nature of transactions.
The bench of P.K. Choudhary (Judicial Member) has stated that the Revenue authorities did not prove that the disputed receipts were actually consideration for taxable services under the Finance Act, 1994. The SCN was not sustainable in law because the department had not performed the required factual examination before raising the demand.
The issue emerged when the department collected third-party details alleging that M/s Vinyl Tech, a proprietary concern involved in construction-related services, had not released its service tax liability. As per the alleged discrepancies, a Show Cause Notice (SCN) was issued on 22 October 2021, asking for service tax of Rs 4.77 lakh along with interest and penalties.
The taxpayer before the Tribunal stated that its financial statements for FY 2016-17 clearly bifurcated receipts into sales, works contract services, and job work activities. Service tax liability on the taxable part had earlier been released, and the small remaining amount, including interest, had also been deposited in the pendency of the appeal.
Also, the taxpayer claimed that a significant part of the receipts related to works contract services rendered to government entities, along with IIT Kanpur, ITI Limited Raebareli, and Power Grid Corporation of India. As per the appellant, these services were waived under Entry No.12 of Mega Exemption Notification No. 25/2012-ST dated 20 June 2012.
Concerning demand for FY 2017-18, the taxpayer said that the disputed amount of Rs 10.96 lakh pertinent with four invoices that had the sale of goods which were erroneously reported in ST-3 returns by the accountant.
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It was claimed that trading of goods comes within the negative list u/s 66D(e) of the Finance Act, 1994, and thus no service tax can be charged on these transactions. Supporting invoices exhibiting VAT and SAT charges were furnished to the Tribunal.
Post analysing the records, the Tribunal considered the claims of the taxpayer. It was observed that the works contract services were furnished before government entities, and no service tax had been collected from those recipients. Also, the Bench considered the disputed invoices for FY 2017-18 related to the sale of goods and thus fell outside the service tax regime.
A crucial observation has been made by the Tribunal that the complete demand had been raised only on the grounds of differences between ST-3 returns and income tax return (ITR) without any scrutiny of the books of accounts or verification of the true nature of the transactions. It upheld that the same strategy was legally unsustainable.
The Bench outlined that u/s 73 of the Finance Act, 1994, the department is required to specify that the amount asked to be taxed actually shows the consideration for taxable services.
The department must show that the transactions fulfilled the regulatory definition of “service” u/s 65B(44) and that the value was taxable under section 67 of the Act. It was discovered by the Tribunal that the same foundational exercise was not present in the SCN.
The Tribunal set aside the impugned order and permitted the appeal with the consequential relief in favour of the taxpayer.
| Case Title | M/s Vinyl Tech Vs. Commissioner, CGST & Central Excise |
| Case No. | Service Tax Appeal No.70818 of 2025 |
| Counsel For PETITIONER | Shri Prakhar Shukla |
| Counsel For Respondent | Ms Chitra Srivastava |
| Allahabad CESTAT | Read Order |
