Gauhati High Court Says Service Tax Demand Cannot Be Based Solely on Form 26AS Data, Orders Fresh CESTAT Review

Gauhati High Court Says Service Tax Demand Cannot Be Based Solely on Form 26AS Data, Orders Fresh CESTAT Review

Introduction

The Gauhati High Court has held that the Revenue Department cannot demand service tax solely on the basis of data reflected in Form 26AS, without conducting a proper inquiry into the nature of the transactions. A Division Bench comprising Justice Michael Zothankhuma and Justice Shamima Jahan delivered the ruling while hearing an appeal filed by the Principal Commissioner of CGST, Dibrugarh challenging an order of the Customs Excise and Service Tax Appellate Tribunal that had set aside a service tax demand of ₹6.39 crore imposed on a contractor.

Factual Background

The dispute arose from service tax proceedings initiated against a contractor who had executed works for government authorities including the Public Works Department (PWD) and the Indian Railways. The tax department issued a show-cause notice in 2019 proposing recovery of service tax based on information contained in the contractor’s Form 26AS for the period between 2013 and 2018. The department alleged that the data reflected taxable receipts that had not been subjected to service tax.

The contractor contested the demand and argued that the services rendered fell within the “Mega Exemption” provided under Notification No. 25/2012-ST dated June 20, 2012, which exempts certain services provided to government authorities. Despite these submissions, the department proceeded to confirm the service tax demand.

Procedural Background

The contractor challenged the order before the CESTAT, Kolkata. The Tribunal set aside the demand, holding that Form 26AS data could not be used as the sole basis for levying service tax. The Tribunal also found that the department had failed to conduct the mandatory pre-show cause notice consultation required under the 2017 Master Circular in cases involving tax demands exceeding ₹50 lakh. Aggrieved by the decision, the Principal Commissioner of CGST, Dibrugarh filed an appeal before the Gauhati High Court.

Issues

1. Whether service tax can be demanded solely on the basis of information reflected in Form 26AS.

2. Whether the absence of mandatory pre-show cause notice consultation rendered the demand unsustainable.

Contentions of the Parties

The Revenue Department argued that the discrepancies reflected in Form 26AS indicated taxable receipts that had not been declared for service tax purposes. It therefore contended that the demand raised by the department was justified.

The contractor, on the other hand, submitted that Form 26AS merely reflects income on which tax has been deducted at source and does not establish whether the underlying transactions are taxable under service tax law. The contractor further argued that the services rendered were covered under the Mega Exemption Notification and therefore did not attract service tax liability.

The respondent also pointed out that the department had failed to conduct the mandatory pre-show cause notice consultation required before issuing a demand exceeding ₹50 lakh.

Reasoning and Analysis

The High Court observed that the Revenue Department cannot rely solely on Form 26AS data to determine service tax liability. The Court noted that Form 26AS only reflects income received and tax deducted at source but does not provide details regarding exemptions or the precise nature of services rendered. The Bench further held that the adjudicating authority cannot travel beyond the scope of the show-cause notice or introduce issues that were not originally raised in the notice.

The Court also examined the requirement of mandatory pre-show cause notice consultation prescribed under the 2017 Master Circular. It held that the department had failed to comply with this procedural requirement before issuing the demand notice. Although a subsequent circular issued in 2021 made such consultations optional in cases involving fraud, collusion, or willful suppression, the Court noted that no such allegations were present in the show-cause notice in the present case. However, the Court observed that the dispute had not yet been adjudicated on its merits because the CESTAT had disposed of the matter primarily on technical grounds relating to the absence of pre-show cause consultation.

Decision

The Gauhati High Court remanded the matter to the CESTAT, Kolkata for fresh consideration on merits. The Court directed that the Tribunal examine the case based on the invoices and other evidence already on record, rather than relying solely on Form 26AS data or procedural technicalities.

In this case the petitioner was represented by S C Keyal, Advocate. Meanwhile the respondent was represented by S Mitra, A. Kalita and A K Boro, Advocates.