The Allahabad Bench of the Customs, Excise and Service Tax Appellate Tribunal (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 justify a service tax demand without proper examination of books of accounts and the nature of transactions.
The bench of P.K. Choudhary (Judicial Member) observed that the Revenue authorities failed to establish that the disputed receipts were actually consideration for taxable services under the Finance Act, 1994. The Show Cause Notice (SCN) itself was unsustainable in law because the Department had not conducted the necessary factual examination before raising the demand.
The dispute arose after the Department gathered third-party information alleging that M/s Vinyl Tech, a proprietary concern engaged in construction-related services, had not properly discharged its service tax liability. Based on the alleged discrepancies, a Show Cause Notice dated 22 October 2021 was issued demanding service tax of ₹4.77 lakh along with interest and penalties.
Before the Tribunal, the assessee explained that its financial statements for FY 2016-17 clearly bifurcated receipts into sales, works contract services, and job work activities. It was argued that service tax liability on the taxable portion had already been substantially discharged and the small remaining amount along with interest had also been deposited during the pendency of the appeal.
The assessee further contended that a substantial portion of the receipts pertained to works contract services rendered to government entities including IIT Kanpur, ITI Limited Raebareli, and Power Grid Corporation of India. According to the appellant, such services were exempt under Entry No. 12 of Mega Exemption Notification No. 25/2012-ST dated 20 June 2012.
With regard to the demand for FY 2017-18, the assessee submitted that the disputed amount of ₹10.96 lakh related to four invoices involving sale of goods that had been mistakenly reported in ST-3 returns by the accountant. It was argued that trading of goods falls under the negative list under Section 66D(e) of the Finance Act, 1994 and therefore no service tax could be levied on such transactions. Supporting invoices showing VAT and SAT charges were also produced before the Tribunal.
After examining the records, the Tribunal accepted the assessee’s contentions. It noted that the works contract services were indeed provided to government entities and no service tax had been collected from those recipients. The Bench also accepted that the disputed invoices for FY 2017-18 pertained to sale of goods and therefore fell outside the service tax regime.
The Tribunal made a critical observation that the entire demand had been raised solely on the basis of differences between ST-3 returns and Income Tax Returns without any scrutiny of books of accounts or verification of the true nature of the transactions. It held that such an approach was legally unsustainable.
The Bench further emphasized that under Section 73 of the Finance Act, 1994, the Department must first establish that the amount sought to be taxed actually represents consideration for taxable services. The department was required to demonstrate that the transactions satisfied the statutory definition of “service” under Section 65B(44) and that the value was taxable under Section 67 of the Act. The Tribunal found that this foundational exercise was completely absent in the Show Cause Notice.
The Tribunal set aside the impugned order and allowed the appeal with consequential relief in favour of the assessee.
Case Details
Case Title: M/s Vinyl Tech Versus Commissioner, CGST & Central Excise, Kanpur
Citation: JURISHOUR-1193-CES-2026(ALL)
Case No.: Service Tax Appeal No.70818 of 2025
Date: 08.05.2026
Counsel For Appellant: Prakhar Shukla, Advocate
Counsel For Respondent: Chitra Srivastava, Authorised Representative
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