Gauhati High Court Quashes Service Tax Demand Based Solely on Form 26AS Data

Background of the Dispute

The case of Technocom Vs Union of India came before the Gauhati High Court as a writ petition filed by a partnership firm, M/S Technocom, operating from Guwahati. The firm, registered under the VAT Act, 2003 and the Finance Act, 1994, executes contracts for Railways as a contractor.

For the Financial Year 2016-17, the Principal Commissioner, GST & Central Excise Commissionerate issued a show cause notice dated 22.10.2022. The notice alleged that:

  • The assessee had suppressed the actual value of taxable services for FY 2015-16 but the demand was framed for FY 2016-17.
  • The assessee did not correctly reflect its service tax liability in the ST-3 returns for FY 2016-17.
  • Service tax of Rs. 9,37,91,059/- was short paid, allegedly in contravention of Sections 66B, 67, 68 and 70 of the Finance Act, 1994 read with Rule 6 and Rule 7 of the Service Tax Rules, 1994.

The entire foundation of the demand was a mismatch between figures declared in ST-3 returns and receipts appearing in Form 26AS obtained from the Income Tax Department.

Revenue’s Case Based on Form 26AS

According to the department:

  • As per third-party information from the Income Tax Department, the assessee had shown Rs. 63,62,45,475/- as “sale of services” in its Income Tax Return.
  • In contrast, the assessee’s ST-3 returns for the same period showed only Rs. 1,09,71,749/- as gross value of services.
  • Based on this difference, the department treated Rs. 62,52,73,726/- as suppressed taxable value, on which service tax of Rs. 9,37,91,059/- was computed.
  • The extended period under the proviso to Section 73(1) of the Finance Act, 1994 was invoked, along with interest under Section 75 and penalty under Section 78.

Subsequently, an Order-in-Original dated 28.06.2022 (No. 27/Pr.Commr./ST/GHY/2022-23) confirmed:

  • Service tax demand of Rs. 9,37,91,059/- for FY 2016-17
  • Interest under Section 75
  • Equal penalty of Rs. 9,37,91,059/- under Section 78

The adjudicating authority recorded that the services rendered by the assessee:

  • Did not fall under the Negative List, and
  • Were not covered by Mega Exemption Notification No. 25/2012-ST dated 20.06.2012

The fundamental plank of the order was that Form 26AS showed total receipts of Rs. 63,62,45,475/-, and therefore the entire value was treated as taxable services.

Assessee’s Submissions Before the Adjudicating Authority

The assessee filed a detailed reply dated 26.10.2021 to the show cause notice, clarifying the nature of its activities and the legal exemptions available.

Nature of Contracts and Claim of Exemption

The assessee explained that:

  • The firm mainly executes works contracts relating to:
    • Construction,
    • Erection,
    • Commissioning, or
    • Installation of original works pertaining to Railways, and
    • Certain AMC (annual maintenance contract) services.
  • It functions as a main contractor for Railway contracts and also engages sub-contractors for partial or full execution of such works.
  • Railway-related works executed by the assessee are exempt from service tax under Entry No. 14(a) of Mega Exemption Notification No. 25/2012-ST dated 20.06.2012 w.e.f. 01.07.2012, as amended.

To substantiate these points, the assessee submitted:

  • Copies of Railway work orders indicating the nature of works.
  • Audited financial statements for FY 2016-17, including:
    • Balance Sheet,
    • Contract Account,
    • Profit & Loss Account with Schedules,
    • Significant accounting policies.
  • A clarification that accounts are maintained on mercantile basis, whereas TDS deduction represented payments on receipt basis, explaining timing differences between receipts and accruals.

The assessee further highlighted that:

  • For AMC services, wherever taxable, service tax had been duly paid and returns filed.
  • Many of the receipts in Form 26AS included amounts on which, even if service tax was applicable, the liability would fall on the service recipient under the reverse charge mechanism, not on the assessee.

The assessee maintained that:

  • Form 26AS is merely a TDS statement under the Income Tax Act, 1961.
  • It only records tax deduction at source against payments made and does not classify receipts as:
    • Taxable services,
    • Exempt services, or
    • Services taxable under reverse charge.
  • Therefore, Form 26AS cannot, on its own, establish service tax liability under the Finance Act, 1994.

Challenge to Extended Limitation, Interest and Penalty

The assessee attacked the show cause notice and the Order-in-Original on several legal grounds:

  1. Improper invocation of extended limitation under Section 73
    • Section 73(1) allows notice within 18 months from the relevant date.