Best-judgment service tax assessments cannot rest on arbitrary estimates when verifiable records are available.

The appellant provided Security Agency Services through offices in several locations and held service-tax registration at its Delhi premises.

Following an audit for FY 2005–06 to 2009–10, the Department alleged that the appellant had understated taxable receipts, wrongly claimed exemptions and CENVAT credit, failed to furnish returns and operated from unregistered premises.

Eight show-cause notices/statements of demand were issued for FY 2005–06 to June 2017, proposing aggregate service-tax demands of approximately Rs. 63.62 crore.

The adjudicating authority ultimately confirmed service-tax/CENVAT liabilities aggregating to Rs. 60,00,93,724, with interest and penalties, after allowing limited credit for verified cash payments for FY 2011–12 and FY 2012–13.

The appellant challenged the order on the grounds of arbitrary valuation, unlawful best-judgment assessment under Section 72 of the Finance Act, 1994, rejection of exemptions and CENVAT credit, violation of natural justice, duplication of proceedings and improper invocation of the extended limitation period.

1. Whether the Department was justified in determining the appellant’s taxable value through best-judgment assessment under Section 72 of the Finance Act, 1994, by applying assumed growth rates, pro-rata calculations or earlier peak turnover despite the availability of audited financial records and other statutory data?

2. Whether exempted, non-taxable and reimbursable receipts could be included in the taxable value merely because they appeared in the appellant’s financial statements, without transaction-wise verification?

3. Whether the appellant’s claims for CENVAT credit could be denied without examination of the underlying invoices, ledgers, expenditure and statutory records?

4. Whether the appellant’s claims relating to export of services and services provided to SEZ units could be rejected solely for non-production of supporting documents, without independent verification of the underlying transactions?

5. Whether the extended period of limitation under the proviso to Section 73(1) of the Finance Act, 1994 could be invoked in the absence of evidence of wilful suppression, fraud or intent to evade tax, particularly where the Department had already audited or obtained the appellant’s financial records?

6. Whether the proceedings for FY 2016–17 involved duplication with the parallel DGGSTI investigation and, if so, whether overlapping demands could be sustained?

The Tribunal applied Section 67 of the Finance Act, 1994, under which service tax is chargeable on the consideration attributable to taxable services; taxable liability cannot be computed merely from gross accounting figures without establishing the taxable character of the receipts.

Section 72 permits best-judgment assessment only where its statutory conditions are satisfied, but such assessment must be based on reasonable and relevant material and cannot become an arbitrary “best guess” or mathematical extrapolation.

Under the proviso to Section 73(1), the extended limitation period requires fraud, collusion, wilful misstatement, suppression of facts or contravention with intent to evade tax; mere non-payment, non-filing or procedural default is insufficient.

The Tribunal relied on Pushpam Pharmaceuticals Co. v. CCE, Anand Nishikawa Co. Ltd. v. CCE, Nizam Sugar Factory v. CCE and Mahanagar Telephone Nigam Ltd. v. Union of India for this principle.

For reimbursable expenses, Union of India v. Intercontinental Consultants and Technocrats Pvt. Ltd. established that, before the amendment effective from 14 May 2015, genuine reimbursed expenses not constituting consideration could not be included in taxable value; for the post-amendment period, exclusion depended on fulfilment of the “pure agent” conditions under Rule 5(2) of the Service Tax (Determination of Value) Rules, 2006.

CENVAT credit had to be examined under the CENVAT Credit Rules, 2004, and could not be denied on assumptions or generalized findings.

The Tribunal found that the Department had relied selectively on the appellant’s financial records: it adopted gross figures from the accounts while disregarding the appellant’s claims concerning exempted services, non-taxable receipts, reimbursements and CENVAT credit.

The best-judgment assessments were held unsustainable because the Department used assumed 50% growth, pro-rata figures and earlier peak turnover without demonstrating a rational nexus with the actual taxable services or explaining why the available audited records could not be verified and reconciled.

The Tribunal further held that the exemption and SEZ/export claims could not be rejected merely because documents were not produced; the underlying contracts, invoices, remittance records, recipient details and other evidence required examination.

Similarly, CENVAT credit required verification of invoices, ledgers and the nature of input services, particularly since the appellant’s accounts reflected substantial administrative and operational expenditure beyond salaries.

On limitation, the Department’s prior audit and access to the appellant’s records negated a finding of deliberate suppression; repeated invocation of the extended period on substantially the same factual basis was barred by the principle in Nizam Sugar Factory.

For FY 2016–17, the Tribunal also directed verification of the DGGSTI proceedings to prevent double taxation or recovery of the same liability.

For SCN-I, the Department was directed to re-examine exempted, non-taxable and reimbursable receipts, allow eligible CENVAT credit, restrict any surviving demand to the normal limitation period and exclude the portion relating to April–September 2005, which was beyond the statutory five-year outer limit.

For the remaining notices, the adjudicating authority was directed to determine liability on the basis of actual and verifiable records, undertake transaction-wise verification of exemptions and reimbursements, allow admissible CENVAT credit, and exclude any demand covered by parallel or prior proceedings.

The extended period of limitation was held unavailable wherever invoked; consequential interest and penalties were to abide by the fresh determination.

The appellant was to be given a reasonable opportunity of hearing and to produce supporting documents, followed by a fresh, reasoned and speaking order.