By TIOL News Service

CHENNAI, OCT 10, 2014: THE assessee was originally rendering housekeeping service for certain clients. They registered themselves with the Service Tax Department and collected and paid the service tax amounting to Rs.3 ,86,217 /- for the period from 1.7.2003 to 30.6.2004. After coming to know that such a service is not liable for service tax, the assessee surrendered the registration certification and did not claim refund of the amount.

The assessee, subsequently, entered into a contract of service with BPL and ICICI to do back office work. Unaware of the taxability of the said service, the assessee did not get itself registered for this service. The department taking note of the fact that the assessee had neither paid service tax for such services rendered nor registered with the department under the category of "Business Auxiliary Service", issued a letter dated 17.6.2005, calling upon the assessee to pay service tax of Rs.4 ,28,461 /- and educational cess of Rs.7,037 /- under the category of "Business Auxiliary Service" for the back office support rendered from 1.6.2004 to 31.3.2005 along with interest. Eventually, the adjudicating authority passed the following order.

++ Appropriated the Service Tax amount of Rs.4,09,702 /- already paid by them.

++ Imposed a penalty of Rs.100 /- per day for the period during which the service tax were not paid under Section 76 of the Finance Act, 1994.

++ Imposed a penalty of Rs.1,000 /- under section 77 of the Finance Act, 1994.

++ Imposed a penalty of Rs.4,09,702 /- under section 78 of the Finance Act, 1994.

Aggrieved by the said order, the assessee filed an appeal to the Commissioner (Appeals), who, after considering the payment of service tax and interest, upheld that the imposition of penalty under Sections 76 and 77 of the Finance Act, 1994. However, he set aside the penalty imposed under Section 78 of the Finance Act, 1994.

Assailing the portion of the order of the Commissioner (Appeals) confirming the imposition of penalty under Sections 76 and 77 of the Finance Act, 1994, the assessee preferred an appeal to the Tribunal, while the Revenue assailed the portion of the order of the Commissioner (Appeals) deleting the penalty imposed under Section 78 of the Finance Act, 1994.

In the appeal filed by the assessee, the Tribunal, taking note of the provision of Section 80 of the Finance Act, 1994 and the conduct of the assessee, came to the conclusion that no penalty is leviable in the facts and circumstances of the case.

Aggrieved by the said orders, the Department has filed these appeals on the following substantial questions of law"

1. Is the Tribunal's decision to allow the service provider's appeal against the impugned Order-in-Appeal without considering the grounds in the cross appeal filed by the Department against the same Order-in-Appeal correct?

2. Is the Tribunal's decision to waive the penalties imposed under Sections 76, 77 and 78 of the Finance Act, 1994 correct?

3. Whether the Tribunal has any discretion to impose penalty, which is less than the minimum amount permissible to be imposed under Section 78 of the Finance Act?

4. Whether the Tribunal is right in totally waiving the penalty under Section 78 of the Finance Act, 1994 by virtue of Section 80 of the Finance Act, 1994 based on irrelevant considerations and by overlooking the relevant ones?

The High Court observed,

The core issue that needs to be considered in these cases is whether the Tribunal was justified in invoking Section 80 of the Finance Act, 1994 to decide not to impose penalty on the assessee.

The facts are not in dispute. It is the plea of the department that the assessee is liable to pay penalty under Sections 76 of the Finance Act, 1994 for failure to pay service tax; under Section 77 of the Finance Act, 1994 for non-registration may be justified; and under Section 78 of the Finance Act, 1994 for intending to evade payment of service tax.

A reading of the provisions of Section 78 of the Finance Act, 1994 makes it clear that penalty is leviable, if service tax has not been levied or paid or has been short-levied or short-paid or erroneously refunded by reason of (a) fraud; or (b) collusion; or (c) willful misstatement; or (d) suppression of facts; or (e) contravention of any of the provisions of this Chapter or of the Rules with an intent to evade payment of service tax.

In the case on hand, the assessee has clearly stated that they had originally got a registration certificate for house keeping and realizing that the said service is not taxable, they have surrendered the same. It may be emphasized here that the assessee had, in fact, paid duty even when there was no requirement under law and has not even chosen to claim refund till date. Even in respect of the present demand, on receipt of notice from the department about the liability of service tax in respect of back office work, they have paid the service tax and interest even before adjudication. This only goes to show that the assessee had no intention to evade payment of tax and non payment was due to lack of knowledge and awareness.

That apart, one another factor which endures to the benefit of the assessee is that there is no finding in the given case as to how the original authority has imposed penalty under Section 78 of the Act. The Original Authority should have applied his mind as to how penalty is leviable under Section 78 of the Act and there should have been some reasons given thereunder, which we find are absent in the original order.

In such view of the matter, the order of the Tribunal confirming the deletion of penalty imposed under Section 78 of the Finance Act, 1994 is justified and warrants no interference.

Apropos of the levy of penalty under Sections 76 and 77 of the Finance Act, 1994, it would be relevant to refer to Section 80 of the Act, which reads as under:

"80. Notwithstanding anything contained in the provisions of Section 76, Section 77, Section 78 or Section 79, no penalty shall be imposable on the assessee for any failure referred to in the said provisions, if the assessee proves that there was reasonable cause for the said failure."

The provision of Section 80 of the Finance Act, 1994 gives the authority the power to consider not to impose penalty in certain cases, where the assessee shows reasonable cause for his failure to comply with the requirement of the Finance Act, 1994. This provision is analogous to Section 273B of the Income Tax Act, which also states that no penalty shall be imposable on the assessee for any failure referred to in the said provision, if the assessee proves that there is reasonable cause for the failure.

The provision of Section 80 of the Finance Act, 1994 is in consonance with the decision of the Supreme Court in Pratibha Processors v. Union of India,- 2002-TIOL-273-SC-CUS, wherein it has been held that penalty is ordinarily levied for some contumacious conduct or for a deliberate violation of the provisions of the particular statute.

In the case on hand, the assessee has stated that they were under the impression that the service rendered by them will not be exigible to service tax. On an earlier occasion, the assessee registered and paid service tax on a non taxable service and they did not even seek for refund of the amount. The bona fide confusion in the mind of the assessee as to which service is taxable or non-taxable is apparent and that justifies the plea of failure to pay service tax. This reasoning pari passu applies to non registration of said service rendered by them. Therefore, the demand of penalty under Sections 76 and Section 77 of the Finance Act, 1994 is not tenable.

The High Court answered the substantial questions of law against the Revenue and in favour of the assessee. Accordingly, these appeals are dismissed.

(See 2014-TIOL-1763-HC-MAD-ST )