By TIOL News Service

NEW DELHI, DEC 10, 2015: REVENUE is in appeal before the High Court.

The facts are that SCNs demanding Service Tax of Rs.8,15,44,386/- for the period 2004-05 to 2008-09; Rs.89,76,597/- for the period 2009-10 and Rs.81,07,919/- for the period 2010-11 were issued and confirmed by the adjudicating authority on 6th November 2012 along with interest. Equivalent Penalty was imposed u/s 78 of FA, 1994 in respect of the first SCN and as regards the other two SCNs penalty was imposed u/ss 76 & 77 of FA, 1994.

Aggrieved, appeals along with applications for stay were filed and listed before the CESTAT on 18th November 2014 i.e. over two years after the passing of the Order-in-Original by the Adjudicating Authority.

In the impugned order passed on that date, the CESTAT recorded a statement on behalf of the assessee that they were not disputing their liability to pay service tax and interest but were only seeking to avail the benefit of the reduced penalty in terms of the 3rd proviso to Section 78 of the Finance Act, 1994.

The Bench, thereafter, relied upon the Gujarat High Court decision in the case of CCE, Ahmedabad v. Ratnamani Metals and Tubes Ltd. - 2013-TIOL-1124-HC-AHM-CX and ordered as under:

"In the light of the foregoing, we do not find any merit in the appeals except to the extent that the benefit of 25% of mandatory equal penalty under Section 78 (ibid) is required to be extended to the appellants. Accordingly the appeals Nos. ST/55809/2013 and ST/55810/2013 relating to Show Cause Notices dated 10.4.2011 and 20.10.2011 are dismissed and appeal No. 55715/2013 relating to the Show Cause Notice dated 20.10.2009 is partially allowed only to the extent that the penalty of Rs. 8,15,44,386/- imposed under Section 78 of Finance Act, 1994 will be reduced to 25% of the said amount provided the service tax and interest are paid within 30 days from the date of communication of this order and the said reduced penalty (25% of 8,15,44,386/-) is also paid within the said time i.e. 30 days from the date of communication of this order."

The question that is urged in the appeal by the Department is whether the CESTAT was justified in law in extending to the Respondent the benefit of payment of 25% of the penalty within 30 days of the order of the CESTAT , which was obviously far beyond the period of 30 days as envisaged in terms of the 3rd proviso to Section 78 (1) of the Finance Act 1994?

The High Court was informed that the Respondent had not even complied with the above order dated 18th November, 2014 of the CESTAT i.e. the reduced penalty was not paid within 30 days of the passing of the order of the CESTAT. In fact, the counsel for the Respondent while not disputing this fact also informed the Court that upon failure of the Respondent to avail of the benefit granted to it by the CESTAT by the impugned order, the Department had initiated steps for recovery of the service tax, interest and penalty by inter alia freezing the accounts of the Respondent and, therefore, the question urged by the Department in the present appeal is rendered academic and should be left open for decision in an appropriate case.

The High Court made it clear that it was not inclined to accept this plea since the question of law is of considerable importance and was likely to arise in several similar appeals.

The High Court, thereafter, extracted the provisions of s.78 of the FA, 1994 and observed that Section 11 AC of the CE Act does not ipso facto apply to the levy of penalty under the Finance Act, 1994 by virtue of Section 78 read with Section 83 thereof. Nonetheless, since section 11AC of the CE Act was the subject matter of decisions of the High Court as well as circulars of the CBEC, the same would be referred to.

The High Court also adverted to the decision in K. P. Pouches (P) Ltd. - 2008-TIOL-240-HC-DEL-CX &CBEC Circular/letter - F.No.208/07/2008-CX-6 dated 22nd May 2008 consequent to the above decision, stating that it had been decided that wherever penalty is imposed under Section 11AC of the CE Act, the provisions contained in first and second proviso to Section 11AC should be mandatorily mentioned in the Order-in-Original itself by the adjudicating authority.

It was also observed that in another Circular 898/18/09-CX dated 15.09.2009 the Board had clarified that the view of the Commissioner (Appeals) in a case allowing the benefit of the proviso to Section 11AC of the CE Act at the appellate stage and permitting an Assessee to pay reduced penalty of 25% within 30 days of the communication of the order of the Commissioner (Appeals)was not in consonance with a combined reading of all the four provisos to Section 11AC of the CE Act. The Circular also made clear that "the benefit of 25% penalty is applicable only when the Assessee has paid the duty, reduced and penalty and interest within 30 days of the communication of the order passed by the adjudication authority." It was further clarified that "only where penalty was enhanced at the appellate stage that in case of the 25% of the differential amount the penalty can be paid within 30 days of the order and not otherwise."

The High Court also relied on the decision in CCE, Raigad v. Castrol India Ltd. - 2012-TIOL-464-HC-MUM-CX, wherein the Bombay High Court took note of the decision in K. P. Pouches (P) Ltd. (supra) as well as of the CBEC circular and observed that although they required the adjudicating authority to make it explicitly clear in the operative part of the adjudication order regarding availability of paying 25% penalty in terms of the first and second proviso to Section 11AC of the CE Act, it did "not mean that the statute casts such an obligation on the adjudicating authorities. Therefore, if the adjudicating authority fails to make a reference in its order regarding the availability of paying 25% penalty, the Assessee cannot agitate that there is violation of the statutory provisions contained in Section 11AC and it will not be open to the appellate authority or the Courts to permit the Assessee to pay 25% penalty beyond the time prescribed under Section 11AC ." Inasmuch as the Bombay High Court had set aside the order of the CESTAT permitting the Assessee to pay 25% of the penalty within 30 days from the date of communication of the order of its order.

It was also noted that the Gujarat High Court in the case of Rajeshree Dyeing & Printing Mills after taking note of the decisions of High Court of Bombay, Delhi and Allahabad - 2012-TIOL-1079-HC-ALL-CX held that the interpretation of Section 11 AC of the CE Act in its true spirit contemplates payment of the reduced penalty within 30 days of the communication of the order of the adjudicating authority. It also noted that "this being the provision embedded in the statute itself, nobody can be permitted to plead ignorance of the law."

The High Court, therefore, concluded thus -

++ To round up the discussion of the case law on Section 11AC of the CE Act, the predominant judicial view as evidenced by the decisions of the High Courts of Bombay, Allahabad and this Court is that, notwithstanding the circular requiring an adjudicating authority to indicate in the adjudication order the option available to an Assessee of paying reduced penalty, that option cannot be made available at the appellate stage by permitting the Assessee to pay the reduced penalty within 30 days of the order of the appellate authority.

++ As far as Section 78 (1) read with Section 83 of the Finance Act, 1994 is concerned, apart from the fact that Section 11AC of the CE Act is not ipso facto applicable, the circular of the CBEC issued in the context of that provision requiring the adjudicating authority to mandatorily state in the adjudication order the availability of the option of payment of reduced penalty, is also not applicable. In other words, an adjudication order levying penalty under Section 78 (1) of the Finance Act 1994 does not have to mandatorily spell out the option available to an Assessee of payment of reduced penalty under the second proviso thereto. The failure to make such mention neither renders the adjudication order bad in law nor permits an appellate authority to give such an option at the appellate stage.

++ the very object of extending to an Assessee the option of availing the benefit of payment of reduced penalty in terms of the second proviso to Section 78 (1) of the Finance Act 1994 was to provide an incentive for prompt payment of the service tax and interest that is due. When an Assessee does not wish to contest the service tax liability or even when it wishes to contest such liability, but is prepared to pay up front the service tax and interest without prejudice to its rights and contentions, the statute provides an option of payment of reduced penalty to the extent of 25% of the service tax. This is, of course, subject to payment of not only the service tax and interest but also the reduced penalty within 30 days of the "communication of the order" of the adjudicating authority.

++ The SCN issued to an Assessee invariably mentions the statutory provisions under which the demand for service tax, interest and penalty is proposed to be raised. There can be no question, therefore, of the Assessee being unaware of the provisions of the statute. It is also very likely that in the adjudication proceedings the Assessee, who invariably has an authorised representative to put across its case to the adjudicating authority, will make a reference to the statutory provisions. In particular if the submission relates to penalty it is unlikely that an Assessee will not even refer to the relevant statutory provisions. The question of an Assessee, therefore, pleading ignorance of the law governing the adjudication proceedings cannot arise. There is no statutory requirement that the adjudication order itself should remind the Assessee of the option available of paying a reduced penalty in terms of the second and third proviso to Section 78 (1) of the Finance Act 1994.

++ Even for the purposes of an appeal, the date on which an order is 'communicated' to the party who seeks to file the appeal is the crucial date. That period cannot get extended only because the appellant was not told of the statutory provision under which he can file an appeal.

++ The upshot of this discussion is that an appellate authority cannot at the appellate stage give the option to an Assessee to pay the reduced penalty within a time that is beyond what is stipulated in the third proviso to Section 78 (1) of the Finance Act, 1994. The statute is explicit. The second proviso states that the payment of the service tax and interest has to be paid within "paid within thirty days from the date of communication of order of the Central Excise Officer determining such service tax" and the third proviso states that the reduced penalty that has been determined also has to be paid "within the period of thirty days referred to" in the second proviso. The option to pay the reduced penalty comes to an end on the expiry of thirty days from the date of communication of the adjudication order. It is only where the service tax is enhanced by an appellate authority that, in terms of the proviso to Section 78 (2) of the Finance Act, 1994, the time period for paying the reduced penalty at 25% of such enhanced service tax is computed from the date of communication of the appellate order.

++ the CESTAT could not have permitted the Respondent to pay the reduced penalty amount in terms of the second proviso to Section 78 (1) of the Finance Act, 1994 within thirty days from the date of the impugned order of the CESTAT since such a direction was contrary to the third proviso to Section 78 (1) of the Finance Act, 1994 and, therefore, legally unsustainable.

The Revenue appeal was allowed.

In passing: Happiness comes in small packages!

(See 2015-TIOL-2751-HC-DEL-ST)