GST UPDATE No 258 ON NON-PAYMENT OF RCM DUE TO OVERSIGHT NOT TO ATTRACT PENALTY

Indirect taxation is complex as it seeks to cast responsibility to pay tax on the recipient under specified circumstances. However, at times, there is default in payment of taxes under reverse charge mechanism due to negligence or sheer clerical mistake on the part of receiver. In such cases, lenient view needs to be taken as regards imposition of penalty on the recipient. Recently, the issue regarding imposition of penalty under section 78 of the Finance Act, 1994 was raised before hon’ble Delhi Tribunal in the case of M/S UMED BHAWAN PALACE VERSUS COMMISSIONER, CGST, EXCISE CUSTOMS-UDAIPUR wherein it was held that non-payment of tax under reverse charge mechanism is revenue neutral situation for which penalty should not be imposed under section 78 of the Finance Act, 1994.

The department had invoked penal provisions against the appellant, M/s Umed Bhawan Palace for non-payment of RCM on 3 invoices of Rs. 41000/- attracting service tax under RCM of Rs. 5540/-. The appellant was providing services of accommodation in hotel and restaurant services and for the period, July 2012 to March 2016, appellant inadvertently did not discharge the tax liability under RCM on 3 invoices amounting to Rs. 5540/-. On pointing the same by the department, the appellant admitted his liability and paid the tax on 10/07/2017. However department in it’s demand notice raised demand for the equal amount of penalty under section 78 of the Finance Act, 1994 on the contention that assessee would not have paid tax had department not noticed the same.
The hon’ble Tribunal held that it was not deliberate mistake of assessee. It was only due to oversight of assessee that he didn’t pay the tax. Further as assessee has paid the applicable tax and is eligible to take CENVAT credit, therefore the situation is revenue neutral for tax department. Consequently, the Tribunal set aside the penalty under section 78 of the Finance Act, 1994.

The situation of paying the service tax first and claiming the credit/refund thereon is revenue neutral which was sustained in many cases. In the case of COMMISSIONER OF C.EX., VADODARA VS NARMADA CHEMATUR PHARMACEUTICALS LTD. [2005 (179) E.L.T. 276] tribunal quashed the notice on the grounds that when amount of Cenvat/Modvat credit wrongly availed is exactly equivalent to the amount of excise duty paid by not availing the exemption, the consequence is revenue neutral. Further in case of MAFATLAL INDUSTRIES LTD. VERSUS CCE, DAMAN [2009 (241) E.L.T. 153 (TRI.-AHMD)] AFFIRMED BY SC [2010 (255) ELT A77 (SC)], it was held that differential duty demanded from assessee is available as credit to his own unit, who was in a position to utilize the same so the situation is revenue neutral and the demand is not justified.

It is worth mentioning that the concept of revenue neutrality has also been acknowledged in GST regime where assessee has been granted refund of tax paid under RCM related to service tax as the credit of the same cannot be given by department. In this regard, reliance is placed on the decision given by hon’ble Chennai CESTAT in the case of M/S TEREX INDIA PVT. LTD. VERSUS THE COMMISSIONER OF GST & CE [FINAL ORDER NO. 42366/2021 DATED 11.10.2021] wherein refund of service tax paid under import of services under reverse charge mechanism has been granted by referring to the provisions contained in section 142(3) of the CGST Act, 2017. Similarly, reliance is being placed on the decision given in the case of M/s FINE AUTOMOTIVE AND INDUSTRIAL RADIATORS PVT. LTD. VERSUS THE COMMISSIONER OF GST [FINAL ORDER NO. 41396/2019 DATED 20.11.2019].

The dispute in revenue neutral cases would not arise if the departmental authorities follow the judicial discipline by placing reliance on the above cited decisions. There is no loss of revenue to the government exchequer in such cases so imposition of penalty on the assessee is unjustifiable.

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GST UPDATE No 258 ON NON-PAYMENT OF RCM DUE TO OVERSIGHT NOT TO ATTRACT PENALTY

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