Can the Service Tax Department Demand Penalty u/s 76, 77 & 78 before Issuance of Show Cause Notice

PJ/CASE LAW/2014-15/2419

Case:- SUNITA TOOLS PVT LTD & SUNITA DIE PARTS PVT LTD Vs COMMISSIONER OF SERVICE TAX MUMBAI – II

Citation:-2014-TIOL-2094-CESTAT-MUM

Brief Facts:- The appeals are directed against Orders-in-Appeal NOs: TKG/10/2011 dated 06/07/2011 and TKG/09/2011 dated 05/07/2011 passed by the Commissioner of Central Excise (Appeals) – IV, Mumbai Zone – I.

Vide the impugned order the learned lower appellate authority has confirmed a service tax demand of Rs. 3,24,277/- along with interest of Rs. 12,410/- against the appellant, M/s. Sunita Tools Pvt. Ltd. apart from penalties under Sections, 76, 77 and 78 of the Finance Act, 1994. Further a demand of Rs. 1,49,189/- along with interest of Rs. 8,025/- has been confirmed against the appellant, M/s. Sunita Die Parts Pvt. Ltd. apart from penalties under Sections 76,77 and 78 of the Finance Act, 1994. Aggrieved of the same the appellants are before Honourable Judge.

As the issue involved in both the appeals is same, they are taken up together for consideration and disposal.

Appellant Contentions:- The learned counsel for the appellants submits that the appellants are small time job-workers. Their factories were visited by the Central Excise officers in December 2004 and they were told that in respect of the job-wok undertaken by them, they are liable to discharge service tax liability. Accordingly, M/s. Sunita Tools Pvt. Ltd. had paid service tax of Rs. 3,24,277/- for the period 10/09/2004 to 31/03/2005 on 26/02/2005. They also paid the interest liability of Rs. 12,410/- on 01/07/2006. Similarly, the other appellant M/s. Sunita Die Parts Pvt. Ltd. has paid the service tax liability of Rs. 1,49,189/- for the period 10/09/2004 to 31/01/2005 on 23/02/2005 and discharged interest liability of Rs. 8,025/- on 29/06/2006. Thereafter, show cause notices dated 13/04/2007 were issued to the appellants demanding service tax along with interest and appropriation of the same and proposing to impose penalties under Sections 77 and 78 of the Finance Act, 1994. The learned counsel submits that as per the provisions of Section 73(3) of the Finance Act, 1994 when the service tax liability along with interest is charged before the issue of show cause notice, then the proceedings abate and no penalty can be imposed on the assessee thereafter as clarified in the explanation to Section 73(3). He also submits that CBEC has clarified this position vide Circular F.No.137/167/2006-CX-4, dated 03/10/2007 wherein it has been clearly stated that the law prescribes conclusion of all proceedings against such person to whom show cause notice is issued under Sub-Section (1) of Section 73.

Therefore, it is not merely a conclusion under sub-section (1) but conclusion of all proceedings against such person, similar to Section 73(3). Accordingly, conclusion of all proceedings in terms of sub-section (3A) of Section 73 implies conclusion of entire proceedings under Finance Act, 1944. In the present case, inasmuch as the appellants have discharged service tax liability along with interest thereon prior to the issue of show cause notice, the question of imposing any penalties under Sections 76 and 77 of the Finance Act, 1994 would not arise at all and consequently imposition of penalties by the authority below are clearly unsustainable in law. He also submits that the appellants have paid 25% of the penalty imposed under Section 78 subsequent to the issue of the order-in-original and this amount must be refunded to the appellants.

Respondent Contentions:- The learned Superintendent (AR) appearing for the Revenue reiterates the findings of the lower appellate authority.

Reasoning of Judgment:-Honorable Judge have carefully considered the submissions made by both the sides.

Section 73(3) along with explanation reads as follows:

“73. Recovery of service tax not levied or paid or short-levied or short-paid or erroneously refunded

(3) Where any service tax has not been levied or paid or has been short-levied or short-paid or erroneously refunded, the person chargeable with the service tax, or the person to whom such tax refund has erroneously been made, may pay the amount of such service tax, chargeable or erroneously refunded, on the basis of his own ascertainment thereof, or on the basis of tax ascertained by a Central Excise Officer before service of notice on him under sub-section (1) in respect of such service tax, and inform the Central Excise Officer of such payment in writing, who, on receipt of such information shall not serve any notice under sub-section (1) in respect of the amount so paid :

Provided that the Central Excise Officer may determine the amount of short payment of service tax or erroneously refunded service tax, if any, which in his opinion has not been paid by such person and, then, the Central Excise Officer shall proceed to recover such amount in the manner specified in this section, and the period of "one year" referred to in sub-section (1) shall be counted from the date of receipt of such information of payment.

Explanation (1) For the removal of doubts, it is hereby declared that the interest under section 75 shall be payable on the amount paid by the person under this subsection and also on the amount of short payment of service tax or erroneously refunded service tax, if any, as may be determined by the Central Excise Officer but for this sub-section.

Explanation (2) For the removal of doubts, it is hereby declared that no penalty under any of the provisions of this Act or the rules made thereunder shall be imposed in respect of payment of service tax under this sub-section and interest thereon.”

From a perusal of the provisions it is abundantly clear that once the assessee discharges the service tax liability along with interest thereon, either on his own account or on pointing out by the department, the proceedings abate and there is no need for issue of show cause notice. The explanation makes it abundantly clear that once the payment are made, no penalty can be imposed under the provisions of Chapter V of the Finance Act, 1994. The Board's circular relied upon by the appellants clarifies this position. In spite of the clear provision in law and clarification given by the Board in this regard, the appellate authority has completely ignored these provisions and chosen to proceed with imposition of penalties which is clearly unsustainable in law. Therefore, the penalties imposed on the appellants under Sections 76, 77 and 78 of the Finance Act, 1994 are set aside. The adjudicating authority is also directed to refund, within a period of one month from the date of receipt of this order, the amount of penalty pre-deposited by the appellants subsequent to passing of the impugned order.

Thus the appeals are allowed by quashing the impugned order to the extent of imposition of penalties. The Cross-objections are also disposed of.

Decision:-Appeal allowed.

Comment:- The substance of this case is that Section 73(3) of FA, 1994, makes it abundantly clear that once the assessee discharges the ST liability along with interest, either on his own account or on pointing out by the department, the proceedings abate and there is no need to issue any SCN. In spite of clear provision in law and clarification given by Board in Circular F.No.137/167/2006 CX-4, imposition of penalties is clearly unsustainable in law. Hence, the appeals were allowed to the extent of quashing penalties.

Prepared by: Meet Jain

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PJ/CASE LAW/2014-15/2419

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