Imposition of penalty under Section 78 - Waiver of penalty under Section 80

Case: Bajaj Travels Ltd v/s Commissioner of Service Tax

Citation: 2012 (25) S.T.R. 417 (Del.)

Issue:- Imposition of penalty under Section 78 – can be waived under Section 80 when reasonable cause is shown and bona fides of assessee are established.

Amendment in Section 78 of Finance Act making imposition of penalty under Section 78 and 76 mutually exclusive – whether has Retrospective operation or prospective effect?

Brief Facts:- Appellant is engaged in Air Travel Agent Service having its registered office in Chandigarh and branch offices in Chandigarh and Delhi. They were exigible to service tax. During Search, it was found by the Department that the value of service declared in ST-3 return was far below the value appearing in the appellant’s record.

Show cause notice was issued to recover the differential duty and suppression of facts was alleged. It was further alleged that appellant did not depict the exact basic fare figures of tickets sold in their ST-3 returns submitted to the department during the disputed period and that there had been under valuation of taxable services. According to appellant, shortfall is occurred due to misunderstanding and confusion of the methodology of calculation of service tax. That they had deposited the differential duty with interest before the issuance of show cause notice. Reliance was placed on judgment in CCE, Delhi-III Vs. Machino Montell (I) Ltd. [2004 (168) ELT 466 (Tri-LAB) and it was submitted that the discharge of their service tax liability before the issuance of show cause notice showed their bona fide and therefore, their case fell under Section 80 of the Finance Act, 1994 and no penalty can be imposed on them.

The Commissioner did not accept contentions of the appellant and confirmed the demand of Service Tax with interest and also imposed penalties under Section 76, 77 and 78.

Appellant filed appeals before the Tribunal. The Tribunal found that appellant was actually paying the service tax at the prevailing rate under Section 66 on the net commission instead of on the gross commission. That had resulted in short payment of tax. It was found that in the ST-3 returns, instead of showing the gross and net commission and calculation of service tax on that basis, the tax payment shown was as if it was on the “basic fare” shown in the ST-3 returns was not the actual “basic fare‟. Those were much lower amount which was being determined by the back calculation so that the tax on the same at the rate mentioned in Rule 6 (7) matches the service tax paid by the appellant on the net commission at the normal rate. The difference between the basic fare declared and the actual basic fare on which the tax was to be paid at the rate prescribed under Rule 6 (7) was to the tune of about Rs. 213 crores in aggregate. Since in the ST-3 returns, the tax payment was being done on basic fare basis under Rule 6 (7), though no formal declaration of option in this regard had been made, the Commissioner had rightly held that the appellant had opted to pay tax on the "basic fare" and having done so, it should pay the tax on the actual "basic fare" instead of tax on much lower amount declared in the returns. There was thus, short payment of service tax whether calculated on basic fare basis under Rule 6 (7) at the rate prescribed thereunder or calculated at the normal rate on the gross commission.

Thus, the Tribunal confirmed the duty and upheld the penalty under Section 76 and reduced the penalty to 25% of the Service Tax demand under Section 78 of the Finance Act, 1994. Penalty under Section 77 was set aside as the said penalty is imposed for non-filing of ST-3 returns but the appellant herein had filed the returns regularly.

Against the said decision, appellant is before the High Court. In appeal, the issue is not argued on merits but the issue of imposition of penalties is being raised.

Appellant’s Contention:- Appellant contended that due to misunderstanding and confusion of the methodology of calculation of service tax the shortfall occurred in discharging the payment of service tax. It was submitted that whatever amount of service tax is received from the customer the same was paid to the department thus not retaining a single penny with them. Further they paid almost the entire amount before the issuance of show cause notice. The appellant further averred that there was no mala fide intention, reason of fraud, suppression of material fact or any intention on the part of the appellant at any stage to evade service tax. Thus the defence of the appellant is that it was at best a case of shortfall of service tax on account of bona fide reason and under Section 80 of the Act, the appellant ought not to have been penalized for the same.

It is also contented by the appellant that Section 78 has been amended by the Finance Act, 2008 categorically providing that in case where penalty for suppressing the value of tax under Section 78 is imposed, penalty for failure to deposit the service tax under Section 76 of the Act shall not apply and, therefore, simultaneous penalties both under Section 76 and 78 of the Act cannot be imposed.

With regard to imposition of penalty under Section 76, it was argued that this provision has no application as tax was paid though short-paid. Section 76 applies only when no tax is paid at all as it deals with "failure to pay service tax" and not when tax is paid but short-paid. It was contended that this failure was due to reasonable cause and, therefore, Section 80 becomes applicable.

Appellant relied on the following cases wherein the Tribunal has set aside such penalties holding that when the service tax/short-service tax was paid before the show cause notice, it was a bona fide error. The details of some of these orders are as under;-

- Akber Travels of India (P) Ltd. Vs. Commissioner of Customs and Central Excise, Cochin, 2008 (11) STR 42 (Tri. Bang.)

- Eta Engineering Ltd. Vs. CCE, Chennai-2004 (1740 ELT 19 (Tri-LB.)

- CCE, Meerut-II, Vs. R.N. Katayal-2006 92) STR 77 (Tri-Del)

- Urban Improvement Trust Vs. CCE, Jaipur- 2006 930 STR 248 (Tri-Del)

- Sri Venkateswar Hi-tech Machiner Vs. CCE, Coimbatore-2007 (6) STR 139 (T)

- Commr. S.T. Kol-I Vs. Pee Kay & Co.-2007 (7) STR 540 (T-kol)

- CCE, Nashik Vs. Bapu Transport-2007 97)Tri- Mum)

- Niki Associates Vs. CCE, Nashik-2007 (7) STR 662 (Tri-Mum)

- CCE Bhopal Vs. Maharashtra Samaj Bhawan Trust-2007 (5) STR 651 (Tri-Del)

- Lakmichand Dharshi Vs. CCE, Mumbai-2007 (5) STR 128(Tri-Mum)

- CCE, Bhopal Vs. Bharat Security Services & Workers‟Cont.-2006 (3) STR 703 (Tri-Del)

- CCE, Bhopal Vs. R.K. Electronic Cable Network-2006 (2) STR 153 (Tri-Del.)

- CCE & C.V. Mukul S. Patil-2008 (10) STR 115 (Bom)

- A.R. Ashish V. Patil Vs. CCE, Nashik-2006 (3) STR 184 (Tri-Mum)

Even some of the High Courts have taken similar view in the following judgments:-

(i) Union of India Vs. TPL Industries Ltd. 2007 (214) ELT 506 (Raj.)

(ii) CCE, Ludhiana Vs. Sigma Steel Tubes-2007 (82) RLT 361 (P &H)

(iii) Union of India Vs. perfect Thread Mills Ltd.- 2009 (234) ELT 49 (Raj.)

Respondent’s Contention:- It was not a case of bona fide error on the part of the appellant who had in fact collected the service tax from the customers but did not deposit the same.

He further emphasized that the investigation revealed that the appellant was passing on a portion of the commission received to their customers and were calculating the Service Tax payable on the commission retained by them. However, in the ST-3 returns they were showing the Service Tax payable by 'basic fare' method by back calculating the basic fare from the service tax already calculated on commission retained by them. Further, on perusal of the sale bills issued by them, it is clear that they were collecting Service Tax on 'basic fare' method. Thus the appellant short paid the service tax and it could not be a bona fide error and was a clear attempt to evade the payment of requisite service tax and in these circumstances the penalty was rightly imposed. According to him, legal position was clear namely the service tax was to be paid on the basis of commission received from the Air Lines and not on the basis of commission retained by the appellant after passing portion of the said commission to the customers. The appellant was showing incorrect figure of payment of service tax on the basis of basic fare in the service tax returns. However, in the ST-3 returns they were showing the Service Tax payable by basic fare method by back calculating the basic fare from the service tax already calculated on commission retained by them. In this manner the appellant was not reflecting the correct amount of basic fare. He argued that Rule 6(7) of the Service Tax Rules, 1994 provided an option to the Air Travel Agent to pay an amount calculated at the specified rate of the basic fare towards the discharge of his service tax liability instead of paying service tax at the rate specified thereunder and the option once exercised would apply uniformly in respect of all the booking of the air travel by the Air Travel Agent and could not be changed during the financial year under any circumstances. In this scenario plea raised by the appellant that although it was aware of both the methods of payment of service tax but nobody advised it that conditions of two cannot be adopted was clearly baseless. It was, therefore, a deliberate misdeclaration on the part of the appellant to suppress the measure levy which was liable for penalty and penalty imposed in these circumstances was fully justified.

Reasoning of Judgment:- With regard to imposition of penalty under Section 76, the High Court noted that the Tribunal had held that appellant had failed to discharge their service tax liability resulting in short payment of service tax. It was noted that the Tribunal has justified imposition of simultaneous penalties under Section 76 and 78 by holding that the two Sections are distinct and separate and even those offences are committed in the course of same transactions or arise out of the same act, therefore penalty would be imposable both under Section 76 as well as Section 78 of the Act. However, the penalty under Section 76 was reduced to Rs 100 per day in one of these appeals.

The High Court noted that with regard to imposition of penalty under Section 78, the Tribunal held that said provision is attracted wherever any service tax has not been levied or paid or has been short levied or short paid or erroneously refunded by the reason of fraud, suppression of facts, willful misstatement or contravention of any provisions of Finance Act or of the rules made thereunder with intent to evade the payment of service tax. According to the Tribunal the ingredients of this provision have been satisfied in the instant case as there was deliberate mis-declaration in the ST-3 returns by the appellant with the intention to suppression of measure of levy. However, going by that fact that service tax as determined under Section 73 (2) of the Act alongwith interest and penalty was paid within 30 days from the date of the communication of the order, having regard to the first and second proviso to Section 78 of the Act, the penalty would be 25% of the service tax. Thus, while upholding the penalty under Section 78 of the Act, the Tribunal has reduced the same to 25% of the service tax.

A perusal of the provisions would show that Section 76 provides for penalty for failure to pay service tax. In such a case, in addition to the tax and interest on that tax amount to be calculated in accordance with the provision of Section 75, penalty is also leviable on the defaulter which shall not be less than Rs. 200 for every day during which such failure continues or at the rate of two per cent of such tax per month whichever is higher. There is, however, a cap on this penalty stipulated in the proviso to this Section which states that penalty payable is not to exceed the service tax payable.

On the other hand, it was noted that as per Section 78, penalty can be imposed for suppressing the value of taxable service. This provision applies where the service tax has not been levied or paid or where it has been short-levied or short-paid or where the service tax has been erroneously refunded by reasons of circumstances stipulated therein which are fraud or collusion or willful mis-statement or suppression of facts or contravention of any of the provisions of this Chapter or of the rules made thereunder. Such fraud, collusion etc. has to be with intent to evade payment of service tax. Thus, provision of Section 78 are attracted when not only a case of fraud, collusion etc. is made out but it is also established that the defaulter did not pay or short-paid or got refund of the tax paid with intent to evade the payment of service tax. In such a case, the person who is liable to pay such service tax or is erroneously refunded the tax can be levied the penalty which shall not be less than the amount of service tax evaded/refunded subject to maximum of the twice the said amount of the non-levy/non-payment/short-levied/short-payment/erroneous refund. However, in case the service tax as determined under Section 72(2) of the Act is paid along with the interest payable under Section 75, within 30 days from the date of communication of the order, this penalty is to be reduced to 25% of the service tax so determined.

It was observed that by their very nature, Section 76 and 78 of the Act operate in two different fields. It was noted that the Kerala High Court in Assistant Commissioner of Central Excise Vs. Krishna Poduval (2005) 199 CTR 58 had categorically held that instances of imposition of penalty under Section 76 and 78 of the Act are distinct and separate under two provisions and even if the offences are committed in the course of same transactions or arise out of the same Act, penalty would be imposable both under Section 76 and 78 of the Act.

Section 78 of the Act has been amended by the Finance Act, 2008 and the amendment provides that in case where penalty for suppressing the value of taxable service under Section 78 is imposed, the penalty for failure to pay service tax under Section 76 shall not apply. With this amendment the legal position now is that simultaneous penalties under both Section 76 and 78 of the Act would not be levied. However, since this amendment has come into force w.e.f. 16th May, 2008, it cannot have retrospective operation in the absence of any specific stipulation to this effect. Going by the nature of the amendment, it also cannot be said that this amendment is only clarificatory in nature. In case of Commissioner of Central Excise v. M/s. Pannu Property Dealers, Ludhiana [2011 (24) S.T.R. 173 (P & H) the view that even if the scope of two sections of the Act may be different, the fact that penalty has been levied under Section 78 could be taken into account for levying or not levying penalty under Section 76 of the Act.

However, in the instant case, the Appellate Authority, including the Tribunal, has chosen to impose the penalty under both the Sections. Since the penalty under both the Sections is imposable as rightly held by Kerala High Court in Krishna Poduval, the appellant cannot contend that once penalty is imposed under Section 78, there should not have been any penalty under Section 76 of the Finance Act.

Thus, it was held that amendment to Section 78 by Finance Act, 2008 shall operate prospectively.

Further, the Court held that as per Section 80 the onus is upon the appellant to prove "reasonable cause" for failure to pay full service tax. The Court noted the meaning of "Reasonable cause". It was noted that it means, in common parlance a cause or ground which was not unreasonable. In the context of this case the appellant has to show that there were sufficient and proper reasons which occasioned the appellant to make short deposits of service tax than required under the provisions of the Act. If the appellant can show that the manner in which he was making the deposits of the service tax was bona fide i.e., in good faith, it would amount to 'reasonable cause'. Bona fide implies in the absence of fraud or unfair dealing. The equivalent of this phrase is "honestly". The term bona fide or genuinely refers to a state of mind. The appellant has been able to prove its bona fides.

It was held that the appellant have been able to prove their bona fides. The short payment of service tax was explained that method of calculation was not clear. Their conduct after being pointed out the correct method by Department prove their bona fides. On being told about their mistake the appellant have deposited the differential amount on the very next day with interest. It was stated by the Court that service tax was a new tax imposed on the Air Travel Agent Services. There were many misgivings and confusion which led to committal of defaults by many such persons. In fact, the Department itself issued Circular accepting the fact that there was confusion and on that basis penalties in all such cases were waived in respect of those who had paid the service tax in response of the said Scheme.

It was held that it was not a case of imposition of penalty upon the appellant. Penalties imposed upon appellant under Section 76 and 78 of the Finance Act are set aside.

Decision:- Appeals allowed accordingly.

Comment:- There are two landmark judgments. First is in favour of revenue. It says that the penalty under Section 76 and 78 can be imposed before the amendment. This has been pleaded by consultants but the outcome is in favour of revenue.

But the second issue is in favour of assesee. If the reasonable belief is proved then penalty cannot be imposed.

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PJ/Case Laws/2012-13/1082

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