Penalty u/S. 78 – Whether imposable when no positive evidence of deliberate misdeclaration of value of taxable service with intent to evade service tax - only failure to declare full value of taxable service in ST-3 returns under bona fide

PJ/Case Laws/2011-12/1263

Case: Commissioner of Central Excise v/s ESS ESS Engineers

Citation: 2011 (23) S.T.R. 3 (P & H)

Issue:- Penalty u/S. 78 – Whether imposable when no positive evidence of deliberate misdeclaration of value of taxable service with intent to evade service tax - only failure to declare full value of taxable service in ST-3 returns under bona fide

Brief Facts:- Assessee was engaged in providing of taxable service of “Erection, Commissioning and Installation”. They failed to pay the service tax for the services rendered during the period 1-7-2003 to 30-9-2006. Show Cause Notice was issued proposing to recover the service tax and levy penalty. The Adjudicating Authority confirmed the demand with interest and also levied penalty under Section 76 and 78 of the Finance Act, 1994.

The Appellate Authority partly allowed the appeal but upheld the demand for levy of penalty. On further appeal, the Tribunal set aside the levy of penalty holding that failure of the assessee to pay service tax due was not with intention to evade the payment of duty but on account of bona fide belief that the same was not payable.

Against this order, Revenue is in appeal.

Appellant’s Contention:- Revenue contended that the penalty under Section 78 of the Act should not have been interfered with as the assessee was guilty of mis-declration of value of taxable service with intent to evade the service tax.

Respondent’s Contention:- Assessee’s contention before the Tribunal was that in addition to erection, commissioning and installation, they were also undertaking the work relating to fabrication and dismantling, on which they were not paying any service tax as according to them, service tax was not payable on the charges for fabrication and dismantling.

Reasoning of Judgment:- The High Court observed that the Tribunal had held that short payment was mainly due to the appellant’s understanding that they were not liable to pay service tax on fabrication and dismantling charges. As regards penalty under Section 78 is concerned, the same is imposable in a case where service tax has not been levied or paid or has been short levied or short paid or erroneously refunded, by reason of fraud; or collusion; or willful misstatement; or suppression of facts; or contravention of any of the provisions of this Chapter or of the rule made thereunder with intent to evade payment of service tax. It was noted that the fact of non-payment of service tax was discovered during the course of audit.

The High Court held that the submission of Revenue that appellant was guilty of mis-declaration was not acceptable as the Tribunal had given a finding of fact that assessee did no have requisite mens rea to evade payment of service tax. The assessee had duly paid the service tax with interest and also made full and true disclosure in the return. The finding of fact of Tribunal was not shown to be perverse in any manner. Hence no question of law arises.

Decision:- Appeal dismissed.

Comment: - When there is no mensa rea then penalty under Section 78 cannot be imposed. But the department is not understanding the same and invoking the penal provision in each and every case. Whenever audit raises the para then invariably the penal provisions are invoked. This is very good decision on this issue. But this year budget has changed the penal provision drastically and now the penalty will be imposed even if there is no mensa rea. The new provisions will be subject to judicial pronouncements. Let us wait and watch.

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PJ/Case Laws/2011-12/1263

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