Whether penalty is imposable if service tax paid along with interest before issue of SCN?

PJ/CASE LAW/2016-2017/3430

Brief Facts-The facts of the case in brief are that the Appellant are engaged in providing taxable services under the category of commercial or industrial construction service and manpower recruitment agency service. On scrutiny of the balance sheet, ledger account and half-yearly challan as well as ST-3 returns for the years 2006-07 and 2007-08, it was observed that the appellant had rendered services under aforesaid categories, has not reflected the actual amount of taxable service received from the service recipient in their ST-3 return or any other statutory document. Accordingly the differential amount of Service Tax of Rs. 15,42,052/- was demanded and confirmed by the adjudicating authority along with the interest at the appropriate rate. He also imposed penalty under Sections 76 and 78 of the Finance Act, 1994. Ld. Commissioner (Appeals) upheld the Order-in-Original, but set aside the penalty imposed on the Appellants under Section 78. Being aggrieved, the Appellant has challenged the imposition of penalty under Section 76 of the Finance Act, 1994.
Appellant’s Contention-The ld. Advocate appearing for the Appellant submitted that the appellant are registered Service Tax assessee and regularly paying Service Tax payable by them. They are also submitting the half-yearly ST-3 return regularly, so there is no such intentional delayed payment. But due to acute shortage of funds, they could not have deposited the amount of Govt. revenue in time in this case and have paid necessary interest of such late payment. They also paid (in February, 2009) the differential amount of Service Tax of Rs. 15,42,052/- before the issue of show cause notice. It is his contention that in view of above, the proceedings for imposition of penalty should not have been initiated against them by virtue of sub-section (3) of Section 73 of Finance Act, 1994. He further submitted that the ld. Commissioner (Appeals) has dropped the penalty under Section 78 by observing that there was no suppression for wilful misstatement of facts with intention to evade payment Service Tax. In these circumstances, their case was fully covered by the sub-section (3) of Section 73 of the Act. He cited various judgments which are mentioned below :-
(a)       Commr. of Service Tax, Bangalore v. Master Kleen [2012 (25)S.T.R.439 (Kar.)]
(b)       M.R. Coatings Pvt. Ltd. v. Commr. of Central Excise, Rajkot [2013 (30)S.T.R.76 (Tri.-Ahmd.)]
(c)       C.C.E. & S.T., LTU, Bangalore v. Adecco Flexione Workforce Solutions Ltd. [2012 (26)S.T.R.3 (Kar.)],
holding that according to sub-section (3) of Section 73 of Finance Act, 1994 no notice shall be served where entire duty along with interest is paid before the issue of show cause notice.
Respondent’s Contention- Ld. AR for the Revenue reiterated the findings of the ld. Commissioner (Appeals). He submitted that the Appellant never disclosed full taxable amount under the category of commercial or industrial construction service in their ST-3 returns during the relevant period and it came to notice only during the course of audit during the verification of their records. It is the contention that in this case the penalty imposed is only for delay in payment of Service Tax and as per law, the same is liable to be paid.

Reasoning Of Judgement- Heard both sides and perused the records.
Appellant have challenged the imposition of penalty on them under Section 76 of the Finance Act, 1994. It is their case that they have been regularly paying the Service Tax and that there was delay in payment of Service Tax due to financial hardship that they have paid interest and duty both before issue of the show cause notice. It is pleaded that their case is covered by the provisions of sub-section (3) of Section 73 of the Finance Act, 1994. The relevant provisions of sub-sections (3) and (4) of Section 73 are reproduced below :-
“(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.
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 sub-section 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.]
(4) Nothing contained in sub-section (3) shall apply to a case where any Service Tax has not been levied or paid or has been short levied by reason of fraud; or collusion; or wilful misstatement; or suppression of facts……”
It is thus evident from the aforesaid provisions that in the cases of non-payment of Service Tax on due dates, once payment along with interest is made before issuance of show cause notice, in such cases no show cause notice could be issued for imposition of penalty. In this regard tribunal also find that ld. Commissioner (Appeals) in his order has made a categorical finding that the elements of fraud, suppression, misstatement, etc. were not present in this case. Revenue has not contested his findings by filing appeal. In view of these facts the appellants’ case is fully covered by the provisions of sub-section (3) of Section 73 of the Finance Act, 1994.
It is not in dispute in this case that the appellant had discharged the entire Service Tax liability and interest thereof before the issuance of show cause notice. The issue is regarding the imposition of penalty on the appellant under Section 76 of the Finance Act, 1994. Tribunal found that once the appellant has already discharged Service Tax liability and the interest thereon and no additional liability has been adjudged in the adjudication proceedings, provisions of Section 73(3) will be applicable in this case and there was no necessity of issuing any show cause notice to the appellant. In such cases no penalty is imposable by virtue of Explanation 2 to sub-section (3) of Section 73 of the Finance Act, 1994.
Hon’ble Karnataka High Court in the case of CCE & ST, LTU, Bangalore v. Adecco Flexione Workforce Solutions Ltd. - 2011-TIOL-635-HC-KAR-ST = 2012 (26) S.T.R. 3 (Kar.)has upheld the ratio that in case the entire amount of Service Tax liability, interest thereon stands paid by the appellant before issuance of show cause notice, hence provisions of Section 73(3) of the Finance Act, 1994 should be made applicable and no show cause notice should have been issued. This judgment has been followed by this Tribunal in the case of M.R. Coatings Pvt. Ltd. v. CCE, Rajkot - 2013 (30)S.T.R.76 (Tri.-Ahmd.).
The issue of penalty came up for the consideration before the High Court of Karnataka in the case of Commissioner of Service Tax, Bangalore v. Master Kleen - 2012 (25)S.T.R.439 (Kar.).The ratio from the judgment of Hon’ble High Court in the case of Master Kleen is reproduced below :-
“The Revenue has preferred this appeal against the order passed by the Tribunal [2010 (17)S.T.R.365 (Tribunal)] setting aside the orders passed by the lower authorities, imposing penalty under Section 76 of the Finance Act, 1994 for non-payment of Service Tax on due dates.
The material on record discloses that the assessee on being pointed out by the authorities for not paying the Service Tax, has paid the Service Tax with interest even before the issue of show cause notice. Sub-section (3) of Section 73 of the Finance Act, 1994, categorically states that if tax and interest is paid and the same is informed to the authorities, then the authorities shall not serve any notice calling upon the authorities to pay penalty. It is unfortunate that inspite of statutory provisions, the authorities have issued a show cause notice claiming penalty. So, tax and interest was paid before issue of show cause notice. Therefore, the Tribunal was justified in setting aside those orders. As the said order is strictly in accordance with law, bench did not found any legal infirmity that calls for interference. Therefore the appeal was dismissed.”
In view of the law being settled as hereinabove stated, bench founded that the impugned order was liable to be set aside and bench did so. Impugned order was set aside and the Appeal was allowed.
Decision- Appeal allowed.
Comment- The kernel of the case is that penalty is not imposable on the appellant in view of provision of section 73(4) as they have paid service tax with interest before issuance of show cause notice. Furthermore, since there was no suppression of facts, the provisions of section 73(4) were clearly applicable in view of decision given in the case of Commissioner of Service Tax, Bangalore v. Master Kleen - 2012 (25) S.T.R. 439 (Kar.).

Prepared By-Arundhati Bajpai

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PJ/CASE LAW/2016-2017/3430

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