Whether waiver from levy of penalties possible for bonafide belief?

PJ/Case law/2014-15/2291

Case:- JINDAL SAW LTD. (IPU) Versus COMMISSIONER OF CENTRAL EXCISE, RAJKOT

Citation:- 2013 (30) S.T.R. 490 (Tri. - Ahmd.)

Brief facts:-The brief facts of the case are that the appellant had entered into a contract with a US based company for technical assessment for the manufacturing process of their final products and thus, were recipient of the services rendered by a foreign based company who does not have any office in India. This activity of the appellant is, therefore, falling under the category of ‘Business Auxiliary Service’ and since the services has been provided from outside India, the recipient of the service is liable to pay Service Tax in terms of provisions of Section 66A of the Finance Act, 1994 (hereinafter referred to ‘the Act’) read with Rule 2(l)(d)(iv) of the Service Tax Rules, 1994 on the amount paid by them to the non-resident service providers, not having office/establishment in India. This fact came to light during the course of scrutiny of records of the appellant by the departmental audit officers. The above observations culminated into the issuance of show cause notice dated 21-6-2010 invoking extended period of five years under the provisions of Section 73 of the Act demanding service tax amounting to Rs. 2,16,648/- along with interest and also proposing imposition of penalties under Sections 76 and 78 of the Act. The Lower Authority confirmed the demand of Rs. 2,16,648/-, appropriated the same being already paid by the appellant and confirmed the interest of Rs. 67,060/- under Section 75 of the Act and appropriated the same being already paid. The lower authorities also imposed penalty of Rs. 1,72,800/- under Section 76 for failure to pay service tax within the prescribed time limit and a penalty of Rs. 2,16,648/- under Section 78 of the Act for suppressing the taxable amount.
Aggrieved by such an order, appellant preferred an appeal before the first appellate authority. The first appellate authority also did not agree with the contentions raised by the appellant as regards the setting aside the penalties imposed under Sections 76 & 78 of the Finance Act, 1994 and upheld the same.

Appellant’s contentions:-Ld. Counsel would submit that the issue involved in this case is regarding the service tax liability on the amount paid by the appellant to the visiting engineers of foreign company from whom they have purchased the technical evaluation/assessment of manufacturing process. It is his submission that the appellant were under, a bona fide belief that any amount paid to such engineers to visit their factory premises is not taxable as this would amount to import of services and there was a confusion regarding the taxability of such incidence due to the statutory provision as to non taxing on the reverse charge mechanism. It is his submission that there was a reasonable cause as even if the service tax liability would have been discharged by them, appellant being a manufacturer, he could have availed cenvat credit of such service tax paid on such services were rendered in relation to the manufacturing activity i.e. technical evaluation/assessment of manufacturing process.

Respondent’s contentions:- Ld. DR would submit that Section 66A of the Finance Act enshrined that the appellant should discharge the service tax liability on the reverse charge mechanism and this was brought into statute from 18-4-2006 and appellant being in the organised sector, should have known the law.

Reasoning of judgment:- They find that the issue involved in this case is regarding challenge to the penalty imposed under Sections 76 & 78 of Finance Act, 1994.
There is no dispute that the appellant had availed the services of manufacturer of machinery and had paid the engineers who visited their factory for technical evaluation/assessment of manufacturing process purchased by the appellant. It is also undisputed that by virtue of reverse charge mechanism as enshrined in provisions of Section 66A of the Finance Act, 1994, from 18-4-2006, the appellant is liable to discharge the service tax liability. It is seen from the records that the audit party pointed out this anomaly to appellant and appellant had, on issuance of show cause notice discharged the service tax liability and interest thereof.
They find strong force in the contentions raised by the ld. counsel inasmuch as that the service tax liability discharged by the appellant, they could have availed the cenvat credit, as the said service tax was in relation to the manufacturing activity. They also find that both the lower authorities have imposed Section 76 as well as 78 as the penalty under provisions of Section 78 during the period when the show cause notice was issued, clearly indicated that penalty can be imposed only under one section.
As regards the reasonable cause put-forth by the ld. counsel, they do find that the appellant could have entertained a bona fide belief as to non discharge of service tax on the services received by him from the foreign supplier of the process, as the same could be considered as an import of service. They find, as correctly pointed out by the ld. counsel, that the Hon’ble High Court of Karnataka in the case of Motor World - 2012 (27)S.T.R.225 (Kar.)has laid down the law as to when the provisions of Section 80 can be invoked. The said with respect is reproduced herein below :
“13. Therefore, given the language of Section 80 of the Act, which confers discretion on the Service tax authorities not to impose penalty if there is reasonable cause in given case, the imposition of penalty under Sections 76, 77 and 78 is not automatic. The existence of grounds/ingredients postulated in the said provisions is a condition precedent for attracting penalty. Therefore, first, we have to find out whether in the facts of a given case whether those ingredients exist. Once it is held that those ingredients exist and the provisions are attracted, then if the language used in the said provisions do not leave any discretion in authority in the matter of imposition of penalty, penalty is to be imposed in terms of the said provision. However, if any discretion is left, then the said quasi judicial discretion is to be exercised reasonably. Before levying penalty, the authority is required to find out whether there was any failure referred to in the concerned provision and the same was without a reasonable cause. The initial burden is on the assessee to shown that there existed reasonable cause, which was the reason for the failure referred to in the concerned provision. Thereafter the authority has to consider the explanation offered by the assessee for failure and whether it constitutes a reasonable cause. “Reasonable cause” means an honest belief founded upon reasonable grounds, of the existence of a state of circumstances, which assuming them to be true, would reasonably lead any ordinarily prudent and cautions man, to come to the conclusion that the same was the right thing to do. Only if it found to be frivolous, without substance or foundation, the question of imposing penalty would arise.”
They find that the above said ratio as laid down by their lordships is fully applicable in the case in hand. Accordingly, in the facts and circumstances of this case, they invoke the provisions of Section 80 of Finance Act, 1994 and set aside the penalties imposed by the lower authorities on the appellant under the provisions of Section 76 & 78 of the Finance Act, 1994.
Appeal to the extent of setting aside of the penalties is allowed and the impugned order to that extent is set aside.

Decision:- The appeal allowed.

Comment:- The analogy of the case is that as the non payment of service tax was due to bonafide belief that no service tax is payable under reverse charge. Further, the service tax paid would be admissible as credit and the entire exercise being revenue neutral, it was held that the present case was fit for waiver of penalties under section 76 and 78 of the Finance Act. Ratio of Motor World [2012 (27)S.T.R.225 (Kar.)] was held to be fully applicable.

{Prepared by: Monika Tak}

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PJ/Case law/2014-15/2291

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