Whether simultaneous penalty under Section 76 and Section 78 is imposable?

PJ/Case Study/2013-14/53

CASE STUDY

Prepared by:-CA Neetu Sukhwani &

Bharat Rathore

Introduction:-

The assessee was issued with a Show cause notice alleging that they have not paid/irregularly paid the Service Tax amounting to Rs. 16,33,862/- for the period 2006-07 to 2008-09. as they not paid service tax on payout commission received by finance companies/ insurance companies under Business Auxiliary Service. Thus, they were asked to deposit service tax under Section 73(1) of the Finance Act, 1994, and imposed penalty under Section 76, 77 and 78 of the Finance Act, 1994. The adjudicating authority confirmed the demand along with interest imposing penalties under Section 77 &78 of the Act. However no penalty was imposed under Section 76 of the act taking recourse to Section 80 ibid. Aggrieved by the said order of adjudicating authority, revenue filed appeal before Commissioner Appeals. It was finally decided by the Commissioner (Appeals) that the benefit under Section 80 of the Finance Act, 1994 can be extended only if the assessee proves that there was reasonable cause for failure to pay the service tax. In this regard, it was also submitted that the law that penalty under Section 76 is not imposable alongwith penalty under Section 78 was almost settled by various tribunal judgments. Accordingly, the Commissioner (Appeals) rejected the appeal of revenue and upheld the order.

M/s. LMJ Services Ltd. v/s Additional Commissioner (JP-II), Jaipur

[Order-In-Appeal no. 18(R.D.N.)ST/JP-II/2013 dated 22.01.2013]

Relevant Legal Provisions:-

Section 76 of the Finance Act, 1994:-

“[76. Penalty for failure to pay service tax
Any person, liable to pay service tax in accordance with the provisions of Section 68 or the rules made under this Chapter, who fails to pay such tax,
shall pay, in addition to such tax and the interest on that tax amount in accordance with the provisions of Section 75, a penalty which shall not be less than [one hundred rupees] for every day during which such failure continues or at the rate of [two per cent.] of such tax, per month, whichever is higher, starting with the first day after the due date till the date of actual payment of the outstanding amount of service tax:
Provided that the total amount of the penalty payable in terms of this Section shall not exceed the service tax payable in terms of this Section shall not exceed [fifty per cent of] the service tax payable.”
Section 78 of the Finance Act, 1994:-
“78. Penalty for suppressing value of taxable service. –
[(1) Where any service tax has not been levied or paid or has been short-levied or short-paid or erroneously refunded, by reason of —

(a) fraud; or
(b) collusion; or
(c) wilful mis-statement; or
(d) suppression of facts; or
(e) contravention of any of the provisions of this Chapter or of the rules made thereunder with intent to evade payment of service tax, the person, liable to pay such service tax or erroneous refund, as determined under sub-Section (2) of Section 73, shall also be liable to pay a penalty, In addition to such service tax and interest thereon, if any, payable by him, which shall be equal to the amount of service tax so not levied or paid or short-levied or short-paid or erroneously refunded:
Provided that where true and complete details of the transactions are available in the specified records, penalty shall be reduced to fifty per cent. of the service tax so not levied or paid or short-levied or short-paid or erroneously refunded:
Provided further that where such service tax and the interest payable thereon is paid within thirty days from the date of communication of order of the Central Excise Officer determining such service tax, the amount of penalty liable to be paid by such person under the first proviso shall be twenty-five per cent. of such service tax:
Provided also that the benefit of reduced penalty under the second proviso shall be available only if the amount of penalty so determined has also been paid within the period of thirty days referred to in that proviso:
Provided also that in case of a service provider whose value of taxable services does not exceed sixty lakh rupees during any of the years covered by the notice or during the last preceding financial year, the period of thirty days shall be extended to ninety days.
(2) Where the service tax determined to be payable is reduced or increased by the Commissioner (Appeals), the Appellate Tribunal or, as the case may be, the court, then, for the purposes of this Section, the service tax as reduced or increased, as the case may be, shall be taken into account:
Provided that in case where the service tax to be payable is increased by the Commissioner (Appeals), the Appellate Tribunal or, as the case may be, the court, then, the benefit of reduced penalty under the second proviso to sub-Section (1), shall be available, if the amount of service tax so increased, the interest payable thereon and twenty-five per cent. of the consequential increase of penalty have also been paid within thirty days or ninety days, as the case may be, of communication of the order by which such increase in service tax takes effect:
Provided further that if the penalty is payable under this Section, the provisions of Section 76 shall not apply.
Explanation.— For the removal of doubts, it is hereby declared that any amount paid to the credit of the Central Government prior to the date of communication of the order referred to in the second proviso to sub-Section (1) or the first proviso to sub-Section (2) shall be adjusted against the total amount due from such person.]”
Section 80 of the Finance Act, 1994:-

“80. Penalty not to be imposed in certain cases. –
(1) Notwithstanding anything contained in the provisions of Section 76 [Section 77 or [first proviso to sub- Section (1) of Section 78]], no penalty shall be imposable on the assessee for any failure referred to in said provisions, if the assessee proves that there was reasonable cause for the said failure.
"(2) Notwithstanding anything contained in the provisions of Section 76 or Section 77 or Section 78, no penalty shall be imposable for failure to pay service tax payable, as on the 6th day of March, 2012, on the taxable service referred to in sub-clause (zzzz) of clause (105) of Section 65, subject to the condition that the amount of service tax along with interest is paid in full within a period of six months from the date on which the Finance Bill, 2012 receives the assent of the President.";”

Issue: - Following issue was made before the Commissioner Appeals:-

Whether simultaneous penalty under Section 76 and Section 78 is imposable?

Brief Facts:-

The appellant, M/s LMJ Services Ltd., is a service provider registered under the category of “Authorised Service station” as defined under Section 65(8) of the Finance Act, 1994 and paying service tax accordingly. The department issued a Show Cause Notice under proviso to Section 73(1) for recovery of amount of service tax chargeable on payout commission received during the period 2006-07 to 2008-09 from various finance companies / insurance Companies on account of disbursement of various loans under the category of Business Auxiliary Service along with proposing penalties under Section 76,77 & 78 of the Act. The adjudicating authority confirmed the demand and imposed penalties under Section 77 & 78 of the Act. However no penalty was imposed under Section 76 of the Act taking recourse to Section 80 ibid. Aggrieved by the impugned order-in-original, the revenue prefers to file this appeal before the Commissioner (Appeals).

Appellant’s Contentions:- The appellant made following submissions before the Commissioner (Appeals):-

The appellant submit that the adjudicating authority have not examined the factual position of the issue involved in the case. As per Section 76 of the Finance Act, 1994, any person, liable to pay service tax in accordance with the provisions of Section 68 or the rules made under this chapter, who fails to pay such tax, shall pay, in addition to such tax and the interest on that tax in accordance with the provisions of Section 75, a penalty which shall not be less than one hundred rupees up to 18/04/2006 and thereafter two hundred rupees for every day during which such failure continues at the rate of two percent of such tax per month, whichever is higher starting with the first day after the due date till the date of actual payment of the outstanding amount of service tax. Provided that the total amount of the penalty payable in terms of this Section shall not exceed the service tax payable.
The appellant also submit that a proviso under Section 78 of the Finance Act, 1994 was inserted w.e.f. 10/05/2008 to the effect that if the penalty is payable under this Section the provisions of Section 76 shall not apply. Since the demand in the impugned case is prior to 10/05/2008. Hence, penalty under both the Sections i.e. 76 and 78 of Finance Act, 1994 were proposed in the show cause notices. The additional commissioner did not impose any penalty under Section 76 ibid by taking recourse to Section 80 of the act ibid.
The appellant further submit that benefit under Section 80 of the Act can be extended if the assessee proves that there was reasonable cause for the failure to pay service tax but imposition of penalty under Section 78 ibid by holding that there was suppression with intent to evade payment of service tax proves that there was no reasonable cause for failure to pay service tax. In such a situation non imposition of penalty under Section 76 ibid by taking recourse to Section 80 ibid appears not to be correct.

Respondent’s Contention:- The respondent pleaded that the penalty under Section 76 and Section 78 are not imposable simultaneously right from the beginning. The penalty under Section 76 is imposable on failure to pay the service tax and the penalty under Section 78 is also imposable where the service tax is not paid or short paid, however here; the said short payment should be by reason of fraud, collusion, willful mis-statement or suppression of facts. Thus, the basic reason for imposing the penalties under two Sections is the same – non-payment/short payment of service tax. Thus, when the one penalty under Section 78 is already imposed for non-payment of service tax, penalty under Section 76 cannot be imposed again for the same default. This very intention of the government has been clarified by inserting the proviso to Section 78. However, the law was settled even before inserting this proviso by way of a no. of judicial pronouncements in favour of assessees. The various Tribunal decisions pertaining to the period prior to 10.5.2008 had already set a rule that the penalties under Section 76 and 78 cannot be imposed simultaneously. Some of such decisions are as follows:-
·         Opus Media and Entertainment vs Commissioner of Central Excise, Jaipur [2007 (8) S.T.R. 368 (Tri.-Del.)]

·         Commissioner of Central Excise, Raigad vs Shield Security Force [2007-TIOL-1084-CESTAT-MUM]

·         Recmac Marketing (P) Ltd. vs Commissioner of Service Tax, Kolkata [2008-TIOL-2050-CESTAT-KOL]

The above decisions pertain to the period prior to said amendment.

As such, the situation prior to insertion of proviso and afterwards is the same. Thus, we can say that this amendment is merely clarificatory in nature and is based upon a no. of judgments wherein tribunal ruled that both of these provisions are mutually exclusive. Therefore, it is ample clear that even before this amendment; it was well settled law that the penalties under Section 76 and 78 are mutually exclusive. Hence, contention of the impugned appeal is not sustainable and simultaneous penalties under Section 76 and 78 are not imposable even before 10.5.2008 and as such, the impugned appeal filed by the department is liable to be quashed.
The respondent further submits that the impugned appeal is contending that the benefit under Section 80 of the Finance Act, 1994 can be extended only if the assessee proves that there was reasonable cause for failure to pay the service tax. In this regard it is submitted that as per forgoing paras it is ample clear that the law that penalty under Section 76 is not imposable alongwith penalty under Section 78 was almost settled by various tribunal judgments as cited hereabove. When there are Tribunal decisions in favour of the respondents under exactly same facts and circumstances and where the law is settled in favour of the respondents there is no reason for taking recourse of Section 80 of the Finance Act, 1994 to justify the same. As such, the contention of the impugned appeal is not sustainable and is liable to be set aside.

Without prejudice of the above grounds, it is submitted that the issue involved in the appeal was that whether the providing of table space to the finance/insurance companies will attract the service tax or not. This issue is contentious and a no. of tribunal decisions are in favour of the respondents. Some of such decisions are as follows:-

·         Silicon Honda V CCE {[2008]17 STT 96 (Bang CESTAT)}

·         Shubhyan Motors Pvt Ltd v/s Commissioner of Central Excise, Pune-III [2010-TIOL-1034-CESTAT-MUM]

·         COMMISSIONER OF C. EX., BELGAUM Versus CHADHA AUTO AGENCIES [2008 (11) S.T.R. 643 (Tri. - Bang.)]

·         TRIBHUVAN MOTORS LTD. Versus COMMR. OF SERVICE TAX, MANGALORE [2010 (17) S.T.R. 281 (Tri. - Bang.)]

The appellant submit that the above decisions are squarely applicable in their case. The respondents have acted under bonafide belief based upon these decisions. It is the settled law that when the assessee has acted under bonafide belief, no penalty is imposable on them. This has been held by hon’ble Supreme Court in the case of COMMISSIONER OF CENTRAL EXCISE, TRICHY Versus GRASIM INDUSTRIES LTD. [2005 (183) E.L.T. 123 (S.C.)]

In this case it is held that where the act of assessee is based on the interpretation taken by the Tribunal, penalty cannot be imposed as the act is based on bonafide belief. Thus, the hon’ble Supreme Court has decided in favour of the respondents and has held that no penalty is imposable when there was judicial pronouncements in favour of the assessees. Therefore, in the light of above decision of Apex Court also, the penal provisions are not invokable. When none of the penal provisions are invokable, the penalty under Section 76 can also not be justified by any other reason as the decision of Supreme Court lies in their favour. The impugned appeal asking for imposition of penalty under Section 76 is also not sustainable and is liable to be quashed.
The respondent also place reliance on the judgement given by the Hon’ble High Court in the case of Commissioner of Central Excise vs First Flight Courier Ltd [2011 (22) S.T.R. 622 (P&H)] in which it was held that no substantial question of law arises in respect of question that whether penalty under Section 76 & 78 can be imposed simultaneously for period prior to 10-05-2008 and subsequently dismissed the Revenue appeal in this respect. The relevant extracts from the case are reproduced as follows:

Penalty - Double jeopardy - Penalty under Sections 6 and 78 of Finance Act, 1994 mutually exclusive from 10-5-2008 - Penalty under said provisions whether simultaneously not imposable for period before 10-5-2008 - Section 76 ibid providing for penalty for failure to pay tax while Section 78 ibid providing for penalty for suppression of taxable value - Section 78 ibid providing for higher amount of penalty is more comprehensive - Penalty under Section 76 ibid not justified if penalty already imposed under Section 78 ibid - High Court order dated 12-7-2010 on similar issue holding penalty under Section 76 ibid not imposable when the same imposed under Section 78 ibid, applicable - Question of law not arises - Appeal dismissed - Sections 76 and 78 ibid.

The respondent further submit that in a recent decision given by the Tribunal in the case of Commissioner of Central Excise, Haldia vs Mittal Technopack P Ltd [2012-TIOL-1507-CESTAT-KOL], it has been held that simultaneous penalty under Section 76 and 78 cannot be imposed even for the period prior to 10.05.2008, i.e. when the proviso was inserted that simultaneous penalty is not imposable.
A similar view has been taken in the case of Science Centre vs Commissioner of Central Excise, Jaipur-I [2012 (27) STR 476 (Tri.-Del)]
.
Therefore, in light of the above case laws, it is crystal clear that simultaneous imposition of penalty under Section 76 and 78 is not warranted even prior to the period when the amendment was not in force and that the amendment was clarificatory in nature.

Reasoning of the Commissioner (Appeals):-

The Commissioner (Appeals) held that the adjudicating authority while waving penalty under Section 76 has exercised his power under Section 80 of the Act for not imposing penalty in the impugned order and the appellate authority is not a platform to examine the validity of discretionary powers of adjudicating authority. The Commissioner (Appeals) also observe that Hon’ble Tribunal is the case of M.R. Bhagat & Associates reported in 2008 (10) S.T.R. 130 (Tri. Mum) held as under:-
Para 3 Considered the submission made by ld. Jt. CDR and perused the records. It is seen from the records that the issue involved in this case is regarding the enhancement of the penalty imposed on the appellant under the provision of Section 84 of the Finance Act, 1994. The appellant failed to pay service tax for the period April 2002 to September, 2003 before the stipulated time subsequently on being pointed out the appellants paid the duty of service tax along with interest considering this fact the adjudicating authority invoking the provisions of Section 80 imposed a penalty of Rs. 2500/- under Section 76 and Rs. 500/- under Section 77. On examination of the case records and the adjudication order, the ld. Commissioner came to the conclusion that the order-in-original is not legal, proper and correct and hence issued a show cause notice for enhancement of the penalty under Section 76. The appellant did not represent before the ld. Commissioner and ld. Commissioner has considered the issued based on the records and enhanced the penalty. I find that the issue is no more res integra. The Hon’ble High Court of Bombay Judicature in the case of CCE &C, Nashik V. Vinay S. Bele (CEA, 193/2006) [2008(9) S.T.R. 350 (Bom.)] has held that the imposition of penalty under Section 76 is discretionary and provisions of Section 80 can be considered for imposition or non imposition or reduction in penalty. As such I find that the issue is squarely covered in favour of the appellant.
Para4. Accordingly respectfully following the judgment of the Hon’ble High Court of Bombay in Central Excise Appeal no. CEA 193/2006. The appeal is allowed with consequential relief if any.
The Commissioner (Appeals) further observe that in the case of CCE &C, Nashik V. Vinay S. Bele (CEA, 193/2006) [2008(9) S.T.R. 350 (Bom.)] and on which the Hon’ble Tribunal Supra relied upon, is read as under:
Para 1: The main contention as urged on behalf of the revenue is that considering Section 76 of the Central Excise Act(Finance Act, 1994), the authorities had to impose the penalty as set out therein and there was no discretion to impose lesser penalty after considering Section 80, we find that such a discretion is vested in the authority.
Para 2: In the light of that in our opinion no substantial question of law arises. Hence, the appeal is dismissed.
In view of the above, the Commissioner Appeals rejected the Revenue’s Appeal and uphold the impugned order.
Decision:- Revenue’s Appeal is rejected.

Conclusion:- The substance of this case is that adjudicating authority while waving penalty under Section 76, has exercised his power under Section 80 of the Act for not imposing penalty in the impugned order and the appellate authority is not a platform to examine the validity of discretionary powers of adjudicating authority. There have been many judicial pronouncements wherein it has been held that the imposition of penalty under Section 76 is discretionary and provisions of Section 80 can be considered for imposition or non imposition or reduction in penalty. Moreover, as per the amended law, simultaneous penalty under section 76 and 78 is not imposable.

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