Pradeep Jain - Chartered Accountant

PJ/CASE STUDY/2007-08/001

09 June 2007

CASE STUDY

SCOPE OF MINIMUM PENALTY: A DEEMED ISSUE

INTRODUCTION

1. The Finance Act, 1994 by Chapter V laid the foundation for levy of tax on the ‘Service Sector’ and christened it as ‘Service Tax’. Subsequent annual Finance Acts have amended the fasciculus of sections in the said Chapter V expanding the base and increasing the levy. This levy is imposed, assessed, adjudicated and enforced by the Central Excise Authorities constituted under the Central Excise Act, 1994. In the case of “DIAL and TRAVEL” (an Air Travel Agent) Vs. CCE Jaipur II, order given imposing penalty did not took notice of the provisions of Section 76 Section 77 and Section 80 of The Finance Act, 1994.

RELEVANT PROVISIONS

2. Some relevant provisions of the Act have been discussed below: -

Section 68 “Payment of Service Tax”.

Section 70 “Furnishing of Returns”.

Section 76 “Penalty for Failure to Pay Service Tax” it reads as follows:

“Any person liable to pay service tax in accordance with the provisions of section 68 or the Rules made there under, who fails to pay such tax shall pay in addition to paying such tax, an interest on that tax in accordance with the provisions of section 75, a penalty which shall not be less than one hundred rupees but which may extend two hundred rupees for every day during which such failure continues, so, however that the penalty under this clause shall not exceed the amount of service tax that he failed to pay.”

Section 77 “Penalty for failure to file Service Tax return” it reads as follows:

“If a person fails to furnish in due time the return which he is required to furnish under section 70 or the Rules made there under, he shall be liable to pay penalty which may extend to an amount not exceeding one thousand rupees.”

Section 80 “Penalty not to be imposed in certain cases” it reads as follows:

“Not withstanding anything contained in the provisions of section 76, section 77 and section 78 or section 79, no penalty shall be imposable on the assessee for any failure referred to in the said provisions, if the assessee proves that there was reasonable cause for the said failure.”

DIAL AND TRAVEL Vs CCE, Jaipur II

3. Brief facts of the case

M/s Dial and Travel, Jodhpur contravened the provisions of section 68 and section 70 of Chapter V of The Finance Act, 1994 in as much as they failed to:

1) Pay the Service Tax in terms of Section 68 and Rules made there under;

2) Furnish quarterly also half yearly return in prescribed form ST-3.

Accordingly a Show cause notice was issued to them asking them to why a penalty (for contravening the provisions of section 68 and section 70) and Service Tax payable should not be recovered from them. In response the assessee (Dial and Travel) requested the department to provide them some time so that they can report to them with more apparent explanation. Later on the explanation so submitted revealed that they have done so in acquaintance of scheme that ‘The Service Tax shall be imposed on the Principal (Indian Airlines) who will deduct the same at source.” But in persuasion from the department it was made clear that service tax is liable on the service rendered by the service provider. Hence, they realized their mistake and were ready to deposit the duty foregone by them. But they failed to do so as some of their staff personnel cheated them and utilized the funds elsewhere. Howsoever they managed to accumulate the funds and deposited the same later on. The assessee further applied to the Deputy Commissioner that they did not had any intention to escape from or breach the service tax rules hence they pleaded that the case shall be decided with a lenient view.

The decision given in the above related matter reads as follows, “….. I am of the opinion that the instant case deserves for a lenient view. Thus in the present case I propose to impose the minimum prescribe penalty under the provision of Section 76 and 77. Accordingly I pass the following order –

In view of above I impose a penalty of Rs. 9863/- under section 76 for contravention of section 68 and a penalty of Rs. 12900/- under section 77 for contravention of section 70 on the assessee. Rs. 9863/- towards Service tax and the interest amount of Rs. 425/-deposited by the assessee in order to appropriate in Govt. account. The assessee are ordered to pay differential amount of interest for Rs. 2250/- henceforth.”

Thus, the Order-in-original provided the words “….I am of the opinion that the instant case deserves for a lenient view. Thus in the present case I propose to impose the minimum prescribe penalty under the provision of Section 76 and 77.” This implies that minimum penalty has to be imposed on for the reluctant mistake.

Thus, the assessee appealed to the Commissioner Appeals against the order-in-original on the ground that “…the appellant authority has agreed to impose minimum penalty and the order-in-original interpreting it not to be Rs. 100/- only (minimum penalty as per section 77) is totally erroneous and deserves to be quashed. Secondly they have pleaded the minimum penalty under Section 76, 77 read with Section 80 is nil” They were also of the view that the maximum penalty under section 76 have been fixed to Rs. 2000/- but the order in original not considering the same is liable to be quashed. But the Commissioner (Appeals) rejected the appeal on the view that the Adjudicating Authority has merely said that he proposed to take a lenient view and impose the minimum penalty and had done so also by imposing the penalty @ 100/-per day in place of Rs.200/- per day and there is no requirement for reducing the duty.

The assessee not satisfied by the order of Commissioner (Appeals), further appealed to CEGAT (Customs, Excise and Gold (control) Appellate Tribunal) on the same grounds. The Tribunal viewed the facts of the case minutely and ordered that “…. the applicant has not made out a strong prima facie case for waiver of entire amount of penalty. We therefore direct them to deposit Rs. 5,000/- towards penalty…….” Thus, the penalty was reduced to a great extent and assessee was satisfied and did not file the appeal in higher forum.

But the department was not satisfied and they filed the petition before the Hon’ble High Court Jodhpur. The main argument of the department was that whether the Tribunal has power to reduce the penalty below the prescribed limit of Rs. 100/- per day or not. The Hon’ble High Court held that the assessee was under a reasonable cause for delay or non payment and submission of tax in time. Thus, no penalty under section 76 and section 77 shall be imposable keeping in mind the provisions of section 80. But the Hon’ble High Court also held that as the assessee has not approached the Court to challenge the order of Tribunal. Thus, the penalty imposed by the tribunal of Rs. 5000/- cannot be reduced below that amount.

Moreover the Hon’ble High Court in its order intended that the assessee has not noticed the provisions of Section 80. In the words of Hon’ble High Court –

“…..In view of the aforesaid circumstances the assesse’s case clearly fell within the province of Section 80 of the Finance Act, 1994 and truly speaking no penalty was leviable. However, since the assessee and Revenue both failed to notice Section 80 and acted only with a view to levy less or the minimum penalty………”

Although the assessee was contending with the Department on the provisions of Section 80 from the very initial, the Hon’ble High Court responded that the assessee did not have notice of it.

QUESTIONS FOR CONSIDERATION

4. The question was that whether the minimum penalty under Section 76, 77 is Rs. 100/- per day or the penalty can be reduced further. The Hon’ble High Court held that the minimum penalty under Section 76, 77 read with Section 80 is nil. It has held that if the circumstances show that genuineness of the case, the penalty can be reduced by invoking the provisions of the Section 80. The High Court further held that the appeal has been filed by the department and assessee has not come forward for the appeal, as such, the penalty imposed by the tribunal can not be reduced further. Thus, the penalty of Rs. 5000/- imposed by the tribunal

COMMENTS

5. The factual scenario of the aforesaid case indicates that the assessee (Dial and Travel) realized its error and rectified the same. It also pleaded to the department for a lenient view in imposing penalty and giving order for the alike as there was no intention to evade duty. Still a high penalty was imposed on the assessee with assertion of imposing minimum penalty. Assessee not satisfied with the order, further appealed to the Commissioner (Appeals) on the ground that the minimum penalty should be imposed. Nothing came out of the same as Commissioner rejected the Appeal and upheld the order-in-original.

The assessee aggrieved by the decision appealed to CEGAT and the result came out that the penalty was reduced to a considerable amount, but was not waived in full. The CEGAT made such a decision with a view that no prima facie evidence was there to waive the full penalty. But as per section 76 and 77 of Chapter V of The Finance Act, 1994 provides that the minimum penalty to be charged is Rs. 100/- and 200/- per day respectively. Moreover section 80 also states that no penalty shall be imposed on the assessee if he proves that such failure was due to reasonable cause. The Revenue approached the Hon’ble High Court but the matter was placed in the assesse’s favour. The Hon’ble High Court held that the minimum penalty under Section 76, 77 read with section 80 is nil. But the assessee should show that there was reasonable cause for invoking the Section 80. But penalty of Rs. 5000/- was upheld on the assessee as the assessee did not filed the petition and it was from the other side.

CONCLUSION

6. Thus, it is ample clear that the minimum penalty under Section 76 and Section 77 is not Rs.100/- per day but it can be reduced further if the conditions of Section 80 are satisfied. This decision will be landmark decision as it will be of great help for the service tax assessee to save themselves from this harsh penal action.

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PJ/CASE STUDY/2007-08/001
09 June 2007

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