Interest, Penalties and Prosecution

  Interest, Penalties and Prosecution Hitherto, penal provisions under service tax law were limited to imposition of interest and penalty in case of ...
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Interest, Penalties and Prosecution Hitherto, penal provisions under service tax law were limited to imposition of interest and penalty in case of defaults made by the assessees. The Finance Act, 2011, effective from 08-04-2011, made major changes in the provisions by introducing prosecution provisions for specific defaults. Also, other changes have been made to rationalise existing penalties and enhance rate of interest in case of delayed payments. As a relief measure for the assessees who maintain true and correct records of their transactions, penal provisions have been diluted to a small extent. Clarifying the objective of these changes, the Government expresses the view that the existing scheme relating to compliance has been revamped with a view to strike a healthy balance between the interests of revenue and legitimate business and to promote voluntary compliance. The changes vide the Finance Act, 2011 have been made with the following philosophy: (i) improve voluntary compliance by encouraging self-correction, wherever the deviations are unintentional omissions; (ii) reduced penalties may be imposed if the transactions are captured fully and truthfully in records and further abated if timely admission and payment is made, and (iii) intentional and unrecorded violations should be dealt with severely with no concession whatsoever. The Government is of the view that with these measures, the undue advantage obtained by carrying on surreptious activities at the cost of lawabiding business would be neutralized. However, the efficacy of these provisions would directly relate to the manner of implementation thereof. 1. Charging of Interest Sections 75 and 73B1 of the Act governs the provisions regarding the payment of interest on delayed payment of service tax. As per Section 75, every person who fails to pay service tax or any part thereof, which he is liable to pay under Section 68 of the Act, within the stipulated time, is required to pay interest on such amount for the period of delay. As per Section 73B, every person who is liable to pay service tax under Section 73A(1), (2) and whose service tax liability has been determined by the Central Excise Officer under sub-section (4) of Section 73A, is required to pay interest on the amount of service tax so determined barring the cases where the amount becomes payable under Section 37B of the Central Excise Act, 1944 and such amount is voluntarily paid within the stipulated time without reserving a right of appeal. A. Payment of interest under Section 75 Payment of interest is mandatory: Section 75 provides for mandatory charging of interest on delayed payment of service tax. Thus, every person who fails to deposit the service tax or any part thereof to the account of Central Government within the period prescribed shall pay simple interest. In Sree Vadivambigai Textile Mills Ltd. v. CCE2, demands of interest were made under Section 75. The appellants pleaded that their company was declared sick by the BIFR and therefore, leniency should be shown in the matter of demand for interest. The Tribunal observed that there was no scope for leniency because the provisions of Section 75 “are couched in mandatory language”. Since the appellants had no case that interest was demanded in excess of what was prescribed in Section 75, company being declared as sick industry was no ground for leniency in demand of interest. The mandatory provisions regarding the payment of interest as provided in Section 75 have to be read in the light of the order passed by the High Court. In CCE v. D.H. Ramani & Co.3, the Tribunal held that interest under Section 75 was not to be charged if service tax was deposited up to the date directed by the High Court. In this case, the assessee was a firm of Chartered Accountants who earlier filed a writ petition in the Gujarat High Court challenging the levy of service tax on Chartered Accountants. Later on the writ petition was dismissed and the High Court directed them to deposit the service tax up to 28-02-2001. The High Court observed that: “we intended that the members of the petitioner association may not be made to suffer any adverse consequence on account of delay in payment of service tax if the payment was made within two months i.e. 28-02-2001. And that the provisions of Section 75 would have to be read in the light of the aforesaid interim relief”. The Tribunal commented that the observation of the High Court clearly reflected upon the fact that the interest was not to be charged if the service tax was deposited up to 28-02-2001. In Parimala Subramanian v. CCE4, the appellant, a mandap keeper was held

                                                             1. 2. 3. 4.

Section 73B has been introduced by the Finance Act, 2006, w.e.f. 18-04-2006. (2005) 179 ELT 151 (Trib.-Chennai). (2005) 180 ELT 456 (Trib.-Mumbai). (2005) 2 STT 14.

liable to pay interest on the default amount of service tax from the date on which the writ petition was dismissed by the High Court to the date of payment of tax. However, in case the High Court does not specify to exclude the period of delay during adjudication of matter in the court, interest is leviable for the entire period. In CCE v. R. K. Swamy, B.B.D.O. Advertising (P) Ltd.,5 it was held that in absence of specific order of the High Court that period covered by stay order was to be excluded for purpose of computing period of delay, appellants were liable for interest for entire period of delay in payment of service tax. In Bholanath Oberoi & Sons v. CCE6, it has been held that payment of service tax before the issue of show cause notice cannot be a ground for waiver of interest on the tax amount. Rate of interest: Effective from 01-04-2011, the rate of interest has been enhanced from 13% to 18% p.a.. This 18% interest is to be further reduced by 3% for assessees with a turnover of upto Rs.60 lakh for the last preceding financial year or for any of the years covered by the notice. As a background, Section 75 as amended by the Finance Act, 2004, w.e.f. 10-09-2004 provides a range, from 10% to 36% p.a. within which, the Government may notify the applicable rate of interest. Accordingly, Notification No. 26/2004-ST, dated 10-09-20047 had been issued which notified 13% p.a. as the rate of interest to be charged for the period by which the deposit of tax or any part thereof has been delayed. Notification No.14/2011-ST, dated 01-032011, effective from 01-04-2011, has now amended Notification No. 26/2004-ST, by enhancing the rate of interest from 13% to 18% p.a. Rate of interest for the prior periods: Initially, w.e.f. 01-07-1994, Section 75 prescribed the rate of interest as 1.5% for every month or part of the month by which the deposit of service tax was delayed. For computing the period of delay in payment of service tax, the month was to be counted from the next day from the date on which the payment of service tax was due. For example, if service tax was payable by 25th of a month, one month period for computation of interest was to be counted from 26th of that month to 25th of the next month. This position had been clarified by Trade Notice No. 50/CE/98-ST, dated27-11-1998 issued by the Chandigarh Commissionerate-I. Prescribing rate of interest on monthly basis proved unfavourable to the assessee inasmuch as the assessee was required to pay interest for two months even if there was a delay of few days i.e. less than a month. This was so because delayed period of even few days used to spread over two months and therefore, the assessee was made to pay interest for two months. To sort out this contentious issue, the Finance Act, 2001, w.e.f. 16-07-2001 amended Section 75 and provided for rate of interest as 24% p.a. to be charged for the period by which the deposit of service tax was delayed. Later, the Finance Act, 2002, w.e.f. 16-08-2002, reduced the rate of interest from 24% to 15% per annum which remained effective till 09-09-2004. Since 10-09-2004, present rate of interest is applicable as discussed in the above para. However, all these rates have been prescribed on per annum basis. Prescribing rate of interest on “per annum” basis implied that interest was to be paid for the actual number of days for which the payment was delayed. However, even with respect of the erstwhile provision prescribing rate of interest of 1.5% per month or part of the month, in BPL Mobile Cellular Ltd. v. CCE8, it was held that where the delay was for part of the month only, interest could be charged for the period of delay alone and not for the full month. For demand of service tax and interest, the Show-Cause Notice (SCN) must be issued under Section 73: In Diamond Cables Ltd. v. CCE,9 the impugned order directing the payment of service tax together with interest was set aside because the SCN was issued in terms of Sections 76 and 77 for payment of interest and for imposition of penalty. The Tribunal relied upon its earlier order in the case of Markfed Oil & Allied Industries v. CCE,10 wherein demand of service tax with interest was set aside on the ground that notice was not issued under Section 73 of the Finance Act, 1994 but under Section 77 for imposition of penalty on account of failure to file returns. No Interest on Service Tax during stay period: In Suri & Co v. CCE11, it was held that during the period of stay, there was no effective provision of law authorising levy of service tax, let alone levy of interest thereon, the demand of interest for the said period is unauthorised. Interest cannot be demanded on the tax paid when there was no liability: In Tebma Shipyards Ltd v. CCE12, it was held that where there was no tax liability for the assessee, there was no liability for them to pay interest on tax either. No liability of interest where cheque presented on due date but amount transferred to the Government treasury after the due date: In Commissioner v. National Publicity13, it was held that that since the cheque was not

                                                             5. 6. 7. 8. 9. 10. 11. 12. 13.

(2005) 1 STT 216, 217. (2010) 24 STT 186. For text of the Notification, refer ,Part D–Chapter V. (2005) 183 ELT 324 (Trib-Chennai). (2005) 180 ELT 444 (Trib.-Mumbai). (2002) 146 ELT 466 (Trib.-Del). (2006) 1 STR 31 (Trib.-Chennai). 2006-TIOL-138-CESTAT-MAD. (2006) 1 STR 112 (Trib–Del).

dishonoured later on, interest not recoverable in view of Circular No. F. N. V/DGST/30-Misc. 46/2000, dated 2803-2000. B. Payment of interest under Section 73B The Finance Act, 2006, introduced Sections 73A and 73B to the Finance Act, 1994, w.e.f. 18-04-2006. Section 73A requires a person to forthrightly deposit service tax collected by him in excess of what he was to collect under service tax provisions or the tax which he was not required to collect at all. Section 73A(4), empowers the Central Excise Officer to determine service tax payable by such person, if not paid by him voluntarily. Section 73B provides the provisions for charging interest with respect to the payment of service tax to be made under Section 73A(4). The interest is chargeable from the first day of the month succeeding the month in which such amount ought to have been paid under the service tax provisions. The rate of interest provided in Section 73B is between the range of 10% to 24% as prescribed by the Central Government. The Central Government had prescribed 13% rate of interest in this regard, which, effective from 01-04-2011, has been enhanced to 18% which is to be reduced by 3% for assessees with a turnover of upto Rs.60 lakh for the last preceding financial year or for any of the years covered under the notice under Section 73B. The payment of interest is mandatory under Section 73B except in case the service tax under Section 73A becomes payable due to an order, instruction or direction by the Board under Section 37B of the Central Excise Act, 1944. In such case, interest is not payable on the amount of service tax if it is voluntarily paid in full, without reserving any right to appeal within 45 days of the order, instruction or direction, as the case may be. In all cases other than above, the interest is payable on the whole amount determined under Section 73A(4) including the amount already paid. Further, where the amount determined under sub-section (4) of Section 73A is reduced by the Commissioner (Appeals), the Appellate Tribunal or, the court, as the case may be, the interest payable thereon under this section shall be on such reduced amount, and where the amount determined under subsection (4) of Section 73A is increased by the Commissioner (Appeals), the Appellate Tribunal or, the court, as the case may be, the interest payable thereon under this section shall be on such increased amount. C. Payment of interest under CENVAT Credit Rules Rule 14 of the CENVAT Credit Rules, 2004, provides that, “where the CENVAT credit has been taken or utilised wrongly or has been erroneously refunded, the same along with interest shall be recovered from the manufacturer or the provider of the output service and the provisions of Sections 11A and 11AB of the Excise Act or Sections 73 and 75 of the Finance Act, shall apply mutatis mutandis for effecting such recoveries.” It may be noted that as per the above Rule, the interest is chargeable in case CENVAT Credit is wrongly taken or utilised. Hitherto courts had been taking the view that it is only in case of wrong utilisation of credit that the interest should be levied, and that in case of wrong availment of credit, interest should not be levied if such amount is not utilised. However, the Apex Court has recently given a judgment holding that interest is payable on wrong availment of CENVAT credit even if it is not utilized by the assessee. The said judgement dated 21.02.11 in Civil Appeal No. 1976 of 2011 has set aside the order of Hon’ble High Court in the case of Ind-Swift Labs. v UOI14, and ruled that “If the aforesaid provision ( i.e. Rule 14 of the Credit Rules) is read as a whole we find no reason to read the word “OR” in between the expressions ‘taken or utilized wrongly or has been erroneously refunded’ as the word “AND”. On the happening of any of the three circumstances such credit becomes recoverable along with interest.” The above judgment endorsed the same view taken by the Department vide Circular No. 897/17/2009-CX (F.No. 267/83/2009-CX-8), dated 03-09-2009. Also, Department has issued another Circular No. 942/03/2011-CX dated 14-03-2011, to re-emphasise that in light of clear and unambiguous provisions of Rule 14 of the CENVAT Credit Rules, 2004, the interest shall be recoverable when credit has been wrongly “taken”, even if it has not been utilized. Though the Apex Court has kind of settled the issue by holding that interest should be payable in case of wrong availment of credit also, the judgment does not seems to be justifiable in view of the fact that the CENVAT Credit Rules are so ambiguously drafted and interpreted over the period of time that eligibility of a given input credit can be contended in most of the cases. 2. Penalties under Service Tax The amount of penalty is over and above the amount of service tax and interest to be paid by the assessee. The purpose of imposing a penalty is to penalise the defaulter. However, payment of penalty is not mandatory under service tax provisions. In CCE v. Pioneer Plastic Products15 it was held that the penalty under Sections 76 & 77 of the Finance Act, 1994 is not mandatory. If the assessee is able to prove that there was reasonable cause for the failure for which a penalty is being imposed, he can avoid the penalty under Section 80 of the Act. In CCE v.

                                                             14. 2009(240)ELT328(P&H)

15. 2005-TIOL-1175-CESTAT-KOL.

Sanchar Bharti (P) Ltd.16, it was held that if reasonable cause exists for delay in depositing service tax, penalty can be reduced or even waived as per Section 80 of the Finance Act, 1994. Further, service tax being a new levy, penalty should not be imposed for mere procedural irregularities. In CCE v. R. K. Electronic Cable Network17, the order of the Commissioner (Appeals) was confirmed by the Tribunal wherein it was held that, “many of new assessees being ignorant, for procedural delays in taking up of registration and consequent filing of the returns etc. a lenient view can be taken. This was precisely the reason as to why many new Voluntary Disclosure Schemes for voluntary compliance like Extraordinary Taxpayer Friendly Scheme declared under Board’s F. No. 137/39/2004-CX4, dated 23-09-2004 to be operational upto 30-10-2004 in respect of the assessees who had not at all complied with the provisions of Service Tax Law, had been launched waiving the various penalties under the aforesaid Sections 75A, 76 & 77 etc. When the assessees who did not at all comply with the Service Tax Law can be given immunity provided they pay the service tax along with appropriate rate of interest, there is no tangible and logical reason as to why the law abiding assessee who had got himself registered more or less in time and had also started paying the service tax along with interest, much before the new scheme became operational, shall be denied the benefit of waiver of the penal provisions referred to above for late registration, delay in filing the relevant returns etc. all of which are procedural in nature.” It is notable that hitherto the default in the payment of service tax entailed only monetary penalties, but the Finance Act, 2006, w.e.f. 18-04-2006, has introduced Section 73D which empowers the Central Government to publish the names and information about the persons committing default under service tax provisions. There are four sections under service tax law which provide for imposing penalty. These are— (i) Section 76 of the Act—prescribes penalty for failure to pay service tax. (ii) Section 77 of the Act—prescribes penalties for specified offences and also general penalty for the offence for which no penalty has been described elsewhere in the Act, and (iii) Section 78 of the Act—prescribes penalty for suppressing the value of taxable service. (iv) Section 73D of the Act empowers the Central Government to publish information in respect of defaulters subject to conditions. Further, the Finance Act, 2011, effective from 08-04-2011, has introduced on Section relating to prosecution provisions under the law – (v) Section 89 of the Act - providing prosecution provisions for specific defaults All the above provisions have been discussed below in sequence (i) Penalty under Section 76 for failure to pay service tax: Section 76 of the Finance Act, 1994 prescribes penalty in case of a person who is liable to pay service tax in accordance with Section 68 or the rules made there under but fails to pay such tax. Amount of penalty: Effective from 08-04-2011, the penalty for such failure is not less than Rs 100 for every day during which such failure continues or at the rate of 1% of such tax per month, whichever is higher, subject to the amount of service tax payable. In other words, total amount of penalty shall not exceed the 50% of the amount of service tax payable. The days constituting the failure to pay service tax would start with the first day after the due date till the date of actual payment of service tax. Effective from 18-04-200618 to 07-04-2011, the penalty for such failure is not less than Rs 200 for every day during which such failure continues or at the rate of 2% of such tax per month, whichever is higher, subject to the amount of service tax payable. In other words, total amount of penalty shall not exceed the service tax payable. Prior to 18-04-2006, the amount of penalty for such failure was not less than Rs 100 for every day which could extend up to Rs 200 for every day during which the failure continues. However, the maximum amount of penalty could not be more than the amount of service tax which that person had failed to pay. Failure to pay service tax includes failure to pay service tax for any period of time beyond the due date. In R.B. Bahutule v. CCE19, the appellants pleaded that Section 76 could not be applied to a person who had paid the tax after some delay since the section was applicable only in case of a person “who fails to pay such tax”. In response, the Tribunal observed that “looking at the construction of the section including the fact that the maximum penalty is relatable to—”every day during which such failure continues”—it is not possible to accept the plea that the Section will not apply to a case where the tax has been paid after some delay, and held that “the section applies to persons who fail to pay service tax including persons who fail to pay such tax for any period of time beyond the due date”. Order adjudicating penalty should be a speaking order: In Stellar Travels Pvt. Ltd. v. CCE20, the penalty of Rs 87,800 imposed under Section 76 for late payment of tax was set aside as the Assistant Commissioner did not issue a speaking order, a negligence on his part which could not be ignored.

                                                             16. 17. 18. 19. 20.

(2006) 2 STR 7 (Trib.-Del). 2006-TIOL-275-CESTAT-DEL. Vide Section 76 as substituted by the Finance Act, 2006. (2004) 166 ELT 233 (Trib.-Mumbai). (2002) 146 ELT 388 (Trib.-Mumbai).

No Penalty if “reasonable cause is shown”: Section 80 of the Finance Act, 1994 provides that if the assessee proves that there was reasonable cause for failure referred to in Section 76 no penalty shall be imposed on him. Thus, the jurisdictional authorities must provide the assessee an opportunity to prove that there was reasonable cause for failure, before imposing any penalty. In Chitrita Virnave v. CCE21, the appellants, being architects, did not pay the service tax for certain quarters and also did not file the returns for the said period. It was pleaded that the Madras High Court had granted the interim stay to the operation of the provisions of service tax in respect of architects and as soon as the stay was vacated the appellants deposited the tax along with interest. In this case, though the appellants were out of the jurisdiction of Madras High Court and hence the stay order was not applicable to them but the Tribunal held that the action on the part of the appellants in not depositing the service tax could not be called mala fide so as to justify the imposition of penalties. In N.C. Maheshwari & Co. v. CCE22, the appellant, by mistake, showed higher figures in the half-yearly return submitted to the department but in actuality there was no short payment inasmuch as the “billed amount” was repeated as “amount received”. The appellant’s records also vouched for the fact that the amount received was much less. Under the circumstances when short levy demand was made based on the wrong entries made in the return and the appellant paid the differential tax, and there was no other evidence indicative of suppression of receipt, the imposition of penalty for making late payment was not justified. In Binani Metals Ltd. v. CCE23, the penalty of Rs 26,800, imposed under Section 76 on the ground of late deposit of service tax and late filing of returns, was challenged. It was pleaded by the appellant that the late filing of return and late deposit of service tax was as a result of advice given by a tax consultant. The Tribunal held that it could not be considered as mala fide on the part of the appellant and therefore, the penalty was reduced to Rs 5000. It may be noted that Section 80 can not always come to the rescue of an assessee. In CCE v. Pandian Hotels Ltd.24, the Tribunal held that the minimum penalty imposed under Section 76 for delayed payment of service tax could not be set aside, for the “cause” given could not be considered as “reasonable cause” within the meaning of Section 80. The cause stated by the assessee was that they were in financial hardships on account of having fallen into the clutches of a “Mafia” but there was no evidence on record to show that the assessee had prosecuted their defrauders as per law. To have associated themselves with Mafia and thereby fallen in financial hardships was not a “reasonable cause” within the meaning of Section 80. (ii) Penalty for specified offences and General Penalty for Contravention of the Service Tax Provisions: Hitherto Section 77 was a provision relating to general penalty for a contravention which was not specified elsewhere in the statute. The Finance Act, 2008, w.e.f. 10-05-2008 has modified Section 77 for providing penalties for multiple defaults. These are as under— Failure to get registered or Failure to furnish information, produce documents or appear before the Central Excise Officer—Rs 10000 (Rs 5000 prior to 08-04-2011) or Rs 200 per day of continuing default, whichever is higher. Number of days of default would be counted starting with the first day after the due date, till the date of actual compliance. Failure to keep, maintain or retain books of accounts as prescribed or Failure to pay tax electronically or Issuance of invoice with incorrect or insufficient details or non accounting thereof —Penalty may extend to Rs 10000 (Rs 5000 prior to 08-04-2011). Also, the Finance Act, 2008 has retained this general penalty feature in the modified Section 77 which states that any person, who contravenes any of the provisions of this Chapter or any rules made thereunder for which no penalty is separately provided in this Chapter, shall be liable to a penalty which may extend to Rs 10000 (Rs 5000 prior to 08-04-2011). In this regard, it is relevant to note that anything “done” which is prohibited or “not done” which is required to be done should be treated as “contravention” only when the intention is to evade service tax. In other words, when the person committing default has a clear intention to do a thing which is specifically prohibited by the concerned law, a contravention will emerge. Something “done” or “not done” unintentionally can not be construed as contravention. In no case Section 77 should be an instrument of harassment in the hands of authorities. Therefore, it should be kept in view that because of invoking of this provision no assessee should feel harassed. Section 77 was made a “general penalty” provision w.e.f. 10-09-2004. Prior to 10-09-2004, Section 77 was specifically related to non-filing of service tax, return by the due date and such non-filing attracted a penalty of Rs 1000. Initially, when this section was enacted, the penalty used to be much more and was pegged at minimum of Rs 100 which could extend up to Rs 200 per day during which the failure continued. After the amendment of Section 77 by the Finance Act, 1998, w.e.f. 16-10-1998, the penalty was reduced and related to per week of default or part thereof instead of per day. Section 77 was again amended by the Finance Act, 1999, w.e.f. 11-05-1999, and this time the maximum penalty prescribed was Rs 2000. The penalty was further reduced to a maximum of Rs 1000 when Section 77 was amended by the Finance Act, 2001, w.e.f. 16-07-2001.

                                                             21. 22. 23. 24.

(2002) 145 ELT 622 (Trib.-Kolkata). (2005) 184 ELT 321 (Trib.-Del). (2005) 180 ELT 450 (Trib.-Mumbai). (2005) 180 ELT 458 (Trib.-Chennai).

No Penalty if “reasonable cause is shown”: Section 80, as already stated, provides that if the assessee proves that there was reasonable cause for failure referred to in Section 77, no penalty shall be imposed on him. Thus, the assessee must be given an opportunity to prove that there was reasonable cause for failure, before any penalty is imposed. In the following cases the penalty was either reduced or set aside as the defaulting persons adduced reasonable cause for failure: (Since prior to 10-09-2004, the penalty under Section 77 related to non-filing of return, the following cases relate to contravention of non-filing of return. However, we have discussed these cases in context of ascertaining reasonableness of the cause of contravention.) In Vijaya Clearing & Forwarding Agency v. CCE25, the penalty for late filing of return was reduced from Rs 10,800 to Rs 2000 in view of the fact the service tax was freshly imposed on the assessees and also that the burden of tax stood discharged. In the case of Sajjan Kumar Kariwala v. CCE26, after considering that the service tax was a new tax at the relevant time and the appellant was a new assessee, the entire penalty imposed for non-filing of “Nil” return was set aside. This decision was followed in the case of Sundeep Goyal & Co. v. CCE27. Again, in the case of Garag Enterprises v. CCE28, the order of penalty for late filing of return was set aside on the ground that service tax was a new levy and the delay in filing the return was considerably reduced in the subsequent months. In CCE v. Milan Tent Place29, Commissioner (Appeals) set aside the penalty imposed under Section 77 on the assessee for delay in filing the return. The Tribunal, on appeal by the Department, upheld the order of Commissioner (Appeals) stating that when the penalty was subject to discretion and also that the penalty was not the minimum one which was required to be imposed compulsorily, the competent authority was at liberty to waive the same under deserving cases. In Palika Palace v. CCE30, the appellants were imposed penalty of Rs 45,300 for non-filing of returns within the specified time-limit because they were under the bona fide belief that Mandap Keeper was also exempted from service tax along with Pandal and Shamiana Contractors. One of the Trade Notices issued by the Mumbai Commissionerate also specifically mentioned about the misunderstanding which was prevailing in the trade that the services of mandap keepers were exempt. Keeping in view the facts and circumstances of the case, the Tribunal in the instant case reduced the penalty to Rs 5000. In M.P.S. Ramani v. CCE31, the appellant, a consulting engineer, delayed filing the returns due to lack of knowledge and clarity of the procedures. Consequently, he was imposed penalty but the same was set aside by the Tribunal keeping in view that the appellant, a retired engineer, was in advanced age whose expertise and age required due consideration. Further, in the profession as engineer, he was motivated more by social service than by the commercial consideration. In Moga Veera Vyavasthapaka Mandali v. CCE32, the appellants were imposed penalty of Rs 1,02,000 [later reduced to Rs 32,700 by the Commissioner (Appeals)] for delayed payment of service tax and late filing of returns. The Tribunal, however, observed that there was reasonable cause for the said failure. The appellant’s main activity was not the mandap keeping and only occasionally the Sabhagriha (hall) was let on payment to their members. Further, the managing committee consisted of senior citizens who were engaged in other charitable work. Besides, they had voluntarily paid all the tax along with interest while filing returns though belatedly. Thus, the appellants had satisfied the provisions of Section 80 and therefore, the penalty was set aside. In CCE v. Air Express Courier Services33, the Tribunal held that non-filing of returns in time was only a procedural lapse, and therefore penalty was not warranted for such a lapse. In R.S. Goel & Co. v. CCE34, the appellant being a Chartered Accountant, was imposed a penalty of Rs 1000 under Section 77 for late filing of return. It was observed that the return was filed within a period of two months from the date of order passed by the Rajasthan High Court dismissing the writ petition but allowing the Chartered Accountants to comply with the requisite formalities prescribed under the service tax law within a period of two month. In view of the decision of the High Court, the penalty was set aside. (iii) Penalty under Section 78 for Suppressing Value of Taxable Service: Penalty for suppressing value of taxable service is provided by Section 78 of the Finance Act, 1994. This section states that where any service tax has not been levied or not paid or short-levied or short-paid or erroneously refunded by reason of: (i) fraud; or

                                                             25. 26. 27. 28. 29. 30. 31. 32. 33. 34.

(2000) 123 ELT 930 (Trib.-Mumbai). (2003) 159 ELT 1131 (Trib.-Del): (1997) 20 RLT 885. (2001) 133 ELT 785 (Trib.-Kolkata). (2002) 145 ELT 303 (Trib.-Bangalore). (2001) 131 ELT 274 (Trib.-Delhi). (2001) 134 ELT 677 (Trib.-Delhi). (2001) 132 ELT 3049 (Trib.-Mumbai). (2004) 166 ELT 476 (Trib.-Mumbai). (2005) 182 ELT 409 (Trib.-Mumbai). (2005) 180 ELT 447 (Trib.- Delhi).

(ii) (iii) (iv) (v)

collusion; or wilful misstatement; or suppression of facts; or contravention of any of the provisions of service tax or of the rules made thereunder with intent to evade payment of service tax, the person committing such default shall be liable to pay penalty, in addition to such service tax and interest thereon. The provisions of Section 78 are attracted when a person evades service tax or succeeds in getting erroneous refund due to fraud or collusion or wilful misstatement or suppression of facts or due to contravention of any of the service tax provisions. In other cases this penalty is not attracted. The Finance Act, 2011, effective from 08-04-2011, has revamped this provision to reduce the penalty under Section 78 from upto twice the amount of tax ( as was applicable prior to 08-04-2011) to an amount equal to the tax. Moreover, in situations where the taxpayer has captured the true and complete information in the specified records, penalty to be further reduced to 50% of the tax amount. The latter penalty (only) shall be further reduced to 25% if the tax dues are paid within a period of one month together with interest and reduced penalty. For assessees with turnover upto Rs.60 lakh, this period of one month to be increased to ninety days. The Finance Act, 2008, w.e.f. 10-05-2008 had inserted a proviso in erstwhile Section 78 to specify that where penalty under this Section is imposed, a simultaneous penalty under Section 76 will not be imposed. This clause has been retained in the redrafted Section 78 as substituted by the Finance Act, 2011. It is still relevant to note that in this regard, CBEC Instruction Letter (F. No. 334/1/2008-TRU), dated 29-02-2008 clarified that penalty for delayed payment of service tax is levied under Section 76. Penalty under Section 78 is levied for failure to pay service tax on account of fraud, misdeclaration etc. Section 78 is being amended so as to provide that penalty for failure to pay service tax under Section 76 shall not apply where penalty is leviable under Section 78. Amount of penalty: Effective from 08-04-2011, the penalty is equal to the amount of service tax not so levied or not so paid or short-levied or short-paid or erroneously refunded. For the period prior to 08-04-2011, penalty amount was not to be less than the amount of service tax, and not more than twice the amount of service tax not so levied or not so paid or short-levied or short-paid or erroneously refunded. No Penalty if “reasonable cause is shown” and specified records correctly maintained: Prior to 08-04-2011, Section 80 empowered the Central Excise Officer to waive penalty under Section 78, if the assessee proved that there was reasonable cause for failure referred to in that section. Effective from 08-04-2011, Section 80 has been amended by substituting words ‘section 78’ with the words ‘proviso to section 78’ as covered there under, and thus, the power to waive penalty under Section 80, shall now be available only in cases where the assessee under such penalty has properly captured true and complete information in the specified records. In Ace Computer Education v. CCE,35 the Tribunal was of the view that when there is technical or judicial breach of the provisions of the Act or where the breach flows from a bona fide belief that the offender is not liable to act in the manner prescribed by the statute then in such circumstance, in the light of the Supreme Court judgments, penalty was not imposable. This view was based on earlier judgment in case of CCE v. Impress Ad-Aids & Displays, Bangalore36. At times, in place of complete relief from penalty, courts have allowed reduction in amount of penalty depending upon the circumstances. In Haryana Industrial Security Services v. CCE37, the appellants filed two separate appeals against two orders of original authority imposing penalty of Rs 3,18,073 and Rs 3,55,000 under Section 78 for deliberately withholding the true value of taxable services. ST-3 returns furnished by the assessee showed only service charges and not the gross value of service for levy of service tax. It was pleaded that the appellants were under the bona fide belief that the service tax was payable only on service charges and not on the gross value charged from the clients. However, the revenue contended that the assessees’ intention to evade payment of service tax on the components other than service charges was evident from the fact that even prior to issuance of SCN they moved the High Court of Punjab and Haryana challenging the relevant provisions of the Finance Act, 1994. The Tribunal observed that the appellant had no order from the High Court enabling them to pay service tax on service charges only during the pendency of the writ petition. Nevertheless, it was also required to be considered that the assessees maintained a conviction that service tax was payable on service charges only and that is why they moved the High Court. Moreover, when the Department asked for gross amounts of the relevant bills for the relevant periods, such details were promptly furnished. Under the circumstances, the Tribunal held that “a lower amount of penalty may be imposed” and accordingly the penalty was reduced to Rs 1.50 lakh each. (iv) Publishing of names and information under Section 73D: Effective from 18-04-2006, the Central Government has been empowered to publish the name of any person and any other particulars relating to any proceedings under the service tax provisions if it thinks necessary in the public interest. In the case of a firm, company or other association of persons, the names of the partners of the firm, directors, managing agents,

                                                             35. 2007-TIOL-359-CESTAT-DEL. 36. (2004) 173 ELT 137. 37. (2003) 158 ELT 242 (Trib.-Del).

secretaries and treasurers or managers of the company, or the members of the association, may also be published if circumstances of the case justify it. The purpose of publishing the name and particulars of any person is to inform the whole world that such person is a defaulter and owes money to the Government and that nobody should deal with such person with respect to his properties, etc. The Government has issued Service Tax (Publication of Names) Rules, 2008, which inter alia provides that if the Commissioner of Central Excise, having jurisdiction over such person, is satisfied that it is necessary or expedient in the public interest to publish the names and any other particulars as he deems fit, he shall after due verification of the facts, and the circumstances of the case, forward a proposal 38(in the Annexure appended to these rules) for such publication to the jurisdictional Chief Commissioner. The jurisdictional Chief Commissioner, on receipt of proposal referred to in sub-rule (1), shall within fifteen days from the receipt of such proposal, examine it and if he is satisfied that circumstance of the case justify such publication, may make a recommendation to the Board accordingly. On receipt of the recommendation by the Board, or on its own, the Central Government may cause publication of the name and other particulars in a manner as specified in Rule 3. The above Rules also clarify that in case the person is a firm, company or other association of persons, the names of the partners of the firm, directors, managing agents, secretaries, treasurers or manager of the company, or any member of association, as the case may be, may also be published if, in the opinion of the Central Government, circumstances of the case justify it. It may be noted that no publication can be made in relation to any penalty imposed under this Chapter until the time for presenting an appeal to the Commissioner (Appeals) under Section 85 or the Appellate Tribunal under Section 86, as the case may be, has expired without an appeal having been presented or the appeal, if presented, has been disposed of. (v) Prosecution provisions under Section 89: The Finance Act, 2011 inserted Section 89 to re-introduce prosecution provisions under the Act. It is relevant to recall here that the Finance Act, 1994, as originally passed, contained provisions related to prosecution in Sections 89, 90 and 91. These provisions were deleted with effect from 16-10-1998 by the Finance Act, 1998. Now, the Finance Act, 2011, has brought back the prosecution related provisions into the statute book, in an expanded and harsher form. The new provisions would apply in the following situations: − provision of service without issue of invoice; − availment and utilization of CENVAT credit without actual receipt of input or input services; − maintaining false books of accounts or failure to supply any information or false information; − non-payment of amount collected as service tax for a period of more than six months. There shall be no power to arrest and the prosecution can be launched only with the approval of the Chief Commissioner. 3. Penalty under Sections 76, 77 and 78 can be avoided on showing reasonable cause Section 80 of the Finance Act, 1994, as already discussed above, provides that if the assessee proves that there was reasonable cause for failure referred to in Sections 76, 77, or ( Section 78 if specified records are maintained by assessee with true and complete details), no penalty shall be imposed on him. It infers that the adjudicating authorities have discretion to reduce or waive the penalty. It was held in R.B. Bahutule v. CCE39, that the adjudicating authorities had discretion not to impose any penalty for delay in paying service tax and for delay in furnishing returns in terms of Section 80 of the Finance Act, 1994. In case the adjudicating authority thinks it fit to impose the penalty, it must, before imposing any penalty, provide the assessee an opportunity to prove that there was reasonable cause for failure. Section 80, however, does not provide any respite regarding payment of interest on delayed payment of service tax. Thus, the payment of interest under Section 75 is mandatory in case the assessee delays deposit of service tax or any part thereof in the Government exchequer. As per the clarification issued by the Board40, in case of short payment/non-payment of petty amounts of Rs 1000 or less, the jurisdictional officer should give an opportunity and allow the assessee to deposit the amount of service tax not paid along with interest, if any. In case the service provider pays the service tax along with interest within period of one month of the default in payment being pointed out, recourse should be made to Section 80 of the Finance Act, 1994 as amended provided the assessee fulfils the conditions therein. In other words no penalty should be imposed. In other cases of failure, the normal procedure should be followed. Section 33A of the Central Excise Act, 1944 has also been made applicable to the service tax provisions by amending Section 83 of the Act w.e.f. 13-05-2005. Section 33A of the Central Excise Act, in context of adjudication, provides that the adjudicating authority must give an opportunity of being heard to a party in a

                                                             38. Refer Text of Service Tax (Publication of Names) Rules, 2008 for the format of the proposal. 39. (2004) 166 ELT 233 (Trib.-Mumbai). 40. Vide CBEC Circular No. 76/6/2004-ST, dated 03-03-2004.

proceeding if the party so desires. Further, on sufficient cause being shown the adjudicating authority may grant time and adjourn the hearing, from time to time after recording reasons for such action in writing. However, the adjournment of proceedings in respect to a party has been restricted to maximum of three times. 4. Power of Adjudication of Penalty Section 83A of the Act, as inserted by the Finance Act, 2005, w.e.f. 13-05-2005, deals with the power of adjudication of penalty under service tax provisions. It states that where any person is liable to pay a penalty, such penalty may be adjudged by the Central Excise Officer who has been conferred such powers by the CBEC by notification on the Official Gazette. In exercise of these powers, the Central Government, vide Notification No. 30/2005-ST, dated 10-08-2005(now amended by Notification No. 48/2010-ST, dated 08-09-2010) specified the following monetary limits within which a Central Excise Officer can adjudicate penalty under Section 83-A. Sr. No. (1) (1)

(2)

(3) (4) (5)

Central Excise Officer (2) Superintendent of Central Excise

Assistant Commissioner of Central Excise or Deputy Commissioner of Central Excise Joint Commissioner of Central Excise Additional Commissioner of Central Excise Commissioner of Central Excise

Amount of service tax or CENVAT credit specified in a notice for the purpose of adjudication under Section 83A (3) Not exceeding Rs. one lakh (excluding the cases relating to taxability of services or valuation of services and cases involving extended period of limitation.) Not exceeding Rs. five lakhs (except cases where Superintendents are empowered to adjudicate.) Above Rs. five lakhs but not exceeding Rs. fifty lakhs Above Rs. twenty lakhs but not exceeding Rs. fifty lakhs Without limit.

A combined reading of Notification No. 30/2005-ST as amended by Notification No. 48/2010-ST , and Circular No. 130/21/2010-ST , dated 20-09-2010, highlights the following points: (i) The Board has decided to confer the power of adjudication on Superintendents for cases involving service tax upto Rs. 1 lakh in a show cause notice, except in respect of issues relating to taxability of services, valuation of services and cases involving extended period. The Superintendents would be competent to decide cases that involve Service Tax and / or CENVAT credit upto Rs. one lakh in individual show cause notices. They would not be competent to decide cases that involve taxability of services, valuation of services, eligibility of exemption and cases involving suppression of facts, fraud, collusion, willful mis-statement etc. (ii) The jurisdictional Commissioners of Central Excise may redistribute the pending cases in the Commissionerate based on above factors. (iii) It may also be noted that the age-wise pendency of cases as shown in the Monthly Technical Report should be reported based on the date of issuance of show cause notice and not on the basis of transfer of cases to the new Adjudicating Authority. Further, all pending notices to show cause shall be disposed of in terms of the above mentioned Circular. However, in those cases where the personal hearing has been completed, orders will be passed by the adjudicating authority before whom the hearing has been held. Such orders should normally be issued within a month of the date of completion of the personal hearing.