Penalty barred after pre-notice tax payment, but interest still runs from expiry of the extended compliance period.

Penalty was not sustainable where the service tax liability had been voluntarily discharged before issuance of the show-cause notice, because prior payment removed the basis for penal proceedings despite the retrospective validation of the levy. Interest on delayed service tax for goods transport operator services, however, remained payable only after expiry of the extended compliance period under the retrospective amendments and the additional two weeks allowed for filing returns, and continued until actual payment. The assessee therefore succeeded on penalty but failed on the limited interest demand for the period of delay after the extended statutory time.

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Issues: (i) Whether penalty could be sustained when the service tax liability was discharged before issuance of the show-cause notice. (ii) From what date interest was payable on the delayed payment of service tax in respect of goods transport operator services, having regard to the retrospective amendments and the time granted for filing returns.

Issue (i): Whether penalty could be sustained when the service tax liability was discharged before issuance of the show-cause notice.

Analysis: The liability was admittedly discharged by the assessee without any prior notice. The governing principle applied was that where the duty or tax liability stands discharged before the initiation of penal proceedings, imposition of penalty is not justified. The retrospective amendments validating levy and recovery did not alter this consequence for penalty, since the payment preceded the show-cause notice.

Conclusion: Penalty was not sustainable and was set aside in favour of the assessee.

Issue (ii): From what date interest was payable on the delayed payment of service tax in respect of goods transport operator services, having regard to the retrospective amendments and the time granted for filing returns.

Analysis: The retrospective amendments in the Finance Act, 2000 and the Finance Act, 2003 were read together to hold that the receiver of goods transport operator services was made liable to pay service tax and to furnish returns under section 71A of the Finance Act, 1994 within six months from presidential assent, with the consequence that the liability to discharge tax was extended up to 17 November 2003. The further period of two weeks granted by the Supreme Court in relation to the return-filing obligation was also taken into account. Interest therefore could arise only after expiry of that extended period and continued until actual payment.

Conclusion: Interest was payable only from the expiry of two weeks after 17 November 2003 until the dates of actual payment, and the demand was upheld to that limited extent.

Final Conclusion: The assessee succeeded on penalty but failed on the issue of interest, which was confined to the period of actual delay after the extended statutory time for compliance.

Ratio Decidendi: Penalty is not exigible where the tax liability is voluntarily discharged before issue of the show-cause notice, but interest on delayed tax payment follows the extended statutory due date fixed by the applicable retrospective amendment and any judicial extension of time.

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