Debatable service tax classification can defeat penalties when tax and interest are paid and the issue turns on facts.

Penalties under the service tax law are not warranted where the taxability of the activity is genuinely debatable and depends on the facts of each case. The dispute concerned whether providing space to a financial institution fell under Business Auxiliary Service or renting of immovable property service. Because the classification issue had already been referred to a Larger Bench and the service tax with interest had been paid, penal consequences under Sections 76 and 78 were deleted. The assessee therefore obtained relief only against the penalties, while the underlying tax dispute remained dependent on factual characterization.

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Issues: Whether penalties under Sections 76 and 78 of the Finance Act were sustainable when the taxability of the service itself was in dispute.

Analysis: The liability arose from the characterization of the activity of providing space to a financial institution as either Business Auxiliary Service or renting of immovable property service. The question had already been referred to the Larger Bench, which held that the classification depends on the facts of each case. In this situation, the taxability issue was genuinely debatable, and the service tax along with interest had already been paid.

Conclusion: Penalties under Sections 76 and 78 were not warranted and were set aside.

Final Conclusion: The appeals succeeded to the extent of deletion of the penalties, with the assessee obtaining relief against penal consequences.

Ratio Decidendi: Where the taxability of a service is genuinely able and depends on the facts of the case, penal consequences under the service tax law are not justified.

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