Debatable service tax liability bars penalties where conflicting Tribunal rulings show reasonable cause and no mala fide intent.

Penalties under Sections 76, 77 and 78 of the Finance Act, 1994 were held unsustainable where service tax on Goods Transport Agency service had been paid through Cenvat credit and the legal position remained debatable. Conflicting Tribunal decisions existed on the permissibility of such payment, and the issue was also stated to be pending before a Larger Bench. In that context, the assessee's conduct could not be treated as mala fide and reasonable cause existed against penal action. The prior setting aside of the Section 78 penalty for one demand also supported deletion of the remaining penalties, which were set aside.

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Issues: Whether penalties under Sections 76, 77 and 78 of the Finance Act, 1994 were sustainable when the service tax on Goods Transport Agency service had been paid through Cenvat credit in the face of conflicting Tribunal decisions.

Analysis: The issue was covered by conflicting judicial views, with some decisions permitting payment of service tax on GTA service through Cenvat credit and another view taking the contrary position, and the matter was also stated to be pending before a Larger Bench. In this background, the assessee's conduct could not be treated as mala fide. The Commissioner had also set aside the penalty under Section 78 for one of the demands, which reinforced the absence of justification for sustaining the remaining penalties. The existence of a debatable legal position furnished reasonable cause against penal action.

Conclusion: The penalties under Sections 76, 77 and 78 were not sustainable and were set aside in favour of the assessee.

Ratio Decidendi: Where liability turns on a debatable question of law supported by conflicting decisions, penalties are not warranted in the absence of mala fide intent and reasonable cause exists for the assessee's conduct.

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