Reduced penalty under Section 78 applies where service tax and interest are paid before the show cause notice.

Where service tax and interest were paid before issuance of the show cause notice, the assessee was entitled to the statutory reduced penalty benefit under the proviso to Section 78 of the Finance Act, 1994. The Tribunal noted that the liability had already been discharged and the lower authorities had imposed penalty without extending the option to pay the reduced amount. The operative effect was that the assessee could discharge 25% of the penalty within 30 days, failing which the original penalty would remain payable.

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Issues: Whether the appellant was entitled to the benefit of reduced penalty under the proviso to Section 78 of the Finance Act, 1994 where the service tax and interest had been paid before issuance of the show cause notice and no option for reduced penalty had been granted by the lower authorities.

Analysis: The liability to service tax and interest was not in dispute and stood discharged before the show cause notice. The lower authorities had imposed penalty under Section 78 without granting the option to pay reduced penalty. In such circumstances, the appellant was entitled to the statutory benefit of a reduced penalty in terms of the governing legal position relied upon by the Tribunal.

Conclusion: The appellant was held entitled to pay 25% of the penalty within 30 days, and failing such payment the original penalty would remain payable.

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