Amended small scale exemption entitlement under service tax notification upheld; penalty set aside in a bona fide interpretative dispute.

An amended service tax small scale exemption notification governed entitlement where the revised turnover limit was substituted from eight lakh rupees to ten lakh rupees, and the assessee's preceding-year turnover did not exceed that enhanced threshold. The demand therefore survived only to the extent of the tax admittedly payable by the assessee, with interest. Penalty was not warranted because the dispute arose from a bona fide interpretative issue concerning the exemption notification and the assessee had already discharged tax on the balance amount. The balance demand and penalty were set aside, and the appeal was allowed in part.

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Issues: (i) whether the appellant was entitled to small scale exemption under the service tax notification as amended, and (ii) whether penalty was leviable in the facts of the case.

Issue (i): whether the appellant was entitled to small scale exemption under the service tax notification as amended

Analysis: The exemption notification originally referred to a turnover limit of eight lakh rupees, but the amendment substituted the words "ten lakh rupees" wherever they occurred. On the facts, the preceding year's turnover did not exceed the revised limit. The demand could therefore survive only to the extent of the amount admitted by the appellant as taxable.

Conclusion: The appellant was entitled to the benefit of the amended small scale exemption, and the demand was sustainable only for Rs. 8,303/- with interest.

Issue (ii): whether penalty was leviable in the facts of the case

Analysis: The dispute turned on the interpretation of the exemption notification and the assessee had itself discharged the tax on the balance amount. In these circumstances, the case did not warrant penal action.

Conclusion: Penalty was set aside.

Final Conclusion: The demand was restricted to the admitted tax liability with interest, while the balance demand and the penalty were set aside, resulting in a partial allowance of the appeal.

Ratio Decidendi: Where an exemption notification is amended to enhance the eligibility threshold, the amended limit governs entitlement, and penalty is not justified when the dispute arises from a bona fide interpretative issue and the assessee has substantially discharged the tax liability.

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