Reverse charge service tax liability defeats bona fide belief, but prompt payment after notice may justify reduced penalty.

Service tax under reverse charge for services received from a foreign provider was stated to be clearly payable from 18.04.2006 under Section 66A of the Finance Act, 1994, so a plea of bona fide belief did not justify relief from penalty under Section 80. The commentary notes, however, that prompt discharge of the tax liability after receipt of notice can support leniency in the quantum of penalty. On that basis, Section 80 relief was denied, the Section 78 penalty was reduced to 25% of the service tax, and the Section 77 penalty was upheld.

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Issues: Whether the appellant was entitled to the benefit of Section 80 of the Finance Act, 1994 so as to escape penalty under Section 78, and whether the penalty under Section 78 was liable to be reduced.

Analysis: The liability to pay service tax under reverse charge for services received from a foreign service provider was clear from 18.04.2006 under Section 66A of the Finance Act, 1994, and the plea of bona fide belief was therefore not sustainable. At the same time, the appellant had discharged the service tax liability promptly after issuance of the notice, which justified leniency in the quantum of penalty.

Conclusion: The benefit of Section 80 was denied, the penalty under Section 78 was reduced to 25% of the service tax, and the penalty under Section 77 was upheld.

Ratio Decidendi: Where tax liability under reverse charge is and the assessee fails on bona fide belief, penalty relief is unavailable under Section 80, though prompt payment may justify reduction of penalty.

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