Penalty and interest on collected service tax were unsustainable where no service tax liability existed and Section 11D was not invoked.

Where an assessee was held not liable to pay service tax for the relevant period, penalty and interest on amounts collected from customers as service tax were held unsustainable. The Tribunal relied on prior rulings that recovery of such amounts could not be maintained in the absence of underlying tax liability. It also noted that the show cause notice did not invoke Section 11D of the Central Excise Act, 1944, so the demand could not be sustained on that basis. The penalty and interest were therefore set aside in favour of the assessee.

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Issues: Whether penalty and interest could be sustained on the amount collected as service tax when the assessee was held not liable to pay service tax for the relevant period and the show cause notice did not invoke Section 11D of the Central Excise Act, 1944.

Analysis: The assessee was held not liable to pay service tax for the relevant period, and the dispute related only to the amount collected from customers as service tax, together with interest and penalty. The Tribunal relied on earlier decisions that where liability to service tax is absent, penalty and interest cannot be imposed on the collected amount. It also noted that Section 11D of the Central Excise Act, 1944 had not been invoked in the show cause notice, and therefore recovery could not be sustained on that basis.

Conclusion: Penalty and interest were not sustainable and were set aside in favour of the assessee.

Ratio Decidendi: Where an assessee is found not liable to pay service tax, penalty and interest on the amount collected as tax cannot be sustained, particularly when the demand is not founded on a notice invoking Section 11D of the Central Excise Act, 1944.

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