Pre-show-cause payment of service tax bars penalties, but interest still survives for the period of delay.

Where service tax liability is discharged before issue of the show-cause notice, penal consequences under sections 76, 77 and 78 are not warranted and the penalties are set aside. However, pre-notice payment does not extinguish the liability to interest for the period of delay, and interest remains payable notwithstanding the belated discharge of tax. The appellate order was therefore modified to delete the penalties while sustaining interest liability, resulting in only partial relief to the assessee.

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Issues: (i) whether penalties under sections 76, 77 and 78 were sustainable when the service tax liability had been discharged before issuance of the show-cause notice; (ii) whether interest was still payable notwithstanding such pre-notice discharge.

Issue (i): whether penalties under sections 76, 77 and 78 were sustainable when the service tax liability had been discharged before issuance of the show-cause notice.

Analysis: The liability had been paid before the show-cause notice was issued, and the matter was treated as covered by the Tribunal's prior view that, in such a situation, penal consequences under the cited provisions are not warranted.

Conclusion: The penalties were held to be unjustified and were set aside.

Issue (ii): whether interest was still payable notwithstanding such pre-notice discharge.

Analysis: Even where tax is paid before the show-cause notice, the obligation to pay interest survives to the extent of the delay in payment of tax.

Conclusion: Interest was held payable and the order dropping interest was reversed.

Final Conclusion: The appellate order was modified to uphold interest liability while deleting the penalties, thereby granting only partial relief.

Ratio Decidendi: Pre-show-cause notice payment of service tax removes the basis for penalty under sections 76, 77 and 78, but it does not extinguish the liability to pay interest for the period of delay.

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