Voluntary payment before show cause notice supported penalty waiver for repair service tax dispute under the Finance Act

Repair of moulds supplied by a client was treated as falling within the taxable service description, but the assessee had issued invoices, recorded the transactions in its books, and acted under a bona fide belief that the activity was exempt under Notification No. 8/2005-ST. Because service tax and interest were paid before issuance of the show cause notice, with intimation to the department, the matter was treated as within the statutory scheme under Section 73(3) and no penalty was sustained. Those facts also constituted reasonable cause for delayed payment, supporting waiver under Section 80, while the tax and interest already paid remained undisturbed.

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Issues: Whether the appellant was entitled to waiver of penalty and consequential relief on the ground that the repair activity was covered by exemption and the tax with interest had been paid before issuance of the show cause notice, attracting Section 73(3) and Section 80 of the Finance Act, 1994.

Analysis: The repair of moulds supplied by the client was treated as falling within the relevant taxable description, but the appellant had raised invoices, reflected the transactions in its books, and entertained a bona fide belief that the activity was exempt under Notification No. 8/2005-ST. The voluntary payment of service tax along with interest, coupled with intimation to the department that the matter be settled under Section 73(3), brought the case within the statutory scheme that no show cause notice is required where tax and interest are paid as ascertained. These facts also constituted reasonable cause for the failure to pay tax on time, justifying invocation of Section 80.

Conclusion: Penalty was not sustainable and was set aside; the tax and interest already paid were maintained.

Final Conclusion: The appeal succeeded to the extent of deletion of penalty, while the service tax liability and interest payment remained undisturbed.

Ratio Decidendi: Where the assessee pays service tax with interest before contesting liability, has disclosed the transactions in its records, and establishes bona fide belief and reasonable cause, penalty can be waived and the matter may be covered by Section 73(3) of the Finance Act, 1994.

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