2008 (12) TMI 161 - AT - Service Tax

Penalty Appeal Upheld in Finance Act Case

Commissioner of Service Tax, Mumbai Versus Mahendra Construction & Co.

The case involved M/s. Mahendra Construction & Co. appealing a penalty imposed under section 78 of the Finance Act, 1994, which was initially set at ... Service Tax Paid before issuance of SCN – Reduction in Penalty - Commercial or Industrial Construction service - Even if a minimum penalty is prescribed, the authority competent to impose the penalty will be justified in refusing to impose penalty, when there is technical or venial breach of the provisions of the Act or where the breach flows from a bona tide belief that the offender is not liable to act in the manner prescribed by the statute – Tribunal uphold the order of the Commissioner (Appeals) reducing the penalty to Rs.10,000 and reject the appeal of the revenue. ISSUES PRESENTED AND CONSIDERED 1. Whether the Commissioner (Appeals) validly reduced the penalty imposed under section 78 below the statutory minimum prescribed by that provision. 2. Whether the protection/relief under section 80 (reasonable cause) can be applied to reduce penalty under section 78 below the statutory minimum, or only to wholly waive penalty. 3. Whether the revenue could challenge and seek enhancement of the penalty imposed by the Assistant Commissioner when no appeal under section 85 was filed and no revision under section 84 was initiated by the revenue. 4. Whether facts of the case (full payment of service tax and interest before issuance of show-cause notice, subsequent registration and filing of returns) justify exercise of discretion to reduce penalty despite statutory band. ISSUE-WISE DETAILED ANALYSIS Issue 1: Validity of reducing penalty under section 78 below statutory minimum Legal framework: Section 78 prescribes that where service tax is not levied/paid etc. by reason of fraud, collusion, wilful mis-statement, suppression of facts or contravention with intent to evade, the person shall be liable to pay penalty which shall not be less than, but shall not exceed twice, the amount of service tax so not levied/paid (i.e., a statutory minimum and maximum band). Precedent treatment: The Tribunal considered prior authority where failure to disclose led to imposition of penalty under section 78; that authority was relied upon by revenue to contend that suppression sustains section 78 penalty. However, those prior facts were distinguished on payments outstanding. Interpretation and reasoning: The Court observed that although section 78 prescribes a statutory minimum, the order imposing a specific penalty by the Assistant Commissioner (within that statutory band) became final because the revenue did not challenge it. The Commissioner (Appeals) did reduce the penalty to Rs.10,000 taking a lenient view; the Tribunal sustained that reduction on the ground that the final O-in-O penalty could not be enhanced by revenue and that circumstances warranted discretionary mitigation. Ratio vs. Obiter: Ratio - a penalty imposed by an adjudicating authority that has become final by absence of departmental appeal cannot be revisited by the revenue to seek enhancement; adjudicatory authorities retain discretion to mitigate penalty in light of relevant circumstances. Obiter - comments distinguishing other factual matrices where part-payment only was made. Conclusions: Reduction of penalty by the Commissioner (Appeals) was upheld because the revenue had not appealed against the original O-in-O penalty and the facts supported a discretionary reduction; the appeal by revenue seeking to overturn that reduction was rejected. Issue 2: Scope of section 80 - waiver or reduction of penalty under section 78 Legal framework: Section 80 provides that no penalty shall be imposable if the person proves reasonable cause for failure; it operates in relation to penalties under the Chapter. Precedent treatment: The Court relied on higher court authority establishing that imposition of penalty is discretionary and must be exercised judicially considering all relevant circumstances. The Court also referred to High Court decisions which recognized that discretion under section 80 permits reduction/waiver of penalties and that provisions for penalty are subject to section 80. Interpretation and reasoning: Revenue argued that section 80 only permits complete waiver and cannot be used to reduce penalty below section 78 minimum; the Tribunal rejected that restricted reading. Citing judicial discipline to follow High Court decisions, the Court held that the authority may exercise discretion under section 80 to mitigate penalty even where a statutory minimum exists, particularly where facts show bona fide/venial breach or reasonable cause (e.g., full payment before show-cause, subsequent registration and compliance). The Court invoked the principle that mere legality of imposing penalty does not mandate its imposition where discretion and circumstances counsel leniency. Ratio vs. Obiter: Ratio - section 80 may be invoked to exercise discretion and mitigate or waive penalties under section 78 where reasonable cause or relevant mitigating circumstances exist; statutory minima do not oust judicial discretion to consider equity and reasonableness. Obiter - detailed limits of how far section 80 can reduce penalties in all permutations were not exhaustively delineated. Conclusions: Section 80 can be applied to mitigate or waive penalties under section 78 in appropriate cases; therefore reduction of penalty to Rs.10,000 was sustainable in the present circumstances. Issue 3: Finality of the Assistant Commissioner's Order and limits on revenue's challenge Legal framework: Statutory appellate/revisional mechanism provides specified time and routes for departmental challenge; absent departmental appeal under section 85 or revision under section 84, an original order attains finality vis-à-vis revenue. Precedent treatment: The Court adhered to principle of finality and procedural regularity - where revenue fails to avail statutory remedies against an original adjudication, it cannot later seek to go beyond that final order. Interpretation and reasoning: The Court noted revenue did not appeal the Assistant Commissioner's Order-in-Original imposing a penalty of Rs.25,000, nor seek revision. Consequently that imposition stood final against revenue and revenue could not challenge the matter beyond the appellate order that reduced the penalty. The Tribunal therefore limited its review to the grounds available and to whether the appellate reduction was permissible. Ratio vs. Obiter: Ratio - departmental inaction on statutory appeals/revisions renders the original adjudication final and circumscribes subsequent revenue relief-seeking. Obiter - none. Conclusions: Revenue was precluded from contesting the penalty beyond the final Order-in-Original because it had not pursued statutory appeal/revision; appeal by revenue was rejected on this basis. Issue 4: Relevance of factual matrix (payment before show-cause, registration, compliance) to exercise of discretion on penalty Legal framework: Penal discretion must be exercised judicially considering all relevant circumstances, including bona fide belief, technical/venial breach, voluntary compliance, and efforts to regularize status. Precedent treatment: The Court relied on apex court authority that penal power is not to be mechanically exercised simply because it is lawful to do so, and on High Court decisions affirming discretionary mitigation where facts justify leniency. Interpretation and reasoning: Distinguishing prior cases where substantial unpaid tax remained, the Court emphasized that here the assessee paid entire tax and interest before issuance of the show-cause notice, obtained registration during investigation and filed returns thereafter. These mitigating factors establish reasonable cause or at least a venial breach, justifying reduction of penalty. The Court thus treated the factual distinction as material to classical penal discretion under section 80 and to the appropriateness of reducing a penalty under section 78. Ratio vs. Obiter: Ratio - full pre-notice payment of tax and interest, subsequent registration and compliance are relevant mitigating circumstances that can justify reduction or waiver of penalty; such circumstances warrant judicial exercise of discretion against automatic imposition of minimum statutory penalty. Obiter - comparative assessment with other cases where only part-payment occurred. Conclusions: The factual matrix justified the Commissioner (Appeals)'s lenient exercise of discretion under section 80 resulting in reduction of penalty to Rs.10,000; the Tribunal upheld that result.