Bona fide belief on warranty service tax supported penalty waiver under Section 80 when taxability was later clarified.

Penalties under Sections 76 and 78 of the Finance Act, 1994 were held unsustainable where service tax on warranty-related free services had been paid and the assessees had not collected tax initially under a bona fide belief that no tax was payable. The issue involved genuine doubt on taxability, later clarified by the Board through Circular No. 87/05/2006-ST dated 06.11.2006, so Section 80 was treated as applicable for penalty waiver. Relief was granted and the penalties were set aside.

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Issues: Whether penalties under Sections 76 and 78 of the Finance Act, 1994 were sustainable where service tax on warranty-related free services had been paid, but the assessees had not collected tax initially under a bona fide understanding that no tax was payable.

Analysis: The activity was disputed only on the question of taxability of free services rendered during the warranty period, and the field position was clarified by the Board only later through Circular No. 87/05/2006-ST dated 06.11.2006. In these circumstances, the issue was treated as one involving doubt in the field, attracting the protective scope of Section 80 of the Finance Act, 1994 for waiver of penalties.

Conclusion: Penalties under Sections 76 and 78 were set aside and the assessee was granted relief.

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