Directors not Liable for Company's Service Tax: Tribunal Rules on Penal Provisions

The Tribunal held that individual directors and employees cannot be penalized under Section 77(2) of the Finance Act, 1994, as the provision applies solely to the company. It ruled that penal provisions cannot be applied retrospectively and that the responsibility to comply with service tax provisions rests with the company, not its directors or employees. The Tribunal set aside the penalties imposed on the appellants, emphasizing that without specific provisions penalizing individuals, no personal penalties can be imposed for the company's service tax evasion.

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Issues Involved:
1. Applicability of Penalty under Section 77(2) of the Finance Act, 1994.
2. Retrospective Application of Section 77(2).
3. Liability of Directors and Employees for Nonpayment of Service Tax by the Company.

Issue-wise Detailed Analysis:

1. Applicability of Penalty under Section 77(2) of the Finance Act, 1994:
The appellants were imposed penalties under Rule 77(2) of the Finance Act, 1994 for nonpayment of admitted liability of Service Tax by M/s. Kingfisher Airlines Ltd. The adjudicating authority imposed penalties on the directors and employees of the company under Section 77(2), which states that any person who contravenes any provisions of the chapter or rules made thereunder, for which no penalty is separately provided, shall be liable to a penalty. The Tribunal analyzed whether the term "any person" includes directors and employees of the company. It concluded that the liability to comply with the provisions of the Finance Act, 1994, and rules made thereunder lies with the company (the assessee) and not with individual directors or employees. Therefore, the appellants, being directors or employees, are not liable under Section 77(2) as they are not the persons legally bound to comply with the service tax provisions.

2. Retrospective Application of Section 77(2):
The appellants argued that Section 77(2) being penal in nature and introduced with effect from May 10, 2013, cannot be applied retrospectively to any offence committed prior to this date. The Tribunal upheld this argument, referencing the Hon'ble Bombay High Court and Supreme Court judgments in the case of S.L. Kirloskar Vs. Union of India, which held that penal provisions cannot be applied retrospectively. Therefore, any penalty imposed under Section 77(2) for acts committed before its introduction is not legally sustainable.

3. Liability of Directors and Employees for Nonpayment of Service Tax by the Company:
The Tribunal examined whether directors and employees can be held liable for the company's failure to pay service tax. It noted that the liability to pay service tax and comply with the provisions of the Finance Act, 1994, rests with the company (M/s. Kingfisher Airlines Ltd.) and not with its directors or employees. The Tribunal compared similar provisions in the Central Excise and Customs Acts, which have specific penal provisions for individuals (e.g., Rule 26 of Central Excise Rules, 2002, and Sections 112/114AA of the Customs Act, 1962). In contrast, the Finance Act, 1994, did not have a similar provision during the relevant period. The Tribunal concluded that in the absence of a specific provision penalizing individual directors or employees, no personal penalty could be imposed on them for the company's service tax evasion.

Conclusion:
The Tribunal found that the appellants could not be penalized under Section 77(2) of the Finance Act, 1994, as the provision applies only to the assessee (the company) and not to individual directors or employees. The Tribunal set aside the impugned order and allowed the appeals, emphasizing that penal provisions cannot be applied retrospectively and that the liability to comply with service tax provisions lies with the company, not its directors or employees.

(Pronounced in court on 26/9/17)

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