Service tax demand denied exemption due to material value exclusion; Penalty under Section 78 set aside.

The Tribunal held that the service tax demand denying exemption due to the non-inclusion of the value of free supplied material in the gross amount charged was incorrect. It was determined that the appellant, who had paid the service tax and interest before any show cause notice, should not be liable for penalty under Section 78. The Tribunal referred to a previous case and concluded that the case had been concluded, setting aside the penalty imposed under Section 78. The judgment was in favor of the appellant and was pronounced on 17/04/2018 by Members R.Nair and C.J. Mathew.

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Issues:
1. Whether the service tax demand denying exemption on the ground of free supplied material not included in the gross amount charged is correct.
2. Whether the appellant is liable for penalty under Section 78 when service tax was paid before the show cause notice.

Analysis:
1. The main issue in this case was whether the service tax demand denying exemption based on the non-inclusion of the value of free supplied material in the gross amount charged to the customer was valid. The appellant argued that the payment of entire service tax along with interest before the show cause notice was issued should preclude the imposition of penalty under Section 78. The appellant also referenced a previous case, Bhayana Builders (P) Ltd. Vs. CST, where a similar issue was decided in favor of the assessee. The Tribunal found that the value of free supplied material need not be included for eligibility of the exemption Notification No. 1/2006-ST. Since the appellant had paid the service tax and interest before any show cause notice, the Tribunal concluded that the case had been concluded, and no penalty should be imposed.

2. The second issue revolved around the imposition of penalty under Section 78 despite the appellant having paid the entire service tax along with interest before the issuance of the show cause notice. The Assistant Commissioner for the Revenue reiterated the findings of the impugned order. The Tribunal, after considering the arguments from both sides, held that since the payment of service tax and interest had attained finality before any show cause notice was issued, the case had been concluded. Therefore, the show cause notice itself was deemed not maintainable. Consequently, the Tribunal set aside the penalty imposed under Section 78 by invoking Section 73(3) of the Finance Act, 1994. The appeals were disposed of in favor of the appellant based on the above analysis.

The judgment was pronounced in court on 17/04/2018 by Mr. Ramesh Nair, Member (Judicial), and Mr. C.J. Mathew, Member (Technical).

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