Penalty waiver for pre-adjudication payment and bona fide belief defeats penalty on service tax and CENVAT disputes

Penalty under the Finance Act, 1994 was set aside for both the storage and warehousing service tax dispute and the excess CENVAT credit utilisation issue because the tax, differential credit, and interest had been paid before adjudication. The tribunal treated the first dispute as arising from a bona fide belief about the tax character of demurrage charges and found penalty relief justified. It treated the second as a procedural infraction without evidence of intention to evade tax, so equivalent penalty was not sustainable. On both issues, the penalty orders were annulled in favour of the assessee.

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Issues: (i) Whether penalty under Section 78 of the Finance Act, 1994 was leviable on the service tax liability relating to storage and warehousing services where the tax and interest were paid before adjudication. (ii) Whether equivalent penalty was leviable for excess utilisation of CENVAT credit beyond the prescribed limit during the relevant period, despite payment of the differential amount and interest before adjudication.

Issue (i): Whether penalty under Section 78 of the Finance Act, 1994 was leviable on the service tax liability relating to storage and warehousing services where the tax and interest were paid before adjudication.

Analysis: The demand arose from the view that demurrage charges were liable to be taxed as storage and warehousing services. The disputed tax and interest had already been discharged before adjudication. The conduct was treated as consistent with a bona fide belief that the amount formed part of cargo handling services, and the circumstances justified invocation of the statutory power to waive penalty.

Conclusion: Penalty was not leviable and was set aside in favour of the assessee.

Issue (ii): Whether equivalent penalty was leviable for excess utilisation of CENVAT credit beyond the prescribed limit during the relevant period, despite payment of the differential amount and interest before adjudication.

Analysis: The excess utilisation was treated as a procedural infraction rather than an act amounting to tax evasion. The differential credit and interest had been paid before adjudication, and the record did not show intention to evade tax. On that footing, the conditions for imposing equivalent penalty were not made out and penalty relief was warranted.

Conclusion: Penalty was not leviable and was set aside in favour of the assessee.

Final Conclusion: The penalty orders were annulled on both issues, and the Revenue's challenge to seek equivalent penalty did not survive.

Ratio Decidendi: Where tax or excess credit is discharged with interest before adjudication and the default is attributable to bona fide belief or a procedural infraction without intention to evade tax, penalty can be waived under Section 80 of the Finance Act, 1994.

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