CENVAT credit adjustment and delayed service tax payment attract interest, while equal penalty may be deleted on partial pre-notice payment

Service tax liability is treated as discharged only when the CENVAT credit adjustment is actually made and reflected; the mere availability of sufficient credit does not avoid interest under section 75 of the Finance Act, 1994 on delayed payment. Non-payment detected in audit supported invocation of the extended period of limitation. However, where the principal tax was paid before the show cause notice and part of the interest had also been discharged, equal penalty under section 78 was not warranted on the facts, and the penalty was set aside. The interest demand was sustained and the limitation challenge failed, but the penalty was deleted.

---

---

Issues: (i) Whether interest was payable on service tax that was adjusted through the CENVAT credit account and not immediately debited in the records; (ii) Whether the extended period of limitation was invocable; (iii) Whether equal penalty under section 78 of the Finance Act, 1994 was sustainable.

Issue (i): Whether interest was payable on service tax that was adjusted through the CENVAT credit account and not immediately debited in the records.

Analysis: The tax liability was treated as discharged only when the adjustment from the CENVAT account was actually made and intimated to the department. Mere availability of sufficient credit in the CENVAT account did not amount to payment or discharge of the service tax liability. Section 75 of the Finance Act, 1994 fastens interest on belated payment of service tax, and it does not create an exception merely because credit balance was available but not utilised or reflected in the accounts earlier.

Conclusion: Interest was payable on the delayed discharge of service tax through the CENVAT account.

Issue (ii): Whether the extended period of limitation was invocable.

Analysis: The non-payment came to light during audit, and the assessee did not successfully show that the demand was barred by limitation. The circumstances did not justify interference with the invocation of the extended period.

Conclusion: The extended period of limitation was rightly invoked.

Issue (iii): Whether equal penalty under section 78 of the Finance Act, 1994 was sustainable.

Analysis: The principal tax demand had been paid before the show cause notice, and part of the interest had also been paid in relation to the cash component. In these circumstances, equal penalty for the non-payment of interest was not warranted. Section 73(3) of the Finance Act, 1994 did not assist the assessee in full, but the facts justified interference with the penalty alone.

Conclusion: The equal penalty under section 78 of the Finance Act, 1994 was set aside.

Final Conclusion: The service tax-related interest demand was sustained and the limitation plea failed, but the penalty was deleted, leaving the order modified only to that extent.

Ratio Decidendi: Service tax liability is discharged, for purposes of interest under section 75 of the Finance Act, 1994, only when payment is actually made or reflected by a corresponding accounting adjustment, and the mere existence of sufficient CENVAT credit balance does not by itself prevent interest on delayed payment.

---