Penalty for service tax non-payment fails where disclosure exists and no intent to evade is shown under SEZ refund-based exemption.

Penalty for non-payment of service tax was held unsustainable where a SEZ unit had routed the payment through banking channels, recorded the transaction in its books, and later discharged the tax with interest after the Department pointed out the applicable notification regime. The exemption for authorised SEZ operations operated through a refund-based mechanism under the relevant notifications, but the disclosed and subsequently paid nature of the liability meant there was no suppression of facts with intent to evade. In the absence of deliberate evasion, the penal consequence could not be invoked, and the penalty orders were set aside.

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Issues: Whether the demand of service tax and penalty could be sustained where the assessee, a SEZ unit, had paid the impugned amount through banking channels, the transactions were duly reflected in the books of account, the tax was later deposited with interest on being pointed out by the Department, and refund was subsequently sanctioned under the applicable notifications.

Analysis: Section 26 of the Special Economic Zones Act, 2005 granted exemption from service tax to authorized operations in SEZ, but the exemption operated through the mechanism prescribed by Notification No. 9/2009-ST dated 03.03.2009 and the superseding Notification No. 17/2011-ST dated 01.03.2011, under which tax was first payable and then refundable. The disputed selling commission had not been paid clandestinely and was reflected in the books. The tax and interest were deposited when the Department brought the notification regime to the assessee's notice, and refund was thereafter sanctioned. On these facts, mere non-payment before the Department's intervention did not establish suppression with intent to evade. The element of deliberate evasion, essential for invoking the penal consequence, was absent.

Conclusion: The penalty could not be sustained, and the orders imposing penalty were set aside.

Ratio Decidendi: Penalty for non-payment of service tax is not sustainable unless suppression of facts is accompanied by an intent to evade tax; where the liability arises under a refund-based exemption regime and the amount is disclosed and later paid with interest, deliberate evasion is not established.

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