Penalty under section 78 needs proof of intent to evade, and tax must be computed on a cum-tax basis when consideration includes tax.

Penalty under section 78 of the Finance Act, 1994 requires evidence of suppression of facts or intent to evade tax; mere non-registration, non-filing of returns or non-payment was held insufficient, so the equivalent penalty was set aside. Where the commission received was shown to be inclusive of service tax, the tax liability had to be computed on a cum-tax basis, and denial of that benefit was set aside. The remaining service tax liability and interest were left undisturbed.

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Issues: (i) Whether penalty equivalent to tax under section 78 of the Finance Act, 1994 was sustainable on the facts of the case; (ii) Whether the appellant was entitled to cum-tax benefit while determining the service tax liability.

Issue (i): Whether penalty equivalent to tax under section 78 of the Finance Act, 1994 was sustainable on the facts of the case.

Analysis: The notices alleged non-registration, non-filing of returns and non-payment of service tax, but the record did not establish the ingredients required for the penal provision. The absence of positive material showing suppression of facts or intent to evade tax was material. Mere failure to comply with registration and return requirements, by itself, was treated as insufficient to justify equivalent penalty.

Conclusion: The penalty under section 78 of the Finance Act, 1994 was not sustainable and was set aside.

Issue (ii): Whether the appellant was entitled to cum-tax benefit while determining the service tax liability.

Analysis: The commission arrangement and supporting material indicated that the commission amount received by the appellant was inclusive of service tax. On that basis, the tax liability had to be worked out on a cum-tax basis for the relevant subsequent periods.

Conclusion: The appellant was entitled to cum-tax benefit and the denial of such benefit was set aside.

Final Conclusion: The decision granted relief on the disputed penalty and tax-computation aspects while leaving the remaining service tax liability and interest undisturbed.

Ratio Decidendi: Penalty under section 78 of the Finance Act, 1994 requires proof of the statutory mens rea element, and where the consideration is found to be inclusive of tax, assessment must be made on a cum-tax basis.

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