Appeal success: Interest and penalty order partially overturned, limitation period not applicable

The appeal succeeded in part as the order demanding interest for the period up to March 2013 and imposing a penalty under Section 78 of the Finance Act was set aside. The demand for interest for the period post March 2013 up to March 2014 was upheld. The extended period of limitation was held not applicable due to the lack of willful suppression with intent to evade tax.

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Issues Involved:

1. Invocation of the extended period of limitation.
2. Liability to pay interest on delayed payment of service tax.
3. Imposition of penalty under Section 78 of the Finance Act, 1994.

Detailed Analysis:

Extended Period of Limitation:

The appellant argued that the extended period of limitation for demanding interest could not be invoked for any period up to March 2013. The principle that applies to the demand for service tax also applies to the demand for interest on late payment of service tax. The Delhi High Court in Kwality Ice Cream Company vs. Union of India and the Tribunal in Bank of Baroda vs. Commissioner of Service Tax, Mumbai held that the limitation for demanding interest is the same as for demanding service tax.

The Commissioner’s findings in paragraph 29.1 of the impugned order noted that the appellant paid most of the service tax amount on its own before the issuance of the show cause notice, suggesting awareness of the liability. However, the Commissioner conceded that there was no malafide intention on the appellant's part, but held that failing to include the correct amount of premiums in periodical returns amounted to suppression of facts.

The Supreme Court in Pushpam Pharmaceutical Co. vs. Commissioner of Central Excise and subsequent cases like Anand Nishikawa Company Ltd. vs. Commissioner of Central Excise and Uniworth Textile Limited vs. Commissioner of Central Excise clarified that suppression of facts must be deliberate and with intent to evade payment of duty. The Delhi High Court in Bharat Hotels Limited vs. Commissioner of Central Excise reiterated that mere failure to pay tax does not justify invoking the extended period of limitation unless there is deliberate suppression with the intent to evade tax.

In the present case, the Commissioner did not record any finding of willful suppression with intent to evade payment of service tax. The industry-wide issue and discussions with GIC further indicated no intention to evade tax. Thus, the extended period of limitation could not be invoked, making any demand up to March 2013 time-barred.

Liability to Pay Interest on Delayed Payment of Service Tax:

The appellant contended that there was no delay in the payment of service tax since the premium was paid only after receiving the matrix from GIC. However, the general principle under the Insurance Act that no risk is assumed unless the premium is paid does not apply to reinsurance. The risk in reinsurance is assumed as soon as the reinsurance treaty is signed, and the accounts are squared up later.

Section 64VB of the Insurance Act, which mandates that no risk should be assumed until the premium is paid, does not apply to reinsurance, as clarified by Rule 59 of the Insurance Rules, 1939. The Supreme Court in Steel Authority of India Ltd. vs Commissioner of Central Excise Raipur and CCE vs SKF India Ltd held that interest is payable even if the duty is paid later due to unavailability of data at the time of removal. Thus, the demand of interest from the appellant for the period post March 2013 up to March 2014 is justified.

Imposition of Penalty under Section 78 of the Finance Act:

The Commissioner imposed a penalty under Section 78 of the Finance Act, citing deliberate suppression of facts with intent to evade payment of service tax. However, it was found that the suppression was not willful nor intended to evade tax. The Supreme Court and Delhi High Court have held that for the extended period of limitation to apply, suppression must be willful and with intent to evade tax. Since this was not the case, the penalty under Section 78 could not be imposed.

Conclusion:

The appeal succeeds in part. The order dated September 7, 2016, by the Commissioner is set aside to the extent it demanded interest for the period up to March 2013 and imposed a penalty under Section 78 of the Finance Act. The demand of interest for the period post March 2013 up to March 2014 is sustained.

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