Service tax penalty set aside after voluntary payment made before show cause notice under Section 78

CESTAT Chennai held that 15% penalty under Section 78 of Finance Act 1994 was improperly imposed where appellant paid service tax of Rs.3,95,743 with interest before show cause notice issuance after being pointed out by ECM. The adjudicating authority failed to provide proper findings for penalty confirmation despite voluntary payment. Since service tax was paid before SCN and no penalty was imposed on larger amount of Rs.25,04,156 following audit settlement principles, the 15% penalty on Rs.3,95,743 was set aside. Refund of Rs.3,75,623 was allowed as department did not challenge original penalty waiver order.

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Issues involved: Non-payment of service tax on royalty payments under reverse charge mechanism, imposition of penalty under Section 78 of the Finance Act, 1994, refund claim of penalty paid under protest.

Issue 1: Imposition of Penalty on Short Payment of Service Tax

The appellant, engaged in manufacturing and providing taxable services, made royalty payments to foreign suppliers during 2013-2016 without discharging service tax under reverse charge mechanism. After audits in 2016 and 2018, the appellant paid the outstanding service tax and interest. Subsequently, a short payment of Rs.3,95,743/- for the period April 2015 to June 2017 was identified in 2020. A show cause notice was issued demanding Rs.28,99,899/-, including the short payment, interest, and a penalty under Section 78. The original authority held that as the appellant had paid the service tax for a part of the period before the notice, no penalty was imposed for that period. However, a penalty of 15% on the short payment was confirmed. The appellant appealed against this penalty, arguing that there was no finding justifying the penalty and that the payment was made under protest. The Tribunal held that the penalty of 15% on the short payment was not justified, as the service tax and interest had been paid before the notice, and set aside the penalty.

Issue 2: Refund Claim of Penalty Paid Under Protest

The appellant filed a refund claim for the penalty paid under protest on the service tax amount of Rs.25,04,156/-. The adjudicating authority had held that no penalty was imposable on this amount, as it was paid in full and final settlement of an audit objection. The refund claim was filed for the penalty amount paid under protest. The department challenged the refund, arguing that the penalty should not have been set aside. The Tribunal noted that the department had not challenged the order setting aside the penalty and held that the penalty on the service tax amount was dropped. Therefore, the Tribunal allowed the refund claim of Rs.3,75,623/-, being the penalty paid under protest.

In conclusion, the Tribunal set aside the penalties imposed on the appellant and allowed the refund claim for the penalty paid under protest. The impugned orders were overturned, and both appeals were allowed with consequential reliefs.

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