2023 (12) TMI 377 - AT - Service Tax

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 ... Levy of 15% penalty - suppression of facts - period April 2015 to June 2017 - royalty payment under reverse charge mechanism - HELD THAT:- There is no finding rendered in the order passed by the adjudicating authority in this regard. It is merely stated in the order that the appellant has paid the service tax along with interest and 15% penalty on 28.12.2020 (a day before issue of show cause notice). It is therefore concluded by adjudicating authority that it is voluntary payment made by the appellant. The facts show that the appellant has paid the service tax of Rs.3,95,743/- immediately on being pointed out by ECM. The SCN has been issued one day after payment of service tax. The original authority has confirmed the penalty of 15% observing that appellant has voluntarily paid the 15% penalty. When the appellant submitted their reply as well as contested the matter, it cannot be said that they do not dispute the imposition of penalty. There is no finding rendered with regard to the reasons for confirmation of penalty under Section 78 of the Finance Act 1994. Further, the service tax along with interest has been paid before issuance of SCN. The penalty of 15% imposed on Rs.3,95,743/- requires to be set aside - the confirmation of demand of Rs.3,95,743/- along with interest is not disturbed and only the penalty of 15% on this amount is set aside. Refund being 15% penalty - HELD THAT:- The adjudicating authority vide OIO dt. 15.4.2021 held that no penalty is required to be imposed under Section 78 in respect of Rs.25,04,156/- for the reason that when the audit pointed out that the amount of service tax to be paid on the royalty is Rs.25,04,156/- the appellant has paid the amount with interest. If the audit had informed that the appellant has to pay Rs.28,99,899/- (Rs.25,04,156 + Rs.3,95,743/-) the appellant would have paid the same - The short payment of Rs.3,95,743/- has been pointed out much later after two years. The appellant then paid the same with interest before issuance of SCN. Sub-section (3) of Section 73 provides that no SCN is to be issued when service tax along with interest is paid as pointed out by the officer of the department. In para 21 of OIO, the adjudicating authority has quoted para 8.2.2 of Audit Manual to hold that after payment as per audit objections the settlement is final - this view of the adjudicating authority is agreed upon. The said order has not been challenged by the department and has become final as against the department - as the department has not challenged the order passed by the original authority setting aside the penalty, the department cannot contend in the refund proceedings that penalty set aside is incorrect. The original authority has dropped the 15% penalty on Rs.25,04,156/. Hence Rs.3,75,623/- is eligible for refund. The impugned orders are set aside - Appeal allowed. 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 TaxThe 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 ProtestThe 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.