Appellant denied 25% penalty reduction under Section 78(1) for late service tax payment beyond 30 days

CESTAT Hyderabad held that appellant was not entitled to 25% penalty reduction under second proviso to Section 78(1) of Finance Act 1994, as service tax and interest were not paid within 30 days of the original order dated 31.05.2022. However, appellant was granted 50% penalty benefit under first proviso for period 08.04.2011 to 14.05.2015 based on maintained transaction records, as confirmed by Commissioner (Appeals). For subsequent period, 100% penalty applies. Appellant directed to calculate total penalty liability and submit to jurisdictional authority with proof of payment.

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Issues:
1. Entitlement to pay reduced penalty under Section 78(1) of the Finance Act 1994.
2. Applicability of the first proviso to Section 78(1) inserted vide Finance Act 2015.

Issue 1: Entitlement to pay reduced penalty under Section 78(1) of the Finance Act 1994:

The case involved the question of whether the appellant was entitled to pay the reduced penalty at 25% under the second proviso to Section 78(1) of the Finance Act 1994. The appellant had provided services, including renting of immovable property services, to M/s Narayana Educational Society without obtaining service tax registration or paying the applicable service tax. A show cause notice was issued based on information from M/s Narayana Educational Society, proposing a demand of Rs. 5,87,909/-, which was confirmed along with an equal penalty. The Commissioner (Appeals) recalculated the total service tax liability for the period from October 2014 to April 2016 as Rs. 2,38,972/- and the appellant admitted and paid this re-determined service tax along with interest. However, the appellant disputed the denial of penalty at 25% and argued for its application.

The Tribunal analyzed the provisions of the second proviso to Section 78(1) which stipulates that the penalty at 25% is applicable only if the service tax and interest are paid within 30 days of the date of receipt of the order determining the service tax. Since the appellant did not pay the determined amount and interest within the specified period, the Tribunal found no grounds to extend the 25% penalty. Citing relevant case laws, the Tribunal emphasized that the option for reduced penalty ends after 30 days from the communication of the order, and the appellate authority cannot permit payment beyond this period. Consequently, the Tribunal upheld the Commissioner (Appeals) decision that the 25% penalty was not applicable in this case.

Issue 2: Applicability of the first proviso to Section 78(1) inserted vide Finance Act 2015:

The appellant also requested consideration for the applicability of the first proviso to Section 78(1) inserted by the Finance Act 2015, which allows for a penalty of 50% of the service tax under certain circumstances. The Tribunal noted that the first proviso is an exception to the mandatory 100% penalty under Section 78(1). Observing that the appellant had maintained detailed records during the material time, as acknowledged by the Commissioner (Appeals), the Tribunal found that the appellant fulfilled the conditions for the first proviso for the period from 08.04.2011 to 14.05.2015. Therefore, the appellant was liable to pay a penalty of 50% of the determined service tax for this period, while for the period beyond that, the penalty rate would be 100%. The Tribunal directed the appellant to calculate the total penalty liability accordingly and submit the same to the jurisdictional authority along with proof of payment.

In conclusion, the Tribunal disposed of the appeal, affirming the decision on the reduced penalty and granting the benefit of the first proviso for the specified period.

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