2025 (1) TMI 344 - AT - Service Tax

Service tax penalties set aside when liability discharged before show cause notice issuance under sections 77-78

CESTAT Allahabad held that issuance of SCN was unjustified when appellant had already discharged service tax liability with interest before SCN issuance. ... Justification in issuance of SCN - whether SCN was justified when the appellant had already discharged the service tax liability along with applicable interest before the issuance of the SCN? - levy of penalty - HELD THAT:- Once the discrepancies were pointed out by the audit team and accepted by the Appellant Assessee and service tax liability was discharged alongwith interest much before the issuance of the SCN, there was no occasion to issue a SCN, as has been consistently held by the Tribunal and the Superior Courts. The Tribunal in the case of Gardenia India Ltd., [2018 (11) TMI 305 - CESTAT ALLAHABAD] observed 'there was no need for issue of show cause notice in respect of the demands confirmed in the Order-in-Original. We set aside the penalties imposed under section 77 and 78 of Finance Act, 1994 read with Rule 15 of Cenvat Credit Rules.' Conclusion - In view of the payment of entire amount before issue of show cause notice there was no need for issue of show cause notice. Penalty also set aside. Appeal allowed. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered in this judgment are:Whether the issuance of the Show Cause Notice (SCN) was justified when the appellant had already discharged the service tax liability along with applicable interest before the issuance of the SCN.Whether penalties under Sections 77 and 78 of the Finance Act, 1994 were rightly imposed on the appellant for alleged contraventions of the Finance Act, 1994.Whether the proceedings for recovery of CENVAT credit were appropriately dropped.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Justification for Issuance of SCNRelevant Legal Framework and Precedents: The legal framework involves Section 73 of the Finance Act, 1994, which provides for recovery of service tax not levied or paid. Sub-section 3 of Section 73 states that if the service tax is paid before the issuance of SCN, the proceedings are concluded. Precedents such as the Tribunal's decisions in Gardenia India Ltd. and Venu Enterprises were considered, which held that no SCN is necessary if the tax is paid before its issuance.Court's Interpretation and Reasoning: The court found that the appellant had discharged the service tax liability along with interest before the SCN was issued. It reasoned that under sub-section 3 of Section 73, the issuance of an SCN was unnecessary, as the proceedings should have been concluded with the payment.Key Evidence and Findings: The appellant paid the service tax and interest on 12.02.2020, prior to the SCN dated 27.08.2020. This was acknowledged in the SCN itself.Application of Law to Facts: The court applied sub-section 3 of Section 73 to conclude that the issuance of the SCN was unwarranted, given the pre-SCN payment.Treatment of Competing Arguments: The Department's argument for the necessity of the SCN was not supported by the facts or legal precedents.Conclusions: The court concluded that the issuance of the SCN was not justified.Issue 2: Imposition of PenaltiesRelevant Legal Framework and Precedents: Sections 77 and 78 of the Finance Act, 1994, provide for penalties for failure to self-assess and for willful suppression of facts, respectively. The precedents discussed above were also relevant here.Court's Interpretation and Reasoning: The court interpreted that the penalties under Sections 77 and 78 were unwarranted because the appellant had already paid the tax and interest before the SCN, and there was no evidence of willful suppression or fraud.Key Evidence and Findings: The court noted the absence of evidence for willful suppression or fraud, and the appellant's proactive payment of dues.Application of Law to Facts: The court applied the legal principles from precedents, emphasizing that penalties should not be imposed when dues are paid before the SCN without evidence of malfeasance.Treatment of Competing Arguments: The Department's justification for penalties was dismissed due to lack of supporting evidence.Conclusions: The court set aside the penalties imposed under Sections 77 and 78.Issue 3: Recovery of CENVAT CreditRelevant Legal Framework and Precedents: Rule 14 of the CENVAT Credit Rules, 2004, governs the recovery of wrongly availed CENVAT credit.Court's Interpretation and Reasoning: The court found no merit in pursuing the recovery of CENVAT credit as the proceedings were already dropped.Key Evidence and Findings: The adjudicating authority had already dropped the proceedings for CENVAT credit recovery.Conclusions: The court upheld the decision to drop the recovery proceedings.3. SIGNIFICANT HOLDINGSPreserve Verbatim Quotes of Crucial Legal Reasoning: The court stated, 'In view of the payment of entire amount before issue of show cause notice there was no need for issue of show cause notice.'Core Principles Established: The principle that payment of service tax and interest before the issuance of an SCN concludes the proceedings, negating the need for an SCN and associated penalties, was reinforced.Final Determinations on Each Issue: The court determined that the SCN was unjustified, penalties under Sections 77 and 78 were unwarranted, and the dropping of CENVAT credit recovery was appropriate.The judgment emphasizes the importance of adhering to statutory provisions regarding the issuance of SCNs and the imposition of penalties, particularly when dues are paid proactively by the taxpayer without evidence of fraud or suppression.