Service tax penalty relief allows deletion of Section 76 penalty and restriction of Section 78 penalty where dues and interest are paid.

Where service tax and interest are paid, the appellate authority may grant discretionary relief and avoid simultaneous penalties for the same default. The Tribunal noted that penalty under Section 78 was attracted, but separate penalty under Section 76 was not warranted on the facts, particularly because the assessee had paid the dues before the show-cause notice and had paid 25% of the Section 78 penalty within the prescribed time. The reduction of Section 78 penalty to 25% and deletion of Section 76 penalty were therefore upheld, with the broader relief treated as a reasonable exercise of discretion under the Finance Act, 1994.

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Issues: (i) Whether penalty under Section 76 and Section 78 of the Finance Act, 1994 could both be sustained for the same default in payment of service tax. (ii) Whether the reduction of penalty under Section 78 to 25% and the setting aside of penalty under Section 76 were justified in the facts of the case.

Issue (i): Whether penalty under Section 76 and Section 78 of the Finance Act, 1994 could both be sustained for the same default in payment of service tax.

Analysis: The tax liability stood paid along with interest. The Tribunal noted the reasoning adopted by the appellate authority that once penalty under Section 78 was attracted, penalty under Section 76 was not warranted in the circumstances, and also considered the availability of the discretionary relief under Section 80 of the Finance Act, 1994. The case law relied upon by the Revenue was noticed, but the facts showed that the respondent had contested taxability through its association and had paid the dues before the show-cause notice, which supported invocation of discretionary relief rather than simultaneous enforcement of both penalties.

Conclusion: Penalty under Section 76 was not sustained and the assessee succeeded on this issue.

Issue (ii): Whether the reduction of penalty under Section 78 to 25% and the setting aside of penalty under Section 76 were justified in the facts of the case.

Analysis: The Tribunal found that the respondent had paid the service tax and interest, had also paid 25% of the penalty within the prescribed time, and was in a substantially similar situation to cases where relief had been granted under Section 80 of the Finance Act, 1994. In that backdrop, the appellate authority's decision to restrict the penalty under Section 78 to 25% and to delete the separate penalty under Section 76 was held to be a reasonable exercise of discretion.

Conclusion: The reduction of penalty under Section 78 and deletion of penalty under Section 76 were upheld in favour of the assessee.

Final Conclusion: The departmental appeal failed, and the relief granted by the Commissioner (Appeals) in relation to penalties was affirmed.

Ratio Decidendi: Where service tax and interest are paid and the facts justify discretionary relief, the appellate authority may delete penalty under Section 76 and sustain only the restricted penalty under Section 78, especially when Section 80 is invoked on reasonable cause.

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