2025 (6) TMI 1727 - AT - Service Tax

Penalty enhancement set aside due to lack of proper show cause notice under Section 78, matter remanded for fresh consideration

M/s Rajeswari Construction Versus Commissioner of Central Tax Visakhapatnam– GST

The Tribunal set aside the Commissioner (Appeals) penalty enhancement from Rs. 88,726 to Rs. 17,65,437 under Section 78, finding it procedurally flawed ... Quantum of penalty - Commissioner (Appeals) failed to entertain Cross Objections as also in enhancing the penalty - levy of service tax on construction services. HELD THAT:- It is no longer res-integra that there is no liability of service tax on construction services till 01.07.2010. It is also noted the fact that they have paid the entire duty and also paid 25% of the penalty, as applicable, after the passing of the Order-in-Original. In so far as the Commissioner (Appeals)’s observation that he being a creature of statute, he cannot extend any benefit beyond Statute, it is found that the same is correct and he could not have entertained “Cross Objections” filed by the appellant. However, there are catena of judgments which held that where the cross objections, per se, are not permissible, the said cross objections itself has to be taken as counter to the grounds taken by the Department. Further, it is noted that, while the Commissioner (Appeals) has not considered that there is any provision for entertaining Cross Objections, however, he has taken into consideration, the grounds raised in their letter dated 31.08.2012 which not only included the grounds for Cross Objections but also other arguments as regards non-imposition of penalty. It is also an admitted fact that no specific show cause notice, as such, was issued to the respondent before enhancing the penalty as against the Order-in-Original. Conclusion - It is found that, as far as the decision of not treating the application dated 31.08.2012 as regards Cross Objections, in view of the Statutory Provisions are concerned, there are no infirmity with the decision of the Commissioner (Appeals). However, it is found that in the given factual matrix, the respondent was not able to effectively present their case, especially when the proposal was for enhancing the penalty. In the facts of the case, especially when on merit itself there was no need even for them to pay any duty and the fact that they have also paid all the imposed duties along with the interest, it is held, in the interest of justice, the matter needs to be remanded back to the Commissioner (Appeals), who shall now issue a notice to the respondent indicating the reasons as to why the penalty should be increased under Section 78 - appeal allowed by way of remand. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Tribunal were:Whether the Commissioner (Appeals) was correct in enhancing the penalty under Section 78 from Rs. 88,726/- to Rs. 17,65,437/- without issuing a specific show cause notice to the appellant as required by law.Whether the Commissioner (Appeals) was justified in refusing to entertain the appellant's Cross Objections on the ground that Section 84 of the Finance Act does not provide for such Cross Objections, unlike Section 35B(4) of the Central Excise Act.Whether the appellant was liable to pay service tax on construction services rendered to Andhra Pradesh State Housing Corporation Ltd. (APSHCL) prior to 01.07.2010 and thereafter, considering the nature of the construction (independent houses).Whether the penalty imposed under Section 78 was correctly levied on the entire amount of demand or only on the differential amount.Whether the appellant was given a reasonable opportunity of hearing before the enhancement of penalty by the Commissioner (Appeals), in compliance with principles of natural justice.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Legality of Enhancing Penalty Without Issuance of Show Cause NoticeRelevant Legal Framework and Precedents: Section 78 of the Finance Act mandates imposition of penalty equal to the amount of duty demanded in cases of service tax evasion. However, principles of natural justice and statutory procedural requirements necessitate issuance of a show cause notice before enhancing penalty. The Tribunal referred to settled legal principles that enhancement of penalty without prior notice is not permissible.Court's Interpretation and Reasoning: The Tribunal observed that no specific show cause notice was issued to the appellant before enhancing the penalty under Section 78. This procedural lapse was significant as it deprived the appellant of an opportunity to contest the enhanced penalty. The Tribunal emphasized that the Commissioner (Appeals) ought to have issued a notice indicating the reasons for enhancement, thereby ensuring compliance with natural justice.Application of Law to Facts: Given that the penalty was increased substantially without prior notice, the Tribunal found the enhancement procedurally flawed. The appellant was unable to effectively present their case on this crucial aspect.Conclusion: The penalty enhancement without notice was held to be improper, necessitating remand for fresh consideration after issuance of appropriate notice.Issue 2: Refusal to Entertain Cross Objections by the AppellantRelevant Legal Framework: Section 84 of the Finance Act does not explicitly provide for filing Cross Objections before the Commissioner (Appeals), unlike Section 35B(4) of the Central Excise Act which explicitly allows such filings.Court's Interpretation and Reasoning: The Commissioner (Appeals) declined to entertain the appellant's Cross Objections on this statutory basis. The Tribunal concurred that as a creature of statute, the Commissioner (Appeals) cannot extend benefits beyond what the statute permits.Treatment of Competing Arguments: However, the Tribunal noted that a catena of judgments have held that where Cross Objections are not permissible, the grounds raised therein must be treated as counter-arguments to the Department's appeal. The Commissioner (Appeals) had considered the appellant's submissions contained in their letter dated 31.08.2012, which included the grounds of Cross Objections and other arguments.Conclusion: The refusal to entertain Cross Objections was legally correct, but the appellant's grounds were considered substantively as counter to the Department's appeal.Issue 3: Liability to Pay Service Tax on Construction ServicesRelevant Legal Framework and Precedents: It is a settled position that service tax was not leviable on construction services for independent houses until 01.07.2010. Post that date, liability depends on the nature of construction and the applicable notifications.Court's Interpretation and Reasoning: The Tribunal observed that the appellant initially did not pay service tax under the impression that the Principal (APSHCL) was discharging the liability. Upon being pointed out by the Department, they started paying service tax along with interest. It was also noted that the appellant had paid the entire duty demanded and 25% of the penalty after the original order.Application of Law to Facts: The Tribunal accepted that on merits, the appellant was not liable to pay service tax prior to 01.07.2010, and even beyond that date for independent houses. Nonetheless, since the appellant had paid the duty and interest, the question of penalty and extended period invocation was rendered moot.Conclusion: No further duty liability existed on merit, and payment already made was acknowledged by the Department.Issue 4: Correctness of Levying Penalty on Entire Demand vs. Differential AmountCourt's Interpretation and Reasoning: The original order imposed penalty under Section 78 on the differential amount of duty. However, on appeal, the Commissioner (Appeals) enhanced the penalty to equal the entire amount of demand raised in the show cause notice, relying on the mandatory nature of penalty under Section 78.Treatment of Competing Arguments: The appellant contended that penalty should be on the differential amount only. The Department argued for penalty on the entire demand. The Tribunal noted the settled legal position that penalty under Section 78 must be equal to the duty demanded, but procedural safeguards must be observed.Conclusion: While the penalty amount may be correct in principle, the manner of enhancement without notice was improper, requiring reconsideration.Issue 5: Opportunity of Hearing Before Penalty EnhancementRelevant Legal Framework: Principles of natural justice mandate that a person should be given a reasonable opportunity to be heard before adverse orders such as penalty enhancement are passed.Court's Interpretation and Reasoning: The Department claimed that the appellant was given opportunity to appear and file Cross Objections before the Commissioner (Appeals). The appellant, however, declined the opportunity by letter dated 26.02.2013, requesting the Commissioner to decide on the submissions already made.Application of Law to Facts: The Tribunal found that despite the appellant's refusal to appear, no specific show cause notice was issued regarding penalty enhancement. Thus, the appellant was effectively denied a proper opportunity to contest the enhanced penalty.Conclusion: The absence of a specific notice and opportunity to be heard on penalty enhancement was a procedural defect requiring remand.3. SIGNIFICANT HOLDINGSThe Tribunal held that:'The Commissioner (Appeals) being a creature of statute, he cannot extend any benefit beyond Statute, and therefore, he could not have entertained 'Cross Objections' filed by the appellant.''No specific show cause notice, as such, was issued to the respondent before enhancing the penalty as against the Order-in-Original.''In the given factual matrix, the respondent was not able to effectively present their case, especially when the proposal was for enhancing the penalty.''The matter needs to be remanded back to the Commissioner (Appeals), who shall now issue a notice to the respondent indicating the reasons as to why the penalty should be increased under Section 78.'Core principles established include:The Commissioner (Appeals) cannot entertain Cross Objections unless expressly permitted by statute.Where Cross Objections are not permissible, the grounds raised therein must be treated as counter to the Department's appeal.Enhancement of penalty without issuance of a specific show cause notice violates principles of natural justice.Payment of entire duty and interest by the appellant on merits negates the justification for penalty and extended period invocation.In the absence of proper opportunity to be heard, penalty enhancement orders are liable to be set aside or remanded.Final determinations on each issue were that the penalty enhancement was procedurally flawed due to lack of notice, refusal to entertain Cross Objections was legally correct but appellant's grounds were considered substantively, and the appellant had no further duty liability on merits. Consequently, the matter was remanded to the Commissioner (Appeals) for fresh consideration after issuing appropriate notice and hearing the appellant.