2025 (8) TMI 1657 - AT - Service Tax

Section 78 penalty waived for no fraud; Section 76(1) penalty Rs 16 lakh, 25% payable early under proviso (ii)

M/s Quilon Real Industries Pvt. Ltd. Versus CGST & Central Excise- Vadodara-II

CESTAT AHMEDABAD - AT held that penalty under Section 78 FA 1994 could not be imposed because there was no fraud, collusion, willful misstatement or ... Levy of penalty u/s 78 of the Finance Act, 1994 - short payment of service tax for a very small period on account of financial crunch - tax with interest paid before the investigation began - intent to evade duty or not - suppression of facts or not - HELD THAT:- For imposition of penalty under Section 78, it has to be established that non-payment of short payment or service tax is by reasons of fraud or collusion or willful misstatement or suppression of facts or contravention of any of the provisions of this Chapter or of the Rules made there under with intention to evade payment of service tax. It is not in dispute that the case was made out on the basis of documents provided by the appellant. It is also not in dispute that the appellant had issued invoices to their clients showing service tax amount therein. The Annexure A-1 to the show cause notice shows that the appellant had already paid service tax for the months of October, November and December 2015 even before the search of their premises by the officers. Also there was no short payment of service tax to be paid by the appellant under reverse charge mechanism for these three months as is clear from Annexure–A2. The reason for including these three months in the show cause notice are therefore, not very clear where there was no short payment. From the above, it is clear that there was no suppression or misstatement on the part of the appellant to pay service tax during the period indicated in the show cause notice. The ingredients to invoke provisions of section 78 in this case for imposing equal penalty are not present. Accordingly, imposition of equal penalty upon the appellant under Section 78(1) of the Finance Act, 1994 is not justified. However, there is no doubt about failure on part of the appellant to pay the service tax in time for which they are liable to penalty under section 76 of the Finance Act, 1994. A penalty of Rs. 16 lakhs (which is approximately 10% of the service tax amount) would be sufficient on the appellant under section 76(1) of the Finance Act 1994 for failure to pay service tax in time. However, since till now there is no order of penalty under section 76 of Finance Act, 1994 option is afforded as per proviso (ii) of Section 76 to pay 25% of the penalty so imposed under Section 76(1) within 30 days of this order either through actual payment or by seeking appropriation of penalty already paid. Appeal allowed in part. ISSUES PRESENTED AND CONSIDERED 1. Whether penalty equal to 100% under Section 78(1) (penalty for failure to pay service tax for reasons of fraud, collusion, wilful mis-statement or suppression of facts with intent to evade) is sustainable where the assessee admits liability, issued invoices showing service tax, recorded transactions in books and attributes non-payment to financial difficulty. 2. If Section 78(1) is not attracted, whether penalty under Section 76(1) (penalty for failure to pay service tax for any reason other than fraud, collusion, wilful mis-statement or suppression of facts with intent to evade) up to 10% of the tax is appropriate, and what relief is available under the provisos to Section 76(1) and Section 78(1) regarding reduced penalty on timely payment. 3. Whether the assessee is entitled to relief/waiver of penalty under Section 80 (reasonable cause) on grounds of delayed/non-payment by certain clients and consequent financial crunch. 4. Whether failure to procure A-2 form from an SEZ transferee precludes benefit of non-chargeability of service tax where there is no dispute about the transferee being located in SEZ. 5. Whether incorrect identification or reference to statutory provisions in notices/orders vitiates the imposition of penalty where the power exercised is available under a correct provision and the assessee had opportunity to contest. ISSUE-WISE DETAILED ANALYSIS - Issue 1: Sustainability of 100% penalty under Section 78(1) Legal framework: Section 78(1) imposes penalty equal to 100% of service tax where non-levy/non-payment/short-payment is by reason of fraud, collusion, wilful mis-statement or suppression of facts or contravention of provisions with intent to evade payment of service tax. The section contains provisos reducing penalty in specified-record cases and further provisos for reduced penalty where tax and interest are paid within prescribed periods. Precedent treatment: The Court referred to established principles that the ingredients of fraud, suppression or mens rea must be established to attract Section 78. Authorities permitting exercise of correct power despite mention of wrong provision were noted (applied to procedural defect issue, see Issue 5). Interpretation and reasoning: The Tribunal found no suppression or wilful mis-statement: invoices showed service tax charged, transactions were recorded, and tax had been paid for certain months even before search. Statements made during investigation admitted liability, and the primary reason for non-payment was financial difficulty caused by non-payment by major clients. Annexures indicated actual payments for some months and no short payment under reverse charge for those months. The factual matrix did not satisfy the mens rea threshold required by Section 78(1). Ratio vs. Obiter: Ratio - Section 78(1) cannot be invoked where documentary records, invoices and payments demonstrate absence of suppression/fraud and non-payment is attributable to financial distress rather than intent to evade. Obiter - Observations on specific months included in the show cause notice where no short payment existed (not essential to final holding but explanatory). Conclusion: Imposition of equal (100%) penalty under Section 78(1) is not justified on the facts; ingredients of fraud, collusion, wilful mis-statement or suppression with intent to evade are not present. ISSUE-WISE DETAILED ANALYSIS - Issue 2: Applicability of Section 76(1) and relief under provisos Legal framework: Section 76(1) provides penalty not exceeding 10% of the amount of such service tax where failure to pay is for any reason other than the factors attracting Section 78. Provisos provide (i) no penalty where tax and interest paid within 30 days of service of notice under Section 73 proviso; (ii) option under sub-section to pay 25% of penalty within 30 days of receipt of determination order as a compounding mechanism. Precedent treatment: The Tribunal relied on general principles that where higher penalty provision is not attracted, the lesser penal provision must be applied and that provisos allowing reduced penalty may be invoked subject to their conditions. Interpretation and reasoning: Having rejected Section 78(1) applicability, the Tribunal held that penalty under Section 76(1) is the appropriate head. Considering the quantum, approximately 10% of the confirmed service tax was deemed sufficient. The appellant had already paid an amount equal to 25% of the confirmed demand as penalty subsequent to the order; however, since no formal order under Section 76 had been passed, the Tribunal afforded the appellant the option under proviso (ii) of Section 76 to pay 25% of the penalty within 30 days of the Tribunal's order either by actual payment or by appropriation of the penalty already paid. Ratio vs. Obiter: Ratio - When Section 78 is inapplicable, Section 76(1) provides the correct penal head and the Tribunal may permit acceptance of payment equivalent to 25% of the penalty under the proviso where conditions are met. Obiter - The exact computation and the suggestion of rounding to approximately 10% are factual applications. Conclusion: Penalty under Section 76(1) (up to 10% of service tax) is appropriate. The appellant is allowed to avail the proviso for payment of 25% of the penalty within 30 days or seek appropriation of the penalty already paid; appeal partly allowed accordingly. ISSUE-WISE DETAILED ANALYSIS - Issue 3: Entitlement to waiver under Section 80 (reasonable cause) Legal framework: Section 80 permits waiver of penalty under Sections 76 and 77 where the assessee proves reasonable cause for failure to pay. Judicial guidance requires demonstration of bona fide reasonable cause beyond ordinary business delays. Precedent treatment: Reliance placed by appellant on authority where waiver was allowed was considered but evaluated on facts. Interpretation and reasoning: The Tribunal found that delayed/non-payment by certain clients and resultant financial crunch, while relevant, are common commercial occurrences. Such commercial contingencies do not, on these facts, constitute sufficient reasonable cause to justify complete waiver under Section 80. The appellant had not established exceptional circumstances that would merit full waiver of penalty. Ratio vs. Obiter: Ratio - Ordinary commercial delays and non-payment by clients do not automatically constitute reasonable cause for waiver under Section 80; waivers require stronger factual justification. Obiter - Reference to specific client amounts and insolvency proceedings as context. Conclusion: Waiver under Section 80 is not appropriate on these facts; penalty under Section 76 remains payable subject to proviso relief as discussed. ISSUE-WISE DETAILED ANALYSIS - Issue 4: Failure to procure A-2 form for SEZ transferee Legal framework: Notification/invoice formalities require production of specific forms for export/SEZ transactions to claim non-chargeability or exemption benefits. Precedent treatment: The Tribunal noted the appellant's contention that benefit should not be denied where there is no dispute as to the transferee's SEZ status. Interpretation and reasoning: The judgment records the contention but does not rest main findings on denial of benefit for lack of A-2 form; the primary disposal concerned penalties. The Tribunal did not make a definitive grant or denial of exemption based solely on A-2 non-production in the headnote analysis; the absence of dispute on the transferee's SEZ location was noted as a mitigating factor against finding suppression. Ratio vs. Obiter: Obiter - Observations that inability to procure A-2 form, without dispute about transferee's SEZ location, may not equate to suppression. No conclusive ratio on entitlement to benefit recorded in this order. Conclusion: The failure to produce A-2 form was considered but did not substantively support findings of suppression or fraud; issue left factual and not determinative of penalty outcome in this order. ISSUE-WISE DETAILED ANALYSIS - Issue 5: Effect of erroneous reference to statutory provision in notice/order Legal framework: Procedural validity of show-cause notices and demands, and whether mis-reference to statutory provisions vitiates action when the substantive power exists and the assessee had opportunity to contest. Precedent treatment: The Tribunal applied established authority that mentioning an incorrect provision does not invalidate an exercise of power if the power legitimately exists under another provision and the assessee was made aware and given an opportunity to contest. Interpretation and reasoning: The Tribunal relied on precedent to hold that wrong mention of a provision does not cause prejudice where contents of the show cause notice made the assessee aware of the liability and permitted defense. This principle supports upholding substantive penal action under proper provision even if the notice cited an incorrect rule. Ratio vs. Obiter: Ratio - Incorrect statutory citation in a show cause notice does not automatically invalidate penalty imposition where the power exists under a correct provision and no prejudice to the assessee is shown. Conclusion: No vitiation of action for erroneous citation where assessee was aware and had opportunity to contest; this principle supports the Tribunal's exercise of power to substitute appropriate penal head (Section 76) after rejecting Section 78 applicability. FINAL CONCLUSION The Tribunal held that the facts did not establish fraud, collusion, wilful mis-statement or suppression with intent to evade so as to attract 100% penalty under Section 78(1). Penalty under Section 76(1) (not exceeding 10% of service tax) is the appropriate consequence for delayed/non-payment; the appellant may avail the proviso allowing payment of 25% of the penalty within 30 days of the Tribunal's order (either by fresh payment or appropriation of the penalty already paid). Waiver under Section 80 was refused on the facts. Procedural mis-citation in notices does not invalidate the exercise of power where the assessee had notice and opportunity to contest. The appeal was partly allowed with consequential relief as indicated.