2025 (11) TMI 602 - AT - Service Tax

Penalty under Section 78 and Rule 15(3)/Section 15(3) quashed where no fraud, suppression or deliberate default proved

M/s National Institute of Public Finance and Policy Versus Commissioner of Central Excise & CGST-Delhi South

CESTAT set aside penalties under Section 78 of the Finance Act and Rule 15(3)/Section 15(3) of the Cenvat Credit Rules, finding no evidence of fraud, ... Imposition of penalty upon the appellant under Section 78 of Finance Act as well as under Rule 15(3) of Service Tax Rules - entire amount of demand confirmed was paid by the appellant even prior issuance of the SCN - assessee admitted tax liability and reversed/paid demanded amounts after detection, but denial of suppression/fraud/collusion/having willful mis-statement was maintained - HELD THAT:- The penalty under these provisions can be imposed when there has been non-payment or short payment of service tax or availment of Cenvat credit/wrong utilization thereof happens by reason of fraud, collusion, willful misstatement or suppression of facts or contravention or any of the statutory provision. The penalty ordinarily has not to be imposed unless the party obliged either acted deliberately in defiance of law or was guilty of conduct in contumacious or dis-honest or acted unconscious disregard of its obligation. In the present case, the appellant has mentioned that the non-payment of service tax and wrong availment Cenvat credit Act was an inadvertent omission. It is also apparent fact on record that the moment this discrepancy was brought to the notice of the appellant, the appellant deposited the entire amount with interest. Above all, the appellant is a governmental authority. In these circumstances, the grave consequence as that of penalty specially when there is nothing on record produced by the department to prove that the non-payment or wrong availment was a deliberate default instead of being an advertent admission, the order imposing penalty under both the provisions is contrary to the statutory intent. Thus, in absence of any evidence of positive act of suppression on part of the appellant, the order imposing penalty on the appellant under Section 78 of Finance Act 1994 as well as under Section 15(3) of Cenvat Credit Rules, 2004 set aside - appeal disposed off. 1. ISSUES PRESENTED AND CONSIDERED 1. Whether penalty under Section 78 of the Finance Act, 1994 and under Rule 15(3) of the Cenvat Credit Rules, 2004 can be imposed where the assessee admitted tax liability and reversed/paid demanded amounts after detection, but denial of suppression/fraud/collusion/having willful mis-statement was maintained. 2. Whether non-declaration of service tax and taking of ineligible Cenvat credit in returns, without more, constitutes 'suppression of facts' or 'willful mis-statement' permitting invocation of extended limitation (proviso to Section 73(1) of the Finance Act, 1994) and enabling imposition of penal consequences under the cited provisions. 3. To what extent established principles governing imposition of penalty (necessity of deliberate, contumacious or dishonest conduct) apply where the assessee is a governmental/public authority and the omission is asserted to be inadvertent. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Power to impose penalty under Section 78 FF Act and Rule 15(3) CCR 2004 where tax liability is admitted and paid post-detection but suppression/intent is denied Legal framework: Section 78 of the Finance Act, 1994 permits imposition of penalty where service tax has not been levied/paid by reason of fraud, collusion, willful mis-statement, suppression of facts or contravention with intent to evade payment. Rule 15(3) Cenvat Credit Rules, 2004 makes the provider liable to penalty where Cenvat credit was wrongly taken/used for the same specified reasons and intent to evade tax. Precedent Treatment: The Court relied on the established principle from higher authority (referred to as Hindustan Steel decision) that penalty ordinarily should not be imposed unless there is deliberate defiance of law, contumacious or dishonest conduct, or conscious disregard of obligation. An act flowing from bona fide belief or a venial/technical breach does not attract penalty despite a minimum penalty provision. Interpretation and reasoning: The Tribunal observed (i) the assessee admitted the tax liability and reversal/non-eligibility of Cenvat credit; (ii) the disputed amounts were deposited with interest immediately upon detection; (iii) there is absence of any positive material on record demonstrating deliberate default, fraud, collusion, willful mis-statement, or conscious suppression by the assessee; and (iv) the assessee is a governmental/public institute engaged in policy advisory work, making the case for inadvertence more plausible. On these facts the Court applied the principle that penal consequences require clear proof of deliberate or dishonest conduct and are not appropriate for inadvertent omissions or bona fide mistakes. Ratio vs. Obiter: Ratio - Penalty under Section 78 and Rule 15(3) cannot be sustained where the record lacks evidence of deliberate fraud, collusion, willful mis-statement or suppression and the assessee admitted liability and paid the amounts with interest promptly upon detection. Obiter - observations on the public character of the assessee supporting a finding of inadvertence. Conclusion: The order imposing penalty under Section 78 of the Finance Act, 1994 and under Rule 15(3) of the Cenvat Credit Rules, 2004 was set aside for lack of evidence of deliberate suppression or dishonest intent; the appeal was allowed to that extent and the impugned order modified accordingly. Issue 2 - Whether non-declaration in returns and taking ineligible Cenvat credit by itself amounts to 'suppression of facts' for extended limitation and penal purposes Legal framework: The proviso to Section 73(1) (Finance Act, 1994) extends the period of limitation from thirty months to five years where non-payment/short payment/erroneous refund arises by reason of fraud, collusion, willful mis-statement, suppression of facts or contravention with intent to evade tax. The meaning of 'suppression of facts' is therefore key to invoking extended limitation and the consequent penal regime under Section 78 and Rule 15(3). Precedent Treatment: The Tribunal relied on a higher authority (referred to as Continental Foundation decision) holding that expressions in the proviso (fraud, collusion, willful default) must be given strict construction, and 'suppression of facts' in that context requires deliberate non-disclosure intended to escape tax. Mere omission or failure to disclose does not necessarily amount to suppression where there is no evidence of deliberate concealment. Interpretation and reasoning: The Court analyzed the ordinary meaning of 'suppression of facts' and the surrounding legislative context (strong words like fraud and collusion). It concluded that 'suppression' in taxation implies deliberate withholding of known correct information to evade payment. Non-declaration in returns or taking ineligible credit, absent material showing deliberate concealment or intent, cannot be equated automatically with suppression justifying extended limitation or penal consequences. The Tribunal noted that the department produced no positive evidence of deliberate concealment; hence the invocation of suppression was not sustained in fact on the record. Ratio vs. Obiter: Ratio - 'Suppression of facts' for purposes of extended limitation and penalty requires evidence of deliberate non-disclosure; mere omission in returns or erroneous credit claims, without proof of intent, does not constitute suppression. Obiter - commentary on dictionary meaning and surrounding statutory language emphasizing strict construction. Conclusion: The Court declined to uphold a finding of suppression of facts on the facts of the case; it refrained from adjudicating fully on the proviso to Section 73(1) given the narrow compass of the dispute (penalty), but held that absence of evidence of deliberate concealment precluded penal consequences predicated on suppression. Issue 3 - Application of the principle of admissions and its effect on prosecution of penalty proceedings Legal framework: Principles of evidence provide that admissions by a party are strong evidence of liability and require no further proof; such admissions affect the scope of inquiry in penalty proceedings where the substantive tax liability is not in dispute. Precedent Treatment: The Court relied on general evidentiary principles and prior pronouncements emphasizing that admissions extinguish factual controversy on liability and reduce the dispute to the question of penal consequences and intent. Interpretation and reasoning: Since the assessee admitted liability for the service tax and non-eligibility of Cenvat credit and paid the demanded amounts with interest promptly, the factual dispute over tax liability fell away. The Tribunal therefore confined adjudication to whether penal consequences were justified by evidence of deliberate misconduct. The admission, together with prompt payment, supported the inference of inadvertence rather than deliberate evasion. Ratio vs. Obiter: Ratio - Admission of tax liability and prompt payment materially impacts the assessment of penal liability and may preclude penalty where there is no independent evidence of deliberate wrongdoing. Obiter - emphasis on admissions being 'the best evidence' in the context of the case. Conclusion: Admissions by the assessee and prompt payment of the demand were material in negating an inference of deliberate suppression or evasion and supported setting aside penalties imposed under Section 78 and Rule 15(3). Cross-reference and final disposition Cross-reference: Issues 1-3 are interrelated: absence of evidence of deliberate suppression (Issue 2) and the assessee's admissions and prompt payment (Issue 3) together determine the appropriateness of penalty under the statutory provisions (Issue 1). Final conclusion: On the facts and evidence before the Tribunal, penalties under Section 78 of the Finance Act, 1994 and Rule 15(3) of the Cenvat Credit Rules, 2004 were not sustainable and were set aside; the Tribunal did not disturb the admitted tax and interest liabilities but modified the impugned order insofar as it imposed penal consequences lacking demonstrable deliberate misconduct.