Service tax penalty for short payment set aside where voluntary payment of differential tax and interest discharged liability and appeal allowed

Imposition of penalty for short payment of service tax was contested where appellants had voluntarily paid differential tax with interest; the bar under Section 73(3) and limitation under the proviso to Section 73(1) were addressed, concluding that voluntary payment fulfilled requirements for discharge of service tax liability and that departmental demand founded on ST-3/ITR mismatch did not sustain penalties. As a consequence, penalties confirmed by the lower authority were set aside and the appellants' appeal allowed to the extent of penalty relief.

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Issues: (i) Whether imposition of penalty under Section 78 of the Finance Act, 1994 on account of alleged short payment of service tax for 2014-15 and 2015-16 is sustainable where the service tax and interest were voluntarily paid by the assessee prior to issuance of the show cause notice.

Analysis: The admitted facts show that the disputed service tax of Rs.23,39,421/- together with interest was paid by the assessee by challans dated in 2015 and 2016, well before the show cause notice dated 29.09.2020 was issued. The Commissioner (Appeals) had dropped the demand on merits but sustained penalty under Section 78 on the basis of the SVLDRS disclosure. The statutory scheme under Section 73(3) permits a person to discharge service tax and interest on own ascertainment or on the basis of tax ascertained by an officer and to notify the officer, and upon such payment the officer shall not serve a notice under Section 73(1) in respect of the amount so paid, except as provided in Section 73(4) where fraud, collusion, wilful misstatement or suppression of facts is established. The record contains no independent evidence of fraud, collusion, wilful misstatement or suppression of facts to bring the case within Section 73(4). The payments were made voluntarily prior to initiation of proceedings and the SVLDRS scrutiny gave relief from interest and penalty subject to payment of tax; there is no substratum to sustain mandatory penalty under Section 78 when tax and interest were already paid prior to issuance of the show cause notice.

Conclusion: Imposition of penalty under Section 78 is not sustainable; penalty confirmed by the lower authorities is set aside and the appeal is allowed in favour of the assessee.

Ratio Decidendi: Voluntary payment of service tax with interest prior to issuance of a show cause notice bars initiation of notice under Section 73(1) in respect of the amount so paid under Section 73(3), and absent findings of fraud, collusion, wilful misstatement or suppression of facts under Section 73(4), penalty under Section 78 cannot be imposed.

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