Retrospective validation sustains service tax demand, but penalty cannot be imposed for conduct covered by earlier Supreme Court ruling.

Retrospective validation of service tax provisions by the Finance Act, 2000 was treated as sufficient to sustain the demand for service tax for the relevant period, because the amended sub-clauses were deemed to have been in force at all material times. Penalty, however, was not sustainable for the period when the Supreme Court had held the provisions ultra vires, since retrospective validation could not create penal liability for past conduct when no such liability existed under the law then operating. The tax demand was maintained, while the penalty was set aside.

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Issues: (i) whether the demand of service tax could be sustained after retrospective validation of the relevant provisions by the Finance Act, 2000; and (ii) whether penalty could be imposed for the period when the Supreme Court decision holding the provisions ultra vires was operating.

Issue (i): whether the demand of service tax could be sustained after retrospective validation of the relevant provisions by the Finance Act, 2000.

Analysis: The relevant sub-clauses of Rule 2(1)(d) of the Service Tax Rules, 1994 had been declared ultra vires by the Supreme Court, but were subsequently validated retrospectively by the Finance Act, 2000 and deemed to have been in force at all material times. In that legal setting, the demand for service tax for the relevant period was held to survive.

Conclusion: The service tax demand was upheld and the challenge to that part of the order failed.

Issue (ii): whether penalty could be imposed for the period when the Supreme Court decision holding the provisions ultra vires was operating.

Analysis: Penalty was imposed under Section 77 of the Finance Act, 1994 for contravention of Section 70 of the Finance Act, 1994. The retrospective amendment could not create penal consequences for a period when the assessee was governed by the law as then declared by the Supreme Court. Retrospective validation may sustain the tax demand, but it does not justify punishment for past conduct in the absence of penal liability during the relevant period.

Conclusion: The penalty was not sustainable and was set aside.

Final Conclusion: The appeal succeeded only on the penalty issue, while the service tax demand was maintained.

Ratio Decidendi: Retrospective validation of a taxing provision can sustain the tax demand, but it cannot by itself impose penal consequences for conduct committed when the law, as then declared, did not attract such liability.

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