PENALTY U/S 78 IF SERVICE TAX HAS BEEN DEPOSTED BEFORE SCN

[Mehul Pandya]

SIR,

WE HAVE PAID OUR FULL SERVICE TAX LIABILITY BEFORE ISSUE OF SCN. WE HAVE ALSO PAID INTEREST ON THE SAME AFTER OIO ADJUDICATED/PASSED. DO WE ELIGIBLE FOR PENALTY WAIVE U/S 78. PL. QUOTE SUPPORTING CASE LAWS IN THIS MATTER.

THANK YOU

[KASTURI SETHI]

(1) As per Section 78 (1) of the Finance Act,1994, you are eligible to take the benefit of reduced penalty by 75% onlyif you have deposited Service Tax, interest and 25% of penalty imposed within thirty days of the receipt of Order-in-Original. You have deposited Service Tax before issuance of SCN and interest after issuance of OIO.

(2) As per Section 78 (1) (i) of the Finance Act, had you deposited payable Service Tax in full along with interest within thirty days of the service of SCN, penalty would have been 15% of Service Tax evaded/payable.

Now, since you have followed hybrid procedure, so first option (1) above is applicable to you. Pl. note that Ii if you have crossed a period of thirty days from the receipt of OIO, you will have to pay penalty equal to 100% of the amount of demand of service tax confirmed.

[Ganeshan Kalyani]

Sir, I would like to welcome your view in a situation where based on audit objection the cenvat credit was reversed and applicable interest was also paid. Even though department issued show cause notice stating that the ineligible credit was taken willingly by the assesse therefore penalty@15% is payable. Here I am of the view that penalty is not leviable as the credit was not willingly availed and upon finding out in audit it was reversed. Please validate my view.

[KASTURI SETHI]

Sh.Ganeshan Kalyani Ji,

Sir, You are absolutely right. How you are right ? It is explained here. Full facts were not known to me. OIO has been passed and Sh.Pandya was asking for waiver of penalty under Section 78. I have replied accordingly.

In this case, Cenvat Credit along with interest stands deposited on the spot during audit i.e. prior to the issue of SCN, SCN should not have been issued as per Section 73 (3) of the Finance Act.Rule 14 is subject to Section 73 of the Finance Act. Penalty should not have been imposed. In case SCN was required to be issued, it should have been issued for for confirmation and appropriation of the amount already reversed. Penalty clause should not have been invoked in the SCN. Invocation of penalty clause is contrary to law. Now OIO has been issued and if penalty has been imposed under Section 78 then better option is to deposit 25% of penalty within 30 days of the receipt of the order.

I further add that Rule 15 (1) of Cenvat Credit Rules is subject Section 76. and Rule 15 (3) is subject to Section 78. Under Section 78 penalty is imposable only if ingredients of suppression of facts, fraud, collusion, misstatement etc. with an intent to evade payment of Service Tax are present. In case, the elements of mens rea are not present and evasion has taken place due to procedural or technical reasons, penalty will be imposable under Section 76.

[Mehul Pandya]

Thank you sir for your valuable reply

Sir,

For removal of confusion I hereby elaborate the case.

During the investigation dept. found that we have received some advance and they told that we have to discharge service tax on advance as per Point of Taxation rules. earlier we are in opinion that we have to raise bill after completion of full work and service tax also payable after the same. Even though dept. pointed out we have paid full service tax amount as they said before SCN but due to financial shortages interest remain to pay. we have paid full interest within one month of issuance of OIO. Time limit for reduced penalty @ 25% also lapse as one month passed.

So whether the above situation will be consider as suppression of fact or intentionally evasion ?

Can we get benefit of penalty waive ? pl. quote any case laws / circulars / trade notice / Citation etc. in support of the same ?

Thank you

[KASTURI SETHI]

Sh.Mehul Pandya Ji,

It appears to me that there has been mis-declaration on your part while filing ST-3 return. You have paid Service Tax on advance payment received towards taxable service only on being pointed out by the department. The department detected non-payment of Service Tax from your books of accounts. Thus the figures mentioned in ST-3 return do not tally with that figures available in your books of accounts. So the element of concealment is there. Had the investigation not visited, it could have remained undetected. The department takes such ground.

Books of accounts is one of the specified records as per Section 78(1) of the Finance Act. You have not concealed the data in the specified record. In such cases 50% of penalty of service tax determined/evaded is payable. But in my view now chances of reduction of penalty or waiver penalty are bleak.

 

[Ganeshan Kalyani]

Thanks for your valuable input Kasturi sir.

[Ganeshan Kalyani]

If in SCN it is written that credit wrongly taken should be recovered and it should appropriated. What does the word 'recover' and 'appropriation' means. If the credit taken wrongly is reversed then why a point inserted to state that it would be recovered. it is not logical that if credit is reversed it in fact means the credit is paid. Please discuss.

[KASTURI SETHI]

Sh.Ganeshan Kalyani Ji,

Yes, Sir. You are right. Credit reversed means credit paid back. In SCN, the word,'recovered' should not have been written. It is wrongly written in a routine fashion. It should have been written as, "Why credit already reversed should not be confirmed and appropriated under Rule 14 of the Credit Rules."

[Ganeshan Kalyani]

Thanks Kasturi sir.

AI Summary

Penalty under Section 78: reduced relief depends on timing of tax, interest and penalty deposits and culpability. Reduced penalty relief under the Finance Act depends on timing of tax and interest payments and on whether elements of suppression or fraud exist. If tax and interest and a stipulated part of penalty are deposited within prescribed periods tied to either the show cause notice or the adjudication order, reduced penalty rates apply; payments made before notice or a hybrid payment sequence can foreclose favourable concessions. Reversal of cenvat credit with interest during audit generally negates the need for a show cause notice and, absent mens rea, penalty should not be invoked; discrepancies between returns and books, however, are treated as concealment and attract heavier penalty exposure.