2025 (5) TMI 480 - AT - Service Tax

Invocation of extended period of limitation - imposition of penalty equivalent to tax involved during the period April 2015 to September 2015 under section 78 and also penalty under section 78A - HELD THAT - Essentially for invoking extended period as also for imposing penalty under section 78 it is incumbent upon the department to establish non-payment or short payment of service tax by reasons of fraud or collusion or willful misstatement or suppression of facts or contravention of any of the provisions of this law with intent to evade payment of service tax where SCN is issued in terms of the proviso to sub-section (1) of section 73. Therefore in order to invoke section 78 the SCN issued under proviso to section 73(1) has to be sustained first. In this case while the SCN has been proposed invoking proviso to section 73(1) we do not find any ingredient to sustain the invocation of extended period for recovery of demand notwithstanding the fact that the appellants are themselves not contesting the recovery of service tax not paid/short paid even for the period beyond the normal period of demand. It is apparently because they paid entire amount of service tax and interest much before the issue of SCN itself. Merely because they are not contesting the confirmation of demand and recovery thereof it would not tantamount to their admitting the fact that there was a deliberate act of evasion or there was any intent on their part to evade service tax payment. On the contrary there is force that this was an omission which can be cured within the provisions of the Finance Act and Rules made thereunder subject to payment of interest late fee etc. Revenue has also argued that since they have paid 25% of penalty they have already admitted the validity of imposition of penalty under section 78. Unlike section 73(3) payment @ 25% under section 76 does not bar a person from agitating the same before the Appellate Authority. Therefore once there is no element of willful misstatement fraud collusion etc. obviously in the given factual matrix section 73(3) would have been available and that there was no need for issuing any SCN. The denial of benefit under section 73(3) by the Adjudicating Authority is therefore not correct or tenable and it is found that they would be entitled for section 73(3) of the Act. Having regard to factual matrix of the case evidence on record as also various case laws cited by both sides we find that the department has not been able to establish the element of fraud or collusion or willful misstatement or suppression of facts or contravention of any provision of this Chapter or Rules made thereunder with intent to evade payment of service tax - the impugned order is liable to be set aside to the extent of imposition of penalty of Rs.7, 16, 02, 680/- under section 78 on the appellant. Penalty u/s 78A on Director of appellant company - HELD THAT - Penalty under section 78A can be imposed on any director manager secretary officer etc. of the company who at the time of such contravention was in-charge of and was responsible to the company for the conduct of business of such company and was knowingly concerned with such contravention - There is nothing on record to substantiate the claim that he was in-charge in relation to those functions and it was under his active and direct instruction that Mr. K.V. Vasantha Rao has committed such non-compliance or alleged evasion. In fact the department has not proposed any penal action in the SCN against Mr. K.V. Vasantha Rao even though he is the manager in the said company who is also covered within the provisions of section 78A. The Adjudicating Authority s reliance on the fact that Mr. K. Bhaskar Rao did not give any explanation or rebuttal to the charges leveled in itself cannot become a ground for sustaining the charges in SCN for imposition of penalty under section 78A - the imposition of penalty under section 78A on Mr. K. Bhaskar Rao is not tenable and is liable to be set aside. Conclusion - i) The invocation of extended period under proviso to section 73(1) was not justified and the appellant was entitled to the benefit of section 73(3). ii) The penalty under section 78 on the appellant and under section 78A on the director was set aside due to lack of evidence of culpable intent or knowledge. Appeal allowed in part.

Summary

The core legal questions considered by the Tribunal in this appeal are:

1. Whether the invocation of the extended period of limitation under the proviso to section 73(1) of the Finance Act, 1994, for recovery of service tax demand is justified in the facts of the case.

2. Whether the imposition of penalty under section 78 of the Finance Act, 1994, on the appellant company is sustainable, given that the service tax and interest were paid before issuance of the show cause notice (SCN).

3. Whether the penalty under section 78A of the Finance Act, 1994, on the director of the appellant company is justified based on the evidence on record.

4. The legal effect of delayed payment of service tax and delayed filing of returns, including the applicability of provisions for revised returns and payment of interest and late fees.

Issue 1: Justification for invocation of extended period under proviso to section 73(1)

The relevant legal framework includes section 73 of the Finance Act, 1994, which governs the recovery of service tax not paid or short paid. The proviso to section 73(1) allows for an extended period of limitation if there is evidence of fraud, collusion, willful misstatement, or suppression of facts with intent to evade payment of service tax. Section 73(3) provides immunity from penalty if the tax along with interest is paid before issuance of SCN, provided there is no suppression or fraud.

Precedents relied upon include judgments emphasizing strict construction of 'suppression' and 'intent to evade,' such as the Supreme Court's rulings in Continental Foundation Joint Venture and Uniworth Textiles, which hold that mere omission or delay without intent does not amount to suppression. The Tribunal also referred to decisions where penalty was set aside when dues were paid before SCN and no fraudulent intent was established.

The Adjudicating Authority had relied on case laws where extended period and penalties were upheld due to collection of service tax but failure to deposit it, and late filing of returns. However, the Tribunal found no evidence that the appellant had actually collected service tax from recipients and withheld it. The appellant admitted delayed payment and filing but had paid the entire tax and interest before SCN issuance.

The Tribunal noted that the appellant filed revised returns suo moto to correct errors and paid interest and late fees, which is permissible under Rule 7B and related provisions. The department failed to establish any fraudulent intent or willful suppression. The delay in payment and filing was held to be a curable omission under the statutory framework.

Therefore, the Tribunal concluded that invocation of the extended period under the proviso to section 73(1) was not justified, and the appellant was entitled to the benefit of section 73(3), which bars issuance of SCN and penalty if dues are paid before notice and no suppression is found.

Issue 2: Sustainability of penalty under section 78 on the appellant

Section 78 of the Finance Act, 1994, prescribes penalty equivalent to the amount of service tax evaded or short paid, where evasion is established. The imposition of penalty is contingent on proof of willful misstatement, suppression, or fraud.

The appellant did not dispute the demand of service tax or interest but contested the penalty. The Tribunal examined the facts that the appellant had paid nearly 40% of dues before summons and the balance along with interest before SCN. The appellant also filed revised returns correcting earlier errors voluntarily.

The Tribunal emphasized that mere delay or default in payment or filing does not amount to evasion or suppression unless accompanied by fraudulent intent. The department's assertion that payment was made only due to investigation was held to be a presumption unsupported by evidence, especially as substantial payments preceded the investigation.

Relying on case laws such as Tirupathi Fuels Pvt Ltd and Jwalla Security Force, the Tribunal underscored that penalty cannot be imposed where there is no deliberate evasion. The absence of evidence of collection of service tax and withholding thereof was a significant factor.

Consequently, the Tribunal set aside the penalty under section 78 imposed on the appellant, finding it unjustified in the absence of fraud or suppression.

Issue 3: Penalty under section 78A on the director of the appellant company

Section 78A enables imposition of penalty on directors or officers who are knowingly concerned with the contravention.

The Adjudicating Authority imposed penalty on the director based on statements of a senior manager, alleging that the director gave directions regarding payment and monitoring of service tax. However, the Tribunal found no direct evidence or statement indicating that the director knowingly directed non-payment or was actively involved in evasion.

The Tribunal noted that the manager, who was directly responsible, was not penalized, and the director's failure to rebut allegations was insufficient to sustain penalty. The absence of concrete proof of the director's culpability led the Tribunal to set aside the penalty under section 78A.

Issue 4: Legal effect of delayed payment and filing, and applicability of revised returns and interest

The Tribunal examined the statutory provisions under the Finance Act and Service Tax Rules, including Rule 7B (revised returns), Rule 7C (late filing with late fee), and section 75 (interest on delayed payment). These provisions allow an assessee to rectify errors or omissions by filing revised returns within prescribed timelines and paying applicable interest and late fees.

The appellant's conduct of filing revised returns and paying interest and late fees was held to be in consonance with these provisions. The Tribunal emphasized that treating every error or delay as suppression would negate these statutory safeguards.

The Tribunal also noted that the department's delay in issuing SCN after completion of reconciliation and payment further undermined the justification for invoking extended period and penalties.

Conclusions

The Tribunal concluded that the department failed to establish fraud, collusion, willful misstatement, or suppression with intent to evade service tax. The appellant's delayed payment and filing were curable defaults under the Finance Act and Rules, for which penalty is not warranted.

The invocation of extended period under proviso to section 73(1) was not justified, and the appellant was entitled to the benefit of section 73(3).

The penalty under section 78 on the appellant and under section 78A on the director was set aside due to lack of evidence of culpable intent or knowledge.

The Tribunal observed: "The term suppression used under proviso to section 11A has to be construed strictly. Mere omission to give correct information is not suppression of facts unless it is deliberate to stop payment of duty."

It was further noted: "Merely because appellant is not challenging extended period it cannot be said that they have admitted suppression of facts."

And: "Once there is no element of willful misstatement, fraud, collusion, etc., obviously in the given factual matrix, section 73(3) would have been available and that there was no need for issuing any SCN."

The appeals were allowed partly, modifying the impugned order to the extent of setting aside penalties under sections 78 and 78A, while sustaining the confirmed demand and interest.