NO PENALTY IS IMPOSABLE IF SERVICE TAX DUE ALONG WITH INTEREST IS PAID BEFORE ISSUE OF SHOW CAUSE NOTICE

[Mr. M. GOVINDARAJAN]

        Sec. 68 of the Finance Act, 1994 (hereinafter referred to as 'Act') provides that every person providing taxable service to any person shall pay service tax at the rate specified in Sec. 66 in such manner and within such period as may be prescribed.   Sec. 73 empowers the Central Excise Officers for the recovery of service tax not levied or paid by issuing show cause notice, within one year from the relevant date, to the concerned person why he should not pay the amount specified in the notice.  Sec. 73A requires that service tax collected from any person to be deposited with Central Government.

        Sec. 75 provides that interest on delayed payment of service tax who fails to credit the tax to the account of the Central Government within the prescribed period at such date as is fixed for the time being by the Central Government.   Sec. 76 provides penalty for failure to pay service tax.  According to Sec. 76 any person, liable to pay service tax in accordance with the provisions of Sec. 68 or the rules made there under, who fails to pay such tax, shall pay in addition to such tax and the interest on that tax amount in accordance with the provisions of Sec. 75 a penalty which shall not be less than two hundred rupees for every day during such failure continues or at the rate of two percent of such tax per month whichever is higher, starting with the first day after the due date till the date of actual payment of the outstanding amount of service tax.   The total amount of the penalty payable shall not exceed the service tax payable.

        The question arised is whether penalty is imposable if service tax due along with the interest is paid before issue of show cause notice.

        Many a case has been decided for the above question by the tribunals in favor of the assessees.  In this article three case laws as detailed below are taken for discussion:

Tidewater Shipping Private Limited V. Commissioner of Service Tax, Bangalore 2008 -TMI - 3793 - CESTAT, BANGALORE;

·  Darmanian Enterprises V. Commissioner of Central Excise, Jhalandar 2008 -TMI - 30181 - CESTAT, NEW DELHI;

·  Commissioner of Central Excise, Chandigarh V. S.S. Electronics 2008 (11) STR 526 (Tri. Del)

In 'Tidewater Shipping Private Limited" (Supra) the appellants paid the entire amount of service tax with interest even before the show cause notice.   The Revenue proceeded against them by way of issue of show cause notice.   The lower authorities took a view that as the appellants have discharged the duty liability much before the issue of show cause notice there was no need to impose any penalty.   Therefore, using the discretion under Sec. 80 of the Act the lower authorities did not proceed to impose any penalties on them.   On reviewing the orders passed by the Original Authority, the Revisionary Authority, viz., the Commissioner proceeded against the appellants and imposed penalties.

        It was contended on the part of the appellants that there are number of case laws which hold that when the duty and the interest are paid much before the issue of show cause notice, there is no need for imposition or any penalty.   On the other hand the Revenue contended that it could not be said that the appellants were under bona fide belief for non payment of service tax.  There is actually suppression of facts in order to evade the tax.   Therefore the appellants are liable for penalty.

        The tribunal found that due to bona fide belief the appellants did not discharge the service tax liability in time.  But as soon as the lapse was pointed out by the departmental authorities, they remitted service tax much before the issue of show cause notice.   The tribunal itself has held in number of cases that if duty is paid before the issue of show cause notice, no interest and penalty can be levied.   In the present case it is seen that even the interest which is due from the appellants has been paid.   Sec. 73(3) of the Act and a Board's Circular based on that provides that if the assessee cleared the service tax due along with interest on his own and even on the insistence of the departmental authority, then no penalty proceedings can be taken against them.   In other words, all the proceedings against the appellants will be deemed to have been concluded.   The tribunal allowed the appeal and set aside the impugned order.

        In "Darmanian Enterprises" (Supra) the appellants are appointed as distributors in terms of agreement dated 9.2.2004 for the marketing of 'Spice post paid products'.   They have received commissions for the services rendered during the period from February 2004 to February 2005.   There was a communication from the Central Excise Authorities in February 2005 and immediately thereafter they have registered themselves and paid the service tax involved along with interest.   The original authority taking the entire back ground into account confirmed the service tax and interest but invoked the provisions of Sec. 80 of the Act and accordingly imposed nominal penalties.

        Commissioner in exercise of his revision powers in terms of Se. 84 of the Act issued notice and passed orders in revision imposing enhanced penalty. 

        The appellants in this appeal submitted that the appellants are from rural area and they are not much educated and they were not aware of the provisions of service tax laws.   They were also not informed about the service tax liability by M/s Spice Telecom whose products they were selling.   As soon as the Central Excise Authorities informed them about the service tax liability, they immediately took out the registration and paid the duty and interest. 

        The tribunal considered the submissions from both side and perused the order in revision.   No ground adduced and no evidence has been relied upon to come to a conclusion different from the one taken by the original authority.   The tribunal opined that the leniency shown by the original authority in terms of Sec. 80of the Act is reasonable and does not required to be interfered with.  The tribunal set aside the orders of the Commissioner (Appeals) restoring the order of original authority.

        In 'S.S. Electronics' case (Supra) the Revenue file appeal against the order of the Commissioner (Appeals) whereby penalty under Sec.76 of the Act was set aside on the ground that the respondent deposited the tax before the issue of show cause notice.   The contention of the assessee is that their business is located in the remote area of Himachal Pradesh and they have deposited the tax as soon as it came to their knowledge.  The tribunal found that the Commissioner (Appeals) dropped the penal provisions without considering the facts of the case in proper manner.  The tribunal held that penalty under Sec. 76 of the Act cannot be set aside merely on the ground deposited the tax before the issue of show cause notice.  The matter is remanded back to the Commissioner (Appeal) to consider the facts of the case.

        In the above three cases the assessees paid the service tax and interest before issue of show cause notice.   In the first case the penalty imposed by Commissioner in his revisionary power has been set aside.   In the second case for the same situation the original authority imposed a lesser penalty which was enhanced by Commissioner.   But the tribunal restores the original authority upholding the penalty imposed by the original authority.   In the third case the tribunal is not satisfied in non imposing of penalty and remanded the case.

        From the facts of above three cases that it is not a blanket rules that penalty may not be imposed if the service tax and interest is paid before the issue of show cause notice.   The intention of the service tax provider is also considered by the tribunals.   Therefore the service providers are to be aware of the provisions of payment of service tax, filing of returns etc., and act accordingly to avoid show cause notices, litigations etc.,