WHETHER THE ASSESSEE HAVING BEEN DECLARED A SICK COMPANY BY BIFR SHOULD BE EXONERATED FROM PENAL LIABILITY UNDER SEC. 80 OF FINANCE ACT, 1994 (Service Tax)?

[Mr. M. GOVINDARAJAN]

     Sec. 76 of the Finance Act, 1994 (hereinafter referred to as 'Act') provides that any person liable to pay service tax in accordance with the provisions of Sec. 68 or the rules who fails to pay such tax shall pay, in addition to such tax and 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 which such failure continues or at the rate of two per cent 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.

     Sec. 77 of the Act provides that whoever contravenes any of the provisions of Chapter V of the Act or any rule made there under for which no penalty is separately provided shall be liable to a penalty which may extend to an amount not exceeding one thousand rupees.

     Sec. 80 of the Act provides that notwithstanding anything contained in the provisions of Sec. 76, 77 or 78, no penalty shall be imposable on the assessee for any failure referred to in the said provisions if the assessee proves that there was reasonable cause for the said failure.

     The answer for the question referred to in the topic is provided by the Chennai Tribunal in 'Ramanasekar Steels Limited V. Commissioner of Central Excise, Chennai' - 2008 -TMI - 2781 - CESTAT, CHENNAI    

       The appellants were working as consignment agents paid the service tax for the period from April 2002 to March 2003 belatedly.   The lower authorities ordered levy of interest on the tax amount and have also imposed penalties of two hundred rupees per day under Sec. 76 of the Act and one thousand rupees under Sec. 77 of the Act.   The appellants paid the interest also.   In the present appeal their only grievance is against the penalties.

     The arguments put forth by the appellants are:

The company had instituted proceedings before the Board for Industrial and Financial Reconstruction (BIFR for short) under Sick Industrial Companies (Special Provisions) Act, 1985 (SICA for short) in the year 2001 and that the Board declared them sick under Sec. 3(1)(o) of SICA as on 31.12.2000 as per order dated 19.2.2002;

·  The factum of the company having been decided such as on a date prior to the period of dispute is a 'reasonable cause' under Sec. 80 of the Act for any penalty not imposed on the assessee under any of the penal provisions viz., Sec. 76, 77 and 78 of the Act.

The Department put forth the following arguments:

Any person who is liable to pay service tax but defaults it is liable to pay penalty under Sec. 76;

·  Similarly he is also liable to pay penalty under Sec. 77 upon his failure to file returns;

·  The liabilities would not be affected in any way by financial constraints;

·  Financial constraints would not constitute 'reasonable cause' under Sec. 80 of the Act.

In support of their arguments, the Department relief on the following decisions of Chennai tribunal:

Sree Vadivambigai Textiles Mills Ltd., V. Commissioner of Central Excise, Madurai - 2005 -TMI - 196 - CESTAT (CHENNAI) ;

·  Inma International Security Agency (P) Ltd., V. Commissioner of Central Excise, Chennai - 2005 -TMI - 203 - CESTAT (CHENNAI)

In 'Sree Vadivambigai Textiles Mills Ltd.,' case (supra) the appellant contended that the company was declared by BIFR as early as in 1999 and therefore leniency should be shown to them in the matter of interest.   The tribunal held that they did not find any scope for leniency in the matter of levy of service tax inasmuch as the provisions are couched in mandatory language.  Appellants have no case for leniency in demand of interest.

     In 'Inma International Security Agency (P) Ltd.,' case (supra) a penalty imposed under Sec. 76 of the Act was reduced in the facts and circumstances of the case and a penalty imposed under Sec.77 was sustained.

     The tribunal after giving careful considerations noted that the question whether the assessee having been declared a sick industry by BIFR should be exonerated from penal liability was not before the Tribunal in the case of 'Sree Vadivambigai Textiles Mills Ltd.,' in which the question was whether the Revenue should be lenient towards such an industry demanding interest on belated payment of service tax.   Neither of the questions arose in the case of 'Inma International Security Agency (P) Ltd.,' (supra) wherein Sec. 77 penalty was sustained and Sec. 76 penalty was reduced.   Therefore the case laws cited by the department did not advance the Revenue's case.

     The tribunal analyzed the provisions of Sec. 76, 77 and 80 of the Act.  For getting exonerated from penal liability under Sec.76 and 77 the assessee must prove that he had reasonable cause for committing the default which in relation to Sec. 76 is having delayed payment of service tax and in relation to Sec. 77 is having failed to file service tax returns.

     Filing of service tax return does not require money.   It is a statutory liability that every person liable to pay service tax is required to discharge. The appellants have not pleaded their ignorance of liability to pay service tax.   If that be so, they were aware of their statutory liability to pay the service tax and file return.   In so far as non filing of return is concerned the tribunal held that there can be no excuse based on financial constraints.   Therefore the question of not imposing penalty of Rs.1000/- under Sec. 77 of the Act on the appellants for their failure to file service tax return is ruled out.

     The payment of service tax requires money.   The company was declared sick with effect from 31.12.2000 by BIFR.   Apparently during the period of dispute the company was sick in terms of Sec. 3(1)(o) of SICA.   The service tax payments during the period happened to be delayed on account of his precarious conditions of the company.   Sec. 80 of the Act says that where a person liable to pay service tax proves that he failed to pay service tax for a certain period for sufficient cause, he shall  be exonerated from penalty under Sec.76.   In the present case the order of BIFR constitutes proof of the sickness of the company in terms of Sec. 3(1)(o) of SICA for the period of dispute (2002-03) and therefore it has to be held that sufficient cause had been shown by the appellants for not having been able to pay service tax in time.   In the result, the appellants are entitled to the benefit of Sec. 80 of the Act.   The tribunal set aside the penalty under Sec. 76 and confirmed the penalty under Sec.77.