SERVICE TAX - NO PENALTY IF REASONABLE CAUSE EXISTS

[Dr. Sanjiv Agarwal]

Penalty not to be imposed in certain cases (Section 80)

According to Section 80, no penalty under Section 76, 77 or 78 can be imposed if the assessee proves that there was a reasonable cause for default or failure under these sections.

This Section provides relief to an assessee from imposition of penalty under Sections 76, 77 or 78, if the assessee is able to prove that failure on his part to collect or pay Service Tax or to furnish prescribed return or suppressing or furnishing inaccurate value of taxable service was not intentional and that there was reasonable cause for such failure. The onus of proof would lie on the assessee. Reasonable cause would depend upon circumstances of each case and would necessarily have to be logical and in ordinary course.

Assistant or Deputy Commissioner of Central Excise would have the final decision on reasonability of cause as to whether the cause is reasonable or not.

A penalty provision in any taxing statute may not attract the rule of prescription of mens rea. Also, a provision to impose penalty does not necessarily covers that penalty must be imposed in all cases. Penalty provisions should not be equated to criminal statute which require the element of mens rea. It is sufficient to prove that a defaulter offence of non-compliance has occurred. Penalty for civil defaults (like taxes) does not generally attract the provision that mens rea must be established before a penalty could be imposed.

Reasonable Cause

Though reasonable cause has not been defined, it has been interpreted by various courts. In Municipal Corporation of Delhi v. Jagannath Ashok Kumar, (1987) AIR 2316 (Supreme Court), Apex Court observed that the reasons given by the Arbitrator are cogent and based on materials on record. Stroud's Judicial Dictionary, Fourth Edition, page 2258 states that it would be unreasonable to expect an exact definition of the work 'reasonable'. Reason varies in its conclusions according to the idiosyncrasy of the individual, and the time and circumstance in which he thinks. The reasoning which built up the old scholastic logic, sounds now like the jingling of a child's toy. But mankind must be satisfied with the reasonableness within reach; and in cases not covered by authority, the verdict of a jury or the decision of a judge sitting as a jury usually determines what is 'reasonable', has in law the prima facie meaning of reasonable in regard to those circumstances of which the actor, called on to act reasonably, knows or ought to know.

In Commissioner of Wealth Tax v. Jagdish Prasad Choudhary, (1996) AIR 58 (Patna), it was held that the context of penalty provision, the word, 'reasonable cause' would mean a cause which is beyond the control of the assessee. 'Reasonable cause' obviously means a cause which prevents a reasonable man of an ordinary prudence acting under normal circumstances, without negligence or inaction or want of bona fide from furnishing the return in time.

In Gujarat Water Supply & Sewerage Board v. Unique Erectors (Gujarat) Pvt. Ltd. (1989) AIR 973 (Supreme Court), it was held that it is difficult to give an exact definition of the word, 'reasonable'. Reason varies in its conclusions according to the idiosyncrasy of the individual and the times and the circumstances of which the actor, called upon to act reasonably, knows or ought to know.

In yet another case of S. Raghbir Singh Sandhawalia v. CIT (1958) AIR 250, (Punjab), it was held that the expression, 'reasonable' means 'rational according to the dictates of reason and not excessive, or immoderate'. An act is reasonable when it is comfortable or agreeable to reasons, having regard to the facts of the particular controversy.

In Ram Krishna Travels Pvt. Ltd. v. CCE, Vadodara, [2007 -TMI - 977 - CESTAT, MUMBAI] it was held that bonafide belief is a reasonable cause under section 80 and as such, penalty was set aside following ETA Engineering Ltd. v. CCE [2005 -TMI - 165 - CESTAT, NEW DELHI].

Reasonable cause to exist

It is necessary that a reasonable cause must exist. In Santosh Travels Vellas Pvt. Ltd. v. CCE, Mumbai-I [2005 -TMI - 59 - CEGAT, MUMBAI], penalty was neither reduced nor waived nor condoned when the assessee did not paid the Service Tax on the belief that the Government would not continue with the Service Tax on manpower recruitment agencies as was the case with goods transport operators. In Surat Municipal Corporation v. CCE, Surat [2006 -TMI - 622 - CESTAT, NEW DELHI], penalty for failure to pay service tax was set aside on the ground that appellant was a Government body and was under a bonafide belief that it was not liable to pay service tax on let out of halls and stadiums for official or social functions.

Section 80 provides notwithstanding anything contained in sections 76, 77, 78 or 79; no penalty shall be imposable on assessee for any failure referred to in the said provisions if assessee proves that there was reasonable cause for said failure. [CCE, Meerut-II v. On Dot Couriers & Cargo Ltd. (2006) 6 STJ 337 (CESTAT, New Delhi)]

Delay in depositing the service tax due to delay in receiving the tax from recipient has been held to be a reasonable cause and penalty under section 76 was set aside. [Splendor Security Services Pvt. Ltd. v. CCE, New Delhi (2006) 7 STJ 93 (CESTAT, New Delhi)]

The Tribunal in the case of Smitha Shetty & Co. v. CCE, Bangalore [2005 -TMI - 102 - CESTAT, BANGLORE] has held that when the service provider has acted bona fide even the minimum penalty shall not be levied. This decision was later relied upon in the case of CCE v. Impress Ad-aids & Displays [2005 -TMI - 159 - CESTAT, BANGLORE].

No penalty when reasonable cause proved

In CCE, Bhubaneswar - II v. Tyazhpromexport [2005 -TMI - 108 - CESTAT, KOLKATA], it has been held that there cannot be an intention to evade Service Tax by a non-resident foreign company which is under the direct control of the Ministry for Economic Affairs and Trade of Russian Federation. It has been held that when under a contract, taxes payable in India were to be borne by the Indian company and when there was some dispute regarding the payment of tax on the services which were being provided and when the matter was resolved, immediately the tax was paid with interest, there was a reasonable cause under Section 80 for failure to deposit Service Tax and penalty was not imposable.

In Sieger Spintech Equipments Pvt. Ltd. v. CCE, Coimbatore, [2006 -TMI - 685 - Appellate Tribunal, Chennai], where assessee had paid entire amount of service tax along with interest prior to issue of show cause notice, penalty imposed under section 76 was set aside.

To sum up, it can be said that assessee shall get the benefit of section 80 provisions, if either  the reasonable cause exists or the reasonable cause is proved .