2025 (5) TMI 70 - AT - Service Tax

Demand of service tax along with penalty imposed under Section 78 of the Finance Act 1994 - differential value of services - Value of Sale of Services as declared in Income Tax returns - taxable value of services declared in the ST-3 returns filed with the Service Tax Department - exemption for supply of Maintenance and Repair Service of a vessel pertaining Naval Dockyard as SEZ - HELD THAT - Firstly the original authority did not take into account the various details already filed by the appellants in the periodic ST-3 returns and therefore the demand had come down upon examination of the details at the stage of adjudication from Rs. Rs.1, 04, 09, 610/- to Rs. 6, 27, 128/-. Further such confirmed amount of service tax upon proper determination of the applicable rates of service tax during the disputed period and also on examination of the merits of the service tax exemption notification applicable in the case of appellants had further been reduced to Rs.1, 82, 290/- by the learned Commissioner (Appeals). Therefore the aforesaid instructions of the CBIC that firstly the SCN should be issued after proper verification of the facts and if this has not been done then the adjudicating authorities are expected to pass a judicious order after proper appreciation of the facts and details submitted by the appellants squarely applies to this case. Thus the provision of imposition of penalty under Section 78(1) ibid is not legally feasible in the absence of any specific grounds for suppression fraud etc. and the same cannot stand the scrutiny of law. Therefore the appeal filed by the appellants is allowed by partially modifying the impugned order to the extent of setting aside the portion of the order which has confirmed the penalty under Section 78(1) of the Finance Act 1994 for an amount of Rs.1, 82, 290/-.

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal are:

(i) Whether penalty under Section 78(1) of the Finance Act, 1994 is imposable on the appellants for alleged short payment of service tax;

(ii) Whether the impugned order imposing such penalty is legally sustainable in the facts and circumstances of the case.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (i): Imposability of penalty under Section 78(1) of the Finance Act, 1994

Relevant legal framework and precedents: Section 78(1) of the Finance Act, 1994 prescribes penalty equal to 100% of the service tax amount where service tax has not been levied or paid or short-paid due to fraud, collusion, willful mis-statement, suppression of facts, or contravention of any provisions with intent to evade payment. The section also provides for reduced penalties in certain cases, depending on timing and compliance.

Court's interpretation and reasoning: The Tribunal noted that the entire proceedings originated on the basis of third-party data from the Income Tax Department comparing declared sale of services in Income Tax returns and Service Tax ST-3 returns. The Department initially alleged a short payment of service tax of over Rs. 1 crore, but on adjudication, the demand was drastically reduced to Rs. 6,27,128/- and subsequently to Rs. 1,82,290/- after considering applicable exemptions and correct tax rates.

The Tribunal emphasized that there was no allegation or finding of fraud, collusion, willful mis-statement, or suppression of facts by the appellants. The appellants had filed periodic ST-3 returns and provided all necessary details to the authorities. The Tribunal observed that the tax demand arose from differences in data but was ultimately reconciled and paid along with interest. The appellants even paid interest and the tax amount within 30 days of the corrigendum.

Key evidence and findings: The appellants produced a work order from the service recipient specifying the taxable portion of the contract value and demonstrated payment of service tax and interest accordingly. The authorities confirmed that the tax liability was properly discharged. The appellants' records and returns were consistent and furnished in good faith.

Application of law to facts: Since Section 78(1) penalty applies only where there is fraud, collusion, willful mis-statement, or suppression of facts with intent to evade tax, and none of these elements were found or even alleged, imposition of penalty was not justified.

Treatment of competing arguments: The Department's reliance on data mismatch was countered by the appellants' detailed explanations, documentary evidence, and compliance with payment obligations. The Tribunal found that the Department did not establish any malafide intent or concealment by the appellants.

Conclusion: Penalty under Section 78(1) is not imposable in the absence of any specific grounds of fraud, collusion, or suppression of facts.

Issue (ii): Legal sustainability of the impugned order imposing penalty

Relevant legal framework and precedents: The Tribunal referred to the instructions issued by the Central Board of Indirect Taxes and Customs (CBIC) dated 26.10.2021, which caution against indiscriminate issuance of Show Cause Notices (SCNs) based solely on differences between Income Tax Return (ITR) data and Service Tax returns. The instructions emphasize proper verification, seeking reconciliation statements, and consideration of exemptions or negative list services before issuing demands.

Court's interpretation and reasoning: The Tribunal noted that the SCN in the present case was issued prior to the CBIC instructions but the principles therein squarely apply. The original authority did not initially consider the details already filed by the appellants, leading to an inflated demand. However, upon adjudication and appeal, the demand was substantially reduced after proper verification of facts, applicable exemption notifications, and correct tax rates.

The Tribunal held that the adjudicating authorities are expected to pass judicious orders after proper appreciation of facts and submissions. The impugned order confirming penalty failed to meet this standard as it did not find any suppression or intent to evade tax, which is a precondition for penalty under Section 78(1).

Key evidence and findings: The Tribunal relied on the procedural history showing progressive reduction of demand and acceptance of exemption claims. The appellants' compliance and cooperation were evident from the records.

Application of law to facts: The Tribunal applied the CBIC instructions and the statutory provisions to conclude that penalty imposition without proof of culpable intent or suppression is not sustainable.

Treatment of competing arguments: The Department's contention of short payment based on data mismatch was outweighed by the appellants' documentary evidence and the absence of any malafide conduct. The Tribunal gave precedence to the principle of natural justice and fair adjudication.

Conclusion: The impugned order imposing penalty under Section 78(1) is not legally sustainable and is liable to be set aside.

3. SIGNIFICANT HOLDINGS

The Tribunal held:

"From plain reading of the above legal provisions, it transpires that in case of fraud, collusion, willful mis-statement or suppression of facts or any other contravention of any of the provision of Service Tax statute, then such a person is liable to pay service tax arising on account of such occasions and is also liable to a penalty, which is equal to the amount of service tax so evaded."

"It is not the case of the Department that the appellants have not filed the periodic ST-3 returns. In fact, on careful examination... the actual tax paid in respect of taxable services were confirmed by the Department and they were satisfied that the entire service tax liability has been properly paid by the appellants."

"All necessary details were provided to both the authorities below for adjudication of the case by the appellants and there was no case of any suppression of facts with an intent to evade the payment of service tax or for violation of any of the legal provisions of Service Tax statute."

"Instructions of the Board to issue show cause notices based on the difference in ITR-TDS data and service tax returns only after proper verification of facts, may be followed diligently... adjudicating authorities are expected to pass a judicious order after proper appreciation of facts and submission of the noticee."

"In the above factual matrix of the case, I find that the provision of imposition of penalty under Section 78(1) ibid is not legally feasible in the absence of any specific grounds for suppression, fraud etc., and the same cannot stand the scrutiny of law."

Final determination: The appeal is allowed by partially modifying the impugned order to the extent of setting aside the penalty under Section 78(1) of the Finance Act, 1994 amounting to Rs.1,82,290/-.

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