2025 (6) TMI 1012 - AT - Service Tax

Quantum of penalty - prayer to reduce penalty to 25% of the amount of demand confirmed - HELD THAT - A perusal of 2nd proviso to Section 78 of Finance Act makes it abundantly clear that for penalty to be reduced to 25% the requirement is that the proposed/confirmed amount of service tax should have been paid along with the interest within the period of 30 days of the serving of show cause notice or of the date of receipt of the order confirming the demand. In the present case apparently and admittedly the amount of Rs. 9, 88, 319/- out of the total demand of service tax of Rs. 11, 16, 723/- was paid by the appellant along with interest even prior the issuance of the show cause notice. Hence the SCN proposing the demand including the amount already paid was actually not sustainable. The proposal confirmed by the original adjudicating authority has accordingly been rightly modified by Commissioner (Appeals) confining the demand to the balance amount of Rs. 1, 28, 404/-. It is also an admitted and apparent fact that the said amount has not been disputed to be the liability of the appellant. The said amount also stands was paid by the appellant along with the interest and even with the amount of penalty of Rs. 32, 101/-/A 25% within 30 days of the order confirming the said demand - the amount of penalty was not required to be paid at the time of making the payment of the amount of demand confirmed except that the amount of proportionate interest was to be paid. Since the duty as well as interest and even penalty were paid by the appellant during the period prescribed under Proviso (ii) of Section 78 of the Finance Act 1994. There are no reason that the appellant should be denied the benefit of the said proviso. Conclusion - The 25% of the demand confirmed should only be imposed as penalty on the appellant. The appeal stands partly allowed.

Summary

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

1. Whether the penalty imposed on the appellant under Section 78 of the Finance Act, 1994, can be reduced to 25% of the confirmed demand amount, given the payment timeline and conditions stipulated in the provisos to the said section.

2. Whether the demand confirmed by the original adjudicating authority, which included an amount already paid by the appellant prior to issuance of the show cause notice, was sustainable.

3. The applicability and interpretation of the provisos to Section 78 regarding the reduction of penalty contingent upon payment of service tax, interest, and penalty within prescribed timelines.

Issue-wise Detailed Analysis

Issue 1: Applicability of reduced penalty under Section 78 of the Finance Act, 1994

The relevant legal framework is Section 78 of the Finance Act, 1994, which governs the imposition of penalty for non-payment or short payment of service tax. The section includes provisos that provide for reduction of penalty to 15% or 25% of the service tax amount, subject to timely payment of service tax, interest, and penalty within specified periods.

The Tribunal examined the second proviso to Section 78, which states that a 25% penalty is payable if the service tax amount determined by the Central Excise Officer is paid along with interest within 30 days of receipt of the order confirming the amount. The proviso further clarifies that the benefit of reduced penalty is contingent on payment of the reduced penalty itself within the same period.

The appellant argued that since the confirmed demand was Rs. 1,28,404/-, the penalty should be reduced to 25% of this amount as per the proviso. The Department contended that the penalty was rightly imposed at the full amount because the penalty was not paid along with the service tax and interest within the stipulated timeline.

The Tribunal's interpretation emphasized that the reduced penalty is available only if the service tax and interest are paid within 30 days of the order confirming the demand, and the reduced penalty amount is also paid within that period. The appellant had paid the confirmed amount along with interest and the penalty within the prescribed period, satisfying the conditions for reduced penalty.

Thus, the Tribunal applied the law to the facts, holding that the appellant was entitled to the benefit of the reduced penalty of 25% of the confirmed demand amount.

Issue 2: Sustainability of demand including amount already paid prior to show cause notice

The Department's demand was based on a discrepancy between the value declared in the appellant's Form 26AS and the ST-3 returns for the financial year 2015-16. The Show Cause Notice proposed recovery of Rs. 11,16,723/- along with interest and penalties.

It was undisputed that the appellant had already paid Rs. 9,88,319/- of the alleged demand along with interest before issuance of the show cause notice. The Commissioner (Appeals) accordingly restricted the confirmed demand to the balance amount of Rs. 1,28,404/-.

The Tribunal agreed with the Commissioner (Appeals) that the demand including the amount already paid was unsustainable, as the payment had been made prior to initiation of proceedings. Therefore, the demand was rightly confined to the outstanding balance.

Issue 3: Interpretation of provisos to Section 78 and their application

The Tribunal carefully analyzed the language of the provisos to Section 78, particularly the second proviso, which provides for reduced penalty if payments are made within 30 days of receipt of the order confirming the service tax amount.

The Tribunal noted that the appellant's payment of service tax, interest, and penalty was made within the prescribed period, fulfilling the conditions for penalty reduction. The Department's contention that the penalty was not paid along with the service tax and interest was addressed by clarifying that the penalty payment is required within the 30-day period post-order receipt, not necessarily simultaneously with the tax and interest.

Thus, the Tribunal held that the appellant was entitled to the reduced penalty benefit under the proviso, modifying the Commissioner (Appeals) order accordingly.

Significant Holdings

The Tribunal held:

"A perusal makes it abundantly clear that for penalty to be reduced to 25% the requirement is that the proposed/confirmed amount of service tax should have been paid along with the interest within the period of 30 days of the serving of show cause notice or of the date of receipt of the order confirming the demand."

"Since the duty as well as interest and even penalty were paid by the appellant during the period prescribed under Proviso (ii) of Section 78 of the Finance Act, 1994, I find no reason that the appellant should be denied the benefit of the said proviso."

"The show cause notice proposing the demand including the amount already paid was actually not sustainable. The proposal confirmed by the original adjudicating authority has accordingly been rightly modified by Commissioner (Appeals) confining the demand to the balance amount of Rs. 1,28,404/-."

Core principles established include:

• The penalty under Section 78 can be reduced to 25% if the service tax, interest, and penalty are paid within 30 days of receipt of the order confirming the demand.
• Payments made prior to issuance of show cause notice must be accounted for, and demands including such amounts are unsustainable.
• The timing and sequence of payments are critical for determining eligibility for reduced penalty, but simultaneous payment of penalty with tax and interest is not mandatory so long as all are paid within the stipulated period.

Final determinations:

• The demand was restricted to the unpaid balance of Rs. 1,28,404/- as the rest was paid prior to show cause notice.
• The penalty imposed was modified to 25% of the confirmed demand amount, consistent with the proviso to Section 78.
• The appeal was partly allowed accordingly.