2025 (6) TMI 1355 - AT - Service Tax

Levy of penalty - appellant submits that since they have collected the amount and paid the entire amount with interest before issuance of show-cause notice penalty needs to be set aside - invocation of extended period of limitation - HELD THAT - The issue is no more res integra. The Hon ble High Court of Karnataka in the matter of CCE ST LTU Bangalore vs. Adecco Flexione 2011 (9) TMI 114 - KARNATAKA HIGH COURT considering the issue held that The assessee has paid both the service tax and interest for delayed payments before issue of show cause notice under the Act. Sub-sec. (3) of Section 73 of the Finance Act 1994 categorically states after the payment of service tax and interest is made and the said information is furnished to the authorities then the authorities shall not serve any notice under sub-sec. (1) in respect of the amount so paid. Therefore authorities have no authority to initiate proceedings for recovery of penalty under Sec. 76 of the Act. Conclusion - Considering the fact that the appellant had paid entire service tax along with interest before issuance of show-cause notice issue of show-cause notice itself is unsustainable. Since the appellant has not disputed the issue on merits accordingly demand confirmed by the adjudicating authority is upheld and the penalty imposed on the appellant under Section 78 of the Finance Act 1994 is unsustainable and the impugned order is modified only to the extent of setting aside penalty imposed on the appellant under Section 78. Appeal allowed in part.

Summary

1. ISSUES PRESENTED and CONSIDERED

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

• Whether the extended period of limitation for recovery of service tax could be invoked in the facts of the case.
• Whether the penalty imposed under Section 78 of the Finance Act, 1994 is sustainable, given that the appellant had paid the service tax and interest prior to issuance of the show-cause notice.
• Whether the adjudicating authority was justified in confirming the demand of service tax along with penalty and appropriating amounts paid through cenvat credit.
• Whether the Tribunal has the power under Section 80 of the Finance Act, 1994 to drop or reduce the penalty even without a specific prayer for such relief.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Invoking Extended Period of Limitation for Recovery of Service Tax

Relevant legal framework and precedents: Section 73 of the Finance Act, 1994 governs the recovery of service tax and prescribes limitation periods. Sub-section (3) of Section 73 states that once the service tax and interest have been paid and information furnished to the authorities, no notice under sub-section (1) shall be served for the amount so paid. The Hon'ble High Court of Karnataka in CCE & ST, LTU, Bangalore vs. Adecco Flexione Workforce Solutions Ltd. (2012 (26) STR 3 (Kar.)) held that if the service tax and interest are paid before issuance of the show-cause notice, authorities lack jurisdiction to initiate proceedings under Section 73(1).

Court's interpretation and reasoning: The Tribunal observed that the appellant had paid the entire service tax liability along with interest before the issuance of the show-cause notice dated 18.08.2010. Therefore, the initiation of proceedings invoking the extended period of limitation was not sustainable as per the statutory bar under Section 73(3). The Tribunal relied heavily on the precedent from the High Court of Karnataka, which categorically states that no notice can be issued once payment and information are furnished prior to notice.

Key evidence and findings: The appellant submitted audited balance sheets and remitted service tax from April 2008 to March 2009 on various dates up to 24.10.2009, along with filing ST-3 returns for the relevant half-years. Interest on delayed payment was also paid. These facts were undisputed.

Application of law to facts: Since the appellant complied with payment and filing before the show-cause notice, the extended limitation period could not be invoked. The Tribunal upheld the demand confirmed by the adjudicating authority but found the initiation of proceedings under extended limitation unsustainable.

Treatment of competing arguments: The Revenue contended that the appellant had collected service tax but paid belatedly, justifying penalty and extended limitation invocation. The Tribunal, however, found that payment with interest before notice barred such proceedings.

Conclusions: The extended period of limitation could not be invoked as the appellant had paid service tax and interest before issuance of the show-cause notice, rendering the initiation of proceedings under Section 73(1) invalid.

Issue 2: Sustainability of Penalty Imposed under Section 78 of the Finance Act, 1994

Relevant legal framework and precedents: Section 78 of the Finance Act, 1994 empowers imposition of penalty for failure to pay service tax. Section 80 allows the adjudicating authority or Tribunal to reduce or drop penalty. The decision of the Hon'ble High Court of Madras in CCE vs. Lawson Travel and Tours (I) Pvt. Ltd. (2015 (38) STR 227) and the Karnataka High Court in Adecco Flexione (supra) were cited, which held that penalty cannot be imposed where service tax and interest have been paid before issuance of notice.

Court's interpretation and reasoning: The Tribunal accepted the appellant's submission that the entire service tax and interest were paid before the show-cause notice. It held that issuance of the show-cause notice itself was unsustainable, and consequently, penalty under Section 78 could not be imposed. The Tribunal further noted that even without an amended prayer, it had the power under Section 80 to drop the penalty.

Key evidence and findings: Payment records, audited financials, and ST-3 returns demonstrated compliance by the appellant prior to the show-cause notice. The appellant also paid interest on delayed payments, indicating no willful evasion.

Application of law to facts: The law bars penalty imposition where tax and interest are paid before notice. The Tribunal applied this principle, setting aside the penalty imposed by the adjudicating authority.

Treatment of competing arguments: Revenue argued that delayed payment warranted penalty. The Tribunal distinguished this by emphasizing that payment was made before the show-cause notice, which precludes penalty under the statutory scheme.

Conclusions: Penalty under Section 78 was held unsustainable and was set aside by the Tribunal.

Issue 3: Appropriation of Service Tax Paid and Cenvat Credit

Relevant legal framework: The adjudicating authority confirmed a demand of Rs.82,27,883/-, appropriating Rs.74,54,143/- paid by the appellant and Rs.7,73,739/- through cenvat credit. The Finance Act and Cenvat Credit Rules regulate such appropriations.

Court's interpretation and reasoning: The Tribunal did not specifically overturn the demand confirmed by the adjudicating authority. Since the appellant did not dispute the demand on merits and had paid the amounts, the Tribunal upheld the demand but modified the order only to the extent of penalty.

Key evidence and findings: Payment records and returns filed by the appellant substantiated the amounts appropriated.

Application of law to facts: The demand was confirmed and upheld as the appellant had not challenged it substantively.

Treatment of competing arguments: No significant contest on the demand amount was recorded.

Conclusions: Demand of service tax and appropriated amounts were upheld.

Issue 4: Tribunal's Power to Drop Penalty under Section 80 of the Finance Act, 1994

Relevant legal framework: Section 80 empowers the adjudicating authority or Tribunal to reduce or drop penalty in appropriate cases.

Court's interpretation and reasoning: The Tribunal accepted the appellant's submission that even without an amended prayer, it could invoke Section 80 to drop the penalty. This was supported by precedents including CCE vs. Lawson Travel and Tours and Adecco Flexione.

Key evidence and findings: The appellant's payment of service tax and interest prior to show-cause notice justified exercise of discretion to drop penalty.

Application of law to facts: The Tribunal exercised its discretion under Section 80 to set aside the penalty.

Treatment of competing arguments: Revenue's contention for penalty was rejected on this ground.

Conclusions: Tribunal was empowered to drop penalty and accordingly did so.

3. SIGNIFICANT HOLD