No Service Tax Penalty if Tax & Interest Paid Pre-SCN & No Intent to Evade: CESTAT Hyderabad

Ganesh & Co. Vs Commissioner of GST & Central Excise (CESTAT Hyderabad)

The appeal concerns the imposition of penalties under the Finance Act, 1994, on a service provider engaged in Business Auxiliary Services. During an audit, it was found that the appellant had neither registered nor paid service tax for certain periods between August 2006 and March 2008, and had also short-paid tax during September 2008 to December 2009. A Show Cause Notice dated 11.01.2011 demanded service tax along with interest. The adjudicating authority confirmed the demand and imposed penalties under Sections 77 and 78. Although the appellant subsequently paid the entire service tax and interest before issuance of the notice, the Commissioner (Appeals) upheld the penalties, leading to the present appeal.

The appellant argued that it had discharged the entire tax liability along with interest in March 2010, prior to issuance of the Show Cause Notice. Therefore, it claimed immunity from penalties under Section 73(3) of the Finance Act, 1994, which provides that no penalty shall be imposed where tax and interest are paid before issuance of notice. The appellant also contended that there was no fraud, suppression, or willful misstatement involved.

The department, on the other hand, argued that the appellant had failed to register and pay tax initially, and that payment was made only after detection during audit. It was contended that this amounted to suppression of facts with intent to evade tax, and therefore penalties were justified.

The Tribunal examined the provisions of Section 73 of the Finance Act, 1994. It noted that where service tax and interest are paid before issuance of a notice, no notice should be issued and no penalty should be imposed. However, this benefit is not available in cases involving fraud, collusion, willful misstatement, or suppression of facts with intent to evade tax.

Upon review, the Tribunal found that the impugned order did not establish any fraud, willful misstatement, or suppression of facts with intent to evade payment of service tax. It relied on judicial precedents which clarify that mere non-payment of tax or failure to obtain registration, without evidence of intent to evade, is insufficient to invoke penal provisions.

In the absence of any such intent, the Tribunal held that Section 73(4) was not applicable and that the appellant was entitled to the benefit of Section 73(3). Consequently, the penalties imposed under Sections 77 and 78 were set aside. The appeal was partly allowed, and the appellant was granted consequential relief as per law.

FULL TEXT OF THE CESTAT HYDERABAD ORDER

This appeal arises from Order-in-Appeal No. 436/2016 (STA I) dated 27.07.2016 passed by the Commissioner of Service Tax (Appeals I), Chennai.

2. Brief facts are that the appellant, a provider of Business Auxiliary Services. During audit of the company by department officers, they were found to have neither registered nor paid service tax for the period August 2006 to March 2008 on services rendered to M/s. Flakt India Ltd. and M/s. AE&E Works Pvt. Ltd., Chennai. Short payment for the period September 2008 to December 2009 and non-payment on certain services to M/s. Flakt India Ltd. were also noticed. Accordingly, a Show Cause Notice dated 11.01.2011 demanded service tax of Rs.3,64,457/- and Rs. 5,55,536/- with interest. The Adjudicating Authority confirmed the demand with interest and imposed penalties under Sections 77 and 78 of the Finance Act, 1994. Although the appellant subsequently paid the entire tax and interest, the Commissioner (Appeals) upheld the penalties of Rs. 3,64,457/-, Rs. 5,55,536/- under Section 78 and Rs. 10,000/- under Section 77, leading to the present appeal.

3. The Ld. Advocate Ms. R. Sumedha appeared for the appellant and Ld. Authorized Representative Shri M. Selvakumar appeared for the respondent

3.1 Ms. R. Sumedha the Ld. Counsel for the appellant submitted that the appellant is engaged in engineering and assembly of fan casings/components and the manufacture and supply of defect-free products as per customer specifications. They were registered with the Department under ‘Business Auxiliary Services’ from January 2008. The appellant undertook job work and claimed exemption from duty under Notification No. 8/2005 dated 01.03.2005. During the disputed period, the appellant provided services to M/s Flakt India Ltd. and AE & E Works (P) Ltd., Chennai, without registration under ‘Manpower Recruitment and Supply Services’ under the Finance Act, 1994. The Ld. Counsel submitted that immediately after receipt of the audit objection the appellant paid the applicable service tax along with interest. The details were submitted in the form of a table during the oral hearing, which is reproduced below:

The Ld. Counsel stated that the Show Cause Notice 05/2011 was issued on 11.01.2011, long after the payment of duty and interest in March 2010. Hence the appellant is entitled to immunity from penalty under Explanation (2) to Section 73(3) of the Finance Act, 1994, which provides that no penalty shall be imposed where service tax and interest are paid before issuance of notice.

She placed reliance on the following decisions:

(i) C.C.E. & S.T., LTU, Bangalore v. Adecco Flexions Workforce Solutions Ltd., 2012 (26) S.T.R. 3 (Kar.)

(ii) C. Ramachandran v. Commissioner of Service Tax, Chennai, 2016 (46) S.T.R. 866 (Tri.-Mad)

She prayed that the Order-in-Appeal be set aside and the appeal be allowed.

3.2 The Ld. AR Shri M. Selvakumar reiterated the findings in the impugned order. He stated that the assessee provided taxable services without registration or payment of service tax during April 2006 to December 2007 and, even after registration in January 2008, wilfully suppressed facts, and evaded tax, which was detected only through audit. The claim of voluntary payment is untenable, as tax was paid only after detection. Accordingly, waiver of penalty under Section 80 is not warranted, and penalties under Sections 76, 77, and 78 of the Finance Act, 1994 are justified.

4. Heard both sides and perused the appeals. The only issue contested by the appellant is the imposition of penalties.

5. As the appellant seeks immunity from penalties, as per Section 73 of the Finance Act, 1994, the relevant extract of the section is reproduced below for ease of reference.”

SECTION 73. Recovery of service tax not levied or paid or short-levied or short-paid or erroneously refunded. —

….

3) Where any service tax has not been levied or paid or has been short-levied or short-paid or erroneously refunded, the person chargeable with the service tax, or the person to whom such tax refund has erroneously been made, may pay the amount of such service tax, chargeable or erroneously refunded, on the basis of his own ascertainment thereof, or on the basis of tax ascertained by a Central Excise Officer before service of notice on him under subsection (1) in respect of such service tax, and inform the Central Excise Officer of such payment in writing, who, on receipt of such information shall not serve any notice under sub-section (1) in respect of the amount so paid :

….

Explanation.1— For the removal of doubts, it is hereby declared that the interest under section 75 shall be payable on the amount paid by the person under this sub-section and also on the amount of short payment of service tax or erroneously refunded service tax, if any, as may be determined by the [Central Excise Officer], but for this subsection.

Explanation 2. — For the removal of doubts, it is hereby declared that no penalty under any of the provisions of this Act or the rules made thereunder shall be imposed in respect of payment of service tax under this sub-section and interest thereon.

(4) Nothing contained in sub-section (3) shall apply to a case where any service tax has not been levied or paid or has been short-levied or short-paid or erroneously refunded by reason of —

(a) fraud; or

(b) collusion; or

(c) wilfulmis-statement; or

(d) suppression of facts; or

(e) contravention of any of the provisions of this Chapter or of the rules made thereunder with intent to evade payment of service tax.

(emphasis added)

6. A plain reading of the above section shows that where an assessee pays the Service Tax that was unpaid or short-paid etc, as ascertained by a Central Excise Officer, before issuance of a notice under sub-section (1), no such notice shall be issued for the amount paid and no penalty shall be imposed under the Act or the rules. This benefit however does not apply where the non-payment or short-payment arises from fraud, collusion, willful misstatement etc

7. I find that the impugned order does not make out a case of fraud, willful misstatement etc. with an intention to evade payment of duty. The Supreme Court in Easland Combines, Coimbatore Vs Collector of Central Excise, Coimbatore [(2003) 3 SCC 410 = 2003 (152) E.L.T. 39 (S.C.)), clarified that mere non-payment of duty or failure to obtain registration, absent of fraud, suppression, or willful misstatement, is insufficient to attract the extended limitation period. This principle was reaffirmed in Uniworth Textiles Ltd. Vs Commissioner of Central Excise, Raipur [2013 (288) E.L.T. 161 (S.C.)] wherein the Apex Court citing Easland Combines (supra), held that the Act contemplates a positive action which betrays a negative intention of willful default. In the circumstances I find that the provision of section 73(4) of the Finance Act 1994 is not attracted and the part of the impugned order imposing penalties on the appellant merits to be set aside.

8. Accordingly, the impugned order is partly modified and the penalties imposed under section 77 and 78 of the Finance Act 1994 are set aside. The appellant is eligible for consequential relief as per law. The appeal is disposed of accordingly.

(Order pronounced in open court on 24.03.2026)