Case Law Details
Bharat Aluminium Company Limited Vs Commissioner (CESTAT Delhi)
CESTAT Delhi held that imposition of penalty under section 78 of the Finance Act without elements of fraud or collusion or willful mis-statement or suppression of facts or violation of Act or Rules made thereunder with an intent to evade payment of tax is untenable in law.
Facts- The appellant is registered with the Central Excise and holds the service tax registration for providing services of consulting engineers, business auxiliary, manpower recruitment or supply, goods transport agency, etc. Its records were audited by the Accountant General of Chhattisgarh, Raipur and it was felt that the appellant had short paid service tax to the extent of Rs. 72,33,994/- during the year 2008-2009 in respect of services received by it from foreign companies in the capacity of recipient of services.
Accordingly, a show cause notice was issued to the appellant demanding service tax of Rs. 3,31,55,802/- under the proviso to section 73 (1) of the Finance Act, 1994 along with interest u/s. 75. Penalties were proposed to be imposed u/s. 77 and 78 of the Finance Act. Principal Commissioner passed the impugned order confirming demand of service tax of Rs. 15,69,570/- along with interest. He dropped the remaining demand of Rs. 3,15,86,232/-. He also imposed penalty of Rs. 10,000/- upon the appellant u/s. 77 of the Finance Act for failing to file the proper return and the penalty of Rs. 15,69,570/- u/s. 78 for intentional evasion of service tax by deliberately suppressing facts from the department. Being aggrieved, the present appeal is filed.
Conclusion- It is undisputed that the services rendered by an employee to its employer are out of the ambit of service tax. The demand of service tax, therefore, needs to be set aside to the extent of Rs. 9,45,494/- on this count.
Held that penalty under section 77 of Rs. 10,000/- was imposed for the reason that the appellant had not correctly reflected the total amount of service tax due from it. This fact is evident as an amount of Rs. 6,24,074/- was admittedly short paid by the appellant. We, therefore, find no reason to interfere with this penalty.
Held that penalty under section 78, we find that this penalty can be imposed only if there is non-payment or short payment by reason of fraud or collusion or willful mis-statement or suppression of facts with an intent to evade payment of duty. In absence of the same, imposition of penalty u/s. 78 of the Finance Act cannot be sustained.
FULL TEXT OF THE CESTAT DELHI ORDER
M/s Bharat Aluminium Company Limited1 filed this appeal to assail the order-in-original dated 05.12.20172 passed by the Principal Commissioner of Central Tax, Central Excise & Customs, Raipur.
2. The appellant is registered with the Central Excise, Raipur and holds the service tax registration for providing services of consulting engineers, business auxiliary, manpower recruitment or supply, goods transport agency, etc. Its records were audited by the Accountant General of Chhattisgarh, Raipur and it was felt that the appellant had short paid service tax to the extent of Rs. 72,33,994/- during the year 2008-2009 in respect of services received by it from foreign companies in the capacity of recipient of services. Similar short payments were noticed during the subsequent three financial years also.
3. Accordingly, a show cause notice dated 16.04.2014 was issued to the appellant demanding service tax of Rs. 3,31,55,802/- under the proviso to section 73 (1) of the Finance Act3, 1994 along with interest under section 75. Penalties were proposed to be imposed under section 77 and 78 of the Finance Act.
4. After considering the appellant’s reply by letters dated 22.12.2014 and 20.10.2016 and the submissions made during the personal hearing held on 15.09.2017, the Principal Commissioner passed the impugned order confirming demand of service tax of Rs. 15,69,570/- along with interest. He dropped the remaining demand of Rs. 3,15,86,232/-. He also imposed penalty of Rs. 10,000/- upon the appellant under section 77 of the Finance Act for failing to file the proper return and the penalty of Rs. 15,69,570/- under section 78 for intentional evasion of service tax by deliberately suppressing facts from the department.
5. Aggrieved, the appellant filed this appeal. We have heard the learned counsel for the appellant and the learned authorized representative for the Revenue and perused the records.
6. Learned counsel for the appellant submits that the only dispute which now remains is the demand of Rs. 15,69,570/-confirmed by the impugned order and the penalties. The rest of the demand proposed in the show cause notice has already been dropped by the Principal Commissioner against which there is no appeal by the Revenue. Hence the issue has attained finality to that extent. The confirmed demand of Rs. 15,69,570/- is on account of two payments made by the appellant :
(a) payments made to Pual Cerullo – Service Tax of Rs. 9,45,494/- ;
(b) Other payments – Service Tax of Rs. 6,24,074/-
7. Learned counsel for the appellant submits that it is not contesting the demand of service tax of Rs. 6,24,074/- on other payments which it made to overseas service providers on reverse charge basis. It is only contesting the demand of Rs. 9,45,494/-as service tax on the payments made to Pual Cerullo. It is the contention of the appellant that Pual Cerullo was an employee of the appellant and any payments made by an employer to an employee for the services of the employee do not form a taxable service as per the Finance Act.
8. Learned authorized representative also does not dispute this legal position.
9. In the impugned order, the Principal Commissioner confirmed the demand of service tax on the amount paid to Pual Cerullo for the reason that the appellant had not submitted evidence to substantiate that Pual was its employee. Relevant paragraph 24 of the impugned order is reproduced below :-
24. As regards payment of amounts of Rs. 91,79,561/- to Mr. Pual M. Cerullo during the period 2010-11, the Noticee has contended that since the same is paid to Mr. Pual M. Cerullo who has acted as an employee of the company and relevant PF vis-à-vis TDS under the provisions of the Income Tax Act was deducted, no service tax is payable. However, they have not submitted any material evidences such as appointment letter of Mr. Pual M. Cerullo, TDS deducted from his salary, income tax return filed by him, etc. in order to prove the employer – employee relationship. Though, the Range Superintendent has not objected the contention of the Noticee, but he again did not submit any evidence in this regard. It is also observed that during the year 2009-10, the Noticee had availed the services of Mr. Pual M. Cerullo as Consulting Engineer and not only paid him Rs. 93,41,000/-, but also paid Service tax on the said amount, as is evident from the details provided by the Noticee. Under the given circumstances and in absence of any evidence the contention of the Noticee is not convincing and therefore this amount of Rs. 91,79,561/- is held to be taxable and Service tax of Rs. 9,45,495/-, including ed. Cess and she cess (@10.30%) is payable on the said amount, along with interest. Held accordingly”.
10. Thereafter, in terms of employment contract, the appellant decided to terminate the services of Pual prematurely and issued a letter dated 10.03.2011 which is reproduced below :-
“No. Balco/Korba/HR/2011/PC/14340/01
Dated : 10th March 2011
To
Mr. Pual M. Cerullo
San Digo
CA 91942
USA
Sub. : Short closure of Assignment Contract.
Ref. : Your Assignment Contract did 6th Aug 2009 and our letter No. Balco/Korba/HR/2011/PC/14340 dated 28th Feb 2011 and your reply dated 01st March 2011.
Dear Mr. Cerullo,
We are in receipt of your letter dated 01st March 2011 in response to our letter No. Balco/Korba/HR/2011/PC/14340 dated 28th February 2011.
Since you have exercised option vide your letter dated 01st March 2011 to avail “Pay in lieu of Notice period” we agreed to your request.
Please find enclosed a letter dated 7th March 2011 indicating details of full and final settlement on short closure of Assignment Contract dated 6th August 2009 amounting to Rs. 16,36,224/-. Also please find enclosed a statement dated 7.3.11 of differential TDS for the period September 2009 to April 2010 along with a letter dated 7.3.2011 issued by Balco EPF Trust in respect of PF remittance in your PF account with Balco EPF Trust. You may submit prescribed form to Balco EPF Trust for withdrawal or transfer of your PF amount.
Please find enclosed the differential TDS statement and a cheque bearing No. 835373 dated 10.3.2011 for Rs. 2,97,129/- towards full and final settlement of the said difference.
Please also find enclosed a cheque bearing No. 187569 dated 7.3.2011 amounting Rs. 16,36,224/- towards full and final settlement on Short closure of contract.
Please be intimated that the assignment contract dated 6th August 2009 stands terminated effective 2nd March 2011 and with this full and final settlement there lies no claim whatsoever against us.
Kindly acknowledge receipt of this letter”.
11. Learned authorized representative for the Revenue submits that the necessary evidence was not produced before the Principal Commissioner and since the documents have now been produced, the matter may be remanded to the Principal Commissioner for adjudication.
12. We are not inclined to remand the matter as it is evident from the impugned order that the only reason the Principal Commissioner confirmed the demand on the payment made to Pual is that the employment contract and other evidence were not produced before him. The letters of appointment and the termination letter produced before us make it amply clear that Pual was appointed as the Chief Operating Officer. Therefore, the relationship between the appellant and Pual was that of an employer and employee. It is undisputed that the services rendered by an employee to its employer are out of the ambit of service tax. The demand of service tax, therefore, needs to be set aside to the extent of Rs. 9,45,494/- on this count.
13. The remaining amount of Rs. 6,24,074/- with interest is uncontested and needs to be upheld and we do so.
14. The penalty under section 77 of Rs. 10,000/- was imposed for the reason that the appellant had not correctly reflected the total amount of service tax due from it. This fact is evident as an amount of Rs. 6,24,074/- was admittedly short paid by the appellant. We, therefore, find no reason to interfere with this penalty.
15. As regards penalty under section 78, we find that this penalty can be imposed only if there is non-payment or short payment by reason of fraud or collusion or willful mis-statement or suppression of facts with an intent to evade payment of duty.
16. Learned counsel for the appellant contests this penalty on the following grounds :-
(i) The transaction is revenue neutral as any amount of service tax which the appellant had paid on the services which it received was immediately available to it as Cenvat credit. Hence, the entire transaction is revenue neutral ;
(ii) Merely because service tax was not paid, it does not mean that there is a malafide intention and such an intention has to be established by the Revenue before imposing penalty ;
(iii) The burden of proof is on the Revenue to establish the malafide intent and there is no evidence in the impugned order to establish it.
17. Learned authorized representative for the Revenue supports the impugned order on the question of penalty under section 78.
18. Having considered the rival submissions on this issue, we find that to impose penalty under section 78 of the Finance Act elements of fraud or collusion or willful mis-statement or suppression of facts or violation of Act or Rules made thereunder with an intent to evade payment of tax must be established. In the absence of evidence of such an intent, no penalty under section 78 can be imposed. In this case, not only is there “no evidence” of such an intent but the entire payment is revenue neutral at the hands of the appellant. The services, in question on which the appellant had short paid the service tax were its input services and the appellant would have been entitled to take Cenvat credit of the entire amount of service tax immediately after paying such tax. In other words, the appellant had to pay with one hand and could take credit with the other. Such being the case, it is unthinkable that the appellant would have had an intention to evade payment of service tax because by not paying such service tax the appellant would gain nothing. We, therefore, find the imposition of penalty under section 78 of the Finance Act cannot be sustained and needs to be set aside.
19. In view of the above, we partly allow the appeal upholding the demand of service tax of Rs. 6,24,074/- along with applicable interest under section 75 and the penalty of Rs. 10,000/- under section 77 and set aside the rest of the impugned order.
(Order pronounced in open court on 18/10/2023.)
Notes
1 the Appellant
2 impugned order
3 The Act
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