Legislative history of Service Tax regime & analysis on penalty provision

Legislative history of Service Tax regime & analysis on penalty provision mentioned under Chapter V of the Finance Act, 1994 by way of a hypothetical question?[1]

Introduction

As enterprisers find different creative models to do business. The government(s) of different countries find ways how to levy tax on the different models which are out of the preview of the taxation regime in the country to scale up the revenue of the exchequer. The same is the topic of the discussion wherein the Government of India in the year 1991 have formed a committee to look into various economic activities and see how to balance the growth of the country through the levy of tax on the services. The government has proposed to form a committee known as Chelliah Committee on tax reforms. The said report was prepared by very eminent individuals who have discussed the topic of taxation and economics, out of many topics there was a chapter specific on “Taxation on Service Tax” under the Indirect Tax regime. Pursuant to the report, the government had legislated the Service Tax regime. Briefly, the Service Tax was implemented in the year 1994 by way of the enactment of Chapter V of the Finance Act 1994.

Under the said enactment the scope of levy of tax was limited to a few services however it was widened by way of several amendments. Also, it is pertinent to note that the Services Tax regime mentioned under Chapter V of the Finance Act, 1994 stands omitted and the legislature has introduced the Central Goods and Service Tax Act, 2017.

The legislature has also under the said enactment included the penalty provision for those assesses who failed to comply with the Services Tax regime and escape the tax liability therefore as a consequence those assesses have to pay a penalty as per the rule established. Now the same can be understood by way of an example: –

Hypothetical Question?

 Presuming that Mr A is running an enterprise involved the business of promotion and marketing of men clothing range and for the same have taken registration of Service Tax “business asuilaeria service” defined under Section 65(19) of Finance Act, 1994, as amended from time to time and has failed to comply with the law. The Assessing Officer (AO) has issued a Show Cause Notice (SCN) alleging that you have escaped the liability to pay XXXXX amount and under section so and so and since you have failed there is a penalty which you have to face. Hence the Assessing officer (AO) invokes Sections 77 and 78 of the Service Tax Chapter V of the Finance Act,1994.  Now the assessee may consider filing a draft reply after due consultation. The reply will consist of the Statement of Facts, Reply on Merits, and the Prayer clause wherein the assessee will explain that the concerned company has complied with the law and therefore the penalty provision invoked shall be dropped.

Now to understand as to what are the penalty provision mentioned under the Service Tax regime. The same is reproduced hereinbelow: –

 Rule

Section 73 (1) of the Finance Act, 1994 provides that –

1. Where any service tax has not been levied or paid or has been short-levied or short paid or erroneously refunded, the [ Central Excise officer] may, within (thirty months) from the relevant date, serve notice on the person chargeable with service tax which has not been levied or paid or which has been short levied or short paid or the person to whom such tax refund has erroneously been made, requiring him to show cause why he should not pay the amount specified in the notice:

Provided that where any service tax not been levied or paid or has been short levied or hsort paid or erroneously refunded by reason of-

• Fraud;or
• Collusion; or
• Wilful mis-statement; or
• Suppression of facts;or
• Contravention of any of the provision of this chapter or of the rules made thereunder with intent to evade payment of service tax,by the person chargeable with the service tax or his agent, the provisions of this sub-section shall effect, as if , for the words (thirty month) the words five year had been substituted.

Section 77 of the Finance Act, 1994

• Any person, –
• Who is liable to pay service tax or required to take registration fails to take registration in accordance with the provision of section 69 or rules made under this Chapter shall be liable to a penalty which may extend to ten thousand rupees;
• who fails to keep, maintain or retain books of account and other documents as required in accordance with the provisions of this Chapter or the rules made thereunder, shall be liable to a penalty which may extend to [ten thousand rupees];
• who fails to-
• furnish information called by an officer in accordance with the provisions of this Chapter or rules made thereunder;or
• produce document called for by a Central Excise officer in accordance with the provisions of this Chapter or rules made thereunder;or
• appear before the Central Excise officer officer, when issued with a summon for appearance to give evidence or to produce a document in an inquiry,

shall be liable to a penalty which such failure continues, whichever is higher, stating with the first day after the due date , till the date of actual compliance;

• who is required to pay tax electronically, through internet banking, fails to pay the tax electronically, shall be liable to a penalty which may extend to ten thousand rupees;
• who issues invoice in accordance with the provisions of the Act or rules made thereunder, with incorrect or incomplete details or fails to account for an invoice in his books of account, shall be liable to a penalty which may extend to ten thousand rupees.
• Any person, who contravenes any of the provisions of this Chapter or any rules made there under for which no penalty is separately provided in this Chapter, shall be liable to a penalty which may extend to ten thousand rupees.

Section 78 – (1) Where any service tax has not been levied or paid, or has been short-levied or short paid, or erroneously refunded, by reason of fraud or collusion or willful mis-statement  or suppression of facts or contravention of any of the provisions of this Chapter or of the rules made thereunder with the intent to evade payment of service tax, the person who has been served notice under the proviso to sub -section (1) of section 73 shall, in addition to the service tax and interest specified in the notice, be also liable to pay a penalty which shall be equal to hundred per cent of the amount of such service tax:

Provided that in respect of the cases where the details relating to such transaction are recorded in the specified records for the period beginning with the 8^th April, 2011 upto the 24 date on which the Finance Bill, 2015 receives the assent of the President (both days inclusive), the penalty shall be fifty per cent of the service tax so determined:

Provided further that where service tax and intrest is paid within a period of thirty days of — the date of service of notice under the proviso to

• Sub-section (1) of section 73, the penalty payable shall be fifteen per cent of such service tax and proceedings in respect of such service tax, interest and penalty shall be deemed to be concluded;
• The date of receipt of the order of the Central Excise officer determining the amount of service tax under sub-section (2) of section 73, the penalty payable shall be twentry fice per cent of the service tax so determined:

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Analysis

 As mentioned herein above the Section 76 of the said Act is  for non-payment of service tax by suppressing the fact of provisions of taxable services and receipt of the consideration thereof ii) under Section 77(1) (b) of the Finance Act, 1994 for failure to keep, maintain or retain books of accounts;(iii) under Section 77(1) (c) for failure to furnish the information and document called for and also for failure to appear before the officer when issued with summons iv) Under Section 77(2) for failure to file periodical ST-3 return as prescribed under Section 70 of the Act.

In the following cases, several courts have observed in what situation the department can invoke the penalty provision under the relevant Section of the Finance Act, 1994 as amended from time to time. The case and the observation made by the Hon’ble Court(s) are mentioned herein below: –

In the case of Hindustan Steel Ltd v The State Of Orissa AIR 190 SC 253 the Hon’ble Court has observed that

“but the liability to pay penalty does not arise merely upon proof of default in registration as a dealer. An order imposing a penalty for failure to carry out a statutory obligation is the result of quasi-criminal proceedings, and the penalty will not ordinarily be imposed unless the party obliged either acted deliberately in defiance of law or was guilty of conduct contumacious or dishonest, or acted in conscious disregard of its obligation. The penalty will not also be imposed merely because it is lawful to do so. Where penalty should be imposed for failure to perform a statutory obligation is a matter of discretion of the authority to be exercised judicially and on a consideration of all the relevant circumstances. Even if a minimum penalty is prescribed, the authority competent to impose the penalty will be justified in refusing to impose a penalty, when there is a technical or venial breach of the provision of the Finance Act or where the breach flows from bona fide belief that the offender is not liable to act in the manner prescribed by the Statute.

In another case Sumeet Industries Ltd V CCE, Surat reported in 2004 (164) ELT (Tri-Mumbai), the Hon’ble Tribunal observed that “power to levy the penalty is not a crop provided to the officers to let loose in all transgressions; penalty should not be ordinarily imposed unless there is a defiance of law or contumacious or dishonest conduct or a conscious disregard to an obligation is established in the facts of a case.”

In another case of Commissioner of Service Tax Vs M/s Motor World & others 2012 (6) TMI 69 HC the court observed that “imposition of penalty under the Act is not automatic. The ingredients mentioned in the Section should exist. In respect of Sections 76, 77, and 78  of the Act, not only the ingredients of those Sections should exist, but also there should be the absence of reasonable cause for the said failure. Even if the ingredients stipulated in Section 76 and 78 of the Act are established, if the assessee shows reasonable cause for such failure, then the authority has no power to impose penalty given Section 80 of the Act.”

Conclusion

As discussed hereinabove in case the assesses failed to comply with the law laid down under the Service Tax regime introduced by the legislature through Chapter V of the Finance Act, 1994 the officer concerned may issue the SCN to call upon the assessee to respond to the said SCN within the time limit prescribed. Also, will ask why the penalty should not be imposed under the revenant Sections. As serval Court in Indian time and again has dealt with the questions of the penalty in which circumstance the penalty shall not be imposed under the relevant Sections of the Service Tax regime. As I have mentioned few case laws in peculiar facts wherein the Courts were of the view that even if the relevant Section(s) ingredient have met but still in case assessee can establish the reasonable cause for such failure to comply with the law the department may consider such circumstance and grant relief to the assessee and drop the penalty levied. However, to drop the penalty will depend on the department and the particular facts and circumstances of the cases. One can only persuade the department to show a reasonable cause[2].

The author of this article can be reached at [email protected] for any discussion or clarification. Please feel free to drop a mail.

[1] Deepanshu Arora holds a degree in B.Com from the University of Delhi  and Law

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