Penalty u/s. 78 justified since tax determined during course of investigation: CESTAT Allahabad

Rama Shankar Sharma Vs Commissioner of Central Excise (CESTAT Allahabad)

CESTAT Allahabad held that when amount of service tax has been determined by the department during the course of investigation then levy of penalty under section 78 of the Finance Act, 1994 justified.

Facts- Appellant is registered as service provider, providing services mainly to M/s Hindalco Industries Ltd., Renukoot, Sonbhadra.

On scrutiny of records of M/s Hindalco Industries Ltd. as service recipient, it was observed that appellant was providing taxable services under the category of Cargo Handling Service, Clean Service, Maintenance & Repair Service, Man Power Recruitment Agency Service & Construction (Commercial & Industrial) Service to the service recipient. However, they have not discharged the service tax due in respect of these services.

Notably, appellant in the present case even before the Original Authority also did not contested anything in the show cause notice except for certain computations.

Conclusion- No deduction under the Head “Provident Fund” is permissible in the above provisions and I therefore, hold that the taxable value of Rs.22,93,296/- for which deduction has been claimed by the party is part of the value of taxable services and is not allowed.

Held that the party failed to discharge the statutory burden of declaring the value of taxable service to the department which amounts to suppression of facts, and provision of extended period is invokable in this case. Accordingly, I hold that the proviso of section 73 (1) of the Finance Act has rightly been invoked and therefore the demand is not barred by limitation.

Held that when the amount of service tax has been determined by the department during the course of investigation then the levy of penalty is justified. In view of the facts and circumstances of the case the proposal for imposition under Section 78 of the Finance Act, 1994 is justified and therefore, I hold the penalty.

FULL TEXT OF THE CESTAT ALLAHABAD ORDER

This appeal is directed against Order-in-Appeal No.24/ST/ALLD/2012 dated 08/02/2012 passed by Commissioner (Appeals) Customs, Central Excise & Service Tax, Allahabad. By the impugned order, Commissioner (Appeals) has upheld the Order-in-Original No.(ST-209/2010) 125 of 2011 dated 20.07.2011, wherein following has been held:-

“ORDER  

1. I hereby confirm the demand of The service tax amounting to Rs.17,19,158/- (Service Tax Rs.16,74,827/- + Education Cess Rs.33,497/- + Secondary & Higher Education Cess Rs.10,834/-) as service tax under the provision of section 73(2) of the Finance Act, 1994 against the party alongwith interest under the provisions of section 75 of the Finance act, 1994 as amended from time to time. This amount is held to be recoverable from the party.

2. I impose penalty of Rs.5,000/- u/s 77 of the Act for violation of Section 70 read with Rule 7 of the Rules.

3. I impose penalty Rs.17,19,156/- under Section 78 of the Finance Act, 1994. However, penalty imposed under this Section shall stand reduced to 25% of the Service Tax amount if the entire dues including Service Tax, Interest and penalties imposed as above are paid within 30 days from receipt of this order.”

2.1 Appellant is registered as service provider, providing services mainly to M/s Hindalco Industries Ltd., Renukoot, Sonbhadra.

2.2 On scrutiny of records of M/s Hindalco Industries Ltd. as service recipient, it was observed that appellant was providing taxable services under the category of Cargo Handling Service, Clean Service, Maintenance & Repair Service, Man Power Recruitment Agency Service & Construction (Commercial & Industrial) Service to the service recipient. However, they have not discharged the service tax due in respect of these services. 2.3 After completion of investigation and inquiry, a show cause notice dated 22.10.2010 was issued to the appellant asking them to show cause as to why:-

“1. The service tax amounting to Rs. Rs.17,71,846/-(Service Tax Rs.17,26,482/- + Education Cess Rs.34,530/-+ Secondary & Higher Education Cess Rs.10,834/-) should not be demanded and recovered from them alongwith appropriate Interest under the proviso to Section 73(1) of the Act r/w Section 75 of the Act.

2. Penalty should not be imposed upon them under the erstwhile Section 75A read with Section 77 of the Act for violation of Section 69 of the Act/rule 4 of the Rules.

3. Penalty should not be imposed upon them under Section 77 of the Act for violation of Section 70 read with rule 7 of the Rules, in case of each default.

4. Penalty should not be imposed upon them under section 76 of the Act for violation Section 68 of the Act read with Rule 6 of the Rules.

5. Penalty should not be imposed upon them under Section 78 of the Act.”

2.4 This show cause notice was adjudicated as per the Order-in-Original referred in para 1 above. Aggrieved appellant filed appeal before Commissioner (Appeals), which has been dismissed as per the impugned order.

2.5 Hence this appeal.

3.1 We have heard Shri Atul Gupta learned Counsel appearing for the appellant and Shri Santosh Kumar learned Authorised Representative appearing for the revenue.

4.1 We have considered the impugned orders along with the submissions made in appeal and during the course of argument.

4.2 Interestingly, appellant in the present case even before the Original Authority also did not contested anything in the show cause notice except for certain computations. Relevant paragraphs of the order of Original Authority are reproduced bellow:-

“The party submitted defence reply on 13.05.2011 and also appeared for personal hearing on 13.07.2011. The contention of the party was also verified by the Assistant Commissioner, Central Excise, Division, Mirzapur on 16.06.2011. The party stated that they do not wish to contest the show cause notice on merit except on the ground of quantification of demand in as much as the gross payments received include the amount of service tax, amount pertaining to a particular service not taxable prior to a particular date, benefit of threshold limit exemption, service amounting to manufacture and material handling within the plant not falling under the purview of service tax. Calculation chart provided by the party is as under-

That the party submitted that he is a petty contractor who is not having enough knowledge about the complex provisions of service tax and at the same time there is no help available in the form of outside consultants/experts in the subject from whom proper guidelines could have been obtained.

That the party has taken registration on its own and has been depositing tax and return thereafter on regular basis. That the party is ready to deposit the service tax, due as per the chart for calculation of tax submitted with the reply, along with interest.

In view of the submissions party prays for waiver of penalty.

At the time of personal hearing Shri Anil Pandey, Proprietor of the firm appeared before me on 13.07.2011 and stated that they are willing to deposit the tax as per calculation chart. They were innocent and ready to pay the tax due upon them. They are regularly paying the service tax after obtaining the service tax registration and furnishing the returns to the department. Further, they pleaded that now being ready to pay the due tax upon them and being innocent, penalty may please be dropped.”

4.3 After considering the submissions made, Original Authority has allowed the claim made by the appellant towards the amount received for providing services prior to 16.06.2005, from the gross amount as the services provided become taxable services only with effect from this date; and

4.4 Thus he has worked out the demand of service tax as follows:-

“On considering these facts, the service tax amount wrongly calculated in the SCN on the value of non-taxable services (prior to 16.06.2005) Rs.5,16,546/- on which Service Tax + Education Cess Comes out to Rs.52,668/-(Rs.51,655/- + 1,033/-). Thus remaining liability on the party comes to Rs.17,19,158/- (Rs.17,71,846/-Rs.52,688/-) The calculation chart is given as under:-

Thus the amount of Rs.17,19,158/- (Rs.16,74,827/-Service Tax + Rs.33,497/- Education Cess +10,834/-HSEd Cess) is liable to be confirmed against the amount as demanded in the SCN.”

4.5 Original authority has disallowed the deduction claimed by the appellants toward the Provident Fund. On perusal of the invoices, we do not find any amount to be indicating any amount as provident fund. After going through the definition of value of taxable services adjudicating authority has observed as follows:-

“I take up the above contentions of the party one by one. As regards the amount representing provident fund, and claim of the party for deductions thereof, I find that the value of taxable services has to be determined as per provisions of section 67 of the Finance Act, 1994, and further as per provisions of Service Tax (Determination of Value) Rules, 2006 for the period after 19.04.2006. I have examined these provisions and I find that the provisions of section 67 of the Finance Act, 1994 are unambiguous and provides that-“the value shall be the gross amount charged by the service provider for such service provided or to be provided”

No deduction under the Head “Provident Fund” is permissible in the above provisions and I therefore, hold that the taxable value of Rs.22,93,296/- for which deduction has been claimed by the party is part of the value of taxable services and is not allowed.”

4.6 On the issue of invocation of extended period of limitation, demand for interest and the penalties imposed original authority has observed as follow:

“Now, I take the issue of invoking the proviso of Section 73 (1) for demand and recovery under the extended period. It is evident from the fact of the case and documents on record that during the relevant period party has not disclosed anything to the department inspite of the fact that they have rendered taxable services and received payment thereof and also the amount of Service Tax and later also obtained service tax registration and charged service tax from the clients. The gross amount received by the party against providing taxable services was not disclosed to the department with clear intent to evade the payment of service tax. If the department would not have initiated enquiry the party might have escaped from paying due tax to the government. I also take note of the charges of non-payment/short payment which have not been rebutted by the party. It is also a fact that the party failed to discharge the statutory burden of declaring the value of taxable service to the department which amounts to suppression of facts, and provision of extended period is invokable in this case. Accordingly, I hold that the proviso of section 73 (1) of the Finance Act has rightly been invoked and therefore the demand is not barred by limitation.

Further, as regards, the payment of interest is concerned the same is payable under Section 75 of the Finance Act, 1994 on the due amount of service tax payable. In this regard 1, place reliance on the judgment of Hon’ble Supreme Court reported in 2008(231) ELT-3(SC) which held that: interest is automatically payable once it is held that tax was not paid by due date.

Now I take up the proposal for imposition of penalty under Section 76, 77 and 78 of the Finance Act, 1994.

As regards imposition of penalty under Section 76 and 78 of the said Act is concern, I observe that Section 78 has been amended and proviso has been inserted in the said Section 78 to the effect, that the provision of Section 76 shall not apply, if penalty is payable under Section 78. I also observe that the amended provisions of Section 78 shall apply to the subject notice issued earlier as per explanation. I therefore, do not impose any penalty under Section 76.

As regards imposition of penalty under Section 77 of the said Act for failure to comply with the statutory provisions of the Service Tax Act and Rules made thereunder, I find that the party has failed to comply with the provisions and therefore for their act of omission and commission, I hold the penalty under Section 77 of the Finance Act, 1994.

As regards imposition of penalty under Section 78, I observe that the party has consciously and deliberately suppressed the value of taxable service and never disclosed the payment received or services rendered by them. As I have observed herein above, in this case the party was conscious that the Services being provided by them are Taxable Services liable to Service Tax and they collected the Service Tax from the Service Recipient but did not deposit the same in clear dis regard to the law. Hon’ble Tribunal in the case of Suhita Ethnic Marketing Services Pvt Ltd. Vs. CCE [2005] 2 STT 222 (Mumbai-CESTAT), Mett MacDonald Ltd. Vs. CCE [1994­2006] STT 239 (New Delhi-CEGAT) and ACME Tele Power Pvt. Ltd. Vs. CCE, Chandigarh AIT-2008-13 (CESTAT) it has been held that when the amount of service tax has been determined by the department during the course of investigation then the levy of penalty is justified. In view of the facts and circumstances of the case the proposal for imposition under Section 78 of the Finance Act, 1994 is justified and therefore, I hold the penalty.

I also observe that the party has not deposited the total gross value amount of Rs 1,84,29,707/- received from the service recipient which clearly shows the bad intention of the party.”

4.7 In the impugned order, First Appellate Authority has observed as follows:-

“5. I have gone through the case records. The department has alleged that the appellant suppressed the gross value of taxable services provided to M/s Hindalco Ind. Ltd resulting into short payment of service tax amounting to Rs. 17,71,846/-. The thrust of the appeal is that (i) entire exercise is revenue neutral as the said tax paid by the appellants, was admissible to Hindalco as credit of such tax and (ii) the demand for interest and imposition of penalty was not sustainable on the services for which the services itself was not taxable.

6. have examined the plea of revenue neutrality raised by the appellants in respect of demand under question. The contention of the appellants that demanding duty or cenvat credit, as the case may be, resulted in a revenue neutral situation if the assessee was entitled to equal amount of Cenvat credit. This argument has no statutory basis. If the credit was available to the service recipient, discharging tax liability should have been easier. The scheme of Cenvat credit availment can be enforced only if there is duty tax payment at every stage . where taxable event is arising. The plea of revenue neutrality shall lead to non-payment of taxes in such a manner as to reduce the entire Cenvat credit system to nullity If the plea of revenue neutrality is taken to its logical conclusions there should be no tax liability on any input service or input. This plea is thus devoid of substance as it is completely inconsistent with statutory provisions 7. Another plea advanced by the appellants is that charging of interest as well as imposition of penalty was not sustainable. I find that for charging of interest, Section 75 of the Finance Act, provides as under “Every person, liable to pay the tax in accordance with the provisions of section 68 or rules made thereunder, who fails to credit the tax or any part thereof to the account of the Central Government within the period prescribed, shall pay simple interest [at such rate not below ten per cent. and not exceeding thirty-six per cent. per annum, as is for the time being field by the Central Government, by notification in the Official Gazette] for the period] by which such crediting of the tax or any part thereof is delayed

On examining the facts of the instant case in terms of grounds put forth by the appellants in their appeal, I find that the providing of taxable service as well as receipt of gross amounts against these taxable services, have not been contested by the appellants whereas they have contested charging of interest and imposition of penalty. It is on record that the appellants did not wish to contest the show cause notice on merits. I find that the fact of not obtaining service tax registration in time as well as late filling/non filling of statutory returns is evident from records

The responsibility of assessment of service tax rests on the person liable to pay the service tax. The arrangement of self assessment called upon appellants to determine their tax liability correctly. It was for them to make assessment. There is nothing on record to show that the appellants ever made any effort or enquired from the department or even from service recipient about the taxability on the services provided by them. It is observed from page 2 of the impugned order that according to the appellants they received Rs. 28,09,842/- as service tax from the service recipient as this amount was included in the gross turn over. There is nothing on record to demonstrate that this amount was ever deposited with the Exchequer These facts manifest the appellant’s intention to evade payment of service tax as, if the department had not detected continuous non-payment of tax, the evasion would have gone on unchecked. Contravention of statutory provision is evident and manifest from records and therefore the order of adjudicating authority to impose penalty, cannot be faulted. There is nothing on record to indicate and prove that there existed reasonable cause for failure to entitle the appellants to get the benefit of Section 80 of the Finance Act, 1994 On the issue of interest, I am of the view that where any amount is payable as tax but not paid/paid belatedly, it results in financial loss to the exchequer and corresponding financial gain to the assessee. Therefore, if the service tax has been paid beyond the due date, interest is chargeable in terms of statutory provisions quoted above. Therefore, in the present case, the interest as well as penalty has correctly been ordered by the adjudicating authority 8. from the perusal of impugned order, it is observed that the appellants had contested the quantification of demand before the adjudicating authority on following grounds –

(a) Amount of Rs. 22,93,296/- received towards Provident Fund, was not liable to be includable in gross value of taxable service.

(b) The value of taxable services provided prior to 16.06.2005 amounting to Rs. 5,16,546/- was included in SCN whereas they were not providing taxable service prior to 16.06.2005.

I find that in respect of point (a) i.e. amount received towards Provident Fund, the adjudicating authority has observed and held as under “No deduction under the head “Provident Fund” is permissible in the above provisions and I therefore, hold that the taxable value of Rs. 22,93,296/- for which deduction has been claimed by the party is part of taxable value of taxable service and is not allowed.”

The appellants have neither contested nor controverted the aforesaid findings in any manner, There is nothing in the appeal or along with it to indicate and prove that the amount claimed to represent Provident Fund actually related to PF and if so, why and how it shall not form part of value of taxable service whereas, in respect of point (b) pertaining to Rs. 5,16,546/-, I find that the adjudicating authority has provided the benefit to the appellants by deducting the service tax liability amounting to Rs. 52,688/-, from the total service tax under demand. In this regard, he has observed and held as under

“I now take up the point as above regarding an amount of Rs. 5,16,546/- which has been contended to be pertaining to the period prior to 16.06.2005 and the party claims that this amount relates to non-taxable services as provided prior to and these services became Taxable from 16.06.2005. I observe that the Division has verified this contention of the party and there is nothing to disbelieve this claim of the party. I also find from record`bill and work authorization sheet) that services of maintenance and management of immovable property and service of site formation and clearance/excavation services and manpower supply services introduced from 16.06.2005 and services provided prior to 16.06.2005 can’t be covered under the Service Tax Net. I allow the benefit on this count to the party and I hold that this amount is not the part of taxable value.”

In view of above, I find no merit in the case of appellants.”

4.8 From the impugned order it is evident that in their appeal before the original authority the challenge was made to invocation of extended period of limitation and penalties imposed on the ground of revenue neutrality. However, revenue neutrality is not a global concept, just because credit is admissible to the service recipient cannot be the ground for invoking this concept. Larger Bench of the Tribunal, in the case of M/s Jay Yushin Ltd. 2000 (119) ELT 718 (Tri.-LB) has held as follows:-

“11. We have considered the rival submissions and have perused the case law. We find that in five cases in the list of cases referred to in Para 9 above and relied upon by the ld. Counsel for the appellants, viz., cases at Sl. Nos. 2,4,6,7 and 8, two options were available to the assessee, one of paying the duty at the time of clearance of the goods and the other, clearing the excisable goods without payment of duty either under some Exemption Notification or under some other legal provision. It was in such circumstances that the Tribunal had taken the view that when the option of clearing the goods without payment of duty was simultaneously available to the assessee, the non-payment/short payment was not attributable to any intention to evade payment of duty. In the other seven cases viz., cases against Sl. No. 1,3,5,9,10,11 and 12 in the list of cases mentioned in Para 9 above, the option of availing Modvat credit was available to the assessee even though he was not availing of it. In the present case, the claim of the appellants that duty free clearance under Notfn. No. 214/86 was concurrently available to them and therefore no intention to evade duty payment can be inferred does not appear to merit acceptance since it is not in dispute that the appellants were admittedly availing of modvat credit under Rule 57A and Rule 57Q. There is also no evidence on record to show that MUL had given any undertaking under Para 2 of Notfn. No. 214/86 in relation to the manufactured items sold by the appellants to MUL. The said defence cannot therefore be accepted for want of factual substantiation. As regards the contention of the appellants that the SCN issued under Section 11A(1) would apply only to a situation where a duty payment is subsisting at the time of issue of notice and where no such outstanding duty liability exists at the time of issuing the SCN, we are of the view that a careful reading of Section 11A(1) does not allow such a construction to be put on the said provision. Inasmuch as Section 11A(1) gives power to the Central Excise Officer to serve a notice within a period of six months from the ‘relevant date’ from the date when non-levy/non-payment or short levy/short payment has occurred, we are of the view that so long as it is not in doubt that there has been an occurrance of non-levy/short levy/ or non-payment/short payment on the relevant date the pre­conditions for issuance of SCN under Section 11A(1) are fully met and notice validly issued. In the instant case there is no dispute that clearance of excisable goods on short payment of duty had taken place. The fact that the differential duty was subsequently debited (albeit voluntarily) by the assessee before the issue of SCN will not debar the issuance of SCN in relation to the short payment occurring on the relevant date. Further, to the extent the appellants had stated in their price list declaration that no extra consideration had been received from the suppliers of the components despite the known fact that the said components were received free of cost, the allegation of suppression of facts in terms of the proviso to Section 11A(1) has to be held to have been established. The fact that there was a huge duty differential of an amount of over Rs. 55 lakhs between the duty paid by the appellants and debited by them later, is a strong circumstance which supports the inference of their intention to evade duty as the said amount has undeniably resulted in a financial gain for the appellants during the period and this financial gain flowed directly from the non-inclusion of the cost of the components in the assessable value. We are therefore satisfied that there will be no illegality in invoking the extended period of limitation under Section 11A(1) in a case like this.

12. As regards the demand of penalty under Section 11AC, as has been stated above the ingredients for invoking the said provision are in par materia with the ingredients to proviso to Section 11A(1). Having regard to the view we have taken above, where no legal infirmity in invoking the proviso to Section 11A(1) is shown to exist, there will also be no infirmity in invoking of penal provision under Section 11AC.

13. In the light of the above discussion, we answer the reference as under:

(a) Revenue neutrality being a question of fact, the same is to be established in the facts of each case and not merely by showing the availability of an alternate scheme;

(b) Where the scheme opted for by the assessee is found to have been misused (in contradistinction to mere deviation or failure to observe all the conditions) the existence of an alternate scheme would not be an acceptable defence;

(c) With particular reference to Modvat scheme (which has occasioned this reference) it has to be shown that the Revenue neutral situation comes about in relation to the credit available to the assessee himself and not by way of availability of credit to the buyer of the assessee’s manufactured goods;

(d) We express our opinion in favour of the view taken in the case of M/s. International Auto Products (P) Ltd. (supra) and endorse the proposition that once an assessee has chosen to pay duty, he has to take all the consequences of payment of duty.”

4.9 In similar set of facts tribunal has in following cases observed as follows:

4.10 In case of Afsar Tour and Travels [2019 (28) G.S.T.L. 153 (Tri. – Hyd.)] Hyderabad bench has observed as follows:

“9. We have carefully considered the submissions made by both sides and arguments. It is not in dispute that the appellant had provided cabs along with drivers from M/s. BSNL & BDL and two other rent-a-cab operators and collected the amounts from them. They have also collected service tax from some and had not deposited the same before the issue of show cause notice. It was never in dispute the service rendered by them amounts to rent-a-cab service and tax is liable thereon. Even when they collected the service tax, they have not deposited with the Government. The assessee has also not filed ST-3 returns and thereby suppressed the fact that they have rendered taxable services and collected service tax and retained the same with them. The only defense by the appellant before the lower authority and the First Appellate Authority and even in the grounds of appeal before this Bench is that they will pay the service tax if their clients reimburse the same to them. Otherwise, they have not paid the service tax. The leviable of service tax does not change that whether or not they have collected same from their clients. We cannot accept a new ground of liability of service tax at this stage, proposed by the Learned Counsel for the appellant because there was never a point of contention at the time of Order-in-Original or Order-in-Appeal. We therefore, find the Learned Lower Authority was correct and confirmed the demands along with interest and imposing penalties and the First Appellate Authority was correct in upholding the Order-in-Original. We find no reason to interfere with the Order-in-Appeal. In conclusion, we find the appeal is liable to be dismissed and we do so.”

Similarly in case of Digital Magic Visual India Ltd [2019 (21) G.S.T.L. 49 (Tri. – Chennai)] Chennai Bench observed:

10. However, coming to the demand on Video Tape Production Services, we find that they had collected the service tax from their customers. Further, Ld. Advocate has also conceded the liability and hence, it is ordered that based on the exact quantum of tax liability, equal penalty shall be imposed pertaining to the amount arrived in the remand for re-quantification, i.e., whether Rs. 16,29,611/-or Rs. 14,60,620/-. The equal penalty under Section 78 shall be applicable in respect of the this demand. No interference is also made with respect to the penalties imposed under Section 70 and 77 of the Act.

In case of Air India Limited [2017 (3) G.S.T.L. 374 (Tri. – Del.)] Delhi bench observed:

“12. Next, we consider the ground of limitation raised by AIL. The contention of AIL is that no allegation of suppression can be fastened against them since the activities of AIL were within the knowledge of the department during the relevant period. Specifically the appellant had cited a letter dated 7-3-2006 written to the Joint Director of Service Tax to inform the various heads under which it was raising bills on AASL. Further, it has been contended that AIL had not paid service tax under the bona fide belief that it is not payable since AIL had not received payment from AASL.

In the annual report 2003-04, it is mentioned “Non-charging of service tax on certain services”. This implies that even where service tax has been collected the same was not deposited pending registration. It has also been recorded by the statutory auditors that service tax was payable on the services rendered by AIL to AASL. However, on the pretext that consideration has not been received (despite realization of the same from sale of tickets conducted on behalf of AASL), AIL has not discharged the service tax liability. In the light of the observations of the statutory auditors, We are not convinced with the argument taken by appellants that service tax was not paid on the basis of bona fide belief that service tax was not payable. Consequently, we are concluding that Revenue is entitled to invoke the extended period of limitation in this case.”

4.11 In view of the discussions as above, we do not find any merits in this appeal.

5.1 Appeal is dismissed.

(Order pronounced in open court on-24 October, 2024)