No Sections 77 & 78 Penalties if No Intent to Evade Service Tax Payment

Passi Construction Vs CCE & ST- Ludhiana (CESTAT Chandigarh)

In a recent ruling by the Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) Chandigarh, in the case of Passi Construction versus the Commissioner of Central Excise, Ludhiana, it has been held that penalties under Sections 77 and 78 of the Finance Act, 1994 will not be applicable if there is no intent to evade payment of service tax.

Background:

The appellant, Passi Construction, was engaged in providing services related to building and civil structures falling under the category of “Commercial or Industrial Construction Services.” The dispute arose during an audit of the records of M/s Ganga Acrowools Ltd, where it was observed that the appellant had received a considerable amount for providing commercial or industrial construction services. A show-cause notice was issued, demanding service tax along with interest and penalties.

The appellant contended that they had already discharged their service tax liability by paying a certain amount with interest. The Commissioner (Appeals) confirmed the demand of service tax, dropped a portion deposited by the appellant, and denied certain benefits and abatement. Penalties under Sections 76, 77, and 78 were imposed.

Key Observations:

Abatement Benefit: The tribunal observed that the Commissioner (Appeals) had not allowed the benefit of abatement on the gross value to the extent of 67% under Notification No. 1/2006-ST dated 01.03.2006. The appellant argued that they had provided evidence to establish that it was a works contract and that the gross amount charged included the value of goods and materials supplied. The service recipient had issued a certificate supporting this claim.

Works Contract Certification: The tribunal noted that the service recipient had certified that the contract was inclusive of material and goods required for completion, and no separate payment was made for the supply of material. Additionally, the service recipient deducted Works Contract Tax TDS under the Punjab VAT Act, further supporting the nature of the contract.

CBEC Circular and Legal Precedent: The tribunal emphasized a circular issued by the Central Board of Excise and Customs (CBEC) stating that contracts treated as works contracts for the purpose of VAT/Sales Tax would also be treated as works contracts for the purpose of levy of Service Tax.

Limitation on Demand: The tribunal held that the substantial demand was barred by limitation as the department failed to establish that the appellant intended to evade the payment of service tax, a crucial factor for invoking the extended period of limitation.

Penalties and Lack of Intent: Since the appellant paid the service tax after the audit objection and availed abatement, the tribunal concluded that there was no intention to evade payment of service tax. As a result, penalties under Sections 77 and 78 were not justified.

Conclusion:

In light of the above considerations, the tribunal set aside the impugned order, allowing the appeal of Passi Construction and providing consequential relief, if any, as per the law. The ruling reinforces the principle that penalties should be imposed judiciously, considering the taxpayer’s intent and compliance actions.

FULL TEXT OF THE CESTAT CHANDIGARH ORDER

The present appeal is directed against the impugned order dated 30.10.2012 passed by the Commissioner (Appeals) of Central Excise, Chandigarh-I whereby the Ld. Commissioner (Appeals) has confirmed the demand of service tax and also dropped the amount of service tax of Rs. 11,47,641/- deposited by the appellant and gave cum tax benefit. The Ld. Commissioner (Appeals) also did not extend the benefit of 67% of abatement under Notification No. 1/2006-ST dated 01.03.2006. However, he has dropped the penalty under Section 76 of the Finance Act, 1994, but has not extended benefit of Section 80 and also confirmed the penalties under Section 77 and 78 of the Act.

2. Briefly the facts of the case are that the appellant is engaged in providing services in relation to building and civil structure or a part thereof, falling under category of “Commercial or Industrial Construction Services”. During the course of audit of the records of M/s Ganga Acrowools Ltd, it was observed that during the period 22.06.2006 to 31.08.2010, the appellant had received Rs. 3,08,64,546/- for providing commercial or industrial construction services to them. It appeared that the appellant was required to pay service tax of Rs. 37,53,353/- w.e.f. 22.06.2006 which was not paid by the appellant.

• Accordingly, a show cause notice dated 01.01.2010 was issued to the appellant demanding service tax alongwith interest and penalty.
• The appellant filed a detailed reply to the show cause notice and submitted that they have already discharged their service tax liability by paying Rs. 11,04,433/- with interest of Rs. 60,020/- in 2008 for the said receipt of Rs. 3,08,64,546/- being inclusive of material (after availing abatement under Notification 1/2006) and Cum tax benefit as per Section 67(2).
• After following due process, the Adjudicating authority confirmed the demand of Service Tax of Rs. 37,53,353/- under Section 73 and ordered recovery of Interest under Section 75 and also imposed penalty under Section 76, 77 & 78.
• Aggrieved by the said order, the appellant filed appeal before the Commissioner (Appeals) who appropriated amount of service tax of Rs. 11,04,433/- deposited by Appellant and gave Cum tax benefit but did not extend benefit of 67% abatement under Notification 1/2006.
• Hence, the present appeal.

3. Heard both the parties and perused the records.

4. Counsel for the appellant submitted that the impugned order is not sustainable in law as the same has been passed without appreciating the facts and the law. He further submitted that the Ld. Commissioner (Appeals) has not allowed the benefit of abatement on the gross value to the extent of 67%, which has been allowed by the Govt. of India under Notification No. 1/2006-ST, for the works which involve supply of material and service (composite contract). He further submits that the invoices which were raised by the Appellant to the Party make it clear that Appellant was providing composite service which involved supply of material alongwith service. He also submits that the appellant has also obtained a Certificate from the Party that work undertaken by Appellant was inclusive of material and goods required for completion, and as such the Party had not paid anything for supply of material separately.

• Ld. Counsel further submitted that the service recipient ledger of the appellant shows that the recipient had deducted VAT TDS @ 4% on payments made to Appellant, which is deducted only in cases where the contract is a Works Contract’ (inclusive of material), as per the Punjab VAT Act.
• Ld. Counsel further submits that the appellant was wrongly made to pay Service Tax under the head “Commercial Construction Services and “Industrial Construction Services” whereas the nature of work done by the appellant was works contract and the appellant has been filing VAT/Sales Tax return, which has been finalized by the State authorities as Works Contract and Sales Tax has been deducted accordingly.
• Ld. Counsel further referred to the Board’s Circular No. B1/16/2007-TRU which provides “Contracts treated as works contract for purposes of levy of VAT/Sales Tax shall be treated as works contract for purpose of levy of Service Tax”.
• Ld. Counsel also referred to the definition of Section 65(105) (zzzza) Finance Act, 1994 which provides that the works contract means a contract wherein transfer of property in goods involved in the execution of such contract is leviable to tax as sale of goods.
• Ld. Counsel further submitted that the works contract service has been introduced w.e.f. 01.06.2007 and was not taxable prior thereto and therefore, the works contract cannot be held taxable prior to 01.06.2007 as Commercial Construction Services.
• Ld. Counsel further submitted that the Hon’ble Supreme Court in the case of Commissioner vs. Daelim Industrial Co. Ltd. has held that the introduction of a new entry for the purpose of levy of tax presupposes that it was not covered by any of the pre-existing entries.
• Ld. Counsel also relied upon the decision in the case of National Building Construction Corp. Ltd. v. CCE, Shillong 2022 (66) GSTL 476 (Tri.-Kolkata) wherein it has been held that the composite contracts for construction involving supply of goods and services executed prior to 1.06.2007 not leviable to Service Tax under Commercial or Industrial Construction Services’.
• Ld. Counsel also submitted that the appellant was entitled to the benefit of Section 80 and no penalty should be imposed on him because he is unaware of liability of service tax and as soon as he came to know, he paid the tax alongwith interest before issuance of the show cause notice and therefore, should have been allowed the benefit of Section 80.
• Ld. Counsel also submits that the present demand of service tax is for the period 2006-2010 whereas the show cause notice is issued on 01.10.2010 and therefore, the time period prior to 01.10.2009 is time barred as there was no intend to evade payment of service tax.

5. On the other hand, the Ld. DR reiterated the findings in the impugned order and submitted that the Ld. Commissioner (Appeals) has rightly denied the benefit of abatement as provided in Notification No. 1/2006-ST dated 01.03.2006.

6. After considering the submissions made by both sides and perusal of material on record, we find that the Ld. Commissioner (Appeals) has not allowed the benefit of abatement on the gross value to the extent of 67% on the ground that the appellant has failed to supply any evidence showing supply of material alongwith service, and that the gross amount charged by them was inclusive of value of goods and material supplied.

7. To counter this, the Ld. Counsel submits that they have provided sufficient evidence to show that it was a works contract. Moreover, the service recipient has also issued a certificate dated 30.12.2010 to the Appellant, whereby the Service Recipient has certified that all work undertaken by the Appellant is inclusive of material and goods required for completion of the job/contract. Further, they have also certified that the present contract is a composite contract of supply of goods and service and that the Service Recipient has not paid anything for the supply of material separately.

8. Besides this, the service recipient is also admittedly deducted 4% Works Contract Tax TDS under the Punjab VAT Act, 2005 on the payment made to the appellant and this 4% Works Contract Tax TDS is only deducted if the payment is made for a Works Contract in terms of Section 27 of the Punjab VAT Act, 2005.

9. Further, we find that the CBEC has issued a Circular No. B1/16/2007-TRU dated 22.05.2007 and clarified as under:-

“Para9.10- Contracts treated as works contract for purposes of levy of VAT/Sales Tax shall be treated as works contract for purpose of levy of Service Tax. This is clear from the definition under Section 65(105)(zzzza).

The said Circular issued by the Board is binding on the Revenue Authorities as held by the Hon’ble High Court of Punjab and Haryana in the case of Ambuja Cements Ltd. vs. Union of India, 2009 (14) STR 3 (P&H).

10. Further, we find that the substantial demand is barred by limitation because the department has not been able to establish that the appellant had intended to evade the payment of service tax which is essential ingredients to invoke the extended period of limitation.

11. Further, we find that since the Audit raised the objection, the appellant paid the service tax after availing the abatement of 67% alongwith interest and therefore, it can safely be said that there was no intention to evade the payment of service tax, therefore, the penalties under Section 77 and 78 are not liable to be imposed on them.

12. In view of our discussion above, we hold that the impugned order is not sustainable in law and the same is set-aside by allowing the appeal of the appellant with consequential relief, if any, as per law.

(Pronounced on 20.10.2023)