The Hyderabad Bench of Customs, Excise and Service Tax Appellate Tribunal(CESTAT) set aside the ₹7.16 crore penalty imposed under Section 78 of Finance Act,1994 holding that there was no evidence of suppression or intent to evade tax in the delayed service tax payments made by the appellant for manpower supply services.
KRS Erectors Pvt Ltd,appellant-assessee,was investigated following intelligence inputs, leading to a Show Cause Notice alleging non-payment and short payment of service tax for manpower supply services provided to Power Mech Projects Ltd during 2014–15 and 2015–16. The department claimed the appellant failed to deposit collected service tax, delayed return filing, and wrongly availed exemption, resulting in a total short payment of Rs. 7.16 crore.
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Although the assessee paid the full tax and interest before the notice was issued, the adjudicating authority held that the delay and non-disclosure amounted to suppression. Relying on past rulings, the authority upheld the invocation of the extended period under section 73(1) and imposed penalty under section 78 on the assessee and section 78A on the Director, Shri K. Bhaskar Rao. The argument that the notice and penalties were unwarranted due to pre-SCN payment was rejected.
The tribunal heard both sides and took up both connected appeals together. The assessee did not challenge the service tax demand or interest but only questioned the penalties imposed under Sections 78 and 78A for the period April to September 2015.
They had delayed paying service tax but cleared about 40% of the dues by October 30, 2015—just a day after receiving the first summons. They later paid the remaining amount, filed the return late on December 4, 2015, and submitted a revised return on January 21, 2016, voluntarily correcting the exemption claims and paying additional tax. These actions were taken on their own, not on departmental instructions.
There was no dispute regarding the nature or value of services. The entire tax and interest had been paid before the Show Cause Notice was issued. In fact, the assessee even paid more interest than required, and the department did not dispute this.
The main issue was whether issuing the notice under the extended period and denying relief under Section 73(3) was justified.
The assessee relied on several rulings to argue that no notice was needed once tax and interest were fully paid. The tribunal also found that while the department claimed the assessee collected tax but didn’t deposit it, there was no evidence to prove this. The only established fact was that they received payment for services but delayed the tax payment.
The department argued that the appellant paid service tax only after the investigation started. However, ₹4.36 crore was already paid before the investigation, and the rest ,₹7.16 crore including interest was paid during the investigation. Only ₹5.63 lakh of interest was pending and under reconciliation.
The assessee was registered under service tax and regularly filed returns, though sometimes late. The issue was whether the delay was intentional or not.
The investigation began in October 2015 and continued into 2018. The assessee explained the mismatch in records was due to unfinalized accounts and work pressure. Taxes were later paid with interest.
The department claimed suppression and non-payment of collected tax, but gave no solid proof. The appellant had filed returns and explained the differences. The law also allowed revised returns with interest and late fees.
The two member bench comprising Angad Prasad(Judicial Member) and A.K.Jyotishi(Technical Member) referred to past rulings where penalties were not upheld in similar cases. It found no fraud or intent to evade. It held this was a case of delayed payment and filing, not suppression.
Since the investigation ended in 2016 and the SCN came only in 2018, the tribunal said the extended time limit and penalty were not justified.It set aside the ₹7.16 crore penalty under section 78 .
The appeal was partly allowed.
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