CESTAT Sets Aside Penalty and Interest on Delayed Service Tax Payment for Lack of Fraud and Time-Barred Claim [Read Order]

The Ahmedabad Bench of Customs,Excise and Service Tax Appellate Tribunal(CESTAT) set aside the penalty and interest demand on delayed service tax payment, citing lack of fraud and a time-barred claim.

Krupa Engineering and Co,appellant-assessee,supplied manpower and tangible goods. During the audit of its financial records for 2005-06, 2006-07, and 2007-08, the department found that it provided manpower and agency services to Gujarat Alkalies and Chemicals Limited. Following the audit, the assessee voluntarily paid ₹8,47,977 as service tax on March 25, 2011.

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On August 7, 2014, the department issued a show cause notice demanding ₹4,45,118 as interest under Section 75 of the Finance Act, 1994. A corrigendum issued the same day invoked penalties under Section 78 for late payment of service tax.

In the order dated February 10, 2016, the adjudicating authority confirmed the interest demand and imposed a penalty of ₹8,47,977. The Commissioner (Appeals) later upheld this decision on August 16, 2016.

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Aggrieved by the decision of the Commissioner (Appeals) the assessee appealed before teh tribunal.

The assessee's counsel, argued that the assessee had paid the entire service tax under protest before the show cause notice was issued. He claimed it was unfair for the authorities to impose interest and a penalty under Section 78 of the Finance Act, 1994, as all transactions were properly recorded with no fraud or suppression.

He stated that the contracts with Gujarat Alkalies and Chemicals Limited were for specific work at fixed rates, not for manpower supply. Since the tax had already been paid, he did not press this point.

The counsel referred to Supreme Court and Gujarat High Court rulings, which held that interest on unconfirmed or time-barred demands was not valid. He also cited a case stating that the limitation period for the principal amount should apply to interest claims unless the law specifies otherwise.

Read More: Taxpayer is liable to pay Interest on Service Tax Paid in Delayed Manner: CESTAT Upholds Rejection of Refund Claim

A single member bench comprising C.L Mahar(Technical Member) reviewed the submissions and found that the assessee had voluntarily paid the service tax shortfall identified during the department's audit for the period 2005-06 to 2007-08. The payment was made through GAR-7 challan No. 00003 dated 25.02.2011, while the show cause notice demanding interest was issued later on 07.08.2014. A corrigendum issued on the same date also invoked penalty provisions under Section 78 of the Finance Act, 1994.

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The appellate tribunal noted that for a penalty under Section 78 to apply, the department needed to establish fraud, collusion, willful misstatement, suppression of facts, or rule violations with intent to evade tax. However, since the audit findings were based solely on contracts with Gujarat Alkalies and Chemicals Limited, which were already on record, no such intent was proven. The CESTAT also considered the service classification dispute irrelevant, as the assessee had already paid the service tax.

Regarding interest under Section 75, the tribunal held that the demand raised in 2014 for payments made in 2011, related to the 2005-08 period, was beyond the normal limitation period. It relied on the Gujarat High Court's ruling in GNFC Limited, which stated that interest on time-barred demands was not valid.

Based on these findings, the bench ruled that the impugned order was legally unsustainable and set it aside. The appeal filed by the assessee was allowed.

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