In Serum Institute of India Ltd v. Commissioner of Central Excise Pune III, the division bench of the Mumbai CESTAT held that if the constitutional validity of the levy of Service Tax is under challenge, that would be a reasonable cause for not discharging service tax liability under reverse-charge mechanism and in such a case, penalty cannot be levied on the assessee.
The issue in dispute in this case is regarding discharge of service tax liability by the appellant on an amount paid by them as consideration for technical advices and consultancy services to the service providers who are situated abroad. According to the Revenue, service tax is applicable from 18/04/2006.
The appellants contended that they have already discharged the service tax liability and interest thereon, before the issuance of show cause notice and have also taken CENVAT credit, which is recorded by the adjudicating authority in paragraph 17 and they have also paid penalty under Section 76 of the Finance Act, 1994. Therefore, penalty under 78 is need to be deleted.
The bench noted that the appellant has discharged the entire service tax liability, interest and penalty under Section 76 of the Finance Act, 1994.
“We find that the period involved in this case is from 18/04/2006 to 30/09/2006 during which period there was confusion as to whether service tax liability would arise on the person making the payment for the services received from overseas service providers. The issue was finally settled by Honble High Court of Bombay in the case of Indian National Shipowners Association [2009 (13) STR 235 (Bom)], which was upheld by the Honble apex Court. Since there was confusion and constitutional validity of the provisions of Section 66A was being challenged, we find that it is a fit case to hold that the appellant had justifiable reasons for not discharging service tax liability under reverse-charge mechanism. Invoking the provisions of Section 80 of the Finance Act, 1994, we set aside the impugned order to the extent it upholds the penalty imposed under Section 78 of the Finance Act, 1994. We also find strong force in the contentions raised by the Learned Counsel that this issue is also covered by the provisions of Section 73(3) of the Finance Act, 1994 which mandates for non-issuance of show cause notice, if the Service Tax liability and interest thereof is discharged by the assessee before issuance of show cause notice.”
Read the full text of the order below.