CESTAT Strikes Down Penalties u/s 78, Finds No Wilful Misstatement in Service Tax Lapses [Read Order]
The Bench upheld that Penalties Cannot be Imposed for Mere Technical or Venial Breaches without Evidence of Intent to Evade
The Principal Bench of the Customs, Excise & Service Tax Appellate Tribunal (CESTAT) at New Delhi, has set aside penalties imposed on assessee, after holding that the non-payment of service tax and wrong availment of Cenvat credit were the result of inadvertent omission and not suppression of facts.
The appeal concerned discrepancies noticed during an audit conducted on a test-check basis, including non-payment of service tax on certain income heads, non-payment under the Reverse Charge Mechanism for rent-a-cab and legal services, and availability of ineligible Cenvat credit.
A show cause notice invoking the extended period under Section 73(1) of the Finance Act, 1994 was issued, proposing recovery of service tax of ₹6,37,205, disallowance of Cenvat credit of ₹7,45,819, interest, and penalties.
Section 73(1) reads as:
“Determination of tax pertaining to the period up to Financial Year 2023-24 not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilised for any reason other than fraud or any willful-misstatement or suppression of facts -
(1) Where it appears to the proper officer that any tax has not been paid or short paid or erroneously refunded, or where input tax credit has been wrongly availed or utilised for any reason, other than the reason of fraud or any wilful-misstatement or suppression of facts to evade tax, he shall serve notice on the person chargeable with tax which has not been so paid or which has been so short paid or to whom the refund has erroneously been made, or who has wrongly availed or utilised input tax credit, requiring him to show cause as to why he should not pay the amount specified in the notice along with interest payable thereon under Section 50 and a penalty leviable under the provisions of this Act or the rules made thereunder.”
Before the Tribunal, the appellant, NationalInstitute of Public Finance and Policy (NIPFP), accepted its tax and interest liability, noting that the entire amount stood deposited even prior to issuance of the show cause notice.
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However, it contested the imposition of penalties under Section 78 of the Finance Act and Rule 15(3) of the Cenvat Credit Rules, 2004, arguing that there was no element of willful suppression.
The Revenue contended that non-declaration of liability and availment of ineligible credit constituted suppression and justified the invocation of the extended period.
The single-member Bench comprising Dr. Rachna Gupta (Judicial Member), observed that penalties under Section 78 and Rule 15(3) can be imposed only when non-payment or wrong availment occurs due to fraud, collusion, willful mis-statement, or deliberate suppression. Relying on the Supreme Court’s rulings in Hindustan Steel Ltd. v. State of Orissa and Continental Foundation v. CCE, the Bench held that penalties cannot be imposed for mere technical or venial breaches without evidence of intent to evade.
It noted that the record did not establish deliberate concealment and that the appellant had promptly deposited the entire tax and interest when the discrepancies were pointed out. Considering that the appellant is also a governmental authority, the Tribunal held that the stringent consequences of penalty were unwarranted.
Accordingly, CESTAT set aside the penalties imposed under Section 78 of the Finance Act, 1994 and Rule 15(3) of the Cenvat Credit Rules, 2004, while leaving the tax and interest liability undisturbed. The appeal was disposed of with the impugned order modified to this extent.
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