Entire Liability Computed from Taxpayer's Records and Returns Filed Before SCN: CESTAT Rules Service Tax Penalty Unjustified [Read Order]

The Chennai Bench of the Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) ruled that a service tax penalty is not justified when the entire tax liability was calculated from the taxpayer’s own records, and returns were filed before the issuance of the show cause notice (SCN).

Nine Stars Information Technologies Ltd., the appellant, is a company based in Chennai engaged in providing software development and digitization services to domestic and international clients. During the period from April 2008 to March 2011, the appellant collected service tax from customers but failed to deposit the full amount with the government. They also did not file their ST-3 returns for the relevant period on time.

The department issued a show cause notice on April 10, 2013, demanding service tax of Rs. 1,25,34,226 along with interest, penalty under Section 78 of the Finance Act, 1994, and late fee for non-filing of returns. The adjudicating authority confirmed the demand, appropriated the tax already paid, and imposed the penalty and late fee.

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The appellant’s counsel argued that almost the entire tax liability, except for a small shortfall, had been voluntarily paid before the issuance of the SCN. They also submitted that the full liability had been determined from their own books of accounts and that they had filed all pending returns before the notice was issued.

They claimed that the delay in tax payment was due to financial hardship and not due to an intention to evade tax. They argued that since tax and interest had been paid before the notice, the case fell under Section 73(3) of the Finance Act, which prohibits a penalty in such situations.

The department counsel argued that the appellant had collected service tax from customers but failed to deposit it until detected during an audit. They argued that this was a case of suppression of facts, which justified the invocation of the extended limitation period and penalty under Section 78.

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The two-member bench comprising Ajayan T.V. (Judicial Member) and Vasa Seshagiri Rao (Technical Member) observed that the tax liability was calculated based on the appellant’s own records and that most of the tax, along with interest, had been paid before the notice was issued.

It further observed that there was no evidence of fraud or intent to evade tax. The tribunal held that the requirements for invoking the extended period and imposing a penalty under Section 78 were not satisfied.

The tribunal also observed that the shortfall in payment was minor and should have been communicated by the department rather than penalized. It found that the appellant had failed to file service tax returns within the prescribed time. The appellant’s appeal was partly allowed, with the penalty under Section 78 being set aside and the late fee demand being upheld.

CESTAT Chennai ruled that the service tax penalty was unjustified as the liability was computed from the taxpayer's records and returns filed before the show cause notice.

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