Penalties under Sections 76 and 78 of Finance Act cannot be Imposed Simultaneously: CESTAT sets aside Penalty u/s 76 [Read Order]

In a recent ruling, the Customs, Excise & Service Tax Appellate Tribunal (CESTAT), Ahmedabad Bench, has ruled that penalties under Sections 76 and 78 of the Finance Act, 1994 cannot be imposed simultaneously. The Tribunal accordingly set aside the penalty levied under Section 76 while upholding other statutory liabilities.

M/s KHS Machinery Pvt. Ltd., the appellant is engaged in services including erection, commissioning, installation, business auxiliary, goods transport agency, and intellectual property rights.

During the audit, authorities discovered that the appellant had availed business support services from a German consultant without discharging service tax under the reverse charge mechanism. A show cause notice was issued demanding service tax of ₹32.72 lakh with interest, along with penalties under Sections 76, 77, and 78.

The adjudicating authority confirmed the demand, interest, and imposed equal penalty under Section 78 besides additional penalty under Section 76. The Commissioner (Appeals) partly relieved the assessee by dropping demand on reimbursable expenses but upheld the remaining tax, interest, and penalties.

The assessee then approached the Tribunal, arguing that once penalty under Section 78 had been imposed, no penalty could survive under Section 76, as both provisions operate in distinct spheres.

The Tribunal referred to the Gujarat High Court ruling in Raval Trading Company v. CST, 2016, which clarified that Section 76 covers cases of non-payment not involving fraud, suppression, or misstatement, while Section 78 specifically addresses cases of deliberate evasion.

Thus, simultaneous penalties under both sections are impermissible. The Bench also noted similar decisions including CCE v. Pannu Property Dealer and CCE v. Silver Oak Gardens Resort, where concurrent penalties were struck down as unduly harsh.

The court noted the case of The Financers Vs. Commissioner of Central Excise, Jaipur and in the case of Commissioner of Central Excise, Ludhiana Vs. Pannu Property Dealers, where it was held that “equal penalty under Section 78 has been imposed, prima facie, there is no justification for imposition of penalty under Section 76.”

Noting that the appellant had already discharged service tax and interest, the bench of Ajaya Krishna Vishvesha (Judicial member) and Satendra Vikram Singh (Technical member) held that their case fell squarely within the settled jurisprudence and ordered deletion of the penalty under Section 76. However, the penalty under Section 78, being equal to the tax evaded in cases of suppression, was sustained.

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