Penalty Not Sustainable Where Service Tax Under RCM Paid Before SCN & No Intent to Evade Shown: CESTAT in Reliance Cellulose Case [Read Order]

In a recent ruling, the Hyderabad Bench of the Customs, Excise and Service TaxAppellate Tribunal (CESTAT) held that penalty under Section 78 cannot be imposed when service tax under Reverse Charge Mechanism was paid before issue of show cause notice and there was no intention to evade tax.

Reliance Cellulose Products Ltd., the appellant, had taken Goods Transport Agency (GTA) services during the relevant period. As per law, service tax on GTA service was required to be paid by the service recipient under Reverse Charge Mechanism. It was not disputed that the appellant did not pay service tax on time.

When the lapse was pointed out by the department, the appellant paid the service tax amount and also claimed abatement as per notification. The department objected to the abatement on the ground that full supporting documents were not submitted and issued a show cause notice proposing demand of tax, interest and penalty.

The adjudicating authority allowed abatement to the extent documents were produced and denied the remaining part. A demand of Rs. 5,57,717 along with interest and equal penalty under Section 78 was confirmed. Later, the Commissioner (Appeals) allowed adjustment of excess service tax paid through ST-3 returns. By the time the case reached the Tribunal, the entire service tax and interest was already paid.

Before the tribunal, the appellant challenged only the penalty. The appellant’s counsel argued that there was a bonafide belief that service tax under Reverse Charge Mechanism was not payable, which caused delay in payment. It was argued that tax was paid even before issue of show cause notice and most of the abatement claimed was later accepted by the department. The counsel argued that there was no intention to evade tax and penalty should be waived under Section 80.

The department argued that the appellant failed to pay service tax as required under law and penalty was correctly imposed.

The two-member bench comprising A.K. Jyotishi (Technical Member) and Angad Prasad (Judicial Member) observed that though service tax was not paid during the relevant period, it was also clear that the appellant paid the tax before issuance of show cause notice. The tribunal observed that major part of demand was dropped after allowing abatement and adjustment of excess tax was also allowed.

The tribunal observed that looking at the facts as a whole, there was no deliberate intention to evade payment of service tax. It pointed out that the failure was later corrected and reasonable cause was shown by the appellant.

In view of this, the tribunal set aside the penalty imposed under Section 78 and partly allowed the appeal, while the rest of the order was upheld.

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