Service Tax Penalty u/s 78 Remains Unsustainable Where Liability Was Unclear During Relevant Period: CESTAT [Read Order]

The Chennai Bench of the Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) has held that the penalty under Section78 of the Finance Act, 1994 cannot be levied if the service tax liability itself was not clear and an issue of interpretation arose during the relevant time period. The Tribunal, therefore, set aside the penalty imposed on the assessee.

The appellant, M/s. Devi Tyres, was carrying on the business of tyre retreading and repair services. The Department issued a show cause notice to the appellant for failing to pay the service tax liability for the period from April 2009 to September 2011 treating the activity as maintenance or repair service.

Although the assessee paid the entire service tax liability along with the interest due, as pointed out by the Department, the adjudicating authority imposed a penalty under Section 78 of the Finance Act, 1994, for suppressing the facts. The assessee was not satisfied with the imposition of the penalty and filed an appeal before the Tribunal.

The assessee argued that during the disputed period, the taxability of tyre retreading services was not clear and was finally clarified by judicial decisions only later. The assessee relied on the fact that the assessee had acted on a bona fide belief, had not collected service tax from clients, and had paid the tax along with interest, thus ruling out any intention to evade tax.

Further, the Revenue maintained that the failure to pay service tax justified the imposition of the penalty provisions.

READ MORE:Wrongful GST ITC Availment Amounting To ₹17.8Cr: Chattisgarh HC Grants Anticipatory Bail

The bench of two members, consisting of P.Dinesha (Judicial Member) and Vasa Seshagiri Rao (Technical Member) held that since the penalty under Section 78 is penal in nature there must be clear evidence of wilful suppression or evasion of tax.

The Tribunal further held that where the dispute is with regard to the interpretation of taxability and the assessee has paid the tax and interest promptly, the penalty cannot be sustained.Therefore, it allowed the appeal and set aside the penalty imposed under Section 78.

Subscribe to Taxscan Premium for latest Job updates on WhatsApp. Stay informed and advance your career with us