2010 (8) TMI 786 - HC - Service Tax

Imposition of penalty under Section 38(3) of the Finance Act, 1979 ( Finance Act or Act for short) for delay in payment of Foreign Travel Tax to the Government challenged Held that - If one goes through the order of remand, one would find that it was not a limited remand. The remand was to enable the adjudicating authority to consider all the issues after affording opportunity of personal hearing to the petitioner. The first order-in-original dated 14th June, 1999 was in breach of principles of natural justice. Consequently, it was set aside, that too, at the request of the petitioner. The show cause notices were restored to the file of the adjudicating authority for consideration afresh. It was not a limited remand. In that view of the matter, it was open for the adjudicating authority to enhance the amount of penalty in consonance with the provision of sub-section (3) of Section 38 of the Act. Thus, submission made in this behalf holds no water. Appeal dismissed.

Issues Involved:
1. Imposition of penalty under Section 38(3) of the Finance Act, 1979 for delay in payment of Foreign Travel Tax (FTT).
2. Legality of penalty imposed exceeding Rs. 5,000/- as per proviso to Rule 11 of the Foreign Travel Tax Rules, 1979.
3. Interpretation of "failure to pay" under Section 38(3) of the Finance Act.
4. Applicability of mens rea for imposing penalty under Section 38(3).
5. Validity of retrospective application of amended Rule 11 of the FTT Rules.
6. Authority of adjudicating officer to enhance penalty upon remand.

Detailed Analysis:

1. Imposition of Penalty Under Section 38(3) of the Finance Act, 1979:
The petitions challenge the imposition of penalties under Section 38(3) of the Finance Act, 1979 for delayed payment of FTT. The court held that Section 38(3) is clear in its mandate that a penalty must be imposed for failure to pay FTT within the prescribed period. The minimum penalty is one-fifth of the unpaid tax, which can extend up to three times the amount of tax not paid. The court emphasized that the statutory provision is mandatory and does not allow for discretion in imposing the minimum penalty.

2. Legality of Penalty Imposed Exceeding Rs. 5,000/- as Per Proviso to Rule 11 of the FTT Rules:
The petitioners argued that Rule 11 of the FTT Rules caps the maximum penalty at Rs. 5,000/-. The court, however, clarified that in case of a conflict between a substantive statutory provision and a rule, the statute prevails. The court referred to precedents, including ITW Signode India Ltd. v. Collector of Central Excise and Union of India v. Somasundram Viswanath, to support this principle. Therefore, the court held that Section 38(3) of the Finance Act overrides the proviso to Rule 11, making the imposition of penalties exceeding Rs. 5,000/- lawful.

3. Interpretation of "Failure to Pay" Under Section 38(3) of the Finance Act:
The petitioners contended that "failure to pay" should not include delayed payments but only complete non-payment. The court disagreed, interpreting "failure to pay" as encompassing any non-payment within the statutory period. The court referenced the Black's Law Dictionary definition of non-payment and concluded that any delay beyond the prescribed 15 days constitutes a "failure to pay," thus attracting the penalty under Section 38(3).

4. Applicability of Mens Rea for Imposing Penalty Under Section 38(3):
The court addressed whether mens rea (guilty intention) is required for imposing penalties under Section 38(3). Citing several Supreme Court judgments, including Chairman, SEBI v. Shriram Mutual Fund and Director of Enforcement v. MCTM Corporation Pvt. Ltd., the court ruled that mens rea is not an essential element for penalties under Section 38(3). The penalty is for breach of a civil obligation, and the statute does not necessitate proof of guilty intention.

5. Validity of Retrospective Application of Amended Rule 11 of the FTT Rules:
The petitioners argued against the retrospective application of the amended Rule 11, which removed the Rs. 5,000/- penalty cap. The court held that the provision in force at the time of the contravention applies. Therefore, the amended Rule 11 does not affect penalties for past contraventions, and penalties imposed under Section 38(3) remain valid irrespective of the amendment.

6. Authority of Adjudicating Officer to Enhance Penalty Upon Remand:
In the case of Saudi Arabia Airlines, the petitioner argued that the adjudicating authority could not enhance the penalty upon remand. The court found that the remand was not limited but allowed for reconsideration of all issues. Therefore, the adjudicating authority was within its rights to impose a higher penalty in line with Section 38(3) upon re-evaluation.

Conclusion:
The court dismissed all petitions, upholding the penalties imposed under Section 38(3) of the Finance Act, 1979. The court ruled that the statutory provision prevails over the conflicting rule, "failure to pay" includes delayed payments, mens rea is not required for these penalties, and the adjudicating authority can enhance penalties upon remand.

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