2011 (2) TMI 358 - AT - Service Tax

Penalty - Rule 2(1)(d)(iv) of Service Tax Rules, 1994 for the period after 18.04.2006 i.e., after insertion of Section 66A of the Finance Act, 1994 - Respondent is a manufacturer of cotton yarn who export to various foreign countries - The service tax demand which is not being disputed has arisen in their capacity as recipients - It is also not in dispute that whatever service tax paid by them as recipient was available as credit and that they were eligible for rebate of duty on yarn cleared on payment of duty utilising such credit - Revenue held that the stay order of the Hon ble High Court in relation to Rule 2(1)(d)(iv) when section 66A was not in force may not apply to the period when Section 66A is in force, the belief entertained by the respondent cannot be held other than bonafide especially in the context of Revenue neutrality as the entire tax paid by them as recipient was available to them as credit - The respondents have not disputed the tax liability primarily on the ground that whatever service tax paid by them was available to them as credit - Decided in favour of assessee.

Summary

Issues:
Appeal against setting aside penalty under Section 78 of the Finance Act, 1994 by Commissioner (Appeals).

Analysis:
The case involved an appeal by the department against the order of the Commissioner (Appeals) setting aside a penalty imposed on the respondent under Section 78 of the Finance Act, 1994. The respondent, a manufacturer of cotton yarn exporting to foreign countries, had engaged foreign-based agents and paid them commission. The original authority confirmed a duty demand, which was later set aside by the Commissioner (Appeals), leading to the department's appeal. The main dispute revolved around the recipient's liability under Rule 2(1)(d)(iv) of the Service Tax Rules, 1994 post the introduction of Section 66A of the Finance Act, 1994. The department argued that the stay order by the High Court of Madras, related to a period before Section 66A, could not justify the respondent's belief in not paying service tax, hence the penalty should not have been set aside.

The department contended that the respondent's belief in not paying service tax was not justified, as the tax was eligible for CENVAT credit, and the stay order did not apply to the relevant period. The respondent, on the other hand, argued that they had taken CENVAT credit for the service tax paid later and had deposited the entire service tax amount with interest upon notification by the department. They claimed a bonafide belief based on the High Court's stay order and the availability of credit. The respondent also cited a Supreme Court decision in support of their position.

The tribunal carefully considered both arguments and the facts of the case. It noted that the respondent's tax liability as a recipient was not disputed, and the tax paid was available as credit, ensuring revenue neutrality. While acknowledging the department's argument regarding the High Court's stay order, the tribunal found the respondent's belief to be bonafide, given the availability of credit and the lack of dispute over the tax liability. Consequently, the tribunal upheld the Commissioner (Appeals)'s decision to set aside the penalty under Section 78, as it deemed the decision reasonable and justified under the circumstances. The appeal by the department was rejected, and the judgment was pronounced in open court.