2008 (11) TMI 111 - AT - Service Tax

Penalty enhanced from Rs. 100 to equal amount of tax in revision order - appellant is a State Govt. Undertaking and rendered service on the basis of agreement with Hindustan Zinc Ltd. for supply of material on commission basis - bona fide belief that obligation under Service Tax are to be complied by Hindustan Zinc Ltd. - no intention to evade payment of tax and tax deposited voluntarily with interest before issuance of SCN - penalty of equal amount of tax u/s 76 is not warranted

Summary

Issues:
Imposition of penalty under Section 78 of the Act beyond show cause notice dated 20th June, 2005.
Appellant's status as a State Government Undertaking and the agreement with Hindustan Zinc Ltd.
Delay in depositing the tax and the imposition of penalty.
Applicability of penalty under Section 76 considering the facts and circumstances.

Analysis:

1. The case involved a government-owned corporation engaged in supplying raw materials to small scale industries under an agreement with Hindustan Zinc Ltd. The corporation detected non-payment of service tax during an internal audit in 2005 and promptly discharged the tax liability with interest. A show cause notice was issued proposing tax demand and penalties, leading to imposition of penalties by the adjudicating authority and later revised by the Commissioner of Central Excise.

2. The appellant argued that the imposition of penalty under Section 78 of the Act was beyond the scope of the show cause notice and highlighted their status as a State Government Undertaking, emphasizing that Hindustan Zinc Ltd. was responsible for paying the service tax. The appellant's immediate action upon detecting the non-payment was also stressed to justify the penalty imposed by the Asst. Commissioner of Central Excise.

3. The Revenue, represented by the D.R., supported the Commissioner's findings, citing a delay in tax deposit as a reason for the penalty. However, the appellant contended that the agreement with Hindustan Zinc Ltd. indicated the responsibility of paying service tax lay with them, leading to a genuine belief that the tax obligations were fulfilled by Hindustan Zinc Ltd.

4. Upon review, it was noted that the appellant had a bona fide belief that Hindustan Zinc Ltd. was responsible for the service tax payment, as per the agreement terms. The appellant promptly registered with the Central Excise authorities and discharged the tax liability upon discovery of the non-payment. The judgment referenced a previous case to support the discretionary power of dropping penalties, emphasizing that the appellant did not intend to evade tax payment.

5. The judgment concluded that the penalty under Section 78 was not warranted as the appellant acted in good faith and promptly rectified the tax non-payment. It was emphasized that penalties should be imposed after considering the specific circumstances of each case. The appellant's status as a State Government Undertaking, coupled with their proactive tax payment before the show cause notice, led to the setting aside of the impugned order and restoration of the original Adjudication Order, granting the appeal with consequential relief.