2016 (7) TMI 128 - AT - Service Tax

Demand of service tax from the Sub-contractor - levy of penalty - there was a written agreement between the appellant and main contractor to the effect that the main contractor would discharge the service tax liability of the subject work. That on the strength of such agreement appellant neither paid tax nor filed returns for the subject work. - Held that - the contention of the appellant that the failure to pay tax was because the appellant bona fidely believed that the main contractor would discharge service tax liability as stated in the agreement is not without merits. The second issue is the penalty imposed on account of failure to take registration. it has to be stated, that this is not a case where the appellant totally failed to take registration. Appellant had registration under the category Works Contract Service and not under commercial or industrial construction service. Department is of the view that the service would fall under Commercial or Industrial Construction Service. Both being construction services, the contention of the appellant that they believed that services would fall within the category of works contract service is probable and acceptable. Demand of service tax with interest confirmed - Levy of penalty u/s 77 & 78 waived invoking the provisions of section 80 - Decided partly in favor of assessee.

Summary

Issues:
Challenge to penalty imposed under Section 77 of the Finance Act.

Analysis:
The appellant contested penalties imposed under Section 77 of the Finance Act, relating to failure to take registration and file returns. The case involved civil works undertaken by the appellant for a subcontracted project, where the main contractor was supposed to discharge the service tax liability. However, upon audit in 2008, it was discovered that the appellant had not fulfilled the tax obligations. A show-cause notice was issued, demanding payment along with interest and penalties under various sections of the Finance Act. The original authority confirmed the demand, interest, and penalties, leading to an appeal by the appellant.

Legal Arguments:
During the appeal, the appellant's counsel argued that penalties were wrongly imposed under different sub-clauses of Section 77, which lacked sub-clauses during the relevant period. It was contended that the appellant had registered under Works Contract Service, believing the activities fell within that category, and had a genuine belief that the main contractor would handle the service tax liability. The appellant's failure to pay tax was attributed to this belief. The appellant also highlighted that the penalties under Sections 77 and 78 should be waived.

Counter-Arguments:
The respondent argued that there were no grounds to overturn the penalties, emphasizing that the appellant was aware of the service tax obligations. The reliability of the agreement between the appellant and the main contractor was questioned, and it was asserted that failure to register under the correct service category warranted penalties under Section 77.

Judgment:
The tribunal considered the agreement provided by the appellant, noting that the appellant could collect the service tax from the main contractor as per the agreement. The tribunal found merit in the appellant's argument that the failure to pay tax was due to the belief that the main contractor would handle it. Regarding the penalty for failure to register under the correct category, it was acknowledged that the appellant had registered under Works Contract Service, not Commercial or Industrial Construction Service. Given the circumstances, the tribunal invoked Section 80 of the Finance Act to waive the penalties imposed under Sections 77 and 78. The demand for service tax and interest were upheld, while the penalties were set aside. The appeal was partly allowed on these grounds.