2008 (12) TMI 133 - AT - Service Tax

Appellant, a PSU bank installed a system called Magnetic Ink Character Recognition (MICR) and the same was utilized for clearing of cheques - whether this operation/activity come under the category of Banking and other financial services - confusion prevailing about the taxability which was resolved by the clarification of the C.B.E.C. dated 25-2-2005 - appellant paid the service tax immediately after clarification - no intention to evade service tax - provisions of Section 80 is rightly invocable - while upholding the service tax demand as uncontested, penalties are set aside

Summary

Issues:
Whether the operation of Magnetic Ink Character Recognition (MICR) system for clearing cheques by a Public Sector Undertaking bank falls under the category of "Banking and other financial services."
Appeal against penalties imposed under Sections 75A, 77, and 76, along with the enhancement of penalty under Section 76 by the Commissioner.
Applicability of Section 80 in the case due to uncertainty regarding taxability resolved by a clarification from the C.B.E.C.

Analysis:

1. MICR System Operation Classification: The appellant, a Public Sector Undertaking bank, utilized the MICR system for clearing cheques, leading to a dispute on whether this operation constitutes "Banking and other financial services." The appellant paid the service tax and interest but contested penalties imposed. The Commissioner (Appeals) set aside the penalty under Section 78 but upheld others. The Tribunal noted the confusion surrounding the taxability of such operations, with the RBI initially opining they are not taxable. However, a clarification from the C.B.E.C. on 25-2-2005 confirmed the tax liability under "Banking and other financial services."

2. Penalties Imposed: The appellant's Chartered Accountant did not contest the service tax and interest but sought to set aside penalties under Sections 75A, 77, and 76, as well as the enhanced penalty by the Commissioner. The appellant argued that the uncertainty regarding taxability, resolved by the C.B.E.C. clarification, warranted invoking Section 80 due to lack of intention to evade tax. The Tribunal agreed, considering the appellant's prompt payment post-clarification and the involvement of the Indian Banks Association and RBI in the taxability issue. Consequently, the penalties under Sections 75A, 77, and 76 were waived, invoking Section 80.

3. Applicability of Section 80: The Tribunal found sufficient cause on the appellant's part for the failure to pay service tax, especially given the ambiguity surrounding the taxability of the MICR system operation. Considering the clarification from the C.B.E.C. and the absence of intent to evade tax, the Tribunal held that Section 80 was rightly invocable in this case. As a result, the Tribunal upheld the service tax as uncontested and accepted the prayer to set aside the penalties sustained by the Commissioner (Appeals) in one appeal and to annul the penalty enhancement in another appeal.

4. Final Decision: In conclusion, the Tribunal disposed of the appeals by setting aside the penalties imposed under Sections 75A, 77, and 76, along with the penalty enhancement by the Commissioner, based on the invocation of Section 80 due to the uncertainty surrounding the taxability issue, which was clarified by the C.B.E.C. in favor of tax liability under "Banking and other financial services."