2017 (4) TMI 1180 - HC - Service Tax

Presence of mens rea - imposition of penalty u/s 78 of FA - Investigation was initiated against the petitioner on the basis of intelligence report that the petitioner is engaged in supply of tangible goods on hire basis without obtaining service tax registration - case of petitioner is that they did not obtain service tax registration under bona fide impression that since the petitioner is a goods transport agency under Section 65 (50b) of the FA, 1994, which is exempted from service tax liability under Section 66D of the FA - Held that - It is settled law that an order imposing a penalty for failure to carry out a statutory obligation is the result of quasi-criminal proceedings and penalty will not ordinarily be imposed unless the party obliged has either acted deliberately in defiance of law or was guilty of contumacious or dishonest conduct, or acted in conscious disregard of its obligation. A penalty will not also be imposed merely because it is lawful to do so - presence of mens rea is absolutely necessary ingredient for imposing penalty under Section 78 of the FA, 1994. It is true that agreement between the petitioner and respondent No.3 clearly provides that the petitioner would produce the service tax registration certificate and likewise, reimbursement of service tax was limited to the production of demand regarding payment of service tax. But, it is not in dispute that the petitioner did not produce the service tax registration certificate to respondent No.3, however, immediately after initiation of investigation and upon service of notice of investigation by respondents No.1 and 2, the petitioner had already discharged its tax liability before issuance of show cause notice and paid the service tax liability on 25-7-2014 and discharged interest liability on 26-8-2014. There is no willful suppression of facts to evade tax on the part of the petitioner and it was bona fide on the part of the petitioner, it was not deliberate and in absence of finding relating to mens rea recorded by the Settlement Commission, the penalty imposed upon the petitioner under Section 78 of the FA, 1994 deserves to be quashed. Petition allowed - decided in favor of petitioner.

Issues Involved:
1. Legality of the penalty imposed under Section 78 of the Finance Act, 1994.
2. Determination of whether there was willful suppression of taxable value.
3. Examination of mens rea as a necessary constituent for imposing penalty.
4. Validity of the Settlement Commission’s decision to impose a penalty while granting immunity from prosecution.

Issue-wise Detailed Analysis:

1. Legality of the penalty imposed under Section 78 of the Finance Act, 1994:

The petitioner, a partnership firm, challenged the penalty of ?4,50,000/- imposed by the Customs & Central Excise Settlement Commission under Section 78 of the Finance Act, 1994. The firm argued that the penalty was unsustainable and bad in law. The Department opposed the writ petition, asserting that the penalty was justified due to willful suppression of taxable value by the petitioner.

2. Determination of whether there was willful suppression of taxable value:

The petitioner had not obtained service tax registration, believing it was exempt as a goods transport agency. Upon investigation, the petitioner immediately obtained registration and paid the service tax and interest. The Settlement Commission found that the petitioner had cooperated and made full and true disclosure of its duty liability, yet it imposed a penalty, citing willful suppression of taxable value.

3. Examination of mens rea as a necessary constituent for imposing penalty:

The court examined whether the petitioner acted with mens rea, i.e., deliberate intent to evade tax. Section 78 of the Finance Act, 1994, similar to Section 11AC of the Central Excise Act, 1944, requires mens rea for imposing penalties. The Supreme Court's rulings in cases like Union of India v. Rajasthan Spinning and Weaving Mills and Commissioner of Central Excise, Chandigarh v. Pepsi Foods Ltd. emphasized that penalties under these sections necessitate proof of willful misstatement or suppression of facts.

4. Validity of the Settlement Commission’s decision to impose a penalty while granting immunity from prosecution:

The court noted that the petitioner had discharged its tax liability before the issuance of the show cause notice and had not benefited from evading tax, as the service tax was recoverable from the service recipient. The Settlement Commission had granted immunity from prosecution, indicating no mens rea on the petitioner's part. The court held that the absence of mens rea meant the penalty under Section 78 was unwarranted.

Conclusion:

The court concluded that there was no willful suppression of facts by the petitioner. The petitioner’s actions were bona fide and not deliberate. Given the lack of mens rea and the Settlement Commission's grant of immunity from prosecution, the penalty imposed under Section 78 of the Finance Act, 1994, was quashed. If the penalty amount had been recovered or paid, it was to be refunded to the petitioner within four weeks. The court reiterated that the presence of mens rea is essential for imposing penalties under Section 78 of the Finance Act, 1994.

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