2017 (10) TMI 455 - AT - Service Tax

Levy of personal Penalty u/r 77(2) on directors / employees - non payment of service tax by the company - retrospective effect of Section 77(2) - whether the appellants are liable to penalty under Section 77(2) of the Finance Act, 1994 for the offence of non payment of service tax committed by the company M/s Kingfisher Airlines Ltd. wherein the appellants are either directors or employees? Held that - penalty can be imposed on any person who contravenes any of the provisions of this chapter of the Finance Act, 1944 or any rules made thereunder for which no penalty is separately provided in this chapter - In the facts of the case, the offence is nonpayment of admitted liability of service tax by the company M/s Kingfisher Airlines Ltd. The liability is on the company and not on the directors or the employees, therefore if the company fails to discharge the statutory liability, it is the company against whom the action of recovery of such unpaid tax can be made under the statute. Therefore by not paying the dues, the company admittedly contravened the provisions of the chapter of Finance Act,1994 and rules made thereunder. As regards individual persons, in the present case, directors and employees of the KAL are not liable to discharge the service tax liability of KAL, therefore the appellants have not contravened the provisions of Act or rules made thereunder. Rule 26 of CER, 2002 is invokable on the individual person for the specific acts of the individual person prescribed therein. Under this rule a person, other than an assessee, can be penalised. Unlike this rule 26, there is no pari materia rule in the chapter of the Finance Act, 1994 or in the Rules made thereunder. Despite existing of Rule 26, a Rule 27 was made to penalise the assessee, which is pari materia to Section 77(2) of the Finance Act, 1994. Therefore in absence of similar provision of Rule 26 of Central Excise Rules, 2002 in the Finance Act, 1994 or rules made thereunder, no personal penalty on individual person can be imposed in connection with evasion of service tax by the assessee (KAL). For service tax matters, when legislators thought deem fit that individual persons such as director, manager, secretary or other officer, of the company who committed specified contraventions a penal provision by way of insertion of Section 78A was enacted in the Finance Act, 1994. Had the provision of Section 77(2) sufficient for penalising individual person, there was no need of Section 78A. This further strengthen the view that Section 77(2) of the Finance Act, 1994 was not adequate to penalise any individual person. The Section 78A was enacted on 10.05.2013 whereas period in the present case involved is April,2010 to March,2012, hence the same is not relevant in the present case. The appellants can not be penalised invoking section 77(2) of the Finance Act, 1994 as the provision of the same is applicable only on the assessee not on individual person - appeal allowed - decided in favor of appellant.

Summary

Issues Involved:
1. Applicability of Penalty under Section 77(2) of the Finance Act, 1994.
2. Retrospective Application of Section 77(2).
3. Liability of Directors and Employees for Nonpayment of Service Tax by the Company.

Issue-wise Detailed Analysis:

1. Applicability of Penalty under Section 77(2) of the Finance Act, 1994:
The appellants were imposed penalties under Rule 77(2) of the Finance Act, 1994 for nonpayment of admitted liability of Service Tax by M/s. Kingfisher Airlines Ltd. The adjudicating authority imposed penalties on the directors and employees of the company under Section 77(2), which states that any person who contravenes any provisions of the chapter or rules made thereunder, for which no penalty is separately provided, shall be liable to a penalty. The Tribunal analyzed whether the term "any person" includes directors and employees of the company. It concluded that the liability to comply with the provisions of the Finance Act, 1994, and rules made thereunder lies with the company (the assessee) and not with individual directors or employees. Therefore, the appellants, being directors or employees, are not liable under Section 77(2) as they are not the persons legally bound to comply with the service tax provisions.

2. Retrospective Application of Section 77(2):
The appellants argued that Section 77(2) being penal in nature and introduced with effect from May 10, 2013, cannot be applied retrospectively to any offence committed prior to this date. The Tribunal upheld this argument, referencing the Hon'ble Bombay High Court and Supreme Court judgments in the case of S.L. Kirloskar Vs. Union of India, which held that penal provisions cannot be applied retrospectively. Therefore, any penalty imposed under Section 77(2) for acts committed before its introduction is not legally sustainable.

3. Liability of Directors and Employees for Nonpayment of Service Tax by the Company:
The Tribunal examined whether directors and employees can be held liable for the company's failure to pay service tax. It noted that the liability to pay service tax and comply with the provisions of the Finance Act, 1994, rests with the company (M/s. Kingfisher Airlines Ltd.) and not with its directors or employees. The Tribunal compared similar provisions in the Central Excise and Customs Acts, which have specific penal provisions for individuals (e.g., Rule 26 of Central Excise Rules, 2002, and Sections 112/114AA of the Customs Act, 1962). In contrast, the Finance Act, 1994, did not have a similar provision during the relevant period. The Tribunal concluded that in the absence of a specific provision penalizing individual directors or employees, no personal penalty could be imposed on them for the company's service tax evasion.

Conclusion:
The Tribunal found that the appellants could not be penalized under Section 77(2) of the Finance Act, 1994, as the provision applies only to the assessee (the company) and not to individual directors or employees. The Tribunal set aside the impugned order and allowed the appeals, emphasizing that penal provisions cannot be applied retrospectively and that the liability to comply with service tax provisions lies with the company, not its directors or employees.

(Pronounced in court on 26/9/17)