2017 (11) TMI 1335 - HC - Service Tax

Penalty - Reverse charge mechanism - Fees for Overseas Borrowing paid to several non-resident financial institutions - Held that - Goodness and precocious conduct of the respondent Corporation in making payment has to be appreciated and not condemned - The respondent-Corporation, to show their bona fides, had paid service tax even for the period prior to 19th April, 2006. Non-contest in the proceedings under Section 73 cannot be used as a ground or reason to establish and show that requirements of Section 78 are satisfied - penalty set aside - appeal dismissed - decided against Revenue.

Summary

Issues:
Imposition of penalty under Section 78 of the Finance Act on a Government of India Corporation for non-payment of service tax on overseas borrowing charges.

Analysis:
The case involved a Government of India Corporation, established to raise funds for Indian Railways, facing a dispute regarding the payment of service tax on charges related to overseas borrowings. The appellant argued that the reverse charge principle applied, making the respondent-Corporation liable for service tax under Section 65 of the Finance Act. The respondent-Corporation, however, contended that no services were rendered in India by the non-resident financial institutions, leading to a disagreement on the tax liability.

The respondent-Corporation, despite their understanding, paid the service tax amount raised by the appellant to avoid disputes, amounting to ?1,21,92,787, along with interest. The central issue revolved around the imposition of penalty under Section 78 of the Finance Act. The appellant argued that the payment made by the respondent-Corporation implied acceptance of fault, satisfying the conditions for penalty imposition, including fraud, collusion, misstatement, or contravention of the Act with intent to evade tax. The appellant equated Section 78 with the proviso to Section 73 for extended recovery periods.

The Court, however, rejected the appellant's argument, emphasizing the respondent-Corporation's good faith and compliance efforts. It highlighted that the respondent-Corporation's payment, even for the period before the relevant amendment, demonstrated their bona fides. The Court held that non-contestation in proceedings under Section 73 did not automatically establish grounds for penalty under Section 78. The Tribunal's decision not to levy a penalty was upheld, considering various factors, including the conduct of the respondent-Corporation. The Court dismissed the appeal, affirming the impugned order without costs, based on the factual findings and the respondent-Corporation's genuine efforts to comply with tax obligations.