2018 (8) TMI 825 - HC - Service Tax

Penalty u/s 78 of the Finance Act, 1994 - service tax was being paid on the net amount received by the respondent that is on the invoice price minus TDS amount withheld by the client - case of Revenue is that the instant case was not one of simple omission or failure, but there was wilful suppression of fact - Held that - As per Section 67 of the Finance Act, 1994, service tax is payable on the gross amount of value service rendered and service tax is payable once the amount billed is realized. But for the investigation, the non payment of service tax would have gone unnoticed. The amount received from the client would include the entire service tax which has been calculated from the customer and it should have been paid to the department. The TDS amount with held cannot be said to include the service tax component - the respondent has received the service tax and has not passed on it to the department. The invoice that is raised would contain the amount payable towards service Tax. The respondent therefore has clearly manipulated their accounts and paid lesser service tax even though they have recovered the entire portion of service tax from the client. The respondent cannot take shelter under a faulty programme when they themselves handled in the system. The service tax could not have been calculated on the basis of the amount received from the clients minus TDS. The respondent is liable to pay penalty. Section 80 of the Finance Act,1994, cannot be invoked - appeal allowed - decided in favor of Revenue.

Summary

Issues Involved:
1. Whether the respondent correctly calculated and paid service tax on the gross amount charged for services.
2. Whether the respondent's failure to pay service tax on the TDS amount withheld by clients constitutes wilful suppression with intent to evade tax.
3. Whether the penalty under Section 78 of the Finance Act, 1994, should be imposed or waived under Section 80 of the Finance Act, 1994.

Issue-wise Detailed Analysis:

1. Calculation and Payment of Service Tax:
The respondent was registered for various services and calculated their service tax liability based on monthly collections, treating the total collection as the cum-tax value. The accounting system did not capture the TDS amount withheld by clients, leading to service tax being calculated on the net amount received (invoice amount minus TDS). The investigation revealed that the respondent did not pay the appropriate service tax on the TDS amount withheld by their clients. The adjudicating authority found that service tax was being paid on the net amount received, not the gross amount charged, as required by Section 67 of the Finance Act, 1994.

2. Wilful Suppression and Intent to Evade Tax:
The adjudicating authority concluded that the respondent's failure to pay service tax on the TDS amount was not a simple omission but a case of wilful suppression of facts with intent to evade tax. The authority noted that the respondent could have detected the mistake during the finalization of accounts or preparation of income tax returns. The non-payment of service tax on TDS amounts was discovered through the department's investigation, indicating wilful suppression. The respondent's claim that the shortfall was due to a software error was rejected as a mere excuse to evade tax.

3. Imposition or Waiver of Penalty:
The Tribunal initially waived the penalty under Section 78 by invoking Section 80, accepting the respondent's contention that the shortfall was due to a system error and not deliberate suppression. However, the High Court found that the respondent's reliance on a faulty software program was not a reasonable cause for failure to pay service tax. The Court emphasized that Section 67 of the Finance Act, 1994, clearly mandates service tax payment on the gross amount charged, and the respondent's actions indicated manipulation to evade tax. Consequently, the High Court set aside the Tribunal's order, reinstating the penalty under Section 78 but allowed a concession of reducing 25% of the penalty amount if paid within 30 days.

Conclusion:
The High Court held that the respondent's failure to pay service tax on the TDS amount was a case of wilful suppression with intent to evade tax. The Court rejected the respondent's defense of a software error and reinstated the penalty under Section 78, while allowing a concession on the penalty amount if paid within a specified period. The judgment underscores the importance of adhering to statutory provisions and the consequences of manipulating accounts to evade tax.