2022 (2) TMI 734 - AT - Service Tax

Quantum of penalty - penalty of ₹ 2,56,000/- being confirmed against him against the duty liability of the appellant for an amount of ₹ 40,318/- - whether the said imposition is not permissible being disproportionate? - HELD THAT - Reliance placed upon the decision of Hon ble Karnataka High Court in PHILIPS ELECTRONICS INDIA LTD. VERSUS STATE OF KARNATAKA 2009 (1) TMI 182 - KARNATAKA HIGH COURT wherein it has been held that the penalty cannot be more than the tax amount to be recovered from the assessee. It was specifically held by the Hon ble High Court that penalty based on extent of delay which sometimes exceeds the liability is grossly disproportionate and arbitrary penalty which is also an irrational levy automatically looses nexus achieving the object of correcting mischief sought to be preventive by the Legislation and therefore, renders itself unconstitutional. Also keeping in view that per day penalty at the rate of ₹ 200/- can be levied in terms of sub-clause (3) of section 77 of Central Excise Act and the SCN is silent about specifically invoking the said sub-clause (3), it is held that the grievance of the present appeal stands already covered by the decisions as discussed above. The issue, therefore, is no more res-integra. Imposition of penalty of ₹ 2,56,000/- ₹ 5000 40318/- as against the duty demand of ₹ 40,318/- is therefore, held to be unreasonable being absolutely disproportionate. Question of adjusting the said amount except for ₹ 40,318/- from the refund sanctioned to the appellant, therefore, does not arise. The adjudication with reference to the impugned SCN s is still pending due to matter being remanded back for afresh adjudication of claim for abatement and reverse charge, the same shall take its own independent course. Hence, setting aside of the present order under challenge to the extent beyond deduction of ₹ 40,318/- shall not be prejudicial to the interest of either of the parties to the lis - Appeal allowed.

Summary

Issues:
1. Service tax liability for the period 2006-2015.
2. Abatement allowed on service tax demand.
3. Refund claim on pre-deposit amount.
4. Imposition of interest and penalty.
5. Quantification of penalty.
6. Principles of natural justice in penalty calculation.
7. Proportionality of penalty to tax liability.
8. Applicability of penalty provisions under Section 77 of the Finance Act, 1994.

Issue 1: Service tax liability for the period 2006-2015
The appellant, a proprietorship firm providing painting and polishing services, was issued multiple Show Cause Notices (SCNs) for the non-payment of service tax liabilities for various periods. The initial demand was reduced after abatement, but subsequent SCNs were issued for different periods, leading to a total proposed demand of &8377; 1,46,36,284.

Issue 2: Abatement allowed on service tax demand
The appellant contested the imposition of interest and penalty on the reduced demand amount after abatement. The Commissioner (Appeals) remanded the matter for fresh adjudication to verify the claim for abatement and reverse charge, providing the appellant with another opportunity to submit relevant documents.

Issue 3: Refund claim on pre-deposit amount
Following the remand order, the appellant filed a refund claim for the pre-deposit amount made during the appeal process. The refund claim was partially allowed, deducting penalty and interest amounts before sanctioning the refund, leading to further appeals and rejections by the Commissioner (Appeals).

Issue 4: Imposition of interest and penalty
The Original Adjudicating Authority confirmed a demand amount along with interest and penalties under various sections of the Finance Act, 1994. The appellant raised concerns about the calculation of penalties and the validity of the imposition without proper explanation opportunities.

Issue 5: Quantification of penalty
The appellant challenged the quantification of penalties, arguing that they were disproportionate to the demand amount. The appellant sought rectification of the penalty amount deducted from the refund and a recalculation of the available refund amount.

Issue 6: Principles of natural justice in penalty calculation
The appellant contended that the penalty calculation should align with the due date of tax payment rather than starting from the beginning of the quarter. They argued that the penalty levied should not exceed the tax amount and should be based on fair and just principles.

Issue 7: Proportionality of penalty to tax liability
Citing legal precedents, the Tribunal analyzed the proportionality of the penalty imposed on the appellant. Referring to relevant court decisions, the Tribunal highlighted that penalties exceeding the tax liability amount could be considered unreasonable and disproportionate.

Issue 8: Applicability of penalty provisions under Section 77 of the Finance Act, 1994
The Tribunal, after considering the arguments and legal principles, set aside the order confirming a penalty disproportionate to the tax liability. The Tribunal emphasized the need for penalties to be reasonable and proportionate, in line with the objectives of corrective deterrence without being excessive.

This detailed analysis of the judgment highlights the key issues surrounding the service tax liability, abatement, refund claims, imposition of interest and penalties, and the application of legal principles regarding penalty calculations and proportionality.