REDUCED QUANTUM OF PENALTY NOT IMPOSABLE ON ESTABLISHING REASONABLE CAUSE

[Mr. M. GOVINDARAJAN]

INTRODUCTION:

1. The provisions of service tax make an obligation on the service providers to pay the service tax levied to the credit of the Central Government within the time prescribed and in the prescribed manner. Failure to pay service tax will attract to pay interest along with service tax payable and also penalty. Sec. 76, Sec. 77 and Sec.78 of the Finance Act, 1944 (‘Act’ for short) deals with penalty imposable on certain occasions.

PENALTY UNDER SERVICE TAX PROVISIONS:

Penalty for failure to pay service tax:

2. Section 76 of the Act provides penalty for failure to pay service tax.  It provides that any person liable to pay service tax in accordance with the provisions of Section 68 or the rules made under this Chapter, who fails to pay such tax, shall pay, in addition to such tax and the interest on that tax amount in accordance with the provisions of Sec. 75, a penalty which shall not be less than two hundred rupees for every day during which such failure continues or at the rate of two per cent of such tax, per month, whichever is higher, starting with the first day after the due date till the date of actual payment of the outstanding amount of the tax.   The total amount of the penalty payable in terms of this section shall not exceed the service tax payable. The quantum of tax imposable in Section 76 took effect from 18.04.2006.  

Penalty for contravention of Rules and provisions of Act for which no penalty is specified elsewhere:

2.1. Sec. 77 provides that any person-

(a) who is liable to pay service tax, or required to take registration, fails to take registration in accordance with the provisions of Section 69 or rules made under this Chapter shall be liable to pay a penalty which may extend to five thousand rupees or two hundred rupees for every day during which such failure continues, whichever is higher, starting with the first day after the due date, till the date of actual compliance;

(b) who fails to keep, maintain or retain books of account and other documents are required in accordance with the provisions of this Chapter or the rules made there under, shall be liable to a penalty which may extend to five thousand rupees;

(c) who fails to-

(i) furnish information called by an officer in accordance with the provisions of this Chapter or rules made there under; or

(ii) produce documents called for by a Central Excise Officer in accordance with the provisions of this Chapter or rules made there under; or

(iii) appear before the Central Excise Officer, when issued with a summon for appearance to give evidence to produce a document in an inquiry,

shall be liable to a penalty which may extend to five thousand rupees of two hundred rupees for every day during which such failure continues, whichever is higher, starting with the first day after the due date, till the date of actual compliance.

(d) who is required to pay tax electronically, through internet banking, fails to pay the tax electronically, shall be liable to a penalty which may extend to five thousand rupees;

(e) who issues invoice in accordance with the provisions of the Act or rules made there under, with incorrect or incomplete details or fails to account for an invoice in his books of account, shall be liable to a penalty which may extend to five thousand rupees.

Any person, who contravenes any of the provisions of this Chapter or pay any rules made there under for which no penalty is separately provided in this Chapter, shall be liable to a penalty which may extend to five thousand rupees.

Penalty for suppressing value of taxable service:

2.2. Sec. 78 deals with the penalty for suppressing value of taxable service.  It provides where any service tax has not been levied or paid or has been short-levied or short paid or erroneously refunded by reason of-

(a) fraud; or

(b) collusion; or

(c) willful mis-statement; or

(d) suppression of facts; or

(e) contravention of any of the provisions of this Chapter or of the rules made there under with intent to evade payment of service tax, the person, liable to pay such service tax or erroneous refund, as determined under sub-section (2) of Section 73, shall also be liable to pay a penalty, in addition to such service tax and interest thereon, if any, payable by him, which shall not be  less than, but which shall not exceed twice, the amount of service tax so not levied or paid or short-levied or short-paid or erroneously refunded;

Where such service tax as determined under Sec. 73(2) and the interest payable thereon under Section 75, is paid within thirty days from the date of communication of the order of the Central Excise Officer determining such service tax, the amount of penalty liable to be paid by such person under this section shall be twenty five per cent of the service tax so determined.

The above said reduced penalty shall be available only if the amount of penalty so determined has also been paid within the period of thirty days.  Where the service tax determined to be payable is reduced or increased by the Commissioner (Appeals), the Appellate Tribunal or, as the case may be, the court, then, for the purposes of this section, the service tax as reduced or increased, as the case may be, shall be taken into account.

In case where the service tax determined to be payable is increased by the Commissioner (Appeals), the Appellate Tribunal or, as the case may be, the Court, then, the benefit of reduced penalty shall be available, if the amount of service tax so increased, the interest payable thereon and twenty five per cent of the consequential increase of penalty have also been paid within thirty days of communication of the order by which such increase in service tax takes effect.   If the penalty is payable under this section, the provisions of Section 76 shall not apply.

The explanation to this section for the removal of doubts it is hereby declared that-

(1) the provisions of this section shall apply to cases in which the order determining the service tax under Sec. 73(2) relates to notice issued prior to the day on which the Finance Act, 2003 receives the assent of the President;

(2) any amount paid to the credit of the Central Government prior to the date of communication of the order shall be adjusted against the total amount due from such person.

Penalty not to be imposed in certain cases:

2.3. Sec. 80 provides that notwithstanding anything contained in the provisions of Section 76, Section 77 or Section 78, no penalty shall be imposable on the assessee for any failure referred to in the said provisions if the assessee proves that there was reasonable cause for the said failure.

ISSUE:

3. From the perusal of the provisions of service relating to penalty it can be inferred that Sec. 76, Sec. 77 and Sec. 78 provide discretionary power on Adjudicating Authorities to decide the quantum of penalty. But at the same time the said section provides the quantum of minimum penalty to be imposed as well as maximum penalty to be imposed.  The discretion of the authorities lies in between the two limit. The issue taken up in this article is whether the penalty can be reduced below the minimum quantity fixed in the said sections. Sec. 80 provides that if reasonable cause is shown no penalty can be imposed.  If reasonable cause is shown whether penalty may be imposed on reduced amount.  The answers for the two issues are derived from the below mentioned case law.                  

Relevant Case law:

4. In ‘Commissioner of Central Excise & Customs V. Port Officer’ – [2010 -TMI - 77834 - GUJRAT HIGH COURT] the Adjudicating Authority confirmed demand to the tune of Rs. 93,621/- towards short paid service tax and imposed penalty of Rs. 20,000/- under Sec. 76 of the Finance Act, 1994.  He also imposed penalty of Rs. 95,000/- under Section 78 of the Act.  The assessee filed an appeal before the Commissioner of Central Excise (Appeals) who deleted the entire penalty under Sec. 76 of the Act on the footing that penalty had been levied also under Section 78 of the Act and there after reduced the penalty under Sec. 78 from Rs. 95,000- to Rs. 94,000/-   The same was carried by appeal before the Tribunal. The Tribunal allowed the appeal and remanded the matter back to the Adjudicating Authority.

The Adjudicating Authority again confirmed the demand of service tax at Rs. 93,180/- and imposed penalty of Rs. 93,180/- under Section 78 of the Act and penalty of Rs. 93,180/- under Section 76 of the Act.  In appeal filed by the assessee the Commissioner of Central Excise held that the penalty has been increased by the Adjudicating Authority in his de novo order from Rs. 20,000/- to Rs. 93,180/- for the same violation without any additional ground and reduced the penalty under Section 76 of the Act from Rs. 93,180/- to Rs. 10,000/-

The Department carried the matter in appeal before the Tribunal.   The Tribunal held that the penalty can be reduced in exercise of the power under Section 80 of the Finance Act, 1994. The Tribunal also found that the benefit of Section 80 of the Finance Act, 1994 has been appropriately extended to the respondents.

The Department has preferred this appeal against the order of the Tribunal raising the following question of law-

“Whether the penalty under Section 76 of the Finance Act, 1994 can be reduced below the limit prescribed by the Section?”

The respondent assessee submitted the following before the Court:

• Under Sec. 76 of the Finance Act, 1994 the Authority is empowered to levy penalty but has discretion in so far as the quantum of penalty  is concerned;
• When read with Section 80 of the Act the said discretion empowers the authority to reduced the penalty to an amount below the limit stipulated in Section 76 of the said Act because once there is a discretion to delete the entire penalty such discretion can also be extended to reducing the penalty partially, if the facts so warrant;
• The Finance Act, 1994 which imposes service tax, is an All India Statute and this High Court should normally not deviate from the view expressed by the other High Courts in the country;
• If the court was of the opinion that the impugned order of Tribunal was a non speaking order, the matter could be restored to file of the Tribunal, leaving it open to the assessee to plead applicability of Section 80 of the Act.

The Court held that in the entire order one does not find as to how and in what manner either Section 76 of Section 80 of the Act vests a discretion in the authority to levy penalty below the minimum prescribed. The last sentence, which appears in the order of the Commissioner of Central Excise (Appeals), indicates that the same is virtually an after thought. After holding that the Tribunal rejects the appeal filed by the revenue it is observed “I also find that benefit of Section 80 of Finance Act, 1994 has been appropriately extended to the respondents”.

A plain reading of Section 76 of the Act, the Court held, indicates that a person who is liable to pay service tax and who has failed to pay such tax is under an obligation to pay, in addition to the tax so payable and interest on such tax, a penalty for such failure. The quantum of penalty has been specified in the provision by laying down the minimum and the maximum limits with a further capin so far as the maximum limit is concerned. The provision stipulates that the person, who has failed to pay service tax, shall pay, in addition to the tax and interest, a penalty which shall not be less than one hundred rupees per day but which may extend to two hundred rupees for every day during which the failure continues, subject to the maximum penalty not exceeding the amount of service tax which was not paid.    The Court held that so far as Section 76 of the Act is concerned it is not possible to read any further discretion, further than the discretion provided by the legislature when legislature has prescribed the minimum and the maximum limits.   The discretion vested in the authority is to levy minimum penalty commencing from one hundred rupees per day on default, which is extendable to two hundred rupees per day, subject to a cap of not exceeding the amount of service tax payable.  The Court further held that from this discretion, it is not possible to read a further discretion being vested in the authority so as to ensure the authority to levy a penalty below the stipulated limit of one hundred rupees per day.   The moment one reads such further discretion in the provision it would amount to re-writing the provision which, as per settled cannot on interpretation, is not permissible.

It is not as if the provision is couched in a manner so as to lead absurdity if it is read in a plain manner. Nor is it possible to state that the provision does not further the object of the Statute or violates the legislative intent when read as it stands.   Hence Section 76 of the Act as it stands does not give any discretion to the authority to reduce the penalty below the minimum prescribed.

The Court held that Section 80 of the Act overrides the provisions of Section 76, 77, 78 and 79 of the Act and provides that no penalty shall be imposable even if any one of the said provisions are attracted if the assessee proves that there was reasonable cause for failure stipulated by any of the said provisions.  Whether a reasonable cause exists or not is on the assessee.   Once reasonable cause is established the authority has the discretion to hold that no penalty is imposable.  If one reads the power in the provisions as contended by the respondent it would mean that the provision is redrafted by incorporating words which are not there.   At the cost repetition, it is required to be stated that the language of the provision as it stands is unambiguous and is not necessary to add any words to make the provision intelligible.

Therefore, even on a conjoint reading of Sections 76 and 80 of the Act it is not possible to envisage a discretion as being vested in the authority to levy a penalty below the minimum prescribed limit.   If the authority imposing the penalty is not entitled to levy below the minimum prescribed the appellate authority and the Tribunal cannot read the provision so as being vested with such powers, namely, to reduce the penalty below the minimum prescribed.

The Court further held that when one goes through the impugned order of Tribunal it becomes clear that the Tribunal has failed to even consider the provisions of Section 76 and 80 of the Act before passing the impugned order.   The statement by the Tribunal that the benefit of Section 80 of the Act has been appropriately extended to the assessee indicates total non application of mind on the part of the Tribunal.   How and in what manner reasonable cause is shown to exist by the assessee in the facts of the case has not even been recorded.  It is unfortunate that despite catena of judgments of the Apex Court and this High Court the Tribunal continues to pass orders which can at best be termed to be non speaking and cursory.  It is necessary that the Tribunal realizes that passing of such orders results in multiplicity of proceedings without benefiting any one, resulting to repeated litigation.   The High Court set aside the order of the Tribunal and remanded back to the file of the Tribunal for deciding the same afresh in accordance with law.

CONCLUSION:

It is clear that when reasonable cause is shown under Sec. 80 of the Finance Act, 1994 the Adjudicating Authority can not impose any penalty.  As such when Sec. 80 is invoked and reasonable cause is shown no penalty shall be imposable under any sections of 76, 77 or 78.  If Section 80 is not invoked then discretion is available to the Adjudicating authorities only between the minimum amount of penalty and the maximum amount of penalty.   He cannot impose penalty below the minimum amount.

Authority to impose penalty below the minimum level if reasonable cause is shown.  This principle is well explained in this article.