IGNORANCE OF LAW – A REASONABLE CAUSE?

[Mr. M. GOVINDARAJAN]

Section 80 of the Finance Act, 1994 (‘Act’ for short) provides penalty not to be imposed in certain cases. Section 80(1) provides that notwithstanding anything contained in the provisions of section 76, section 77 or first proviso to sub-section (1) of 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. Section 80(2) provides that notwithstanding anything contained in the provisions of section 76 or section 77 or section 78, no penalty shall be imposable for failure to pay service tax payable, as on the 6th day of March, 2012, on the taxable service referred to in sub-clause (zzzz) of clause (105) of section 65, subject to the condition that the amount of service tax along with interest is paid in full within a period of six months from the date on which the Finance Bill, 2012 receives the assent of the President.

Various punishments are imposable under Section 76, 77 or Section 78(1). Despite the provisions for imposing penalty under these sections, Section 80(1) provides for waiver of penalty if the assessee is able to prove that such failure is due to reasonable cause. There is no definition in the Act for the term ‘reasonable cause’. In various judgments the said terms have been widely interpreted. In ‘R.R. Bhutule V. Commissioner of Central Excise’ – 2004 (2) TMI 2 - CESTAT, MUMBAI it was held that the adjudicating authorities had discretion not to impose any penalty for delay in paying service tax and for delay in furnishing returns in terms of Section 80 of the Finance Act, 1994.   The following are the case laws dealing with the waiver of penalty under Section 80(1).

Whether ignorance of law will be taken as a reasonable cause? For this question the following case law will give answer:

In ‘Maganti Rama Rao V. Commissioner of Central Excise’- 2013 (5) TMI 263 - CESTAT BANGALORE in Final Order No. 706 of 2012 in Appeal No. E/258 of 2011 decided on 6.11.2012 by CESTAT, Bangalore Bench a show-cause notice was issued to the appellant demanding total service tax of Rs. 3,68,727/- from the appellant for the period from September 2004 to December 2006 in respect of outdoor catering service. The demand was worked out after allowing abatement to the extent of 50% of the total catering charges. The adjudicating authority took the view that the assessee did not have tax liability for the period prior to 16.6.2005 and hence the demand of service tax of Rs. 1,96,184/-confirmed against the assessee. Equal amount was appropriated from the amount of Rs. 3,69,459/- already paid by the assessee. Interest on service tax was also appropriated from the said amount of Rs. 3,69,459/- already paid by the assessee. The remainder was allowed to be adjusted towards “any future liability”. The adjudicating authority also invoked Section 80 of the Finance Act, 1994 to drop all penal proposals raised in the show-cause notice. The order-in-original was reviewed in the department and accordingly an appeal preferred to the Commissioner (Appeals).

The Commissioner (Appeals) accepted the contentions raised by the Department and passed order as detailed below:

• Confirmed the dement of service tax Rs.3,68,727/-;
• Confirmed the demand of interest under Section 75;
• Imposed a penalty of Rs.200/- per day or 2% of the service tax involved per month, whichever is highest, from the first day after the due date of actual payment of the outstanding amount of service tax, but subject to a maximum of the service tax involved under Section 76 of the Finance Act;
• Imposed a penalty of Rs.3,68,727/- under Section 78 of the Finance Act.

 Against this order the appellant filed appeal before the Tribunal. On perusal of the records the Tribunal found that the appellant was rendering catering service to M/s Dr. Reddy’s Laboratories Limited during the disputed period. One of the issues raised in this case is whether the appellant can claim exemption from payment of service tax for the period prior to 16.6.2005. Section 65(76a) of the Finance Act, 1994 defined “outdoor caterer” as follows for the period prior to 16.6.2005:

“(76a) “Outdoor Caterer” means a caterer engaged in providing services in connection with catering at a place other than his own”.

After an amendment of the definition by the Finance Act, 2005, the definition reads as follows:

“(76a) “Outdoor Caterer” means a caterer engaged in providing services in connection with catering at a place other than his own but including a place provided by way of tenancy or otherwise by the person receiving such services”.

The Tribunal held that the appellant fell within the ambit of “outdoor caterer” as defined at all times inasmuch as he was admittedly catering food to Dr. Reddy’s Laboratories Ltd. at a place owned by the latter and it is not the case of the appellant that he was the owner of those premises. In this view of the matter, it is held that the appellant was liable to pay service tax prior to 16.6.2005 also. For the period from 16.6.2005, there is no room for doubt inasmuch as the amended definition is explicit. Accordingly it has to be held that the appellant was liable to pay service tax under the head “outdoor catering service” on the catering charges collected from Dr. Reddy’s Laboratories Ltd. for the entire period.

The appellant also objected the invocation of extended period of limitation. The Tribunal found that the appellant fell within the ambit of “outdoor caterer” as defined at all times inasmuch as he was admittedly catering food to Dr. Reddy’s Laboratories Ltd. at a place owned by the latter and it is not the case of the appellant that he was the owner of those premises. In this view of the matter, it is held that the appellant was liable to pay service tax prior to 16.6.2005 also. For the period from 16.6.2005, there is no room for doubt inasmuch as the amended definition is explicit. Accordingly it has to be held that the appellant was liable to pay service tax under the head “outdoor catering service” on the catering charges collected from Dr. Reddy’s Laboratories Ltd. for the entire period.

The appellant pleaded ignorance of law and hence penalty is not to be imposable.

For this Tribunal observed that the show-cause notice had invoked Sections 76 and 78 for imposing penalties on the party but the adjudicating authority chose to refrain from imposing such penalties. It held that the assessee’s failure to pay duty was due to “the dilemma whether the service tax was payable or sales tax was payable”. On this basis, the benefit of Section 80 of the Finance Act, 1994 was given to the assessee by the adjudicating authority. The Tribunal held that the statutory definition of “outdoor caterer” at all times has been clear enough for any prudent person to believe that anyone engaged in providing services in connection with catering at a place other than his own would fit in the definition. The appellant as a prudent person could not have entertained any doubt about this. It was not open to him to plead ignorance of law as an excuse for not getting registered with the department, not filing service tax returns, not paying service tax, etc. Therefore, the plea of bona fide belief raised in this appeal is not acceptable vis-a-vis the penalties imposed on the appellant. The Tribunal is of the view that the facts and circumstances of this case did not provide any ground for the appellant to claim the benefit of Section 80 of the Finance Act, 1994.