CONFIRMATION OF DEMAND WITH INTEREST AND PENALTY ON UNNECESSARY PERSON WITHOUT ISSUE OF NOTICE

[Mr. M. GOVINDARAJAN]

Section 73 of Finance Act, 1994 provides that where any service tax has not been levied or paid or has been short levied or short paid the Central Excise Officer, authorized in this behalf, proceed to recover the service tax from the assessee and for that purpose he is to issue a notice to the assessee to give a reasonable opportunity of being heard. On personal hearing the Assessing Officer may drop the notice or confirmed the demand of service tax along with interest and penalty. As per the provisions without issuing notice to the assessee no order imposing penalty could not be passed. If it is so whether the irrelevant party may be penalized without issuing notice. This aspect is discussed in this article with reference to decided case law.

In ‘Damodar Valley Corporation V. Commissioner of Central Excise and Service Tax’ – 2013 (5) TMI 694 - Jharkhand High Court the petitioner is not the assessee.   He has not been given any notice by the authority for levy of service tax, interest or penalty. The petitioner was asked to furnish certain information by the Department and the same was supplied by the petitioner. The Assessing Officer, in his order, observed that since the noticee (not the petitioner) is a very small service provider, it was a responsibility of the big brother i.e., Damodar Valley Corporation not only to guide their service providers to discharge the proper service tax liability but also to pay the due service tax timely.   Had they done the payment of service tax timely to their service providers, there was no question of non payment of non payment of service tax by the service providers to the Government of India.

It was further observed that though the DVC has not been issued with show cause notice, though they played important role in non payment of service by their service providers, they cannot escape their responsibilities towards the Government and by guiding their service providers to discharge the taxes in the legal manner. If the penalties and the interest and the Service tax due is recovered from the tiny service tax provider, this may amount to killing the small businessmen and their business. If DVC discharges their responsibility to payment of all the dues to their service providers, they would not only set a creditable example in the industry and the society as well. By doing this act of not ensuring service tax payments to their service providers, their working system has been exposed, especially when they have the taxation wing and specialized staff working for taxation and accounting. Such a unit cannot take a plea of not knowing the law and guiding their dependent service provider, who simply follow their guidelines/dictates.

It was further observed that the payment of service tax due on behalf of their service providers, the demand of service tax from these service providers would reach the final end. On the other hand, demanding the dues from the tiny service providers would only add to only arrears of service tax, which is not desirable, especially when the service tax is the tax of indirect nature and gets passed on to the final person.   Demanding service tax from the beginners of chain would also amount to unjust enrichment of DVC. It was held that therefore it was necessary for DVC not only to pay the entire service tax liability with interest and penalty amount to their service providers but also ensure that their service providers discharge them as soon as they received the amount from DVC and pay to the Government of India to the treasury towards payment of service tax, interest and penalty dues.

The authority confirmed the payment of service tax on noticee as well as confirmed the demand of interest and penalty. Further it was held that on DVC as they are fully involved in receiving above referred services from the Noticee and in turn owe the service tax dues to the noticee, to compensate the entire financial loss including interest and penalty to the noticee on account of the above order, as such loss arose on account of serious mistake and carelessness of DVC. Had they paid the service tax amount timely to the notice, this situation could be avoided. The authority also directed the Preventive wing and arrear recovery wing of the Commissionerate of Central Excise and Service, Tax, Ranchi to take corrective and punitive measures on the DVA in case of non compliance of the order passed by him and secure non recurrence of such incidents in future.

Against this order the petitioner filed writ petition before the High Court. The petitioner contended the following before High Court:

• In law the petitioner is not liable to pay any service tax;
• Even if noticee is liable to pay service tax, penalty and interest, such liability cannot be fastened upon the petitioner;
• DVC has been condemned for no reason;
• The Assessing Officer has shown sympathy to the persons who is liable to pay the tax and they have been described as ‘tiny service tax provider’ and the petitioner is sought to be blamed for ‘killing the small businessman and their business’;

The Departmental side sought time to file reply. But the High Court satisfied before consideration of the matter in detail to give notice to the Assessing Officer so that certain allegations may also be examined against the officers whether the order in question has been passed in bona fide exercise of power under the statutory provision or it is something else, which would be adequately answered by the said officer himself, who has right to be heard before any observation. The High Court directed to issue notice to the Assessing Officer who may meet with the allegation of the petitioner questioning the passing the order against the petitioner without given opportunity of hearing to the petitioner and also passing stricture that too without factual finding of the said authority. The Court stayed the operation of the impugned order and the stay would not be applicable for the recovery of the tax, interest and penalty from the assessee.