BENEFIT OF SECTION 80 OF FINANCE ACT, 1994 IS NOT DENIABLE EVEN IN CASES WHERE EXTENDED PERIOD OF LIMITATION INVOKED FOR DEMAND OF DUTY

[Mr. M. GOVINDARAJAN]

Section 73(1) of the Finance Act, 1994 provides that where any service tax has not been levied or paid or has been short-levied or short-paid or erroneously refunded, the Central Excise Officer may, within eighteen months (before 28.05.2012, one year) from the relevant date, serve notice on the person chargeable with the service tax which has not been levied or paid or which has been short-levied or short-paid or the person to whom such tax refund has erroneously been made, requiring him to show cause why he should not pay the amount specified in the notice.

The proviso to Section 73(1) provides that 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) wilful 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, by the person chargeable with the service tax or his agent, then the limitation period shall be five years.

Section 80 of the Act 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 76 provides penalty for failure to pay service tax.   Section 77 of the Act provides penalty for contravention of rules and provisions of the Act for which no penalty is specified elsewhere.  Section 78(1) provides that 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) wilful 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 the 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 be equal to the amount of service tax so not levied or paid or short-levied or short-paid or erroneously refunded.

According to Section 80 no penalty may be imposed under Section 76, 77 or 78(1) of the Act if the assessee is able to prove that there is reasonable cause for such failure. In ‘Daurala Organics V. Commissioner of Central Excise’ – 2014 (4) TMI 843 - ALLAHABAD HIGH COURT the benefit under Section 80 was allowed to the assessee by Adjudicating Authority but it was rejected by Commissioner in his review power and also the Tribunal. The High Court upheld the benefit given under Section 80 to the assessee by the Adjudicating Authority.

The facts of the case is the assessee set up a plant for the manufacture of Parahydroxyphenylglycine (PHPG) and entered into a licenced agreement with Gerard Kessels Sociedad Anomia (KSA), a company incorporated under the laws of Spain.  A show cause notice was issued to the assessee following the audit covering the period between 2004-05 and 2005 – 06 which found that the assessee had not got itself registered under the category intellectual property services and had failed to file returns and had suppressed information regarding payment of royalty to KSA.   This show cause notice dated 7.1.2008 covers the period from 01.10.2004 to 31.03.2007.  Another show cause notice dated 11.03.2008 was issued covering the period from 01.04.2007 to 31.12.2007.

The appellant furnished replies to the show cause notices which had invoked the extended period of limitation.   On 05.12.2008 the appellant paid the entire amount of service tax together with interest as demanded in the notices. The Adjudicating Authority did not impose penalty giving the assessee the benefit of Section 80 of the Act since the assessee bearing in mind the voluntary tax compliance behavior of the assessee it was held that a bona fide cause duly established by the assessee though in the initial stages, there was some confusion and the assessee has disputed the levy.

However the Additional Commissioner passed an order of adjudication holding that the assessee was liable to pay service tax and that the extended period of limitation could be invoked.  The Commissioner of Central Excise, suo motu, issued a show cause notice proposing to reverse the order of adjudication in so far as it dropped the penalty proceedings.  The Commissioner imposed penalties under Section 76, 77 and 78 of the Act. Aggrieved by the order of Commissioner the appellant filed an appeal to the Tribunal.  The Tribunal dismissed the appeal holding that once the extended period of limitation under the proviso to Section 73(1) was attracted and the finding of the Additional Commissioner was not challenged by the assessee, there was no scope for the assessee to contend that it did not discharge the service tax liability with a bona fide intention. Consequently according to the Tribunal, confirmation of the service tax demand by invoking the proviso to Section 73(1) and a waiver of penalty under Section 80 could not co-exist.

The appellant filed appeal before High Court against the order of the Tribunal.  The High Court held that Section 80 of the Finance Act, 1994 containing a non obstante  provision which begins with the words ‘notwithstanding any thing contained in the provisions of Section 76, Section 77 and Section 78’.  Under Section 80, the burden is cast upon the assessee of proving that there was reasonable cause for the failure referred to in Section 76, 77 or 78, in which event no penalty would be imposable for the failure.  The important point to note is that while enacting Section 80, Parliament introduced an overriding non obstante provision which operates even in relation to the provisions of Section 78.   Consequently, the provision envisages that notwithstanding what is contained in Section 78, it is open to assessee to prove that there was a reasonable cause for the failure attributed in Section 78.

The High Court further observed that the view which has found acceptance by the Tribunal in the present case is that once extended period of limitation under Section 73(1) has been applied, there can be no reasonable cause within the meaning of Section 80.  The Parliament did allow to the assessee an opportunity to establish that there was a reasonable cause for the failure and this provision in Section overrides Section 78 as well by virtue of the non obstante clause.  The non obstante provision of Section 80 must obviously be given a meaning.   If the view of the revenue, which was accepted by the Tribunal were to be affirmed, that would render the non obstante provision of Section 80 otiose. 

Consequently, in the view of the High Court, the Tribunal was in error in coming to the conclusion that there would be no occasion to establish a reasonable cause within the meaning of Section 78, once the extended period of limitation had been validly invoked under the proviso to Section 73(1).   If the analogy which has been used by the Tribunal is extended, it would have to be held that Section 80 would have no application whatsoever to a case which falls within the purview of Section 78 since the language of Section 78 is similar to the language which is used in the proviso to Section 73(1). Accepting such an interpretation would involve re-writing the provisions of Section 80 by excluding the provisions 78 from the non obstante clause which is contained in Section 80.   This would be impermissible.    In interpreting a fiscal enactment, the duty of the Court is to adopt a plain and a literal construction of the words which have been used by the legislation.

Now clause 106(E) of the Finance Bill (no.2), 2014 brings an amendment to Section 80 which would be read as amended is as below:

Penalty not to be imposed in certain cases.

80. (1) Notwithstanding anything contained in the provisions of section 76, or section 77 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.

(2) 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.

The new amendment takes away the benefit extended by Section 80 to the penalty imposed under the first proviso to Section 80, which is not just and proper and against the interest of service provider.