2016 (9) TMI 539 - AT - Service Tax

Levy of interest alongwith penalty - Section 75 and 77(2) of Finance Act, 1994 - tax liability not been fastened on the appellants - administrative charges received from the client - differential service tax paid after pointing out by the department - treatment of payment made as voluntarily or under protest - Held that - the show cause notice proposes to recover interest under Section 75 and penalty under Section 77(2) on the amount already paid by the appellant. Section 75 can be invoked only when the person liable to pay service tax in accordance with the provisions of Section 68 has not credited the same. I find that the appellants herein are contesting the demand and have paid the amount only on being pointed out by the department during audit. I find that there is no allegation in the Show Cause Notice to demand or appropriate the amount paid by the appellants. I also find that the finding of the adjudicating authority that the appellants had not disputed the tax liability is also not correct. Hence the demand of interest under Section 75 cannot be fastened on the appellants. Accordingly, penalty under Section 77(2) also fails. Invokation of extended period of limitation - period of dispute is from October 2006 to July 2008 - Show Cause Notice was issued only on 06.08.2010 - Held that - the Show Cause Notice does not invoke provision of Section 73 to invoke the extended period of limitation and the case of the department fails on that ground alone. it is found that there has been no deliberate action on the part of appellants to invoke larger period and the department was well aware of the activities of the appellants. - Decided in favour of appellant

Summary

Issues:
1. Liability to pay interest when tax liability is not determined.
2. Applicability of penalty under Section 77(2) of the Finance Act, 1994.
3. Invocation of extended period of limitation under Section 73.

Analysis:

Issue 1: Liability to pay interest when tax liability is not determined

The appellant, engaged in providing manpower services, was alleged to have not paid service tax on administrative charges received from clients. The department demanded interest and penalty under Section 77(2) of the Finance Act, 1994. The appellant contended that the payment was made under compulsion of the department during scrutiny and not voluntarily. The Counsel argued that interest cannot be levied when tax liability is not determined, citing relevant case laws. The Tribunal held that interest under Section 75 cannot be imposed when the appellants contested the demand and paid only upon department's audit pointing out the discrepancy. As the Show Cause Notice did not demand or appropriate the amount paid by the appellants, interest liability was not established. The Tribunal also noted that the appellant did not deliberately withhold information to invoke the extended period of limitation under Section 73, thereby ruling in favor of the appellant.

Issue 2: Applicability of penalty under Section 77(2) of the Finance Act, 1994

The Commissioner (Appeals) rejected the appellant's appeal on the grounds that interest should be discharged for the belated period when tax liability is deferred and subsequently discharged. The department argued that interest follows duty payment and the appellant's failure to contest interest liability was an afterthought. However, the Tribunal found that the appellant contested the demand and paid upon department's audit, indicating no voluntary payment. The Tribunal further clarified that penalty under Section 77(2) fails when interest liability is not established, and the appellant did not betray faith by not depositing and contesting the interest liability.

Issue 3: Invocation of extended period of limitation under Section 73

The Show Cause Notice was issued in 2010 for a period from 2006 to 2008 without invoking the extended period of limitation under Section 73. The Tribunal held that the notice failed to establish deliberate withholding of information by the appellant to warrant invoking the extended period. Citing relevant Supreme Court judgments, the Tribunal concluded that the absence of invoking Section 73 rendered the notice inadequate, leading to the allowance of the appeal.

In conclusion, the Tribunal allowed the appeal, emphasizing that interest cannot be levied when tax liability is not determined, penalty under Section 77(2) fails when interest liability is not established, and the extended period of limitation under Section 73 must be invoked with proper justification.