2019 (10) TMI 1041 - AT - Service Tax

Imposition of penalty u/s 77 and 78 of FA - the entire amount of service tax along with interest was paid by the appellant before issuance of SCN - benefit of sub-section (3) of Section 73 ibid - Suppression of facts/intent to evade or not - HELD THAT - It is an admitted fact on record that the diamond manufacturing unit, including the appellant herein have challenged the constitutional validity of Section 66A ibid before the Hon ble Bombay High Court and also made representation to the Finance Minister of Government of India regarding the clarification on the issue, whether customs duty or service tax to be levied on such type of transaction. Thus, under such circumstances, it cannot be said that non-payment of service tax during the relevant period was owing to the reason of suppression or misstatement of facts etc. Since, the appellant had deposited the service tax along with interest before issuance of the show cause notice, in my considered opinion, the benefit of sub-section (3) of Section 73 ibid should be available to the appellant for non-issuance of any show cause notice, especially seeking for imposition of penalties. Penalties set aside - appeal allowed - decided in favor of appellant.

Summary

Issues:
1. Liability to pay service tax under reverse charge mechanism for imported software.
2. Applicability of penalties under Section 77 and 78 of the Finance Act, 1994.
3. Benefit of sub-section (3) of Section 73 for non-imposition of penalties.
4. Element of suppression or fraud in non-payment of service tax.
5. Constitutional validity of Section 66A challenged before the Hon’ble Bombay High Court.

Analysis:

1. The appellant, engaged in the manufacture and sale of cut and polished diamonds, imported customized software from Israel during the disputed period. The software fell under the category of “Information Technology Software Service” taxable under Section 65 (105) (zzzze) of the Finance Act, 1994. The appellant, as the recipient of the taxable service, was liable to pay service tax under reverse charge mechanism. The appellant contested the levy of service tax under Section 66A by filing a writ petition before the Hon’ble Bombay High Court. Despite paying the service tax and interest before the show cause notice, the department initiated proceedings seeking confirmation of the service tax demand, interest, and penalties under various provisions of the Act.

2. The appellant did not contest the service tax and interest demand but sought the benefit of sub-section (3) of Section 73 to avoid penalties under Sections 77 and 78 of the Act. The appellant argued that there was no collusion or willful misstatement to defraud the government, relying on a judgment by the Hon’ble Supreme Court. The Revenue contended that the appellant’s actions, including selective payment of service tax, indicated an intention to defraud the government, justifying penalties under sub-section (4) of Section 73.

3. The Tribunal considered the appellant’s challenge to the constitutional validity of Section 66A and representations made to the Finance Minister regarding the tax issue. It concluded that the non-payment of service tax was not due to suppression or misstatement of facts. Since the service tax was paid before the show cause notice, the Tribunal held that the appellant should benefit from sub-section (3) of Section 73, preventing the imposition of penalties. Citing the Nestle India Ltd. case, the Tribunal emphasized the requirement of conscious or deliberate withholding of information for allegations of suppression or fraud.

4. The Tribunal found no merit in upholding the penalties under Sections 77 and 78, as the department was aware of the activities undertaken by the appellant since 2006. Initiating show cause proceedings much later without evidence of suppression or fraud was deemed unjustified. Consequently, the Tribunal set aside the penalties imposed, allowing the appeal in favor of the appellant.

5. The Tribunal’s judgment focused on the appellant’s compliance with tax obligations, the absence of fraudulent intent, and the procedural fairness in penalty imposition. By considering the legal provisions, judicial precedents, and factual circumstances, the Tribunal provided a detailed analysis and ruled in favor of the appellant on the issue of penalties under Sections 77 and 78.