2021 (4) TMI 649 - HC - Service Tax

Levy of penalty u/s 76 of FA - Reasonable cause for the failure or not - photography services - cost of material consumed in process of rendering service to be included in assessable value or not - HELD THAT - The appellant is justified in his belief and he was supported by a reasonable ground to the effect that he was not liable to pay the service tax on cost of such material. The benefit of this belief for him is receiving a favourable consideration at the instance of the Tribunal while granting the relief qua the penalty imposed under Section 78. There are no reason why the said benefit cannot be extended to the penalty imposed under Section 76, since both the Sections are to be read along with Section 80, which gives an overriding effect over Sections 76 to 78. The impugned order passed by the Tribunal which denied the said benefit to the petitioner qua the penalty imposed under Section 78 to the tune of 1,00,000/-, is therefore a gross injustice and deserve ₹ to be set aside on account of non-consideration of Section 80 of the Act. No doubt penalty can be imposed under the Act, for contravention of the law, if law provides and no mens rea need to be established, the effect of Section 80, has been completely overlooked - Penalty set aside - petition allowed - decided in favor of petitioner.

Summary

Issues:
1. Interpretation of Section 76 of the Finance Act, 1994 regarding imposition of penalty for non-payment of service tax.
2. Application of Section 80 of the Finance Act, 1994 exempting penalty if reasonable cause for failure to pay tax is proven.

Analysis:
1. The appellant, engaged in photography services, was issued a Show Cause Notice for alleged non-payment of service tax. The appellant contended that there was a reasonable ground to believe that the cost of materials consumed in rendering services was not taxable. The Tribunal imposed a penalty under Section 76 of the Finance Act, citing lack of mens rea. However, the Tribunal set aside the penalty under Section 78, acknowledging the reasonable ground for the appellant's belief. The High Court noted the provisions of Section 76, which prescribe penalties for non-payment of service tax, and analyzed the case law to determine the appellant's liability for penalty under this section.

2. The High Court examined Section 80 of the Finance Act, which exempts penalty imposition if a reasonable cause for failure to pay tax is demonstrated. The appellant argued that the uncertainty in the law regarding the taxable value of services led to a bonafide belief that the cost of materials used in rendering services was not taxable. The Court emphasized that Section 80 provides an overriding effect over Sections 76 to 78, and the Tribunal's failure to consider this provision while denying relief under Section 76 was deemed a gross injustice. Consequently, the Court allowed the Writ Petition, quashing the Tribunal's order and setting aside the penalty imposed under Section 76 of the Finance Act.

3. The judgment highlighted the importance of Section 80 in providing relief from penalties if a reasonable cause for non-payment of tax is established. The Court emphasized the need to consider the entirety of the relevant provisions in the Finance Act to ensure a just and fair application of penalties in cases involving service tax liabilities. The decision serves as a reminder of the significance of legal provisions safeguarding against unjust penalties when genuine reasons for non-compliance are presented.