CESTAT Kolkata Deletes Section 78 Penalty in Case of Bona Fide Service Tax Default

The Kolkata Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) in PrideCo Commercial Projects Pvt. Ltd. Vs Commissioner (CESTAT Kolkata) examined whether a penalty under Section 78 of the Finance Act, 1994 could be sustained where service tax was not paid due to a bona fide misunderstanding regarding who was to bear the tax burden. The Tribunal concluded that, in the facts of the case, the ingredients for invoking Section 78 were not satisfied and therefore set aside the penalty.

This decision is significant for assessees who, acting under genuine belief or contractual arrangements with clients, have failed to discharge service tax but later regularized their liability along with interest.

Background of the Dispute

Nature of Services and Period Involved

The assessee, M/s. PrideCo Commercial Projects Pvt. Ltd., had rendered ‘Commercial Construction Service’ to West Bengal Housing Infrastructure Development Corporation (WBHIDCO) during the period from 2009-10 to 2013-14.

  • The services rendered were undisputedly liable to service tax.
  • The recipient of the service, WBHIDCO, is a Government-controlled entity engaged in housing and infrastructure projects in West Bengal.

Show Cause Notice and Demand

A Show Cause Notice (SCN) dated 26.08.2014 was issued to the assessee proposing:

  • Demand of Service Tax of Rs.30,60,658/-, on the ground that service tax had not been discharged on the commercial construction services provided to WBHIDCO.

The allegation in the SCN was straightforward: service tax applicable on the taxable services had not been paid and therefore was recoverable along with interest and applicable penalties.

Assessee’s Stand: Bona Fide Belief on Tax Incidence

Understanding Between Assessee and WBHIDCO

In response to the SCN, the assessee explained that:

  • WBHIDCO had categorically informed the assessee that service tax would be borne by WBHIDCO.
  • Acting upon this understanding, the assessee believed that WBHIDCO would directly remit the service tax to the Service Tax Department.
  • Based on this belief:
    • The assessee did not obtain Service Tax registration.
    • No separate service tax amount was charged in the Running Account (RA) Bills raised on WBHIDCO.
    • As a result, the assessee did not collect any service tax component from WBHIDCO and did not deposit the same with the department.

Subsequent Events and Tax Payment

After issuance of the SCN dated 26.08.2014:

  1. The assessee took up the issue of unpaid service tax with WBHIDCO at higher levels.
  2. WBHIDCO thereafter released the full service tax amount of Rs.30,60,658/- to the assessee.