Service Tax Penalty Not Sustainable When Tax and Interest Paid Pre‑SCN Without Intent to Evade
Background of the Dispute
The case of Ganesh & Co. Vs Commissioner of GST & Central Excise (CESTAT Hyderabad) deals with the validity of penalties imposed under the Finance Act, 1994 on a service provider covered under Business Auxiliary Services and alleged Manpower Recruitment and Supply Services.
An audit conducted by departmental officers revealed that the assessee:
- Had not obtained service tax registration nor discharged service tax liability on certain services rendered between August 2006 and March 2008; and
- Had short-paid service tax and failed to pay tax on certain services during September 2008 to December 2009.
This related primarily to services provided to M/s. Flakt India Ltd. and M/s. AE & E Works Pvt. Ltd., Chennai.
Based on these findings, a Show Cause Notice (SCN) dated 11.01.2011 was issued demanding:
- Service tax of Rs. 3,64,457/- and Rs. 5,55,536/-, along with
- Interest under applicable provisions.
The adjudicating authority confirmed the service tax demand with interest and invoked penal provisions under:
Section 77of the Finance Act, 1994, andSection 78of the **Finance Act, 1994`.
Although the assessee had already paid the entire service tax and interest before issuance of the SCN, the Commissioner (Appeals) sustained the penalties, which led to the present second‑stage appeal before the CESTAT, Hyderabad.
The central issue before the Tribunal was whether penalties under Section 77 and Section 78 could survive when the entire service tax and interest had been discharged prior to issuance of the SCN, in light of Section 73(3) read with Explanation 2 of the Finance Act, 1994, and in the absence of proven intent to evade.
Facts Presented Before the Tribunal
Nature of Services and Registration Status
Counsel for the assessee explained that the entity was engaged in:
- Engineering and assembly of fan casings and related components; and
- Manufacture and supply of defect-free products in accordance with customer specifications.
The assessee was registered with the department under Business Auxiliary Services from January 2008 and was undertaking job work under purported exemption claimed in terms of Notification No. 8/2005 dated 01.03.2005.
During the relevant period, the assessee provided services to:
- M/s. Flakt India Ltd., and
- AE & E Works (P) Ltd., Chennai,
without obtaining registration under Manpower Recruitment and Supply Services as per the Finance Act, 1994.
Payment of Service Tax and Interest Prior to SCN
Once the audit pointed out non‑payment and short‑payment, the assessee promptly deposited the applicable service tax and interest. The payment details furnished were as follows:
For the period August 2006 to March 2008
- Service tax: Rs. 3,64,457/-
- Interest: Rs. 56,938/-
- Date of payment: 31.03.2010
For the period September 2008 to December 2008
- Service tax: Rs. 5,55,536/-
- Interest: Rs. 1,20,365/-
- Date of payment: 15.03.2010
The SCN, however, was issued later, on 11.01.2011, i.e., well after the deposits made in March 2010.
The assessee therefore claimed the statutory protection available under Section 73(3) and its Explanation 2, arguing that no penalty could legally survive once service tax and interest were paid before issuance of the SCN and there was no finding of fraud, collusion, willful misstatement or suppression with intent to evade.
Arguments of the Parties
Submissions on Behalf of the Assessee
The learned counsel for the assessee contended: