Penalty Can't Be Levied When Extended Limitation Period Is Not Invokable: Chandigarh CESTAT

The Chandigarh Bench of Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) has held that when the extended period is not invokable, the penalty under Section 78 of the Finance Act, 1994, is also not leviable since the ingredients for invoking the extended period and levying the penalty under Section 78 are the same.

The bench of S. S. Garg (Judicial Member) and Rajeev Tandon (Technical Member) has observed that when the extended period of limitation is not invokable, the demand cannot be confirmed for the normal period of limitation for some of the same transactions. Though there is an amendment in Section 73 made by the Finance Act, 2013 w.e.f. May 10, 2013 by inserting sub-section (2A), the period of dispute in the present case is prior to that. Therefore, this amendment will not be applicable.

Section 78 of the Finance Act, 1994, is in respect of the penalty for failure to pay service tax for reasons of fraud, etc. It states that where any service tax has not been levied or paid, or has been short-levied or short-paid, or erroneously refunded, by reason of fraud, collusion, wilful misstatement, or suppression of facts, the person, in addition to the service tax and interest specified in the notice, shall also be liable to pay a penalty, which shall be equal to 100% of the amount of service tax.

The appellant or assessee is in the business of providing services under the category of "work contract." A show cause notice was issued to the appellant alleging that they were not entitled to the concessional rate of 4% service tax as provided under the Composition Scheme as they had not added the value of free materials supplied by the service recipients to the taxable value, and therefore, they were liable to pay service tax as specified under Section 66 of the Finance Act, 1994. The service tax amounting to Rs. 2,15,86,841/- short paid by them was proposed to be recovered by invoking the extended period of limitation.

The adjudicating authority confirmed the demand for service tax under Section 73(1) of the Act by invoking the extended period of limitation along with the imposition of an equivalent amount of penalty under Section 78.

The assessee contended that the finding is beyond the allegation in show cause notice, and there is also no finding on wilful suppression. Therefore, once the extended period is not invokable, the penalty under Section 78 is also not leviable.

The department contended that the appellant is not entitled to abatement under Notification No. 1/2006-ST dated March 1, 2006, because they have not included the cost of free supplies in the gross amount on which service tax is payable.

The tribunal noted that the show cause notice was issued without conducting an investigation, and the allegation in the show cause notice for not taking registration on time was found to be false by the adjudicating authority. The allegation in the show cause notice for non-filing of service tax returns for the periods 2007–08 and 2008–09 was also found to be false by the adjudicating authority. The show cause notice is lacking in certain material in particular and has not been issued after proper investigation, and certain allegations made in the show cause notice were found false by the adjudicating authority.

The tribunal held that the order imposing the penalty was not sustainable in law, and therefore it was liable to be set aside.

Counsel For Appellant: J. K. Mittal

Counsel For Respondent: Nikhil Kumar Singh

Case Title: M/s P S Construction Versus Commissioner

Case No.: Service Tax Appeal No. 60388 of 2013

Click Here To Read The Order