South Eastern Coalfields Limited vs Commissioner of GST & Central Excise, Raipur

Dilip Gupta, J

South Eastern Coalfields Limited, the appellant has filed this appeal to assail the order dated 18.12.2018 passed by the Commissioner (Appeals) upholding the imposition of penalty under section 78 of the Finance Act, 1994, the Finance Act and dismissing the appeal filed by the appellant.

The appellant, a Government of India undertaking, received various services. It claim that for these services it had to make payment of service tax under the reverse charge mechanism. During an audit conducted by the department for the period April 2011 to March 2014, it was pointed out that the appellant had received “supply of man power” service but it had not paid service tax and cess on the said service amounting to Rs.34,66,851/-. Accordingly, the Superintendent sent a letter dated 17.03.2015 to the appellant requiring it to pay the short payment of service tax to the extent of Rs. 18,10,862/-. The appellant deposited Rs.14,98,090/- and Rs. 2,10,691/- towards the demand of service tax and interest and informed the department regarding the said payment. The appellant also pointed out that in some cases, the service providers had discharged 100% liability of service tax amounting to Rs. 8,50,894/-, which included the liability of the appellant to the extent of Rs. 6,38,171/- i.e. 75% of the total liabilitiy of Rs. 8,50,894/- and this amount had been subsequently reimbursed by the appellant to the service provider.

A show cause notice dated 18.10.2016 was issued to the appellant requiring the appellant to show cause as to why an amount of Rs. 18,10,862/- should not be recovered from the appellant under the proviso to section 73(1) of the Finance Act and the service tax of Rs. 14,98,090/- deposited by the appellant should not be appropriated against the aforesaid proposed demand of service tax and the amount of Rs. 02,10,691/- deposited by the appellant towards interest should not be appropriated against the proposed demand of interest. The show cause notice also proposed penalty under section 78 of the Finance Act for allegedly suppressing relevant details and value of taxable service with pre-meditated intention of evading payment of service tax.

The appellant filed a reply dated 27.12.2016 to the aforesaid show cause notice and stated that the allegations made in the show cause notice were not correct. It was pointed out that the entire amount had been paid with interest before the issuance of the show cause notice and, in any case, no penalty could be imposed on the appellant.

The Assistant Commissioner, however, by order dated 29.06.2018 confirmed the demand and the operative part of the order is reproduced below:

“ i. I hereby confirm the demand and order recovery of Service Tax of Rs.11,72,091/- including Ed. Cess & SHE Cess under proviso to Section 73(1) of Finance Act 1994. I order for appropriation of Rs.11,72,091/- already deposited by the Noticee. Remaining Service Tax of Rs.6,38,171/- paid by the service providers is not liable for recovery from the Noticee.

ii. I order for recovery of interest under Section 75 of the Finance Act 1994 and order for appropriation of the interest already deposited by the Noticee.

iii. I impose a penalty of Rs. 5,86,045/- under Section 78 of the Finance Act 1994. However, the Noticee is given an option to pay only 25% of this penalty amount subject to condition that entire amount of Service Tax and interest along with the 25% penalty under Section 78 are paid within thirty days of communication of this order.”

Feeling aggrieved, the appellant filed an appeal before the Commissioner (Appeals). This appeal was dismissed by order dated 18.12.2018 and the relevant observations of the Commissioner (Appeals) in the impugned order are reproduced below:

“9. In this regard, I find that it is an undisputed fact that the appellant had discharged their liability of impugned service tax of ₹11,72,091/- only after it was pointed out by the audit. It is also on record that the appellant had not disclosed the full value of taxable services in the relevant statutory ST-3 returns. The said short payment of service tax was detected during the course of audit on the records of the appellant. Had this fact of non-payment gone undetected by the department, it would have resulted in loss to the Government exchequer. The fact of non-payment of appropriate service tax was never brought to the knowledge of department by the appellant till audit was initiated. Also in a self assessment regime it is the responsibility of the appellant to assess the service tax himself and make payment thereof and also, to file the ST-3 returns with full & correct information. But in this case, the appellant had failed to disclose the correct information in ST-3 returns as discussed earlier and also, had failed to deposit the service tax dues correctly. Thus from facts of the case it appears to be a clear case of suppression of material facts with intent to evade payment of service tax warranting imposition of penalty under Section 78 of the Finance Act, 1994. Thus, I find that appellant's contention in this regards is not sustainable.”

Shree Rajeev Kumar Agarwal, learned counsel for the appellant submitted that the Commissioner (Appeals) committed an error in confirming the imposition of penalty upon the appellant under section 78 of the Finance Act. In this connection, learned counsel pointed out that during the period in dispute, the appellant was liable to pay service tax under reverse charge mechanism in respect of the supply of man power service. This reverse charge mechanism liability on ‘man power services’ was brought for the first time with the introduction of the negative list with effect from 01.07.2012 and in terms of the applicable provisions, 75% of the service tax liability was to be paid by the recipient of service under reverse charge mechanism and the balance 25% was to be paid by the provider of service under forward charge mechanism. Though there was a short payment of service tax by the appellant, but it was paid with interest when this fact was pointed out by the audit. Learned counsel submitted that in such circumstances when the short payment of service tax with interest was deposited, the show cause notice could not have been issued under section 73 (3) of the Finance Act. Learned counsel pointed out that the provision of section 73(4) of the Finance Act which provides that nothing contained in sub-section (3) shall apply to a case where any service tax has been short paid by reason of fraud; or collusion; or willful misstatement; or suppression of facts; or contravention of any of the provisions of Chapter V or of the rules made thereunder with intent to evade payment of service tax would not be applicable in the facts and circumstances of the present case. Learned counsel, therefore, pointed out that the Commissioner (Appeals) committed an error in holding that there was suppression of material facts with intent to evade payment of service tax warranting imposition of penalty under section 78 of the Finance Act.

Ms. Jaya Kumari, learned authorized representative appearing for the department supported the impugned order and submitted that in the facts and circumstances of the case, the Commissioner (Appeals) was justified in imposing penalty under section 78 of the Finance Act.

The submissions advanced by the learned counsel for the appellant and the learned authorized representative appearing for the department have been considered.

The issue that arises for consideration in this appeal is as to whether penalty under section 78 of the Finance Act could have been imposed upon the appellant. Section 78 of the Finance Act is reproduced below:

“ 78. Penalty for failure to pay service tax for reasons of fraud, etc.

(1) 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 or collusion or willful mis-statement or suppression of facts or contravention of any of the provisions of this Chapter or of the rules made thereunder with the intent to evade payment of service tax, the person who has been served notice under the proviso to sub-section (1) of section 73 shall, in addition to the service tax and interest specified in the notice, be also liable to pay a penalty which shall be equal to hundred per cent of the amount of such service tax: xxx xxx”

It is not in dispute that the short payment of service tax with interest had been deposited by the appellant before the issuance of the show cause notice. Section 73(3) of the Finance Act provides that where any service tax has been short paid, the person chargeable with service tax may pay the amount of service tax before service of notice upon him under section 73 (1) in respect of such service tax and inform the Central Excise officer who, on receipt of such information, shall not serve any notice under section 73(1) in respect of the amount so paid. However, sub-section (4) of section 73 of the Finance Act provides that nothing contained in sub-section (3) of section 73 shall apply to a case where any service tax has been short paid by reason of suppression of facts or other factors enumerated therein.

It has, therefore, to be seen whether the provisions of sub-section (4) of section 73 of the Finance Act could have been invoked in the facts and circumstances of the present case.

To examine this contention, it would be pertinent to refer to the allegations made in the show cause notice dated 25.10.2016 so far as this aspect is concerned and the relevant allegations are:

8.1. xxx xxx xxx The Noticee has suppressed the value of services by not disclosing the full consideration amount against the Manpower Recruitment of Supply Service in the ST-3 filed with the Department. It was only during the course of audit of the books and accounts of the Noticee that this irregularity was noticed for which extended period of limitation i.e. five years is invokable for recovery of service tax evaded by the Noticee as per the proviso to Section 73(1) of Finance Act along with interest under section 75. Further the Noticee was well aware of the provision that consideration amount against such activity is clearly covered under the Manpower Recruitment agency or Supply service and their liability under reverse charge mechanism xxx xxx xxx. Hence, such deliberate act of defiance of law on the part of the Notice tantamount to contravention of law with intent to evade payment of duty.

8.2 xxx xxx xxx The Noticee is also liable for penal action as provided in the Section 78 of the Act for the contravention of various provisions of the Act, the Rules and the Valuation Rules with intent to evade payment of service tax.

The appellant filed a reply dated 27.12.2016 to the show cause notice and pointed out that the appellant should have ideally discharged the payment of service tax of Rs. 6,38,171/- directly to the credit of the Central Government under the reverse charge mechanism, but instead of depositing the service tax it reimbursed the same to the service provider who deposited the amount in the Government treasury. The details of the service tax liability, interest and payment made by the appellant were indicated in the reply in the following manner:

Service Tax payable as per show cause notice (A)

Rs. 18,10,262

Service Tax already reimbursed to service provider (75% portion) (B)

Rs. 6,38,171

Balance Service Tax liability (A)-(B)=(C)

Rs. 11,72,091

Interest payable (D)

Rs. 5,36,690

Total (E)=(C)+(D)

Rs. 17,08,781

The appellant also pointed out that the above amount had already been paid as per the details recorded in the show cause notice and it is as follows:

Challan No. 11040 dated. 04.06.2015

Rs. 14,98,090

Challan No. 02457 dated. 15.12.2015

Rs. 210,691

Total paid as above

Rs. 17,08,781

The appellant also pointed out that penalty under section 78 of the Finance Act was not leviable on the appellant since there could be no suppression of facts by the appellant since it would be a case of revenue neutrality. It was also pointed out that it was a public sector undertaking and could not have had any intention to evade payment of service tax.

The Commissioner (Appeals) has confirmed the imposition of penalty under section 78 of the Finance Act for the reason that the appellant had discharged the service tax liability only after it was pointed out by the audit and if the audit had not been conducted, short payment of service tax would have gone undetected. The Commissioner (Appeals) also noted that in a self assessment regime, it is the responsibility of the appellant to assess the service tax and make payment and to file ST-3 returns with correct information, but the appellant failed to disclose the correct information in the ST-3 returns. This was, therefore, in the opinion of the Commissioner (Appeals), a case of suppression of material of facts with intent to evade payment of service tax warranting imposition of penalty under section 78 of the Finance Act.

As noticed above, the appellant should have discharged service tax liability of Rs. 06,38,171/- under the reverse charge mechanism but instead of doing so, it reimbursed the said amount to the service provider who deposited this amount in the government treasury. The appellant availed Cenvat credit on input service. Had the appellant deposited the amount under the reverse charge mechanism, the same could have been available to the appellant as Cenvat credit. The situation, therefore, is revenue neutral. The Commissioner (Appeals) was, therefore, not justified in holding that if an audit had not been conducted, non-payment of service tax would not have come to the knowledge of the department. The appellant had deposited the amount with interest before issuance of the show cause notice. In such circumstances, it is not possible to accept the contention of the learned authorized representative appearing for the department that the appellant suppressed facts with intent to evade payment of service tax.

The imposition of the penalty upon the appellant under section 78 of the Finance Act, therefore, cannot be sustained. The impugned order dated 18.12.2018 passed by the Commissioner (Appeals), is accordingly, set aside and the appeal is allowed.

(Order dictated in the Open Court)