Delhi High Court Waives ₹4.5 Lakh Penalty After Finding Service Tax Default Was Bona Fide, Not Deliberate

The Delhi High Court has set aside a ₹4.5 lakh penalty imposed on a consultancy firm for non-payment of service tax, holding that the default arose from a bona fide and reasonable belief regarding the taxability of its services and was not a deliberate attempt to evade tax.

The Division Bench of Justices Anil Kshetarpal and Manmeet Pritam Singh Arora set aside the penalty imposed on Appellant under Section 78 of the Finance Act, 1994, and observed,

“the non-payment of service tax by the Appellant for the relevant period cannot be viewed as a deliberate or contumacious default, as the assessee had acted under a bona fide and reasonable belief that the services rendered by it were not exigible to service tax.”

The Court was dealing with the company's challenge to a CESTAT order which had reduced the penalty from ₹65,75,890 to ₹4,50,000.

The company was engaged in providing services relating to the planning, designing, construction, management and supervision of projects for government hospitals, medical colleges and educational institutions.

Its case was that the services rendered to such institutions were non-commercial in nature and, therefore, not liable to service tax. The company relied on contemporaneous communications issued by the Service Tax Department itself.

The Court noted that in letters dated September 11, 2006 and November 20, 2007, the Assistant Commissioner and Deputy Commissioner of Service Tax had taken the view that services provided by the appellant to government institutions were non-commercial and not exigible to service tax.

The Court observed that these communications lent credence to the appellant's contention that it had a reasonable and bona fide cause for failing to deposit service tax.

Referring to Section 80 of the Finance Act, which provides that no penalty is imposable where an assessee proves that there was reasonable cause for the failure, the Court held that the CESTAT's finding regarding absence of wilful suppression had a material bearing on the penalty proceedings.

The Court held that the interpretational uncertainty, coupled with the absence of any material suggesting suppression, fraud, wilful misstatement or an intention to evade tax, constituted reasonable cause within the meaning of Section 80.

As such, the Court allowed the appeal and set aside the penalty.

For Appellant : Advocates Dr.Prabhat Kumar, Pralabh Mathur, Karan Kanwal

For Respondent : Advocates Atul Tripathi, SSC with Shubham Mishra, Gaurav Mani Tripathi, Akshay Sagar and Madhav Anand for CBIC