CESTAT Hyderabad Sets Aside Penalty Against Biofuels Company As Service Tax Paid Before SCN

The Customs, Excise and Service Tax Appellate Tribunal at Hyderabad has recently set aside penalties imposed on Universal Biofuels Pvt. Ltd., holding that the tax department should not have issued a show cause notice after the company had already paid the full service tax with interest.

A coram of Technical Member A.K. Jyotishi and Judicial Member Angad Prasad observed, “In view of the factual matrix of this appeal, we find that in this case, in the first place, the SCN itself should not have been issued as the appellant had already paid the entire service tax along with applicable interest. Further, we find that the issue of payment of service tax under the category of MRSAS itself was under litigation and differing judgments were passed. There is nothing on record to substantiate that there was deliberate attempt on the part of the appellant for non-payment of service tax with an intent to evade payment of service tax. Therefore, in the facts of the case, we find that the appellants were eligible under section 73(3) and the reliance placed by the adjudicating authority on section 73(4) is not correct."

The bench said that under Section 73(3) of the Finance Act, 1994, which allows closure of proceedings where tax and interest are paid before a show cause notice, the case ought to have been closed. It added that penalties can be waived under Section 80, which applies where there is a reasonable cause for the failure to pay tax.

The case arose from reimbursements made by Universal Biofuels to a foreign company for salary and travel costs of technical experts deputed to its plant in Kakinada. The department treated these payments as taxable services received from abroad under the reverse charge mechanism and raised a demand under manpower supply service.

Following audit queries and correspondence, the company paid about Rs 78.5 lakh towards service tax and interest before the issuance of a show cause notice and requested closure of the matter. The department, however, proceeded to issue the notice and imposed penalties under Sections 78 and 77, which deal with penalties for suppression of facts and other violations.

Before the tribunal, the company did not dispute the tax liability but challenged the penalties. It argued that it had acted under a bona fide belief that such reimbursements were not taxable. It also said that all transactions were recorded in its books and shared with the department during the audit and that the payment was made voluntarily once the issue was pointed out.

It further argued that in the absence of any intent to evade tax, Section 73(4), which allows extended proceedings in cases involving fraud or suppression, would not apply.

The tribunal accepted these submissions. It noted that the demand arose entirely from audit observations and that the company had disclosed all relevant facts over a period of time. It also observed that the taxability of such arrangements was uncertain during the relevant period and had seen conflicting decisions.

In these circumstances, it found that there was a reasonable cause for the delay and no material to show any intent to evade tax. It held that the benefit of Section 73(3) should have been extended and that reliance on Section 73(4) was misplaced. It further held that penalties were liable to be waived under Section 80.

The tribunal accordingly set aside the penalties under Sections 78 and 77 while upholding the rest of the order, partly allowing the appeal.

For Appellant: Advocate Ashwani Pahwa,

For Respondent: Advocate K. Raji Reddy, AR