By TIOL News Service

MUMBAI, OCT 13, 2015: THE appellant is registered under "Manpower Recruitment or Supply Agency Services". It was noticed by the jurisdictional authorities that during the period June 2005 to March 2010, there was an evasion of service tax to the tune of Rs.1.13 crore due to fabrication/alteration of TR-6/GAR-7 challans and bogus challans.

SCN was issued to the appellant for demand of the tax liability and also for demand of interest and imposition of penalty.

The CCE, Pune-I confirmed demand along with interest and imposed equivalent penalty.

The appellant submitted before the CESTAT that they are at the receiving end due to the Consultant's embezzlement of the amounts; that they had appointed one Mr. Deepak Joshi, to look into the activities of compliance of Service Tax Rules and also for payment of the service tax; that the appellant had in fact paid various amount in cash by withdrawing from the Bank to the said Consultant Mr. Deepak Joshi who used to file service tax returns with challans indicating proper payment of tax liability; that Mr. Deepak Joshi played fraud on the appellant and used to fabricate challans of showing more amounts paid toward the service tax and used to pocket the differential amounts. It is his submission that appellant has discharged the entire service tax liability and the interest thereof as has been worked out by authorities based upon the statement of Mr. Deepak Joshi.

It is further submitted that appellant is not contesting the service tax liability but is seeking setting aside of penalties as they are hurt by the action of the Consultant. The appellant also produced the copy of the cash book for the relevant period which indicates withdrawal of cash from the bank for paying service tax and duly certified by the Chartered Accountant. On identical issue, in the cases of Ganesh Enterprises - 2015-TIOL-1650-CESTAT-MUM, Shri Sai Enterprises - 2015-TIOL-1586-CESTAT-MUM the Tribunal had held that penalty is not imposable on the assessee, the appellant averred and sought similar benefits.

The AR submitted that the appellant was in the knowledge of the activity undertaken by the Consultant; that no criminal complaint has been filed by the appellant against the said Consultant and it is incomprehensible that the appellant had entrusted the payment of service tax by cash instead of by cheque; that there is no reasonable cause shown for setting aside the penalties imposed as the appellant had signed the ST-3 returns wherein there was a declaration that the facts and figures shown in the tax returns were correct. It is also emphasized that the vicarious liability of any payment of service tax and interest thereof lies on the appellant. For this purpose the AR adverted to section 238 of the Indian Contract Act and submitted that appellant is liable to be penalized for mis-representation or fraud by agents. Reliance is placed on the decisions in Indsur Global Ltd. - 2014-TIOL-2115-HC-AHM-CX and V.S. Ubhayakar - 2012-TIOL-139-HC-MUM-FEMA.

The Bench considered the submissions and inter alia observed -

On merits:

+ On a specific query from the Bench as to what is the evidence available with the appellant to show that they had withdrawn the cash from the bank and gave to the said Mr. Deepak Joshi for discharging the service tax, the certificate produced today by the learned Counsel indicates that the cash book of the appellant during the period June 2006 to April 2009 indicates recording of various amounts as payment of service tax. The said amounts were tallied by us with the amounts shown in paragraph 4 of the impugned order and the figures are matching. It can be presumed that the appellant had withdrawn cash and handed the same to the Consultant for discharging the service tax liability.

+ We find strong force in the contentions raised by the learned Counsel that the activity of the Consultant to embezzle the amount by playing fraud, cannot be held as has been done with the knowledge of the appellant herein. The fraudulent act of the Consultant seems to be driven by the greed of the Consultant to enrich himself. To our mind it cannot be attributable to the appellant as nothing is brought on record that the appellant had knowledge of such an activity undertaken by the Consultant. It is also not on record that the appellant had not paid any amount to the Consultant for the payment of service tax to the department. We find that the Consultant has defrauded the appellant by fabricating GAR-7/TR-6 challans. It is also on record that the appellant had discharged the entire service tax liability and the interest thereon.

+ Point raised by D.R. that the service tax returns were signed by the appellant indicating that the tax liability has been discharged will also not carry the case of Revenue any further. It is on record that such returns were prepared by the Consultant Mr. Deepak Joshi and signed by appellant believing them to be correct.

Vicarious liability: As per the Indian Contract Act, Section 238 talks about the vicarious liability only in the case if the principal authorizes an agent to do an act in the course of business for the principals. In the case in hand it is on record that the appellant had appointed Consultant to discharge the appropriate service tax liability and had not appointed him for making any mis-representation or to commit fraud. In view of the above, the question of vicarious liability on the part of the appellant does not arise.

The Bench also distinguished the case law cited by the AR and held that the appellant being unaware of the fraudulent activity of the Consultant, and having discharged the service tax liability and interest thereof on being pointed out, had made out a justifiable reason for setting aside the penalties imposed on them.

Invoking the provisions of Section 80 of the Finance Act, 1994, the CESTAT set aside the penalty imposed by the adjudicating authority.

The appeal was allowed to the said extent.

(See 2015-TIOL-2184-CESTAT-MUM)