By TIOL News Service

MUMBAI, NOV 06, 2017: ON the appellants, penalties were imposed u/s 77(2) of the FA, 1994 for non-payment of admitted liability of Service Tax by the company M/s. Kingfisher Airlines Ltd.

In appeal before the CESTAT, the appellants submit -

a) To attract penalty under Section 77(2) of the Act, it is necessary to establish that the person was required to comply with any provision of the Act or the rules made thereunder and further he has contravened such a provision.

b) Section 77(2) of the Act being penal in nature and having been introduced with effect from 10 May 2013,it cannot be made applicable retrospectively to any offence committed prior to the said date.

The appellant also relied on the apex court decision in S.L. Kirloskar v. Union of India in support.

The AR sought to distinguish the cited decision by submitting that the relevant section of the CEA, 1944 that was examined by the Bombay High Court and Supreme Court employed the word "manufacturer". Inasmuch as in the present case, Sec 77 (1)(b) as well as Sec 77(1)(c) of the FA, 1994 does not deal with either "manufacturer" or "any person who is liable to pay Service Tax" but makes "any person" who violates the provisions of the Act liable to penalty. Furthermore, Service Tax was collected by M/s Kingfisher Airlines and 4 persons, made liable to penal action in the SCN, and they had taken a conscious decision not to pay the collected Service Tax to the Government, which fact had been admitted by them. Furthermore, collecting of Service Tax and not paying the same is an offence under the Finance Act, 1994, and as such any person who has taken the decision to violate the law would be liable for penal action under the provisions of Sec 77. That Sec 78A specifies the penalty on persons in cases of specific violation whereas the general penal provision in section 77 provides for penalty for any violation of any of the rules or other provisions of the Act. Reliance is also placed on the decisions in Hatkesh Cooperative Housing Society Ltd. - 2016-TIOL-2073-HC-MUM-IT & M/s Kripa Outdoor Publicity - 2016-TIOL-132-HC-MAD-ST.

The Bench extracted section 77(2) of the FA, 1994 and observed -

+ From the reading of the above rule(s), it is understood that penalty can be imposed on any person who contravenes any of the provisions of the chapter of the Finance Act, 1944 or any rules made thereunder for which no penalty is separately provided in this chapter. Now the question arises that who is that 'any person' and whether that person is legally bound to comply with any of the provisions of the chapter of the Finance Act 1994 or any rules made thereunder.

+ In the facts of the case, the offence is non-payment of admitted liability of service tax by the company M/s Kingisher Airlines Ltd. The liability is on the company and not on the directors or the employees, therefore if the company fails to discharge the statutory liability, it is the company against whom the action of recovery of such unpaid tax can be made under the statute . Therefore by not paying the dues, the company admittedly contravened the provisions of the chapter of Finance Act, 1994 and rules made thereunder. As regards individual persons, in the present case, directors and employees of the KAL are not liable to discharge the service tax liability of KAl, therefore, the appellants have not contravened the provisions of Act or rules made thereunder.

+ In section 77(2) of Finance Act, 1994, the term of 'any person' means a person who is liable to comply with the provision(s) of the Act and/or rules made thereunder. From the adjudication order, it is seen that no provision of law was quoted therein which binds the present appellants to follow certain legal provisions of the Act and/or rules made thereunder. In this position, next question arises, then on whom the provision of section 77(2) shall apply. The simple answer is the person who is legally bound to comply the various provision of chapter of Finance Act,1994 and/or rules made thereunder. As regards provisions of the chapter of Finance Act, 1994 and/or rules made thereunder it is meant for levy of service tax and prescribed procedures therefor. The person liable for payment of service tax and compliance of various provisions is that person who is liable to pay the service tax and to comply the prescribed procedure under the rules.

+ Therefore for the purpose of Section 77(2) of the Finance Act, 1994, in the present case the person, who is liable to pay service tax and to comply the provisions therefor, is the company M/s Kingfisher Airlines Ltd and no one else. The purpose of the Section 77(2) is to impose penalty on the taxpayer, in case the assessee contravenes any of the provisions and/or rules, if not provided separately. For example, if the assessee does not, maintain statutory records in the manner prescribed, the said assessee shall be liable for penalty under Section 77(2).

Comparing the provisions of the CEA, 1944, CER, 2002, Customs Act, 1962 and drawing a parallel with the FA, 1994, the Bench noted -

++ Rule 26 is invokable on the individual person for the specific acts of the individual person prescribed therein. Under this rule a person, other than an assessee, can be penalized. Unlike this rule 26, there is no pari materia rule in the chapter of the Finance Act, 1994 or in the Rules made thereunder. Despite existing of Rule 26, a Rule 27 was made to penalise the assessee, which is pari materia to Section 77(2) of the Finance Act, 1994. Therefore, in absence of similar provision of Rule 26 of Central Excise Rules, 2002 in the Finance Act, 1994 or rules made thereunder, no personal penalty on individual person can be imposed in connection with evasion of service tax by the assessee (KAL).

++ Similar to penal provision of Rule 26 of CER, 2002, in Customs Act, 1962 also separate penal provisions for individual person have been provided under Section 112/114AA of Customs Act and similar to Rule 27 of CER, 2002, in customs there is a provision under Section 117 for the assessee which is similar to Section 77 (2) of Finance Act, 1994.

++ Whenever the legislature had intention to penalise individual person that too for their specific acts, a separate penal provision for the specific acts were made such as Rule 26 in Central Excise Rules, 2002 and Section 112/114AA in Customs Act, 1962. However, there is no similar provision enacted in Finance Act, 1994 for service tax matters during the relevant period of this case.

++ It is also observed from the text of the Rules 26 of CER, 2002, Section 112/114AA of Customs Act, 1962 that the acts prescribed therein which are liable for penalty are such which can be acted only by an individual person and not by artificial person like a Company. Therefore, for penalizing an individual person an independent provision is must, which is absent in the Finance Act, 1994. For this reason, general penal provision for contravention of the provision of act/rules provided under Section 77(2) of the Finance Act, 1994 cannot be invoked to penalise an individual person.

++ It is pertinent to note that for service tax matters, when legislature thought deem fit that individual persons such as director, manager, secretary or other officer, of the company who committed specified contraventions, a penal provision by way of insertion of Section 78A was enacted in the Finance Act, 1994. Had the provision of Section 77(2) been sufficient for penalizing individual person, there was no need of Section 78A. This further strengthens the view that Section 77(2) of the Finance Act, 1994 was not adequate to penalise any individual person. The Section 78A was enacted on 10.05.2013 whereas period in the present case involved is April, 2010 to March, 2012, hence the same is not relevant in the present case in view of the Hon'ble Bombay High Court's judgment in the case of S.L. Kirloskar(supra) wherein it was held amongst other grounds, that penalty on the director under Rule 209A cannot be imposed for the period when said rule was not in force and Rule 209A can not be invoked retrospectively.

Concluding that the appellants cannot be penalized by invoking section 77(2) of the FA, 1994, the impugned order was set aside and the appeals were allowed.

(See 2017-TIOL-3902-CESTAT-MUM)