By TIOL News Service

CHENNAI, AUG 20, 2018: REVENUE is in appeal against the order dated 16.06.2016 - 2016-TIOL-2379-CESTAT-MAD of the CESTAT wherein the Tribunal has set aside the penalty imposed u/s 78 by invoking the provisions of Section 80 of the Finance Act, 1994.

The short facts are that the respondent was calculating their service tax liability based on the collection report for each month taking the total collection as the cum-tax value and were working the service tax backwards.

It was noticed that the accounting system did not provide for capturing of the amount of Tax Deducted at Source (TDS) recovery made by their clients from their invoices for the calculation of their service tax liability.

Suffice to say that the TDS was never reflected in their collection reports and was never made a part of the reckoning for the purpose of service tax.

The stand of the Revenue is explained by an example -

If service is provided for Rs.100 and service tax thereon is Rs.10, the total invoice will be for Rs.110. If the client remits Rs.99 by deducting TDS of Rs.11/-, then the sum of Rs.99 would include Rs.10 to be paid towards service tax and Rs.10 should be paid to the Government. The service tax cannot be calculated on Rs.99.

The reasoning given by the respondent for the shortfall is that the same was a result of wrong software programme and the shortfall in the remittance was not wilful. Inasmuch as penalty is not imposable under the FA, 1994.

The adjudicating authority rejected this plea on the ground that the instant case was not one of simple omission or failure, but there was wilful suppression of fact; that the assessee has enjoyed financial accommodation of more than 10 crores of rupees for more than 5 years and that even the payment of interest does not cover the entire financial accommodation enjoyed by them; that the assessee is liable to pay penalty under Section 78 of the Finance Act, 1994.Nonetheless, the adjudicating authority gave a concession on the penalty imposed, by directing that since the entire amount of service tax had been paid, the penalty would be reduced to 25% of the service tax demanded if the penalty under Section 78 is paid within 30 days of the communication of the order.

In appeal, the CESTAT, as mentioned, granted relief from imposition of penalty u/s 78 of the FA, 1994, and, therefore, being aggrieved, Revenue has filed an appeal in the Madras High Court.

The Counsel for the Revenue submitted that section 67 of the FA, 1994 clearly postulated that where the service is provided for consideration in money, service tax has to be paid on the gross amount charged by the service provider for such services provided or to be provided by him. Moreover, since tax was paid only after the suppression was unearthed, penalty is correctly imposed - 2018-TIOL-988-HC-DEL-CX relied upon].

The Respondent blamed the software and emphasised that there was no intention to evade payment of service tax; that there was confusion regarding applicability of law and penalty should not be levied.

The High Court considered the submissions and inter alia observed -

++ Section 67 of the Finance Act, 1994, makes it very clear that when the service tax is provided for consideration of money, service tax is payable on the gross amount charged by service provider ... There is no ambiguity in the Section.

++ The respondent cannot blame the system error or a faulty software by which the service tax payable was calculated. It is clearly a bogey raised by the respondent to evade payment the service tax.

++ The service tax has been paid only after the inspection and investigation by the department and full payment of service tax is not a mitigating circumstance, in the facts of the case. Violation of a statute in which there is no ambiguity and relying on the software programme as a reason for non payment of service tax in time cannot be a reasonable cause for the failure to pay tax, in time.

++ But for the investigation, the non payment of service tax would have gone unnoticed. The amount received from the client would include the entire service tax which has been calculated from the customer and it should have been paid to the department. The TDS amount withheld cannot be said to include the service tax component. Viewed in this angle the respondent has received the service tax and has not passed on it to the department. The invoice that is raised would contain the amount payable towards service Tax.

++ The respondent, therefore, has clearly manipulated their accounts and paid lesser service tax even though they have recovered the entire portion of service tax from the client. The respondent cannot take shelter under a faulty programme when they themselves handled the system. The service tax could not have been calculated on the basis of the amount received from the clients minus TDS.

Concluding that section 80 of the Finance Act, 1994 could not have been invoked, the order of the Tribunal was set aside and the respondent was held liable to pay penalty. Nonetheless, the benefit of reduced penalty, as granted by the adjudicating authority, was extended provided the same was paid within 30 days of the order.

(See 2018-TIOL-1656-HC-MAD-ST)