C.C.E., and Cus., Daman vs Psl Corrosion Control Services Ltd.

H.N. Devani, J.—The Commissioner of Central Excise & Customs, Daman has, in this appeal u/s 35G of the Central Excise Act, 1944, proposed the following two questions stated to be substantial questions of law arising out of the impugned order dated 4th August, 2008 (2008) 15 STJ 325 made by the Customs, Excise & Service Tax Appellate Tribunal (the Tribunal):

[1] Whether or not the CESTAT is right in remanding the matter back to the original jurisdiction authority for re-quantification of the demand by extending the benefits to the respondent?

[2] Whether the CESTAT is right in setting aside the penalty in terms of Section 80 of the Finance Act, 1944?

The facts stated briefly are that the respondent M/s. P.S.L. Corrosion Control Services Ltd. is engaged in the activity of applying Fusion Bonded Epoxy Coating (FBE Coating) on Reinforced Steel Bars supplied by its customers. Working upon an intelligence that the respondent was not paying service tax on the said activity though the same was taxable service under the heading "Business Auxiliary Service", the officers of the DGCEL, Vapi Regional Unit, conducted inquiry by issuing summons on 10-3-2005 to the respondent to collect the required details and documents relevant for investigation. Pursuant to the investigation, it appeared to the appellant that the respondent was liable to pay service tax for the services rendered by it under the head "Business Auxiliary Service", however, it had failed to register itself with the Department for paying such service tax and had also failed to pay appropriate service on the amount collected by it from its clients for applying FBE Coating on the Reinforced Steel Bars supplied by its customers. On scrutiny of records maintained by the respondent for the period 10-9-2004 to 30-6-2005, it was found that the respondent had collected Rs. 10,48,46,503/- from its customers for FBE Coating, but did not pay service tax and education cess on the said "Business Auxiliary Service" provided by them to its clients/customers.

A show cause notice dated 9th September, 2005 came to be issued to the respondent which came to be adjudicated vide Order in Original dated 12th April, 2006, whereby the service tax demand of Rs. 1,04,84,650/- and education cess of Rs. 2,09,693/- came to be confirmed. Penalty was imposed under Sections 76, 77 and 78 of the Finance Act, 1994 (the Act) and interest was imposed u/s 75 of the Act.

Being aggrieved, the respondent carried the matter in appeal before the Tribunal. The Tribunal held that the respondent was liable to pay service tax in respect of the activity undertaken by it during the relevant period. However, the quantum of such tax was required to be re-quantified by extending the benefit of Cenvat credit of duty on coating material used for epoxy coating and the credit in respect of other input services as available during the relevant period. The Tribunal, however, set aside the penalties imposed upon the respondent in terms of Section 80 of the Act in view of the fact that the revenue was aware of the fact that the respondents were carrying on the activity of epoxy coating.

Ms. Naina Gadhvi, learned Standing Counsel for the Central Governments assailed the impugned order of the Tribunal. It was submitted that the Tribunal was not justified in setting aside the penalties imposed on the respondent inasmuch as the respondent-assessee had not proved that there was reasonable cause for not paying the service tax. It was submitted that the services rendered by the respondent being amenable to service tax, it was incumbent upon the appellant to get itself registered and discharge its liability to pay service tax in connection with the said service. That having failed to do so, the Adjudicating Authority had rightly imposed penalties under the relevant provisions of the Act.

As can be seen from the impugned order of the Tribunal, on merits the Tribunal has held against the respondent by holding that the respondent was covered even under the un-amended definition of "Business Auxiliary Service". After holding the respondent liable to pay service tax in relation to the activity undertaken by it during the relevant period, the Tribunal was of the view that the quantum of tax was required to be re-quantified by extending benefit of CENVAT credit on duty of coating material used for epoxy coating as well as credit in respect of other input services as available during the relevant period. In the circumstances, the Tribunal deemed it fit to remand the matter to the Adjudicating Authority for re-quantification of the demand by extending the aforesaid benefits to the respondent.

In this regard it may be pertinent to note that the Commissioner in paragraph 34 of his order has observed thus :

M/s. PSL have further contended that if the activity undertaken by them is held to be taxable, they would be entitled to Cenvat credit of duty paid- -on-coating material, etc. used in epoxy coating and to avail credit on all input services, however, they have not produced any details or any documents in support of this claim. Therefore, the said benefit cannot be granted to them at this stage. However, M/s. PSL shall produce all documentary evidence in support of his claim before the Jurisdictional Deputy/Assistant Commissioner who shall allow such benefit in accordance with the law in force and only after verifying genuineness of the documents produced by them in this regard." However, contrary to the said observations, in the operative part of the order, the Commissioner has confirmed the entire duty demand. Moreover, as noted by the Tribunal the duty demand was also required to be re-quantified in the context of the submission of the respondent that the services prior to 10-9-04, that is, when clause (v) was inserted in the definition of "business auxiliary services" so as to include ''production of goods on behalf of the client''; were required to be excluded.

Insofar as the liability of the respondent to pay service tax is concerned it is an admitted position that the liability arose only with effect from 10-9-2004 when clause (v) came to be inserted in the definition of "business auxiliary services" so as to include ''production of goods on behalf of the client''. Hence, it cannot be gainsaid that the services rendered prior to the said date were required to be excluded while computing the tax liability. As regards entitlement to the benefit of Cenvat credit duty paid on coating material, etc., used in epoxy coating and to avail credit on all input services, both the Commissioner as well as the Tribunal, have concurrently found as a matter-of fact that the respondent was entitled to the me. In the circumstances, no infirmity is found in the order of the Tribunal in remanding the matter to the original adjudicating authority for re-quantification of the demand by extending the above benefits to the respondent. It may also be noted that though a question has been proposed as to whether the Tribunal was justified in remanding the matter to the original jurisdiction authority for re-quantification of the demand, no ground is taken up in the appeal memo in relation to the said question. All the grounds pertain only to the second question. In the prayer clause also the appellant has challenged the order of the Tribunal only to the extent of the penalty on the respondent.

Insofar as imposition of penalties is concerned, the Tribunal was of the view that the revenue was aware of the activity of epoxy coating being carried out by the respondent, inasmuch as litigation as regards whether the said activity amounted to manufacture or not was going on between the Department and the assessee. That upon inclusion of the said service in the service tax net with effect from 10-9-2004, the revenue never advised the respondent to start paying tax on the said activity. The Tribunal, therefore, found that it cannot be said that there was any suppression or intent on the part of the respondent to evade service tax and accordingly, did not find any reason for imposition of penalty upon the respondent, and set aside the same in terms of Section 80 of the Act.

Section 80 of the Finance Act, 1994 reads thus :

Penalty not to be imposed in certain cases

Notwithstanding anything contained in the provisions of section 76, section 77 or section 78, no penalty shall be imposable on the assessee for any failure referred to in the said provisions, if the assessee proves that there was reasonable cause for the said failure

Section 76 provides for penalty for failure to pay service tax. Section 77 provides for contravention of Rules and provisions of the Act, for which no penalty is specified elsewhere, whereas section 78 provides for penalty for suppressing value of taxable services.

From the facts noted above, it is apparent that the revenue was fully aware of the activities carried on by the respondent. In the circumstances, as rightly held by the Tribunal, though according to the revenue the said activities were taxable as "Business auxiliary services", the revenue never advised the respondent to start paying tax on the said activity. That considering the fact that the revenue was aware of the respondent''s activities, it cannot be said that there was any suppression, misstatement or intent on the part of the respondent to evade service tax. Besides, the facts of the case indicate that there was a bona fide litigation going on as regards the nature of the activity carried on by the respondent. As to whether the activity carried on the by respondent would amount to production so as to be covered under the category of "Business Auxiliary Services" was a debatable issue. In the circumstances, it cannot be said that the assessee has not proved that there was reasonable cause for the failure referred to in the provisions of Section 76, Section 77 or Section 78 of the Act. The Tribunal was, therefore, justified in setting aside the penalty imposed u/s 80 of the Finance Act, 1994.

In the light of the aforesaid discussion, the impugned order of the Tribunal does not suffer from any legal infirmity so as to warrant interference. In the circumstances no question as proposed or otherwise, much less any substantial question of law can be stated to arise out of the impugned order of the Tribunal. The appeal is, accordingly dismissed, with no order as to costs.