VIP Road Chartered Accountants Association

Procedures

Scope of the article
This article covers the following areas :
1. Registration;
2. Payment of service tax;
3. Filing of returns;
4. Assessment;
5. Penal Consequences.
These provisions are broadly covered in sections 68 to 80 of Chapter V of the Finance Act, 1994 ("Act"), the law governing service tax, and Rules 1 to 7 of the Service Tax Rules, 1994 ("Rules"). We now proceed to analyse the procedures.
Registration (Section 69 and rule 4)
1. Time limit for application
  1. Application for registration is to be made by ‘every person liable for paying the service tax’ in Form ST-1 within 30 days from the date on which service tax is levied or within 30 days from the date of commencement of business, whichever is later, to the concerned Superintendent of Central Excise having jurisdiction.¹ However, the said Form ST-1 does not contain any column to provide for the date of commencement of business.
2. Premises to be registered
  1. General Rule
    If taxable services are provided from more than one premises or offices separate applications for registration are to be made in respect of each such premises or office.² However, the ‘focal point’ of registration is billing. It is only the premises or offices of an assessee which raise bills that need to be registered. Thus, say in case of an advertisement agency, where the bills are raised by a regional office for all its branches under that region, it is the regional office alone which is to be registered and not the individual offices which do not raise the bills.³
  2. Centralised billing system
    In case of centralised billing, the assessee may opt for registering only the premises or office from where such centralised billing is done.⁴ Thus, where the head office of an advertisement agency has a centralized billing system in respect of services rendered to clients from each of its branches, the head office alone maybe registered.
  3. Centralised accounting system
    Where an assessee is providing taxable service from more than one premise or office and also bills from more than one premises or office, but has a centralised accounting system, the Commissioner of Central Excise may permit such assessee to register only the premise or office from where such centralised accounting is done, if he is satisfied that such registration shall not be detrimental to the interests of the revenue.⁵ With the advent of input tax credit rules assesses may have to consider this option to capture data and claim all the input tax credit at one place.
3. Multiple Taxable services
  1. Where an assessee is providing more than one taxable service, he may make a single application mentioning therein all the taxable services provided by him.⁶
  2. In case the assessee is already registered for one service but subsequently becomes liable for another category of service, then he has to get his certificate endorsed for the other category of service.⁷
4. Certificate of registration
  1. The Superintendent of Central Excise shall after due verification of the Form ST- 1, grant a certificate of registration in Form ST - 2 within 7 days from the date of receipt of the application. If the registration certificate is not granted within the said period, the registration applied for shall be deemed to have been granted⁸. However, this may not be a solution for non granting of the certificate since the registration number is required for payment of service tax, filing of returns, etc.
5. Miscellaneous
  1. Every assessee shall be required to obtain a Service Tax Code (STC) number based on Permanent Account Number (PAN) allotted by the Income Tax Department for which an application has to be made in a format as given by the CBEC in its Circular No. 35/3/2001-CX4, dated 27-8-2001 (2001) 132 ELT T33 and C.B.E. & C Service Tax Circular No. 40/3/2002, dated 21-2-2002 (2002) 140 ELT T55.
  2. When a registered assessee transfers his business to another person, the transferee shall obtain a fresh certificate of registration.⁹ Every registered assessee who ceases to provide taxable service shall surrender his registration certificate immediately to the Sup erintendent of Central Excise.¹⁰
  3. There is no minimum/threshold limit prescribed for registration. Thus, if a person renders taxable service even for a paltry amount of Rs. 100 he has to register and pay service tax.
  NOTES
  - Charge/Collection of Service tax before registration
    It appears that a person may charge and collect service tax before applying for registration and after being registered pay the service tax collected. There is no bar to charge and collect service tax before being registered though it would be advisable to charge service tax after obtaining the number.
  - Amendment of registration certificate
    Rule 4 does not provide for amendment of the registration certificate consequent to change in name, place, etc. as was provided in the earlier section 69(6) [prior to its deletion w.e.f. 16-10-1998]. However, it would be advisable to intimate the change of name / address and get the registration certificate amended, incorporating the new name / address. If the change in the address results in a change of jurisdiction then a request maybe made for transferring the records.
  - Change in constitution of the firm
    There is no provision in the service tax law where there is a change in the constitution of a firm registered under service tax. Rule 9 of the Central Excise Rules, 2002 read with Notification No. 35/2001-C.E. (N.T.) dated 26-6-2001(as amended) providing for intimation to the Central Excise Officer within 30 days of the change in constitution of a firm is conspicuous by its absence in service tax. Thus, it appears that such change in the constitution of the firm need not be intimated to the Superintendent of Central Excise though it may be advisable to intimate the change.
Payment of Service Tax (Section 68 and rule 6)
1. Person liable for paying service tax
  It is the service provider who is liable to pay service tax¹¹. However, in respect of any taxable services notified by the Central Government in the Official Gazette the Service tax thereon shall be paid by such person in such manner as may be prescribed at the specified rate¹². Thus, the onus of paying service tax may be passed on to a person other than the provider of service. This has been done in the following cases where the availer of services is liable to pay service tax :
  
  Services provided by Non-residents / person from outside India
  
  In case of taxable services provided by a person who is a non resident or is from outside India and does not have any office in India, it is the person receiving the taxable service in India, who will be liable for paying service tax.¹³
  
  Insurance Companies to pay service tax in respect of services provided by insurance agents.
  
  In case of insurance auxiliary services, relating to general insurance and life insurance provided by an insurance agent, service tax shall be paid by the general insurance company or the life insurance company which has appointed the agent¹⁴.
  
  Thus, it is to be noted that service tax in certain cases maybe payable by the receiver of services instead of the service provider which is known as the ‘reverse charge mechanism’.
2. Payment only on receipt
  Service tax is payable to the Government only when the value of taxable services is ‘received’ and also as and when ‘received’ though the service provider charges service tax in his bill raised on his client as and when the service is provided. The situs of taxation is on service provided but the payment of service tax to the government is deferred till the receipt of the value of the taxable service.
3. No service tax on advances received
  The fact that service tax is payable on value of taxable services received does not mean that service tax is payable on advances received. It is to be noted that in accordance with section 66 service tax is levied on the value of taxable services and taxable service means "any service provided to a client". Hence unless service is provided the situs of taxation does not arise. Thus, there is no liability to pay service tax when advance is received. In such cases where an advance is received service tax is payable only when the service is provided.¹⁵ The CBEC has also clarified that where a lump sum payment for a service to be provided in future over a certain period of time, is received in advance before the date on which the particular service came under the tax net, but the entire or part of such service is provided after the date on which it became taxable, (for example, a case where payments for coaching service is received before 1-7-2003; i.e., the date on which this service became taxable, but the entire or part of coaching is provided after that date) service tax has to be paid on the value of service attributable to the relevant month/quarter in which the taxable service is provided which may be worked out on pro rata basis¹⁶.
4. Time limit for payment of service tax
  Service tax on the value of taxable services received during any calendar month is payable by the 25th of the month immediately following the said calendar month¹⁷. However, where the assessee is an individual or a proprietary firm or a partnership firm service tax on the value of taxable services received during any quarter is payable by the 25th of the month immediately following the said quarter¹⁸. The due dates for payment of service tax is given in Annexure A to this article.
5. Manner of payment
  1. Service tax has to be paid to the credit of the Central Government in Form TR-6 challan (yellow colour) into the designated bank¹⁹. The Form TR-6 Challan is to be filled in quadruplicate and tendered to the designated bank along with the payment of service tax; and the bank will return two sets of TR-6 Challan duly acknowledging payment, one for the assessee’s record and the other to be submitted with the return. It should be noted that filling up of the challan entails knowledge of lot of information like Accounting Collectorate, Accounting Collectorate Code, Division, Division Code, Range, Range Code, Name and code of Designated bank, Name and code of Focal Point bank, Accounting Code No, etc which should be procured from the concerned Central Excise Collectorate. The CBEC has clarified [vide Circular No. 58/7/2003 ST, dated 20/05/2003 (2003) 154 ELT T52] that where service tax has been paid using a wrong accounting code, the assessee need not pay the service tax again and where the assessee has paid service tax again, it is to be refunded. Such matters should be sorted out with the PAO.
    
    N.B. The Service Tax Rules provide that if the assessee deposits the service tax by cheque, the date of presentation of cheque to the designated bank shall be deemed to be the date on which service tax has been paid, provided the cheque is not dishonoured in the course of clearing²⁰.
  2. It was stated vide DGST Circular F. No. V / DGST / 21/(7)/ Engg/16/2000/1976 dated 23-8-2001 (2001) 133 ELT T17, that payment of service tax into a non-designated bank would not amount to payment of service tax but as a one time measure adjustment was possible for the first time. However, the Mumbai Tribunal has held²¹ that payment of tax into a non-designated bank cannot result in the conclusion that tax has not been paid at all. Tax having, been paid once, the appellants cannot be asked to pay tax with interest again. The lower authorities should get the matter regularized by transferring the amount from one authorized bank to another. The department should have a sympathetic approach and guide the appellants to pay service tax in the appropriate bank.
6. Adjustment of excess service tax paid
  1. There is no provision for adjustment of excess service tax paid except in the limited circumstance provided in rule 6(3). Rule 6(3) provides the assessee is allowed to adjust against his subsequent period’s liability the excess service tax paid by him for services which is not wholly or partially rendered by him for any reason provided he has refunded the amount charged as also the service tax thereon to the client. It has been clarified that in such cases of adjustment the assessee is required to file the details in respect of such suo motu adjustments done by him at the time of filing the service tax returns. The Return Form ST-3 also provides for enclosure of documentary evidence for adjustment of such excess service tax paid. It is to be noted that rule 6(3) does not allow adjustment of excess payment of service tax per se, say due to clerical mistake etc.. In such cases the assessee has to follow the procedure laid down in section 11B of Central Excise Act to claim the refund of excess tax paid.
  2. However, the Delhi Tribunal in Commissioner of Central Excise, New Delhi vs. Sentinel Security (P) Ltd. (2001) 134 ELT 806 (Tri-Delhi) allowed the adjustment of excess tax paid for one half-year period against the amount payable in the subsequent half-year period.
7. Provisional payment of tax
  Rule 6(4) provides that where an assessee is unable to correctly estimate the actual amounts of service tax payable for any month or quarter, the assessee may make a request in writing to the Assistant Commissioner of Central Excise or Deputy Commissioner of Central Excise (AC/DC), as the case may be, to make a provisional assessment of tax on the basis of the amount deposited. The AC/DC as the case may be, may, on receipt of such request, order provisional assessment of tax. Accordingly, the provisions of Central Excise (No. 2) Rules, 2001 relating to provisional assessment shall apply except the provisions relating to execution of bond.
8. Interest on delayed payment of service tax
  Failure to pay service tax on time attracts simple interest @ 15% per annum (Section 75)²². In case of provisional payment of service tax as mentioned in para 3.7 hereinbefore interest on delayed payment of shortfall of service tax is to be computed till the date of final payment of such tax.²³
NOTES
- Course of action in case of short receipts
  Service tax is payable only on the value of taxable services received and not on the value of taxable services billed. However, in the case of short receipts it has been clarified in Para 22.1 of Trade Notice No. 7/98- Service Tax dated 13.10.1998 issued by Commissioner of Central Excise, Mumbai-I that "in all such cases where the amount received is less than the -gross amount charged/billed to the client the assessee should be required to amend the bills either by rectifying the existing bill or by issuing a revised bill and by properly endorsing such change in the billed amount. In case an assessee does not do so his liability to pay service tax shall be on the amount billed by him to the client for the services rendered." It is to be noted that there is no such requirement in the Rules or in the Act.
- Calculation of Service Tax where billing is inclusive of service tax
  On a reading of section 68 and Rule 6, it appears that service tax is payable on the receipt of the amount paid towards the services notwithstanding whether service tax has been received or not. If service tax has been billed separately and the amount of the bill excluding service tax has been settled by the client but service tax has not been paid by the client, then service tax has to be paid @ 8% on the value of taxable services received notwithstanding whether service tax has been received or not. However, if the total amount billed is inclusive of service tax, then, the service tax may be calculated by applying the formula —
  
  8
  —— x value of taxable services received
  108
  
  though there appears to be no legal sanctity for such calculation in service tax as against sales tax law which clearly provides for such computation in case the bill is inclusive of tax. The above method of calculating service tax as 8/108 is substantiated by the Mumbai Tribunal decision in K.R. Choksey and Company vs. Commissioner of Central Excise, Mumbai-I reported in 1996 (88) E.L.T. 566 where, in the context of service tax on stock brokers, it was held that "where the brokerage collected was shown to be inclusive of service tax and where the fact was indicated in all the relevant documents, there was no justification for calculating the service tax on the brokerage so inclusive of service tax."
- Appropriation of part payments or on account payments
  Where a person renders taxable as well as non-taxable service and charges the client for both, a question may arise when a part payment or on account payment is received from the client as to which bill, the part / on account payments is to be adjusted against the bill for taxable services or the bill for non-taxable services. To take an example, say, Mr. A, a practising chartered accountant bills a client for Rs. 1 lakh out of which Rs. 40,000/- is towards taxable service and Rs. 60,000/- is towards non–taxable service. He receives a part payment of Rs. 30000/- towards the bill of Rs. 1 lakh. Is he required to appropriate the part/on account payment towards taxable or non-taxable service? The answer to this question lies in sections 59, 60 and 61 of the Indian Contract Act, 1872 dealing with appropriation of payments. These sections (without illustrations) are reproduced below:
  
  Application of payment where debt to be discharged is indicated
  
  59. Where a debtor, owing several distinct debts to one person, makes a payment to him, either with express intimation, or under circumstances implying that the payment is to be applied to the discharge of some particular debt, the payment, if accepted, must be applied accordingly.
  
  Application of payment where debt to be discharged is not indicated
  
  60. Where the debtor has omitted to intimate and there are no other circumstances indicating to which debt the payment is to be applied, the creditor may apply it at his discretion to any lawful debt actually due and payable to him from the debtor, whether its recovery is or is not barred by the law in force for the time being as to the limitation of suits.
  
  Application of payment where neither party appropriates
  
  61. Where neither party makes any appropriation the payment shall be applied in discharge of the debts in order of time, whether they are or are not barred by the law in force for the time being as to the limitation of suits. If the debts are of equal standing, the payment shall be applied in discharge of each proportionably.
  
  Thus, applying the above provisions to the facts in the given example, the following conclusions can be made :
  1. If the client intimates A, then the payment should be applied accordingly (section 59)
  2. If the client fails to intimate, then A could appropriate the payment to either the taxable service or to the non-taxable service at his discretion (section 60); and ideally inform the client accordingly.
  3. If neither the client nor A makes an appropriation, it should be appropriated it in order of time. If the debts are of equal standing, then Rs. 12000/- (i.e., 40000 / 100000 x 30000/-) should be appropriated towards taxable service and Rs.18000/- (i.e., 60000 / 100000 x 30000/-) should be appropriated towards non-taxable service.
- Service tax is to be levied on value of taxable service before levy of other taxes
  Service tax is payable on the value of taxable service before levy of any tax in the event the service attracts some other levy of tax also e.g. sales tax etc.

Returns (Section 70 and rule 7)

The assessee shall himself assess the service tax due on the services provided by him and thereafter furnish the returns²⁴.
Returns have to be filed in Form ST-3 on half yearly basis by the 25th of the month following the particular half year, indicating inter alia, monthwise for each of the taxable service rendered by the assessee —
1. Value of taxable services charged/billed;
2. Value of taxable service realised;
3. Amount of Service Tax payable/paid
4. Service tax credit utilised etc.²⁵
The due dates for filing the returns are given in Annexure A to this paper.
The said Form ST-3 has to be filed in triplicate along with a copy of the Form TR-6 challans for the months/quarters covered in the half-yearly return²⁶.
The first return should be accompanied by a list of all accounts maintained by the assessee in relation to service tax including memoranda received from his branch offices²⁷.
Rule 6(5) provides that in case an assessee requesting for provisional assessment (as elucidated in para 3.7 hereinbefore) the assessee shall submit a memorandum in form ST-3A; giving details of difference between the provisional amount of service tax deposited and the actual amount of service tax payable for each month along with the half-yearly return in Form ST-3.

Select assessees have been given an option to file their returns electronically from the month of April 2003 in accordance with the CBEC Circular No. ST 52/1/2003 dated 11-3-2003 (2003) 153 ELT T30. A list of such selected services is given as under:

S. No.	Service category	Code
1.	Telegraph Services	TGH
2.	Telephones	TSU
3.	Life Insurance Services	LIS
4.	Insurance Auxiliary Services	IAX
5.	General Insurance Business	GIB
6.	Stock Brokers	STB
7.	Advertising Agencies	ADV
8.	Courier Services	COU
9.	Banking and Financial Services	BFN
10.	Custom House Agents	CHA

NOTES

The requirement of filing Form ST-3A is only for the purposes of giving a statement about the details of the difference between the service tax deposited and the service tax liable to be paid for each month which is basically for the purpose of enabling the proper officer to make the correct final assessment. Simply because the assessee had not filed Form ST-3A, it cannot be concluded that the assessments were not provisional especially when the same have been finally assessed by the proper officer at the request of the assessee.²⁸ Hence, when the assessments are provisional, the relevant date for the purpose of claiming the refund under section 11B of the Central Excise Act, 1944 is the date on which the final assessment and adjustment of excess/short payment is ordered by the proper officer and not the date on which the duty was paid by the assessee pending final orders of the proper officer.²⁹ Accordingly the limitation period for claiming refund (currently one year from the date of payment of tax) will be reckoned from the date on which final assessment and adjustment of excess/short payment is ordered by the proper officer and not from the date on which the tax was paid.
There is no provision in the Service Tax Law for revising the returns due to any omission or wrong statement. In such cases the only option available to the assessee is to follow the undermentioned procedure :
1. In case the omission or mistake results in refund, the assessee has to apply for refund in accordance with section 11B of the Central Excise Act, and
2. In case the omission or mistake results in a shortfall of tax paid it would be advisable for the assessee to pay the shortfall and inform the Superintendent of Central Excise and thereafter get the matter rectified during the course of assessment. It may even be advisable to file a revised return to complete the record though the law does not provide for furnishing a revised return.
A ‘Nil’ return (i.e., where no taxes are required to be paid) also has to be filed.

Verification / Assessment (Section 71)

The Superintendent of Central Excise may verify the correctness of service tax assessed by the assessee on self-assessment basis in the service tax return [Section 71(1)]. For the purpose of verification the Superintendent of Central Excise may require the assessee to produce any accounts, documents or other evidence as he may deem necessary for such verification as and when required [Section 71(2)]. If on verification, the Superintendent of Central Excise is of the opinion that service tax on any service provided has escaped assessment or has been under-assessed, he may refer the matter to the AC/DC, who may pass such order of assessment as he thinks fit [Section 71(3)].
NOTES

The following points need to be noted :

Sub-section (2) provides that the Superintendent of Central Excise may require the assessee to produce any accounts, documents, or other evidence as he may deem necessary for such verification as and when required. But, the sub-section does not categorically provide for an issuance of notice as clearly provided in the erstwhile section 71(1) (prior to 16-7-2001).

The section does not provide for a time limit within which the accounts, documents, etc. for verification of a return filed by the assessee, may be called;

The section does not provide for a time limit for completion of verification/assessment;

The Superintendent of Central Excise can take up the case for verification/assessment on his own accord as and when required. The necessity of obtaining the previous permission of Commissioner of Central Excise has been dispensed with.

It appears that the Superintendent of Central Excise can call for the documents for a particular year any number of times he wishes since there is no finality to the verification process (assessment) reflected by way of an assessment order;

Further, sub-section (3) provides for passing an order by the AC/DC if –

the Superintendent of Central Excise is of the opinion that service tax on any service provided has escaped assessment or has been under-assessed; and

he refers the matter to the AC/DC.

Thus, there would be no requirement to pass an order under section 71 after the verification by the Superintendent of Central Excise in the event there is no escapement or under assessment of service tax.

Value of taxable services escaping assessment (Section 73)

Section 73 deals with the value of taxable services escaping assessment i.e.
1. where service tax has escaped assessment or has been under assessed or
2. has not been paid or has been short paid or
3. where there is an erroneous refund.
In such cases the AC/DC is empowered to issue a show cause notice and thereafter determine the amount of service tax due and payable.
This section envisages two sets of circumstances [viz., sections 73(1)(a) and 73(1)(b)] and imposes a time bar on the issue of show cause notice in each case. These circumstances are enumerated below.
1. where there is an omission or failure on the part of the assessee –
  1. to make a return under section 70 for the prescribed period ; or
  2. to disclose wholly and truly all material facts required for the verification of assessment under section 71.
  the show cause notice maybe issued within five years from the "relevant date" as mentioned below in para 5.3.3.
2. where there is no such omission or failure as is referred to in (i) above, and the AC/DC has "reason to believe" in consequence of information in his possession that value of taxable service has escaped assessment the show cause notice has to be issued within one year from the "relevant date" mentioned in para 5.2.3.

The "relevant dates" would be as under:

Circumstance				Relevant date
A.	Where service tax has escaped assessment or has been under assessed or has not been paid or has been short paid :
	i)	if the assessee is liable to file the return, and
		a)	return is filed	Date on which return filed*
		b)	return is not filed	Last date on which the return is to be filed*
	ii)	in other cases		Date on which service tax is to be paid

B.	Where service tax is provisionally assessed			Date of adjustment of service tax after final assessment.
C.	Where any sum has been erroneously refunded			Date of refund

* It may be noted that the limitation period for issuing a show cause notice is more for assessees who have filed the returns but have filed it late as compared to assessees who have not filed the returns !

The Finance Act, 2003 has inserted a new sub-section (2A) in section 73 to provide that the above show cause notice shall not be served in the event the person liable to pay service tax pays the amount of service tax along with interest on the basis of his own ascertainment or on the basis of the ascertainment of the Central Excise Officer before he serves the notice and thereafter informs the AC or DC in writing. Within one year from the date of receipt of such information, the AC or DC may determine the amount of short payment of service tax, if any, and thereafter proceed to recover such shortfall along with interest. The above provisions shall not apply in the following cases –
1. where service tax has escaped assessment in the circumstances mentioned in point no.(i) of para 5.2.2 above;
2. where the service tax had become payable or ought to have been paid before the Finance Act, 2003 came into force; i.e., 14-5-2003.

Penal consequences

The penal consequences for various defaults are summarized in the table below:

Sr. No. Section
Nature of default Consequences of default

1. 75A
Failure to register in accordance with the provisions of section 69

Penalty - Rs.500/-

2. 76 Failure to pay service tax
Penalty — Minimum Rs. 100 and maximum Rs. 200 per day during which default continues restricted to amount of service tax

3. 77
Failure to furnish return.

Penalty — Maximum Rs. 1000/-

4. 78
Suppressing value of taxable service.

Penalty — Minimum amount of service tax evaded by reason of suppression up to maximum of twice the amount of service tax evaded. (See note below)

5. 79
Failure to comply with notice.

Penalty — Minimum. 10% and maximum 50% of the amount of service tax avoided

N.B. The Finance Act, 2003 has restriced the penalty under section 78 to 25% of service tax, if the amount of service tax, interest and such penalty, is paid within 30 days of the date of communication of the adjudicating order. The benefit of such reduced penalty shall also apply where the order determining the service tax relates to notices issued prior to 14th May, 2003; i.e., the date when the Finance Act, 2003 came into force.

NOTES

Quantum of penalty under section 76
The Tribunal held that on a plain reading of section 76 which imposes a penalty for delay in payment of taxes it was clear that, in absence of a comma after the words "rupees one hundred" in section 76 the minimum penalty was an absolute amount of Rs. 100/- and the maximum penalty was Rs. 200/- for everyday of delay and not Rs. 100/- per day or Rs. 200/- per day of delay. [Smitha Shetty vs. Comissioner of Central Excise, Bangalore (2003) 156 ELT 84 (Tri-Bang.);Collector of Central Excise, Calcutta – I vs. B.L. Company (1999) 105 ELT 434 (Tri-Kol) dissented in Harilal & Co. vs. Commissioner of Central Excise, Mumbai – I, (2000) 115 ELT 375 (Tri-Mum) – The last two decisions were on the interpretation of erstwhile section 77 which had a similar language as in section 76].
Penalty for failure to file returns on time can be imposed only under the provisions of law in existence at the time of issuing a show cause notice and not the date of filing the returns. Accordingly penalty was reduced to Rs. 2000/- being the amount of penalty imposable under section 77 at the time of issuing the show cause notice [West Minster International (P) Ltd. vs. Commissioner of Central Excise, New Delhi (2002) 140 ELT 244 (Tri-Del)].
Penalty for suppressing value of taxable service (Section 78)
The main part of section 78 reads as follows:
"78. Penalty for suppressing value of taxable service – If the Assistant Commissioner of Central Excise or, as the case may be, Deputy Commissioner of Central Excise in the course of any proceedings under this Chapter is satisfied that any person has, with intent to evade payment of service tax, suppressed or concealed the value of taxable service or has furnished inaccurate value of such taxable service, he may direct that such person shall pay by way of penalty, in addition to service tax and interest, if any, payable by him, a sum which shall not be less than, but which shall not exceed twice, the amount of service tax sought to be evaded by reason of suppression or concealment of the value of taxable service or the furnishing of inaccurate value of such taxable service :"

Thus, section 78 of the Act provides for penalty in a case where any person has–

with an intent to evade payment of service tax,

suppressed or concealed the value of taxable service, or

has furnished the inaccurate particulars as regards the value of taxable service.

Thus, the most important condition to invoke the provisions of section 78 is that there must be an intent to evade the payment of service tax. It has been held by the Supreme Court in Padmini Products vs. Commissioner of Central Excise (1989) 43 ELT 195 (SC) & Collector of Central Excise, Hyderabad vs. M/s. Chemphar Drugs and Liniments, Hyderabad (1989) 40 ELT 276 (SC) in the context of section 11A of the Central Excies Act, ³⁰ that something positive other than mere inaction or failure on the part of the assessee or conscious or deliberate withholding of information when the assessee knew otherwise, is required before he is saddled with any liability. Mere failure or negligence on the part of the assessee either not to register and pay duty in case where there was scope for doubt whether goods were dutiable or not, would not amount to an intention to evade payment of duty. However, it has been held that payment of tax only after the inquiry was conducted by the Department regarding the assessee’s activity amounted to suppression of material facts and imposition of penalty under section 78 is justified [Mett MacDonald Ltd. vs. Commissioner of Central Excise, Jaipur (2001) 134 ELT 799 (Tri- Delhi)].

"Reasonable cause" – Section 80
Section 80 provides that no penalty under section 76, 77, 78, or 79 shall be imposed if the assessee proves that there is "reasonable cause" for the failure referred to in the said sections. No condonation under the "reasonable cause" ground is allowed for penalty under section 75A.
NOTES
Important judgments in this regard are noted below:
1. It is mandatory on part of the department to follow the principles of natural justice viz., the audi alterem partem rule (i.e., hear the other party) before imposition of the penalty and provide the assessee an opportunity to prove that there was reasonable cause [Ashwani & Associates vs. Commissioner of Central Excise, New Delhi (2000) 118 ELT 57 (Tri-Del.); Commissioner of Central Excise, Calcutta-I vs. Suraj Ratan Mohta (1999) 113 ELT 260 (Tri-Kol.)].
2. Even if a minimum penalty is prescribed, e.g Rs. 100 per day under section 76 or under section 77 of the Act [as it stood prior to 16-10-1998] the authority competent to impose penalty will be justified in refusing to impose any penalty, when there is a technical or judicial breach of the provisions of the Act or where the breach flows from a bona fide belief that the offender is not liable to act in the manner prescribed by the statute. [Smitha Shetty vs. Comissioner of Central Excise, Bangalore (2003) 156 ELT 84 (Tri-Bang.) relying on Hindustan Steel vs. State of Orissa (1978) 2 ELT J59 (SC). See also Commissioner of Central Excise, Jaipur vs. Milan Tent Palace (2001) 131 ELT 274 (Tri. - Del.); Harilal & Co. vs. Commissioner of Central Excise, Mumbai (2001) 115 ELT 375 (Tri-Mum)]. This principle will also be applicable in the context of sections 78 and 79.
3. Penalty for delayed payment of service tax under section 76 has been condoned on the ground that initially there is bound to be a lack of clear understanding, service tax being a new concept. [Re Oriental Insurance Co.Ltd. (1998) 103 ELT 459 (Commr. Appl); Ashwani & Associates vs. Collector of Customs, New Delhi (1999) 105 ELT 40 (Tribunal) – a case of waiver of pre-deposit of penalty.]
4. Penalty for failure to file returns under section 77 has been condoned on the grounds that service tax was new and the assessee was not conversant with the provisions; the assessee did not carry on any business; the return for the period was a ‘nil’ return; service tax was introduced for the first time and it was the assessee’s first delay [Ashok Rastogi vs. Commissioner of Central Excise, Kanpur (1998) 104 ELT 480 (Tri-Del.); Sri Sajjan Kumar Kariwala vs. Commissioner of Central Excise, Allahabad (1997) 20 RLT 885 (Tri –Del.)]. Similarly, penalty under section 77 has also been condoned where service tax was deposited along with interest as provided in section 75 without collecting it from the clients and service tax was imposed for the very first time; the quarter in question was also very first quarter and the appellant too was new to service tax [Re. B.M.Rehan (1999)108 ELT 859 (Commr. Appl.)].
5. Penalty under section 77 has not been condoned, though reduced since tax was deposited on time and the default took place during the initial period of the imposition of the new tax. [Harilal & Co. vs. Commissioner of Central Excise, Mumbai – I, (2000) 115 ELT 375 (Tri- Mum.); Vijaya Clearing and Forwarding Agency vs. Commissioner of Central Excise, Mumbai –I (2000) 123 ELT 930 (Tri-Mum.); Sundeep Goyal & Co. vs. Commissioner of Central Excise, Calcutta – I (2001) 133 ELT 785 (Tri-Kol.)].
6. Penalty has not been condoned though reduced even where the return is a ‘nil’ return, but there has been consistent failure on part of the assessee to submit the returns [Rajinder Kumar Somani vs. Commissioner of Central Excise, Kanpur (1999) 113 ELT 111 (Tribunal), Northern Bench, New Delhi].
7. The Delhi Tribunal reduced the penalty for delay in filing the returns to a token figure of Rs. 5,000/- since the appellants were under a bona fide belief that they were exempted from service tax. [Palika Palace vs. Commissioner of Central Excise, Chandigarh (2001) 134 ELT 677 (Tri-Delhi).]
8. Penalty for failure to file the returns under section 77 was reduced on the basis of the law amended subsequent to the date of filing of the return. Thus, the Tribunal took cognizance of the reduction of penalty by the legislature subsequent to the date of filing the return. [Anchor Shipping Agencies vs. Commissioner of Central Excise, Mumbai - I (2000) 118 ELT 719 (Tri-Mum.)].
9. The respondent a non-resident entered into a contract with an Indian company for providing technical services. As per the contract the Indian company were to bear the taxes. Penalty was imposed upon them for non-compliance under various provisions. The Tribunal dismissed the penalties and held that the respondent company was a non-resident in India and was directly under the Ministry of Economic Affairs and Trade of Russian Federation, and hence there cannot be any intention on the part of the assessee company to evade payment of service tax. Further, as per the terms of the contract it was the Indian company which was to bear the burden of the taxes. Hence the respondent’s default was not intentional and they had reasonable cause as envisaged under section 80 and accordingly no penalty is imposable [Commissioner of C. Ex., Bhubaneswar-II vs. Tyazhpromexport 2003 (157) ELT 576 (Tri – Kol.) ].
10. In this case the assessee who was registered under the category of Architects, did not deposit service tax during the period the provisions of service tax was stayed by Hon’ble High Court of Madras but soon thereafter, the assessee deposited the service tax when he came to know about the vacation of stay. The Commissioner (Appeals) held that assessee was out of the jurisdiction of that High Court and hence the stay order was not applicable to them. As such, he concluded that the appellants have knowingly delayed the deposit of service tax and filed returns justifying imposition of penalties upon them. The Tribunal set aside the order of the Commissioner (Appeals) and held that the action on the part of the appellants in not depositing service tax during the period of stay cannot called mala fide so as to justify the imposition of penalties upon them [Chitrita Virnave vs. Commissioner of Central Excise, Patna (2002) 145 ELT 622 (Tri-Kolkata)].

Conclusion

Service tax law is at its nascent stage. In fact the law governing service tax is still governed by Chapter V of the Finance Act, 1994. A separate Act is in the making. Hence the future would see a lot of development in service tax law. Correspondingly it is expected that the procedures will also get streamlined. Till then - Wait and Watch ! – wisdom in three words.

Rule 4(1)
Rule 4(3).
Para 22 of M.F. (D. R.) letter F. No. 341/43/96 – TRU dated 31/10/1996 (1996) 88 ELT T15.
Rule 4(2).
Rule 4(3A).
Rule 4(4).
Refer CBEC Circular No. 51/13/2002 dated 7/1/2003 (2003) 151 ELT T44.
Rule 4(5).
Rule 4(6).
Rule 4(7).
Section 68(1).
Section 68(2).
Rule 2(1)(d)(iv).
Rule 2(1)(d)(iii).
Para 5.4 of Trade Notice No. 7/98 - Service Tax dated 13/10/98 issued by the Commissioner of Central Excise, Mumbai-I. See also C.B.E.C. Circular No. 65/14/2003-S.T., dated 5-11-2003 (2003) 158 ELT T6.
C.B.E.C. Circular No. 65/14/2003-S.T., dated 5-11-2003 (2003) 158 ELT T6.
Rule 6(1).
ibid.
Rule 6(2).
Rule 6 (2A).
Shaman Marketing Research Associates vs. Commissioner of Central Excise Mumbai - V (2003) 153 ELT 231 (Tri. – Mum.); Nisa Industrial Service Pvt. Ltd. vs. Commissioner of C. Excise Mumbai 2003 (157) ELT 66 (Tri – Mumbai) ; 2003 (58) RLT 581 (CESTAT – Mum.).
Earlier rates of interest were as follows :
1. From 1.7.1994 to 15.7.2001 interest was chargeable @ 1.5% p.m. or part thereof
2. From 16.7.2001 to 15.8.2002 interest was chargeable @ 24%. p.a..
Re: Oriental Insurance Co. Ltd. (1998) 103 ELT 459 (Commr. Appl.).
Section 70.
Rule 7(2).
Rule 7(1).
Rule 5(2).
Kolkata Tribunal decision in Hari Shankar Almal vs. Commissioner of Central Excise, Kolkata (2002) 145 ELT 578 (Tri-Kolkata).
ibid.
Under section 11A of the Central Excise Act, 1944 in order to recover a demand beyond a period of six months and up to a period of 5 years, the proviso to sub-section (1) of section 11A requires that, it be established that the duty of excise had not been levied or paid or short-levied or short-paid, or erroneously refunded by reasons of either fraud or collusion or willful mis-statement or suppression of facts or contravention of any provision of the Act or Rules made thereunder, with intent to evade payment of duty. The decision would equally apply in interpreting the provisions of section 78 of the Act also where as a pre-condition to the imposition of penalty it must be proved that there is an intent to evade payment of service tax.

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