In view of the Revenue Department’s own contemporaneous opinion that services to government hospitals and educational institutions were non-taxable, the Delhi High Court has accorded finality to CESTAT’s finding of no suppression and shields assessee from penalty. The Court emphasised that where an assessee acts under a bona fide and reasonable belief that the services rendered by it are not exigible to service tax, and the Department itself, at the contemporaneous time, holds a similar view regarding the non-taxability of such services, the default in payment of service tax arises from a bona fide understanding of the applicable legal position rather than from any deliberate attempt to avoid statutory liability.
In the absence of any material suggesting suppression, fraud, wilful misstatement or an intention to evade tax, such interpretational uncertainty and bona fide conduct constitute a reasonable cause within the meaning of Section 80 of the Finance Act, 1994, and the imposition of penalty under Section 78 of the Finance Act, 1994 is not warranted, added the Court.
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The Division Bench comprising Justice Anil Kshetarpal and Justice Manmeet Pritam Singh Arora observed that the communications dated 11 September 2006 and 20 November 2007 from the Assistant Commissioner and Deputy Commissioner of Service Tax to the Senior Audit Officer, CAP-IV, clearly demonstrated that the Department itself was of the opinion that the services rendered by the Appellant to government institutions were not exigible to service tax. This lent credence to the Appellant’s submission that it had a reasonable and bona fide cause for its failure to deposit service tax.
The Court further took note of CESTAT’s finding in the Final Order dated 15 May 2023, which had attained finality, that there was no wilful suppression of facts by the Appellant with an intent to evade payment of service tax. The Court held that this finding had a material bearing on the allegations in the Show Cause Notice for imposing penalty and on the Appellant’s plea under Section 80 of the Finance Act, 1994 for waiver of the penalty.
The Court placed reliance on a Co-ordinate Bench decision in Bharat Hotels Ltd. v. Commissioner of C. Ex. (Adjudication) [2017 SCC OnLine Del 12813], which held that where the material on record demonstrates that the assessee had acted under a bona fide belief regarding the non-taxability of the services in question and there was no deliberate intention to evade payment of service tax, such circumstances would constitute a reasonable cause within the meaning of Section 80 of the Finance Act, 1994, and the imposition of penalty would be unwarranted.
The Court also relied upon another Co-ordinate Bench decision in M/s Bajaj Travels Ltd. v. Commissioner of Service Tax [2011:DHC:3908-DB], which held that notwithstanding a default in payment or deposit of service tax, the authorities are required to examine whether the assessee has been able to establish a bona fide and reasonable cause for such default, and where the failure to deposit service tax was not deliberate, the statutory protection under Section 80 of the Finance Act, 1994 could be invoked.
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Briefly, Hospitech Management Consultants Pvt Ltd, the Appellant, was engaged in providing planning, designing, construction, management and supervision services to government hospitals, medical colleges and educational institutions. The Appellant contended that its services were rendered to institutions established for educational, charitable and health purposes and not for profit, and were therefore non-commercial in nature and not liable to service tax under the Finance Act, 1994.
The dispute originated from a CERA Audit Memo dated 18 January 2006, which took the view that the Appellant’s services were taxable. Significantly, the Service Tax Department itself initially disagreed with this audit objection. The Assistant Commissioner of Service Tax and the Deputy Commissioner of Service Tax, both addressed to the Senior Audit Officer, CAP-IV, relied upon CBEC Circular No. 80/10/2004-ST dated 17 September 2004 and stated that the services rendered by the Appellant to government institutions were non-commercial and not liable to service tax.
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A Show Cause Notice was thereafter issued, proposing invocation of the extended period of limitation, levy of service tax with interest, denial of CENVAT credit and imposition of penalties. The Commissioner of Service Tax (Adjudication) vide Order-in-Original, confirmed a demand of service tax of Rs. 65.75 lakhs along with interest, recovery of CENVAT credit of Rs. 12,360/- along with interest, and levied a total penalty of Rs. 65.93 lakhs under Sections 77 and 78 of the Finance Act, 1994 read with Rule 15 of the CENVAT Credit Rules, 2004.
The Appellant challenged this order before CESTAT, who set aside the demand for the extended period of limitation on the finding that there was no suppression of facts by the Appellant with the intent to evade payment of service tax, which is a sine qua non for invoking the proviso to Section 73(1) of the Finance Act, 1994. CESTAT, however, upheld the demand of service tax for the normal period of limitation, i.e., 01 July 2009 to 30 March 2010. Since the Final Order did not deal with the penalty of Rs. 65.75 lakhs, the Appellant filed an application for Rectification of Mistake. Vide Miscellaneous Order, CESTAT reduced the penalty to Rs. 4.50 lakhs.
