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December 10, 2022

Penalty cannot be extended above the amount of the tax demanded

by CA Shivam Jaiswal in GST, Legal Court Judgement

Penalty cannot be extended above the amount of the tax demanded

Facts and Issues of the Case

The appellant is a proprietorship firm being engaged in providing service of painting and polishing of new construction as contractor / sub-contractor as per the requirement. The nature of service being provided by him was of work contract services. Based on audit findings of an appellant client, M/s. Tirat ST/50730 of 2021 [SM] Ram Ahuja Pvt. Ltd., the department found that the appellant had failed to pay his service tax liability. As a result, a Show Cause Notice for the years 2006–2007, demanding Rs. 1,22,174, was issued on November 27, 2009. Subsequently , due to correction in Notification No. 1/2006 , abatement at the rate of 67% was allowed for such services and simultaneously , the demand was reduced to Rs. 40,318 /-.The appellant paid this amount . Subsequently , another show cause notice for the period 2007-08  to 2011-12 , demanding Rs. 1,46,36,284 /- was issued on April 23, 2013. Three more Show Cause Notices were subsequently issued for the period 2010-11 and 2011-12 and the period 2013-14 and 2014-15.

All of these Show Cause Notices were initially decided upon in accordance with Order-in-Original No. 1/2017-18 dated 04.05.2017, which confirmed the demand of Rs.40,318/- only and also imposed interest and a penalty at a rate of Rs.200/- per day for the time the impugned failure persisted in accordance with Section 77 (1) (a) of the Finance Act, 1994. Also, the appellant was given a penalty under sections 77(2) and 78 of the Act of Rs. 5000 and Rs. 40,318 under ST/50730 of 2021 [SM]. In addition to filing an appeal against thesid order , the appellant also made a pre-deposit of Rs. 14,40,000 on June 29, 2017. The matter was remanded for de-novo fresh adjudication by the Commissioner (Appeals) in Order No. 14/ST/DLH/2018 dated 1st February, 2018, giving the appellant another opportunity to pursue its claim for abatement and reverse charge verified and to resubmit the verified documents to be considered afresh by the adjudicating authority.

After the  order of Commissioner (Appeals) order dated 01.02.2018, the appellant filed a refund claim on January 8, 2020, for the pre-deposit amount of Rs. 14,40,000. The said refund claim was decided upon by Order-in-Original No. R-01/ 2020– 2021 dated 29.06.2020, in which the refund of Rs.13,03,723/- was sanctioned after deducting the amount of penalty (Rs.2,56,000 + 5000 + 40318) and that of interest (Rs.18381/-) from Rs.14,40,000/-. Being aggrieved of this order that the appeal  was filed before Commissioner (Appeals) who vide Order No.08/2021 dated 03.02.2021 has  rejected the appeal. Being aggrieved the appellant is before this Tribunal.

It is argued that despite the Appellate Authority’s Order No. 178 of 1st February 2018 confirming the imposition of interest and penalties, the amount of those charges was not specified. The order under challenge has for the first time quantified the interest and ST/50730 of 2021 [SM] the  penalty. The quantification is alleged to be disproportionate to the demand. For the said reason the order under challenge is prayed to be set aside and appeal is prayed to be allowed.

The order has been used by ld. DR to rebut these submissions. It has mentioned that the Section 77 of Finance Act, 1994 permits the imposition of penalty at the rate of Rs.200/- each month. The Original Adjudicating Authority determined the penalty in accordance for a period of 1280 days at a cost of Rs. 2,56,000/- as mentioned in Order-in-Original dated 29 June 2020’s  in Table II. Hence,  there is no infirmity in the order under challenge. It is prayed that the appeal be dismissed.

Observation of  the Court

After hearing the rival contentions it appears that the appellant’s only grievance to be about the penalty of Rs. 2,56,000 /- was confirmed against him against the duty liability of the appellant for  an amount of Rs.40,318/-. The decision of the Hon’ble Karnataka High Court in the case of M/s. Philip Electronics India Ltd. v. State of Karnataka, which was decided on 2nd January 2009, where it was held that the penalty cannot be more than the tax amount to be recovered from the assessee, is what I rely on to determine whether the said imposition is not permissible and disproportionate.

The Hon. High Court specifically said that a penalty based on the extent of the delay, which sometimes exceeds the liability, is irrational and grossly disproportionate. The ST/50730 of 2021 [SM] levy automatically loses connection with the object of correcting the mistake that the legislation meant to prevent, and as a result, becomes unconstitutional. In the case of Hindustan Steel Limited v. State of Orissa, which was reported in 1970 (25) STC 2011, the Hon. Apex Court also held that a penalty is an automatic levy up to a maximum extent that must be reasonable, i.e. to say the maximum limit for penalty is the extent of levy  itself. The penalty exceeding thereof assumes the character of disproportionate penalty. The Hon’ble Apex Court later in a decision titled as State of Haryana vs. Sangla reported in 1993 (4) SCC 390 has held that the object in purpose for which the penalty is levied is that the penalty should be sufficient to remedy the mischief sought to be prevented and once it exceeds the limits of a corrective deterrent, sufficient to dissuade the violator, it assumes the character of disproportionate penalty the Hon’ble Apex Court in the case of Hindustan Steel Limited (Supra) has also held that not providing for an opportunity of hearing to the assessee before levying maximum penalty, the act by itself is in violation of the principles of natural justice.

Keeping in view the said decisions, also keeping in view that per day penalty at the rate of Rs.200/- can be levied in terms of sub-clause (3) of section 77 of Central Excise Act and the SCN is silent about specifically invoking the said sub-clause (3), the court hold that the grievance of the present appeal stands already covered by the decisions as discussed above. Therefore, the issue is that ST/50730 of 2021 [SM] does not integrate further. Therefore, the imposition of a penalty of Rs. 2,56,000/- + Rs. 5000 + Rs. 40318/- in comparison to the duty demand of Rs. 40,318/- is seen to be completely disproportionate and unreasonable. Therefore, it is not necessary to adjust the abovr mentioned amount from the refund granted to the appellant, with the exception of Rs. 40,318.

Conclusion

in view of the above discussion, the appeal is  hereby set aside. However, the adjudication with reference to the impugned SCN’s is still pending due to matter being remanded back for afresh adjudication of claim for abatement and reverse charge, the same shall take its own independent course. Hence, setting aside of the present order under challenge to the extent beyond deduction of Rs.40,318/- shall not be prejudicial to the interest of either of the parties to the lis . The appeal stands allowed by the court .

Abdul_Khalique_vs_Principal_Commissioner_Central_on_16_February_2022

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