CESTAT has set aside penalties under Section 78 of the Finance Act, 1994, in a ₹2.12 lakh service tax dispute, citing revenue neutrality and valid CENVAT credit. The ruling reinforces limits on penalty imposition where tax credit is legitimately claimed.
CESTAT Overturns Extended Limitation and Penalty in Service Tax Appeal
The Chennai Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has allowed an appeal against the imposition of penalties under Section 78 of the Finance Act, 1994, in a service tax dispute involving ₹2.12 lakh. The tribunal ruled that the extended limitation period could not be invoked where the assessee had maintained proper accounts and claimed CENVAT credit in a revenue-neutral manner.
The department had initiated proceedings beyond the normal limitation period, relying on alleged suppression. However, CESTAT held that mere discrepancy in credit utilization does not amount to suppression if the input services were genuine and records maintained. The tribunal emphasized that Section 78 penalties require wilful evasion, not mere arithmetical errors or adjustments.
Where the availment of credit is based on actual receipt of input services and the same reflects in the books, the benefit of revenue neutrality applies, and penalty u/s 78 cannot be sustained.
The assessment was conducted under the pre-GST regime. The decision clarifies the scope of ‘suppression’ under the Finance Act and protects bona fide claims where documentary compliance is met. Practitioners should review pending penalty proceedings in legacy service tax matters given this precedent.
Practice Note
This ruling strengthens the defence against arbitrary penalty impositions in cases involving CENVAT credit. Tax professionals must ensure documentation demonstrates traceability of input services and consistency in returns.
Citations
- Finance Act, 1994, Section 78
