In a major relief to M/s Indian Railway Finance Corporation, a division bench of the Delhi High Court held that penalty under section 78 of the Finance Act, 1994 cannot be levied merely on ground that the assessee has not contested its liability at the time of recovery proceedings under section 73 of the Act.
The respondent-Corporation, a Government of India Corporation, was established with an objective to raise money from the market to part finance the planned outlay and finance capital expenditure for expansion, development and modernization of Indian Railways. The respondent-Corporation in turn raises funds in the form of taxable and tax free bonds, term loans from banks/financial institutions and through offshore borrowings.
The department took a view that the assessee is liable to pay service tax for overseas borrowing, the respondent-Corporation had paid arrangement fee, annual agency fee, upfront fee, underwriting fee etc. to several non-resident financial institutions.
Initially, the assessee refused their liability to pay tax. But, with a view to avoid or controversy, they discharged the liability by paying tax and interest without any dispute. Parallally, penalty under section 78 of the Finance Act, 1994 was imposed on the assessee.
Before the High Court, the department submitted that since the respondent-Corporation had paid the service tax for the extended period without any contest, it should be held that the said Corporation has accepted that they had suppressed facts or contravened provisions of the Act/Rules with the intent to evade payment of service tax.
Rejecting the above argument, the bench comprising Justices Sanjiv Khanna and Parthiba M Singh noted that Goodness and precocious conduct of the respondent Corporation in making payment has to be appreciated and not condemned.
“The respondent-Corporation, to show their bona fides, had paid service tax even for the period prior to 19th April, 2006. Non-contest in the proceedings under Section 73 cannot be used as a ground or reason to establish and show that requirements of Section 78 are satisfied. The Tribunal after appreciating different aspects, including conduct of the respondent-Corporation has held that penalty should not be levied. The finding is a finding of fact,” the bench observed.
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