A recent decision of the Supreme Court with regard to imposition of a penalty under certain provisions of the Central Excise Act, which have equivalence in service tax law, is of considerable interest as it clarifies an important point which was always clear in law but which had unfortunately been construed as having changed as per an earlier decision of the Supreme Court in that regard.
In order to fully appreciate the significance of this recent judgement, it is important to understand the underlying background. In UOI Vs. Dharmendra Textile Processors (2008 (231) ELT-3), the Supreme Court had an occasion to consider the provisions of Section 11AC of the Central Excise Act which relate to imposition of penalty in certain situations where the duty has not been levied or paid or has been short levied or short paid or, for that matter, erroneously refunded on account of various acts of malfeasance such as fraud, collusion, willful misstatement, suppression of fact or contravention of the statutory provisions with an intent to evade payment of tax. Section 11AC states that where excise duty has not been levied or paid under such circumstances, the assessee shall be liable to a penalty equal to the duty so determined to be not levied or paid.
The equivalent provisions in service tax law are to be found in Section 78 of the Finance Act, 1994, which hold that if service tax is not levied or paid n exactly similar circumstances, the taxpayer would be liable to a penalty which would not be less then the tax not paid but which shall not exceed twice that sum. It can thus be seen that whereas both Section 11AC of the Central Excise Act and Section 78 of the Finance Act 1994 are similarly worded, the maximum penalty under service tax law is at twice the escaped whereas under excise law the maximum penalty is equal to the duty not paid.
The Supreme Court, in its decision in Dharmendra Textiles, held that under the provisions of Section 11AC, there was no scope for any discretion in the imposition of penalty thereunder and that should the Section be invoked and a demand of duty be confirmed or determined there under, the provisions required a mandatory imposition of penalty at 100 per cent of the duty so determined. In other words, the decision in Dharmendra Textiles had held that there was no scope for imposition of a penalty under Section 11AC of an amount less than the amount of duty determined under that Section and, consequently, there was also no scope for not imposing a penalty at all thereunder.
This decision in Dharmendra Textiles appeared to have been interpreted or understood by the department that in all situations where duty was not levied or paid or short levied or short paid, the imposition of penalty was mandatory in law, whether or not such a duty was held to be not levied or paid in the circumstances under Section 11AC i.e. as per the various acts of malfeasance described there under.
This precise point came up for determination before the Supreme Court in the Union of India Vs. Rajasthan Spinning Mills and Commissioner of Customs and Excise Vs. Lanco Industries Ltd. In these cases, the Revenue had contended, relying upon Dharmendra Textiles, that mere non-payment or short payment of duty would inevitably lead to imposition of penalty equal to the amount of the duty not paid or short paid.
The Supreme Court came to the conclusion that the above interpretation of Dharmendra Textiles was entirely misconceived. The court took note of the provisions of Section 11AC and compared and contrasted them with the provisions of Section 11A of the Central Excise Act and, in particular, the first proviso to Section 11A (1) which enumerated the very same malafide acts that were elaborated in Section 11AC and held that the conditions incorporated in both of the provisions were exactly similar.
Accordingly, on further elaboration of several other provisions, the Court held that it was only where the notice was issued under the first proviso to Section 11A, in order to invoke the extended period of limitation specified thereunder of five years, and there was a legally tenable finding to that effect, subsequent to the notice that the provisions of Section 11AC were at all attracted and hence, in the absence of any finding of revenue authorities that the duty was not paid or short paid etc., in these specified circumstances, the question of imposition of penalty under Section 11AC did not arise. In other words, where a determination was reached that the duty was not paid or short paid etc. on any grounds other than those specified above and where the period for which the escaped duty was sought to be reclaimed was one year, as opposed to the period of five years specified in the aforesaid particular circumstances, the provisions of Section 11AC were not attracted at all and hence no penalty could be imposed thereunder.
The Supreme Court therefore come to the clear and unequivocal conclusion that the provisions of Section 11AC were only brought into play if an order was passed with the express finding that the duty was not paid or short paid etc. as a result of the acts of deception enumerated in the first proviso to Section 11A(1) and Section 11AC.
The Supreme Court took note of the earlier decision in Dharmendra Textile and held that it was inconceivable that that a particular decision could at all be interpreted in the manner sought to be done by the Revenue to suggest that the penalty under Section 11AC would apply to every case of non payment or short payment of duty.
Indeed, the court extracted a particular paragraph of the decision in Dharmendra Textile to suggest that the argument taken by the Revenue in that case was that mens rea was actually prescribed statutorily in Section 11AC as opposed to certain other provisions which were also the subject matter of that case! It is of course true should the mens rea be heldto be attracted as per the provisions of Section 11AC and the duty not paid or short paid be so determined, thereafter Section 11AC required a mandatory imposition of penalty of the sum equivalent to the amount of duty not paid or short paid as per the above determination.
It is thus now the position that both Dharmendra Textile and Rajasthan Spinning have held that the mandatory penalty under Section 11AC will only have application should duty be demanded and confirmed thereunder and not if it was demanded and confirmed in any other circumstances. This principle in law will have direct application to service taxes, given the similarity in the wordings of Section 11AC of the Central Excise Act and Section 78 of the Finance Act, 1994.
Another important and entirely independent point that has also been determined by the Supreme Court in the Rajasthan Spinning case is the fact that the assessee or tax payer had deposited the amount of duty or tax short paid or not paid under Section 11AC before the issuance of the notice thereunder could not have the result that the penalty thereunder was not therefore payable at all. This is a very significant finding and will be discussed in a subsequent article.