Delhi High Court Allows Service Tax Appeal, Sets Aside Penalty Under Section 78 Of Finance Act 1994

The Case

HOSPITECH MANAGEMENT CONSULTANTS PVT LTD Vs PRINCIPAL COMMISSIONER OFCENTRAL GOODS AND SERVICES TAX
Case No.: SERTA/15/2023
Decided on: 09/01/2026
CNR: DLHC010366612023 ·
High Court of Delhi

The Legal Issue

The Court decided whether the penalty of Rs. 4,50,000/- imposed under Section 78 of the Finance Act, 1994 by CESTAT's Miscellaneous Order dated 30.06.2023 was liable to be set aside. The Appellant confined its challenge to this penalty, relying on Section 80 of the Act of 1994 on account of reasonable cause, and contending that there was no fraud, collusion, willful misstatement, suppression of facts or intention to evade tax. The Respondent argued that the services were classifiable as Architect's Services and Management or Business Consultancy Service and that penalty was leviable under Sections 77 and 78 of the Act of 1994.

Facts of the Case

The Appellant was engaged in providing services relating to planning, designing, construction, management and supervision of projects for government hospitals, medical colleges and educational institutions, and was registered under various taxable service categories. The genesis of the dispute was CERA Audit Memo No. 95 dated 18.01.2006, whereby audit authorities took the view that the services were taxable. The Assistant Commissioner of Service Tax, Div.-I, Delhi vide letter dated 11.09.2006, and the Deputy Commissioner of Service Tax, Div.-I, Delhi by communication dated 20.11.2007, stated that the services were non-commercial and not liable to service tax, relying on CBEC Circular No. 80/10/2004-ST dated 17.09.2004. A Show Cause Notice dated 22.10.2010 proposed invocation of the extended period of limitation, demand of service tax with interest, denial of CENVAT credit, and imposition of penalties. The Commissioner of Service Tax (Adjudication) vide order dated 31.03.2014 confirmed a demand of Rs. 65,75,890/- with interest, CENVAT credit of Rs. 12,360/- with interest, and total penalty of Rs. 65,93,250/-. CESTAT's Final Order dated 15.05.2023 sustained the demand of service tax only for the normal period of limitation with interest, and its Miscellaneous Order dated 30.06.2023 reduced the penalty to Rs. 4,50,000/- under Section 78 of the Act of 1994.

Summary of the Decision

The Court allowed the appeal and set aside the penalty of Rs. 4,50,000/- imposed under Section 78 of the Act of 1994. It held that the communications dated 11.09.2006 and 20.11.2007 bore out the Appellant's submission that the Department itself was of the opinion that the services rendered to Government Institutions were not exigible to service tax, lending credence to a reasonable and bona fide cause for failure to deposit service tax. The Court noted that the Tribunal, while setting aside the extended period demand under proviso to Section 73(1), returned a finding that there was no willful suppression of facts with intent to evade payment of service tax, which finding was not challenged by the Respondent and had attained finality. Relying on Bharat Hotels Ltd. v. Commissioner of C. Ex. (Adjudication) and M/s Bajaj Travels Ltd. v. Commissioner of Service Tax, the Court observed that where material demonstrates bona fide belief regarding non-taxability and no deliberate intention to evade, Section 80 of the Act of 1994 is available and penalties are unwarranted. It found that the non-payment was not a deliberate or contumacious default, and the interpretational uncertainty coupled with absence of suppression, fraud, willful misstatement or intention to evade constituted reasonable cause under Section 80. The challenge to the demand of CENVAT credit and penalty of Rs. 12,360/-, and to penalty of Rs. 5,000/- under Section 77, was not pressed before CESTAT and attained finality. Relief (i) of the appeal challenging imposition of service tax under the normal period of limitation was dismissed as not pressed. Pending applications, if any, stand disposed of.

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