Finance Act 1994 Section 68(2) applied in service tax dispute
“Tribunal Upholds Service Tax Demands on Legal, Transport, and Works Contract Services; Penalties Set Aside Under Finance Act”
The Customs, Excise and Service Tax Appellate Tribunal, Allahabad bench, has recently delivered a landmark judgment concerning service tax liabilities on legal consultancy, reconciliation discrepancies, and goods transport agency services under the reverse charge mechanism. The ruling reaffirms the importance of compliance in tax disclosures while clarifying the scope of penalties under the Finance Act, 1994.
Background and Audit Findings
The case involves M/s Zumax Equipments Pvt. Ltd., a registered service provider engaged in maintenance, repair, erection, commissioning, installation, and works contracts. An audit conducted for the period 2014–15 through June 2017 uncovered multiple irregularities:
- Payment of ₹1,49,000 to advocates for legal consultancy services without discharging the corresponding reverse charge service tax liability amounting to ₹21,950 under Section 68(2) of the Finance Act, 1994, read with Notification No. 30/2012-ST.
- Freight charges amounting to ₹1,40,000 paid to goods transport agencies without payment of service tax of ₹6,300 under reverse charge.
- A significant mismatch of ₹6,87,702 between the company’s books and ST-3 returns, attracting service tax demands of ₹1,03,129.
- Non-payment of service tax of ₹1,08,038 on modular kitchen works provided under works contract services during 2014–15.
Despite these lapses, the company made payments covering the dues through its March 2019 GSTR-3B return, prior to the issuance of a formal show cause notice.
Legal Submissions and Contentions
Representing the appellant, Stuti Saggi argued that the legal consultancy services were not exclusively provided by advocates, and the reconciliation discrepancy pertained to the sale of goods rather than taxable services. It was further contended that the works contract receipts were duly disclosed in ST-3 returns, and since the tax and interest were paid before the show cause notice, penalties under Section 73(3) of the Finance Act, 1994 should be barred.
On the other hand, Chitra Srivastava, appearing for the revenue, maintained that the appellant failed to provide evidence establishing that legal consultancy was procured from non-advocates or that service tax had been discharged by the service providers. The revenue also insisted that reconciliation-based demands and invoice-specific works contract demands were well-founded. Additionally, the mandatory nature of interest payments and insufficiency of mere disclosure in returns to absolve liability were emphasized.
Tribunal’s Verdict
The Tribunal bench, comprising Member Technical Sanjiv Srivastava, upheld the service tax demands totalling ₹2,39,417, asserting that the appellant’s claims were unsubstantiated and could not overturn the audit’s conclusive findings. The interest liability was upheld as an automatic consequence of delayed tax payments, with the appellant’s claim of prior interest payments dismissed for lack of proof.
However, while the late fee of ₹4,500 related to delayed filing of ER-3 returns was confirmed, the Tribunal notably set aside the penalties imposed under Section 78 of the Finance Act, 1994. Citing Section 73(3), the bench emphasized that when service tax and interest are paid prior to the issuance of any notice, the imposition of penalties is expressly prohibited. The appeal was therefore partly allowed — validating the tax and interest demands while annulling penalties.
Implications
This ruling clarifies the application of reverse charge provisions under the Finance Act, particularly the critical importance of accurate reconciliation between accounting records and statutory returns. It also reaffirms taxpayer protections against penalties where dues are settled before formal proceedings commence, underscoring the balance between enforcement and taxpayer rights.