Section 78 Penalty Cannot Be Reduced by Tax Paid During Investigation: CESTAT New Delhi

CESTAT New Delhi partly allowed the Revenue’s appeal, holding that a service provider which collected tax but did not deposit it falls under Section 73(4) and must bear penalty equal to the entire confirmed demand.

The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), New Delhi, has held that penalty under Section 78 of the Finance Act, 1994 must equal the full service tax confirmed, with no deduction for amounts paid during investigation, where the assessee had collected tax from customers but not deposited it. Such a case falls under Section 73(4), so the shield of Section 73(3) against a show cause notice (SCN) is not available [Commissioner of CGST & Central Excise-Delhi South, New Delhi v. Shanivi Constructions Private Limited, 2026-juristway.com-3322-CESTAT(New Delhi)-ST].

The Bench of Ajay Sharma, Member (Judicial), and P.V. Subba Rao, Member (Technical), heard the Revenue’s appeal; the order was written by Mr. Subba Rao. An SCN dated 20 Nov 2017 for 2012-13 to 2016-17 had proposed ₹7,04,99,548. The Principal Commissioner confirmed about ₹97.15 lakh, appropriated ₹95,54,417 already paid during investigation, and imposed penalty under Section 78 of only ₹1,60,708.

The Tribunal upheld the extended period. The assessee had collected service tax but not paid it, so it could not claim a bona fide belief that no tax was due. The Tribunal relied on the Gujarat High Court in INDSUR Global Pvt Ltd. v. Additional Commissioner of Service Tax, Vadodara (2015).

On valuation, the Revenue complained that the assessee had raised separate invoices for goods and services on some works contracts and composite invoices with abatement on others. The Tribunal held that the burden was on the Revenue to prove the invoices wrong. Where values are shown separately, Rule 2A(i) of the Service Tax (Determination of Value) Rules, 2006 applies, and composite values fall under Rule 2A(ii). The assessee had also paid VAT on the goods value, so the Commissioner’s computation stood.

On penalty, the Tribunal found “no legal basis for such deduction of amounts paid during investigation to compute penalty under section 78”. The assessee argued that no SCN could issue for amounts paid before notice under Section 73(3). The Tribunal rejected this, holding that Section 73(4) excludes cases of fraud, suppression or intent to evade, and that collecting tax without depositing it placed the case there.

The appeal was partly allowed, and the penalty under Section 78 is to be re-determined as equal to the total duty confirmed.

2026-juristway.com-3322-CESTAT(New Delhi)-ST