In a significant ruling that brings relief to taxpayers, the Customs, Excise, and Service Tax Appellate Tribunal (CESTAT), New Delhi Principal Bench, has held that a reduced penalty of 25% under Section 78 of the Finance Act applies if tax and interest are paid within 30 days of the service of the demand order.

This decision was delivered in the case of Minerals Marketing & Consultancy, and it clarifies the scope and benefit of Section 78 Proviso (ii) — a provision designed to encourage timely compliance.

Background of the Case

The case revolves around Minerals Marketing & Consultancy, a firm engaged in providing taxable services. During a departmental audit, authorities noticed a mismatch between the income shown in Form 26AS and the taxable value declared in the firm’s ST-3 returns for FY 2015–16.

Based on this discrepancy, a show cause notice was issued, demanding ₹11,16,723 in service tax, interest, and penalties.

Payments Before the Notice

Interestingly, the appellant had already paid ₹9,88,319 along with applicable interest before the show cause notice was issued. As a result, the differential amount of ₹1,28,404 remained in dispute — along with an equal penalty, as imposed under Section 78.

The Commissioner (Appeals) confirmed this full penalty amount, prompting the appellant to file an appeal with CESTAT.

What the Law Says – Section 78 Proviso (ii)

Section 78 of the Finance Act deals with penalties in cases where service tax is not paid due to fraud, suppression, or willful misstatement. It allows for a 100% penalty on the tax amount.

However, Proviso (ii) to Section 78 clearly states:

If the taxpayer pays the tax, interest, and 25% of the penalty within 30 days of receiving the order, the remaining 75% penalty is waived.

Tribunal’s Decision

The tribunal, led by Dr. Rachna Gupta (Judicial Member), carefully reviewed the facts and held:

  • The appellant did pay the confirmed tax, interest, and 25% penalty within 30 days.

  • The conditions under Section 78 Proviso (ii) were fully satisfied.

  • The intention of the law is to encourage voluntary and timely compliance, not to punish compliant taxpayers with full penalties.

Accordingly, the CESTAT modified the earlier order and restricted the penalty to 25% of the confirmed demand — partly allowing the appeal in favor of the taxpayer.

Why This Ruling Matters

This decision reinforces the fact that taxpayers who comply quickly can avoid heavy penalties. It’s a reminder that knowing and acting within the legal time frame can make a major difference in how much is ultimately payable.

FAQs – Frequently Asked Questions

Q1. What does Section 78 of the Finance Act deal with?
Section 78 imposes penalties in cases of fraud or suppression leading to non-payment of service tax. It allows a 100% penalty but offers relief if conditions are met.

Q2. What is Section 78 Proviso (ii)?
It allows a reduced penalty of 25% if the taxpayer pays the confirmed tax, interest, and 25% penalty within 30 days from the date of the demand order.

Q3. Can I get this benefit if I pay before receiving the notice?
Pre-payment of tax and interest is positive, but to get the reduced penalty, you must pay all dues within 30 days of the demand order, including the 25% penalty.

Q4. What if I miss the 30-day deadline?
If you miss the 30-day window, the benefit under Proviso (ii) is lost, and the full 100% penalty becomes payable, unless further relief is granted on appeal.

Q5. Is this applicable under GST also?
While this case pertains to service tax, GST laws also have provisions for reduced penalties under certain conditions for timely voluntary payments.

Conclusion

The CESTAT’s ruling in favor of Minerals Marketing & Consultancy is a welcome interpretation of Section 78 that rightly emphasizes the importance of timely compliance. It assures taxpayers that if they respond quickly and pay within the specified timeframe, they are eligible for significant penalty relief.

In an era where businesses are under increasing scrutiny, this judgment is a positive signal. It reminds taxpayers to stay alert to statutory deadlines and take prompt action — doing so could mean paying 25% instead of 100% in penalties.

Facing a service tax or GST penalty notice?
Timely advice and action can save you money. Reach out to your tax advisor or visit TaxeFiling.in for guidance on appeals and compliance strategies.