Bona fide belief and absence of suppression constitute reasonable cause warranting penalty waiver under Section 80.

The Appellant provided planning, designing, construction-management, supervision, architectural and consultancy services to government hospitals, medical colleges and educational institutions.

It claimed that the services were non-commercial and therefore not liable to service tax, relying, inter alia, on CBEC Circular No. 80/10/2004-ST dated 17.09.2004.

Contemporaneous departmental communications dated 11.09.2006 and 20.11.2007 also indicated that the services provided to such institutions were non-taxable.

The Commissioner confirmed service-tax demand of Rs. 65,75,890/- for 01.04.2005–30.03.2010, along with interest and penalties under Sections 77 and 78 of the Finance Act, 1994.

CESTAT set aside the demand for the extended period on the finding that there was no suppression of facts with intent to evade tax, but upheld the demand for the normal period, i.e. 01.07.2009–30.03.2010.

On a rectification application, CESTAT reduced the Section 78 penalty to Rs. 4,50,000/-.

Before the High Court, the Appellant confined its challenge to this penalty.

Whether the Appellant was liable to a penalty of Rs. 4,50,000/- under Section 78 of the Finance Act, 1994, despite CESTAT’s finding that there was no suppression of facts with intent to evade service tax.

Whether the Appellant had established a bona fide and reasonable cause under Section 80 of the Finance Act, 1994 warranting waiver of the penalty.

The Court applied Section 73(1) of the Finance Act, 1994, under which invocation of the extended limitation period requires suppression of facts or a similar deliberate default with intent to evade tax.

Section 78 permits penalty for fraud, collusion, wilful misstatement, suppression of facts or contravention with intent to evade service tax; however, Section 80 provides that no penalty under Sections 76, 77 or the first proviso to Section 78 is imposable where the assessee proves reasonable cause for the failure.

Relying on Bharat Hotels Ltd. v. Commissioner of C. Ex. (Adjudication), 2017 SCC OnLine Del 12813, and M/s Bajaj Travels Ltd. v. Commissioner of Service Tax, 2011:DHC:3908-DB, the Court held that a bona fide belief regarding non-taxability, absence of deliberate tax evasion and interpretational uncertainty may constitute reasonable cause under Section 80, justifying waiver of penalty.

The Court found that the departmental communications contemporaneous with the relevant period supported the Appellant’s contention that the services rendered to government institutions were regarded by the Department itself as non-taxable.

This materially corroborated the Appellant’s bona fide belief that no service tax was payable.

Further, CESTAT had already recorded a final finding that there was no wilful suppression of facts with intent to evade tax, thereby negating the essential basis for invoking the extended limitation period and materially undermining the allegation supporting the Section 78 penalty.

Although the service-tax liability for the normal period had been accepted, the mere failure to pay tax did not establish a deliberate or contumacious default.

In light of the interpretational uncertainty, the Department’s own earlier view, and the absence of fraud, suppression, wilful misstatement or intent to evade tax, the Appellant established reasonable cause under Section 80.

The penalty of Rs. 4,50,000/- imposed under Section 78 was set aside.

The appeal was allowed, and all pending applications were disposed of.

The Appellant’s acceptance of the normal-period service-tax demand, interest, CENVAT-credit demand and other penalties that had not been pressed before CESTAT remained undisturbed.