PERSONAL PENALTY FOR SERVICE TAX OFFENCES ON DIRECTORS

Dr. Sanjiv Agarwal

FCA, FCS

 

Finance Act, 2013 had inserted a new section 78A in the Finance Act, 1994 to provide for penalty for offences by director etc of a company w.e.f. 10.05.2013.

Section 78A reads as under –

“78A. Where a company has committed any of the following contraventions, namely:—

a)    evasion of service tax; or

b)    issuance of invoice, bill or, as the case may be, a challan without provision of taxable service in violation of the rules made under the provisions of this Chapter; or

c)    availment and utilisation of credit of taxes or duty without actual receipt of taxable service or excisable goods either fully or partially in violation of the rules made under the provisions of this Chapter; or

d)    failure to pay any amount collected as service tax to the credit of the Central Government beyond a period of six months from the date on which such payment becomes due, then any director, manager, secretary or other officer of such company, who at the time of such contravention was in charge of, and was responsible to, the company for the conduct of business of such company and was knowingly concerned with such contravention, shall be liable to a penalty which may extend to one lakh rupees.”

Section 78A has been inserted so as to impose penalty, which may extend up to one lakh rupees, on director, manager, secretary or other officer of the company for knowingly involved

in the contraventions specified therein. Thus, section 78A provides for imposition of penalty on director, manager secretary, or other officer of the company, who is in any manner knowingly concerned with specified contraventions.

Salient features of Penalty for Offences by Company Officials under Section 78A

 

  • To impose penalty for contraventions/violations by Company
  • Penalty may extend up to one lakh per official
  • Penalty on any director, manager, secretary or officer of Company
  • Incharge/responsible to Company for conduct of business of Company
  • If knowingly involved in specified contraventions
  • Penalty may be levied on more than one person for single contravention/offences

 

Specified Contraventions

 

  • Evasion of Service Tax
  • Issuance of bill/Invoice/challan without provision of service in violation of rules.
  • Availment and utilization of credit of taxes /duties without actual receipt of services / goods either fully or partially.
  • Failure to pay amount collected as service tax to the credit of Central Government beyond 6 months of the due date.

 

Who is Punishable

Any person who is

 

  • Director
  • Manager 
  • Secretary
  • Other Officer
  • and who at the time of contravention was in charge of/was responsible to company
  • for conduct of business, and
  • was knowingly concerned with such contravention.

In Ashish Kumar Agarwal v. CCE, Ahmedabad (2012) 284 ELT 529 (Cestat, Ahmedabad), in absence of any duty liability on main company ,it was held that provisions of Section 112 and 117 of Customs Act, 1962 for imposition of penalties on directors was not invocable. However, in Shri Krishna Urja Projects v. CCE (Meerut-I) (2013) 288 ELT 257 (Cestat, Delhi), it was held that personal penalty can be imposed on director who is actively involved in company’s day to day activities.

In CCE & C, BBSRI v. Pentagon Steel Pvt. Ltd. (2013) 288 ELT 271 (Cestat, Calcutta), it was held that no penalty is imposable on the managing director in absence of any evidence of his direct or indirect involvement.

In O T Enasu v. Union of India (2012) 27 STR 206; (2013) 38 STT 113 (Kerala), where a person is managing director of a company, it was held that he would not be fastened with penalty, unless it is shown that he had, by his commissions or omissions, led to a situation where  duty/tax was evaded. Levy of penalty on managing director without stating any reasons whatsoever and without entering a finding as to his involvement in evasion, was to be set aside.

In Hansa Gosalia v. CCE, Thane-II (2013) 289 ELT 266 (Bombay), since authorized signatory of the company was engaged in the day-to-day transactions of the company and had stated that the credit was availed on the inputs without receiving such inputs as per the direction of director, it was held that this fact was recorded by the adjudicating authority and upheld by the Cestat that the appellants were aware about the developments taking place in the company. Hence, the assessees were liable to pay penalty.

In Suman N. Agarwal v. Union of India (2013) 38 STT 598; (2013) 289 ELT 281; (2013) 30 taxmann.com 59 (Bombay), it was held that in absence of any provision enabling recovery of service tax dues of a private company from director thereof, such a recovery cannot be permitted, as company is a separate entity from its directors. Hence, attachment of assessee’s properties was held to be invalid.

In Microsynth Fabrics (India) Ltd. v. CCE, Vapi (2013) 290 ELT 262 (Cestat, Ahmedabad), it was held that penalty on managing director as well as manager-cum-authorized signatory needs to be considered in proportion to the amount of duty which has been confirmed against the appellant company.

In United Enterprises v. CCE & ST, Patna (2013) 29 STR 605 (Cestat, Kolkata), where authorities did not recorded specific involvement of the director in short/non-payment of service tax warranting a personal penalty against him, except holding that he was overall in charge of the affairs of the assessee company, it was held that penalty on directors was not imposable without recording specific involvement.

In Naveen Jain v. CCE, Kanpur (2014) 302 ELT 241 (Cestat, Delhi), it was held that if company availed wrong credit then penalty could not be imposed on its director of the company, only company which availed Cenvat credit was liable for penal action.

In J.V. Strips Ltd v. CCE, Delhi-III (2013) 294 ELT 33 (Cestat, Delhi), where issues involved were of legal and technical nature, it was held that there could be no mala fide on the part of the director so as to attract personal penalty.

In Coimbatore Polytex Pvt. Ltd. v. CCE, Coimbatore (2015) 316 ELT 321; (2015) 49 GST 549 (Cestat, Chennai), where penalty was imposed on company secretary and authorized signatory of the company, it was held that he is only employee of company and was not making any personal gain out of duty evaded. Hence, it was not justified to impose penalty on him since penalty had already been imposed on company who was beneficiary of the duty evaded.

In Intex Technologies (India) Ltd v. CCE, Delhi-II (2014) 307 ELT 760 (Cestat, Delhi), where assessee paid entire amount including duty, interest and 25% of duty as penalty before issue of SCN, it was held that it was provided in law that if duty and interest paid within 30 days from date of communication of order, penalty liable shall be 25% of duty. Therefore, penalty was reduced to 25% of duty. It was also held that if penalties imposed on assessee having paidbefore issue of SCN, separate penalty on Managing Director was not imposable.

Personal Penalty on Partners / Proprietors

The aforementioned provisions does not provide for personal penalty on partners/proprietor of the firm. However, section 77 talks of any person but such expression ‘any person’ does not imply more than one person or ‘firm as well as partner’ for the same offence. If it is meant to be such, it may result in double penalty or even more. In certain cases, Department seeks to impose personal penalty on the partners u/s 77 of the Finance Act, 1994 (as amended) which has not been specifically provided in the statutory provisions.

 

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