The Allahabad Bench of the Customs, Excise & Service Tax Appellate Tribunal (CESTAT) has held that penalties under the Central Excise Act and the Finance Act, 1994 cannot be sustained where an assessee has voluntarily discharged the entire tax liability along with applicable interest before the issuance of a show cause notice.
While granting substantial relief to the assessee, the bench of Sanjiv Srivastava (Technical Member) upheld penalties imposed for delayed and non-filing of ST-3 returns, holding that such liabilities are civil in nature and do not require proof of mens rea.
The appellant/assessee challenged an order of the Commissioner (Appeals), Allahabad, which had affirmed demands of central excise duty, service tax under reverse charge on legal services and Goods Transport Agency (GTA) services, interest, and multiple penalties imposed by the adjudicating authority.
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The appellant is engaged in the manufacture of printed materials and plastic packaging products and was registered under the Central Excise Act as well as the service tax regime for discharging reverse charge liability on GTA services.
During departmental scrutiny of the company’s financial records for 2016-17, authorities found discrepancies between the sales figures reflected in the sales ledger and those reported in the monthly ER-1 returns. According to the department, the mismatch resulted in a short payment of central excise duty amounting to ₹1.57 lakh.
The scrutiny also revealed that the company had failed to discharge service tax under the reverse charge mechanism on payments made towards legal consultancy services and had short-paid service tax on GTA services received during 2015-16 and 2016-17. In addition, the department alleged delayed filing and non-filing of ST-3 service tax returns for certain periods.
Before the issuance of the show cause notice, the appellant deposited the entire excise duty, service tax on legal services, and the corresponding interest after the discrepancies were pointed out by the department. Nevertheless, a show cause notice dated June 7, 2019 was issued proposing confirmation of the demands along with penalties under the Central Excise Act and the Finance Act.
The appellant contended that no penalty could be imposed because the entire excise duty and service tax relating to legal services had already been paid together with interest before the issuance of the show cause notice. It argued that the statutory provisions themselves prohibit imposition of penalties in such circumstances.
With respect to the service tax demand on GTA services, the appellant submitted that the situation was revenue neutral since any tax paid under the reverse charge mechanism would have been immediately available as CENVAT credit. It also argued that the demand could not be sustained by invoking the extended period of limitation and relied upon several Tribunal decisions supporting the principle of revenue neutrality.
The Tribunal observed that the Central Excise Act clearly provides that where an assessee pays the duty together with applicable interest before issuance of a show cause notice, no penalty should be imposed.
Referring to Sections 11A and 11AC of the Central Excise Act, the Tribunal held that the lower authorities had ignored the plain language of the statute while sustaining the penalty.
In a strongly worded observation, the Tribunal remarked that the statutory provisions were sufficiently clear and did not require any complex legal interpretation. It observed that the authorities had failed even to properly read the provisions before imposing the penalty.
Accordingly, the Tribunal set aside the penalty of ₹1.57 lakh imposed under Section 11AC of the Central Excise Act.
The Tribunal adopted the same reasoning with respect to service tax payable under reverse charge on legal consultancy services.
Since the assessee had discharged both the service tax liability and the applicable interest well before issuance of the show cause notice, it held that no penalty under Section 78 of the Finance Act, 1994 could survive.
The Tribunal therefore deleted the penalty imposed on this component of the demand as well.
While examining the service tax demand relating to GTA services, the Tribunal rejected the argument that revenue neutrality itself extinguishes tax liability.
It observed that although courts have recognised revenue neutrality while considering invocation of the extended period of limitation, the doctrine does not erase the statutory obligation to pay tax. The Tribunal found that the show cause notice had been issued within the normal limitation period prescribed under Section 73 of the Finance Act and therefore the demand itself was not barred by limitation.
Consequently, the Tribunal upheld the service tax demand along with applicable interest on GTA services.
Although the Tribunal upheld the tax demand, it concluded that the circumstances did not justify the imposition of penalty under Section 78 of the Finance Act.
It observed that where the transaction is revenue neutral and the assessee could have availed credit upon payment of tax, there could be no basis for concluding that there was an intention to evade payment of service tax.
Relying on the Supreme Court’s judgment in Union of India v. Rajasthan Spinning & Weaving Mills Ltd., the Tribunal reiterated that penalties under Section 11AC and analogous provisions require conscious and deliberate wrongdoing involving fraud, suppression or wilful misstatement with intent to evade tax.
Since such ingredients were absent, the Tribunal deleted the penalty imposed in respect of the GTA service tax demand as well.
However, the Tribunal refused to interfere with the penalties imposed for delayed filing and non-filing of ST-3 returns.
It observed that penalties prescribed for late filing are civil liabilities intended to ensure compliance with statutory obligations. Referring to the Supreme Court’s decision in Gujarat Travancore Agency, the Tribunal held that proof of mens rea is not necessary for levy of such penalties.
Accordingly, the penalties of ₹20,000 and ₹40,000 imposed for delayed and non-filing of ST-3 returns were sustained.
The Tribunal partly allowed the appeal by setting aside the penalty of ₹1.57 lakh imposed under Section 11AC of the Central Excise Act and the aggregate service tax penalties of ₹1.14 lakh imposed under Section 78 of the Finance Act. However, it upheld the confirmed tax demands, applicable interest, and penalties relating to delayed and non-filing of ST-3 returns.
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