M/S. Karnataka Power Transmission vs. Principal Commissioner Of

Facts

The appellant, M/s. Karnataka Power Transmission Corporation Limited (KPTCL), filed a writ petition challenging a show cause notice dated June 20, 2016, issued by the Commissioner, Central Excise and Service Tax, Large Tax Payers Wing (Audit), New Delhi. The notice alleged KPTCL's liability to pay service tax on amounts collected as penalties from contractors for delays or non-performance. KPTCL also challenged the constitutional validity of Section 66E(e) of the Finance Act, 1994, and related notifications and circulars. The learned Single Judge dismissed the writ petition. KPTCL appealed this dismissal, arguing that subsequent circulars and a CESTAT judgment vindicated their position, making the show cause notice liable to be quashed.

Held

The Court noted that the appellant's contentions regarding the leviability of service tax on penalties and retained amounts had been interpreted and construed by the respondents through Circular No. 178/10/2022-GST dated August 3, 2022, which was issued subsequent to the impugned show cause notice. It was also relevant that prior to this circular, the CESTAT had rendered a judgment in the case of South Eastern Coalfields Ltd., which the Government decided not to challenge, as indicated by Circular No. 214/1/2023 dated February 28, 2023. The Court found that these subsequent developments went to the foundational basis of the show cause notice. Therefore, instead of quashing the notice outright, the Court directed the petitioner to appear before the second respondent (Commissioner of Central Excise & Service Tax LTU (Audit)) on April 30, 2024, to present their defense and all supporting material. The second respondent was directed to consider the defense in light of the circulars dated August 3, 2022, and February 28, 2023, and pass appropriate orders. All contentions of the petitioner were left open.

Key Issues

1. Whether the challenge to the vires of Section 66E(e) of the Finance Act, 1994, and related notifications/circulars is pressed by the appellant? - Appellant's argument: The appellant is not pressing the challenge to the vires, as their contentions have been practically accepted due to subsequent developments. -Revenue's argument: The revenue argued that the contentions regarding subsequent circulars were being raised for the first time and were not adjudicated by the Single Judge, and that these circulars were subsequent events not available when the show cause notice was issued. 2. Whether the show cause notice dated June 20, 2016, is liable to be quashed in light of subsequent circulars and a CESTAT judgment? -Appellant's argument: The appellant contends that subsequent circulars (dated August 3, 2022, and February 28, 2023) and the CESTAT judgment in South Eastern Coalfields Ltd. vindicate their position that service tax is not leviable on penalties and retained amounts, as there is no value addition or service element. Therefore, the show cause notice should be quashed. -Revenue's argument: The revenue argued that the circulars relied upon by the appellant are subsequent events and were not available at the time the show cause notice was issued. They also contended that these arguments were not adjudicated by the Single Judge.