The Customs, Excise and Service Tax Appellate Tribunal (CESTAT) Hyderabad has clarified that service tax cannot be imposed on trade discounts received by mobile retailers, and penalty under Section 78 is unsustainable where non-payment arises from judicial uncertainty rather than deliberate evasion. This ruling reinforces the principle that tax liability must be grounded in clear statutory classification and intent, not retrospective application of ambiguous interpretations.
Background & Facts
The Dispute
M/s Big C Mobiles (P) Ltd, a mobile phone retailer, was assessed for service tax liabilities for the period 2007-08 to 2011-12. The department alleged that amounts received as activation charges, commissions, and incentives from telecom operators constituted taxable services under 'Management, Maintenance or Repair Service' (MMRS) and 'Business Auxiliary Service' (BAS) under the Finance Act, 1994. The department also contended that trade discounts received from manufacturers were part of taxable business auxiliary services.
Procedural History
- 2014: Adjudicating Authority issued an Order-in-Original demanding Rs.1.27 crore in service tax, interest, and penalty.
- 2014: The authority reduced the demand to Rs.1.27 crore by allowing some discounts as non-taxable trading income but upheld tax on activation charges and disallowed Rs.30 lakh in claimed discounts.
- 2025: Appeal filed before CESTAT Hyderabad challenging the demand, invocation of extended period, and imposition of penalty.
Relief Sought
The appellant sought: (1) Exclusion of Rs.30,18,384/- in trade discounts from taxable income; (2) Cancellation of penalty under Section 78; (3) Restriction of tax demand to the normal period under Section 73, rejecting the extended period; and (4) Waiver of penalty under Section 80.
The Legal Issue
The central question was whether trade discounts received by a retailer from manufacturers constitute taxable 'Business Auxiliary Service', and whether non-payment of service tax on activation charges - amidst conflicting judicial pronouncements - constitutes deliberate evasion warranting penalty under Section 78 of the Finance Act, 1994.
Arguments Presented
For the Appellant
The appellant argued that trade discounts are intrinsic to the sale of goods and fall outside the scope of BAS, citing BSNL v. Union of India and Idea Mobile Communication Ltd v. CCE to show that activation charges were subject to judicial uncertainty until the Supreme Court’s 2011 ruling. They submitted CA-certified documents proving the nature of discounts and emphasized that they had voluntarily paid substantial tax once clarity emerged. They contended that penalty cannot be imposed without mens rea and that Section 80 mandates waiver where there is no deliberate evasion.
For the Respondent
The department maintained that all receipts from telecom operators, including discounts, were part of business auxiliary services under Section 65(64). It argued that the appellant’s failure to maintain proper records and disclose all income justified invocation of the extended period under Section 73(2) and imposition of penalty under Section 78. It contended that judicial ambiguity does not absolve taxpayers of due diligence.
The Court's Analysis
The Tribunal examined the nature of the receipts and the legislative intent behind BAS and MMRS. It held that trade discounts, turnover discounts, and price drop incentives are directly linked to the sale of mobile phones and are therefore part of trading activity, not service provision. The Tribunal observed:
"Any other income, which is not relatable to these activities [activation or repair] cannot be covered either under the category of MMRS or BAS."
It further noted that the appellant had paid service tax on activation charges once the Supreme Court clarified the law in Idea Mobile Communication Ltd, and had not resisted the appropriation of Rs.97.44 lakh already paid. The Tribunal distinguished this case from those involving concealment or false declarations, emphasizing:
"One cannot attribute any deliberate or malafide intent for non-payment of duty... the issue was agitated before various judicial forums and clarity emerged only after the Hon'ble Supreme Court decided the issue."
Regarding the extended period, the Tribunal held that Section 73(2) requires positive evidence of concealment or misstatement. Here, the non-payment stemmed from legal ambiguity, not concealment. The Tribunal rejected the department’s reliance on technical non-disclosure, noting that the appellant had cooperated fully and produced documents.
The Verdict
The appellant partially succeeded. The Tribunal set aside the penalty under Section 78, quashed the invocation of the extended period, and directed the adjudicating authority to re-examine the disputed Rs.30,18,384/- in light of the clarified legal position. The balance demand was upheld, but only for the normal period.
What This Means For Similar Cases
Trade Discounts Are Not Taxable as Services
- Practitioners must distinguish between trading income and service receipts when assessing BAS liability.
- Retailers receiving manufacturer discounts can now confidently exclude such amounts from service tax returns if supported by ledger entries and CA certificates.
- The burden shifts to the department to prove that a discount is not linked to sale of goods but constitutes a service consideration.
Penalty Is Not Automatic in Cases of Legal Ambiguity
- Section 78 penalties require proof of deliberate evasion; judicial uncertainty negates mens rea.
- Taxpayers who pay voluntarily upon clarification of law cannot be penalized retroactively.
- Advocates should cite CESTAT Hyderabad v. Big C Mobiles to oppose penalty in cases involving evolving jurisprudence on service tax.
Extended Period Requires Concrete Evidence of Concealment
- Mere non-filing or technical omission does not justify invoking Section 73(2).
- The Tribunal’s emphasis on "positive evidence of concealment" raises the threshold for departmental action.
- Practitioners should challenge extended period notices where the taxpayer has acted in good faith and disclosed all transactions.
