CESTAT Hyderabad Sets Aside Penalties on Universal Biofuels, Holds SCN Unwarranted After Pre-Deposit of Tax and Interest

April 2, 2026 : The Hyderabad Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has set aside penalties imposed on Universal Biofuels Pvt. Ltd., holding that issuance of a show cause notice (SCN) was unwarranted when the assessee had already discharged the entire service tax liability along with interest prior to its issuance.

The Tribunal, comprising A.K. Jyotishi (Technical Member) and Angad Prasad (Judicial Member), observed that the case squarely fell within the ambit of Section 73(3) of the Finance Act, 1994, which permits closure of proceedings where tax and interest are paid voluntarily before issuance of an SCN.

Universal Biofuels Pvt. Ltd., engaged in the manufacture of biodiesel and refined glycerine, had entered into an arrangement with a foreign entity, AE Biofuels Inc., for deputation of technical personnel for commissioning its glycerine refining plant in Kakinada. The company reimbursed salaries and travel expenses of the deputed personnel on a cost-to-cost basis, with such transactions duly reflected in its audited financial statements.

During audit, the department formed a view that the appellant had failed to pay service tax on import of services under the reverse charge mechanism, classifying the activity under manpower recruitment or supply agency service. Following audit objections and correspondence, the appellant voluntarily paid service tax amounting to ₹78.56 lakh along with applicable interest and requested closure of proceedings under Section 73(3).

Despite this, a show cause notice dated October 3, 2012, was issued proposing demand of tax and imposition of penalties under Sections 76, 77, and 78 of the Finance Act, 1994. The adjudicating authority confirmed the demand and imposed penalties, which were challenged before the Tribunal.

The Tribunal noted that the entire demand arose from audit observations and that the appellant had paid the tax and interest well before issuance of the SCN. It further recorded that all relevant details were disclosed in the books of accounts and shared with the department over a prolonged period, negating any allegation of suppression or intent to evade tax.

Importantly, the Bench acknowledged that the taxability of such secondment arrangements was a contentious issue during the relevant period, with conflicting judicial precedents. It also referred to subsequent legal clarity emerging only later, reinforcing the appellant’s claim of bona fide belief.

Holding that Section 73(4), which permits issuance of SCN in cases involving suppression or fraud, was wrongly invoked, the Tribunal ruled that the benefit of Section 73(3) ought to have been extended. It further held that penalties were liable to be waived under Section 80, given the existence of reasonable cause for non-payment during the relevant period.

Accordingly, the Tribunal set aside penalties imposed under Sections 78 and 77 while upholding the appropriation of tax and interest already paid. The appeal was partly allowed.

Case Details:
Case Title: Universal Biofuels Pvt. Ltd. v. Commissioner of Central Excise & Service Tax, Visakhapatnam-II
Case No.: Service Tax Appeal No. 26117 of 2013