Workshop on Understanding the Amended law of Service Tax dated 03.09.2014 Session 4

CORPORATE KNOWLEDGE FOUNDATION

Presents

Workshop

On

Understanding the Amended Law of Service Tax

Conducted by

Dr. Sanjiv AgarwalFCA, FCS

Wednesday, 3rd September, 2014 @ Mumbai © Dr. Sanjiv

Agarwal

1

Session – IV

Adjudication

of

Demand

in

Service Tax2

ADJUDICATION OF DEMAND IN SERVICE TAX

This presentation covers –

• Triggers for SCN

• Show Cause Notice – Contents, when and how

• Handling SCN’s

• Adjudication process

• Issuance of demand order

• Consequences / options after Order

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TRIGGERS FOR SCN

• Where any service tax has not been levied or paid, or has been short

levied or short paid, erroneously refunded including suppression

cases (Section 73 )

• Any enquiry which makes officer believe that it may result into a

demand / tax dues

• Any audit conducted by the Department which raises audit para for

possible demand / tax dues

• Any summons issued to assessee which may lead to any demand /

tax dues

• Service Tax collected but not deposited (section 73A)

• Cases of best judgment assessment (Section 72)

• Levy of penalties (sections 76, 77, 78)

• Wrong availment of Cenvat credit

• Rejection of refund claim

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DEMAND OF SERVICE TAX

What is Demand Demand – A legal rightA claim / request made as a rightDemand of tax – something more than what is dueSomething which is being demanded as a legal

rightDemand of amount of tax not paidBeyond assessment / voluntary action

When does a demand arise in Service TaxTaxable service is renderedValue of taxable services leads to payment of

service taxCharge of service tax (section 66B)Person liable All these to be present

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DEMAND OF SERVICE TAX Section 66B Charge of Service Tax

(Levy of Service Tax @ 12.36% of the value of taxable service)

Section 68(2) Charge of Service Tax on services

under reverse charge

Section 67 Valuation of taxable service for charging

Service Tax

Section 68 Payment of Service Tax (Rule 6)

Section 69 Registration of assessee / person liable

[Rule 2(1) (d); Rule 4]

Section 70 Furnishing of returns under self assessment

[Rule 7]

If these sections are not complied with, situation for demand of Service

Tax/ penalties may arise.

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DEMAND OF SERVICE TAX

Recovery of Service Tax not levied or paid or short levied or short paid or erroneously refunded (Section 73)

Demand involvesNon- payment / short payment / erroneous refund

for : Eighteen months (one year upto 27.05.2012 ) in normal

course five years in cases of suppression, fraud, etc.

From Relevant dateSteps involved

Issuance of Show Cause Notice (SCN)Adjudication ( Section 83A)Determination of demandDemand confirmation (subject to Appeal)Recovery Proceedings

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SHOW CAUSE NOTICE • Adjudicating authority can issue / serve Show Cause Notice (SCN) to the

person liable asking him to show cause why recovery of service tax not be

made from him

• SCN to be issued within following time limits-

Short levy/ short payment / erroneous refund arising due to specified reasons within - five years from the relevant date

Short levy / short payment / erroneous refund arising due to any other reasons – within eighteen months (w.e.f. 28.05.2012) from the relevant date

Specified reasons may be one or more of following –

Fraud

Collusion

Willful mis- statement

Suppression of facts

Contravention of any provisions / rule

with the intention to evade service tax

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SHOW CAUSE NOTICE What is Relevant Date

• Where service tax has not been levied/paid/short levied /short paid:

When return filed – date of filing of return

When return not filed –due date on which return was to

be filed

Where revised return filed – date of filing of revised return

Any other case- date on which service tax should have

been paid

• Where service tax is assessed on provisional basis- date of

adjustment of service tax after its final assessment

• Where service tax has been erroneously refunded - date of such

refund

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SHOW CAUSE NOTICE

What should SCN contain

• SCN should include / specify

Brief facts

Specific allegations against the assessee / noticee

Amount of service tax sought to be recovered

Basis on which such service tax is payable

Category of taxable service under which tax is sought to be levied

Proposed penalties

Documents on which reliance is made (RUDs)

Time within which show cause must be shown

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SHOW CAUSE NOTICE

Understanding SCNs

• Before any SCN is issued, it is desirable and expected that a written

communication be sent to the assessee so that does not plead

ignorance, non intimation or innocence at a later stage. Such letter

may contain necessary particulars about period, nature of demand,

amount, non compliances etc.

• Department raises demands by way of SCN to assessee when

irregularities are observed or suspected.

• SCN is a mandatory requirement for raising any demand of

duty/service tax.

• A SCN should follow certain principles to be legally sustainable.

• SCN should be clear, precise and unambiguous.

• The basic aim of SCN is to provide a reasonable opportunity to

assessee to present his case or show cause to the proposed demand

before any demand is confirmed.

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Understanding SCNs

• SCN to be issued timely. The time limit for issuance of SCN is eighteen months

/ five years from the relevant date ,i.e., date of filling of the return. Belated

SCNs are liable to be dropped.

• If any SCN is to be issued on the basis of audit para, it would be desirable that

the audit team provides inputs / draft of SCN to the adjudicating authority

with necessary documentary evidences and enclosures.

• Writ Jurisdiction is not available against a SCN where matter requires factual

examination.

• SCN cum-demand notice merely on the basis of audit para without

documentary evidences may not be sustainable.

• SCN is the first limb of principle of natural justice – no one should be

condemned unheard.

SHOW CAUSE NOTICE

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Understanding SCNs – Natural Justice

• Basic requirements of principles of natural justice are:

Full information about charges to the party

Allowing party to state his defence i.e. through personal hearing

Unbiased authority

Reasoned Order

• The natural justice hangs on the following elements –

No man shall be judge in his own cause

Both sides shall be heard – ‘audi alteram partem’

The parties to a proceeding must have due notice of when

the Court / Tribunal will proceed

The Court / Tribunal must act honestly and impartially and

not under the direction of any other person to whom

authority is not given by law.

SHOW CAUSE NOTICE

SHOW CAUSE NOTICE

Adjudicating SCN - Natural Justice Principle

• not capable of a definition

• root of judicial process

• to check arbitrary exercise of power

• duty to act fairly

• to secure justice or to prevent miscarriage of justice

• No person should be condemned or held guilty unheard or an

opportunity should be given for being heard

• Orders without giving adjournment sought

• Denial of cross examination

• Non- return of RUDs

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SHOW CAUSE NOTICE

Understanding SCNs

• Reasonable time may be given for adjudication to take place.

Issue of order one day after the SCN has been held to be bad in

law [Ganesh Polytex Ltd. v Union of India (2011) 264 ELT

35(Allahabad)].

• A proper SCN has to specify the demand, i.e., quantify the

demand and liability in clear terms

• A letter from the Department is not a proper SCN [CCE v.

Merchant Impex (2012) 276 ELT 458 (Karnataka)]

• Periodical or follow-on SCN is issued when the issues under

consideration are not decided and such issues continue for a

longer period.

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SHOW CAUSE NOTICE Handling of Show Cause Notice

• Proper and detailed reply to be submitted to the Department

along with annexures and supporting documents

• Reply should be submitted on time as specified in SCN

• Reply to all departmental letters on time or seek extention of

time

• Submit information as desired by the Department during the

course of adjudication

• Opt for and attend to personal hearings

• Don’t seek adjournments , if it is possible to attend the hearing

• In case personal hearing cannot be attended , adjournment

should be demanded in writing citing the reasons

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ADJUDICATION OF SCN

Principles of Sound Adjudication

• The authorities are quasi-judicial authorities.

• Adjudication is a quasi judicial function

• Duty bound to justify their existence and carry

credibility with the people by inspiring confidence

in the adjudication process.

• No economic loss is caused on both sides.

• No injustice with innocent person.

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ADJUDICATION OF SCN

• Adjudication pre-supposes issuance of a show cause notice

(SCN) – an intimation to show cause, explain or defend the

proposed action as mentioned in the SCN.

• Adjudication is a legal process of deciding on issue relating

to tax matters through departmental authorities.

• Adjudicating proceedings is important aspect because it

provides an opportunity to the assessee to be heard and

SCN before any action is taken against him.

• Adjudication is an important function of Revenue Officers

• Powers of adjudication are subject to jurisdiction and

monetary limits for different officers

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ADJUDICATION OF SCN

Adjudication Process

• SCNs are issued under provisions of the Finance Act,

1994 charging any person for contravention of any

provisions of the said Act and rules and/or notifications

issued thereunder and penal action is proposed

• Competent officers of the Department adjudge the case

• Adjudication is a process involving various steps

• Hearing of other party/ defence grounds to be

considered

• Issuance of adjudication order

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• Issue of SCN is a pre-condition to a proper adjudication.

• Adjudication proceedings shall be conducted by observing

principles of natural justice.

• Adjudicating order should comply with the principle of natural

justice. [Meenakshi Associates Pvt. Ltd. v. CCE, Noida (2009)

245 ELT 362 (Cestat, Delhi); Afloat Textiles Pvt. Ltd. v. CCE,

Vapi (2007) 215 ELT 198 (Cestat, Ahmedabad)]

• In case of multiple show cause notices, adjudication shall be

done by the authority competent to adjudicate the SCN

involving highest amount of tax/duty.

• For genuine reasons, three adjournments should be given to

assessee opportunity of hearing for three occasions before

passing any order.

ADJUDICATION OF SCN

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ADJUDICATION OF SCN

• Cases remanded back for de novo adjudication should be

decided by authority which passed the remanded order.

• Adjudicating authority cannot pass two orders on same SCN,

though corrigendum may be issued on minor issues without

substantially altering the order

• Order can not travel beyond the scope of SCN. [MCnally Bharat

Engineering Co. Ltd. v. CCE (2012) 25 STR 496 (Jharkhand)]

• Adjudicating order should be in accordance with judicial

discipline which must be strictly adhered to.

• Order of adjudication must show application of mind and be self-

speaking/reasoned order. Reasons for order would ensure justice

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ADJUDICATION OF SCN

• Adjudication order must be a speaking order giving clear findings

on all the points raised by the defence dropping the proposed

allegations or rebuttal of defence points.

• Adjudication order has to be dated and signed by the

adjudicating authority.

• Adjudicating authority should communicate the order/decision

within a reasonable time after the personal hearing is held (say,

upto one month). However, this does not happen in reality and

even the time taken is more than six months in many cases.

• Conditional orders or orders subject to verification are to be

avoided and should not be passed.

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ADJUDICATION OF SCN

• Adjudication orders must be dispatched by registered post

acknowledgement due.

• The period of filing of appeal has to be reckoned from the

date of receipt of order.

• Finance Act, 2014 stipulates time limit for adjudication of

SCN within :

Six months (of SCN) extended period not invoked (18

months)

One Year (of SCN) extended period invoked (upto 5

years)

• But language used is vague – ‘ where it is possible to do so’

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ADJUDICATION OF SCN

De Novo Adjudication

• De Novo - a new hearing / a hearing for the second time

• DE Novo adjudication can be sought for the following reasons- Non-speaking order Non-acceptance of evidence Non-consideration of the submissions Non-application of mind by the adjudication authority Submission of additional evidences to higher appellate

forum which were not considered by lower authorities Non-furnishing of the relied upon document in the SCN Denial of natural justice such as appropriate notice /

reasonable opportunity / sufficient time not given to assessee

Non-consideration of evidence by the adjudicating authority

ADJUDICATION OF SCNJudicial Discipline / Precedent

• Order can not be passed which is inconsistent with judgment

of Apex Court

• Tribunal’s decision have overriding effect over departmental

clarification

• Larger Bench decisions to be followed by smaller Bench.

• Decision delivered on peculiar set of facts can not be applied

to situation in different set of facts

• One can not pick a sentence from here and there in judgment

and characterize it to be ratio of case.

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ADJUDICATION OF SCN

Reasoned / Speaking Order

• Countering grounds / defence

• Order should give reason for arriving at conclusion showing proper

application of mind

• Order should be supported by reasons of rationality

• Out come of observance of principles of natural justice

• Orders without assigning any valid reason and without discussion are not-

speaking orders

• Mere reproduction of submissions in the body of order is not enough.

Findings of deciding authority on those submissions is necessary.

• Order must give specific findings on submission, judgments relied upon

and distinguishing features pointed out by both parties

• Cryptic orders not bringing out reason why assessee faced demand set

aside. 26

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ADJUDICATION POWERSS.No.

Central Excise Officer

Amount of service tax /CENVAT credit specified in a notice for the purpose of adjudication under section 73/ 83A

1 Superintendent of Central Excise

< Rs.1 lakh (excluding cases relating to taxability of services or valuation of services and cases involving extended period of limitation.)

2 AC/DC of Central Excise

< Rs. 5 lakhs (except cases where Superintendents are empowered to adjudicate)

3 JC of Central Excise <Rs. 5 lakhs >= 50 lakhs

4 Addl. Commissioner of Central Excise

< Rs. 20 lakhs >= Rs. 50 lakhs

5 Commissioner of Central Excise

Without limit

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ADJUDICATION OF SCN

• In Shree Renuka Sugars Ltd v CCE, Mangalore (2013) 293 ELT 616

(Cestat, Bangalore), it was held that adjudicating proceedings has to be

based on evidences relied upon in show cause notice and adjudication

order could not go beyond those evidences. [ Also see: Welspun Corpn.

Ltd v. CCE, Vadodara-II (2013) 40 STT 327 (Cestat, Ahmedabad) ]

• In Vishnu Steels v. Union of India (2014) 299 ELT 292; (2013) 40 STT

408;35 taxmann.com 75 (Bombay), it was held that adjudication is

complete only after authority dispatches order. Prior to such dispatch,

adjudication remains pending, therefore application for settlement filed

before date of dispatch of order but after signing thereof, held to be

valid.

• In Sunita Ispat Pvt. Ltd. v. CCE (2014) 300 ELT 326 (Allahabad), it was

held that there must be a demand in the SCN which is to be confirmed in

the order.

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ADJUDICATION OF SCN• In Union of India v. Madras Steel Re-rollers Association (2013) 38 STT 346 (SC), it was

held that assessing/adjudicating authorities, appellate and revisional authorities are

creatures of Act and are quasi-judicial authorities. The adjudication authorities must pass

their order by exercising independent mind and without impartiality. While doing so, they

are required to consider various evidences made available to them

• In Bestilo Packaging Pvt. Ltd v. CCE, Chandigarh 2012 (25) STR 440 (Cestat, Delhi), it

was held that adjudication order cannot be based only on audit observation which were

basis to issue show cause notice when the authority fails to examine the issue

independently.

• In Delhi Public School Society v. CST, New Delhi (2014) 43 GST 421; 41 taxmann.com

377; (2013) 32 STR 179 (Cestat, New Delhi), where Department issued corrigendum to

show cause notice to convey the arithmetical computation of tax and such corrigendum

was served after expiry of normal time-limit, it was held that in fact by corrigendum, only

arithmetic re-computation of alleged liability was conveyed and there was no fresh

attribution of fact or law was made against the assessee. Hence, show-cause notice

which was served in time could not be considered as time-barred.

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ADJUDICATION OF SCNIn TRF Ltd. v. CCE & ST, Jamshedpur (2013) 293 ELT 172

(Jharkhand), it was held that–

a) Challenge to SCN is not ordinarily permissible. It is justified only in exceptional circumstances (Article 226 of Constitution).

b) SCN should not show pre-determined mind of department. Such a notice cannot be treated to be a notice to show cause in any manner.

c) Reasons for forming opinion against assessee is required to be reflected in the notice itself. It cannot render notice illegal as being issued with pre-determined mind. However, notice reflecting in unequivocal terms decision on contentious issues rather than putting question to assessee, may sometimes reflect pre-determined mind of issuing authority. This distinction is required to be found out from facts of each case.

d) Neither issuing authority nor assessee should make any prestige issue in SCN. It is especially so as quasi judicial proceedings are initiated by officers exercising vast statutory powers and jurisdiction, which should not be misunderstood to have been exercised to humiliate person holding position in assessee company.

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ADJUDICATION OF SCN

Call Book Cases

• Why some cases cannot be adjudicated

Department in appeal

Injunction from Courts

Contesting of CERA audit objections

• Need for monthly review

• March, 2013 – 8637 cases in call book

involving Rs. 21340 Crores

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ADJUDICATION OF SCN

Consequences of / Options on Adjudication

• To deposit full demand with interest and penalties within 30 days to avail an

option to only pay @ 25% of total penalty under section 78.

• To deposit demand with interest and entire penalties after 30 days of receipt

of order.

• To file an appeal to the Department against the order –

within 2 months from the receipt of the order Commissioner (Appeals)

within 3 months from the receipt of the order Cestat

• For Order passed below the rank of the Commissioner, appeal is to be filed

before Commissioner (Appeals)

• For Order passed by the Commissioner or Commissioner (Appeals), appeal is

to be filed before Cestat

• W.e.f. 6.08.2014, mandatory pre-deposit has to be deposited

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THANK YOU

FOR

YOUR

PRECIOUS TIME

AND

ATTENTION

Dr. Sanjiv Agarwal

FCA, FCS, Jaipur / Delhi

[email protected]

[email protected]