Service Tax - Recovery under Section 87 cannot be resorted to at Show Cause Notice stage - High Court quashes notices issued to debtors under Section 87
By TIOL News Service
AHMEDABAD, OCT 21, 2015: THE petitioner is engaged in providing services of industrial and civil work to various clients and is registered with the Service Tax Department under "Works Contract Service and Construction of Industrial Building and Civil Structure Service". During the period October 2009 to December 2013, the petitioner paid service tax of Rs.96,22,650/-. Consequent to the search operation conducted, it was alleged that the total service tax liability of the petitioner firm for the period from October 2009 to December 2013 was Rs.4,25,74,611/-The Petitioner also paid an additional amount of Rs 83,00,000/- during the investigation.
The department issued notices under section 87 of the Finance Act, 1994 to the debtors of the petitioner, with a direction that monies payable by the clients of the petitioner, instead of being paid to the petitioner, be deposited in the treasury of the Central Government. Thereafter, on 17.04.2015 (i.e. after issuance of the notices under Sec 87), the petitioner was served with a show cause notice. Challenging the action of the department under Section 87, the Petitioner is before the High Court. Vide order reported 2015-TIOL-1458-HC-AHM-ST, the High Court granted interim relief to the Petitioner and stayed the recovery proceedings.
The Petitioner contended that when no demand has been raised from the petitioner, there was no warrant for resorting to such a drastic measure. The senior standing counsel for the respondents, has reiterated the contents of the affidavit-in-reply filed on behalf of the respondents.
After hearing both sides, the High Court held:
+ From the facts noted hereinabove, it is evident that the proceedings initiated against the petitioner, post the search operations, are still at the stage of show cause notice. Therefore, there is no final adjudication in respect of the service tax liability of the petitioner. The respondents, however, have unilaterally worked out such liability for the period in question at Rs.4,25,74,611 /-. Thereafter, no demand for such amount has been made from the petitioner by issuing any demand notice in this regard. However, the respondents have resorted to the drastic measure of issuing notices under section 87 of the Act to the debtors of the petitioner.
+ Section 87 of the Finance Act, 1994 came up for consideration before the Jharkhand High Court in the case of Exman Security Services Pvt. Ltd. v. Union of India wherein the court reiterated the view expressed by the Uttarakhand High Court in the case of R. V. Man Power Solution v. Commissioner of Customs and Central Excise, wherein it has been observed that going by the language of section 87 of the Finance Act, any amount payable means the amount adjudged after hearing the show cause notice and this provision of section 87 is one of the methods of recovery of the amount due and payable after adjudication is done. Such claim can be made only when the final adjudication has been done after quantifying the amount due and payable by the assessee.
+ This court is in agreement with the aforesaid view expressed by the Uttarakhand High Court, namely, that recovery under section 87 of the Finance Act can be resorted to only after an amount is adjudicated to be due to the Central Government. Under the circumstances, at the stage of show cause notice when the liability of the petitioner is yet to be crystallized, it was not permissible for the respondents to resort to the drastic provisions of section 87 of the Act.
Accordingly, the High Court quashed the notices issued to the debtors under Sec 87.
(See 2015-TIOL-2451-HC-AHM-ST)
