JANUARY 05, 2015

By Rajesh Pandey

THERE is a widely believed impression that the Dispute Settlement mechanism of Central Indirect Taxes is in shambles, and it imposes disproportionate costs on the Taxpayer, which are definitely avoidable. It is also believed that being a producer of goods or services, the Taxpayer is the positive contributor for increasing the supply of goods and services in the economy and therefore Government policies need to take care of his genuine concerns so that he can deploy his resources of time and money in productive channels, instead of Tax litigation dictating his economic decisions primarily. This paper is an attempt to suggest practical methods to move in that direction.

There are a few systemic causes for litigation of Central Indirect Taxes. It is felt that the same need to be identified and addressed so that litigation is minimised. The following such causes are identified and their remedies are also proposed.

(a) Lack of uniformity in decisions

It has been observed that issues of similar nature involving same legal provisions are decided in different ways by the Adjudicating Authorities, (at times, even within a Commissionerate/Zone) resulting in multiple Appeals and a large volume of litigation.

Suggestion : Volume of litigation can be reduced if a permanent database in respect of all Show Cause Notices, starting from the first point of litigation, along with regular update of the same, recording the gist of decision and status of appeal, etc. is maintained in an integral manner at Commissionerate/Zone/All India level. If demand on any issue raised in any Show Cause Notice is dropped and the Order-in-Original or the Appellate Order of Commissioner (Appeals)/CESTAT/High Court/Supreme Court is accepted by the Department in review, then the same must be promptly entered in the said database, so that it is available to be viewed by all other Officers. This will ensure that subsequent periodical Show Cause Notices are not issued in that Commissionerate/Zone/All India level on that settled issue.

(b) Lack of clarity in legal provisions – Sections, Rules or Notifications.

At present, a large number of Show Cause Notices are being issued periodically, as there is lack of clarity in the manner a legal provision is drafted, thereby not conveying the intent of that legal provision clearly and unambiguously.

Suggestion : Such legal provisions which are resulting in large number of Show Cause Notices need to be identified, which can be easily done by analysing the database proposed at point (a) above. Thereafter, the Board may form an Expert Committee of Officers and Tax Consultants/Lawyers to give recommendations on the issues being litigated. The Expert Committee shall give its recommendations on each such issue after considering all relevant case laws & precedents. After considering the views of the said Expert Committee on each such issue, the Board may issue Policy Circulars clearly conveying the intent of legislation behind the legal provision (Section, Rule, Notification, as the case may be), so that decisions can be taken by all original Adjudicating Authorities and Appellate Authorities, including CESTAT/Courts, in light of the Board's Circular conveying the intent of the legislation. Even before the proposal of a comprehensive database of litigation is operationalised as proposed at (a) above, all the field formations may be asked to submit issues involved in current demands/refunds, which are resulting in repeated Show Cause Notices/Orders-in-Original, in respect of the same Taxpayer or in respect of different Taxpayers. After studying the Orders-in-Original of all Adjudicating Authorities, of both demands and of refunds, each Commissionerate may be asked to submit five such issues which are resulting in repeated litigation. After consolidation of these issues at Zonal level, each Chief Commissioner may submit five such issues of his Zone every month to the Board for issuing Policy Circulars , indicating the numbers of Show Cause Notices/Orders-in-Original linked to that issue in last 3 years. The proposed Expert Committee shall give recommendation on each issue and the Board shall issue Policy Circulars on each such issue. Priority shall be given by the Board to those issues which have maximum Show Cause Notices/Orders-in-Original linked to them at all India level. It is felt that with this methodology, in a period of around one year, based on the Policy Circulars issued by the Board, the existing and future litigation will substantially come down.

(c) Non utilization of legal provisions enacted to reduce litigation

It is also observed that even though the legal provisions relating to 'specified records' and reduced penalty in cases involving detection from specified records during the course of Audit, Investigation or Verification are existing in the statute since 2011 (Section 73(4A) of the Finance Act, 1994 or Section 11A(6) of the Central Excise Act, 1944), still there is a tendency among Officers to issue Show Cause Notices proposing imposition of penalty equal to duty/tax not paid.

Suggestion : There should be a conscious attempt on the part of Departmental Officers to induce Taxpayers to use these legal provisions so that litigation is minimised. The Officers conducting Audit / Verification of records of the Taxpayer, or even during Investigation, should guide the Taxpayer to make use of these Sections and avoid litigation. All such cases, wherein Show Cause Notices were avoided due to utilization of the provisions of Section 73(4A) of the Finance Act, 1994 or Section 11A(6) of the Central Excise Act, 1944 by the Taxpayers, should be reflected in the Performance Report of those Officers who guided the Taxpayers to utilize these provisions and thereby avoided litigation.

(d) CAG Audit Objections

As per the current instructions of the CBEC, Show Cause Notices are essentially required to be issued for every CAG Audit Objection. For those CAG Audit Objections which are accepted by the department at any stage (half–margin, LAR, SOF or Factual Note, DAP), the said Show Cause Notices are adjudicated. However, for those CAG Audit Objections which are not accepted by the department, the Show Cause Notices are periodically issued and kept in Call Book. However, the Taxpayer is required to periodically reply to such periodic Show Cause Notices, even though the department is aware that all such Show Cause Notices will not be adjudicated in foreseeable future. It has been noticed that Show Cause Notices have been issued for 10 to 15 years on issues involving CAG Audit Objections causing multiple litigations. Such Show Cause Notices are examples of entirely avoidable litigation with Taxpayers. Further, the Taxpayers are required to reflect the demands raised in these periodical Show Cause Notices in their books of accounts. These demands which are reflected as contingent liability in the books of accounts unnecessarily spoil the financial health of the Taxpayer in their books of accounts.

Suggestion : A Standing Committee (consisting of Commissioners / Principal Commissioners / Chief Commissioners / Principal Chief Commissioners) may be constituted in the Department to examine on monthly basis the CAG Audit Objections which have not been accepted by Commissioners / Principal Commissioners, in-charge of Commissionerates. The Commissioners / Principal Commissioners in-charge of Commissionerates will place those CAG Audit Objections which have not been accepted by them, before the said Standing Committee within three months from the date of initiation of that CAG Audit Objection in the form of Half-Margin / LAR. The Standing Committee shall give its categorical recommendation in respect of each such CAG Audit Objection to the Board in two months of the Objection having been placed before it. A decision will then be taken by the Board regarding acceptability or otherwise of each such CAG Audit Objection. If the CAG Audit Objection is accepted by the Board, it will issue a Section 37B Order (for Central Excise & Service Tax issues) / Section151A Order (for Customs issues) and the Show Cause Notice will be decided accordingly. For those CAG Audit Objections which are not accepted by the Board, a Circular will be issued by the Board and the Show Cause Notice will be dropped immediately. By this method, only one Show Cause Notice will be issued and decided for each CAG Audit Objection which has not been accepted by the Commissioners / Principal Commissioners in-charge of Commissionerates. The whole process will take less than one year time and, therefore, it will bring down the number of Show Cause Notices resulting from CAG Audit Objections substantially.

(e) Litigation at lower level on a recurring issue, even though the matter is pending at a Higher Judicial Forum

At present, if on any recurring issue, an appeal of the Taxpayer is pending before CESTAT, periodic Show Cause Notices are issued and demands are confirmed, along with interest, besides imposing penalty. The Taxpayer is thus forced to file appeal before Commissioner (Appeals), knowing fully well that the Commissioner (Appeals) will decide against him. Then he files second appeal before CESTAT where he gets decision in respect of all the subsequent periodic Show Cause Notices on the same lines as the CESTAT decision on his first Show Cause Notice on that issue. The entire process of Adjudication/Appeal by Officers below CESTAT, including Commissioner (Appeals), is nothing but avoidable litigation for the Taxpayer, in such recurring cases.

Suggestion : If an issue of any Taxpayer is pending before CESTAT, all periodic demands issued to the said Taxpayer for the subsequent periods on the same issue should skip the stages of departmental adjudication and Commissioner (Appeals) and such periodic demands should be tagged to the original case pending before CESTAT. Provisions in the Central Excise Act, 1944, the Finance Act, 1994 and the Customs Act, 1962, which deal with filing of appeals before CESTAT, may be suitably amended for this purpose. It will avoid this large quantum of unnecessary litigation at the lower stage. Simultaneously, a provision may be inserted in Chapter VIA of the Central Excise Act, 1944 and Chapter XV of the Customs Act, 1962 that the Taxpayer and the department shall file a ‘Joint Statement' before CESTAT affirming that - "the issue involved in this periodic demand for the period ____ to ____ is the same as the issue that is pending before CESTAT" for the said Taxpayer. Whenever CESTAT decides the first appeal on this issue, all the periodic Show Cause cum Demand Notices will get decided at CESTAT level automatically, along with corresponding interest liability, thereby saving the Taxpayer from the effort and cost of adjudication before the lowers level of Adjudicators & of Appeal before the Commissioner (Appeals). This suggestion is on the lines of the provisions of Section 73(1A) of the Finance Act, 1994 and Section 11A(7A) of the Central Excise Act, 1944.

(The author is Commissioner, Service Tax (Appeals), Pune & the views expressed are strictly personal.)