SEPTEMBER 26, 2015

By Pradeep Jain, CA & Neetu Sukhwani, CA

THIS article is an attempt to analyse the clarification issued by the CBEC vide Instruction no. 137/46/2015-Service Tax dated 18.08.2015 which starts with the phrase "Keeping in mind the need to reduce litigation as well as paperwork and compliance formalities.." It is rarely observed that the clarifications are issued in the interest of assessees and to reduce litigation and rather the clarifications issued only add to the fire of dispute and unwarranted litigation. Moreover, even if the clarifications are issued for the benefit of the assessees, their intention is never recognised by the field formations and a new meaning is given to the clarifications issued by the Board. The Instruction dated 18.08.2015, also spells out its aim to reduce litigation and paperwork but how far it is able to meet its objective will be observed in the time to come.

Gist of the Clarification issued by the Instruction:- The clarification issued by the instruction is briefly summarized as follows:-

Questions that arise on account of above clarification:- On reading the above clarification, a number of questions arise in the minds of the assessees as follows:-

•  Whether statutory provision like that of section 73(3) of the Finance Act, 1994 or section 11A(2) of the Central Excise Act, 1944 mandating an officer not to issue show cause notice if the tax/duty along with interest is paid and intimated before issuance of show cause notice is akin to voluntary waiver of right to receive show cause notice by the assessee?

•  Whether oral adjudication of a matter is possible as per the statutory provisions contained in Finance Act, 1994 or Central Excise Act, 1994? If yes, then What is the procedure for keeping track record of such adjudication for future reference by the assessee?

•  Whether conclusion of proceedings in case of fraud without issuing show cause notice and without issuing adjudication order valid?

•  Whether is it possible for the assessee to waive its right to receive written show cause notice and subsequently revoke the same?

•  What will be the consequences if assessee waives its right to receive written show cause notice and also does not pay duty/tax along with interest and reduced penalty within a period of 30 days from the date of letter. In such a situation, Is revenue department free to adjudicate and recover the duty/tax along with interest and entire penalty without issuing show cause notice?

Well, the Instruction only clarifies about the benefits available to the assessees and does not speak of the adverse consequences that could lead an assessee.

Absence of statutory provision regarding non-issuance of show cause notice in case of fraud on payment of tax/duty along with interest and reduced 15% penalty:- It is also pertinent to note that although there is specific and express provision as regards conclusion of proceedings in cases not involving fraud, suppression of facts in the section 73(3) of the Finance Act, 1994 and section 11A(2) of the central Excise Act, 1944 wherein it is stated that if the duty/tax along with interest is paid before issuance of show cause notice and also intimated to the concerned officer in writing, there is no need to issue show cause notice for imposing penalties on the assessee and the proceedings with respect to the matter shall be deemed to have been concluded. These sections also expressly state that they are applicable only in situation when the normal period of limitation is applicable. However, practically, the benefit of the above cited sections has hardly been extended because in 99% cases, the revenue department alleges presence of intention to evade payment of duty. Leaving apart the implementation part of these sections, it is submitted that when there is express provision for conclusion of proceedings in the statue, whether, an instruction issued by CBEC has the power to extend similar benefit in cases of fraud, collusion, suppression of facts etc. in line with the amended penalty provisions. If the language of amended section 78 and section 11AC is pursued, it is found that the new provision has been inserted to conclude the proceedings if the service tax/excise duty along with interest and reduced penalties are also paid within a period of 30 days from the date of service of notice to the assessee. The amended penalty provisions do not even whisper about the requirement of issuance of show cause notice. Rather, the benefit of the reduced penalties is required to be counted from the date of issue/service of show cause notice. However, the clarification issued by the instruction seeks to give answers regarding the requirement to issue written show cause notice, if the benefit of reduced penalties is availed by the assessees. In our opinion, to the extent the instruction seeks to clarify that assessee may request waiver of written show cause notice is ultra vires the statutory provisions. This is for the reason that as per the statue, the officer is not required to issue show cause notice only in the circumstances covered by section 73(3) of the Finance Act, 1994 and section 11A(2) of the Central Excise Act, 1944. There is no express provision that if the assessee agrees to the duty/tax along with interest and reduced penalty, the proceedings can be concluded by way of a simple letter. We submit that even in cases where the assessee chooses to exercise the benefit of reduced penalties, the show cause notice issued is required to be settled by way of passing of an order. Mere exercise of beneficiary provisions by the assessee would not absolve the adjudicating authority from passing of an order concluding the proceedings initiated vide the impugned show cause notice. As such, when the adjudicating authority is required to pass order as otherwise on issuance of show cause notice, the said procedure cannot be dispensed with by merely assessee agreeing to discharging the duty/tax along with interest and reduced penalty by way of letter. It is submitted that when a statue requires certain things to be done in a particular manner, the said procedure cannot be altered by way of issuance of an instruction without being any statutory backing for the same. In our opinion, when the amended sections do not incorporate the provision as regards non-issuance of show cause notice in cases the assessee avails the benefit of reduced penalties, the clarification issued by the CBEC cannot alter the said situation. Furthermore, sections 11A and 73 were amended along with the amended penalty provisions under section 76, 78 of the Finance Act, 1994 and 11AC of the Central Excise Act, 1944. If at all, the government wanted that the provisions similar to those contained in section 73(3) and section 11A(2) pertaining to cases of normal period of limitation be also introduced even in cases of extended period of limitation, the provisions of section 73 and 11A should have been amended. The clarification issued by instruction cannot extend the benefit to the assessee which is not otherwise provided for in the statue.

Certain observations on the clarification issued:- The authors also wish to highlight certain absurdities or lacunas in the clarification issued as follows:-

•  This is a mischievous clarification in the sense that it does not indicates conclusion of proceedings merely on payment of tax along with interest and 15% penalty but only when written request is made that no written show cause notice is required by assessee. Furthermore, it permits oral representations to be made, for which no future evidence and tracking is possible. Not only this, it also mentions that the assessee is required to give written confirmation that the assessee has been informed about all the grounds orally along with its quantification. However, as regards the submissions made by the assessee orally, there is no written evidence available.

•  There is lot of difference in the provision that 'no show cause notice will be issued' and the provision that "the assessee will waive its right to receive show cause notice in writing". In the former case, the provision mandates that the proceedings will be treated as closed and there will not be any requirement to issue show cause notice in future for the same. However, the latter case reveals that the assessee himself waives its right to receive show cause notice and in future, there is possibility that the revenue may litigate the issue again. This may complicate the situation further as the assessee will not have any track record of oral representation made by him.

•  The provision that the thirty day period is to be computed from the date of receipt of letter by the department is highly deceptive as there is no such provision in the statue.

•  This circular states that if multiple issues involving different monetary values arise from the same proceedings, then the sum total involved in all the issues arising from the same proceedings should be considered for conclusion of proceedings. This indicates that if the audit report contains 3 different issues, then, it is not possible for an assessee to conclude its proceedings with respect to 2 issues only.

•  It is also clarified that there is no need to issue an adjudication order and the conclusion of proceedings should be intimated to assessee in writing. This closes the opportunity of preferring appeal on the concluded issue because no order will be passed. This circular itself also mentions that no review of such proceedings will be undertaken on part of revenue department also. This provision seeks to put the assessees to whom show cause notice has been issued at different position. This is for the reason that when show cause notice has been issued, the adjudicating authority is required to pass the order in original. It cannot simply issue a letter regarding conclusion of proceedings and there is also no explicit provision that no order shall be passed if the assessee exercises option of reduced penalty after issuance of show cause notice. As such, the order passed after issuance of show cause notice shall be appealable whereas if the assessee exercises the option waiving the right to receive show cause notice, then in that case, the option of filing appeal will automatically be closed. Simultaneously, the assessees will also be open to the risks of review by the revenue department.

•  The circular also clarifies that the provisions of section 73(3) and clause (i) of proviso to section 76 are to be read harmoniously thereby meaning that if assessee pays service tax along with interest either before issuance of SCN or within 30 days of issuance of SCN, proceedings shall be deemed to have been concluded and no penalty is imposable in such cases. However, if both the sections are to have the same effect, then every prudent assessee will pay the service tax as soon as possible and thereafter pay interest within 30 days from the date of issuance of show cause notice. Moreover, the new section 76 seeks to dilute the importance of section 73(3) of the Finance Act, 1994.

Good Bye words:-

The maintainability of the instruction clarifying issues that are nowhere specifically provided in the statutory provisions is highly doubtful. The clarifications made in this Instruction lack statutory backing and so every prudent assessee will think twice before opting for availing the benefit contained in this Instruction. Moreover, since the benefit of reduced penalties and conclusion of proceedings can be obtained even within a period of 30 days from the date of communication of the show cause notice, it would be safe to opt for the specific provisions contained in the statue rather than believing on the clarification issued by the Instruction that has no legal backing. Furthermore, there is no extra benefit in placing reliance on the clarification issued by this Instruction and rather relying on this Instruction will only invite unwarranted disputes and litigation.