OCTOBER 05, 2015

J V Niranjan, Adv. & V Kalyanapasupathy, Consultant

AMENDMENT to Section 35F of the CEA, 1944 has reduced the work of the Tribunal and the Commissioner Appeals as also the work of the Advocates as there is no stay petition to be filed and argued. Once 7.5% or 10%, as the case may be,is paid, stay is automatic and hence the petition for staying recovery is not being filed at all. Now that this provision is in the statute book for little more than an year, perhaps the time has come to take a look at the actual operation of this provision and examine as to whether this cured the malaise or has it created even more problems. Few other questions too crop up at this juncture. Does this amendment not spawn a lackadaisical approach and perhaps create a situation where there would not be any accountability? Can this be a weapon in the armour of the Department? Another question which is more worrisome is that given the dismal record of success of the Department at the appellate level, was it right on part of the Government to bring in a provision to compel assesses wishing to pursue appeal to shell out pre-deposit - mandatorily - notwithstanding the merits and sustainability of the demand. Surely, the Government would be aware that the number of cases decided in favour of the Department at the level of Tribunal and upwards is pretty low.

Given that an appeal in CESTAT takes around 3 to 8 years or at times even more, is not the requirement to pre deposit draconian with little interest payable by the Department in case the appellant succeeds in the appeal? Admittedly,the pre deposit would be returned, but when one factors in inflation and the dimunition in the value of money due to efflux of time, the amount received back would be much less while the Government enjoys the amounts as interest free deposits. While certain appeals may need this treatment, others too would get bunched up and grave injustice would be caused to them by this provision.

On the other hand, if the quasi judicial officers are judicial, then the impact of this amendment would be much reduced. But the question is "are they". One gets an impression that the officers of the Department have deleted the word "drop" from their dictionaries, with all the demands (barring a very little percentage) being confirmed with orders being passed in certain cases with a casual disdain for principles of adjudication, judicial discipline and natural justice, be it on their own accord or due to certain other external circumstances. Is there a thought process that if a demand is confirmed, irrespective of its merit, the authority is safe from questions while he has to face a barrage of questions and insinuations if the demand is dropped? Adorning high positions in tax administration, the quasi judicial authorities ought not shy away from following their conscience and not allow external pressures to cloud their judgement and if this resolve is not shown by such officers, it is a pathetic situation.

While the above may appear to be sweeping statements, these are not so as evidenced from the following experiences of the authors and those shared by their friends in the profession:

i. In a case involving Refund of Cenvat Credit, a quasi-Judicial officer rejected the refund on the only ground that the assessee had not fulfilled the procedures set out in a notification that was not operational during the relevant period, since superseded by a subsequent notification. In the litigation before Commissioner (Appeals), the appeal was dismissed, and the order of the adjudicating authority upheld.

ii. Few assessees, on their own volition paid the service tax remaining unpaid with appropriate interest for the past periods and intimated the fact to the Department with a request to treat the same under Section 73(3) of the Finance Act. Based on the intimation, the Department registered offence cases against the assessees, and issued Show Cause notices invoking extended period of limitation alleging "suppression of facts" during the relevant point of time (!). Another fact relevant in this regard is that no such Show Cause notices were issued to another set of assessees, in identical facts and circumstances while all such assessees fall under the Jurisdiction of the same Division.

iii. An exporter was issued with a show cause notice for non-payment of service tax under reverse charge on "foreign bank charges" deducted from his export proceeds. The exporter (erroneously) admitted his liability and paid the amounts demanded by availing VCES scheme. After issuing VCES-3, and after one year from the date of their VCES declaration, orders confirming the demands raised in the Show Cause notice was passed, while noting the fact of perusing the VCES files specifically in the Order. The crux of the matter is that the amounts paid under VCES were appropriated against the demand, while the acknowledgment of discharge issued in VCES-3 still holds good.

iv. Another exporter was issued SCN on the same issue - service tax on "foreign bank charges" for 5 years invoking extended period of limitation and the demands were confirmed. The exporter pursued the matter with Commissioner (Appeals), citing the circular issued by Service Tax Commissionerate, Mumbai, wherein the clarification provided is that the banks in India, through whom the proceeds were realised are the service recipients and are only liable to tax and that the service tax law has to be uniform throughout the country. Commissioner (Appeals) rejected the appeals and upheld the order of the adjudicating authority by recording a finding that the amounts deducted on account of foreign bank charges out of the export proceeds was only from exporter and hence they have only received the services, making the circular inapplicable.

v. Another assessee was issued a Show cause notice, based on the change in stand of the Department communicated through CBEC circulars. The last circular was dated May 2014, by which the CBEC viewed that a particular commodity would classify in a heading that would attract duty. Department issued SCN to the assessee, invoking extended period of limitation demanding duty for the last 5 years, in gross violation of settled principles of law. [This case is yet to be adjudicated, but we are certain that the entire demand will be confirmed, making the assessee to pay 7.5% to pursue appeals.]

vi. Many exporters in Tirupur, were issued with Show Cause notice for recovery of drawback on account of non-submission of Bank realization certificates. In some cases, the Bank realization certificates were submitted much earlier to the date of Show cause notice, in some cases, the Bank realization certificates were submitted upon receipt of show cause notice and in many other cases, neither the SCNs, nor the intimation for Personal hearing were received by the exporters, but strangely enough, only the orders for recovery were received - much strange, in some of the orders, specific mention as to the return of the P.H.intimations were also recorded. Nevertheless, in respect of all the cases that were pursued before Commissioner (Appeals), Coimbatore, during the period 2013-14 and 2014-15 together with copies of the respective BRCs, the recoveries ordered were upheld, while rejecting the appeals of the respective exporters, forcing them to file revision applications after remitting the application fee.

vii. In yet another case, rebate claims filed by an assessee were returned with defect memos pointing out trivial objections after over a week's time specified in the CBEC supplementary instructions. When the assessee re-filed the claims, the date of re-filing was taken as relevant date for computing the limitation of one year, in a blatant departure from the settled position of law - the date of filing the claim for the first time to be reckoned - and rejected through Orders in original. The assessee has gone on appeal before Commissioner (Appeals) and a decision is pending at the time of writing this article. And, we are pretty much confident of the performance of the 'quasi-judicial' justice delivery system of the Department, we could only expect Commissioner (Appeals) to reject the appeals of the assessee while upholding the orders of the lower authority.

The existence of this provision for mandatory predeposit can be a instrument of harrasment as an officer for reasons whatever it may be, issue a futile Show Cause notice, confirms the demand and makes the hapless assessee run from pillar to post, making him lose hard earned money by way of legal expenses and pre-deposit in the process, not to mention the fact that his attention is diverted from running his business to fighting litigation.

Given that litigation is expensive and moreso when it invloves multiple tiers, in case of small demands, it may not be practicable to follow the route of litigation and the assessee may well decide to pay the Demand rather than pay the Advocate or Consultant, nothwithstanding the merit in the matter in which case the Government would be unjustly enriched at the cost of the tax payer which is a deplorable state of affairs.

Interestingly the CBEC too seems to be aware of the acute malaise in the system and this is evidenced from the fact that in the Result Frame Work document of CBEC for the year 2014-15, data is provided only for the percentage increase over the previous year in favour of revenue and does not give the success in absolute numbers. Details of number of cases decided by CESTAT during any financial year, of which how many are in favour of the Department and how many are against is not provided. Is it that the number is too small to be shared ?

The CBEC however has been quite diligent in analysing the reasons for revenue losing out on cases and has been sharing its results of such analysis in the form of Instructions to its officers and these instructions do make an interesting read.

i. CBEC Instruction in Circular No. 5/92, dated 13-10-1992 - wherein CBEC had expressed its concern, which is better put in its own words : Facts in each case have to be studied by the Collectors to make sure that there are good and sufficient reasons to invoke the extended period. Indiscriminate use of such restricted powers even at high levels leads to fruitless adjudications with the gamut of appeals and reviews, inflates the figures of outstanding, confirmed and unconfirmed demands and above all, avoidable harassment of the assessees.

ii. CBEC Instruction in F.No. 392/164/92-JC dated 02/01/1992 - wherein the CBEC has directed its officers to apply their mind and avoid filing frivolous appeals in a routine manner ;

iii. CBEC Circular No. 312/28/97-CX dated 22/04/1997 - wherein CBEC has instructed not to issue Show Cause notices indiscriminately by invoking extended period of limitation, when mere non-declaration is not sufficient, in the absence of positive act - to avoid unnecessary litigation and a feeling of harassment by the assessees ;

iv. CBEC Instructions in Circular No. 710/26/2003-CX. dated 23/04/2003 - wherein the Departmental officers are instructed to adhere to Judicial discipline. A couple of findings by the C&AG, based on which the said circular was issued was "Application of wrong rules" and "Filing of frivolous appeals" being the cause for losing the cases;

v. MF.DR.Instruction F.No.390/Review/2/2012-JC dated 23/11/2012 - wherein the CBEC has expressed its concern on the mechanical and callous manner in which the Commissioners constituting the review committee are functioning;

vi. CBEC Instruction in F.No. 201/01/2014-CX-6 dated 26/06/2014 - wherein the CBEC has reiterated its endeavour that its quasi-judicial officers adhere to Judicial discipline to not to make it end up red-faced before Higher Courts;

While CBEC has been issuing such instructions, its seriousness and commitment seems questionable as evidenced by the fact that it has to issue so many instructions to its officers who, at the first instance ought to be aware of these by themselves in order that they discharge the noble task of adjudication conferred upon them by law and it is a matter of great shame that these instructions are issued in the first instant and it is much more a matter of greater shame that these instructions need to be repeated. What seems clear, as borne out by the frequency of the instructions and personal experience is that these are followed more in breach. A question that crops up at this juncture is would the CBEC have allowed its officers to get away with breach of its instructions if the instructions relate to collection of duty? Apparently both the CBEC and its officers do not seem to be concerned with principles of adjudication nor of the hapless tax payers inasmuch as the sufferer is the tax payer and not the officers, were the instructions not followed.

Certainly it does seem that non adherence to these instructions is not penalised in any manner as is evidenced by the impunity with which the said instructions are treated with casual disdain.

The recent instruction F.No. 500/39/2015 dated NIL (listed in http://www.cbec.gov.in/deptt_offcr/circ-ins.htm) is hilarious as well as disturbing inasmuch as it acknowledges the deep rooted malaise in the system.

It need not be overemphasized that the adjudicating and appellate authorities are required to pass fair, judicious and legally sustainable speaking orders which can withstand judicial scrutiny at higher appellate fora. Apprehensions have, however, been raised that the above instructions have created a 'fear of vigilance' amongst the field officers, due to which some of the adjudicating/ appellate authorities are resorting to confirmation of demands through non-speaking orders/ without following judicial discipline/ non consideration of pleas put forth by the parties, etc. merely due to a fear of coming under vigilance scrutiny. Such unjust orders, besides attracting adverse judicial scrutiny, cause harassment to the trade and undermine the efforts of the Department in providing a non-adversarial tax regime to taxpayers.

...... The fear of vigilance action against adjudicating/ appellate authorities in respect of adjudication/ appeal orders, therefore, appears to be totally unfounded and misplaced. With a view to remove any such misgiving/ 'fear of vigilance' in adjudication/ appeal matters, further clarifications are being issued .....

The instruction above, while acknowledging the fact of harassment to assessees, mis quantifies the number of officers resorting to confirmation of demand as "some", but in reality, it is not "some" but "except some". And, the following are the words of the President of CESTAT, Justice Raghuram, which would substantiate it could be "except some" as against "some" in the said instruction.

This is a compulsive evidence of a deep pathology in departmental adjudication. Two interpretations are possible - one that the judges are not able to understand the law as well as the commissioners are able to - one interpretation, which is comfortable for the departmental family....

....If the pro-family interpretation is to be assumed as hallucinatory, then we are left with the inescapable conclusion that something is pathologically, terminally and seriously wrong with our departmental adjudication.

.... Departmental adjudication is a blasphemy. If a revenue collecting Chief Commissioner is writing the confidential report of an adjudicating Commissioner...

Such being the state of affairs, was the Government right in making the amendment to Section 35F? Does this amendment unwittingly not made into a weapon of harrasment and does this not strike at the very root of the avowed policy of the Government to provide a conducive environment for entrepreneurship? Should the officers be allowed to act with such impunity and disdain and should they be allowed to get away for not being true to their work?

Another interesting instance of inequality is the unfair treatment meted out to the tax payers, by the very law itself. While the Money of the Government seems to be very costly, the Government feels that the tax payers money is very cheap as is evidenced by the fact that interest that is payable to Government is in the range of 18% to 30% depending upon the time frame, whereas that which is payable to the taxpayer is only 6%. While it is a settled position in law that interest is compensatory in nature, the present interest rates seem to be penalising in nature, especially in the light of the great disparity (in interest rates) in treating what is due to Government and what is due from Government.

Had the Legislature been fair, it ought to have fixed the rate of interest at the same level. And, with all the above entrepreneur support initiatives, let us seek investments to "Make in India" with great pride!