AUGUST 26, 2019

By R Sai Prashanth and V Baratwaj

WITH the Goods and Services Tax (GST) celebrating its 2 nd anniversary in July 2019, one major area of concern in the words of our Finance Minister in her budget speech 2019 is "the huge pending litigations from the pre-GST regime". To address the same, a Legacy Dispute Resolution titled "Sabka Vishwas (Legacy Dispute Resolution) Scheme, 2019" (hereinafter referred to as the 'Scheme') was proposed under the Finance Bill, 2019. The Bill has now become an Act w.e.f. 01.08.2019.

Broadly, under the Scheme, when an eligible assessee makes payment of a portion of the amount of demand in question, he is provided relief from payment of the remaining amount of demand along with full waiver of interest, penalty and prosecution. The scheme appears lucrative for assessees burdened with legacy litigations under the erstwhile indirect tax regime. However, there are a few critical areas that remain un addressed in the Scheme which makes it lose its sheen.

This article highlights and discusses some of the burning questions which remains unanswered on reading of the provisions of the Scheme as on date.

1.  Are disputes pertaining to CENVAT credit covered under the Scheme?

Section 121(d) of the Finance Act, 2019 (hereinafter referred to as the 'Act') defines the term 'amount of duty' to mean the amount of Central Excise Duty, Service Tax and cess payable under the indirect tax enactment. Further, as per Section 123, the scheme benefit is available only in respect 'amount of duty' involved in a particular proceeding.

From the above, it can be observed that disputes pertaining to eligibility of CENVAT credit is not covered in the definition of 'tax dues'. While it may be argued that 'Central Excise Duty' includes cenvat credit also based on Section 2A of Central Excise Act, 1944, there continues to be ambiguity on a plain reading of the Scheme. The implication of such non-coverage is that in cases where the pending litigation pertains to CENVAT credit eligibility, the assessee may not be eligible to avail the benefit of the scheme.

Further, for the same reasons, the scheme may not be applicable to pending litigations in respect of CENVAT credit reversals, for instance under Rule 6 or Rule 3(5) of the Cenvat Credit Rules, 2004.

There is uncertainty as to whether such non-inclusion is deliberate, especially since in the erstwhile Kar Vivad Samadhan Scheme introduced vide Finance Act, 1998, which was also aimed at closure of pending litigations, the term 'tax arrears' as per Section 87(m)(ii) specifically included 'credit of duty'. Thus, while the erstwhile scheme specifically covered MODVAT credit disputes also in its domain, the present scheme conspicuously does not cover such disputes.

This non-inclusion will result in a major chunk of litigants not being eligible for the benefits of the scheme. If the intention of the Finance Minister was to eliminate legacy litigations, not including credit disputes under the scheme's ambit is only counterproductive.

2. Is a show cause notice issued only for demand of interest covered under the Scheme?

As per Section 124(1)(b), the Scheme provides for full waiver of penalty and late fee in case where a show cause notice is issued proposing to demand only penalty or late fee respectively, subject to the condition that the entire demand either stands paid or is 'NIL'. Such benefit is however not granted in case a notice is issued demanding only interest.

The intent of the scheme could be gathered from Section 129 of the Act which states that when an assessee makes payment of the amount payable under the scheme, no further demand, interest and penalty is payable. In such a scenario, non-inclusion of a show cause notice which is issued demanding only interest seems to be defeating such intent.

At this juncture, it is important to note that the erstwhile Kar Vivad Samadhan Scheme had covered interest also as part of 'tax arrears'. In such a scenario, a question arises as to whether the non-inclusion in the present scheme is due only an inadvertent omission or a deliberate deletion.

3. Are disputes under Section 11D of Central Excise Act, 1944 and Section 73A of the Finance Act, 1994 eligible for relief under the Scheme?

As mentioned above, Section 121(d) of the Act defines the term 'amount of duty' to include Central Excise, Service Tax and cesses payable under the indirect tax enactment. This definition does not seem to cover disputes raised under Section 11D of Central Excise Act, 1944 and Section 73A of the Finance Act, 1994 which deals with cases where an assessee collects amounts representing excise duty or service tax, as the case may be, and does not deposit it to the credit of the Government.

The erstwhile Kar Vivad Samadhan Scheme had covered these disputes under its ambit by the mention of the words 'any amount representing duty' in the definition of 'tax arrears'.

4. When is an appeal said to be 'heard finally'?

As per the provisions of the Scheme, an assessee is ineligible to make declaration under the Scheme in case a show cause notice or an appeal filed before the appellate forum is 'heard finally' on or before 30th June 2019.

As the scheme stands today, there is no clarity as to when an appeal is said to be 'heard finally'. If suppose, the appeal has been heard by a forum before 30th June 2019 and Order was reserved but is posted for re-hearing either suo moto by the forum or on request from either party, will such assessees be eligible to make declaration under the scheme? There is no express answer for this in the absence of meaning of the term 'heard finally'.

5. Will the embargo for appeal 'heard finally' as on 30.06.2019 be applicable even to 'amount in arrears'?

Proviso to Section 123(a) of the Act states that the amount of duty involved in appeal which has been heard finally on or before 30th June 2019 shall not be regarded as 'tax dues'. There is no such proviso under Section 123(e) of the Act in respect of 'amount in arrears'.

Section 125 on the other hand provides ineligibility from filing declaration under the Scheme to cases of appeal as well as SCN which has been 'heard finally' on or before 30th June 2019.

From the above-mentioned provisions, it can be observed that, although no embargo is created in definition of 'tax dues' to exclude the amount of duty as 'amount in arrears' in case where appeal has been heard finally as on 30th June 2019, the ineligibility provisions under Section 125 does not allow a person to make a declaration in such a scenario.

The above provision may lead to a situation where diligent assessees would become ineligible to file declaration under the scheme for no fault on their part especially when they are regular in the hearings before the forum, due to which the appeal is heard finally on or before 30.06.2019.

The intent of the Scheme in this respect can be understood from Section 123, where the embargo in respect of appeal 'heard finally' is present only in case of 'appeal pending' and not in case of 'amount in arrears', though Section 125 creates an artificial embargo by extending the ineligibility to even 'amount in arrears'. Hence, the ineligibility provision is against the intent of the scheme in respect of 'amount in arrears'.

6. Should the ineligibility to the Scheme u/s 125 of the Finance Act be seen qua the person rather or qua the issue?

Section 125 of the Act states that all persons are eligible to make declaration under the scheme except in the situations mentioned therein. It creates an embargo on a person from availing the Scheme in to to instead of barring him vis-à-vis the particular issue which has suffered the ineligibility.

For instance, Clause (d) of Section 125 states that a person is ineligible to make declaration if he has been issued a show cause notice under the indirect tax enactment for an erroneous refund. On plain reading of this clause, it can be inferred that, say, in case a person has been issued 2 notices - one for demand of service tax and another for recovery of erroneous refund, he would not be eligible to make declaration under the scheme in respect of both the matters since the ineligibility is in respect of the 'person' and not the issue of refund.

In contrast, Clause (b) of Section 125 provides that no declaration can be made in respect of an issue for which a person is convicted for any offence punishable under any indirect tax enactment. This is the only provision which provides for ineligibility qua the issue rather than qua the person. Considering the overall intention of the Scheme, it can be inferred that the ineligibility is proposed only in respect to the issue, although the provision reads differently.

7. Does the ineligibility to the Scheme continue to apply if a Settlement application is held to be not maintainable by the Settlement Commission? Or if the Commission remands the matter back to the adjudicating authority? Or if a Writ Petition against the Order of the Settlement Commission is pending as on 30.06.2019?

Section 125(1)(g) of the Act states that a person is ineligible to make declaration in case an application is filed before the Settlement Commission for settlement of a case. But will the eligibility continue if the settlement application is held to be not maintainable? Or if the Settlement Commission remands the matter to the adjudicating authority? On plain reading of the provision, it can be inferred that persons covered in the above scenarios are not eligible to make declaration under Scheme. There is no provision to cover cases where the application is disposed of as above.

Also, in case where a Writ Petition is filed by either party against the order of the Settlement Commission and the same is pending as on 30.06.2019, there is no clarity as to whether such proceeding would be covered by the scheme. In addition to the embargo created in the threshold by providing for ineligibility to cases where application is filed before Settlement Commission, there are two other reasons for this non-clarity.

Firstly, there is no clarity as to whether Writ Petitions per se are covered under the Scheme. Secondly, there is a doubt as to whether order of Settlement Commission would be regarded as 'Order' under the Scheme. The term 'Order' is defined under Section 121 (o) of the Act to mean an order of determination under any indirect tax enactment, passed in relation to a show cause notice under such indirect tax enactment. There is no clarity as to whether an order of the Settlement Commission would constitute an 'order of determination'.

Way Forward?

In conclusion, the above lacunae need to be addressed to ensure that the Scheme does not lose its attractivity. However, the FAQs issued by Central Board of Indirect Tax and Customs (CBIC) in this regard does not provide clarity on any of the above issues. Despite the fact that the Act has come into force and the FAQs not addressing the issues, all is not lost as the Government can still issue a Circular and clarify the above issues. Such clarifications will lead to increased participation and also aid in preventing unnecessary litigation on the scope of the Scheme, thereby attaining the objective of "reducing legacy litigation".

Only then will the Sabka Vishwas Scheme provide solutions to SABKA PROBLEMS.

[R. Sai Prashanth is Principal Associate and V. Baratwaj is Associate in Lakshmikumaran & Sridharan, Chennai. Views expressed are strictly personal.]