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Stop the parroting SCNs

JANUARY 13, 2021

By K S Naveen Kumar, B.Com.,ML (Contracts)., Advocate, Bengaluru

A recent trend in Indirect Tax litigation is to compare the income tax returns with ST-3 returns filed under Service Tax law and seek to tax the unexplained difference. However, this has been carried to an extreme length to demand service tax from exempt persons and persons covered under reverse charge. Many cases have been foisted maliciously and vexatious proceedings have been commenced for statistical purposes. The explanation offered during the investigation/enquiry is cast away to the winds and the notices have been issued using templates and formats, which do not even discuss the nature of services. No attempt is made to understand or analyse the so-called services and its taxability.

Wild conjectures and surmises and extreme revenue bias triggers the fertile imagination of tax officers, who go ahead and issue notices without application of mind. The persons who have received the notices would include those exempt from service tax or whose services are covered under reverse charge mechanism, where the recipient is expected to pay tax or has already paid tax or persons whose activity is not liable to tax. Ironically, it may even cover exporters.

In the garb of checking evasion and detecting revenue leakage, the departmental officers have unnecessarily dragged these persons to litigation, which would not yield any results ultimately. Parrot-like notices, which reflect non-application of mind, are being issued to serve nothing more than statistical purposes. The noticees are put to mental agony and undue hardship and have to endure harassment for years till the litigation comes to an end. I am reminded of the Madras High Court decision in Madura Coats Limited Vs CCE, 1979 (4) ELT J.16 (Mad.), wherein the Court held that the Department while issuing show cause notice should examine the facts properly and should not behave in a parrot-like fashion.

In my view, the IT return could at best be the starting point of further investigation as it is not conclusive for ST purposes due to many reasons including but not limited to the following:

a. The difference may be on account of exemption.

b. It may be covered under small scale exemption upto Rs.10 lakhs.

c. Reverse charge mechanism may be applicable.

d. The services may be non-taxable in nature.

e. The services may be provided in a non-taxable territory.

f. The activity or transaction may find place in the negative list.

g. There may be valuation difference due to abatement or partial exemption.

h. The concept of income is different from taxable service and taxable value.

Instead of analysing the difference, the officers have straight away resorted to issuance of notices by exercising unbridled powers.

If this trend percolates into the GST regime, almost every income tax assessee carrying on business or profession would be bestowed with the "rare honour" of being a tax litigant. The innocent citizens of this country deserve something better than cruelty meted out in the form of non-existing tax demands not to speak of interest and penalties. The eminent jurist and Senior Advocate Late Sri.N.A.Palkhivala once commented that if the taxpayers were to be considered as animals then the tax officers could be punished or prosecuted under the Prevention of Cruelty to Animals Act, 1960. Palkhivala has shown us the way long back, what remains to be done is an amendment to the definition of ‘animals' in the said enactment.

[The views expressed are strictly personal.]

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