JANUARY 03, 2022

By Makarand P S Joshi, Founder MAX Legal, Advocates & U. K. Godbole, Advocate

THE principle of no reformatio (reformation) in peius (worse) or prohibition of reformatio in peius, means that a person should not be placed in a worse position, as a result of his filing an appeal. It is a Latin phrase expressing the principle that using the remedy at law may not aggravate the situation of the one who exercises it.

The purpose of an appeal is to seek to eliminate an adverse effect.

A decision of the Court cannot create a situation more difficult for the party which has filed an appeal against the Orders passed by the lower forum. A person must have the certainty that by reason of filing an Appeal he would not be subjected to additional liability.

To illustrate, let us say a person is tried before a Trial Court for a crime, punishable with imprisonment up to 8 years. Trial court finds him guilty and sentences him to imprisonment of 5 years. Such person Appeals to the Appellate Court. Then, in absence of an Appeal by the other side, such Appellate Court while deciding his Appeal, cannot increase sentence of 5 years of imprisonment to 8 years and put such person in a position worse than he was.

This principle is not new. The Federal Court expressed this view in King Emperor V. Sibnath Banerji (1945 SCC Online FC 9). The Hon'ble Supreme Court has laid down this law in several Judgments. This principle has recently been reiterated by the Hon'ble Supreme Court in Akhil Bharatvarshiya Marwari Jatiya Kosh V. Brijlal Tibrewal (2019) 2 SCC 684.

This principle was applied, in relation to tax laws, by the Hon'ble Madras High Court in Servo Packaging Ltd. V. CESTAT - 2016-TIOL-1791-HC-MAD-CX and the Hon'ble Bombay High Court in Jyoti Plastic Works Pvt. Ltd. V. UOI - 2020-TIOL-1874-HC-MUM-CX following the Hon'ble Supreme Court in Jaiswal Neko Ltd. V. Commissioner of Customs (2015 (322) ELT 561). Even the Hon'ble Tribunal in Commissioner of Customs V. VS Arunachalam - 2019-TIOL-2680-CESTAT-MUM has applied the principle and held that:

"13. In the original adjudication proceedings, penalty of Rs. 5,00,000 was imposed on the second respondent herein and it was on his appeal that the matter was remanded back to the original authority. If at all, any penalty that could be imposed by the original authority in fresh proceedings would have to be limited by this ceiling."

On this background, let us see how GST Law deals with this principle in its provisions of first Appeal under Section 107:

SECTION 107. Appeals to Appellate Authority. -

(1) …

(2) …

(11) The Appellate Authority shall, after making such further inquiry as may be necessary, pass such order, as it thinks just and proper, confirming, modifying or annulling the decision or order appealed against but shall not refer the case back to the adjudicating authority that passed the said decision or order:

Provided that an order enhancing any fee or penalty or fine in lieu of confiscation or confiscating goods of greater value or reducing the amount of refund or input tax credit shall not be passed unless the appellant has been given a reasonable opportunity of showing cause against the proposed order:

Provided further that where the Appellate Authority is of the opinion that any tax has not been paid or short-paid or erroneously refunded, or where input tax credit has been wrongly availed or utilised, no order requiring the appellant to pay such tax or input tax credit shall be passed unless the appellant is given notice to show cause against the proposed order and the order is passed within the time limit specified under section 73 or section 74. (Emphasis Supplied)

It may be noted that the principle of prohibition of reformatio in peius has gone for a toss in Section 107. The Appellate Authority, after making necessary inquiry, can pass such order, confirming, modifying or annulling the decision or order appealed against. In the process of confirming, modifying or annulling the decision, if the Appellate Authority finds that any tax has not been paid or input tax credit has been wrongly availed, the Appellate Authority can Order the Appellant to pay such enhanced tax or input tax credit. Before passing such an Order the Appellant has to be given an opportunity by way of a notice to show cause against the proposed order.

Let us see this by an Example. A Show Cause Notice is issued to an assessee demanding GST on the issue of wrong classification. Assessee classified the goods under heading 3333 and paid GST @ 10%, the Notice proposed classification under heading 4444 and demanded GST @ 15%. Both the proposals of classification under heading 4444 and demand of differential GST are confirmed by Adjudication Order. Assessee files an Appeal to the Appellate Authority under Section 107. Appellate Authority finds that the goods merit classification under heading 5555 and GST is payable @ 20%. A Show Cause Notice can be issued to the Appellants requiring him to show cause as to why the goods should not be classified under heading 5555 and GST should not be charged @ 20%. Then Appellate Authority can pass an Order confirming classification of goods under heading 5555 and confirming demand of GST @ 20%.

So, assessee has to think twice before filing an Appeal to the Appellate Authority. Assessee cannot take it for granted that he will be protected by prohibition of reformatio in peius. Assessee is likely to be in a position worse than he was before filing an Appeal. The Second proviso to Section 107(11) empowers the Appellate Authority to set up a completely new case against the assessee and his liability can get enhanced.

It is not clearly spelt out as to who will issue this Show Cause Notice in terms of the aforementioned second proviso to Section 107(11). At first blush, it appears that the Appellate Authority will issue the Notice. However, if one checks this possibility, in the context of Section 5 of the Act, then it becomes clear that the Appellate Authority cannot exercise this option.

"SECTION 5. Powers of officers. -

(1) …

(4) Notwithstanding anything contained in this section, an Appellate Authority shall not exercise the powers and discharge the duties conferred or imposed on any other officer of central tax."

The "Proper Officer", on directions of the Appellate Authority will issue show cause notice to the assessee, in relation to same goods, for the same period, on entirely new grounds. This will be second Show Cause Notice because the first show cause notice has already been given to the assessee and the same has already been adjudicated and appeal against, the same is pending before the Appellate Authority.

This will open pandora's box, because the Department will get an opportunity to improve upon the first show cause notice and to issue a fresh one, in line with the proposed Order of the Appellate Authority.

The moot point is whether such second show cause notice alleges suppression of facts to evade tax, in the light of the law laid down by the Judgment of the Hon'ble Supreme Court in Nizam Sugar Factory - 2006-TIOL-56-SC-CX.

It would be interesting to find out the intent and purpose of proviso/s to Section 107(11). We see none. Such provision (Section 32) existed even in the Income Tax Act, 1922. But that was because the Revenue did not have the right of appeal. Therefore, a provision that can give an opportunity to the Appellate Authority (wearing Revenue Officer's hat) was justifiable.

Under Section 107(2) and (3), the GST Department has a right to file an Application for determination of points arising out of Adjudication Order and such Application is treated as an Appeal. GST Department can file such Application within six months from the Order as against mere three months period available to an assessee. Therefore, Revenue stands protected.

It is not just about protecting the Revenue. It is something beyond. It is about a fresh notice on fresh grounds, after having gained knowledge and wisdom from the grounds taken by an Assessee in his reply and in his first Appeal. The provision is authorising the GST Department to change its stand in the Notice, after an Appellant Assessee has disclosed its defence. It is moving the goalpost after the game has begun.

The provision is not just unwarranted and unfair, but is arbitrary and draconian.

This time we cannot blame only GST Law. Similar provisions existed in proviso to Section 35A(3) of the Central Excise Act, proviso to Section 85(4) of the Finance Act, 1994 and proviso to Section 128A(3) of the Customs Act.

[The views expressed are strictly personal.]