2023 (8) TMI 312 - HC - VAT / Sales Tax

Review orders quashed for exceeding show cause notice scope and violating natural justice under Rule 58(1)(h)

Kalpataru Power Transmission Ltd., Versus State of Maharashtra, Commissioners of Sales Tax, Mumbai, Deputy Commissioner of State Tax, Mumbai

The HC quashed the impugned review orders for lack of jurisdiction and violation of natural justice. The show cause notice addressed denial of deduction ... Scope of SCN - Challenge to Review order - jurisdiction of the Respondents to pass the impugned order which is contrary to the decision of the Supreme Court in case of GANNON DUNKERLEY & CO. VERSUS STATE OF RAJASTHAN & LARSEN & TOUBRO LTD. & UNION OF INDIA [1992 (11) TMI 254 - SUPREME COURT] - principles of natural justice. Whether the orders impugned in the present petition passed by Respondent No. 2 would satisfy the test of law when questioned on the ground of jurisdiction and illegality being attributed to it by the Petitioners? - whether, in the facts and circumstances of the case, whether it is required to entertain this petition, by not accepting the objection urged on behalf of the revenue of an alternate remedy available to the Petitioners to file an appeal before the Tribunal? HELD THAT:- On a perusal of the show cause notice dated 22nd October 2018 and on a complete reading of the said show cause notice, it is very clear that the show cause notice was issued only to deny deduction on account of profit on supply of labour and service, amounting to Rs. 9,41,22,626/- which would only fall under Rule 58(1)(h) and therefore, the reference to Rule 58 in the show cause notice although not specifying the sub-rule, should be read to mean that the show cause was only for disallowance of the item under Rule 58(1)(h) of the MVAT Rules and not all the deductions under Rule 58(1)(a) to (h). This is further fortified by the second show cause notice dated 23rd November 2020 which specifically refers to Rule 58(1) (h) only to deny the deduction of Rs. 9,41,22,626/. The figure of Rs. 9,41,22,626/- in the show cause notice is only under Rule 58(1)(h). Therefore, in our view, the show cause notice was only for item to be disallowed under Rule 58(1)(h) and not all the items under Rule 58(1)(a) to (h). However, in the review order dated 8th March 2021 under Section 25 of the MVAT Act, what is disallowed is all the items under Rule 58(1)(a) to (h), amounting to Rs. 30,59,93,405/-. The Respondents have not brought to our notice any document which would show that the show cause notice was issued for disallowing all the items specified in Rule 58(1)(a) to (h). It is well settled that any order beyond the show cause notice is bad-in-law. The Supreme Court in case of COMMISSIONER OF CUSTOMS, MUMBAI VERSUS TOYO ENGINEERING INDIA LIMITED [2006 (8) TMI 184 - SUPREME COURT] noted that the Department cannot be allowed travel beyond the show cause notice. The Supreme Court further observed that it would be against the principles of natural justice that a person who has not been confronted with any ground is saddled with liability thereof and since the issue did not form the basis of the show cause notice and was not even confronted to the order passed beyond show cause notice is to be quashed. The Supreme Court in case of COMMISSIONER OF CENTRAL EXCISE, NAGPUR VERSUS M/S BALLARPUR INDUSTRIES LTD [2007 (8) TMI 10 - SUPREME COURT] observed that if Rule 7 of the Valuation Rules 1975 have not been invoked in the show cause notice, it would not be open to the Commissioner to invoke the said rule in the remand proceedings. The view expressed by the Supreme Court in cases of Commissioner of Customs, Mumbai vs. M/s. Toyo Engineering India Limited and Commissioner Of Central Excise, Nagpur vs. M/s. Ballarpur Industries Ltd. was applied in subsequent decisions of the Supreme Court in case of The Commissioner of Central Excise, Bhubaneswar-1 vs. M/S. Champdany Industries Ltd., [2009 (9) TMI 7 - SUPREME COURT] and also in the case of Commissioner of Central Excise Vs. Gas Authority of India Limited [2007 (11) TMI 276 - SUPREME COURT]. Therefore applying the ratio of the Supreme Court, the impugned order disallowing all the deductions under Rule 58(1)(a) to (h) without giving any show cause notice to the Petitioner would be rendered bad in law. Such defect in the adjudication goes to the root of the matter and is an incurable defect. Further the Respondents in the review order have applied the rate of 20% specified in table under Rule 58(1). On a reading of Rule 58(1) of the MVAT Rules, the rates specified in the Table can be applied only if the contractor has not maintained accounts which would enable a proper evaluation of the different deductions as specified in Rule 58(1)(a) to (h) or where the Commissioner finds that the accounts maintained by the contractor are not sufficiently clear or intelligible. It is only under these circumstances that the Commissioner may in lieu of the deduction as prescribed under Rule 58(1)(a) to (h) of the MVAT rules on actual basis can apply the percentage specified in the Table to arrive at the sale price of the goods for the purpose of MVAT Act - in the absence of satisfying the pre-condition prescribed under proviso to Rule 58(1) the application of rate specified in Table below Rule 58(1) in the final review order is without jurisdiction. Even otherwise, in the assessment order dated 11th December 2015, the Assistant Commissioner of Sales Tax has recorded a finding that he has verified the books of accounts with respect to the claim of the dealer under Rule 58 on actual basis. Insofar as the GAIL project is concerned, the assessment order records verification of trial balance, expense ledger copies, contract copies, sample invoices, sub-contractors works order, etc. The audit done under Section 22 of the Act by the Deputy Commissioner prior to the passing of the said assessment order also accepts the maintenance of the books of accounts by the Petitioner with respect to the works contract executed by the Petitioner - the jurisdictional condition required for applying the rates prescribed in the table to Rule 58(1) have not been complied with before passing the review order and, therefore, even on this account, the impugned order is without jurisdiction. The issue of exercising jurisdiction under Article 226 of the Constitution of India, when an alternate remedy is available has been a subject matter before the Supreme Court in the case of Whirlpool Corporation Vs. Registrar of Trade Marks Mumbai [1998 (10) TMI 510 - SUPREME COURT], and the also very recently in the case of Godrej Sara Lee Limited [2023 (2) TMI 64 - SUPREME COURT] wherein, the principles laid down in the case of Whirlpool Corporation [1998 (10) TMI 510 - SUPREME COURT] for exercising the jurisdiction under Article 226 of the Constitution of India have been reiterated on the ground of challenge to the very jurisdiction and principles of natural justice. The impugned orders dated 8th March 2021 and 6th July 2021 are hereby quashed and aside - Petition allowed. Issues Involved:1. Jurisdiction of the Respondents to pass the impugned order.2. Validity of the review order dated 8th March 2021 under Section 25 of the MVAT Act.3. Validity of the order rejecting the rectification application dated 6th July 2021 under Section 24 of the MVAT Act.4. Principles of natural justice and whether the impugned order exceeded the scope of the show cause notice.5. Applicability of Rule 58(1) of the MVAT Rules and the conditions for applying the rates specified in the Table to Rule 58(1).Summary:Jurisdiction of the Respondents:The Petitioner challenged the jurisdiction of the Respondents to pass the impugned order, arguing it was contrary to the Supreme Court's decision in M/s. Gannon Dunkerley and Co. & Ors. Vs. State of Rajasthan & Ors. and the provisions of the MVAT Act. The Petitioner also contended that the review order was passed without satisfying the pre-conditions required under Rule 58(1) of the MVAT Rules.Validity of the Review Order:The Court found that the show cause notice issued on 22nd October 2018 was only to deny deduction on account of profit on supply of labour and service under Rule 58(1)(h) amounting to Rs. 9,41,22,626/-, and not all deductions under Rule 58(1)(a) to (h). The review order dated 8th March 2021, however, disallowed all deductions amounting to Rs. 30,59,93,405/-, which was beyond the scope of the show cause notice, rendering it bad in law.Validity of the Order Rejecting Rectification Application:The order rejecting the rectification application dated 6th July 2021 was also found to be without jurisdiction as it justified the review order by improperly applying the rates specified in the Table under Rule 58(1) without satisfying the pre-conditions.Principles of Natural Justice:The Court held that the impugned order was in breach of principles of natural justice as it was passed without giving a show cause notice for disallowing all deductions under Rule 58(1)(a) to (h). The Supreme Court's decisions in Commissioner of Customs, Mumbai vs M/s. Toyo Engineering India Limited and Commissioner Of Central Excise, Nagpur vs. M/s. Ballarpur Industries Ltd. were cited to support this conclusion.Applicability of Rule 58(1) of the MVAT Rules:The Court noted that the rates specified in the Table to Rule 58(1) could only be applied if the contractor had not maintained accounts for proper evaluation of deductions or if the accounts were not clear or intelligible. The show cause notices did not allege this, making the application of the rates specified in the Table without jurisdiction.Conclusion:The impugned orders dated 8th March 2021 and 6th July 2021 were quashed and set aside. The Court allowed the petition on the grounds that the orders were passed in excess of the jurisdiction conferred by Section 25 of the MVAT Act and beyond the scope of the show cause notice. The petition was allowed in terms of prayer clauses (a), (b), and (c) with no order as to costs.