2023 (11) TMI 478 - HC - Service Tax

Deficiency memos breach natural justice; cannot substitute for SCNs, and denial of unutilized CENVAT credit quashed

BT (India) Private Limited Versus Union Of India & Anr.

The HC held that deficiency memos violated principles of natural justice and do not qualify as SCNs; they failed to call the applicant to explain why ... Violation of the principles of natural justice - Refund of unutilized CENVAT credit - Issuance of Deficiency memo to be treated as Show Cause Notice (SCN) or not - input services having been utilized by the petitioner in connection with ‘export of services’ - Broadcasting services - Business Support services - IT Software service - Management, Maintenance or Repair services. Violation of the principles of natural justice - HELD THAT:- The deficiency memos abjectly fail to meet the two foundational precepts as enunciated by the Supreme Court in Gorkha Security Services [2014 (8) TMI 1081 - SUPREME COURT]. As was noticed, the respondents neither called upon the petitioner to explain why the services rendered by it would not be liable to qualify as an ‘export of services’ nor did it place the petitioner on notice of the second respondent proposing to take the view that the petitioner was an ‘intermediary’. More fundamentally, it is found that the deficiency memos did not embody a preliminary view or opinion that may have been formed by the second respondent for rejecting the applications for refund - the deficiency memos did not fulfil the rudimentary requirements of an action being imbued and informed by the principles of natural justice. In any event, the deficiency memo cannot be viewed as a substitute for a SCN - the observations rendered by the Gujarat High Court in New Pensla Industries v. Union of India [2017 (5) TMI 130 - GUJARAT HIGH COURT] agreed upon, which correctly held that a deficiency memo is not in the nature of a SCN and that it merely serves the purpose of placing a party on notice of being liable to furnish additional information and remedy any deficiency in a claim that may be laid. Examination of refund claim - HELD THAT:- It becomes pertinent to note that both the Customs as well as the Excise Acts follow an identical procedure of self-assessment. While Section 17 of the Customs Act enables an importer or an exporter, as the case may be, to self-assess and pay the duty leviable on goods, the said provision further empowers the proper officer to verify the self-assessed return that may be submitted. In terms of Section 17(4) of the said enactment, if the proper officer on verification, examination or testing of the goods comes to the conclusion that the self assessment is incorrect, it becomes entitled to reassess the duty leviable on goods. It is in extension of the aforesaid power that sub-section (5) of Section 17 speaks of reassessment and the obligation of the proper officer to pass a speaking order in support of the exercise of reassessment. The Supreme Court in ITC Limited [2019 (9) TMI 802 - SUPREME COURT] notwithstanding Section 27(2) employing the expression ‘satisfied’ held that unless a self-assessed return is revised or doubted in exercise of powers of reassessment, best judgment assessment or where it be alleged that duty had been short levied, short paid or erroneously refunded, those powers would not be available to be exercised at the stage of considering an application for refund. Having noticed the statutory position which prevails, we turn then to the decisions which would have a bearing on the question which stands posited. Unless the self-assessed return, as submitted had been questioned, re-opened or re-assessed and the assertion of the petitioner of the services rendered by it qualifying as an ‘export of service’ questioned or negatived in accordance with the procedure prescribed under the Act, its claim for refund could not have been negated - As was observed by the Supreme Court in ITC Limited, a self-assessed return also amounts to an ‘assessment’ and unless it is varied or modified in accordance with the procedure prescribed under the relevant statute, the same cannot possibly be questioned in refund proceedings. As the Supreme Court had held in the decisions aforenoted, the authority while considering an application for grant of refund neither sits in appeal nor is it entitled to review an assessment deemed to have been made. In fact, the Supreme Court in ITC Limited had described refund proceedings to be akin to execution proceedings. Thus, in the absence of the self-assessed return having been questioned, reviewed or re-assessed, the claim for refund of CENVAT credit could not have been denied by the respondents. When confronted with the application for refund, all that the respondents could have possibly examined or evaluated was whether the provisions of Rule 5 read along with the various prescriptions contained in the notification dated 18 June 2012 had been complied with. The respondents, at this stage of the proceedings, could not have doubted, questioned or undertaken a merit review of the self-assessed return which had been submitted. The impugned order dated 04 October 2021 is hereby quashed and set aside - petition allowed. Issues Involved:1. Violation of Principles of Natural Justice2. Nature and Extent of Power in Refund Claims3. Certainty in Taxation Matters4. Alternative Remedy ObjectionSummary:A. Violation of Principles of Natural Justice:The petitioner contended that the deficiency memos issued by the respondents did not serve the same purpose as a Show Cause Notice (SCN) and failed to inform the petitioner of the grounds on which the refund application was to be rejected. The Court agreed, noting that the deficiency memos were more in the nature of interrogatories rather than SCNs and did not place the petitioner on notice of the proposed action or the view the respondents were inclined to take. The Court emphasized that for a notice to comply with the principles of natural justice, it must embody the material or grounds on which an action is proposed and disclose the particular penalty or action proposed to be taken. The deficiency memos failed to meet these requirements, rendering the impugned order unsustainable on this ground.B. Nature and Extent of Power in Refund Claims:The Court examined whether the adjudicating authority had the power to question or review the self-assessed returns while considering a refund claim. Citing the Supreme Court decisions in ITC Limited, Flock (India), and Priya Blue Industries, the Court held that a self-assessed return amounts to an assessment and unless it is varied or modified in accordance with the procedure prescribed under the statute, it cannot be questioned in refund proceedings. The Court concluded that in the absence of the self-assessed return being questioned, reviewed, or reassessed, the claim for refund of CENVAT credit could not have been denied by the respondents. The authority while considering a refund application does not sit in appeal nor is it entitled to review an assessment deemed to have been made.C. Certainty in Taxation Matters:The petitioner argued that refunds for similar services had been granted for earlier periods, and there was no fundamental change in the nature of services rendered. The Court found merit in this contention, citing the Supreme Court's decision in M/s Radhasoami Satsang, which held that unless a fundamental aspect common to different assessment years has come to be altered, the taxing authorities are bound by the view already taken. The respondents did not allude to any material change justifying a different view, making the impugned order unsustainable on this additional ground.D. Alternative Remedy Objection:The respondents contended that the petitioner should be relegated to the alternative remedy of filing an appeal. The Court rejected this objection, noting that the action initiated was in gross violation of the principles of natural justice and that the second respondent had acted in excess of its jurisdiction. Such violations constitute exceptions to the self-imposed restraint exercised by the Court when invoking its constitutional powers under Article 226 of the Constitution.Directions:The writ petition was allowed, and the impugned order dated 04 October 2021 was quashed and set aside. The respondents were directed to process the claim as submitted by the petitioner and effect refunds in accordance with the law.