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

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 services qualified as export or to indicate a preliminary view of intermediary status. The court found respondents could not re-examine a valid self-assessed return in refund proceedings absent reassessment under statutory procedure, so the denial of unutilized CENVAT credit was impermissible. The impugned order was quashed and set aside and the petition allowed.

---

---

Issues Involved:
1. Violation of Principles of Natural Justice
2. Nature and Extent of Power in Refund Claims
3. Certainty in Taxation Matters
4. Alternative Remedy Objection

Summary:

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.

---