Service tax notice quashed for challenging finalized company arrangement scheme under Sections 391-394

The Bombay HC quashed a show cause notice (SCN) issued to the petitioner regarding alleged non-payment of service tax for FY 2013-14. The court held that the SCN was issued without jurisdiction since it challenged a scheme of arrangement approved by the HC under Sections 391 and 394 of the Companies Act, 1956, which had attained finality as no authority challenged it. The court followed a similar Gujarat HC decision in the same petitioner's case under excise law, where the SCN was quashed on identical grounds, and exercised discretion under Article 226 to set aside the impugned notice.

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Issues Involved:
1. Jurisdiction of the Show Cause Notice.
2. Compliance with the Scheme of Arrangement.
3. Similarity with Gujarat High Court Judgment.
4. Alleged Non-submission of Details.
5. Double Taxation.

Issue-wise Detailed Analysis:

1. Jurisdiction of the Show Cause Notice:
The petitioner challenged the show cause notice dated 23rd October 2018 under Article 226 of the Constitution of India, arguing it was issued without jurisdiction. The court noted that the foundation of the notice was the High Court's approval of a scheme of arrangement, which the respondents claimed contravened the Finance Act, 1994. The court emphasized that the order approving the scheme had not been challenged and had attained finality. Consequently, the show cause notice lacked jurisdiction and fell to the ground.

2. Compliance with the Scheme of Arrangement:
Larsen & Toubro Limited (L&T) had hived off its Hydrocarbon Division to L&T Hydrocarbon Engineering Limited (LTHE) through a scheme of arrangement approved by the High Court. The scheme stipulated that all business activities from the appointed date (1st April 2013) to the effective date would be carried out by L&T on behalf of LTHE. The court noted that all statutory compliances, including service tax, were deemed to have been done by LTHE. The court found that the scheme was fair, reasonable, and not in contravention of any law, thus supporting the petitioner's compliance.

3. Similarity with Gujarat High Court Judgment:
The court considered the Gujarat High Court's judgment dated 3rd February 2022, which quashed a similar show cause notice issued for excise duty. The court noted that the basis of the show cause notice in both cases was similar. The Gujarat High Court had ruled that the scheme of arrangement was not in contravention of the Central Excise Act, 1944, and that the Central Government, being a party to the scheme, was barred from raising objections. The court found this judgment persuasive and applicable to the present case, reinforcing the petitioner's position.

4. Alleged Non-submission of Details:
The respondents argued that the petitioner had not provided details regarding the expenditure related to output services. However, the court noted that the petitioner had furnished all required details during the investigation, as evidenced by various letters submitted between June 2014 and February 2018. The court found no rebuttal from the respondents to these submissions and concluded that the allegation of non-submission was baseless.

5. Double Taxation:
The petitioner argued that any attempt to recover service tax from L&T for the period 2013-14 would amount to double taxation, as L&T had already discharged the liability on behalf of LTHE. The court agreed, noting that the scheme of arrangement stipulated that all compliances by L&T were deemed to have been done by LTHE. The court found that the impugned show cause notice sought to impose double taxation, which was impermissible.

Conclusion:
The court quashed and set aside the impugned show cause notice dated 23rd October 2018, ruling it was issued without jurisdiction and lacked a valid basis. The court exercised its discretion under Article 226 of the Constitution of India, agreeing with the Gujarat High Court's decision, and made the rule absolute in terms of prayer clause (a).

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