Service tax show cause notice quashed after two decades delay with refund ordered

The HC quashed a show cause notice (SCN) due to excessive delay in adjudication spanning over two decades. The department had internal conflicting views regarding service tax valuation methods, with recommendations for closure being ignored until 2021. The petitioner had already discharged service tax liability under works contract service provisions of Finance Act, 1994. The court held the delayed adjudication was unnecessary and unwarranted given the department's own contradictory stance. The respondent was ordered to refund excess deposits within two months with 6% interest from payment date.

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The issues presented and considered in the judgment are as follows:1. Whether the delay in adjudication of Show Cause Notice No.300/2009, issued on 31.07.2009, warrants quashing of the notice.2. Whether the petitioner was entitled to alter the basis of valuation for the purpose of payment of service tax under the provisions of the Finance Act, 1994.3. Whether the department's decision to issue the show cause notice was justified in light of internal conflicting views and audit objections.Detailed Analysis:Issue 1: Delay in AdjudicationThe petitioner argued that there was a significant delay in adjudicating the show cause notice issued in 2009. The petitioner had replied to the notice multiple times, and the dispute centered around the valuation method for service tax payment. The petitioner claimed to have paid service tax based on a specific interpretation of the Finance Act, 1994. The department transferred the case to the call book due to internal disagreements and awaited further clarification.Issue 2: Basis of Valuation for Service TaxThe department contended that the petitioner was not entitled to change the basis of valuation for service tax payment as per Circular No.98/1/2008-ST. The petitioner argued that they had the right to opt for a different method of payment under the Finance Act, 1994. The department's objection was overruled by senior audit officers, and the case was eventually taken up for adjudication after a long delay.Issue 3: Justification for Issuing the Show Cause NoticeDespite internal recommendations for closure of the case, the department proceeded with the show cause notice after a prolonged period. The court noted that the department's decision to issue the notice and delay in adjudication were unwarranted, especially given the conflicting views within the department. The court found that the petitioner had correctly paid the service tax under the works contract service category.Significant Holdings:The court held that the delay in adjudication of the show cause notice warranted quashing of the notice. The court also determined that the petitioner was entitled to alter the basis of valuation for service tax payment as per the Finance Act, 1994. Additionally, the court found that the department's decision to issue the notice and proceed with adjudication after a long delay was unjustified.In conclusion, the court allowed the writ petition, directing the respondent to refund the excess amount deposited by the petitioner during the investigation by CERA, along with interest. The court emphasized the unnecessary and unwarranted nature of the adjudication at such a late stage, given the internal disagreements and the petitioner's compliance with the relevant tax provisions.

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