HC sets aside service tax demand order due to department's failure to determine liability within mandatory one-year period under Section 73(4B)

The Patna HC set aside a service tax demand order against a taxpayer providing erection commissioning and installation services. The court found the department failed to determine service tax liability within the mandatory one-year period under Section 73(4B) of Finance Act, 1994, with the file remaining unmoved for two years without justification. The case involved non-payment of service tax, non-filing of ST-3 returns, and reverse charge mechanism violations. The court expressed concern over departmental delays and directed the Principal Commissioner to investigate the procedural failures. The writ application was allowed.

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1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court in this matter are:

(a) Whether the impugned Order-in-Original dated 24.06.2024 imposing service tax liabilities and penalties for the Financial Years 2016-17 to 2017-18 (up to June 2017) was passed in accordance with statutory provisions and principles of natural justice.

(b) Whether the adjudicating authority complied with the time limits prescribed under Section 73(4B) of the Finance Act, 1994 for passing the order determining service tax liability, specifically the requirement to pass the order within one year from the date of issuance of the show cause notice unless it was not possible to do so.

(c) Whether the delay of approximately two years and eight months in passing the Order-in-Original was justified or arbitrary, and if the delay invalidates the order.

(d) Whether the petitioner was liable to pay service tax under the normal and reverse charge mechanisms, and penalties under Sections 77, 78 of the Finance Act, 1994, for non-payment and non-filing of returns and failure to produce documents.

(e) Whether the respondents could take coercive action for recovery of the alleged dues during the pendency of the writ application.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a) & (d): Validity of the impugned order imposing service tax liabilities and penalties

The petitioner challenged the impugned order on grounds that it was passed arbitrarily without adherence to statutory provisions or principles of natural justice. The petitioner denied any fraud, misstatement, or suppression of facts in relation to the non-payment of service tax. The respondent department alleged non-payment of service tax amounting to Rs. 2,96,85,837/- under normal charge and Rs. 11,60,639/- under reverse charge mechanism based on third-party data from the Income Tax Department. Penalties were also imposed under Sections 77(1)(c)(ii), 77(2), and 78 of the Finance Act, 1994 for failure to produce documents and non-filing of ST-3 returns.

The Court noted the allegations but focused primarily on procedural compliance, particularly the delay in adjudication, rather than the substantive merits of the tax liability. The petitioner's contention that the order was passed without considering available materials was noted but not elaborated upon, as the procedural lapse was determinative.

Issue (b) & (c): Compliance with time limits under Section 73(4B) of the Finance Act, 1994

Section 73(4B) of the Finance Act, 1994 mandates that the adjudicating authority must pass the order determining service tax liability within six months or one year from the date of issuance of the show cause notice, "where it is possible to do so." The Court examined whether the delay of nearly two years and eight months in passing the order was justified.

The Court observed that the show cause notice was issued on 12.10.2021, but the first personal hearing was fixed only on 19.10.2023, with no recorded activity or communication in the intervening period. The official records did not disclose any reasons for this inordinate delay. The counter affidavit filed by the respondents failed to explain why the order could not be passed within the prescribed one-year period.

The Court reviewed precedents including a coordinate Bench decision in M/s Kanak Automobiles, which held that the time period under clause (b) of sub-section (4B) is not an absolute limitation but requires the authority to take all possible steps to conclude proceedings within one year. The failure to take any steps for an entire year frustrates the statutory objective of expediency, warranting discontinuation of proceedings.

The Supreme Court's refusal to interfere with the Kanak Automobiles decision was noted, reinforcing its precedential value.

The Court also relied on judgments from the Delhi High Court (L.R. Sharma & Co. and Sunder System Pvt. Ltd.) and the Gujarat High Court (Siddhi Vinayak Syntex Pvt. Ltd.) which interpreted the phrase "where it is possible to do so" as imposing a duty on the adjudicating authority to complete proceedings within the stipulated time unless genuine, unavoidable reasons exist such as voluminous records, witness examination, or officer unavailability. Mere administrative inertia or "cold storage" of cases is impermissible.

Applying these principles, the Court found no justification for the delay in the present case, as the file remained dormant for over two years without any recorded steps or reasons for non-prosecution of the matter.

Issue (e): Restraining coercive action during pendency of writ application

The petitioner sought a direction restraining the respondents from taking coercive recovery action during the pendency of the writ petition. The Court's order setting aside the impugned demand effectively precluded any such coercive action. The Court's concern about departmental inaction and failure to expedite proceedings implicitly underscored the need for procedural fairness before enforcement measures are undertaken.

3. SIGNIFICANT HOLDINGS

The Court set aside the impugned Order-in-Original No. 41/ST/Aayukt/2024 dated 24.06.2024 and quashed the consequent demands for service tax, interest, and penalties raised against the petitioner on the ground of inordinate and unexplained delay in adjudication.

Key legal reasoning preserved verbatim includes:

"... it requires the statutory authority to take all possible steps, so to do and conclude the proceedings within an year. No steps were taken in the entire one year period, which results in the frustration of the goal of expediency as required statutorily. We hence find that the proceedings cannot be continued."

"When the legislature has used the expression 'where it is possible to do so', it means that if in the ordinary course it is possible to determine the amount of duty within the specified time frame, it should be so done. ... However, when a matter is consigned to the call book and kept in cold storage for years together, it is not on account of it not being possible for the authority to decide the case, but on grounds which are extraneous to the proceedings."

The Court emphasized that the adjudicating authority has no power to extend the time limit indefinitely merely awaiting decisions in other cases or for administrative convenience.

The Court also expressed serious concern over the departmental failure to act expeditiously, directing the Principal Commissioner of CGST and CX to investigate the reasons for the delay and take appropriate remedial measures.

In conclusion, the Court held that the statutory time frame under Section 73(4B) is a substantive safeguard ensuring timely adjudication, and failure to comply without explanation vitiates the order. The impugned order was therefore quashed, and the writ petition allowed.

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