2014 (4) TMI 882 - HC - Service Tax

Demand of service tax - recovery of service from third party - barely two days after the show cause notice, the department wrote two separate letters to M/s.Reliance Industries Limited and M/s.Essar Oil Limited, both service recipients from the petitioners calling upon them to make service tax payment - Held that - The petitioners have raised several disputes including the dispute that some of the services having been provided in the special economic zone areas, service tax is not applicable. We are not judging the validity of such contentions. All that we are suggesting is that when the show cause notice was issued by the department to which the petitioners have raised their objections, recoveries without adjudication of such disputed taxes was simply not permissible in law. We notice that section 73C of the Finance Act 1994 allows the department to make provisional attachment of the properties of the assessee during the pendency of the proceedings under section 73 or 73A of the Act for the purpose of protecting the interest of the Revenue. Such provision cannot be activated for seeking recovery even before adjudication. Recovery of unpaid tax is to be made as per section 87 of the said Act which provides for the power and procedure for such recoveries - within two days of issuance of show cause notice, the respondents issued recovery orders against the customers of the petitioners, which in our opinion, was not simply permissible - However, assessee directed to make service tax payment - Decided partly in favour of assessee.

Summary

Issues:
Challenge to recovery of service tax dues based on pending show cause notice proceedings and disputes regarding the recoveries.

Detailed Analysis:

1. Challenge to Recovery of Service Tax Dues:
The petitioners, engaged in construction business under the service tax regime, contested the action of the respondents seeking recovery of service tax dues. The respondents initiated investigation proceedings revealing irregularities in tax payments by the petitioners over the years. The Managing Director of the petitioner company admitted to irregularities in tax payments in statements. A show cause notice was issued demanding recovery of Rs.1,86,94,281 with interest and penalties. The petitioners objected to the recovery notices sent to their service recipients even before full adjudication of the show cause notice.

2. Contentions of the Department:
The department argued that the petitioners had admitted a liability of Rs.1.50 crores for unpaid service tax, collected from clients but not deposited. The department believed it had the right to seek recovery based on the admission of liability. The undisputed liability was assessed at approximately Rs.1.24 crores, with the petitioners having already deposited Rs.1.16 crores. The department contended that the remaining amount was due and recoverable.

3. Judicial Analysis and Decision:
The court examined the statements of the Managing Director and determined the undisputed liability to be around Rs.1.24 crores. Considering the amount already deposited by the petitioners, the court ruled that they may be required to deposit the difference of Rs.8 lacs. The court emphasized that recoveries without adjudication of disputed taxes were impermissible under the law. Provisional attachment of properties during proceedings is allowed for protecting revenue interests, but recovery must follow the procedures outlined in the Finance Act. The court found the recovery orders against the petitioners' customers issued within two days of the show cause notice to be impermissible.

4. Court's Decision and Directions:
The court quashed the communication directing recovery from the petitioners' customers and ordered the petitioners to deposit Rs.8 lacs towards the service tax liability by a specified date. The Managing Director of the petitioner company was required to file an undertaking confirming the deposit. The writ petition was disposed of with these directions.

This detailed analysis of the judgment highlights the issues, arguments presented by both parties, judicial scrutiny, and the final decision rendered by the court, providing a comprehensive understanding of the legal proceedings and outcome.