2023 (3) TMI 643 - HC - Service Tax

Need of pre-consultation before issuance of Show Cause Notice - Liability of service tax imposed on the petitioner - ocean freight charges - petitioner states that the goods imported were CIF imports and, therefore, there is no question of any service tax being paid on any service relating to ocean freight since the petitioner has not received any such service and the service, if any received, has been received by the exporter from the overseas. HELD THAT - The Department shall give full opportunity to the petitioner to respond to the observations in the special audit report and if the explanation is found, not satisfactory, then issue a fresh Show Cause Notice, also correcting the errors that have crept in the Show Cause Notice dated 21.04.2022. Mr. Tarun Gulati, learned Senior Counsel appearing for the petitioner submits that although the audit report itself is liable to be set aside but the suggestion from the respondent would meet the ends of justice. The Department is at liberty to issue a fresh notice for pre-consultation. It is also directed that the Show Cause Notice, if any, would be issued only after the explanation of the petitioners in respect of observations made in the special audit report have been duly considered and after reflecting on the figures. The petition is disposed off.

Summary

Issues:
Challenge to service tax liability on ocean freight charges, validity of special audit under Section 72A of the Finance Act, 1994, errors in the Show Cause Notice, limitation period for proceedings.

Service Tax Liability on Ocean Freight Charges:
The petitioner challenged the service tax liability imposed on them for ocean freight charges, arguing that as the goods were CIF imports, they did not receive any service related to ocean freight, which was received by the exporter. The petitioner relied on a Gujarat High Court decision to support their contention that no service tax should be levied on ocean freight charges unless the judgment is modified or set aside by a superior court.

Validity of Special Audit under Section 72A:
The petitioner contested the action of the respondents in directing a special audit under Section 72A of the Finance Act, 1994, stating that the authority had no valid "reasons to believe" as required by the Act. They highlighted that despite a draft audit report being furnished, the required consultation with the petitioner did not take place before issuing a demand letter and a Show Cause Notice. The petitioner also pointed out errors in the Show Cause Notice regarding the input tax credit amount.

Errors in Show Cause Notice and Limitation Period:
The Court noted errors in the Show Cause Notice and the lack of consultation with the petitioner before issuing demands. The petitioner argued that the proceedings were beyond the limitation period as there was no evidence of fraud, wilful misstatement, or suppression of facts. Consequently, the demand letter and Show Cause Notice were set aside, and the Department was directed to issue a fresh notice for pre-consultation and to consider the petitioner's explanations before issuing a new Show Cause Notice.

Conclusion:
The Court disposed of the petition by setting aside the demand letter and Show Cause Notice, allowing the Department to issue a fresh notice after considering the petitioner's explanations. The judgment clarified that all contentions of the parties were left open except the challenge to the initiation of a special audit.