2024 (3) TMI 631 - HC - GST

Scope of SCN - Refund claim - Unutilised Input Tax Credit (ITC) - applicability of principle of res judicata - whether principle of res judicata does not apply in matters of taxation and merely because refund claims have been sanctioned previously, does not mean that the refund claims for subsequent period will also be sanctioned? - adherence to the Accounting Standards or not - Specific goods have not been capitalised by the Petitioner in accordance with Accounting Standard 10. HELD THAT - The inconsistency and irrationality displayed by the Department in withholding refund claims for July-September 2019 and October-December 2019, despite having sanctioned similar claims in the past and in the future are indefensible. - The Supreme Court in Bharat Sanchar Nigam Ltd. And Anr. v. Union of India 2006 (3) TMI 1 - SUPREME COURT and others and other decisions has consistently emphasized that Revenue cannot take a different stand when facts are almost identical. These judgments underscore the significance of consistency in tax administration and the need for tax authorities to adhere to established principles and precedents. The arbitrary withholding of refund claims for specific periods, despite past precedents and the absence of any material change in circumstances, is contrary to the principles of fairness and equity. It is evident in the instant case that the Department has deviated from the show cause notice, and as such any order passed by it running contrary to the grounds taken in the show cause notice, cannot be sustained. Issuance of the show cause notice represents a pivotal juncture in legal or administrative proceedings, demarcating the boundaries within which any authority can exercise its powers. Adhering to the confines of the show cause notice upholds principles of fairness, accountability, procedural regularly, and legal certainty essential for the legitimacy and effectiveness of the governance systems. Any attempt to transcend these limits not only violates the rights of the individuals or entities involved but also undermines the rule of law and public trust in the institutions tasked with upholding it. Therefore, adherence to the show cause notice is not merely a procedural formality but a mandatory requirement, beyond the scope of which, no action can be taken. While the principle of res judicat a does not apply to taxation matters, it is incumbent upon authorities to take a consistent approach when dealing with similar factual and legal circumstances. The principle of consistency states that when faced with analogous factual and legal circumstances, the treatment should remain uniform. Taxpayers have a legitimate expectation that similar factual and legal circumstances will be met with uniform treatment, and any deviations from this principle undermine the credibility and legitimacy of the actions taken by tax authorities. When facts and circumstances in a subsequent assessment year are the same, no authority, whether quasi-judicial or judicial can generally be allowed to take a contrary view. The arbitrary withholding of refund claims for specific periods, despite past precedents and the absence of any material change in circumstances, is contrary to the principles of fairness and equity. Capital goods, are intended for long-term use and are typically subject to capitalization. However, inputs, are goods used in the day-to-day operations of the business and are not subject to capitalization. While issuing a Show Cause Notice, it is incumbent upon the Department to clearly outline the specific allegations or concerns against the recipient. In no case, the Department can be allowed to traverse beyond the confines of the Show Cause Notice, since the same will trample upon the recipient s right to defend itself. Any attempt by the issuing authority to expand the scope of inquiry or introduce new allegations beyond those articulated in the show cause notice would constitute a violation of the principles of natural justice. Such actions would not only undermine the recipient s right to a fair hearing but also erode trust in the integrity and impartiality of the adjudicatory process. Any action taken beyond the confines of the Show Cause Notice, is void ab initio and cannot be sustained. It is evident that the impugned orders dated October 25, 2021 and February 24, 2023 are palpably erroneous, and cannot be sustained. Accordingly, let there be a writ of certiorari issued against the orders dated October 25, 2021 and February 24, 2023 passed by the Respondent No. 2. The said orders are hereby quashed and set aside. Petition allowed.

Summary

Issues Involved:
1. Inconsistent approach by the Department in dealing with refund applications.
2. Department's deviation from the scope of show cause notices.
3. Distinction between inputs and capital goods under the CGST Act, 2017.

Summary of Judgment:

Inconsistent Approach by the Department:
The Petitioner argued that the Department adopted an inconsistent approach in dealing with refund applications, despite similar facts and circumstances. The Court agreed, noting that refund claims for previous and subsequent periods were sanctioned, but claims for July-September 2019 and October-December 2019 were withheld without valid justification. The principle of consistency dictates uniform treatment under similar factual and legal circumstances, and the Department's actions lacked cogent rationale, leading to perceptions of unfairness and arbitrary decision-making.

Department's Deviation from the Scope of Show Cause Notices:
The Petitioner contended that the Department exceeded the scope of show cause notices by introducing new grounds during adjudication. The Court emphasized that any action beyond the specific allegations in the show cause notice violates principles of natural justice. The Department's actions in this case were deemed impermissible, as they expanded the scope of inquiry without providing the Petitioner a fair opportunity to respond, thus undermining the integrity of the adjudicatory process.

Distinction Between Inputs and Capital Goods:
The Petitioner argued that specific goods used for R&D, software development, and validation were not capitalized in the books of account and should be treated as inputs under the CGST Act, 2017. The Court agreed, stating that the distinction between inputs and capital goods lies in whether the goods are capitalized. Since the specific goods were not capitalized and were essential for providing IT services, they qualify as inputs. The Court also referenced the Supreme Court's decision in Tata Engineering & Locomotive Company, which supports the classification of essential goods as inputs.

Conclusion:
The Court found the impugned orders dated October 25, 2021, and February 24, 2023, to be erroneous and inconsistent with established principles. The orders were quashed, and the writ petitions were allowed, with consequential reliefs to follow. The judgment underscores the importance of consistency, adherence to the scope of show cause notices, and the correct classification of goods under the CGST Act, 2017.