Litigation: An undisclosed levy for the State

[Mr. Somesh Arora]

“No tax shall be levied or collected except by authority of law.”- Art 265 of CoI.

But can authority of law be used to encourage litigation and make litigation a parallel levy.  May sound absurd, but practically it happens. And it has potential of bringing all efforts of the Government to bring ease of doing business to futile exercise.  Since 1990’s when interest was for the first time brought in and mandatory penalty introduced in Customs and Excise law, it is becoming more and pro-revenue and anti-business in its pragmatics.  This is how it may work out of many other ways:

Interest on stated duty evaded: Charge 18% on duty demands and pay only 6% if refunds are involved and that too after rigorous checks of unjust enrichment which itself can be cause of litigation. Further, pay interest on refund after 3 months of litigations attaining finality or if paid ad-interim during litigation, then on winning by the department call it “wrongful refund” and litigate further by charging 18% interest from the date of payment of wrongful refund. To top it all. Despite the rate of interest being penal vis-a-vis the assessees demand mandatory penalties with no discretion to the departmental adjudication or appellate authorities.  The only discretion which is available with the Departmental Authorities is to impose penalties under multiple sections, which process is happily used by many even bringing to naught the discretion of the assessee to avail settlement provision of paying 25% penalty within 30 days of adjuration.  So, whatever is provided by the statute is easily taken away by the unmindful Adjudicating Authorities and then against litigation gets prolonged and department’s cuckoo clock of 18% interest starts ticking against the assessees. The more the litigation the more the state benefits by way of either using money at 6% even when its litigation had no legs to stand beyond the clutches provided by administratively biased Adjudicating Authorities in initial stages or in case it manages to win, it gets right to recover 18% interest and penalties imposed along with pocketing whatever mandatory deposit has already come its way.

Mandatory deposit as a source of unwarranted revenue: It was supposed to bring down the discretions and consequent possibility of corruption that existed during the period when stay of pre-deposit and interest and penalty was required to be obtained under various tax laws as all were equally required to pay 7.5% or 10% of duty or penalty or penalty when no duty was involved, depending upon the appellate stage. But soon distortions started appearing like natural justice not being followed, RUDs not being given or cross-examination not being given and litigant still required to pay 7.5% to 10% of duty or penalties confirmed or High Courts being required to be approached in equity jurisdiction.  The number of parties subjected to Show Cause Notice for connivance/collusion or abatement went up so at least 10% could be recovered from them too. Separate adjudications being held of penalties while show causing for confiscation of goods under Section 124 and then another adjudication being done with same parties for demand of duty or penalty. The artificial bifurcation helping both collection of penalty and 10% of duty or penalty twice rather than segregating or collectively adjudicating both Section 124 SCN along with that of demand under Customs Act, 1962. Then there is ever increasing menace of invoking and confirming extended period demand most of which fall flat during litigation but created a neat mandatory deposit of hiked duty for the department without any hassles. Under GST, the mandatory deposit to hear appeal can be obtained by assessee only after paying 10% at the stage of first appeal and 25% before Appellate Tribunal and then even any litigation further may not help as department will have right to recover all dues including penalties despite approaching High Court or Supreme Court under Section 119 of CGST Act, 2017. Therefore, the finality of order is obtained at the Tribunal stage as far as department is concerned. Thus, it is all benefit for the State to litigate and not to any individual.  The right to equality thus has no existence as far as State is concerned vis- a–vis its tax payers.

PENALTY OR PENALTIES:

Section 129E of the Customs Act, 1962 and mutatis-mutandis Section 35F of Central Excise Act, 1944 provides for payment of 7.5% of duty or penalty where ‘duty’ or ‘penalty’ are in dispute or ‘penalty’ where such penalty is in dispute.  In pursuance of order of lower authorities against which appeal is to be filed.  However, despite term penalties (plural) having been used elsewhere in the statute, the Departmental Appellate Authority include sum total of all the penalties instead of a penalty (singular) while depositing mandatory deposit for litigation by the assessees.  This becomes another point of garnering undue revenue when penalties are imposed while confiscating goods under Section 124.  This despite the trite law that ambiguities at least in law have to be resolved in favour of public and also that there can not be same meaning assigned when different expressions are used in the statute by the legislature, such as ‘penalties’ and ‘penalty’ in the instant case. 

While the National Litigation Policy is being formulated and even the Prime Minister has expressed his concerns over undue litigation by the State depriving other litigants their right to litigate, it is feared that a reduced litigation may not be achieved at the cost of making the litigants run away from the courts or face severe financial odds which only go to favour the State.