SHOW CAUSE NOTICE / ADJUDICATION- BASIC INGREDIENTS

[Dr. Sanjiv Agarwal]

Adjudication proceedings in any assessment or penal proceedings is a very important aspect of tax administration. It provides an opportunity to the assessee to be heard and show cause before any action is taken in proceedings relating to him. Issue of show cause notice is a pre-condition to a proper adjudication which is an intimation to assessee of the proposed action by the department. The adjudicating officer adjudicates the show cause notice by considering the reply to show cause notice and other available or produced evidences by the noticee. A SCN should follow certain principles to be legally sustainable.

Power of Adjudication — Section 83A

The Finance Act, 2005 had inserted a new Section 83A which relates to Power of Adjudication. According to Section 83A, where under this Chapter or the Rules made thereunder, any person is liable to a penalty, such penalty may be adjudged by the Central Excise Officer conferred with such power as the Central Board of Excise and Customs constituted under the Central Board of Revenue Act, 1963, may, by notification in the Official Gazette, specify.

Allahabad High Court (DB) in U.G. Sugar & Industries Ltd. v. CCE (2012) 276 ELT (A61) held that raising of defence in reply to show cause notice did not amount to proof of correctness. It confirmed the CESTAT’s order that the onus lies on the person claiming the benefit to maintain the accounts books and then claim the benefit. Once the defence was raised by the appellants, it was essentially for the appellants to lead necessary evidence in that regard. Mere raising of plea in answer to the show cause notice does not by itself mean the proof of correctness of such plea. When the plea relates to certain factual aspect, it is absolutely necessary for the person raising such plea to make the same goods by producing sufficient evidence in support of such plea. Undisputedly, the appellants did not produce any such evidence in support of such plea.

Adjudication and SCN

Adjudication pre-supposes issuance of a show cause notice (SCN) – an intimation to show cause, explain or defend the proposed action as mentioned in the SCN. Infact SCN is the first limb of principle of natural justice i.e., no one should be condemned unheard. SCN should be clear, precise and unambiguous. Adjudication has not been defined in the Act but according to www. wikipedia. org, “Adjudication is the legal process by which an arbiter or judge reviews evidence and argumentation including legal reasoning set forth by opposing parties or litigants to come to a decision which determines rights and obligation between the parties involved."

Following three types of dispute are resolved through adjudication:

• Disputes between private parties, such as individuals or corporations.

• Disputes between private parties and public officials.

• Disputes between public officials or public bodies.

Adjudication of SCN

When show cause notices are issued under provisions of the Finance Act, 1994 charging any person for contravention of any provisions of the said Act and rules and/or notifications issued there under and penal action is proposed the competent officers of the Department adjudge the case and issue orders. This process is called adjudication.

Often notices are issued under section 73 of the Finance Act, 1994 for determination of tax, and the matter is decided by a competent officer. This is also referred to adjudication in common parlance.

Central Excise Officers conferred with powers of adjudication by CBEC shall be empowered to adjudicate the cases of imposition of penalties. Thus, as per Section 83A, Central Excise Officers shall be vested with powers of adjudicating penalties on service providers for defaults under service tax provisions. Such powers shall be notified by the Government later.

When any amount is demanded as Service Tax or other dues from any person under the Finance Act, 1994 and rules made thereunder towards recovery of service tax or other dues which is not levied or paid or short levied or short paid by any person, or erroneously refunded to any person, and/or any person is liable to penalty under the said Act/Rules, notices are issued in the interest of natural justice to enable such person to understand the charges and defend his case before an adjudicating officer.

Where any service tax has not been levied or paid or has been short-levied or short-paid or erroneously refunded, the person chargeable with the service tax, or the person to whom such tax refund has erroneously been made, may pay the amount of such service tax on the basis of his own ascertainment thereof, or on the basis of tax ascertained by a Central Excise/Service Tax Officer before service of notice on him and inform the Central Excise/Service Tax Officer of such payment in writing, in such a case show cause notice will not be issued. [Refer Section 73(3) of Finance Act, 1994]. However, sub-section (3) of Section 73 of Finance Act, 1994, is not applicable to the cases involving fraud or collusion or wilful mis-statement or suppression of facts or contraventions of any of the provisions of Chapter V of the Finance Act, 1994 and the rules made thereunder with intent to evade payment of Service Tax [Refer sub-section (4) of Section 73 of Finance Act, 1994].

General Importance of Adjudication

Adjudication of offences under the Central Excises Act, 1944, or the Customs Act, 1962 or the Finance Act, 1994 (Service Tax) are important functions of the officers of the Central Excise, Customs and Service Tax competent to adjudge offences. It seeks to ensure that no economic loss is caused by the alleged contravention by the imposition of an appropriate penalty after an adjudication. If an innocent person is punished or the punishment is more than warranted by the nature of offence it may undermine the trust between the government and the public. If, on the other hand, a real offender escapes the punishment provided by law, it may tend to encourage commission of offences to the detriment both of the government and the honest tax payers. The authorities exercising quasi-judicial function are duty bound to justify their existence and carry credibility with the people by inspiring confidence in the adjudicatory process. The public is entitled to have assurance that process of correction is in place and working. It is the requirement of law that correction process of judgments should not only appear to be implemented but also seem to have been properly implemented. These functions, therefore, cast a heavy responsibility on the officers invested with the powers of adjudication and confiscation to use it with utmost care and caution, free from any prejudice or bias, so that the innocent does not suffer by any injustice done to him and the real offender does not escape the punishment provided by law. 

Central Excise, Customs and Service Tax laws are self-contained laws. Besides containing the provisions for levy of duty, adjudication of matters relating to the provision of the Law is also provided for in the legal provisions e.g. for demand of duty, credit availed, determination of classification, valuation, confiscation and imposing penalty. The adjudication is done by the departmental officers, and in this capacity they act as quasi-judicial officers. It is an important function of the officers and casts heavy responsibility on the officers invested with the powers of adjudication to use it with utmost care and caution, free from any prejudice or bias. It is important to know and understand the facts of the case, processing them properly and to apply correctly the sections and rules of Central Excise law or Notifications that may be relevant to the facts of each case.   taxmanagementindia.com

Statutory Provisions

Statutory provisions have been provided under section 33A of Central Excise Act, 1944 in respect of Adjudication procedure. It requires that the Adjudicating authority shall, give an opportunity of being heard to a party in a proceeding, if the party so desires. Further, section 35Q of the Central Excise Act, 1944 provides for appearance by authorized representative before a central excise officer or Appellate Tribunal in connection with any proceedings. The Adjudicating authority may, if sufficient cause is shown, at any stage of proceeding referred to above, grant time, from time to time, to the parties or any of them and adjourn the hearing for reasons to be recorded in writing. However, no such adjournment shall be granted more than three times to a party during the proceeding.

The above also applies to cases of Service Tax in terms of section 73 of the Finance Act, 1994, wherein sub-section (2) reads as follows:

“(2) The Central Excise Officer shall after considering the representation, if any, made by the person on whom notice is served under sub-section (1), determine the amount of service tax due from, or erroneously refunded to, such person (not being in excess of the amount specified in the notice) and thereupon such person shall pay the amount so determined.”

Moreover, the provisions of section 35Q of the Central Excise Act, 1944 with regards to

appearance of authorized representatives apply mutatis mutandis to cases of Service Tax. 

Basic Ingredients of Show Cause Notice / Adjudication 

• SCN is a mandatory requirement for raising any demand of duty / service tax.
• The basic aim of SCN is to provide a reasonable opportunity to assessee to present his case or show cause to the proposed demand before any demand is confirmed.
• The time limit for issuance of SCN is one year from the relevant date i.e., date of filling of the return.
• Summons u/s 14 of the Central Excise Act, 1944 can be issued before the SCN, if the assessee does not cooperate or submit the sought information forthwith.
• If any SCN is to be issued on the basis of audit para, it would be desirable that the audit team provides the draft of SCN to the adjudicating authority with necessary documentary evidences and enclosures.
• SCN cum - demand notice merely on the basis of audit para without documentary evidences may not be sustainable. Before any SCN is issued, it is desirable and expected that a written communication be sent to the assessee so that does not plead ignorance, non intimation or innocence at a later stage. Such letter may contain necessary particulars about period, nature of demand, amount, non compliances etc.
• Reasonable time may be given for adjudication to take place. Issue of order one day after the SCN has been held to bad [Ganesh Polytex Ltd. v. Union of India 2010 (9) TMI 299 - ALLAHABAD HIGH COURT]. 
• SCN cum - demand notice should be based on proper investigation by the officials and duly supported by valid documentary evidences. [Ram Steel Rolling & Forging Mill v. CCE, Mumbai – II 2006 (9) TMI 332 - CESTAT, MUMBAI; Swastik Tin Works v. CCE, Kanpur 1986 (3) TMI 192 - CEGAT, NEW DELHI].
• A proper SCN has to specify the demand, i.e., quantify the demand and liability in clear terms
• A letter from the department is not a proper SCN [CCE v. Merchant Impex 2011 (9) TMI 783 - KARNATAKA HIGH COURT].
• Adjudication is an important function of revenue officers.
• Adjudication is a quasi judicial function.
• Powers of adjudication are subject to jurisdiction and monetary limit for different officers.
• Periodical SCN is issued when the issues under consideration are not decided and such issues continue for a longer period.
• For genuine reasons, three adjournments should be given to assessee or giving opportunity of hearing for three occasions before passing any order. 
• Cases remanded back for de novo adjudication should be decided by authority which passed the remanded order.
• In case of multiple show cause notices, adjudication shall be done by the authority competent to adjudicate the SCN involving highest amount of tax / duty.
• Adjudicating authority cannot pass two orders on same SCN, though corrigendum may be issued on minor issues without substantially altering the order.
•  Adjudicating order should comply with the principles of natural justice [Meenakshi Associates Pvt. Ltd. v. CCE, Noida 2009 (1) TMI 552 - CESTAT, NEW DELHI; Afloat Textiles Pvt. Ltd. v. CCE, Vapi 2007 (7) TMI 444 - CESTAT, AHMEDABAD].
• Order cannot travel beyond the scope of SCN. [Mcnally Bharat Engineering Co. Ltd. v. CCE 2011 (2) TMI 1240 - JHARKHAND HIGH COURT].
• Adjudicating order should be in accordance with judicial discipline.
• Order of adjudication must show application of mind and be self - speaking / reasoned order. Reasons for order would ensure justice.
• Adjudication order must be a speaking order giving clear findings on all the points raised by the defence dropping the proposed allegations or rebuttal of defence points.
• Adjudication order has to be dated and signed by the adjudicating authority.
• Adjudicating authority should communicate the order / decision within a reasonable time after the personal hearing is held (say, upto one month). However, this does not happen in reality and even the time taken is more than six months in many cases.
• Conditional orders or orders subject to verification are to be avoided and should not be passed.

Adjudication orders must be dispatched by registered post acknowledgement due. The period of filing an appeal has to be reckoned from the date of receipt of adjudication order.

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