SHOW CAUSE NOTICE CANNOT BE DROPPED WITHOUT ADJUDICATION WHEN DUTY PAID UNDER PROTEST

[Mr. M. GOVINDARAJAN]

Section 28 of the Customs Act, 1961 provides that where any duty has not been levied or not paid or has been short-levied or short- paid or erroneously refunded, or  any interest payable has not been paid, part-paid or erroneously refunded, the proper officer shall issue show cause notice to the assessee with directions to give reply within the time stipulated in the show cause notice.  The assessee, on his own, may assess the duty if he accepts the allegations in the show cause notice along with interest and pay the same.  The assessee is to inform the Department on such payment so that the show cause notice may not be issued.

After the issuance of show cause notice the assessee may file reply within the time stipulated in the notice.  The assessee is to be given reasonable opportunity of being heard.  After considering the reply, if any, filed by the assessee in response to the show cause notice along with the material evidences put forth before the Authority concerned, the Authority may either drop the proceedings or confirm the demand.

In case the assessee deposits the amount involved in the show cause notice under dispute the Authority cannot drop the proceedings.  The Authority is to conduct the proceedings and consider all the reply and relevant material evidences and pass orders as to either drop the proceedings or confirm the demand.  Without following this procedure the proceedings could not be dropped.

In ‘Meghamani Organics Limited v. Union of India’ – 2018 (10) TMI 1568 - GUJARAT HIGH COURT the petitioners are engaged in manufacturing various dyes and intermediaries.  They had an Export Oriented manufacturing unit situated at Bharuch.  Therefore the petitioner received various benefits meant for EoU including the reimbursement of central sales tax on goods purchased by the petitioners and utilized for such manufacturing activity. 

The Revenue issued show cause notices to the petitioners for the recovery of part of such reimbursements which related to the petitioners’ purchases of such goods from other EoUs.  In the meanwhile the petitioners wanted to exit from EOU.  The Revenue refused to permit to de-bond the petitioners’ manufacturing unit unless and until all dues were recovered.    The petitioners paid a um of ₹ 45,74,285/- under protest on two different dates since the Revenue would not allow the petitioners to exit from EoU.  The said amount has been paid despite the show cause notices have not been adjudicated. 

The petitioners contested the show cause notices.  The competent authority disposed all the three show cause notices by one order as detailed below-

• During the Audit conducted by the CRA review by CAG, Ahemdabad for the year 2012 it was observed that an amount of ₹ 38,46,108/- for the CST claims had been erroneously paid to the petitioner company.
• Appendix 14-I-I of HBP Vol.1 of the relevant period clearly mentioned that EoUs are entitled to reimbursement of CST paid by them on purchases made from DTA subject to fulfillment of certain terms and conditions.Further as per para 9.21 of FTP ‘Domestic Tariff Area’ means are within India which is outside SEZs and EPU/EGTP/STB/BTP.Therefore CST refund on supplies from EoU to EoU is inadmissible.This has resulted in incorrect grant of CST amount.
• As per para 2(a) of Appendix 14-I-I in the relevant period the supplies from DTA to EoU must be utilized by them for production of goods meant for export and/or utilized for export of services and may include raw material components, consumables, packing material, capital goods, spares, material handling equipment etc., on which CST has been actually paid by EoU.Therefore proportionate CST amount involved in DTA clearances was inadmissible.
• The petitioner was given opportunity to appear for personal hearing on 07.08.2015, 22.01.2016 and 06.06.2016 but none of the representative attended for personal hearing.
• However during the exit from 100% EoU scheme, the petitioner had paid an amount of ₹ 48,79,876/- against their pending paras of all their 100% EoUs.
• In view of the above facts and circumstances the Development Commissioner found sufficient grouds to drop show cause notice proceedings as the petitioner has paid a total amount of ₹ 38,46,108/- under section 13 of the Foreign Trade (Development and Regulation) Act, 1992 as amended read with Section 11 of the Foreign Trade (Development and Regulation) Act, 1992 as amended.

The petitioners in the present writ petition challenged the above said orders passed in three show cause notices by the Development commissioner, Kandla Special Economic Zone.

The High Court found two things curious about such order of Development Commissioner-

• The Development Commissioner recorded that he found sufficient grounds to drop the show cause notice proceedings as the unit has paid to the total demand.The petitioners had deposited the amount under protest since the petitioners were in a hurry to exit EoU but still continued to contest the show cause notices.Therefore, no question of dropping the show cause notices merely because the amount was deposited.
• The authority made fleeting observation on the inadmissible portion of the petitioners reimbursement which runs counter to the judgment of the Court in ‘Asahi Songwon Colors Limited v. Union of India’ – 2017 (7) TMI 512 - GUJARAT HIGH COURT .

The High Court also found that the Authority did not contest the basic aspects.  The petitioners’ assertion that without depositing the disputed amount, the petitioners’ request for de-bonding would not have been accepted, remains virtually admitted.  Even otherwise when the petitioners continued to oppose the demands raised in the show cause notices, their mere act of depositing the disputed amount under protest would not enable the authorities to close the show cause notices on the ground that the amount is already deposited.  The High Court pointed out that the deposit of an amount and paying the amount to the credit of the Government without protest are two entirely different concepts.  The said Authority was therefore to give his final legal opinion on the issues raised by the petitioners.

The High Court relied on the judgment in ‘Asahi Songwon Colors Ltd’, (supra) in which the petitioner of the case was an EoU and would purchase raw materials manufactured in India from units which may be situated in DTA or Non DTA such as EoU.  As per FTP prevailing at that time, the petitioner would claim reimbursement of CST on the purchases made.  Such reimbursements were granted at the relevant time.  Later on the Department issued demands for returning such reimbursement in relation to the petitioners’ purchases from EoU.  The Court in this case held that there was no such condition in the FTP and the condition sought to be read or imposed through the procedure laid down HBP could not over ride the provisions contained in the FTP.

The High Court that the facts in the present case are identical to the Asahi Songwon Colors Ltd., (supra).  The High Court quashed all the orders and directed that the demand raised in show cause notices would not be enforced against the petitioners.  The High Court directed to refund the entire amount deposited by the petitioners within the time prescribed in the order failing which the authorities would pay interest at the rate specified under section 75A of the Customs Act from such date.