SCN issued without considering or rebutting the clarifications or explanations placed on record – Few possible ways to address such SCNs

[Shripada Hegde]

Since the time this trend of issuing SCN for difference in ST returns and Income Tax returns started, there has been a considerable increase in the disturbing trend of issuing SCNs by completely ignoring the documents, explanations, clarifications placed on record by the assessee during the pre-SCN enquiry stage. Such SCNs put forth no rebuttals against the clarifications placed on record by the assessee.

Such SCNs hurt the assessees in many ways. Few examples are as below

• SCNs demanding tax are issued even on exempt services and services covered by negative list. In such case, the assessee is subjected to unnecessary hardship of adjudication process.
• Gives room for authorities to ignore submissions at later stage and thereby gives room for unnecessary hardship – I have come across cases where ‘explanations, clarifications and additional facts and evidences’ placed on record were ignored while issuing SCN and when the said ‘explanations, clarifications and additional facts and evidences’ are again put forth in adjudication process, the adjudicating authorities have denied looking into such ‘explanations, clarifications and additional facts and evidences’ claiming such an examination would be outside the scope of SCN.
• The main issue gets digressed and usually noticee will be left to assume the actual issue against which he has to show cause and to the extent to which he has to show cause.
• Assessee is deprived of proper opportunity to counter the possible stands which the department may take against his explanations and clarifications. This might result in assessee being caught in unnecessary litigations and remands.

This article tries to explore few of the possible defences which may be taken against such SCNs.

It is a settled position of law that a vague SCN is a nullity and is void ab initio [COMMISSIONER OF C. EX., BANGALORE VERSUS BRINDAVAN BEVERAGES (P) LTD. [2007 (6) TMI 4 - SUPREME COURT], BRITOMATICS ENGG. PVT. LTD. VERSUS COMMISSIONER OF CENTRAL EXCISE, MUMBAI [2006 (3) TMI 44 - CESTAT, MUMBAI] MR. DHARAMBIR SINGH & CO. VERSUS COMMISSIONER OF CUSTOMS, C.E. & S.T., NOIDA [2017 (9) TMI 455 - CESTAT ALLAHABAD], SHILPI ENTERPRISES VERSUS C.C.E., ALLAHABAD [2016 (12) TMI 1263 - CESTAT ALLAHABAD] Further, in the case of ROYAL OIL FIELD PRIVATE LIMITED VERSUS UNION OF INDIA [2005 (10) TMI 100 - BOMBAY HIGH COURT] the honourable High Court of Bombay has struck down the SCN as vague for not disclosing the material based on which claim of the assessee or evidence produced by the assessee was rejected. Reliance can be placed on this judgment of Bombay High Court and SCN can be rebutted as vague. Once the SCN is shown to be vague, very validity of said SCN becomes questionable in the light of various judgements and the settled position of law.

Further, pre-notice consultation was made compulsory, vide Circular No 1053/02/2017-CX dated 10-Mar-2017, before issuing SCN. Also, in the case of AMADEUS INDIA PVT. LTD. VERSUS PRINCIPAL COMMISSIONER, CENTRAL EXCISE, SERVICE TAX AND CENTRAL TAX COMMISSIONERATE [2019 (5) TMI 669 - DELHI HIGH COURT] SCN was quashed for not holding pre-notice consultation. While setting aside the SCN, the honourable High Court observed that ‘very object of para 5.0 is to narrow down the scope of the dispute by engaging the Assessee on specific areas where the Respondent may require information/clarification from the Assessee regarding alleged evasion of service tax’. Narrowing down the scope of dispute inevitably includes taking into account the materials produced and rebutting the stands put forth by the assessee. That being the case, the act of ignoring the materials placed on record by the assessee during pre-notice consultation turns the whole process of pre-notice consultation into a mechanical act or mere formality. When the compulsory procedure has not sufficiently been followed to satisfy the intent behind such a procedure, the procedure cannot be said to have been performed. As a result, the SCN becomes void in the light of HC judgement mentioned above (reliance can be placed on case laws where in SCNs and OIOs have been struck down by courts as the SCNs were issued with predetermined mindset or where SCNs have been turned into mere mechanical formality)

Further, there are a number of cases where adjudication orders were struck down for not discussing and not giving findings on the materials placed on record by assessee [HSBC ELECTRONIC DATA PROCESSING (INDIA) PVT LTD VERSUS COMMISSIONER OF CUSTOMS, CENTRAL EXCISE AND SERVICE TAX [2014 (2) TMI 1000 - CESTAT BANGALORE], PDS LOGISTICS INTERNATIONAL PVT. LTD. VERSUS COMMISSIONER OF SERVICE TAX, BANGALORE [2006 (8) TMI 680 - CESTAT BANGALORE], COMMISSIONER OF SERVICE TAX, BANGALORE VERSUS M/S QUALCOMM INDIA PRIVATE LIMITED [2011 (1) TMI 692 - CESTAT, BANGALORE], M/S. NITCO LOGISTICS PRIVATE LIMITED VERSUS THE COMMISSIONER OF SERVICE TAX [2020 (4) TMI 43 - CESTAT NEW DELHI]. As the SCNs and OIOs are on different footing, these case laws may not be directly binding. However, the intent behind such decisions will hold good even in case of SCNs as in both scenarios non-consideration of materials result in unwarranted implications.

On a case to case basis, options of filing writs, to question the validity of SCN, before the  high courts can also be explored based on the above reasonings.

It is not that such SCNs hurt only assessees. They also hurt revenue. Consider a scenario where SCN is issued for difference between ITR and ST-3 where the assessee has clarified the difference to be relating to job work charges exempt from ST. When such clarification is ignored, the SCN would have only proposed tax on a ‘service’ which it claims to be taxable based on the disclosure made in ITR. It is obvious that the assessee will place the clarification again on the record via SCN Reply. While concluding the case, the scope adjudication will have to be restricted to ‘whether the difference between ITR and ST-3 relates to what assessee claims as job work?’ as the SCN only contains allegations towards difference and not towards claim of exemption. The adjudication cannot examine ‘whether what assessee claims as job work is in fact job work? Or whether what assessee claims as exempt is actually exempt under law?’ since no relevant allegations were made in the SCN. This cripples the authorities as they cannot confirm (legally) tax even in cases where they are of the view that exemption claimed in erroneous. Even if exemption is denied on some ground, such OIOs are less likely to sustain in appeals. While filing the appeal against such orders “OIO traveling beyond the scope of SCN” should be taken as a ground to question the very sanctity of orders.

Any constructive criticisms, additions or modifications to the above are most welcome.

Discussions to this article

[KASTURI SETHI]

Dear Shripada Hegde Ji,

Very useful article. The cited case laws will help the assessees indeed. Such SCNs are called 'lame' SCNs. Your voice should reach the officers of the department. If implemented, it will save Govt.'s precious man hours and assessees' time, money and energy. You have laboured hard in the interest of readers of TMI. Lame SCNs are really harassment to the noticees.

Before issuance of SCNs sufficient opportunity should be given to the assessees to explain their stand. The issuance of SCN without completion of investigation is also in violation of principles of natural justice.

[Gnanamuthu samidurai]

Sir,

.Again and again Hon'ble courts and superior authorities are issuing directions in such matters . . Again and again such notices are being issued and even orders are passed. We have to again approach the court by spending money . It is a matter of issue happening for several decades.Please suggest a solution instead of bringing back the history.

[Shripada Hegde]

Dear Gnanamuthu sir,

Problems are long persisting and there is no doubt that everyone wants solutions. However it is also a hard reality that solution is not that simple and may not be coming any soon. But, till then we have no option than to deal with such issues legally. That's where my article tries to be of some help.

[KASTURI SETHI]

Sh.Gnanamuthu Samidurai Ji,

Until and unless action is not taken against those officers who issue lame SCNs and confirmed the demand (without any merit in order to save their skin) either by the department or by the courts, this problem will continue unabated. Even holding personal hearing becomes mere empty formality. Such type of adjudications increase avoidable workload of the Courts also. Sh. Shripada Hegde has raised his voice with the judgements of various courts. Action is to be taken by the Govt.

The assessees who have suffered because of lame SCNs should come forward. The sufferer should come forward.