2025 (4) TMI 1192 - HC - Service Tax

Recovery of service tax with interest and penalty - exempted services under Entry Serial No. 12 (e) of the notification - adequate opportunities of personal hearing provided to petitioner as per Central Board of Excise Customs (C.B.E. C.) Circular No. 1053/02/2017-CX dated 10.03.2017 or not - violation of principles of natural justice - HELD THAT - This writ application is fit to be allowed on the very first ground taken by learned counsel for the petitioner i.e. the ground of violation of principles of natural justice the other issues raised by learned counsel for the petitioner are not required to be discussed and adjudicated upon for the present in this writ application. On the point of violation of principles of natural justice this Court finds that the petitioner has made out a case. The facts reveal that the show cause notice was issued on 13.10.2021 no defence reply was filed but then for two and half years nothing happened in the proceeding. For the first time a date was fixed on 11.01.2024 for personal hearing. On this date the petitioner submitted a letter requesting a deferment which was accepted by Respondent No. 3 and a date of hearing was fixed on 14.02.2024. Admittedly on 14.02.2024 the representative of the petitioner appeared - The impugned order (Annexure-P4) nowhere records that the Respondent No. 3 fixed a further date giving an opportunity to the petitioner company to appear with the documents and make its submissions. All that is stated in the impugned order in paragraph 3.2 is that the representative of the petitioner was explicitly asked to provide substantiating documentation supporting the assertions made by the noticee. However as of the present moment even after 15 days the noticee has failed to submit any documents in support of his claim. Thus it appears that when the hearing took place on 14.02.2024 no specific date was fixed by Respondent No. 3 giving an occasion to the petitioner company to know the actual date of the next hearing. Paragraph 14.4 of the master circular mandates that the adjudicating authority must maintain a record of personal hearing and written submission made during the personal hearing. Evidence of personal hearing and written submission on record would be very important while adjudicating the case. A combined reading of paragraph 14.3 and 14.4 of the master circular leaves no room to contest that Respondent No. 3 may deviate from these provisions of the master circular but in the present case we find that Respondent No. 3 has not followed the mandate of granting at least three opportunities of personal hearing to the petitioner company. Conclusion - The statutory requirement as envisaged under Section 33A of the Central Excise Act 1944 read with paragraph 14.3 of the master circular has not been complied with. The impugned order is liable to be set aside - The matter is remitted to the Respondent No. 3 for fixing a date of hearing giving at least four weeks time to the petitioner to produce the documents and submit a written submission in support of its contention - application allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court are:

(a) Whether the impugned order demanding service tax, interest, and penalties under the Finance Act, 1994, is valid and sustainable.

(b) Whether the order violates the principles of natural justice by failing to provide the petitioner with adequate opportunities of personal hearing as mandated under Section 83 of the Finance Act, 1994 read with Section 33A of the Central Excise Act, 1944 and the Central Board of Excise & Customs (C.B.E.&C.) Circular No. 1053/02/2017-CX dated 10.03.2017.

(c) Whether the services rendered by the petitioner fall within the exemption under Serial No. 12(e) of the Mega Exemption Notification No. 25/2012-ST dated 20.06.2012, thereby exempting the petitioner from payment of service tax.

(d) Whether the impugned order was passed beyond the prescribed period of limitation under Section 73(4B) of the Finance Act, 1994.

(e) Whether the petitioner's conduct amounts to willful suppression or evasion of tax, thereby justifying invocation of extended limitation and imposition of penalties.

(f) Whether the operation of the impugned order should be stayed during the pendency of the writ application.

2. ISSUE-WISE DETAILED ANALYSIS

(a) Validity of the Impugned Order Demanding Service Tax, Interest, and Penalties

Legal Framework and Precedents: The demand for service tax is made under the proviso to Section 73(1) of the Finance Act, 1994, which allows recovery of service tax in cases of willful suppression or evasion. Interest is levied under Section 75, and penalties under Sections 77 and 78 of the said Act. The adjudication procedure is governed by Section 83 of the Finance Act, 1994, which incorporates relevant provisions of the Central Excise Act, 1944, including Section 33A.

Court's Interpretation and Reasoning: The Court examined the impugned order dated 29.02.2024, wherein the Commissioner confirmed the demand of service tax amounting to Rs. 3,54,59,160/- along with interest and penalties. The order was based on the conclusion that the petitioner had engaged in taxable services without proper registration and had suppressed the taxable value.

Key Evidence and Findings: The Commissioner relied on the show cause notice dated 13.10.2021, alleging suppression and evasion for the period April 2016 to June 2017. The petitioner had executed agreements for turnkey projects involving design, construction, supply, testing, and commissioning of pipe water supply schemes with fluoride treatment.

Application of Law to Facts: The Commissioner found that the petitioner's activities did not qualify for exemption under the Mega Exemption Notification and that the petitioner had not produced any documents to substantiate its claim. Hence, the demand was confirmed.

Treatment of Competing Arguments: The petitioner argued exemption applicability and procedural violations, while the Respondent maintained that the petitioner had not cooperated and had evaded tax. The Court, however, did not decide on the merits of exemption or evasion due to procedural infirmities.

Conclusion: The Court refrained from upholding the demand on merits, noting procedural lapses that vitiated the order.

(b) Violation of Principles of Natural Justice and Adjudication Procedure

Legal Framework and Precedents: Section 83 of the Finance Act, 1994, read with Section 33A of the Central Excise Act, 1944, mandates that the adjudicating authority must provide an opportunity of being heard to the party. Section 33A(2) limits adjournments to three times. The C.B.E.&C. Master Circular No. 1053/2/2017-CX dated 10.03.2017 prescribes that at least three opportunities of personal hearing must be given with sufficient intervals, with separate communications for each hearing.

Court's Interpretation and Reasoning: The Court found that the petitioner was issued a show cause notice in October 2021, but the first hearing was fixed only in January 2024, after a delay of over two and a half years. On the first hearing, the petitioner sought adjournment, which was granted. On the second hearing in February 2024, the petitioner appeared and explained the nature of its operations and requested time to produce documents. The impugned order reveals that no further hearing dates were fixed, and the petitioner was asked to submit documents within 15 days. The order was passed thereafter without further personal hearing.

Key Evidence and Findings: The impugned order's paragraph 3.2 records that the petitioner was asked to submit documents but does not record any subsequent hearing or opportunity to present those documents. The Master Circular mandates maintaining records of personal hearings and written submissions, which was not complied with.

Application of Law to Facts: The Court held that the statutory requirement of granting at least three opportunities of personal hearing was not fulfilled. The absence of further hearing dates and failure to record any adjournment or opportunity to present evidence violated the principles of natural justice.

Treatment of Competing Arguments: The Respondent argued that sufficient opportunity was given and that principles of natural justice cannot be applied rigidly. The Court rejected this, emphasizing the mandatory nature of the procedural safeguards.

Conclusion: The Court concluded that the impugned order is vitiated due to violation of principles of natural justice and non-compliance with statutory adjudication procedures.

(c) Applicability of Exemption under Mega Exemption Notification

Legal Framework and Precedents: Notification No. 25/2012-ST dated 20.06.2012 exempts certain services under Serial No. 12(e), including services related to water supply schemes and fluoride treatment plants.

Court's Interpretation and Reasoning: The petitioner contended that the services rendered under the agreements fall within this exemption. However, the Commissioner found no documentary proof supporting this claim.

Key Evidence and Findings: The petitioner submitted agreements and related documents showing turnkey projects for fluoride-affected areas. The Respondent found these insufficient to establish exemption.

Application of Law to Facts: The Court did not adjudicate on the exemption issue due to the procedural infirmities but noted that the petitioner should be given an opportunity to present evidence on this aspect in further proceedings.

Treatment of Competing Arguments: The Respondent challenged the exemption claim, relying on absence of registration and documentary proof.

Conclusion: The exemption issue remains open for fresh adjudication after compliance with procedural requirements.

(d) Limitation Period for Passing Order under Section 73(4B)

Legal Framework and Precedents: Section 73(4B) of the Finance Act, 1994 requires that the adjudicating authority pass the order within one year from the date of receipt of the adjudication file, "wherever it is possible to do so." The Delhi High Court has held that this provision is not to be misused to keep matters pending indefinitely.

Court's Interpretation and Reasoning: The petitioner argued that the order was passed beyond the limitation period, as the show cause notice was issued in October 2021, but the first hearing was only in January 2024.

Key Evidence and Findings: The Respondent contended that delay was due to the COVID-19 pandemic and transfer of cases and that the provision is not mandatory but discretionary.

Application of Law to Facts: The Court did not decide on this ground, as the matter was disposed on natural justice grounds, but noted the delay in proceedings.

Treatment of Competing Arguments: The Court acknowledged the Respondent's explanation but did not accept delay as justification for denial of opportunity.

Conclusion: The limitation issue remains undecided but was not relied upon to uphold the impugned order.

(e) Allegation of Willful Suppression and Evasion

Legal Framework and Precedents: The proviso to Section 73(1) of the Finance Act, 1994 applies in cases of willful suppression or evasion of tax liability, enabling extended limitation and imposition of penalties.

Court's Interpretation and Reasoning: The Respondent alleged that the petitioner had not taken registration and had suppressed taxable value, constituting evasion.

Key Evidence and Findings: No conclusive evidence was found on record due to lack of proper hearings and submissions.

Application of Law to Facts: The Court refrained from adjudicating on this issue due to procedural defects.

Treatment of Competing Arguments: The petitioner denied willful suppression, asserting exemption and procedural lapses.

Conclusion: The issue requires fresh consideration after adherence to procedural safeguards.

(f) Stay of Operation of the Impugned Order

The Court did not specifically address the prayer for stay but effectively stayed the operation of the impugned order by setting it aside and remitting the matter for fresh adjudication.

3. SIGNIFICANT HOLDINGS

The Court held:

"The statutory requirement as envisaged under Section 33A of the Central Excise Act, 1944 read with paragraph '14.3' of the master circular has not been complied with."

"The impugned order is liable to be set aside on this ground alone."

"The matter is remitted to the Respondent No. 3 for fixing a date of hearing giving at least four weeks' time to the petitioner to produce the documents and submit a written submission in support of its contention."

"The Respondent No. 3 shall pass a fresh reasoned order considering all aspects of the matter which would be brought to his notice by the petitioner within a period of two months from the date of receipt/production of a copy of this order."

The Court established the core principle that adherence to principles of natural justice, including providing at least three opportunities of personal hearing with adequate notice and intervals, is mandatory in adjudication proceedings under the Finance Act, 1994 and Central Excise Act, 1944, as reinforced by the master circular.

It emphasized that failure to comply with these procedural safeguards renders the adjudication order liable to be quashed, regardless of the merits of the case.

The Court declined to decide other issues such as exemption applicability, limitation, and willful suppression, leaving these for fresh adjudication after compliance with procedural requirements.