The Service tax authorities have recently issued a spate of SCNs for the FY 2015-16 to June 2017. Most of these notices are worded same and seems to be a template issued by someone from the ministry. The said SCN are purportedly issued under section 73(1) of the Finance Act 1994 alleging “wilful attempt to evade taxes”.
While preparing the template of the SCN the concerned draftsman has totally ignored the settled law laid down by apex court, the consequent circular issued by the Board (now CBIC) in 2017 and the specific provisions of section 73(1).
The said notices are identically worded and have a common grouse that the person has not submitted details of taxable receipts. In most cases the SCN is issued in the same template even where actually detailed submissions are made by the person concerned.
It appears that SCNs have been issued under the diktats of the higher authorities in ministry and hence the officers issuing the said SCN have no option but to ignore all law and submissions of the persons to whom such SCN are issued.
In this article we have analysed the legality of such SCNs.
Section 73(1) inapplicable:
It is stated that the SCN issued u/s 73(1) is inapplicable to the said SCNs. The said section comes into play only if the person has underpaid / not paid service tax or received excess refund.
In most cases the person who has received the SCN are either:
a) exempt from collection and payment of service tax; or
b) the service tax is payable by the service recipient instead of service provider under the reverse charge mechanism (RCM).
For instance, as per notification nos. 25/2012-ST issued by Central Government under section 93(1) and notification no. 30/2012-ST issued under section 68(2) the advocates providing legal services are not liable either to collect and pay service tax or to register under the Service tax provisions.
Therefore, since the chargeable provisions under section 66B is not applicable in most cases and persons receiving notices don’t have obligations under the said Act, section 73(1) is inapplicable at the outset itself.
The SCN is barred by Limitation
Even if for argument’s sake it is held that section 73(1) is applicable by any stroke of luck then too the said SCN is barred by limitation. The said section lays down a time limit of 30 months from the relevant date.
The relevant date is separately provided under section 73(6) as the date when the return was due to be filed. Therefore, for the period FY 2015-16 to June 2017 the 30 months time period relevant date has expired before the said SCN have been served on the persons concerned.
|FY 2015-16||Quarterly due date (relevant date)||30 months from due date (30 months from relevant date)|
|Q 1 – April to June||5th / 6th Of July, 2015||5th / 6th of December, 2017|
|Q2 – July to September||5th / 6th of October, 2015||5th / 6th of March, 2018|
|Q3 – October to December||5th / 6th of January, 2016||5th / 6th of June, 2018|
|Q4 – January to March||31st March, 2016||31st September, 2018|
|FY 2016-17||Quarterly due date (relevant date)||30 months from due date (30 months from relevant date)|
|Q 1 – April to June||5th / 6th Of July, 2016||5th / 6th of December, 2018|
|Q2 – July to September||5th / 6th of October, 2016||5th / 6th of March, 2019|
|Q3 – October to December||5th / 6th of January, 2017||5th / 6th of June, 2019|
|Q4 – January to March||31st March, 2017||31st September, 2019|
|FY 2017-18||Quarterly due date (relevant date)||30 months from due date (30 months from relevant date)|
|Q 1 – April to June||5th / 6th Of July, 2017||5th / 6th of December, 2019|
The officers have issued the SCNs apparently on the basis of an extended period of 5 years from the relevant date. However, the said extended period of 5 years is applicable only in following situations:
(IV) Concealing information with the wilful intent to defraud revenue
(V) Not following any provisions of law.
Burden on department to prove Fraud etc:
It is seen that the said SCNs are strangely silent on any instance or details citing any of the above elements. The SCNs merely cite the relevant provision of law but the fact of instance is totally absent.
The courts have repeatedly looked down upon such SCN as they lead to “inspector Raj”. Safeguards are provided in the process which are being ignored.
The apex court has in the case of M/s. Cosmic Dye chemical Vs Collector of Cen. Excise, Bombay [1995 (75) E.L.T. 721 (S.C.) held that
a) the burden is on the revenue to prove any of the above elements to uphold validity of an extended period of 5 years.
b) that detailed verification must be made prior to issuing SCN and complete details be provided to the person in the SCN.
However, in almost all cases the SCN is issued only for the reason that the turnover in income tax records do not match with the turnover in the service tax records. The reason for such mismatch is conveniently ignored by the officers even when pointed out citing the notifications of exemption and RCM. Hence, we believe that such SCNs will not pass the test of validity if and when challenged.
Inspired by the decision of SC in the case of M/s. Cosmic Dye chemical Vs Collector of Cen. Excise, Bombay (supra), the board issued a Circular no. 1053/02/2017-CX, F.No. 96/1/2017-CX.I dated 10th March, 2017 laying down guidelines for issuance of SCN. In principle it laid down that such SCN cannot be issued for making roving and fishing inquiry. The burden is on the department to prove with evidence and details as to which transaction falls in the above category. The officers are mandated to carry out proper verification before issuing such SCN.
The authors believe that the burden cannot be laid on the party to prove no fraud etc. Otherwise, there will be no difference between 30 months period and 5 years period if roving and fishing inquiry is allowed to be made for SCN of 5 years.
It is also stated that in absence of any instance of fraud or collusion being pointed out there is nothing for rebuttal by the person receiving such notice. How is the person required to prove that he is not liable for service tax other than relying upon government notifications. A person can offer rebuttal with evidence only where the department provides the details of the transactions which they consider to have led to underpayment / non payment of service tax. Merely comparing the income tax returns with service tax returns will not be an instance especially where it has been repeatedly pointed out that there was no liability on the party to collect and pay service tax. The department has not rebutted this contention while issuing the standard format SCNs.
The allegations of fraud and collusion etc are allegations of serious nature and they cannot be just thrown at a party lightly and in a vague manner. These allegations lead to serious consequences and such light mannered, routine allegations if upheld will give unbridled and arbitrary powers to the department to just allege and leave the party receiving notice scurrying to somehow prove his innocence and bona fide which is not the mandate of law.
Statutory Exemption from payment of Service Tax
The SCN claiming difference between IT return and ST return is merely a roving and fishing inquiry without even bothering to find that the persons are not liable to either register under service tax nor collect and pay service tax as per various notifications issued by Central Government.
As stated earlier, the department cannot use extended 5 year period to make a roving and fishing inquiry whether all transactions carried out by us fall within the above notifications. It should have been done within 30 months of relevant date.
In other words, So for SCN to be valid both the following conditions must be fulfilled:
1. Service tax should have been underpaid / not paid / excess refund
2. It should have happened due to fraud, collusion by the party.
If only condition 1 is satisfied then 30 months is limitation period.
If both 1 and 2 both are satisfied only then the 5 years period is applicable
In the instant SCNs, in fact none of the above conditions are satisfied. There is no underpayment or excess refund due to specific exemption or RCM notifications as mentioned above. Hence there cannot be possibly a valid SCN under section 73(1).
SCN do not meet requirement of a valid notice:
The SCN issued merely states that details be submitted within 30 days of receipt of the SCN. The said SCN does not mention the date and time of compliance or the mode of compliance i.e whether by personal appearance or through email etc. It is clear from various representations and newspaper reports that thousands of such illegal notices have been issued by the department. How and when will these proceedings come to an end is not known.
As we pen this article, we are informed that the Mumbai High Court has already stayed one such SCN. We are also told that many other writs have been filed by various other persons or are in the process of being filed. Unfortunately, the ministry is looking on the other side while dealing (rather, not dealing) with this issue. Welcome to ease of doing business in India. Let the courts and litigation flourish.