1 IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 28.02.2019 CORAM THE HONOURABLE Dr. JUSTICE [ENTITY] [CASE NUMBER] & WMP Nos.1800 & 1801 of 2019 & [CASE NUMBER] M/s. [ENTITY], Represented by its National Head - Finance & Accounts, Mr. P.Vijayakumar, Rathna Tower No.1, Super A-7 Thiru-vi-ka Industrial Estate, Guindy, Chennai - 32 Petitioner vs. The Commissioner of Central Goods and Service Tax and Central Excise - Audit II Commissionerate, MHU Complex, 692 Anna Salai, Nandanam, Chennai 600 035 Respondent Prayer:- Writ Petition filed under Article 226 of the Constitution of India to issue a Writ of Certiorari to call for the records of the respondent in relation to the impugned show cause notice SL No.07/2018 (Commissioner), dated 29.08.2018 and to quash the same. For Petitioner: Mr. [ENTITY] For Respondent: Mr. [ENTITY], Sr. Standing Counsel ORDER
The writ petitioner challenges notice No.07/2018, dated 29.08.2018, for the period from October 2012 to June 2017 calling upon the petitioner to show cause in the following terms:-
http: www.judis.nic.in ' 9. Therefore, M/s. Freight Systems India Private Limited, Rathna Tower No.1 Super A-7 Thiru-vi-ka Industrial Estate, Guindy, Chennai - 600 032 is required to show cause to the Commissioner of CGST & Central Excise, Chennai South Commissionerate, MHU Complex, 692 Anna Salai, Nandanam, Chennai 600 035, as to why-
i) the service tax totally amounting to Rs.16,18,93,417/- (Rupees sixteen crore eighteen lakhs ninety three thousand four hundred and seventeen only) payable for the period from October 2012 to June 2017 should not be demanded from them under proviso to [SECTION] of the [ACT].
ii) interest at the appropriate rate on the amount of Rs.16,18,93,417/- should not be recovered from them under the provisions of [SECTION] of the [ACT], and
iii) penalty should not be imposed upon them under [SECTION] and [SECTION] of the [ACT].'
2. Mr. [ENTITY], learned counsel appearing for the petitioner assails the impugned show cause notice on two grounds. The first ground is that Circulars issued by the Central Board of Excise, Customs and Service Tax as well as Departmental Instructions have formulated a procedure, whereby a process of consultation is envisaged as between the Assessee and the Service Tax Authorities to arrive at an amicable resolution of disputes raised by the Tax Department, prior to escalation of disputes to the level of issuance of show cause notice. The first instruction is dated 21.12.2015, in [CASE NUMBER], the second instruction/clarification is dated 08.07.2016 in [CASE NUMBER], the third instruction / clarification is dated 13.10.2016 in [CASE NUMBER] and the fourth Circular is issued in [CASE NUMBER], dated 10.03.2017. According to the learned counsel, the process of consultation has not been followed in the present case.
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3. The second contention raised by the learned counsel is that the show cause notice seeks to bring to tax the income from certain activities carried out by the petitioner that have been clarified as 'business auxiliary service' or 'business support service', in terms of the [ACT]. The identical issue has been held in favour of the petitioner for later periods by the Customs, Central Excise and Service Tax Appellate Tribunal (CESTAT), vide its order dated 28.03.2018. Thus, even on merits, the impugned Show Cause Notice is untenable in law.
4. Per contra, Mr.[ENTITY], learned Senior Standing Counsel appearing for the respondent / Revenue would deny the allegation that the consultative process has not been followed in the present case. He draws attention to communication dated 03.05.2018 from the Assistant Commissioner of CGST and Central Excise to the petitioner putting the petitioner to notice about e-mail dated 19.04.2018 from the Audit Group regarding liability of service tax to the tune of Rs.16,91,06,992/- received as per credit note from its foreign branches for the period in question. The detailed objection of the audit department is annexed to the aforesaid letter, wherein at paragraphs 8 and 9, after extracting all relevant statutory provisions and Rules, the Assessing Officer states as follows:-
' 8) In this case, the goods are consigned by the foreign entities to the assessee to undertake the activity of break bulk of the goods at the Port of destination in the Indian Territory, on behalf of them, for delivery to the importer of such goods in India. Thus in terms of the provisions of [SECTION] of the said Rules supra, the place of provision of service provided by the assessee falls within the taxable territory. Further the service provided by the assessee to their foreign entities is not covered within the Negative list of services specified under [SECTION] of the [ACT]. http: www.judis.nic.in Hence the service provided by the assessee is a taxable service and the consideration received by way of credit note issued by their foreign entities as profit sharing is leviable to service tax under [SECTION] of the [ACT].
9) The service tax totally amounting to Rs.16,91,06,992/- shall be payable on the credit note received for the period from Oct 2012 to June 2017.' The Officer has thus called for the reply of the petitioner to be furnished urgently.
5. The assessee has replied to the aforesaid audit query by its letter, dated 07.05.2018 in the following terms:-
'Apropos above, the following factual submissions are made to clarify your queries regarding income received through credit notes.
1. We are licensed multi-modal transport operator (MTO) engaged in providing freight forwarding services by sea and air.
2. The copy of the agreement provided to you was drafted in 2004.
Our business model has undergone drastic changes depending on the growth, specialization and core business activities and areas of strength with further factors of business climate and environment and economic constructs.
3. The agreements are broad based and non-exclusive, taking into account out business interests and specializations and operate on mutually agreed terms and conditions. The present business model envisages that we share in equal ratio, the profits derived from the freight differentials earned.
4. The profit share, which is nothing but the freight differentials earned by us and the foreign entities in their respective territories, is paid through credit notes on a monthly basis through an accounting and settlement mechanism after reconciliation process.' No personal hearing has been sought and none afforded by the Officer.
6. Thus, according to Mr.[ENTITY], the consultation process, has been faithfully followed in the present case and there is absolutely no justification on the part of the petitioner to have approached this Court. Mr.[ENTITY], urges that http: www.judis.nic.in the writ petition is not maintainable and the petitioner be directed to appear before the Assessing Officer and place on record all materials in support of its contentions. He points out that the order of the CESTAT dated 29.08.2018 has not even been referred to in the petitioners' reply to the audit objection and that the impugned show cause notice only calls for the attendance of the petitioner and no grievance has been caused to it. He also draws the attention of this Court to the contents of the show cause notice, wherein the Assessing Officer has discussed the reply filed by the petitioner before the Audit Wing. Thus, there has been application of mind by the Assessing Officer to the objections filed by the Assessee and this, in effect, is, according to him, substantial compliance with the requirement for consultative process.
7. Heard learned counsel.
8. The tenor of the Circulars / Instructions makes it clear that the introduction of the Consultative process is as a measure to avoiding litigation. I refer to the Circulars / Instructions in some detail, since it is necessary to understand the purpose for which the process has been introduced.
9. In its Instructions dated 21.12.2015 the Board states as follows:-
'5. Pre show cause notice consultation with the Principal Commissioners and Commissioners is being made mandatory prior to issue of SCN in the case of demands of duty above Rs.50 lakhs (except for preventive / offence related SCN's'.
10. Thereafter, Instruction / Clarification, dated 08.07.2016 referring to the earlier Circular dated 21.12.2015 provides for a clarification in the following terms:-
'Please refer to the instruction issued vide [CASE NUMBER] dated 21st December 2015, wherein, http: www.judis.nic.in pre show cause notice consultation with the Principal Commissioner / Commissioner prior to issue of show cause notice in cases involving demands of duty above Rs.50 lakhs (except for preventive / offence related SCN's) has been made mandatory.
2. Certain doubts have been expressed with regard to this. It is clarified that the pre show cause notices consultation shall be done by the adjudicating authority with the assessee concerned. This is a step towards trade facilitation and promoting voluntary compliance and also to reduce the necessity of issuing show cause notice.'
11. Instruction / Clarification [CASE NUMBER], dated 13.10.2016, further clarifies the Consultative process in the following terms:-
'Subject: Pre-show cause notice consultation in cases other than those detected by Preventive / Anti-Evasion and amount involved being more than Rs.50 lakhs - Reg.
Please refer to the notification issued vide [CASE NUMBER], dated 28th June 2016, wherein it has been clarified that the pre-show cause notice consultation with the assessee concerned shall be done by the adjudicating authority.
2.0 Certain doubts have been further expressed with regard to this.
As per [CASE NUMBER], dated 22.09.2014 Audit Commissionerate has been made responsible to issue the show cause notices, wherever necessary, after the audit objections are confirmed in the MCMs. Such show cause notices are answerable to and adjudicated by the Executive Commissioner or the Subordinate officers of the Executive Commissionerate as per the adjudication limits. In such cases, show cause notice issuing authority and adjudicating authority are different.
3.0 Hence, it is clarified that in cases where show cause notice issuing authority / Commissionerate and adjudicating authority / Commissionerate are different, pre-show cause notice consultation with the assessee concerned shall be done by the Commissioner of show cause notice issuing authority / commissionerate. 4.0 In cases where the SCN issuing authority is from the Executive Commissionerate, the pre-SCN consultation shall be done by the concerned commissioner.
5.0 All cases of pre-SCN consultation which leads to closure of case without issuing of SCN, either in part or whole, the file shall be http: www.judis.nic.in submitted to the relevant reviewing authority for case of such nature to keep the reviewing authority informed of the decision.'
12. [CASE NUMBER], dated 10.03.2017, deals with the subject of Consultation at paragraph 5 in the following terms:-
'5.0 Consultation with the notice before issue of Show Cause Notice: Board has made pre show cause notice consultation by the Principal Commissioner / Commissioner prior to issue of show cause notice in cases involving demands of duty above Rs.50 lakhs (except for preventive / offence related SCN's) mandatory vide instruction issued from [CASE NUMBER]/[CASE NUMBER]/MISC/15, dated 21st December 2015. Such consultation shall be done by the adjudicating authority with the assessee concerned. This is an important step towards trade facilitation and promoting voluntary compliance and to reduce the necessity of issuing show cause notice.'
13. A wholistic reading of the above extracts makes it clear that the Customs Department has incorporated the Consultative process as a measure of Alternative Dispute Resolution to reduce litigation wherever possible. This is to facilitate resolution of disputes raised by the Audit in the light of the responses sought and received from the Assessee thus obviating the necessity of even a show cause notice where the dispute can be resolved in an amicable fashion.
14. Clarifications dated 08.07.2016 and 10.03.2017 make it expressly clear that these are steps towards trade facilitation and promoting voluntary compliance and also a measure to reduce the necessity of issuing show cause notices where avoidable. This is thus, a laudable initiative that has to be diligently pursued for maximum benefit to both the assessee as well as the Revenue. In the present case, the objections dated 07.05.2018 are in general terms. The petitioner points out that the document in the possession of the Department is of the year 2004, whereas the enquiry relates to the period October http: www.judis.nic.in 2012 to June 2017. The business activities and methods of doing business are likely to have changed over the years. There is also no reference, as rightly pointed out by Mr.[ENTITY], to the order of the CESTAT, dated 28.03.2018. However, there has been no opportunity extended to the assessee for a face-to-face with the assessing officer, which, in my view, is what a 'consultation' entails. One could argue, as Mr.[ENTITY] has, that no personal hearing has been sought in this case and in any event, such hearing will be afforded by the respondent prior to his decision whether to confirm the proposals in the show cause notice or otherwise.
15. That may be so. However, the import of the Circulars / Instructions is to provide a medium for 'consultation' between the Assessee and the Department, prior to issuance of show cause notice. In fact, Master Circular dated 10.03.2017 uses the phrase 'such consultation shall be done by the Adjudicating Authority with the Assessee concerned'.
16. According to Black's Law Dictionary, the word 'consultation' is defined as follows:
'1. The act of asking the advice or opinion of someone. 2. A meeting in which parties consult or confer. 3. International law. The interactive methods by which states seek to prevent or resolve disputes.'
17. The obvious inference is that consultation has to be between the assessee and the officer and prior to the stage of issuance of show cause notice. In fine, I conclude that the consultative process as envisaged by the Department mandates an opportunity of personal hearing with the Assessee, face to face, in order to make the process an effective one. The petitioner, in this case, has been denied this opportunity.
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18. Moreover it is not unusual for Courts to read an opportunity of personal hearing into a statutory provision where the provision may not contain such requirement. The Supreme Court in the case of [ENTITY] vs. Union of India (199 ITR 530), was considering the provisions of [SECTION] of the [ACT], dealing with compulsory acquisition of immovable property and read into the Chapter the requirement of personal hearing to the Assessee, prior to passing of an order of compulsory acquisition. This is all the more so, in the case of a scheme of Alternative Dispute Resolution where the emphasis and very purpose is to make the consultative process as effective as possible. In [ENTITY]'s case, (supra), it has been held as follows:-
'26. The next question to which we propose to address ourselves is whether the provisions of [SECTION] are bad in law as there is no provision for giving the concerned parties an opportunity of being heard before an order is passed under the provisions of [SECTION] of the said Chapter for the purchase by the Central Government of an immovable property agreed to be sold in an agreement of sale. In this regard a plain reading of the provisions of the said Chapter clearly shows that they do not contain any provision for giving the concerned parties an opportunity to be heard before an order for compulsory purchase of the property by the Central Government is made. In connection with the requirement of opportunity of being heard before an order for compulsory purchase is made we find that somewhat similar questions have been considered by this Court on a number of occasions. In the case of [PRECEDENT] facts were that the first respondent who was in the class-I service of the Survey of India and rose to the position of Deputy Director was compulsorily retired by an order under [SECTION] of the Fundamental Rules, no reasons were given in the order. Respondent No. 1 challenged the order on the ground that it violated principles of natural justice and no opportunity had been given to the first respondent to show cause against his compulsory retirement. A Division Bench of this Court in its judgment in that case observed as follows:-
Rules of natural justice are not embodied rules nor can they be elevated to the position of fundamental http: www.judis.nic.in rights. As observed by this Court in [PRECEDENT]the aim of rules of natural justice is to secure justice or to put it negatively to prevent miscarriage of justice. These rules can operate only in areas not covered by any law validly made. In other words they do not supplant the law out supplement it.' It is true that if a statutory provision can be read consistently with the principles of natural justice, the courts should do so because it must be presumed that the legislatures and the statutory authorities intend to act in accordance with the principles of natural justice. But if, on the other hand, a statutory provision either specifically or by necessary implication excludes the application of any or all the principles of natural justice then the court cannot ignore the mandate of the Legislature or the statutory authority and read into the concerned provision the principles of natural justice. Whether the exercise of a power conferred should be made in accordance with any of the principles of natural justice or not depends upon the express words of the provision conferring the power, the nature of the power conferred, the purpose for which it is conferred and the effect of the exercise of that power.
27. In the case of [PRECEDENT], a Constitution Bench comprising five learned Judges of this Court had occasion to deal with the provisions of [SECTION] of the [ACT]. [ENTITY], C.J., (as he then was) delivering the judgment of the Court held that "the said Section confers on the Commissioner the discretion to cause an encroachment to be removed with or without notice.
That discretion has to be exercised in a reasonable manner so as to comply with the constitutional mandate that the procedure accompanying the performance of a public act must be fair and reasonable. The Court must lean in favour of this interpretation because this helps sustain the validity of the law." [ENTITY], C.J., went on to observe as follows:-
It must further be presumed that, while vesting in the Commissioner the power to act without notice, the Legislature intended that the power should be exercised sparingly and in cases of urgency which brook no delay. In all other cases, no departure from the audi alteram partem rule ('Hear the other http: www.judis.nic.in side') could be presumed to have been intended. [SECTION] is so designed as to exclude the principles of natural justice by way of exception and not as a general rule. There are situations which demand the exclusion of the rules of natural justice by reason of diverse factors like time, place the apprehended danger and so on. The ordinary rule which regulates all procedure is that persons who are likely to be affected by the proposed action must be afforded an opportunity of being heard as to why that action should not be taken. The hearing may be given individually or collectively, depending upon the facts of each situation. A departure from this fundamental rule of natural justice may be presumed to have been intended by the Legislature only in circumstances which warrant it. Such circumstances must be shown to exist, when so required, the burden being upon those who affirm their existence.
28. It must, however, be borne in mind that courts have generally read into the provisions of the relevant sections a requirement of giving a reasonable opportunity of being heard before an order is made which would have adverse civil consequences for the parties affected. This would be particularly so in a case where the validity of the section would be open to a serious challenge for want of such an opportunity.
29. It is true that the time frame within which the order for compulsory purchase has to be made is a fairly tight one but in our view the urgency is not such as would preclude a reasonable opportunity of being heard or to show cause being given to the parties likely to be adversely affected by an order of purchase under [SECTION]. The enquiry pursuant to the explanation given by the intending purchaser or the intending seller might be a somewhat limited one or a summary one but we decline to accept the submission that the time limit provided is so short as to preclude an enquiry or show cause altogether.
30. In the light of what we have observed above, we are clearly of the view that the requirement of a reasonable opportunity being given to the concerned parties, particularly, the intending purchaser and the intending seller must be road into the provisions of [SECTION] In our opinion, before an order for compulsory purchase is made under [SECTION], the intending purchaser and the intending seller must be given a reasonable opportunity of showing cause against an order for http: www.judis.nic.in compulsory purchase being made by the appropriate authority concerned Although [SECTION] does not contain any express provision for the affected parties being given an opportunity to be heard before an order for purchase is made under [SECTION], not to read the requirement of such an opportunity would be to give too literal and strict an interpretation to the provisions of [SECTION] and in the words of Judge Learned Hand of the United States of America "to make a fortress out of the dictionary." Again, there is no express provision in [SECTION] barring the giving of a show cause notice or reasonable opportunity to show cause nor is there anything in the language of [SECTION] which could lead to such an implication. The observance of principles of natural justice is the pragmatic requirement of fair play in action. In our view, therefore, the requirement of an opportunity to show cause being given before an order for purchase by the Central Government is made by an appropriate authority under [SECTION] must be read into the provisions of [SECTION] There is nothing in the language of [SECTION] or any other provision in the said Chapter which would negate such an opportunity being given.
Moreover, if such a requirement were not read into the provisions of the said Chapter, they would be seriously open to challenge on the ground of violations of the provisions of [SECTION] on the ground of non-compliance with principles of natural justice. The provision that when an order for purchase is made under [SECTION] must be recorded in writing is no substitute for a provision requiring a reasonable opportunity of being heard before such an order is made.'
19. In the light of the aforesaid discussion, the impugned show cause notice is set-aside. The respondent will call upon the petitioner to appear before him with all relevant materials and afford it full opportunity of hearing and consultation prior to issuance of show cause notice, if at all necessary.
20. This writ petition is allowed in the aforesaid terms. There will be no order as to costs. Consequently, the connected WMPs are closed.
28.02.2019 Index : Yes/No Web http: www.judis.nic.in : Yes / No Speaking Order / Non Speaking Order srk http: www.judis.nic.in Dr. [ENTITY], J., srk To The Commissioner of Central Goods and Service Tax and Central Excise - Audit II Commissionerate, MHU Complex, 692 Anna Salai, Nandanam, Chennai 600 035 & [CASE NUMBER] & [CASE NUMBER] 28.02.2019 http: www.judis.nic.in