Meghalaya High Court Sets Aside Service Tax Demand Over 8.5-Year Adjudication Delay

The Meghalaya High Court has recently set aside a service tax demand against the Assam Rifles Group Insurance Scheme (ARGIS). It held that the Revenue authorities could not justify taking nearly 8.5 years to adjudicate the show-cause notice.

The Division Bench of Justice H.S. Thangkhiew and Justice B. Bhattacharjee observed that the delay was “undue and unexplained”. It held that the order passed after such a delay violated Section 73(4B)(b) of the Finance Act, 1994, and was “arbitrary and bad in law”.

The court was dealing with an order dated March 12, 2025. The order confirmed a service tax demand against ARGIS and imposed interest and penalties. It also invoked the extended limitation period under Section 73(1) on the allegation of willful suppression.

The dispute arose from a show-cause notice issued on October 5, 2016. ARGIS submitted its reply on October 25, 2016. However, its first personal hearing was held only on April 5, 2024, nearly 7.5 years after the notice was issued.

The final order was passed on March 12, 2025. The court recorded that this was 3,081 days, or about 8.5 years, after the show-cause notice.

Section 73 of the Finance Act, 1994, deals with recovery of service tax that was not paid, was paid short, or was wrongly refunded. It sets out the procedure and limitation framework for such recovery.

Section 73(4B) sets time frames for the tax officer to determine how much service tax is payable after a show-cause notice is issued. In an ordinary case under Section 73(1), the officer is required to determine the amount within six months, “where it is possible to do so”.

In cases where the extended limitation period under the proviso to Section 73(1) is invoked, Section 73(4B)(b) provides for a period of one year from the date of the notice, again “where it is possible to do so."

In this case, the Revenue had invoked the extended limitation period by alleging willful suppression. The High Court therefore held that Section 73(4B)(b) applied. The officer was required, as far as possible, to determine the service tax within one year of the notice.

The court clarified that the words “where it is possible to do so” do not give tax authorities unlimited time. A reasonable or plausible delay may be justified depending on the facts and circumstances of the case. However, the provision cannot be used to justify an unexplained, unreasonable, or inordinate delay.

The court relied on the Bombay High Court's decision in IDFC First Bank v. Union of India. That decision held that the statutory time limits cannot be treated as having no significance. It also observed that the phrase “where it is possible to do so” does not give an adjudicating officer complete freedom to decide a show-cause notice at will.

The court also referred to other decisions relied upon by ARGIS. These decisions, it observed, consistently recognized that a statutory authority must exercise its jurisdiction within a reasonable period, even where the law does not prescribe an absolute deadline.

The six-month and one-year periods under Section 73(4B) cannot be extended for an inordinate period without valid justification.

The Revenue argued that the delay was partly attributable to ARGIS. It relied on the petitioner's requests for exemption from service tax. It also relied on inter-departmental coordination, scrutiny of statutory records and detailed examination of the schemes to explain the delay.

The Revenue further contended that Section 73(4B) was directory rather than mandatory.

The court rejected the explanation for the prolonged delay. It observed that the show-cause notice itself contained the relevant facts, allegations, and reasons on which the proposed tax demand was based.

The court therefore observed that the representations made by ARGIS could not be treated as a restraint or bar under law to completing the adjudication. The respondents had failed to provide a justifiable reason that prevented them from completing the assessment within the prescribed time.

ARGIS had raised several other challenges to the service tax demand. These included whether its schemes were taxable services and whether compulsory salary deductions constituted “consideration” for a taxable service.

It also questioned whether ARGIS qualified as “Government” for the purposes of the Negative List and whether the Revenue authorities had the necessary jurisdiction.

It had also challenged the invocation of the extended limitation period based on alleged willful suppression. The High Court did not decide this issue or the other substantive challenges.

The court observed that the finding on the nearly 8.5-year delay was sufficient to dispose of the case. It therefore found it unnecessary to examine the other questions raised by ARGIS.

The court also considered the Revenue's objection that ARGIS had an alternative statutory appeal available. It held that the delay issue involved the interpretation of Section 73(4B) alongside the facts of the case. The court treated this as essentially a question of law and observed that the impugned order was arbitrary and offended Article 14 of the Constitution.

The High Court consequently set aside and quashed the March 12, 2025 Order-in-Original on the ground of the prolonged and unexplained delay. It allowed the writ petition to that extent, without deciding the other issues.