"Unexplained Delay": Rajasthan High Court Quashes Service Tax Order Passed Nine Years After Show Cause Notices

The Rajasthan High Court has recently set aside a service tax demand raised nearly nine years after issuance of show cause notices, holding that revival of proceedings after prolonged administrative dormancy amounts to an arbitrary exercise of power and defeats the statutory discipline prescribed under the Finance Act.

A Division Bench of Justice Arun Monga and Justice Yogendra Kumar Purohit quashed an order dated October 24, 2019 passed by the Joint Commissioner, Central Excise and Goods and Service Tax, Udaipur.

The order had confirmed additional service tax demands for the financial years 2007–08, 2009–10 and 2010–11 against Hazi A.P. Bava & Company, a proprietorship concern engaged in fabrication and erection of structures at the sites of principal employers using materials supplied by them.

"The delay is entirely attributable to administrative inaction, resulting in revival of proceedings after an inordinate lapse of time, thereby causing serious prejudice to the petitioner and rendering the continuation of proceedings contrary to the principles of certainty, fairness, and reasonable exercise of statutory power," the court observed.

The proprietorship concern had received multiple show cause notices between 2009 and 2011 alleging short payment of service tax on the premise that fabrication formed part of “erection, commissioning, or installation” and was taxable under Section 65(39a) of the Finance Act, 1994.

An earlier demand for 2008–09 was adjudicated against it but was set aside by the CESTAT in December 2011, which held that fabrication did not fall within the taxable entry.

Despite the tribunal's ruling, the department did not adjudicate the remaining notices. Instead, in March 2012, they were transferred to the “Call Book”, keeping the proceedings in abeyance. Although the department filed an appeal against the tribunal's decision before the High Court, it later withdrew the appeal in September 2018 in view of the CBIC Circular dated July 11, 2018 prescribing monetary limits for filing appeals.

The department subsequently revived the old notices and passed the impugned order in October 2019 confirming tax demands along with interest and penalties, which the company challenged before the High Court.

Before the Court, the taxpayer argued that the issue of taxability of fabrication stood conclusively settled by the tribunal's order, which had never been set aside and therefore continued to bind the adjudicating authority. It also contended that revival of the show cause notices after nearly nine years was grossly time barred and arbitrary.

The department argued that the tribunal's order had not been accepted on merits and had been duly challenged before the High Court. It contended that withdrawal of the appeal on monetary grounds did not amount to acquiescence nor did it confer precedential value on the tribunal's ruling.

Examining Section 73(4B) of the Finance Act, 1994, which prescribes timelines for adjudication of show cause notices, the Bench observed, “It provides that the Central Excise Officer 'shall' determine the tax liability within six months from the date of notice in normal cases under Section 73(1), and within one year where the extended period is invoked under the proviso to Section 73(1) or in cases covered by the proviso to Section 73(4A), 'where it is possible to do so'.”

The court added, “Nevertheless, the Department is expected to act within a reasonable period and cannot justify inordinate or unexplained delays in concluding proceedings.”

Rejecting the justification that the matter was kept in the Call Book pending the outcome of appellate proceedings in a similar case, the Bench held, “Where the authority sleeps over the matter for years and provides no satisfactory explanation, any attempt to resurrect the proceedings amounts to arbitrary exercise of power.”

Referring to the timeline in the present case, the Court noted, “Impugned assessment order qua the said financial year was passed on 24.10.2019 which is once again beyond the one year period in terms of Section 73(4B).”

Allowing the writ petitions, the bench set aside the Order-in-Original dated October 24, 2019. The court, however, clarified that the issue whether fabrication falls within the ambit of “erection, commissioning or installation” under Section 65(39a) of the Finance Act, 1994 was left open to be decided in appropriate proceedings in future.

For Petitioner: Advocates Lokesh Mathur and Prakash Kumar

For Respondents: Advocates Kuldeep Vaishnav and Arpit Yoganandi