CESTAT Mumbai Sets Aside Service Tax Demand, Says Show Cause Notice Must Be Served, Not Merely Issued

The Mumbai bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has set aside an appellate order that had sustained a ₹1.52 lakh service tax demand after finding that the Department failed to establish that the show cause notice had been served on the assessee before adjudication proceedings were initiated.

A single-member bench of Judicial Member Ajay Sharma allowed the appeal filed by Anil Lingappa Palle, proprietor of Khushi Enterprises, against an order of the Commissioner (Appeals), Pune, which had partly modified the Order-in-Original by reducing the demand to ₹1.52 lakh while sustaining interest and an equal penalty.

"The language employed in section 73 assumes significance. The expression employed in is “serve notice” and not merely “issue notice”. The distinction is deliberate and carries legal significance. The legislature has consciously used the expression “serve notice”",the tribunal held.

It added, "The statutory requirement is satisfied only when the notice is duly served in accordance with law. The burden of proving such service squarely rests upon the department. In the present case, despite a specific direction of this Tribunal, the department has failed to produce any dispatch register, postal receipt, acknowledgment due, delivery report or any other contemporaneous evidence to establish service of the show cause notice. In these circumstances, mere production of a copy of the notice or reliance upon its date cannot substitute the mandatory requirement of service."

Palle contended that the show cause notice dated December 28, 2020, was never served on him and that he became aware of the show cause notice and the adjudication order only after receiving the Order-in-Original on July 5, 2024.

Although he raised this objection before the commissioner (Appeals), it was rejected on the ground that he had subsequently participated in the appellate proceedings.

When the tribunal directed the department to produce proof of service, it stated that the notice had been issued under a Document Identification Number (DIN), but the office copy contained no dispatch number, and its dispatch could not be verified.

It also failed to produce any dispatch particulars, postal acknowledgment, speed post receipt or other documentary evidence showing that the notice had been dispatched or served upon the appellant.

The tribunal observed that service of a show cause notice is "the very foundation of adjudication proceedings" and that unless the notice is served, the noticee is deprived of the opportunity to submit a reply, produce evidence, contest the allegations and avail an effective opportunity of personal hearing.

It held that adjudication undertaken without such service constitutes a violation of the principles of natural justice. The tribunal further held that mere issuance of a notice does not satisfy the statutory requirement of service and that the burden of proving valid service rests on the Department.

Holding that the Department had failed to establish service of the show cause notice even within the extended limitation period, the tribunal ruled that the adjudication stood vitiated for violation of the principles of natural justice.

It accordingly set aside the January 31, 2025 Order-in-Appeal while allowing the appeal with consequential relief.

For Appellant: Advocate Makrand Joshi,

For Respondent (Revenue): S. B. P. Sinha, Authorised Representative (AR).