Introduction: In a recent case, EID Parry (India) Ltd. approached the CESTAT Hyderabad against a demand of service tax on the payment of insurance premium for a marine cargo policy. The issue revolved around the admissibility of Cenvat credit on the said premium. The CESTAT’s decision highlighted the lack of clarity in the show cause notice issued by the tax authorities.
Analysis: The show cause notice issued to the appellant did not provide detailed grounds for disallowing the Cenvat credit on the marine cargo insurance premium. The notice only quoted legal provisions without specifying the reasons for denying the credit based on the nexus to manufacturing or clearance activities.
The Commissioner (Appeals) and the Original Authority made contradictory arguments to establish the inadmissibility of the credit, but neither of them aligned with the grounds stated in the show cause notice. The CESTAT emphasized that authorities cannot decide a matter based on grounds not explicitly alleged in the show cause notice, as it would violate the principles of natural justice.
Citing a precedent case, the CESTAT observed that when a show cause notice lacks clarity in its grounds, it deprives the party of an effective opportunity to defend its case. Consequently, the CESTAT set aside the order of the Commissioner (Appeals) and allowed the appeal filed by EID Parry (India) Ltd.
Conclusion: The CESTAT’s decision in the case of EID Parry (India) Ltd. highlights the significance of providing clear and specific grounds in show cause notices. Authorities must ensure that the reasons for denying any credit or imposing liabilities are explicitly stated to give the parties a fair opportunity to present their arguments. Lack of clarity in show cause notices can lead to the rejection of the demands by the appellate authorities.
FULL TEXT OF THE CESTAT HYDERABAD ORDER
The appellant were served with a show cause notice by the Department alleging that in terms of definition of “input service” under Rule 2(l) of the Cenvat Credit Rules 2004, they are not entitled to avail service tax credit on “insurance premium” paid on marine cargo policy for the year 2016-17. The Department, from the reading of the definition under Rule 2(l) of Cenvat Credit Rules 2004, with effect from 01.04.2011, came to conclusion that the service mentioned in para 2 of the show cause notice received by the tax payer cannot be considered as the input service for them. The show cause notice dated 17.07.2018 was issued placing the reliance on the Marine Cargo Policy No. 5002002116P108170546 and Assessee’s mail dated 05.06.2018.
2. The said show cause notice, along with another show cause notice dated 06.06.2017, which was on the same issue, were confirmed by the Original Adjudicating Authority vide common order dated 08.07.2019. In his Order-in-Original, interalia, he came to the conclusion that the service on which assessee had taken credit and utilised the credit is not in the nature of input service as the said service has no nexus either directly and indirectly with manufacturing or clearance activity of the appellants. He also relied on Rule 9(5) & 9(6) of CCR 2004, which required that the burden regarding admissibility of credit availed by assessee lies on them. He also relied on Board’s Circular dated 20.10.2014 in support of his contention that payment of transport charges incurred on transport, payment of insurance or who bears the risk etc are not relevant consideration in determination of place of removal. He has also submitted that assessee has not supplied any documentary evidence in support of their claim, that place of removal is customer’s premises.
3. On appeal, Commissioner (Appeals), interalia, went through the arguments and documents supplied by the appellant and he carefully analysed the P.O. relied upon by both the sides and thereafter he arrived at the conclusion that sale was not on FOR basis as claimed by the appellant. He has distinguished the facts and decision in the case of M/s Roofit Industries Ltd., and thereafter found it not applicable to the facts of the case. He came to the conclusion that the price in this case is ex-works and not FOR as claimed by the appellant. He has given reasons as to why either Roofit case or Emco case would not be applicable in the facts of the case. Instead, he has relied upon the case of Ispat Industries Ltd., [2015 (324) ELT 670 (SC)], which is later to the judgment in the Roofit Industries Ltd. He also relied on the judgment in the case of Ultratech Cement Ltd., [2018 (9) GSTL 377 (SC)] and Vasavadatta Cements Ltd., [2018 (11) GSTL 3 (SC)].
4. On the other hand the appellant has mostly argued that in view of P.O., the sale is on FOR destination basis. They also relied on Board’s Circular No. 1065/4/2018-CX dated 08.06.2018. They have submitted that cost of insurance has to be borne by them and therefore the risk in transportation lies with appellant. They also relied on CESTAT’s judgment in the case of Anglo French Drugs & Industries Ltd., Vs CCE, ST & Customs, Banglore-II [2017-TIOL-1307-CESTAT-BAN] in support of fact that marine cargo and fire extinguishers are directly connected with business and therefore included in the definition of input service.
5. The appellants have, interalia, also submitted that impugned order has gone beyond the allegations made in para 5 of both the show cause notices. They have invited attention to para 5 where the allegation is stated as “From a reading of the definition of “input service”, it appears that the services mentioned in Para 2 above, received by the taxpayer, cannot be considered as input services for them. Therefore, it appears that they cannot avail Cenvat credit of Service Tax paid on the said services and therefore it appears that the taxpayer is liable to reverse the Cenvat credit so availed by them on the services mentioned in Para 2 of this Notice”. However, there was no explanation or details given as to how and on what basis the above services cannot be classified as input service.
6. Before deciding the issue on merit, what is apparent from the facts and records of the case is that the show cause notice has not given any detailed grounds on the basis of which the Department has alleged that subject credit was not admissible in the facts of the case. The show cause notice has only quoted the legal provisions, but have not brought on record any grounds based on which they have came to the conclusion that the said credit i.e. premium paid for Marine Insurance was not an admissible credit, either on the grounds of nexus to manufacturers or on the grounds that the clearance being ex-work and not FOR basis etc therefore not admissible. In the absence of any clear cut charge and the grounds given in the show cause notice, the confirmation of demand by taking recourse to various contradictory grounds, which were not even alleged explicitly and explained in the show cause notice, would not be legally tenable.
7. It is now a settled law that the matter cannot be decided by the Original Authority or in appeal by the Appellate Authority on the grounds not covered or alleged in the show cause notice.
8. The Delhi Bench of Tribunal in their order in the case of M/s R.K. Singh & Company Vs Commissioner of Customs and Central Excise, Bilaspur [2023-TIOL-577-CESTAT-DEL] have in a case related to service tax matter, after carefully going through plethora of case laws, found that the Show Cause Notice was vague and therefore set aside the order of Commissioner confirming the demand based on said SCN. Though the case is in relation to service tax, the ratio can be relied upon in the case of matters relating to customs or central excise matter as well. Further, when the SCN lacks clarity of the grounds on which demand is raised, it deprives the noticees an effective opportunity to defend his case before the authority. It is clearly against the principles of natural justice. In this case, it is apparent that no specific grounds for denying the credit has been given except for quoting the legal provisions. The Commissioner (Appeals) has tried to establish that it is a case of admissibility or otherwise on account of determination of “place of removal” portion of definition of input service as per CCR 2004, and held that as clearance was ex-works, credit is not admissible. The Original Authority had confirmed demand on the grounds of “absence of nexus” with manufacture or clearance. The appellants have valiantly tried to convince that clearance is on FOR basis and therefore even if it is not covered under main definition, it is still an admissible credit. All the arguments and counter arguments could have been avoided had the Revenue given exact detailed grounds in show cause notice as to why the credit of “insurance premium paid for Marine Insurance service” was not an admissible credit in a given set of facts. Revenue has clearly failed on this count.
9. Thus, on the ground itself that both Order-in-Original and Order-in- Appeal have travelled beyond allegations in show cause notice, the order of the Commissioner (Appeals) is liable to be set aside without going into the merits of the case advanced by both the sides. Therefore, the order of the Commissioner (Appeals) dated 27.02.2020 is set aside and appeal filed by the appellant is allowed.
(Order pronounced in the open court on 24.07.2023)