Service Tax Audit report cannot be regarded as an order of determination

Federal Mogul Goeteze India Limited Vs Commissioner, Central Tax, (GST) (CESTAT Delhi)

CESTAT Delhi held that an audit report cannot be regarded as an order of determination under Voluntary Compliance Encouragement Scheme. Accordingly, audit report is akin to an order of determination under the relevant sections of the Scheme.

Facts- An audit of the records of the appellant was conducted for the period 2004 – 05 to 2007 to 2007– 08 resulted in issuance of show cause notice dated 19 October 2012 alleging wrongful availment of Cenvat credit by the applicant in respect of Medical Insurance Services provided to its employees for the period 2007 – 08 to 2011 – 12.

Thereafter, Voluntary Compliance Encouragement Scheme was introduced vide Chapter VI of the Finance Act, 2013. The appellant submitted a VCES declaration u/s. 107 of the Finance Act 2013 and made declaration of its service tax dues amounting to Rs. 7,22,89,051/- for the period 2007-08 to 2011-12.

As per the condition of the VCES, 2013, the appellant deposited an amount of Rs. 3,61,44,524/- as service tax dues by 31.12.2013. In response to the appellant’s VCES declaration, the designated authority issued a letter dated 9.1.2014 proposing to reject the application.

The applicant filed his written submissions before the designated authority. Further, on 28.06.2014, the appellant paid the remaining 50% of the declared amount of service tax dues equivalent to Rs.3,61,44,527/- as per the provisions of the said scheme.

The Designated Authority partially rejected the VCES declaration vide order dated 24.05.2016 stating that once an audit paragraph is admitted by the Appellant, payment of tax dues amounts to determination of tax dues as envisaged in the said scheme. The Commissioner (Appeals) vide his order upheld the order of designated authority. Hence, the present appeal has been filed.

Conclusion- An order of determination under sections 72, 73 or 73A would be an order in relation to a show cause notice issued under such indirect tax enactment. An audit report cannot be regarded as an order of determination.

In view of the above findings, we allow the appeal and hold that the Commissioner (Appeals) has erred in holding that the audit report is akin to an order of determination under the relevant sections of the Scheme. We set aside the said order and hold that the VCES declaration filed by the Appellant was correct. We direct the jurisdictional authority to issue the VCES 2 for full and final settlement under the Scheme.

FULL TEXT OF THE CESTAT DELHI ORDER

The current appeal has been filed to assail the order passed by the Commissioner (Appeals) vide Order-in-Appeal No. 86/ST/DLH/2017 dated 12^th December, 2017. The appellant is a company engaged in the business of manufacture of automobile parts. The appellant is also registered with the service tax department. An audit of the records of the appellant was conducted for the period 2004 – 05 to 2007 to 2007– 08 resulted in issuance of show cause notice dated 19 October 2012 alleging wrongful availment of Cenvat credit by the applicant in respect of Medical Insurance Services provided to its employees for the period 2007 – 08 to 2011 – 12.

2. Thereafter, in the Budget for the financial year 2013-14, Voluntary Compliance Encouragement Scheme was introduced vide Chapter VI of the Finance Act, 2013. The appellant submitted a VCES declaration under section 107 of the Finance Act 2013 and made declaration of its service tax dues amounting to Rs. 7,22,89,051/- for the period 2007-08 to 2011-12. As per the condition of the VCES, 2013, the appellant deposited an amount of Rs. 3,61,44,524/- as service tax dues by 31.12.2013. In response to the appellant’s VCES declaration, the designated authority issued a letter dated 9.1.2014 proposing to reject the application on the following grounds:

(i) An Internal Audit Report was issued

(ii) A SCN dated 19.10.2012 had been issued to the applicant for the same period as covered under the declaration, which was pending as on 1.3.2013.

3. The applicant filed his written submissions before the designated authority. Further, on 28.06.2014, the appellant paid the remaining 50% of the declared amount of service tax dues equivalent to Rs.3,61,44,527/- as per the provisions of the said scheme. The Designated Authority partially rejected the VCES declaration vide order dated 24.05.2016 stating that once an audit paragraph is admitted by the Appellant, payment of tax dues amounts to determination of tax dues as envisaged in the said scheme. The Commissioner (Appeals) vide his order upheld the order of designated authority. Hence, the present appeal has been filed.

4. Shri B. L. Narasimhan, learned Counsel for the Appellant appeared for the hearing today. He contended that the order of partial rejection of the designated authority is incorrect as section 106 of the Finance Act, 2013 specified conditions that rendered a declarant ineligible to declare his/her tax dues under the VCES, which is, that any person may declare his tax dues in respect of which no notice or an order of determination under section 72 or section 73 or section 73A has been issued before the 1st day of March, 2013. He contended that none of the restrictive clauses as illustrated in section 106 of the Finance Act, 2013 is applicable to them as no show cause notice nor an order in original had been issued to them. He also pointed out that the audit had concluded on 22.9.2012, which is prior to 1.3.2013. In addition, he stated that the show cause notice which was pending did not include the tax issues as declared in the VCES. He also placed reliance on the Circular No. 169/4/2013 dated 13.05.2013 which had clarified that all tax dues that were not covered by a show cause notice or an order of determination can be declared under the scheme, subject to the provisions of the scheme. To buttress his arguments that an audit report is not an order, the learned counsel for the appellant placed reliance on the Supreme Court judgement in Jaswant Sugar Mills Vs Laxmi Chand & Ors¹ wherein it has been held that for any decision to be an order of determination, it is necessary that it must be judicial or quasi-judicial in nature and not an administrative decision.

4.1 Further, in Pace Setter Business Solutions Private Limited Vs Union of India², the High Court held that a past audit objection for an earlier period cannot be utilised to reject an application under the scheme.

5. The learned Counsel also stated that the VCES notice neither alleged that the VCES application and the IAR dated 22-9-2010 covered the same issues nor that the IAR dated 22.09.2010 qualified as an order of determination. Thus the impugned order had traveled beyond the VCES notice dated 24.05.2016, and was liable to be set aside.

6. The learned Authorised Representative reiterated the submissions of the Commissioner (Appeals) and stated that the proviso to section 73 (4A) reads as under:

“provided that Central Excise Officer may determine the amount of service tax, if any due from such person, which in his opinion remains to be paid by such person and shall proceed to recover such amount in the manner specified in subsection(1).”

6.1. He stated that such a determination is required only if the Central Excise Officer opines that some amount remained to be paid. Since the appellant had accepted the service tax liability worked out by the audit, there was no need for any further determination of the liability. Therefore, the claim of the appellant that in the absence of any order of determination, debarment from filing VCES declaration under proviso to section 106(1) was not applicable to them, is not logical.

7. We have carefully gone through the arguments of the learned counsel and the learned authorised representative. Before we take up the issue on merit, it is important to look at the legal provisions of the VCES, 2013:-

“106. (1) Any person may declare his tax dues in respect of which no notice or an order of determination under Section 72 or Section 73 or Section 73A of the Chapter has been issued or made before the 1st day of March, 2013 :

Provided that any person who has furnished return under Section 70 of the Chapter and disclosed his true liability, but has not paid the disclosed amount of Service Tax or any part thereof, shall not be eligible to make declaration for the period covered by the said return.

Provided further that where a notice or an order of determination has been issued to a person in respect of any period on any issue, no declaration shall be made of his tax dues on the same issue for any subsequent period.

(2) Where a declaration has been made by a person against whom, –

(a) an inquiry or investigation in respect of a Service Tax not levied or not paid or short-levied or short-paid has been initiated by way of –

(i) search of premises under Section 82 of the Chapter; or

(ii) issuance of summons under Section 14 of the Central Excise Act, 1944, as made applicable to the Chapter under Section 83 thereof; or

(iii) requiring production of accounts, documents or other evidence under the Chapter or the rules made thereunder; or

(b) an audit has been initiated, and such inquiry, investigation or audit is pending as on the 1st day of March, 2013, then, the designated authority shall, by an order, and for reasons to be recorded in writing, reject such declaration.

Procedure for making declaration and payment of tax dues.

107. (1) Subject to the provisions of this Scheme, a person may make a declaration to the designated authority on or before the 31st day of December, 2013 in such form and in such manner as may be prescribed.

(2) The designated authority shall acknowledge the declaration in such form and in such manner as may be prescribed.

(3) The declarant shall, on or before the 31st day of December, 2013, pay not less than fifty per cent of the tax dues so declared under sub-section (1) and submit proof of such payment to the designated authority.

(4) he tax dues or part thereof remaining to be paid after the payment made under sub-section (3) shall be paid by the declarant on or before the 30th day of June, 2014 :

Provided that where the declarant fails to pay said tax dues or part thereof on or before the said date, he shall pay the same on or before the 31st day of December, 2014 along with interest thereon, at such rate as is fixed under Section 75 or, as the case may be, Section 73B of the Chapter for the period of delay starting from the 1st day of July, 2014.

(5) Notwithstanding anything contained in sub-section (3) and sub-section (4), any Service Tax which becomes due or payable by the declarant for the month of January, 2013 and subsequent months shall be paid by him in accordance with the provisions of the Chapter and accordingly, interest for delay in payment thereof, shall also be payable under the Chapter.

(6) The declarant shall furnish to the designated authority details of payment made from time to time under this Scheme along with a copy of acknowledgement issued to him under sub-section (2).

(7) On furnishing the details of full payment of declared tax dues and the interest, if any, payable under the proviso to sub-section (4), the designated authority shall issue an acknowledgement of discharge of such dues to the declarant in such form and in such manner as may be prescribed.”

“Immunity from penalty, interest and other proceeding.

108. (1) Notwithstanding anything contained in any provision of the Chapter, the declarant, upon payment of the tax dues declared by him under sub­section (1) of Section 107 and the interest payable under the proviso to sub­section (4) thereof, shall get immunity from penalty, interest or any other proceeding under the Chapter.

(2) Subject to the provisions of Section 111, a declaration made under sub­section (1) of Section 107 shall become conclusive upon issuance of acknowledgement of discharge under sub-section (7) of Section 107 and no matter shall be reopened thereafter in any proceedings under the Chapter before any authority/or Court relating to the period covered by such declaration.”

8. It is noticed that the said Scheme was introduced as a one time amnesty opportunity to Service Tax defaulters to pay their dues. The Scheme provided that the assessment to the liability has to be made, the declaration or application will be scrutinized for its compliance with the provisions. Thereafter, the authority would accept the application and grant immunity from prosecution and also exempt interest and penalty liability. Keeping in mind the spirit of the Scheme, certain safeguards and conditions have been indicated. The applicant should deposit 50% of the admitted liability with the declaration itself on or before 31-12-2013 and the balance was to be paid latest by 30-06­2014. The second condition was that there should be no issue pending or determined before any of the tax authorities or Tribunals for adjudication. The object of this was to avoid reopening of settled matters. It is in this light that we examine the grounds proposed for rejection of the VCES declaration by the designated authority and subsequently by the Commissioner (Appeals). To appreciate this, it would be appropriate to refer to the said notice. The same is reproduced for ease of reference:

“C.No. 1-26(494)ST/VCES/STVC-847/2013

Dated: 07.01.2014

To

Federal Mogul Goetze(India) Ltd,
7870-7877, Roshnara Plaza Building,
Roshnara Road, Delhi-110007.

Sir,

Subject: declaration received under ‘voluntary compliance encouragement scheme(VCES), 2013’-reg

Please refer to your VCES declaration dated 11–12 –2013 file under section(1) of section 107 of the Finance act 2013 filed under the Voluntary Compliance Encouragement Scheme(VCES) 2013 wherein you have declared the tax dues of Rs.7,22, 89, 053/-.

2. In this regard it is informed that audit of your company has been done by this Commissionerate and IAR No. 174/10-11 dated 22.09.2010 has been to you. Further demand come show cause notice number 132/ST/GGN/2012-– 13 dated 19.10.2012 has also been issued for the period provided in the VCES scheme the same is pending as on 01. 03. 2013.

3. As per the provisions contained in section 106 of the Finance act, 2013 which provides a person who may make declaration of tax dues, as:-

(1) Any person may declare his tax dues in respect of which no notice or in order of determination under section 72 or section 73 or section 73A of the chapter has been issued or made before the 1^St day of March, 2013: Provided that any person who has furnished return under section 70 of the chapter and disclosed is true liability, but has not paid the disclosed amount of service tax or any part thereof, shall not be eligible to make declaration for the period covered by the said return:

Provided further that where the notice or an order of determination has been issued to a person in respect of any. On any issue, no declaration shall be made of his tax dues on the same issue for any subsequent period.

(2) Where a declaration has been made by a person against whom, –

(a) an inquiry or investigation in respect of a service tax not levied or not paid or short levied or short paid has been initiated by way of –

(i) search of premises under section 82 of the chapter; or

(ii) issuance of summons under section 14 of the Central Excise act, 1944, as made applicable to the chapter under section 83 thereof; or

(iii) requiring production of accounts, documents or other evidence under the chapter or the rules made there under; or

4. Whereas, audit against you has been conducted for the period under VCES, 2013 and a demand cum show cause notice No. 132/ST/GGN/2012-13 dated 19.10.2012 has been also issued same is pending as on 01.03.2013 under the provisions of the Finance act, 1994, therefore, as per provisions under section 106 of the Finance act, 2013, it appears that you are not eligible to file declaration under the said scheme

5. Hence in view of the above your hereby called upon to show cause to Sh Karan Thapar, designated authority, VCES, room No. 206, 17 – B, IAEA House, I.P. Estate, New Delhi as to why the declaration filed by you should not be rejected in terms of section 106 of the Finance act, 2013. You are requested to appear in person or through authorised representative o on20.01.2014 at 12.30 hrs before the designated authority with your written submission in this regard. You are required to produce at the time of showing cause, all evidences upon which you intend to rely in support of your defence

6. If no cause is shown against the actions proposed to be taken, within the stipulated period and/or you do not appear before the designated authority, the case will be decided on the basis of evidences available on record.

7. This notice is being issued without prejudice to any other action that may be taken against you under the provisions of the Finance Act, 1994, and the rules made thereunder or any other of the time being in force.

Yours sincerely

Sd

(Designated Authority)”

9. We note that the aforesaid notice has raised two issues in Para 4, which relate to (i) pending show cause notice No. 132/ST/GGN/2012-13 dated 19.10.2012 and (ii) An audit was conducted for the period under VCES, and seeks to reject the VCES declaration on these two grounds. From the records available before us, we note that the aforesaid show cause notice dated 19.10.2012 has been issued to the appellant alleging wrongful availment of CENVAT credit of Rs. 1,34,18,976/- on Medical Insurance Services provided to its employees for the period F.Y. 2007 – 08 to F.Y. 2011 – 12. This Notice was adjudicated in favour of the Appellant vide order dated 28.10.2016. A perusal of the list of services on which the appellant declared under the VCES does not include “Medical Insurance Services”. As regards the second issue as well the VCES declaration indicates that appellant had declared nine other services on which they had chosen to pay the service tax dues under the VCES, 2013. So the argument that a notice on the said issues was pending as on 01.03.2013 is factually incorrect. We also take note of the clarification provided in the FAQs published by CBEC on the VCES. The same is reproduced below:

“Q3: whether an assessee to whom show cause notice or order of determination has been issued can file declaration in respect of tax dues which are not covered by such SCN or order of determination?

In terms of section 106(1) of the Finance act, 2013 and second proviso thereto, the tax dues in respect of which any show cause notice or order of determination under section 72, section 73 or section 73A has been issued or which pertains to the same issue for the subsequent period are excluded from the ambit of the Scheme. Any other tax dues could be declared under the scheme subject to the other provisions of the Scheme.”

9.1 As noted in the paragraph above, the issues declared under VCES was completely different from the Show Cause Notice dated 19.10.2012 Accordingly, we hold that the aforesaid notice does not bar the Appellant from filing the declaration on 01.03.2013.

10. We now address the second issue to determine whether an Audit report forms determination of liability under section 106(1) & 160(2) of the Finance Act, 2013. We note that the Commissioner (Appeals) has rejected the appellant’s VCES declaration on the ground that the working of the audit through the Internal audit report was the determination of liability by the Central Excise Officer. To appreciate this argument we need to go back to the wording of the section 106(1) of the Finance act 2013. Section 106(1) reads as follows:

‘106. (1) any person may declare his tax dues in respect of which no notice or in order of determination under section 72 or section 73 or section 73A of the chapter has been issued or made before the 1st day of March, 2013: …. .’

10.1 An order of determination under sections 72, 73 or 73A would be an order in relation to a show cause notice issued under such indirect tax enactment. An audit report cannot be regarded as an order of determination. If that be the case, it would render clause (b) of section 106(2) infructuous. In this regard, we note that the High Court of Bombay, in the case Pace Setter Business Solutions Pvt Ltd Vs Union of India³ has held the following:

“17. Upon hearing both sides and perusing the impugned order, we are of the view that the payment which has been made and for the past audit objection, for an earlier period cannot be utilised to reject the application as is now made by the present writ petitioner. The application invoking VCES has to be considered and if at all rejected, it must be on the touchstone of the paragraphs of the VCES, 2013 and the wording thereof. The scheme itself cannot be defeated by holding that on the earlier occasion parties like the petitioners have accepted their liability…………………………..

19. The authorities need not be so anxious to protect the government revenue and reject the applications, as are made in the present case by closing the files instantaneously. They have to apply their mind. They must consider the application in accordance with the paragraphs of the scheme. They must pass an order in accordance therewith. In the circumstances, finding that the conclusions reached are unsustainable in law we quash and set aside the impugned order. We direct that the application shall be considered in accordance with law, as expeditiously as possible. While considering the application, the authorities shall not be influenced by the earlier conclusions. By keeping open all the contentions of the parties for being raised during the course of consideration of the application, we allow the writ petition. No order as to costs.”

11. In view of the above findings, we allow the appeal and hold that the Commissioner (Appeals) has erred in holding that the audit report is akin to an order of determination under the relevant sections of the Scheme. We set aside the said order and hold that the VCES declaration filed by the Appellant was correct. We direct the jurisdictional authority to issue the VCES 2 for full and final settlement under the Scheme.

(Pronounced in the open court on 13.03.2023 )

Note

1 [1962(9)TMI 63-SC)],

2 [2017(52) STR 11(Bombay)],

3 [2017(52)STR 11(Bom)]