Recovery proceedings under Section 87 of the Finance Act before adjudication of SCN is not permissible
We are sharing with you an important judgement of the Hon’ble Karnataka High Court in the case of Mrs. Prashanthi (Legal Heir and W/o. Late Sri P S Harsha, Proprietor of M/s Rapid Marine Suppliers) Vs. Union of India and Others [2015-TIOL-1596-HC-KAR-ST] on the following issue:
Whether recovery proceedings under Section 87 of Finance Act, 1994 (“the Finance Act”) can be initiated without adjudicating Show Cause Notice issued under Section 73 thereof?
Facts & Background:
Mrs. Prashanthi (“the Petitioner”) is a wife of Late Shri. P S Harsha, Proprietor of M/s Rapid Marine Suppliers (“RMS” or “the Firm”). The Firm was engaged in providing services under the category of “Port Services” and “Supply of Tangible Goods Service”. On account of non- payment of Service tax amounting to Rs. 71,48,987/- and 40,27,335/- for the period 2004-05 to 2007-08 and 2008-09 respectively, the Department had issued Show Cause Notices (“SCNs”) under Section 73 of the Finance Act on August 5, 2009 and October 19, 2009 respectively, to pay the amount along with interest. Further, the Department also issued third SCN on April 22, 2015 demanding Service tax for the period October 1, 2009 to September 30, 2014.
However, even before said SCNs got adjudicated, the Department initiated recovery proceedings, after verification of the invoices and ledgers submitted by the service receivers of the Firm, by issuing Recovery Notices (“Impugned Notices”) under Section 87 of the Finance Act to the Banks, where the Firm had accounts, calling upon them to divert the funds which are held by them on behalf of the Firm to the Central Government and had also recovered a sum of Rs. 39,96,157/- from the Bank accounts of the Firm.
Being aggrieved, the Petitioner filed a Writ Petition before the Hon’ble High Court of Karnataka to quash the Impugned Notices and to grant refund of amount already recovered from the Bank accounts of the Firm.
The Hon’ble High Court of Karnataka relying upon the decision in the case of GSP Infratech Development Ltd. Vs. Union of India and Others [2013-TIOL-399-HC-KAR-ST], held that the words “amount payable by a person” used in Section 87 of the Finance Act will have to be considered in the background of Section 73 of the Finance Act inasmuch as, SCN issued under Section 73(1) of the Finance Act is required to be adjudicated after considering representation of the person, if filed, and thereafter determining the amount payable under the Finance Act. Any deviation in this regard would be in violation of principles of natural justice and doctrine of Audi Alteram Partem would be attracted.
The Hon’ble High Court further held that initiating action under Section 87 of the Finance Act before adjudication of SCN is like putting cart before horse. Thus, the Jurisdictional Central Excise Officer would be entitled to recover the amount payable from the person only after adjudication of the SCNs has been done.
Accordingly, the Impugned Notices were quashed and the Department was directed to remit the amount recovered to the respective accounts.
Point to Note:
It is pertinent here to note that effective from May 14, 2015, new sub-section (1B) has been inserted in Section 73 of the Finance Act to provide that the Service tax amount self-assessed and declared in the Return (ST-3) but not paid (either in part or full) shall be recovered under Section 87 thereof, without service of any notice as required under Section 73(1) of the Finance Act. Section 73(1B) of the Finance Act is reproduced hereunder:
“(1B) Notwithstanding anything contained in sub-section (1), in a case where the amount of service tax payable has been self-assessed in the return furnished under sub-section (1) of section 70, but not paid either in full or in part, the same shall be recovered along with interest thereon in any of the modes specified in section 87, without service of notice under sub-section (1).”
Thus, if an assessee declares amount of Service tax payable by him in his ST-3 Return (on self-assessment) but does not pay the Service tax, immediate recovery proceedings can be initiated under Section 87 of Finance Act, without even issuing any SCN.