Maheswari Enterprises vs Commissioner of Central Excise

Harish Tandon, J.�A short point involved in this writ petition relates to making out of a case by the adjudicating officer beyond the show cause notice. In other words, whether the adjudicating officer or the Appellate Authority or the Tribunal can travel beyond the case made out in a show cause notice. Before proceeding to deal with the point as narrated above, it would be apposite to record the excerpts from the show cause notice to ascertain as to the exact case made out therein, which runs:

"7. Contravention of statutory provisions:

Thus, the said M/s. Maheshwari Enterprise, Rankganj, Burdwan, WB the noticee, appeared to have contravened

(a) the provisions of Section 67 and 68 of the Finance Act, 1994 as amended read with Rule 6 of the Service Tax Rules, 1994 as amended, in as much as they failed to pay the Service Tax at the rate specified in Section 66 in the required manner within the prescribed period;

(b) the provisions of Section 73 of the Finance Act, 1994 as amended read with Rule 6 of the Service Tax Rules, 1994 as amended, in as much as they had short paid Service Tax then the actual Service Tax payable at the rate specified in Section 66 in the required manner within the prescribed period;

(c) the provisions of Section 70 of the Finance Act, 1994 as amended read with Rule 7 of the Service Tax Rules, 1994 as amended, in as much as they failed to assess the tax due on the services provided by them and to furnish the return in prescribed form and in prescribed manner and at the prescribed frequency; and

(d) the provisions of Section 91 and Section 95 of the Finance (No. 2) Act, 2004 and Section 136 & Section 140 of the Finance Act, 2007 in as much as they failed to pay the appropriate Education Cess and Secondary & Higher Education Cess on the appropriate Service Tax payable by them."

Alleging the contravention of the aforesaid statutory provisions the demand was made to the tune of Rs. 2,22,97,430/- together with the Education Cess of Rs. 4,45,950/- and Rs. 1,81,412/- and further penalty and interest under the provision of Sections 75, 76, 77 and 78 of the Finance Act, 1994.

The adjudicating officer in its Order-in-Original dated 30th June, 2011 found that the petitioner has violated Rule 3(3) of the Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007 and confirmed the demand, so raised, in the show cause notice. The said order is challenged before the CESTAT and an application seeking the dispensation of pre-deposit is also taken out therein. The order impugned in this writ petition pertains to the disposal of an application seeking dispensation of the pre-deposit on the ground that neither the adjudicating officer nor the Tribunal can make out a case which has not been made out by the authority in the show cause notice.

The petitioner has gone further to say that the direction to the deposit 25% of the duty confirmed is illegal, arbitrary and is an outcome of a closed mind. According to the petitioner when a strong prima facie case has been made out direction to deposit any amount as condition to maintain and/or entertain the appeal by the CESTAT amounts to undue hardship which has not been considered by the Tribunal.

Mr. Das, learned advocate for the authority submits that the Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007 has a statutory flavour and placing reliance thereupon in course of the adjudication is justified and, therefore, the authority have not committed any wrong in relying thereupon. According to Mr. Das, the statutory rules can be relied upon and pressed in action at any point of time and, therefore, the non-mentioning of the aforesaid provision does not entail the entire adjudication to fall on the legal parameters. Mr. Das, however, submits that the authorities have taken into consideration the materials documents and the pleadings of the parties and have found the petitioner guilty of violating the provision of law and have confirmed the demand. As and by way of demurrer, Mr. Das submits that the impugned order was a time-bound order as the non-compliance thereof makes the appeal automatically dismissed and admittedly the petitioner have not deposited the amount as directed in the impugned order, the appeal is no longer subsisting and, therefore, the petitioner should have invoked the statutory remedy provided therefore and this Court should not exercise the discretion under Article 226 of the Constitution of India. Lastly, Mr. Das submits that since the petitioner has not pleaded a financial hardship, nor produced any document in support thereof, and the CESTAT have recorded that the financial hardship has not been approved and, therefore, have not granted the absolute and total waiver.

Refuting the contention of Mr. Das, Mr. Kurmi, learned advocate appearing for the petitioner submits that the Tribunal has extended the date for compliance and have fixed the next date on 22nd December, 2014 and, therefore, the submission of department that the appeal stood automatically dismissed, is not correct.

As indicated above, the point which is involved in this writ petition is whether a new or foreign case can be made out by an adjudicating officer without affording an opportunity to the noticee to defend the charge. In a precedent paragraph, this Court have reproduced the case made out by the authorities in paragraph 7 thereof wherefrom my endeavour has failed to find out that any case of violation of Rule 3(3) of the said statutory rules is made out.

In paragraph 4.13 of the Order-in-Original, the adjudicating authority have explicitly and clearly recorded the violation of Rule 3(3) of the said rules and held that since the conditions of the composite scheme has not been fulfilled, it cannot be accepted that any Service Tax has been paid on excavation service provided by the noticee in course of shaft sinking.

Even the CESTAT have proceeded to record that the assessee has not exercised the option to pay the concessional rate of Service Tax under the scheme envisaged under the aforesaid rules and, therefore, is not entitled to get the benefit thereof.

My attention is drawn to an appeal filed by the CESTAT where the petitioner has categorically taken a plea that the findings recorded by the adjudicating officer, is outside the purview of the show cause notice. The issuance of the show cause notice is not a mere formality or casual exercise. It is a foundation of proceeding initiated against the noticee and inviting the noticee to disclose his defence. Therefore, the show cause notice must clearly, lucidly and explicitly contains the offences and/or charges prima facie found against the noticee in order to give the opportunity to disclose the statement of defence on the aforesaid allegation. Any extraneous matter which was never made a foundation for initiation of the proceeding cannot be taken into account as it would amount to punishing a person without affording an opportunity to meet the same. In other words, if a person is punished on a ground not indicated in the show cause notice, he has no occasion to plead the defence against such allegation and, therefore, an order of punishment offends the principles of natural justice. Whether the authority can travel beyond the case made out in the show cause notice is answered by the Supreme Court in case of Reckitt and Colman of India Ltd. Vs. Collector of Central Excise, , in these words:

"3. It will be remembered that the case of the Revenue, which the appellant had been required to meet at every stage from the show cause notice onwards, was that the said product was a preparation based on starch. Having come to the conclusion that the said product was not a preparation based on starch, the Tribunal should have allowed the appeal. It was beyond the competence of the Tribunal to make out in favour of the Revenue a case which the Revenue had never canvassed and which the appellants had never been required to meet. It is upon this ground alone that the appeal must succeed."

The another Bench of the Supreme Court in Warner Hindustan Ltd. Vs. Collector of Central Excise, Hyderabad, , reiterated the principle that it is not impermissible to the Tribunal to consider a case that has been laid for the first time in appeal because the stage for setting out the factual matrix is before the authorities below.

In a subsequent judgment rendered in the case of Commissioner of Central Excise, Nagpur Vs. Ballarpur Industries Ltd., , the Apex Court in categorical and unequivocal terms held:

"21. Before concluding, we may mention that, in the present case, the second and the third show cause notices are alone remitted. The first show cause notice dated 21-5-1999 is set aside as time-barred. However, it is made clear that Rule 7 of the Valuation Rules, 1975 will not be invoked and applied to the facts of this case as it has not been mentioned in the second and the third show cause notices. It is well settled that the show cause notice is the foundation in the matter of levy and recovery of duty, penalty and interest. If there is no invocation of Rule 7 of the Valuation Rules, 1975 in the show cause notice, it would not be open to the Commissioner to invoke the said rule."

In view of the ratio laid down in the above noted reports, it is no longer res Integra that the show cause notice is the foundation of a proceeding initiated against the noticee and invocation of any rule which does not find place in the said show cause notice is impermissible and cannot withstand on the anvil of legal parameters.

This Court does not find from the show cause notice that there is any reflection of Rule 3(3) of the said rules which could only see the light of the day in the order of the adjudicating authority. Though Mr. Das was much vocal in saying that during the recording of the evidence of the officer of the noticee, the offence to the said provision has been recorded but this Court does not find the aforesaid submission to be tenable. If in the preceding page of the show cause some recording which may justify the invocation of the aforesaid rules was apparent, there is no difficulty in including the aforesaid violation in paragraph 7 thereof where the authority jotted down the violation of the specific provision of the Act.

Mr. Das tried to impress the Court that the CESTAT has relied upon certain judgments of the Constitution Bench of the Supreme Court for the proposition that the omission to exercise option disentitled the assessee to have the benefit under the exemption. There is no quarrel to the aforesaid proposition. The point is whether a noticee can be condemned for any offence without being afforded an opportunity of hearing. If the authority as according to Mr. Das was sure in his mind that such action disentitled the petitioner to claim the benefit under the said scheme, the same should have been a ground incorporated in the show cause notice and having not done so the petitioner cannot be penalised without affording an opportunity of hearing. This Court, therefore, does not find that the aforesaid submissions of Mr. Das has any substance.

Since this Court have simply decided on the ground that a matter foreign to the show cause notice was the basis for adjudication which is clearly impermissible in law, this Court find that the petitioner has made out a strong prima facie case for the purpose of dispensation of pre-deposit conditions.

Mr. Das, however, submits that if the petitioner has not pleaded in the application nor produce any document in support of his financial hardship, the authority have rightly imposed the condition by directing the petitioner to deposit 25% of the duty demand. Though financial hardship is one of the ingredients for exercising the discretion relating to dispensation of pre-deposit but cannot be a sole basis. The proviso to Section 35F does not speak of the financial hardship but speak of the undue hardship which in my view can be applied where a strong prima facie case has been made out by the petitioner. I am not oblivion of the proposition of law that there lies a distinction between a prima facie case and an arguable case.

A person who has made out a strong prima facie case would suffer undue hardship if he is directed to deposit certain amount of the duty demanded.

Since this Court has found that the petitioner has made out strong prima facie case, the CESTAT should have directed the total waiver. This Court, therefore, find that this order of the Tribunal is illegal, arbitrary and have been made without application of mind and is, therefore, not sustainable.

Furthermore, since the appeal is still alive, this Court feels that the Tribunal should take utmost step to dispose of the same within reasonable time.

The order impugned is, thus, set aside.

The writ petition succeeds. There shall be no order as to costs.