2025 (5) TMI 160 - HC - Service Tax

Inordinate and unexplained delay in adjudication of SCN - mandatory obligation as per statutory time limits prescribed under Section 73(4B) of the Finance Act 1994 - violation of principles of natural justice - HELD THAT - As is apparent the Respondent kept the adjudication of the impugned SCNs pending for a period of 6 to 11 years. This Court in Vos Technologies (P) Ltd. 2024 (12) TMI 624 - DELHI HIGH COURT had occasion to deal with the issue of delay on behalf of the authorities in concluding the proceedings within a reasonable time (arising out of the Customs Act 1962 the Finance Act 1994 the Central Goods and Services Act 2017 and the Central Excise Act 1944). After a detailed analysis of the relevant provisions and previous judgments of the Hon ble Supreme Court and High Courts this Court in Vos Technologies (P) Ltd. while highlighting the fact that the authorities are legally obligated to conclude the adjudication with due expedition held that an inordinate and unexplained delay on behalf of the authorities to act within a reasonable period would constitute sufficient grounds to quash the proceedings. Ultimately it is incumbent upon the authorities to establish that it was genuinely hindered and impeded in resolving the dispute with reasonable dispatch. A statutory authority when faced with such a challenge would be obligated to prove that it was either impracticable to proceed with or was constrained by factors beyond its control which prevented it from moving with reasonable expedition. The authority does not in fact assert as such in the present case - there are no hesitation in holding that the rationale put forth in Vos Technologies (P) Ltd. would apply squarely to the facts and circumstances of the present case. Conclusion - The respondents clearly failed to discharge their obligation within a reasonable time. Petition allowed.

Summary

The core legal questions considered by the Court include:

(a) Whether the inordinate and unexplained delay in adjudication of the show cause notices (SCNs) violates principles of natural justice and constitutional mandates, thereby rendering the adjudication orders and SCNs liable to be quashed;

(b) Whether the statutory time limits prescribed under Section 73(4B) of the Finance Act, 1994, which provide for adjudication within six months or one year "where it is possible to do so," impose a mandatory obligation on authorities to conclude proceedings within such timeframes;

(c) Whether the delay in adjudication, despite personal hearings and replies filed by the Petitioner, constitutes sufficient grounds for quashing the demands of service tax, interest, and penalty;

(d) The applicability and interpretation of judicial precedents concerning delay in adjudication, including the extent of discretion available to tax authorities under the Finance Act, Customs Act, and CGST Act;

(e) The effect of pandemic-related lockdowns and other external factors on the limitation period and adjudication timelines;

(f) Whether the adjudicating authorities have discharged their statutory obligation to conclude proceedings with due expedition and reasonable dispatch.

Issue-wise Detailed Analysis

1. Delay in Adjudication and Principles of Natural Justice

The Petitioner challenged the impugned orders and SCNs primarily on the ground of inordinate delay ranging from six to eleven years in adjudicating service tax demands for multiple financial years. The Petitioner contended that such delay deprived it of a fair opportunity to defend its case, thereby violating the principles of natural justice and rendering the orders constitutionally untenable.

The Court examined the relevant statutory framework, particularly Section 73(4B) of the Finance Act, 1994, which prescribes that the Central Excise Officer shall determine the amount of service tax due within six months or one year from the date of notice "where it is possible to do so." The adjudicating authority in the impugned order interpreted this phrase as conferring discretion and flexibility, allowing for extended timelines where necessary.

However, the Court referred extensively to the recent judgment in Vos Technologies (P) Ltd., which clarified that the phrase "where it is possible to do so" does not license lethargy or inaction. The Court held that statutory authorities are bound to conclude adjudication with due expedition and that unexplained and inordinate delays constitute sufficient grounds to quash proceedings. The flexibility afforded by the statute must be read narrowly, applicable only in cases of insurmountable exigencies or genuine impediments beyond the control of the authorities.

The Court found that the Respondents failed to demonstrate any such insurmountable constraints or justifications for the protracted delay. The delay was attributed to departmental inertia rather than external or unavoidable factors. The pandemic-related lockdowns, invoked by the Respondents, were insufficient to explain delays spanning several years before and after the lockdown period.

The Court further noted that for the first four SCNs, a personal hearing was conducted in December 2016, and the Petitioner had submitted written clarifications. Despite this, the adjudication remained pending for over seven years, indicating neglect of statutory duty.

2. Interpretation of Section 73(4B) of the Finance Act, 1994 and Comparison with Customs Act

The adjudicating authority distinguished the Finance Act's Section 73(4B) from the Customs Act's Section 28(9), emphasizing that the former contains the phrase "where it is possible to do so," which allows discretion, whereas the latter imposes strict mandatory timelines with provisions for extension and deeming proceedings concluded if not completed within the stipulated period.

The Court, however, relying on precedents including Vos Technologies, held that the discretion under Section 73(4B) is not unfettered and must be exercised reasonably. The statutory language contemplates flexibility only when it is genuinely impracticable to conclude adjudication within the prescribed period, not as a blanket justification for delay.

The Court underscored that the legislative intent behind such provisions is to balance the need for timely adjudication with the practical complexities of tax investigations, but this cannot be stretched to condone prolonged inaction.

3. Applicability of Judicial Precedents on Delay and Time-bound Adjudication

The Court extensively analyzed judicial precedents, including the Vos Technologies judgment and others such as Paras Products and M/s Shyam Indus Power Solutions, which uniformly emphasize that tax authorities must conclude proceedings expeditiously and that inordinate delay without reasonable cause is a ground for quashing proceedings.

The Court also considered the Supreme Court decisions cited by the Respondents, including Commissioner, GST and Central Excise Commissionerate-II v. M/s Swati Menthol and CCE v. Bhagsons Paint Industry. These were distinguished on facts and legal grounds, with the Court observing that those decisions do not authorize indefinite delay or non-adjudication.

The Court reaffirmed that the principles of natural justice and statutory mandates require that adjudication must be completed within a reasonable time, failing which the proceedings become unsustainable.

4. Effect of Pandemic-related Lockdowns and External Factors

The Respondents justified delay partly on account of COVID-19 lockdowns and related judicial directions suspending limitation periods. The Court acknowledged these factors but held that they do not justify delays extending several years beyond the lockdown period.

The Court emphasized that the burden lies on the authorities to prove that delay was due to insurmountable factors. The mere invocation of the pandemic or procedural complexities without concrete evidence does not satisfy this requirement.

5. Application of Law to Facts and Treatment of Competing Arguments

The Court meticulously compared the timelines of SCNs issuance and final adjudication, highlighting delays of up to eleven years. The Petitioner's submissions on delay and prejudice were accepted as valid and substantiated.

The Respondents' arguments emphasizing statutory discretion and ongoing procedural complexities were rejected due to lack of credible justification and failure to demonstrate genuine impediments.

The Court found the impugned orders' reasoning inadequate and inconsistent with the established legal principles and precedents.

Conclusions

The Court concluded that the delay in adjudication was inordinate, unexplained, and attributable to the department's inaction. The statutory discretion under Section 73(4B) of the Finance Act does not permit such delay. The principles of natural justice and the jurisprudence on timely adjudication mandate quashing of the impugned SCNs, Order-In-Original, and Order-In-Appeal.

Significant Holdings

The Court held:

"The flexibility which the statute confers is not liable to be construed as sanctioning lethargy or indolence. Ultimately it is incumbent upon the authority to establish that it was genuinely hindered and impeded in resolving the dispute with reasonable speed and dispatch."

"The phrase 'where it is possible to do so' could not be equated with lethargy or an abject failure to act despite there being no insurmountable factor operating as a fetter upon the power of the proper officer to proceed further with adjudication."

"Matters which have the potential of casting financial liabilities or penal consequences cannot be kept pending for years and decades together."

"The respondents have clearly failed to establish the existence of an insurmountable constraint which operated and which could be acknowledged in law as impeding their power to conclude pending adjudications."

"The inaction and the state of inertia which prevailed thus leads us to the inevitable conclusion that the respondents clearly failed to discharge their obligation within a reasonable time."

Accordingly, the Court quashed and set aside the impugned SCNs dated 17.04.2013, 07.05.2014, 20.04.2015, 10.05.2016, and 19.03.2018, the Order-In-Original dated 27.06.2024, and the Order-In-Appeal dated 31.01.2025.