2025 (6) TMI 1015 - HC - Service Tax

Time limitation - Violation of principles of natural justice - adjudication of the Show Cause Notices issued in 2008 after a delay of more than 17 years - HELD THAT - There are several circulars which have been issued by the Board which have enjoined the Department to adjudicate the show-cause notice proceedings as expeditiously as possible - That apart there are earlier schemes referring cases to call-book has been referred to in Circular no.1023/11/2016-CX dated 08.04.2016. The decisions cited by the learned counsel for the petitioner particularly that of this Court indicate that the delay in adjudication of show cause proceedings has to result in abatement of the aforesaid proceedings. In this case the Show Cause Notices were issued in the year 2008. Now more than 17 years have lapsed. In the case of J.Sheik Parith 2020 (9) TMI 311 - MADRAS HIGH COURT this Court has held that where the period of more than 8 years had lapsed from the issuance of show cause notice and there was no proper or justifiable explanation from the Revenue for the delay in their adjudication show cause proceedings have to abate. In the present case also there are no justifiable reasons forthcoming from the Revenue for the delay in adjudication of the show cause proceedings. Thus the continuation of show cause proceedings long after their issuance have to be held to be arbitrary and offending under Article 14 of the Constitution of India. Therefore these writ petitions are deserve to be allowed in view of the overwhelming body of decisions of various Courts holding that the proceedings initiated long before cannot be continued after efflux of time. Conclusion - Though really no prejudice can be said to have been caused to the petitioner on account of the transfer of the case to the Call Book and delay in adjudication of the Show Cause proceedings. Nevertheless in view of the overwhelming body of decisions of the Courts including that of this Court these writ petitions deserve to be allowed. The Show Cause Notices dated 29.09.2008 05.11.2008 impugned in these writ petitions are quashed - Petition allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court in these writ petitions are:

(a) Whether the adjudication of the Show Cause Notices issued in 2008, after a delay of more than 17 years, is arbitrary and violative of the principles of natural justice and Article 14 of the Constitution of India;

(b) Whether the petitioner's liability to pay service tax on information technology services rendered prior to the amendment of the Finance Act, 1994, with effect from 16.05.2008, is valid;

(c) Whether the delay in adjudication caused by the transfer of the Show Cause Notices to the Call Book in 2011 is justified and whether it bars the petitioner from challenging the delay;

(d) The applicability and interpretation of relevant circulars and government instructions regarding the adjudication of show cause notices and audit objections;

(e) The effect of judicial precedents relating to delay in adjudication of show cause notices and the consequent abatement of proceedings;

(f) Whether the petitioner's reliance on various High Court and Supreme Court decisions supports the quashing of the impugned show cause notices;

(g) Whether the petitioner's predecessors' mergers and changes in corporate identity affect the continuation of the show cause proceedings.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a): Delay in adjudication and violation of principles of natural justice and Article 14

Relevant legal framework and precedents: The Court referred to a series of judicial decisions, including those from this Court and other High Courts, which have held that an inordinate and unexplained delay in adjudication of show cause notices renders the proceedings arbitrary and violative of Article 14 of the Constitution. Specifically, the decision in J.Sheik Parith (2020) 374 E.L.T. 15 (Mad.) was highlighted, where delay exceeding 8 years without justification led to abatement of proceedings.

Court's interpretation and reasoning: The Court observed that more than 17 years had elapsed since the issuance of the impugned Show Cause Notices in 2008. The Revenue failed to provide any justifiable or reasonable explanation for this delay. The Court held that such delay offends the principle of equality and fairness guaranteed under Article 14, making the continuation of proceedings arbitrary.

Key evidence and findings: The Show Cause Notices were issued in 2008, but the case was transferred to the Call Book only in 2011, and no adjudication has occurred since. The petitioner had replied promptly to the notices, and the delay was solely attributable to the Revenue's inaction.

Application of law to facts: Applying the principle that delay without explanation vitiates proceedings, the Court found that the delay here was excessive and unjustified, warranting quashing of the show cause notices.

Treatment of competing arguments: The Revenue argued that the case was transferred to the Call Book in 2011 and that Board circulars mandated adjudication of such cases. However, the Court found these arguments insufficient to justify the delay and held that the delay itself rendered the proceedings arbitrary.

Conclusion: The Court concluded that the delay in adjudication was arbitrary and violative of Article 14, and therefore the show cause proceedings could not be continued.

Issue (b): Liability to pay service tax on IT services rendered prior to 16.05.2008

Relevant legal framework and precedents: Service tax liability on information technology services was introduced by Finance Act, 2008 with effect from 16.05.2008, by insertion of Section 65(105)(zzzze) in the Finance Act, 1994. Prior to this date, such services were not taxable under service tax laws.

Court's interpretation and reasoning: The petitioner's case was that the services rendered prior to 16.05.2008 were not liable to service tax, and therefore the show cause notices demanding tax for earlier periods were without basis.

Key evidence and findings: The petitioner's predecessors became liable to service tax only from 16.05.2008. The impugned show cause notices related to periods before this date, making the demand untenable.

Application of law to facts: Since the Finance Act amendment was prospective, the Court accepted that service tax could not be levied for IT services rendered before 16.05.2008.

Treatment of competing arguments: The Revenue did not seriously contest this point but focused more on the delay issue.

Conclusion: The Court found merit in the petitioner's contention that the demand for service tax on IT services rendered prior to 16.05.2008 was not sustainable.

Issue (c): Effect of transfer to Call Book and delay in adjudication

Relevant legal framework and precedents: Board circulars, including Circular No.1023/11/2016-CX dated 08.04.2016, regulate the treatment of audit objections and show cause notices transferred to the Call Book. The circular directs that show cause notices related to audit objections vetted by the Comptroller and Auditor General (CAG) may be adjudicated following prescribed procedures.

Court's interpretation and reasoning: The Revenue contended that the case was transferred to Call Book in 2011 and that the Board's instructions permitted adjudication thereafter. The petitioner argued that transfer to Call Book caused delay and that the delay was arbitrary.

Key evidence and findings: The Court noted the absence of any explanation from the Revenue for the delay between 2011 and 2025 in adjudicating the show cause notices. The circulars did not justify indefinite delay.

Application of law to facts: The Court held that mere transfer to Call Book does not justify inordinate delay in adjudication. The delay must be reasonable and justified, which was not the case here.

Treatment of competing arguments: The Court rejected the Revenue's reliance on Board circulars as a shield against the constitutional challenge to delay, emphasizing that administrative instructions cannot override constitutional guarantees.

Conclusion: The delay caused by transfer to Call Book without adjudication for over a decade was arbitrary and unacceptable.

Issue (d): Applicability of circulars and government instructions on adjudication

Relevant legal framework and precedents: Various circulars were cited, including Circular No.20/92-CX.6 (1992), F.No.275/17/2015-CX.8A (2015), Circular No.1053/02/2017-CX (2017), Circular No.732/48/2003-CX (2003), and Circular No.1023/11/2016-CX (2016). These circulars emphasize expeditious adjudication of show cause notices and provide guidelines for handling audit objections.

Court's interpretation and reasoning: The Court acknowledged these circulars but noted they impose a duty on the Department to adjudicate expeditiously rather than justify delay. The circulars do not provide immunity from constitutional scrutiny.

Key evidence and findings: The circulars were relied upon by the Revenue to justify proceeding with adjudication despite delay.

Application of law to facts: The Court held that administrative circulars cannot override the constitutional mandate of fairness and timely adjudication.

Treatment of competing arguments: The Court distinguished between procedural instructions and constitutional rights, holding the latter prevail.

Conclusion: Circulars emphasize expeditious adjudication but do not validate inordinate delay.

Issue (e): Effect of judicial precedents on delay and abatement of proceedings

Relevant legal framework and precedents: The Court extensively referred to precedents from various High Courts and the Supreme Court, including decisions from Gujarat, Delhi, Bombay, Allahabad, and Madras High Courts. These decisions consistently hold that delay in adjudication without justifiable cause results in abatement of proceedings and quashing of show cause notices.

Court's interpretation and reasoning: The Court aligned with the established principle that delay beyond a reasonable period violates natural justice and equity, leading to abatement.

Key evidence and findings: The petitioner's reliance on these precedents was found well-founded.

Application of law to facts: The Court applied these precedents to the facts, finding the delay excessive and unjustified.

Treatment of competing arguments: The Revenue's contention that some cases were pending with the CAG or subject to other procedural delays was rejected as insufficient justification.

Conclusion: The Court held that the show cause notices must be quashed due to delay, consistent with judicial precedents.

Issue (f): Effect of mergers and corporate identity changes on continuation of proceedings

Relevant legal framework and precedents: The petitioner's predecessors were merged into the present petitioner company over time. The Court considered whether such corporate changes affect the validity of the show cause notices and proceedings.

Court's interpretation and reasoning: The Court noted that while mergers may affect the party's identity, they do not justify indefinite pendency of proceedings. The petitioner's liability is derivative from predecessors, but delay in adjudication is not excused by corporate restructuring.

Key evidence and findings: The petitioner's predecessors had similar show cause notices adjudicated or dropped in other jurisdictions, supporting the petitioner's case.

Application of law to facts: The Court found no justification for continuing show cause notices after mergers and prolonged delay.

Treatment of competing arguments: The Revenue did not dispute the mergers but relied on procedural grounds to continue proceedings.

Conclusion: Corporate mergers do not justify delay or continuation of stale proceedings.

3. SIGNIFICANT HOLDINGS

"Where the period of more than 8 years had lapsed from the issuance of show cause notice and there was no proper or justifiable explanation from the Revenue for the delay in their adjudication, show cause proceedings have to abate."

"The continuation of show cause proceedings long after their issuance have to be held to be arbitrary and offending under Article 14 of the Constitution of India."

"Administrative circulars emphasizing expeditious adjudication cannot override the constitutional mandate of fairness and timely adjudication."

"Transfer of show cause notices to the Call Book does not justify inordinate delay in adjudication."

"Service tax on information technology services became leviable only with effect from 16.05.2008; demands for prior periods are unsustainable."

Final determination: The writ petitions were allowed, and the impugned Show Cause Notices dated 29.09.2008 and 05.11.2008 were quashed due to inordinate and unjustified delay in adjudication violating principles of natural justice and Article 14. No costs were imposed.