Service Tax Demand Order Quashed Due to Unexplained Delay in Adjudication

Service Tax Demand Order Quashed Due to Unexplained Delay in Adjudication

Issue: Whether a Service Tax demand order passed under Section 73(1) of the Finance Act, 1994, invoking the extended period of limitation, can be sustained if the Adjudicating Authority fails to pass the order within the period prescribed by Section 73(4B)(b) (one year from SCN issuance for extended period cases), and fails to provide any justification for such delay.

Facts:

• For the financial periods October 2015 to March 2016 and July 2017 (up to June 2017), the respondent authority determined a service tax liability upon the assessee under Section 73(1) of the Finance Act, 1994.
• The extended period of limitation (beyond the normal one year) under the proviso to Section 73(1) was invoked.
• The assessee submitted that the order-in-original had been passed approximately three and a half years from the date of issuance of the Show Cause Notice (SCN).
• The assessee argued that it was incumbent upon the authority to determine tax liability either within the prescribed period of one year under Section 73(4B)(b) or to at least show prima facie that it was not possible to determine the liability within that period.
• The respondent authority conceded that the determination was delayed but contended that the one-year period prescribed under Section 73(4B)(b) was not an absolute and mandatory period. They cited a Co-ordinate Bench decision in Kanak Automobiles Pvt. Ltd. v. Union of India & Ors. (CWJC No. 18398 of 2023, dated 4-4-2024), which purportedly supported their view that the period was not final.

Decision: The impugned order was set aside. The court acknowledged that in Kanak Automobiles Pvt. Ltd. (supra), the Co-ordinate Bench had indeed agreed that the one-year period in Section 73(4B)(b) was not an “absolute mandate.” However, it also critically noted that Kanak Automobiles simultaneously held that a duty is cast upon the Department to show that it was not possible to pass an order determining the amount within one year for cases falling under the extended period. Since, in the instant case, the counter-affidavit had “no whisper” to prima facie satisfy the Court that it was not possible for the Taxing Authority to determine the tax liability within the prescribed one-year period, the ratio of Kanak Automobiles was applicable in favor of the assessee. The decision was in favor of the assessee.

Key Takeaways:

• Conditional Nature of “Wherever Possible” in Section 73(4B)(b): While Section 73(4B)(b) of the Finance Act, 1994 (pertaining to Service Tax adjudication) uses the phrase “wherever it is possible to do so” regarding the one-year time limit for extended period cases, this does not grant indefinite leeway to the department.
• Department’s Burden to Justify Delay: The core principle established is that if the department fails to adhere to the one-year period, it must affirmatively demonstrate and justify why it was not possible to pass the order within that timeframe. Mere inaction or silence regarding the delay is insufficient.
• No Presumption of Justifiable Delay: The burden is on the revenue to explain the delay, particularly when an extended period of limitation (which often implies a more serious default by the assessee) is involved.
• Importance of Counter-Affidavit: The court specifically noted the absence of any justification in the counter-affidavit, indicating that the department failed to meet its evidentiary burden to explain the delay.
• Consequences of Unexplained Delay: An unexplained and inordinate delay in adjudication, even if the statutory period is not “absolute,” can lead to the quashing of the demand order, as it can be seen as an arbitrary exercise of power and prejudicial to the assessee.
• Spirit of Timely Adjudication: The ruling reinforces the legislative intent behind prescribing time limits for adjudication – to ensure certainty for taxpayers and efficient disposal of disputes.