By TIOL News Service

AHMEDABAD, MAY 03, 2014: THE Service Tax Voluntary Compliance Encouragement Scheme (VCES) proposed by the Finance Bill, 2013 came into effect from 10.5.2013.

One of the many issues that the CBEC had clarified in its Circular 170/5/2013-ST, Dated: August 8, 2013 reads -

This clarification is under scrutiny in the present Writ Petition filed.

Facts of the case:

Petitioner is a partnership firm engaged in the business of construction. One of its partners is also a petitioner.

On 8.3.2013 preventive officers of the Service Tax Department conducted inquiry at the premises of the petitioners regarding the petitioners' unpaid service tax dues. Statements of the representatives of the firm were recorded. Documents and registers were seized. According to the petitioners various postdated cheques were taken from the petitioners under duress. Against such postdated cheques during the period between 9.3.2013 to 15.4.2013, the petitioners deposited total sum of Rs.35.51 lakhs with the department.

On 14.7.2013 the petitioners deposited further amount with the department so that inclusive of the previous deposit of Rs.35.51 lakhs, the total deposit with the department made by the petitioners came to Rs.47,79,770/-. This was towards the petitioners' unpaid service tax liability upto 31.3.2013 as per the calculations of the department.

Under the Finance Act, 2013, the legislature introduced the VCES 2013. The controversy is with regard to the correct interpretation of term "tax dues" defined in section 105(1)(e) of the Finance Act, 2013.

On 24.8.2013 the petitioners declared tax dues of Rs.43,61,719/-. The petitioners filed a revised declaration on 30.12.2013 and revised the amount of tax dues to Rs.45,76,476/-. This amount included the sum of Rs.35.51 lakhs deposited by the petitioners with the department between 9.3.2013 till 15.4.2013. Case of the petitioners is that in terms of section 105(1)(e) tax dues would include any service tax which remained unpaid as on 1.3.2013. Since these amounts remained unpaid on 1.3.2013, it would qualify to be categorized as tax dues. The case of the department, however, is that these amounts were deposited before 10.5.2013 when the Scheme was promulgated. The declaration of amount, therefore, could not be a declaration under the Scheme.

On such premise the designated authority issued a notice on 13.9.2013 asking the petitioners to show cause as to why their claim under VCES, 2013 should not be rejected.

The petitioners in their reply contended that amount of Rs.35.51 lakhs was deposited after 8.3.2013 i.e. after the cut-off date of 1.3.2013. Such amount, therefore, would also qualify under the Scheme of 2013.

The designated authority, however, by his impugned order dated 31.12.2013 acknowledged the declaration of the petitioners only to the extent of tax dues to the tune of Rs.10,24,656/- and which amount was deposited by the petitioners after 10.5.2013.

The designated authority based his conclusion on the clarification contained in circular 170/5/2013-ST dated 8.8.2013.

After receiving such acknowledgment the petitioners made further representations to the respondents without any response from the respondents.

Hence the petitioners are before the Gujarat High Court.

They inter alia submitted -

++ The intention of the legislature while framing the Scheme was clear and was to give benefit to all declarants covering all tax dues, which remained unpaid on 1.3.2013 and, therefore, the respondents cannot rely on any circular or clarification to override statutory provision. [Inter Continental (India) vs. Union of India 2003 (154) E.L.T. 37(Guj.)]

++ Parallels were also drawn to other similar schemes framed by the Parliament in the past for comparison viz. KarVivadSamadhan Scheme, 1998 and when the Parliament desired that only that amount of tax arrears which remained unpaid on the date of the scheme would qualify for immunity, it was so specifically provided in other schemes.

The Counsel for the department opposed the petition by contending that the intention of the VCES 2013 was to give immunity to the tax declared by a person under the Scheme. In the present case, the petitioners had already paid the tax even before the Scheme was promulgated. Quite apart from clarification contained in the circular dated 8.8.2013 the petitioners' declaration qua such amounts was rightly rejected by the designated authority.

The High Court extracted the definition of "tax dues" given in clause (e) of sub-section(1) of section 105, sections 106 (Person who may make declaration of tax dues), 107 (Procedure for making declaration and payment of tax dues), 108 (Immunity from penalty, interest and other proceedings) and after adverting to section 114 authorizing the Central government to make rules viz. Service Tax Voluntary Compliance Encouragement Rules, 2013 observed -

++ In terms of sub-section (1) of section 106 any person can make declaration of his tax dues in respect of which no notice or an order of determination under sections 72 or 73 or 73A of the Finance Act, 1994 has been issued before 1.3.2013.

++ Sub-section (2) of section 106 essentially provides that in cases where any inquiry or investigation against declarant is initiated for non-payment or short-payment of service tax dues which is pending on 1.3.2013, the designated authority would reject the declaration of such a person. In turn, the term "tax dues" defined under section 105(1)(e) means service tax or tax payable for the period between 1.10.2007 to 31.12.2012 but not paid as on 1.3.2013.

++ Combined reading of section 106 with section 105(1)(e) would make it clear that the position of a declarant   vis-à-vis his service tax dues would have to be ascertained as on 1.3.2013. If any proceedings for determination of the tax dues of a person have been initiated before 1.3.2013, declaration of such a person would not be accepted. Likewise, arrear of tax which could be declared in such declaration would be the service tax due or payable for the period between 1.10.2007 to 31.12.2012 and which sum is not paid before 1.3.2013. In plain terms, therefore, if any service tax is due and payable by a person for the aforesaid period, the same would be included in the definition of the expression "tax dues" if the same has not been paid as on 1.3.2013.

++ In the present case, admittedly the disputed amounts of taxes were deposited by the petitioners with the department after 1.3.2013. However, the same having been deposited before 10.5.2013 that is the date on which the scheme was framed, the department contends that such amount cannot form part of the declaration under the Scheme.

++ In our opinion, the contention ignores the statutory provisions contained in the Scheme of 2013. As we have noticed, the declaration can be made in terms of section 106 of tax dues. The term "tax dues" is defined in section 105(1) (e). If we accept the stand of the department that any tax which is deposited before 10.5.2013 cannot form part of a declaration, the same would substantially mutilate the definition of term "tax dues' contained in section 105(1)(e).

++ If the intention of the legislature was to exclude any tax deposited before the framing of the scheme, the same could have been provided in plain language. On the contrary, the legislature excluded from the purview of declaration only those taxes which were already paid by 1.3.2013. The period between 1.3.2013 and 10.5.2013 would, by necessary application of the provision of the scheme, be covered for declaration under the Scheme itself.

++ In our understanding, for a valid declaration two of the essential conditions were that the proceedings for either declaration or recovery of the tax dues should not be pending on 1.3.2013 and secondly that the tax should not have been deposited before the said date. In the present case, both the conditions were fulfilled.

++ In response to a query whether the person who has made the payment of tax dues before the Scheme was notified and would later on make a declaration under the Scheme, would such a declaration be valid, the response was that the immunity from interest and penalty is only for tax dues declared under the Scheme. If any tax has been paid prior to the enactment of the Scheme, liability of interest and penalty would be adjudicated as per the Finance Act, 1994.

++ For several reasons this clarification cannot be pressed in service in the present case. It is well settled in law that an authority cannot, through a circular or clarification, override the provisions of the statute. If the clarification thus runs counter to the statutory provision, the same would be invalid.

++ We have already held that the Scheme permits a person to declare his tax dues, even the amount deposited before 10.5.2013, as long as the same was done after 1.3.2013. If the concept of making a declaration under the Scheme which cannot be done till the Scheme is formulated is brought into operation, the very same clarification to Point No.4 would run counter to this principle. The query here was whether a party against whom an inquiry, investigation or audit has been initiated after 1.3.2013 can make declaration under the scheme? Answer to the question was, there is no bar from filing of a declaration in such cases.

++ There is one more reason why the said clarification would not cover the case of the petitioners. The query was concerning a person who has made payment of his tax dues before the Scheme was framed. In the present case, the amount of Rs.35.51 lakhs deposited after 1.3.2013 at the relevant time was never offered as a tax by the petitioners. The same was only deposited under duress.

++ In the present case, till the Scheme was framed the amount remained with the department by way of a deposit. Once the scheme was framed, the petitioners made a declaration and even included such sum of Rs.35.51 lakhs by way of a declaration of their tax dues. Thus the admission on the part of the petitioners that the service tax was short-paid came only by way of declaration under the Scheme. The clarification thus even for this reason would not cover the situation on hand.

In fine, the communication dated 31.12.2013 is quashed to the extent the designated authority failed to cover the additional sum of Rs.35.51 lakhs against the item "tax dues" declared.

The designated authority was directed to issue a fresh acknowledgment or amend the acknowledgment forwarded to the petitioners under communication dated 31.12.2013 so as to include the said additional sum of Rs.31.51 lakhs as tax dues declared in addition to Rs.10,24,656/- for which such acknowledgment was already issued.

The Writ Petition was allowed.

(See 2014-TIOL-630-HC-AHM-ST)