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Departmental Litigation System - Flaws and Remedies thereof

FEBRUARY 25, 2015

By H S Brar

A large majority of the assessees as well as law practitioners like to blame the departmental adjudication and appellate system for being unfair, biased and partisan. For a detailed analysis of the departmental adjudication and appellate system, it is necessary to examine the causes of initiation of the litigation, the structure of the adjudication/appellate authorities and an analysis of the "review" procedure under which the decision to file a review of an "anti-revenue" order is taken. Lastly, the purpose of this review shall not be served without presenting a set of recommendations.

Departmental adjudication in Central Excise and Service Tax arises on account of the following reasons :-

1. CERA objection – Board letter F. No. 206/02/2010-CX.6 dated 3rd February, 2010 prescribes that if the CERA objection is not settled at preliminary stage, a show cause notice has to be necessarily issued, even if the department does not agree with the contentions of the Accountant General and is contesting the same. If the issue is of recurring nature, it implies that the assessee is bound to receive recurring show cause notices for the subsequent period, though of course, they are all transferred to the call book. The same are decided either after settlement of the objection or after a lapse of one year, if the para is not converted into an SOF till that time.

2. Audit objection – Audit teams comprising of departmental officers conduct audit of the records of the assessees as per the prescribed frequency and point out violations, if any. If the assessee does not agree with the objection, the department is bound to issue a show cause notice. The department has streamlined issuance of show cause notices based on such audit objections by entrusting the job of drafting and getting the show cause notice issued on the audit team itself. This ensures that the show cause notice is not only drafted properly, clearly bringing out the view of the department, but also ensures that the same is issued after collection of/by placing reliance on, all the requisite information/documents. All show cause notices of this category are based upon audit objections which have been approved, after deliberation, by the Excise Audit Monitoring Committee consisting of the jurisdictional Commissioner, all Additional/Joint Commissioners posted in the Commissionerate, all Assistant Commissioners/Deputy Commissioners posted at the Headquarters office as well as the Divisions and all the members of all the audit teams.

3. Detections by Preventive – Another source of generation of litigation is detection of evasion of tax by the Preventive/Anti-evasion wings. Here again, the litigation arises when the assessee/evader does not agree with the point of view of the department or is unable to discharge his tax liability and interest, penalty thereon.

4. Procedural lapses/detections by the Range staff – This type of litigation normally arises only when either an assessee commits a procedural lapse or any contravention of the law is detected by the Range staff during scrutiny of the assessee's periodical returns or monitoring an assessee's activities required under provisions of the specific benefits being availed by them.

A show cause notice is issued by the following officers as per the monetary limit prescribed in the provisions of law as mentioned against each :-

Sr. No.

Designation of the officer

Monetary limit in respect of Central Excise

Monetary limit in respect of Service Tax

1

Superintendent

Upto Rs. 1 lakh (excluding case involving determination of rate of duty or valuation and cases involving extended period of limitation)

Not exceeding Rs. 1 lakh (excluding case relating to taxability of services or valuation of services and cases involving extended period of limitation)

2

Assistant/Deputy Commissioner

Upto Rs. 5 lakhs(except where the Superintendents are empowered to adjudicate)

Upto Rs. 5 lakhs(except where the Superintendents are empowered to adjudicate)

3

Joint/Additional Commissioner

Above Rs. 5 lakhs and upto Rs. 50 lakhs

Above Rs. 5 lakhs and upto Rs. 50 lakhs

4

Commissioner

Without limit

Without limit

The officer, who issues the show cause notice, later adjudicates it. The officer is expected to impartially decide the matter in adjudication proceedings, which are quasi judicial in nature, after giving an opportunity to the noticee to present his views/opinion on the matter. A show cause notice is expected to be issued by an officer after proper application of mind and it is expected that all facts/laws related to the offence in question had been considered by the issuing authority. Once an officer has applied his mind while issuing a show cause notice, how can he be expected to apply his mind while adjudicating the same and arrive at a conclusion that the demand does not sustain. So a show cause notice is normally adjudicated in favour of the department, unless the noticee presents some drastically different new facts or case laws in his favour. Leave aside the original adjudicating authority, any individual, who has formed an informed opinion on an issue, cannot be expected to change his view-point later-on, unless some compelling new facts surface.

This conclusion has been arrived at without taking into consideration the pressure on the departmental officer acting as an adjudicating/appellate authority, which may be in the form of reports regarding number of anti/pro-revenue orders passed by him, the animosity that may be generated within the workplace by adopting a liberal or "anti-revenue" posture or the effect such an approach may have on his future prospects (may be read as "APAR" or "career" or "promotion") .

To avoid all such "biases" the following measures are suggested, which will go a long way in ensuring more transparency and "balance" in adjudication proceedings :-

1. Issuance of show cause notice by an officer one rank lower than the adjudicating authority: This step will ensure doing away with the inhibition of an officer to pass an order which goes against the show cause notice. However, once the show cause notice is issued, all its relied upon documents/annexures should be sent alongwith a copy of the show cause notice to the adjudicating authority for his consideration while adjudicating the same. Also, an adjudicating authority can take a more "balanced" view as the show cause notice has been issued by someone else.

2. Stricter examination of facts and relevant laws as well as improving the drafting of the show cause notices: This will ensure that a half-baked show cause notice is not issued. Many a time it is observed at the appellate stages that even though the alleged offence has actually been committed by the noticee, but due to improper drafting of the show cause notice, the demand fails to sustain. Also, the sustainability of the issue should be examined conservatively and only those issues should be raised through show cause notices which can sustain till the highest appellate authority.

3. Removal of any kind of pressure on the adjudicating/appellate authority: The adjudicating/appellate authority should be reposed with a sense of trust/confidence so that it can freely decide a matter at hand without considering its impact on the "revenue" per se . At the end of the day pursuing un-sustainable litigation costs the exchequer.

4. Issuance of periodical circulars: Periodical circulars should be issued every quarter by Board office wherein the stand of the department is spelt out, alongwith the reasons thereof, on the issues actively in dispute during the period concerned so that an informed view is taken at adjudication/review stages. The departmental stand can be regarding both, sustaining or settling the issues in question. This is especially relevant in cases where a recurring demand is raised on a particular issue only in one Zone and nowhere else in the country.

5. Strict monitoring of pendency at draft show cause notice, show cause notice and Commissioner(Appeals) stages: It is often observed that the show cause notices, where extended period of limitation has been invoked, are issued only when their last date is approaching. In case the invocation of extended period does not sustain at an appellate stage, the demand for the extended period, which could have been covered under the normal period if the initial show cause notice had been issued early and the remaining period through a subsequent notice,fails. Similarly, it is noticed that despite clear-cut directions regarding completion of adjudication proceedings, the cases are not disposed of within the prescribed period. It is beneficial both for the revenue as well an assessee, if the show cause notice is disposed off quickly. Similar monitoring and remedial action thereof is necessary in respect of appeals pending with Commissioner(Appeals). A long drawn out litigation is helpful only for an assessee who knows he doesn't have a case on merits and wishes to delay the inevitable for as long as possible.

6. Early settlement of CERA objections: Once a protective demand has been issued in respect of a CERA objection to which the department does not agree, the classical Lucknawi situation arises ( Pehle AAP, that is! ). The AG office seeks to know the status of the demand raised before settling the para and the department wants to know whether the para has been settled before adjudicating the demand, which, alongwith recurring demands are kept in "Call book". The easiest solution to this problem is that the draft show cause notice be proposed by the AG office and once the same has been issued by the appropriate Central Excise Officer, the para should be settled and the concerned officer trusted to adjudicate it impartially. In any case, each adjudication order goes through the review process and if the order is flawed, the reviewing authority can be expected to file a review. This step will kill two birds with one stone, on one hand the pendency of CERA objections will be reduced and on the other the litigation will reach the next level.

The above measures should go a long way in passing of more impartial and sustainable orders at adjudication stage.

Next process needing examination is the process of "review" of an order passed by the adjudicating/appellate authority. It is necessary to examine the structure governing the same.

Sr. No.

Impugned order

Reviewing authority

1

All adjudication orders issued by Assistant/Deputy/Joint/ Additional Commissioner

Jurisdictional Commissioner.

2

All orders issued by Commissioner(Appeals)

Committee of Commissioners. In cases of difference of opinion, the matter is referred to the jurisdictional Chief Commissioner who decides the matter

3

All adjudication orders issued by Commissioner.

Committee of Chief Commissioners. In cases of difference of opinion, the matter is referred to the Board office which decides the matter

4

All orders of CESTAT and High Court

Jurisdictional Commissioner. In cases of anti-revenue orders the same can be accepted only after approval of jurisdictional Chief Commissioner. In case of anti-revenue decisions of CESTAT, CDR is expected to send his comments/ recommendations to the jurisdictional Commissioner.

5

All proposals to file Civil Appeals/Special Leave Petitions

Jurisdictional Commissioner with the approval of jurisdictional Chief Commissioner.

A perusal of the above structure reveals that the orders of Commissioner and Commissioner(Appeals) are reviewed by the two-member Committees of Commissioners/Chief-Commissioners, but the next stage of decision-making is restricted to the jurisdictional Commissioner and/or Chief Commissioner. As we proceed higher in the appellate stages the main points of contention change from facts to legal fiction. Thus, decision-making power to review an order, at litigation levels requiring application of mind by more than one person, rests with only one person, the jurisdictional Chief Commissioner. Also, a Commissioner does not have the power to be involved in the review of an order passed by him as an adjudicating authority, but he is involved in reviewing the order of CESTAT in respect of the same order . Viewing it from another aspect, in case of the same adjudication order, concurrence of two Chief Commissioners is required to arrive at a decision whether to file an appeal against the same or not, but the CESTAT order against the same can be reviewed by only one person, the jurisdictional Chief Commissioner. As we proceed further, it is observed that the Commissioner and Chief Commissioner decide whether to accept an order of the High Court or not. The Joint Secretary(Legal) comes into the picture only after a proposal against the order of the CESTAT/High Court is sent to him. It appears that the perception is - once mind has been applied and it has been decided to not to accept an order at the first appellate level, anti-revenue orders of the next higher levels do not require the same level of application of mind and can be reviewed by the jurisdictional Commissioner, with the concurrence of the jurisdictional Chief Commissioner. This is contrary to the fact that the interpretation of the legal points discussed at higher appellate levels requires more application of mind than the facts interpreted at the lower levels of litigation.

The review structure can be modified to make it more progressive in the following manner :-

Sr. No.

Impugned order

Reviewing authority

1

All adjudication orders issued by Assistant/Deputy/Joint/ Additional Commissioner

Jurisdictional Commissioner.

2

All orders issued by Commissioner(Appeals)

Committee of Commissioners. In cases of difference of opinion, the matter is referred to the jurisdictional Chief Commissioner who decides the matter

3

All adjudication orders issued by Commissioner.

Jurisdictional Chief Commissioner.

4

All orders of CESTAT against orders of Commissioner(Appeals)

Jurisdictional Chief Commissioner.

5

All orders of CESTAT (except 4 above), High Court and all proposals to file Civil Appeals/Special Leave Petitions

Committee of Chief Commissioners. In cases of difference of opinion, the matter may be referred to the Board office which may decide the matter.

 

Another aspect requiring attention is the lower monetary limit for filing an appeal before the CESTAT, High Court and Supreme Court, which is Rs. 5, 10 and 25 lakhs, respectively, except in cases where the Constitutional validity of the provisions of an Act or Rules is under challenge or where Notification/Instruction/Order or Circular has been held illegal or ultra vires. There is no provision of filing an appeal in cases of recurring nature, some of which may be below the prescribed monetary limit. This issue needs to be looked into and appropriate directions/clarification issued and issues of recurring nature exempted from the said monetary limit.

The efforts to rationalise and minimise litigation, by fixing the minimum monetary limits for filing appeals before appellate authorities, have only resulted in mechanisation of the process at the cost of judicious application of mind. An order below the relevant monetary limit is accepted in view of standing instructions and its effect is cast on the cases above the monetary limit with the perception being that somehow the same need to be appealed against. It is important to realise that it is better to pursue two cases where the department has a strong case despite an anti-revenue order by an appellate authority, rather than filing appeals in twenty cases just because an appeal had been filed at the first appellate level or because a point of view had been taken at the show cause notice and/or adjudication stage.

To conclude, the following checks at various stages can go a long way in reducing the litigation :-

1. Initiation stage – Thoroughly examine the issue raised by the concerned section, be it audit, preventive or by Range staff and initiate the litigation only if it can be conclusively deduced that the same can be sustained till the highest appellate level and ignore the pressure of targets to be achieved or to transfer the decision-making stage to adjudication/review stage. Conduct thorough investigation, study facts comprehensively before drafting the show cause notice to ensure that the show cause notice is detailed, self explanatory and correct provisions have been invoked. Issue a show cause notice at the "earliest" possible date.

2. Adjudication/appellate stage – The adjudication/appellate process should be separate from the show cause notice/adjudication process and should be conducted in a completely impartial/unbiased manner, setting aside the fact that the adjudicating/appellate officer is a "revenue" officer and should act only as a "quasi-judicial authority".

3. Review stage – It is not necessary that a case which appeared sustainable at the initiation stage can be sustained at the higher appellate stages. The reviewing officers should judiciously decide to "let go" of an issue which cannot be sustained instead of flogging a dead horse.

I hope both the legal practitioner community as well as the departmental officers will agree with my diagnosis of what ails the departmental litigation system and that the above proposed steps can go a long way in faster, efficient and balanced disposal of litigation.

(The author works in the department and the views expressed are strictly personal.)

( DISCLAIMER : The views expressed are strictly of the author and Taxindiaonline.com doesn't necessarily subscribe to the same. Taxindiaonline.com Pvt. Ltd. is not responsible or liable for any loss or damage caused to anyone due to any interpretation, error, omission in the articles being hosted on the sites)

 RECENT DISCUSSION(S) POST YOUR COMMENTS
   
 
Sub: Audit and Litigation Few further improvement

I agree with the various issues & suggestions by the author with regard to audit & consequent minimization of litigation under indirect tax. We would like to further add the following point for consideration.
• First of all, does it actually require having multiple Audit by various departments in Central Excise & Service Tax i.e CERA Audit, EA-2000 audit, Preventive Audit etc?
• Considering it actually require to have audit by various aforesaid wing then definitely not for the same period or same financial year. There should be a mechanism & co-ordination among various wing of excise & service tax department that once audit is completed for a particular period by any wings of the excise & service tax department says CERA audit then should not have further audit for the same period by other wing of the department say EA-2000 audit or vice –versa.
• With regard to adjudication, there should be some timelines before adjudicating authority preferably upto commissioner appeal to decide the matter. May be on similar time frame as prescribed for issuance of SCN.
• Also once personal hearing completed before adjudicating authority then the relating Order should be passed at the earliest possible time and should not be have further personal hearing for the same matter even if there is change in adjudicating authority due to transfer, promotion etc, It is noticed that assessee appeared multiple times before adjudicating authority for the same matter without having order in hand.

Thanks



Posted by PRAKASH JHA
 
Sub: adjudications

well said,need of the department is to create an psycho-official environment which encourages passing of judicious orders instead of passing just pro-revenue orders without following any judicial discipline in this regard

Posted by chdzone chdzone
 

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