Handling disputes professionally – An indirect tax perspective

The objective of writing this detailed article is to create awareness among taxpayers, as to how impactful a reply to notice can be made. We have also provided links to our previous articles, which may be referred for in-depth analysis.

Key takeaways from this article –

• Create awareness among taxpayers, the importance of responding to letters/notices issued by the department.
• Knowing the means of communication of notice by the department under GST
• How to handle such notices, and – Need for a professional?
• What makes a reply, effective to resolve the issue at best

Death is not the end. There remains litigation over the estate.

 – By Ambrose Bierce

Today, in these tough times of pandemic there is a dire need to unload the baggage of frivolous litigation and allow businesses to move on. The pendency of disputes under Indirect tax has continued for prolong period and there is no assurance how these pending litigation under erstwhile indirect tax law would dissipate, considering the pendency of cases be it at CESTAT, high court, or Supreme court. Today the need of the hour is to strategically analyze the pain points of disputes with a pragmatic solution-based approach.

Taxpayers should primarily identify if the communication received from the department is a letter calling for information, or a summon or a demand notice, or an order. Some may not understand the difference between the letter/ summon/ notice/ or order. Resultantly it should be made a habit to proactively attend such letters/ summons issued by the department. Likewise, any information called by the department should be duly furnished along with an acknowledgment copy duly signed by the departmental officer.[1]

Not responding to such letters/ summon/notices/ or orders, may have a significant impact on litigation. Tax papers at the first instance by responding to departmental letters and by furnishing the required documents can bay the storm of litigation to some extent.

Taxpayers are required to understand various methods of communication through which notices are issued by the department under GST [U/s 169] [2] - 

• A notice could be sent through the registered email ID of the assessee,
• A notice could be uploaded on the tax-payers common portal,
• Delivery of notice through courier to notice or its manager,
• Delivery of notice to advocate or tax practitioner to an authorized representative of notice,
• Delivery of notice through registered post or speed post, acknowledgment due, at his last known place of business or residence; or
• By publication in a newspaper where the taxable person resides,
• If none of the modes aforesaid is practicable, by affixing it in some conspicuous place at his last known place of business or residence.
• If such mode is not practicable for any reason established and satisfied by the officer, then by affixing a copy on the notice board of the office of the concerned officer or authority who or which passed such decision or order or issued such summons or notice.

The most common mistake is where the taxpayer is not aware that the notice could be issued through email at the registered email ID, and as a general tendency the person who handles GST and related compliances furnish his email ID at the common portal. Whereas when such person quits from his designated job, the service of notices at the email ID of such employee goes unnoticed and resultantly such notices go un-responded.   

Similar could be a situation where the notice is served on the GST common portal which may not be attended by Noticee regularly. Therefore, it is advised as a habit to regularly check the common portal at least twice a week to ensure nothing important gets unnoticed.

As some taxpayers are unaware of the issue of notices, resulting in not responding to notices and consequently attracting serious consequences. Therefore, taxpayers are advised to create a permanent registered email ID, e.g.: ([email protected]) which remains a permanent email ID, irrespective of change in resources handling GST and as an official mode of communication with the Department.

Litigation at present has taken its course through an issue of letters and culminates into notices on issues that are primarily centric to compliances even though such issues could be interpretational in nature. In such cases, it is suggested professional advice is sought before deciding the course of action. The practice of resolving the issue by oneself and thereafter taking professional help may have an adverse impact on assessees. For instance, the opportunity of opting for settlement commission before passing of adjudication order for cases pertaining to erstwhile indirect tax law might be a missed opportunity.

There are various disputes, which could either be in the nature of classification, questionability on export or not, liability under reverse charge, the applicability of the exemption, eligibility of credit, reconciliation difference between GSTR-2A and 3B, recovery of ITC u/s 16(4), demand for the penalty, e-way bill related issues[3] , etc. For cases under the erstwhile regime, notices also being issued invoking extended period of limitation for issues like a difference in income reported in ITR and ST-3[4] or difference in revenues reported in ITR and P/L account, resulting in piling up of litigation cases, which also impacts the taxpayers psychologically.

Whereas to note that each of these issues has a solution, provided the taxpayer acted within the framework of law and despite this, the taxpayers were issued with demand notices. Accordingly, Taxpayers are suggested to seek professional advice/consulting before responding to such notices. In cases where complex issues are self-addressed, there could be possibilities of missing out on few legal points, which a professional could have well demonstrated in the reply, by way of additional submissions.

There may be issues that are already settled in favor of the assessee. However, due to lack of awareness on decided laws, the tax-payers, either pay the demand amount or continues to litigate without citing such decisions, which could lead to unproductive results. Adjudication of such cases may sometimes set in a wrong precedent for subsequent cases. When these kinds of decisions are relied upon by the department should be distinguished either with the decision of superior authority or should be established if the same was per incuriam or should be distinguished on facts or on certain other technical grounds.  

Many-a-times, cases are decided in favor of the taxpayer, but litigation gets prolonged consequent to the department filing an appeal and might take years to conclude. In such cases, there is a need to keep a tap on the issue, to check if the departmental appeal fell beyond the disputed monitory limits, if yes, the same should be brought to the notice of CESTAT, High Court or Supreme court and get the departmental appeal disposed.

There may be a need to keep a tap on issues in dispute, sometimes the Supreme Court might have decided the issue in favour of the assessee, in such cases the said decision should be brought to the notice before the authority before whom the departmental appeal is pending and by filing an early hearing application the case could be fast-tracked.

Decisions of higher judicial forums should be relied upon, normally principles of judicial precedents carry high weightage during litigation, in case of Union of India Vs Kamalakshi Finance Corp ltd, 1991 (55) ELT 433, Hon’ble Supreme court had held that “The observations of the High Court should be given the utmost care and held that failing to follow the judicial discipline would lead to the passing of strictures.

Instances could be where disputes are purely interpretational in nature, which require planning to determine the course of action under professional guidance. Therein an intimation to the department about our understanding and seeking clarification from the department on the understanding and keeping the department informed about our understanding, sometimes helps the assessee save from the invocation of the extended period of limitation.

Today mergers and acquisitions are themes of operations, start-ups operate with the objective of being taken over by big conglomerates, and start-ups aim of getting the accretive valuation, however in case of litigation the valuations get truncated. If such is the objective of operations, taxpayers may tend to err towards the revenue by depositing the disputed amount and not getting into litigations.  On the contrary few corporates operate with an objective of tax compliance and in case of any frivolous notices, they fight until the last mile to seek justice.

While drafting an effective reply to notice all the essential facts should be put forth in the reply. Corroborative evidence should be brought on record, agreement, purchase orders, contracts, statements, certificates etc., depending upon the fact and circumstance of the case should be brought out to strengthen the case. This is an important aspect that many taxpayers fail to bring out during adjudication. If the facts are not appropriately brought out during adjudication, then if the matter reaches before the high court or supreme court, such missed out facts cannot be brought on record, which could have an adverse impact on the case. Therefore, all essential facts of the case should be brought on record during adjudication. However, any legal points can be brought on record at any point of time.  

One must always be aware that issuance of a notice is a statutory mandate for raising a tax demand.  Before passing an order, taxpayer is given an opportunity to respond to demand notices and represent the case, by giving an opportunity of being heard. In case of M/s Brindavan Beverages (P) Ltd [2007(213) ELT487(SC)], Hon’ble Supreme court had held that a show cause notice is a foundation or sine qua non for proceedings against any recovery.

It is a settled position of law that letters either in the form of suggestion or advise or deemed notice cannot be considered as show cause notice for recovery. Mere communication intimating assessee of non-payment or asking for payment of dues cannot be construed as a SCN [CCE Vs. Merchant Impex Pvt. Ltd. 2012 (276) ELT 458 (Kar)]. Supreme Court in CC Vs. Virgo Steels Pvt. Ltd. [2002 (141) ELT 598 (SC)] has categorically held that show cause notice has to be a written document and any for any oral intimation, cannot be an alternative to show cause notice.

Below are few best practices to be followed while replying to a notice -

• To ensure that all forms of intimation, notices letters are communicated through the registered e-mail ID of the taxable person. It is wise to timely update the registered mail in cases of change in person handling GST.
• Ensure all relevant facts, evidence is streamlined based on priority of submission.
• Ensure relied upon documents in the notice forms part of the notice, else an objection can be raised by the taxpayer in reply to notice.
• Adjudication is a stage for examining evidence thus, examining the relied upon documents (agreement, invoice, accounts etc.) in the notice comprehensively.
• If notice is based on audit note, verify the documents submitted in reply to audit. Check the if the SCN appreciated the submissions made during the reply to audit note.
• Notice should have proper basis to propose the tax demand.
• Notice should indicate the charges.
• Notice should be specifically worded, and no demand can be based on assumptions. Check for incomplete or colored facts or facts that are omitted in the notice.
• Check of the provisions relied upon in the notice, whether relevant provisions prevailing during the period of dispute was brought out in notice.
• Notice should quantify the liability.
• Sections under which demand, interest, penalties are proposed, should be clearly brought out in the notice.
• Officer issuing notice, should have proper jurisdiction to issue such notice.
• Confirm if the values and tax amounts proposed in the notice matches with the books of accounts. Sometimes the values mentioned in the notice do not match with the books, this can be an easy low hanging ground of argument to reduce the tax liability.
• In case notice is issued based on statement of the taxpayer, or after having recorded the statement of taxpayer. Check if there is a requirement of cross-examining of the officer who conducted the investigation, if yes, the same should be requested in writing before the officer who issued the notice.
• If opportunity of cross examination was not granted that can be a ground to plead before the next appellate authority.
• Once the issue in the notice is identified, proper research is to be done supporting the arguments. Reliance on a ratio of decision should synchronize with relevant facts of the case.
• Check if material grounds has been brought out for invoking extended period of limitation in the notice. Analyze if the issue link with facts and support case laws to substantiate extended period of limitation could not be invoked.
• Check if the issue involved in the case was revenue neutral, if yes extended period cannot be invoked.
• In recent trend where notices are issued based on third party data in ITR or previous audit conducted, information being already available with the department, extended period cannot be invoked. There are series of decision, holding service tax demand notices cannot be issued based on ITR. Few decisions are cited for reference.
  • • J. I Jesudasan Vs CCE 2015 (38) S.T.R 1099 (Tri.Chennai)
    • Synergy Audio Visual Workshop V. CST 2008 (10) S.T.R.578 (Tri-Bang.)
    • Paro Foods Products Vs CCE 2005 (184) E.L.T 50 (Tri. Bang)
    • BSNL Vs CST 2010 (20) S.T.R 55 (Tri. Bang)
    • Free look outdoor advertising Vs CCE 2007 (6) S.T.R 0153 (Tr. Bang)
    • Alp Management Consultant P. Ltd Vs CST 2006 (4) STR 21 (Tri.Bang)
• In cases where demand has been previously dropped, in such cases extended period cannot be invoked for imposing 100% penalty, for subsequent period proceedings.
• Check for divergent views available by judicial fora, which in itself is an indication that the matter involves interpretational issue, which can be a ground to pleade for non-invocation of extended period of limitation.
• Check for clarification issued by way of (Education guide, circulars or press release) available on subject issue, those can be used to plead non invocation of extended period of limitation.
• Ensure alternative pleas, are submitted in the replies with non-obstantive clause.
• Ensure proper email address for personal hearing, is mentioned in the reply to SCN.
• Make a specific request for granting an opportunity for personal hearing.
• Ensure proper acknowledgement is obtained after having filed the reply to notice.
• Whiling attending the hearing, ensure a synopsis for the case is prepared and submitted along with copies of relied upon case law. Specific paras of the relied upon case-law should be highlighted for easy of reference.
• Avoiding placing reliance on head notes of the case laws.  
• Any latest case law on the subject issue could be submitted during the hearing.
• Ensure the record of hearing is taken.  

As rightly quoted by Sir Jon Cryer, Litigation solves everything, the foundation to which is a show cause notice. Adhering to the above best practices helps in drafting an effective reply, one can efficiently combat pain of litigation, and try our best in getting the charges dropped.

Paper writers have made an effort to give exhaustive material to the readers, we have also shared few links, which may be referred for in-depth analysis.

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