LOW HANGING FRUIT IN INDIRECT TAX LITIGATION

I’ve been thinking about low hanging fruit lately.

If there were a few things that could produce massive results with very little investment, it would be worth it to spend some time considering those few things.

For example, 20% of the work generates 80% of results, 20% of criminals commit 80% of crimes, 20% of students have grades 80% or higher, etc.

How do we apply this thinking to indirect tax litigation?

Having spent a few years in this area, I have a few takeaways that you could use.

Regardless of the issue involved, whenever you or your client receives an indirect tax Show Cause Notice or Order levying tax and/or penalty, these are the 2 things you should always look for before going into the merits of the matter:

1. LIMITATION

This is the biggest low hanging fruit that we routinely see.

Just as in civil law, tax law prescribes strict periods of limitation within which the Department may levy tax or penalty against a tax payer. In other words, the tax department cannot wait till the limitation period expires and then take action against a taxpayer.

The first step when looking at a show cause notice or an order is – what is the assessment period in question? For which period is tax department coming after a taxpayer?

The second step is to ascertain whether on the date of receipt of the show cause notice or the order, the assessment period in question is within time.

To take an extreme example, if you receive a show cause notice in 2020 for the assessment year 1950 stating that you have committed some irregularity in paying your tax dues in 1950, the notice (and any consequent order) is clearly barred by time. No law provides for a limitation of 70 years! Therefore, the relevant inquiry is whether on the date of receipt of the order, is the assessment period in question within time?

Therefore, the relevant inquiry is whether on the date of receipt of the order, is the assessment period in question within time?

Here are some of the limitations under important indirect statutes:

Under the Telangana VAT Act, 2005, Section 21(4) prescribes a limitation of 6 years from the end of each month. Right now, it is July 2020. Therefore, the earliest period that can be taxed in July 2020 is June 2014 (if we go back six years from today). In other words, any show cause notice or tax order that tries to levy tax for periods earlier than June 2014 is barred by time.

Under the Central Sales Tax Act, Rule 14-A(5A) of the CST Telangana Rules, 1957 prescribes a period of 4 years from the date of filing the return. Therefore, if the return for a particular year was filed in July 2011, the Department can initiate proceedings against the tax payer until June 2015. Unfortunately, assessing authorities across Telangana today are misapplying the limitation of 6 years under the Telangana VAT Act to assessments under the CST Act which only provides for a limitation of 4 years. The Telangana High Court has passed orders in several Writ Petitions holding that assessing authorities are not entitled to use the 6-year-period under the CST Act.

Under the Central Excise Act, 1944, Section 11A provides a limitation period of 2 years from the relevant date for the issuance of a show cause notice. If a taxpayer has filed a return, the relevant date is the date of filing of return.

Therefore, for the period July 2020 – the earliest period that can be taxed is June 2018. However, GST law came into force on 1st July 2017. Therefore, no order can be passed to today against a taxpayer under the Central Excise Act! The only exception to this is if the Department invokes extended period of limitation for fraud or suppression. In such a case, the Department gets 5 years instead of 2 years.

Under the Service Tax law, Section 73 of the Finance Act, 1994 provides for a limitation of 30 months from the relevant date. If service tax returns are filed, the relevant date is 30 months from the date of filing of returns. Applying the going-back-in-time-method, the earliest period that can be taxed in July 2020 is January 2018 (if we go back thirty months from today). In other words, any show cause notice that tries to levy tax for periods earlier than January 2018 is barred by time.

Under the GST regime, Section 73(10) of the CGST Act, 2017 provides a limitation period of 3 years from the due date of filing annual return. However, the Department ought a show cause notice 3 months prior to expiry of the 3-year period to save limitation under Section 73(2). Therefore, the effective limitation period is 2 years and 9 months.

One exception: As noted above, all the above statutes provide for an extended period of limitation in the event of fraud or suppression by the taxpayer. The logic behind such extended period of limitation is that fraud or suppression takes longer to detect and therefore the Department is afforded a longer time frame to initate proceedings against assesses.

To invoke extended limitation, the Department must establish some positive act by the taxpayer to play fraud.

It is crucial to note that in a catena of decisions of the Supreme Court and High Courts have held that every omission or irregularity cannot be termed as suppression or fraud. If it were, the concept of a genuine mistake by a taxpayer would be obliterated. To invoke extended limitation, the Department must establish some positive act of the taxpayer to play fraud.

Therefore, before going into the merits, do take a moment to check if an order or a show cause notice is barred by time.

2. VIOLATION OF PRINCIPLES OF NATURAL JUSTICE

This is another simple yet effective remedy to have a tax order set aside and get the issue remanded to the assessing authority.

The three main requirements of natural justice that must be met in every case are: adequate notice, fair hearing and no bias.

Here are some situations where violation of principles of natural justice can be invoked. I’ve seen Writ Petitions filed on each of these grounds:

1. If a taxpayer has received a tax order for which no show cause notice has been issued;
2. If a taxpayer has received a tax order without being given a chance for a personal hearing;
3. The assessing authority relies on a report which is not furnished to a taxpayer;
4. The show cause notice and the tax order have the same date (this happens in legislations where no limitation is prescribed for the show cause notice (eg. TSVAT Act) and the officer passes both the show cause notice and order at the last moment to save limitation)
5. Where the assessing authority who has passed the order has been promoted and sits in judgment of his own order (bias).

These grounds are not exhaustive. If any of the these requirements are not met, the order can be set aside.

CONCLUSION

Before you dig into a tax order or a show cause notice on merits, you should consider doing a preliminary check for both these issues.

If any of the two issues are present in a case, the taxpayer can approach the High Court instead of going through the rigmarole of the appeal process. This provides the advantage of avoiding hefty pre-deposits that are to be paid upfront by an assesses to file an appeal.

P.S. All things being equal, do what is easy given available resources before doing what is difficult.

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