Quashing Of Show Cause Notice On One Issue Doesn't Mean Other Demands Are Not Liable To Be Adjudicated: Delhi High Court

The observation was made by the bench of Justices Prathiba M. Singh and Dharmesh Sharma in a case where the SCN was quashed by another division bench of the High Court so far as the issue relating to duty on free supply of materials was concerned. However, the CESTAT proceeded to discharge the entire SCN.

The Court observed, “The SCN was quashed, but the Department was permitted to proceed in accordance with the decision in Era Infra Engineering Ltd. vs. Union of India (Supra) and exclude the value of free materials used by the Assessee. The liberty which was given to the Department in effect meant that the Court was conscious of the fact that there were various other components of demands which were raised by the Department and it is the admitted position that these components for eg., - in respect of short payment of Service Tax, education cess, treatment of secondary and higher education cess etc. have all not been adjudicated at all till date. All the other demands which are raised, accordingly, deserve to be adjudicated on facts and in accordance with law.”

The assessee herein was engaged in a business relating to finishing buildings or civil structures. It had availed CENVAT credit on inputs and input services, leading to a SCN and subsequent demand.

When the matter reached the Supreme Court, it was decided in favour of the assessee. It was held that service which has been provided free of cost or material, would not be included in the gross value for the purposes of service tax.

Thereafter, the Adjudicating Authority passed an Order by which the SCN against the assessee was quashed and the proceedings were dropped. The said order was challenged by the Department but the CESTAT agreed that the quashing of the SCN would in fact mean that the entire SCN is quashed.

The Revenue then approached the High Court, arguing that the SCN had various issues and demands for which were raised on different counts. Only the issue relating to the free supply of materials was discussed in these judgments and none of the other issues were ever considered. Accordingly, the adjudicating authority committed an error in holding that the proceedings cannot continue against the Respondent.

Counsel for the Assessee submitted that if the SCN is quashed, no proceedings can go on in respect of the SCN.

The High Court noted that the Division Bench order permitted the Department to proceed further strictly in accordance with the judgment (Era Infra Engineering Ltd. vs. Union of India (2016)) and exclude the value of free materials.

As such, it held “both the adjudicating authority and the CESTAT were incorrect in holding that the SCN having been quashed, none of the other demands would also be liable to be adjudicated” and directed that all other demands deserve to be adjudicated.

Appearance: Ms. Anushree Narain, Sr. SC with Mr. Ankit Kumar, Adv. for Appellant; Mr. Kamal Aggarwal, Adv. for Respondent

Case title: Principal Commissioner, Central Tax Commissionerate, Gst Delhi West v. M/S Alkarma

Citation: 2025 LiveLaw (Del) 192

Case no.: SERTA 3/2025

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