Facts of the Case

The Respondent, M/s Alkarma, was engaged in fabrication and installation services related to building structures and was registered under the Service Tax regime. The Respondent availed CENVAT credit during the period 2004–2007.

A Show Cause Notice (SCN) dated 11 February 2009 was issued demanding approximately ₹8.51 crores alleging wrongful availment of exemptions and non-inclusion of free-supplied materials in taxable value.

The SCN was challenged before the Delhi High Court in a writ petition, where the Court quashed the SCN following earlier judgments including Era Infra Engineering Ltd. vs Union of India and Y.F.C Projects Ltd. vs Union of India, holding that free-supplied materials cannot be included in taxable value.

Subsequently, the Supreme Court in Commissioner of Service Tax vs Bhayana Builders Pvt. Ltd. upheld the legal position that free-of-cost materials are not includible in taxable value.

After this, the adjudicating authority dropped the SCN entirely. The Department challenged this before CESTAT, which upheld the dropping of SCN. The Department then filed the present appeal before the Delhi High Court. 

Issues Involved

  1. Whether quashing of a Show Cause Notice entirely bars further adjudication on all issues contained therein.
  2. Whether the Department can proceed on other components of demand not specifically dealt with in earlier judgments.
  3. Scope of liberty granted by the High Court while quashing the SCN. 

Petitioner’s Arguments (Department)

  • The earlier High Court judgment only addressed the issue of inclusion of free-supplied materials.
  • The SCN contained multiple independent demands such as short payment of service tax, education cess, etc.
  • Liberty was granted to proceed in accordance with law; hence adjudication on remaining issues was permissible.
  • The adjudicating authority and CESTAT erred in treating the entire SCN as extinguished.

Respondent’s Arguments (Assessee)

  • Once the SCN was quashed by the High Court, no further proceedings could survive.
  • The entire foundation of the proceedings ceased to exist after quashing of SCN.
  • Therefore, no partial revival or adjudication could be permitted.

Court’s Findings / Order

  • The High Court clarified that quashing of SCN was limited in scope, particularly concerning inclusion of free-supplied materials.
  • The liberty granted earlier allowed the Department to proceed in accordance with law after excluding such value.
  • The Court held that:
    • Other components of demand (e.g., short payment, cess, etc.) were never adjudicated earlier.
    • Both the adjudicating authority and CESTAT incorrectly assumed complete extinguishment of SCN.

Final Holding:

  • The Department is allowed to proceed with adjudication of remaining issues in the SCN.
  • The assessee must be given an opportunity of hearing.
  • The Court did not express any opinion on merits of remaining demands.

Important Clarification

  • Quashing of a Show Cause Notice does not automatically nullify all issues, especially where:
    • The Court grants liberty to proceed further, and
    • Certain issues were not adjudicated previously.
  • The judgment reinforces that scope of quashing must be read with the liberty granted by the Court.

Link to download the order -  https://delhihighcourt.nic.in/app/showFileJudgment/61012022025SERTA32025_110113.pdf 

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