FACTS OF THE CASE

The respondent assessee, engaged in manufacturing automobile parts, was registered under various taxable service categories.

An audit conducted on 22.09.2010 alleged wrongful availment of CENVAT credit amounting to ₹1.34 crore for the period 2007–2012. Subsequently, a show cause notice (SCN) dated 19.10.2012 was issued concerning service tax on medical insurance services provided to employees.

Thereafter, the assessee opted for the Voluntary Compliance Encouragement Scheme (VCES), 2013, declaring service tax dues of ₹7.22 crore and deposited 50% as required.

However, the Designated Authority rejected the declaration partially, citing:

  • Prior audit determining liability, and
  • Pending SCN as on the cut-off date (01.03.2013).

The matter travelled through appellate stages to CESTAT, which allowed the assessee’s appeal. The Revenue challenged the same before the Delhi High Court. 

ISSUES INVOLVED

  1. Whether an audit report constitutes “determination of tax liability” under Section 106(1) of the Finance Act, 2013?
  2. Whether the existence of a pending SCN renders an assessee ineligible for VCES benefits?
  3. Whether VCES declaration can be denied when SCN does not cover the same tax dues? 

PETITIONER’S ARGUMENTS (REVENUE)

  • The audit report quantified tax liability and therefore amounts to determination of dues.
  • Since The Delhi High liability stood determined prior to filing declaration, the assessee was ineligible under Section 106(1).
  • Pending SCN and audit findings barred the assessee from availing VCES.

RESPONDENT’S ARGUMENTS (ASSESSEE)

  • An audit report is not equivalent to a statutory determination under Sections 72, 73, or 73A.
  • The SCN was limited only to medical insurance services and did not cover the declared dues.
  • VCES benefits cannot be denied unless the exact dues are already subject to statutory determination.

COURT FINDINGS / ORDER

  • Court upheld the CESTAT order and dismissed the Audit report is NOT a determination of liability under Sections 72, 73, or 73A of the Finance Act, 1994.
  • Section 106(1) clearly requires a formal order of determination, not merely an audit observation.
  • The SCN issued was limited in scope and did not cover the dues declared under VCES.
  • Therefore, the assessee remained eligible for VCES benefits.
  • Final Order: Revenue’s appeal, holding:

Key Findings:

  • No substantial question of law arose.
  • Appeal dismissed.

IMPORTANT CLARIFICATION BY COURT

  • “Determination of tax liability” must be strictly interpreted as orders passed under Sections 72, 73, or 73A.
  • Audit reports or internal assessments do not disqualify VCES eligibility.
  • SCN disqualification applies only when it pertains to the same issue and period.

SECTIONS INVOLVED

  • Section 106, Finance Act, 2013 (Eligibility under VCES)
  • Section 107, Finance Act, 2013 (Declaration of tax dues)
  • Sections 72, 73, 73A, Finance Act, 1994
  • Section 65(105), Finance Act, 1994
  • Section 35G, Central Excise Act, 1944

Link to download the order -  https://delhihighcourt.nic.in/app/showFileJudgment/VIB13112024SERTA62024_123928.pdf

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