24 January 2017

EY Tax Alert
CBEC issues draft Master Circular on Show Cause Notice, Adjudication
and Recovery

Executive summary
This Tax Alert summarizes the contents of the Master Circular issued in draft
Tax Alerts cover form by the Central Board of Excise and Customs (CBEC) vide F.No.96/1/2017 –
significant tax news, CX.1 dated 19 January 2017. It deals with show cause notice, adjudication and
developments and
recovery.
changes in legislation
that affect Indian The master circular aims at consolidating 85 existing circulars of Central Excise.
businesses. They act Relevant legal and statutory provisions on the subject will be compiled by
as technical summaries including all relevant circulars issued in the past and by rescinding Circulars
to keep you on top of which are no longer relevant.
the latest tax issues.
For more information, Two annexures are also attached to the said Circular:
please contact your EY
advisor. ► Annexure-I provides a list of 82 circulars which are proposed to be rescinded
by this master Circular.
► Annexure- II provides a list of 3 Circulars which would remain operative as
they contain comprehensive instructions on the subject.

Draft Master Circular is divided into 4 parts.

► Part I deals with SCN related issues,

► Part II deals with issues related to adjudication proceedings,
► Part III deals with closure of proceedings and recovery of duty and
► Part IV deals with miscellaneous issues.

Board has sought feedback from the Trade and the officers of the Department on
the draft circular by 15 February 2017. Suggestions/comments are to be sent
via e-mail to shankar.sarma@nic.in.

[1]
[TS–36–SC–2016-VAT]
Background ► Similarly, a SCN can also be issued for
recovery of refund erroneously paid by
the Government to the taxpayer.
► Central Board of Excise and Customs
(CBEC) has issued 85 circulars and
► SCN offers the noticee an opportunity to
Instructions on show cause notices (SCN)
submit his oral or written submission
and adjudication from time to time.
before the adjudicating authoritiy on the
charges alleged in the SCN.
► These circulars address references from
trade and field formations and provide
► SCN issuance is mandatory requirement
clarity and uniformity on the issues
according to the principles of natural
raised.
justice which are commonly known as
audi alteram partem which means that
► CBEC has undertaken an exercise of
no one should be condemned unheard.
consolidating these circulars from time
to time for ease of reference.
Structure of SCN
► Draft master circular on the subject of
SCN, adjudication proceedings and ► A SCN should comprise of the following
recovery is an effort to compile relevant parts, though it may vary on a case to
legal and statutory provisions by case basis:
including relevant circulars of the past
and rescinding circulars which have lost ► Introduction of the case
relevance. ► Legal frame work
► Factual statement and appreciation
► Annexure-I to the circular provides list of of evidences
82 circulars which stand rescinded. ► Discussion, facts and legal frame
work,
► 3 circulars listed in Annexure-II have not ► Discussion on Limitation
been rescinded as they contain ► Calculation of duty and other
comprehensive instructions on the amounts due
subject they address. ► Statement of charges
► Authority to adjudicate
► Draft master circular is divided into 4
parts. ► Introduction of SCN - It contain the
details of the person to whom the notice
► Part I deals with SCN related issues, is to be issued such as name, registration
► Part II deals with issues related to number/IEC and address of the person. A
adjudication proceedings, very brief background as to how the
► Part III deals with closure of present proceeding started should be
proceedings and recovery of duty provided in the SCN. Further, the details
and of verification/investigation conducted
► Part IV deals with miscellaneous and the summary of the verification may
issues. also be mentioned.

► Legal framework - The authority issuing

Part I – Show Cause Notice the SCN should clearly lay down the legal
provisions violated by the noticee.
► Demand of duty from the assessee is
made by way of issue of SCN indicating ► Factual statement and appreciation of
therein charges of violations of provision evidence - Facts relating to act of
of law requiring the assessee to explain omission and commission pertinent to
as to why the duty not levied/not paid or the initiation of the proceedings against
short levied/ short paid should not be the noticee need to be stated in a most
recovered from the noticee with interest objective and precise manner.
and penalty, if applicable.
► Quantification of duty demanded - on revenue and these ingredients need to
Demand should be quantified in the SCN, be clearly brought out in the SCN
however if due to some genuine grounds alongwith evidence. The active element
it is not possible to quantify the short of intent to evade duty by action or
levy at the time of issue of SCN, it would inaction needs to be present for invoking
not be considered as invalid. Principles extended period.
and manner of computing the amounts
due from the noticee should be clearly ► Issuance of a second SCN invoking
laid down in the SCN. extended period after issuance of the
first SCN invoking extended period is not
► Authority to adjudicate - SCN must state legally tenable. However, the second
the authority to whom the reply to the SCN, also needs to establish the
SCN is required to be made. In case of ingredients required to invoke extended
seizure of goods, the issue of SCN is period independently. It is desirable that
mandatory before any order for after the first SCN invoking extended
confiscation of goods is passed. period, subsequent SCNs should be
issued within the normal period of
Where there is a change in the limitation.
adjudicating authority, a corrigendum3 to
the SCN may be issued and served on the ► In cases where the duty has been paid
noticees to ensure that the noticees have belatedly and interest has not been paid,
a fair opportunity to present their case to interest needs to be demanded and
the appropriate adjudicating authority. recovered following the due process of
demand and adjudication. In such cases,
► Interest - Interest is chargeable on the the period of limitation applies for
delayed payment of duty. There may not demand of interest.
be need for any explicit mention of the
interest liability in the SCN since the legal Demand due to Departmental or Central
provisions in this regard are explicit and Excise Revenue Audit (CAG Audit):
contained in section 11A(14) of the
Central Excise Act, 1944 (‘CE Act’). ► SCN may be required to be issued due to
audit objection arising out of either
► Statement of charges - SCN should list all internal audit or CERA conducted by the
charges against the noticee. office of CAG. The decision to issue SCN
is with the Audit Commissioner. As far as
Limitation to demand duty CERA audit is concerned, a detailed
circular has been issued vide Circular No.
► Where duty has not been paid or short 1023/11/2016-CX dated 8 April 16.4
paid by reason of fraud or collusion or
any wilful mis-statement or suppression ► CBEC has made pre SCN consultation by
of facts or contravention of any of the the Principal Commissioner/
provisions of the CE Act or Rules with an Commissioner prior to issuance of SCN in
intent to evade payment of duty, a longer cases involving demands of duty above
period of limitation applies and SCN Rs. 50 lakhs mandatory vide Instruction
demanding duty can be issued within 5 No. 1080/09/DLA/MISC/15 dated 21
years from the relevant date. December 2015. Such consultation shall
be done by the adjudicating authority
► Extended period can be invoked only with the assessee concerned.
when there are ingredients necessary to
justify the demand for the extended ► SCN should ideally be issued by the
period. authority empowered to adjudicate the
case. SCN issued by a Central Excise
► The onus of establishing that these officer of rank other than the one
ingredients are present in a given case is

3
Corrigendum to SCN is issued due to change in corrigendum and then transfer the file to the new
jurisdiction, monetary limit, re assignment, etc. The adjudicating authority.
4
authority who issued the SCN has to issue the Refer EY Tax Alert dated 13 April 2016.
 prescribed in the circular would not ipso
facto be an invalid SCN. ► The conclusion of proceedings should
invariably be intimated to the assessee in
Issue of unjust enrichment to be raised writing. There is no need to issue an
in SCN itself adjudication order. Further, there is no
need to undertake review of such
► In case of consequential refund of excess conclusion of proceedings.
duty paid, the applicant should be
granted a refund only after the claim is Part II – Adjudication of
found admissible on merits as well as
within time and the question of unjust SCN
enrichment is decided in favour of the
applicant. ► Officers of Central Excise have been
vested with powers under section 33A of
► Where a refund application is prima-facie CE Act to adjudicate SCN issued to the
found to be liable to rejection, a notice noticees and are answerable to the
should be served on the applicant stating officers. They, in their capacity as
the ground on which the refund adjudicating officers act as quasi-judicial
application is liable to be rejected. officers.

► In cases where refund is admissible on ► CBEC vide Circular No 1049/37/2016-

merits but is liable to be paid to the CX dated 29 September 2016 has
Consumer Welfare Fund on grounds of prescribed monetary limits for
unjust enrichment, the assessee will be adjudication of cases by the officers. The
adversely affected by the decision and revised monetary limits are as follows:
therefore, a notice should be served on
the applicant before such adjudication CE Officer Monetary limit of
rejecting refund is undertaken. duty
Superintendent Not exceeding INR
► A long standing practice of assessment 10 lakhs
which is widely prevalent across the Deputy/Assistant INR 10 lakhs to INR
country should not be suddenly changed Commissioner 50 lakhs
by issuing SCN demanding duty. Such Additional/Joint INR 50 lakhs to INR
issues should be referred to CBEC in a Commissioner 2 Crore
comprehensive manner with inputs Commissioner Above INR 2 Crores
obtained from the other zones regarding
the proposed change in the practice of ► Cases involving taxability, classification,
assessment. Demand of duty if any valuation and extended period of
should be limited to normal period in limitation shall be kept out of the
such cases as the practice of assessment purview of adjudication by
in such cases is known to both trade as Superintendents. Such cases, upto INR
well as the department. 10 lakhs, shall also be adjudicated by the
Deputy/Assistant Commissioner in
► The issue of waiver of SCN has been addition to the cases exceeding INR 10
dealt vide circular No 137/46/2015- lakhs but not exceeding INR 50 lakh.
Service tax dated 18 August 2015.5
► Refund matters (including rebate), shall
► The crux of the above clarification is that be adjudicated by the Deputy/Assistant
on receipt of written request of the Commissioner without any monetary
assessee the requirement of written SCN limit
may be waived and the charges
alongwith duty payable may be explained ► In case different SCN have been issued
orally. However, where the issue is likely on the same issue answerable to
to be litigated at a later date by the different adjudicating authorities, it shall
assessee, a written SCN may be issued. be adjudicated by the authority

5
Refer EY Tax Alert dated 21 August 2015
 competent to decide the case involving contain all the details of the issue, clear
the highest amount of duty. findings and a reasoned order.

► Where differential duty/demand of duty is ► Adjudicating authority is expected to

paid without interest, SCNs demanding examine each of the points raised in the
interest and levy of penalty should be reply to the SCN and accept or reject
issued. Reference of duty already paid them with cogent reasoning.
should also be mentioned in the SCN.
► The adjudication order should generally
► DGCEI after investigation issues SCN contain brief facts of the case, written
which may be answerable to either ADG and oral submissions by the party,
(Adjudication) or to Executive observation of the adjudicating authority
Commissioner as the case may be. CBEC on the evidences on record and facts of
has issued detailed circulars regarding omission and commission during
adjudication of cases booked by DGCEI personal hearing and finally the
vide circular no 994/01/2015-CX dated operating order. The findings and
10 February 2015 and Circular No discussions should not go beyond the
1000/7/2015-CX dated the 3 March, scope and ground of SCN.
2015.
► The duty demanded and confirmed
► SCN and the documents relied upon should be clearly quantified and the
needs to be served on the assessee for order portion must contain the
initiation of the adjudication provisions of law under which duty is
proceedings. The documents/records confirmed and penalty is imposed. The
which are not relied upon in the SCN are duty demanded in an adjudication order
required to be returned under proper cannot exceed the amount proposed in
receipt to the persons from whom they SCN.
are seized.
► Where a Statement is relied upon in the
► SCN generally provides a time limit of 30 adjudication proceedings, it would be
days for submission of written reply, required to be established by the process
however the time limit may be extended of cross-examination of the person
by the adjudicating authority on written whose statement is relied upon in the
request of the assessee. SCN.

► After having given a fair opportunity to ► A signed adjudication order, generally

the noticee for replying to SCN, the called as Order-in-original (O-I-O’) shall
adjudicating authority may proceed to fix be issued within reasonable time. The
a date and time for personal hearing. At order is required to be communicated to
least three opportunities of personal the assessee in terms of provisions of
hearing should be given to the noticee section 37C of the CE Act.
with sufficient interval of time.
► A corrigendum to an adjudication order
► The adjudicating authority may, if can only be issued to correct minor
sufficient cause is shown, at any stage of clerical mistakes which do not alter the
proceeding, adjourn the hearing for adjudication order per se.
reasons to be recorded in writing.
However, no such adjournment shall be ► Adjudicating authority does not have
granted more than three times to a powers to review his own order and carry
noticee. out corrections to the adjudication order.

► The adjudicating authority must maintain ► Adjudicating officers should issue O-I-O
a record of personal hearing and written before being relieved in cases where
submission made during the personal personal hearing has been completed.
hearing. The successor in office cannot issue any
order on the basis of personal hearing
► The adjudication order must be a conducted by the predecessor. The
speaking order. Such order should successor in office should offer a fresh
 hearing to the noticee before deciding
the case and issuing adjudication order. ► Central Excise dues shall have first
charge, after the dues, if any, under the
► O-I-O should be signed by the provisions of Companies Act, Recovery
adjudicating authority only and it should of Debt due to Bank and Financial
not be further delegated to any other Institution Act, 1993, Securitisation and
officer. Order furnished to the noticee(s) Reconstruction of Financial Assets and
has to be an originally signed copy and Enforcement of Security Interest Act,
not an attested copy. 2002 and the Insolvency and Bankruptcy
Code, 2016.
► Where an issue was under audit objection
and has been subsequently either ► CBEC has issued two circulars on
judicially settled, by Hon’ble Supreme recovery during pendency of litigation
Court or where a circular has been issued vide circular no 984/08/2014- CX dated
on the subject, further correspondence 16 September 2014 and Circular no
with CBEC on the audit objections, even 1035/23/2016-CX dated 4 July 2016.7
if they have become DAPs6, is not
necessary and such cases may be ► Where a demand has been confirmed by
adjudicated on merits taking into the CESTAT or High Court, recovery
consideration the latest judgments and proceedings may be initiated after 60
circulars. days of issue of order provided no stay
has been granted by the Court.
Part III: Confirmed demands ► Where the liability of duty is admitted but
/ Recovery not paid by the assessee, adjudication
proceedings envisaged under Section
11A are not required to be undertaken.
► Recovery of confirmed demand can be
Notice for recovery of admitted liability
made by exercising any of the powers
may be served on the assessee under
under section 11 of the CE Act such as
section 11 and when such dues are not
adjustment from refunds payable
paid within a reasonable time, recovery
attachment and sale of excisable goods
proceedings may be initiated.
or through certificate action treating the
recoverable amounts as arrears of land
► CBEC may on its discretion allow
revenue.
recovery of arrears of taxes, interest and
penalty in monthly instalments.
► After exhausting the option of taking
Commissioners can sanction to pay
action as above, if dues remain
arrears in instalments upto a maximum
unrecovered, action is to be taken under
of 24 monthly instalments. Chief
the provisions of Section 142 of the
Commissioners can sanction to pay
Customs Act, 1962 which have been
arrears in monthly instalments greater
made applicable to like matters in Central
than 24 and upto a maximum of 36
Excise.
monthly instalments.
► Further, where the entire business is
► Commissioner shall also exercise the
disposed off with assets and liabilites,
power to cancel the permission to pay
duty or any other sums are recoverable
arrears in instalments in cases of default
from the successor in business also.
in the payment of installments or when
Central Excise Officers are empowered to
the company is becoming financial
issue an order to any other person from
unviable and there is likelihood of
whom money is due to such person (from
winding up of business. After cancelling
whom recovery of arrears is required to
the permission to pay in installments,
be made). Such notice for recovery to
action should be taken forthwith for
the other person is generally referred as
recovery of arrears.
Garnishee Notice.

6 7
Draft audit paras Refer EY Tax Alerts dated 17 September 2014 and 8
July 2016
Part IV: Miscellaneous
Comments
► Various methods are provided for service
of notice such as by sending it through Consolidation of all the existing
registered post with acknowledgment
due or as a fallback, by affixing a copy Central Excise Circulars into one
thereof to some conspicuous part of the Master Circular will provide a one
factory or warehouse or other place of stop solution to the tax authorities
business or usual place of residence of
the person or as a further fallback, by as well as taxpayers for matters
affixing on the notice board of the relating to SCN, adjudication and
officer.
recovery.
► In cases of de novo adjudication in
pursuance of the order of Appellate Master circular shall serve as a
Authority, such cases should be decided quick reference guide on the above
by the adjudicating authority of the same
matters and shall save a lot of time
rank who had passed the order which
was in appeal. spent in analysing various circulars
and instructions.
► Where the appellate authority has
decided the matter in favour of the
Central Excise Master Circular
appellant, refund of pre-deposit with
interest should be paid to the appellant issued by CBEC may also apply in
within 15 days of the receipt of the letter case of Service tax since certain
of the appellant seeking refund,
irrespective of whether order of the provisions of Central Excise Act,
appellate authority is proposed to be 1944 are adopted by Service tax
challenged by the Department or not. legislation.
► Refund along with interest shall not be
payable if such order is stayed by a
competent Appellate Authority.

► It is important to note that in such cases

of consequential refund, besides filing of
appeal against the order, it is also
necessary that a protective demand of
the refunded amount be issued under
Section 11A by not lower than
Assistant/Deputy Commissioner of
Central Excise.

► In the event of a remand, refund of the

pre-deposit shall be payable along with
interest.
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