The Bombay High Court provided relief to Larsen & Toubro by setting aside a service tax demand Show Cause Notice ( SCN ) that was issued without jurisdiction. The court, agreeing with the Gujarat High Court’s reasoning, quashed the show cause notice.
In a petition filed under Article 226 of the Constitution of India, L&T Hydrocarbon Engineering Limited ( LTHE ) has sought to challenge a show cause notice (No. 127 of 2018) dated October 23, 2018. The notice, issued for the period 2013-14, demands an explanation as to why service tax should not be levied under the Finance Act, 1994.
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Larsen & Toubro Limited (L&T), a public limited company with various divisions including Hydrocarbon, Heavy Engineering, Power, and Construction, had hived off its Hydrocarbon Division as an independent business unit. The scheme of arrangement was approved by the Company Court on December 20, 2013, with an appointed date of April 1, 2013. As per the scheme, L&T was to manage the business of the Hydrocarbon Division on behalf of LTHE until the effective date, including all compliance responsibilities. This arrangement was finalized with no challenges from any authority, and service tax registration was transferred to LTHE following the court’s approval.
In August 2017, the Director General of Goods and Services Tax Intelligence in Chennai initiated an investigation against LTHE, alleging non-payment of service tax for the financial year 2013-14. LTHE contends that L&T, the transferor company, had discharged all service tax liabilities on behalf of LTHE for that period. Despite providing the necessary documentation and cooperating with the investigation, a show cause notice was issued by the Gujarat Excise Officials and another by the Chennai Officer, leading to this petition.
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The October 23, 2018, notice challenges the High Court’s approval of the scheme, alleging it violated the Finance Act, 1994, and suggesting that the court would not have sanctioned the scheme if this had been known. A similar show cause notice issued by Gujarat Excise Officials was quashed by the Gujarat High Court in a judgment dated February 3, 2022, which has not been contested further and thus stands final.
Senior Counsel Mr. Sridharan, representing LTHE, argued that the show cause notice lacks jurisdiction and contradicts the Bombay High Court’s order approving the scheme. He highlighted that L&T had already fulfilled all service tax liabilities for 2013-14, and any attempt to recover the same from LTHE would constitute double taxation and violate the approved scheme.
Conversely, Respondent’s Counsel, Mr. Ochani, contended that the Gujarat High Court’s decision pertained to excise duty, not service tax, and maintained that LTHE had not provided sufficient details as required under the show cause notice. He argued that the case involves disputed facts that should be addressed through the show cause notice procedure, rather than through a writ petition.
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The Division Bench, comprising Justices Jithendra Jain and K.R. Shriram, noted that the basis of the show cause notice was similar to that which was quashed by the Gujarat High Court. They observed that L&T had already discharged the service tax liabilities for 2013-14 and that the notice was issued without jurisdiction. The court, agreeing with the Gujarat High Court’s reasoning, quashed the impugned show cause notice dated October 23, 2018.
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