Union 1

Report No.
1 of 2021 (Indirect Taxes – Goods and Services Tax, Central Excise and Service Tax)
Chapter V: Show Cause Notices (SCNs) & Adjudication Process

in CBIC
5.1 Introduction
Adjudication is a quasi-judicial function of the departmental officers of the
Central Board of Indirect Taxes and Customs (CBIC). Through imposition of an
appropriate penalty after adjudication, the department seeks to ensure that
no revenue loss is caused by the contravention of applicable laws and rules,
which may result in non/short payment of tax, erroneous refunds, irregular
availing of CENVAT credit etc. It is mandatory that a Show Cause Notice (SCN)
is issued if the department contemplates any action prejudicial to the assessee.
The SCN would detail the provisions of law allegedly violated and ask the
noticee to show cause why action should not be initiated against him under
the relevant provisions of the Act/Rules. Thus, an SCN gives the noticee an
opportunity to present his case.
5.2 SCN and adjudication process
Process for issue of SCNs and their adjudication under the three Acts viz.
Central Excise Act, 1944, Finance Act, 1994 and CGST Act, 2017 are described
in the relation chart below;
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Report No. 1 of 2021 (Indirect Taxes – Goods and Services Tax, Central Excise and Service Tax)
Chart 5.1
SCN and Adjudication Process
Tax/Duty
Not Levied Short Levied Not Paid Short Paid Erroneously Input Tax
Refunded Credit Wrongly
availed/utilised
Department Assessee voluntarily

contemplates action pays with Interest and
penalty, if applicable
Issue of Show Cause Notice

(SCN) No SCN
Time Limit Contents - SCN received by Assessee

Date, Name and Address
of Assessee. Amount etc.
Normal Period – 2 Assessee accepts Assessee does not
years for CX/30 the Facts of SCN accept the facts of SCN
months for ST & 33
Extended Period – 5 years for CX
months for GST
& ST and 54 months for GST from Demand is confirmed Personal Hearing
relevant date when tax not paid (Maximum 3 Adjournments)
due to fraud, collusion, any
willful mis-statement, Demand is confirmed fully,
suppression of facts or any partially or dropped
contravention of act / rules with
intent to evade payment of tax
Order in Original (O-I-O) in writing to be issued
within 30 days of last PH (CX & ST)
5.3 Administrative set up for Issue of SCNs and adjudication process

The organizational chart of Central Board of Indirect Taxes and Customs (CBIC)
is depicted in Chart-5.2. As on 31 March 2019, CBIC was supported by 21 Zones,
107 Executive Commissionerates, 725 Divisions and 3,785 Ranges. In addition,
there were 48 Audit Commissionerates alongwith 71 other units. The
monetary limits in relation to adjudication68 are depicted in Chart-5.3
68
As per the Master Circular No.1053/02/2017-CX dated 10 March 2017
112
Chart 5.2
Organizational Structure for SCN & Adjudication Process
CBIC
DG CEI ( Now
CGST ZONES
DGGSTI)
Zonal Units of DG
CGST Commissionerates Audit Commissionerates GSTI
(supported by
Regional units)
Divisions Circles
Ranges Groups
Chart 5.3
Monetary limit for Adjudication of SCNs
Commissioner •Cases exceeding rupees two crore
Additional/ Joint •Above fifty lakh but not exceeding rupees

Commissioner two crore
Deputy/ Assistant •Above ten lakh but not exceeding rupees

Commissioner fifty lakh
Superintendent •Not exceeding rupees ten lakh
5.4 Results of previous Audits

We had examined the SCN and adjudication process of the department in FY15
covering the period FY12 to FY14. This was included in Chapter-II of Report No.
1 of 2016 (Service Tax) and Chapter-V of Report No. 2 of 2016 (Central Excise).
The major findings of that exercise, inter-alia, were incorrect invocation of
extended period of time while issuing SCN resulting in demands getting timed
barred, delay in adjudication of SCNs, non-issuance of adjudication orders
within stipulated period and non-periodic review of Call Book cases resulting
in irregular retention of cases in Call Book.
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The Ministry in its Action Taken Note (ATN) (June 2016) stated that all the field
formations had been instructed for timely issuance of SCN and strict
monitoring to reduce delays in various stages and processing of SCN so that
the interest of both the Government revenue and the assessee are protected.
The Ministry further stated (March 2017) that a master circular dated
10 March 2017 had been issued for SCN & Adjudication process, which
provided for strict adherence to time limit for issuance of SCN and rightful
invocation of extended period of limitation, as prescribed in para 3.1 to 3.7 of
the said circular. Para 14.10 of the circular further states that in all cases where
personal hearing has been concluded, it is necessary to communicate the
decision as expeditiously as possible but not later than one month in any case,
barring in exceptional circumstances to be recorded in the file.
We followed up on the Ministry’s reply, and during the course of current audit,
noticed persistent compliance deviations with respect to issue of SCN and
Adjudication process despite Ministry’s assurance in the action taken note
(March 2017). The audit findings are reported in the subsequent paras.
5.5 Audit Objectives
In the present audit, we examined:
a) the adequacy of rules, regulations, notifications, circulars/instructions
etc. issued from time to time in relation to adjudication process;
b) whether the extant provisions of law and rules relating to issue of SCNs
and adjudication process were being complied with adequately;
c) whether there was an effective monitoring and internal control
mechanism to ensure timely corrective action by the department.
5.6 Scope of Audit, Audit Criteria and Audit Sample
5.6.1 Scope of Audit
During the audit, we had examined the SCN files, registers and monthly returns
prepared by the departmental offices related to SCN and adjudication process
for the period FY17 to FY19.
5.6.1.1 Audit Sample
We followed a risk based sampling method to identify departmental units for
audit. We selected one to three executive Commissionerates from each CGST
Zone depending on the number of Commissionerates in a Zone, based on
stratified random sampling. In the zones where the number of executive
Commissionerates is 1 to 5, one Commissionerate has been selected. In the
zones where the number of executive Commissionerates is 5 to 10, two
Commissionerates have been selected. In the zones where the number of
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executive Commissionerates is more than ten, three Commissionerates have

been selected. In addition to executive Commissionerates, one Audit
Commissionerate from each Zone and one Zonal Unit of Directorate General
of Goods and Services Tax Intelligence (DGGSTI) (earlier DG CEI) was selected
in addition to the DGGSTI Headquarter for audit. The details of departmental
units selected for audit are given in table 5.1 below-
Table No. 5.1: Universe and sample of departmental units
Type of units Total number of Units selected as

units sample
28 Commissionerates
Executive
(including 28 division
Commissionerate 107
and 26 Ranges there
(CGST)
under)
Audit Commissionerate 48 20
14 (including DGGSTI
Zonal units of DGGSTI 25
Hqrs)
We have selected 116 units under Executive Commissionerates, Audit

Commissionerates and Zonal units of GSTI including DGGSTI, New Delhi69.
Further, sample of SCN related files, available in the selected units, was derived
for detailed examination based on random sampling. The audit universe and
sample for focus audit areas are detailed in table 5.2 below:
69
Ghaziabad, Allahabad, Jamshedpur, Ahmedabad North, Rajkot, Vadodara II, Jaipur,
Mumbai South, Mumbai West, Raigad, Pune II, Nashik, Hyderabad, Visakhapatnam,
Bhubaneswar, Trichy, Chennai North, Thiruvananthapuram, Jalandhar, Gurugram, Bhopal,
Bengaluru East, Mangalore, Kolkata North, Howrah, Guwahati, Agartala, Delhi South,
Kanpur Audit, Meerut II Audit, Ahmedabad Audit, Vadodara Audit, Jaipur Audit, Raigad
Audit, Pune II Audit, Nashik Audit, Hyderabad I Audit, Visakhapatnam Audit, Bhubaneswar
Audit, Chennai I Audit, Kochi Audit, Ludhiana Audit, Gurugram Audit, Delhi II Audit, Bhopal
Audit, Bengaluru I Audit, Kolkata I Audit, Guwahati Audit, DGGI Hqrs. Delhi, Lucknow
DGGI, Ahmedabad DGGI, Jaipur DGGI, Pune DGGI, Hyderabad DGGI, Visakhapatnam DGGI,
Bhubaneswar DGGI, Chennai DGGI, Ludhiana DGGI, Bhopal DGGI, Bengaluru DGGI,
Kolkata DGGI and Guwahati DGGI.
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Table No. 5.2: Universe and Sample of files selected for detailed examination
` In crore)
(`
Audit Sample Sample as

Sl. Audit
Focus Area Period % of
No. Universe
No. Amount population
As on 31
1. SCN pending for adjudication70 11,723 4,457 29,672.96 38
March 2019
2. SCNs adjudicated FY17 to FY19 8,766 3,335 17,208.40 38
As on 31
3. SCNs pending in Call Books 5,491 2,191 13,308.02 40
March 2019
4. Remand back cases FY17 to FY19 748 622 3,358.21 83
5. Waiver of SCNs FY17 to FY19 17,095 1,020 1,155.69 6
Draft SCNs(DSCNs) pending for As on 31

6. 203 203 1,282.80 100
issuance March 2019
7. CERA audit objections FY17 to FY19 1,079 373 912.15 35
SCNs & DSCNs transferred due to July 2017 to

8. 551 500 523.26 91
GST restructuring March 2019
5.6.2 Audit Criteria

The audit criteria included the provisions related to adjudication in the Central
Excise Act, 1944,the Finance Act, 1994, rules and circulars issued by the Board
to its field formations viz. the master Circular No. 1053/02/2017-CX dated
10 March 2017 vide which all other circulars on this subject were rescinded
except the three circulars i.e. 984/08/2014-CX dated 16 September 2014,
137/46/2015-S.T. dated 18 August 2015 and 1023/11/2016-CX dated
8 April 2016. As for GST, audit criteria included provisions relating to demand
and recovery as contained in Section 73 to 84 of Chapter XV of IGST Act, 2017
and rule 142 to 161 under chapter XVIII of the CGST Rules, 2017.
5.7 Performance of the department in adjudication of SCNs
5.7.1 Receipts, Disposal and Closing Balance of SCNs pending for
adjudication
As per Sub-Section 11(b) of Section 11A of Central Excise Act, 1944 read with
Sub-section 4B of Section 73 of the Finance Act, 1994 as amended with effect
70
This also includes:
• 1,922 SCNs issued and transferred to other formations by the Audit
Commissionerates
• 2,208 SCNs issued and transferred to other formations by DGGSTI Units.
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from 06 August 2014, SCNs issued in normal cases were to be adjudicated

within six months in respect of Central Excise (CE) & Service Tax (ST), and SCNs
issued for fraud and collusion cases should be adjudicated within two years
relating to CE and in one year relating to ST.
Details of receipt, disposal and closing balance of the SCNs during the last three
years are given in table 5.3 below:
Table No. 5.3: Receipt, Disposal and closing Balance of SCNs
Table No. 5.3(A) - Central Excise
Amount (` in crore)
Opening SCNs issued during SCNs disposed Closing Balance Percentage
balance(SCN) the year during the year (SCN) of disposal
Year No. Amount No. Amount No. Amount No. Amount
FY17 23,104 29,354.68 55,520 50,218.92 68,166 59,097.92 10,347 20,474.20 86.69
FY18 10,347 20,474.20 28,876 50,513.21 30,321 53,776.60 8,534 17,401.47 77.30
FY19 8,534 17,401.47 17,174 28,219.49 18,719 28,210.50 6,989 17,410.46 72.81
Table No.5.3 (B) - Service Tax

Amount (` in crore)
Opening SCNs issued during SCNs disposed Closing Balance Percentage
balance(SCN) the year during the year (SCN) of disposal
Year No. Amount No. Amount No. Amount No. Amount
FY17 30,453 76,123.74 54,310 67,413.25 65,702 74,594.52 19,053 68,940.78 77.51
FY18 19,053 68,940.78 35,173 70,918.42 32,349 55,931.20 22,208 81,280.44 59.65
FY19 22,208 81,280.44 44,776 1,25,740.29 34,788 92,256.81 32,196 1,14,764.40 51.93
As evident from the table above, as on 31 March 2019, 6,989 SCNs with Central
Excise duty of ` 17,410.46 crore and 32,196 SCNs with Service Tax of
` 1, 14,764.40 crore were pending for adjudication. The disposal of SCNs was
showing a declining trend as is evident from the tables above. Disposal of SCNs
declined from 86.69 per cent in FY17 to 72.81 per cent in FY19 in respect of
Central Excise. Similarly, disposal of SCNs in Service Tax declined from
77.51 per cent in FY17 to 51.93 per cent in FY19.
5.7.2 Age-wise analysis of pending SCNs
Age wise pendency of SCNs pertaining to Central Excise and Service Tax is
shown in the Chart-5.4 below:
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Chart 5.4 – Age-wise pendency of SCNs
Central Excise Service Tax

0
1177 5926
(17%) 8458
3001 (19%)
(26%)
(43%)
1349
6860
(19%)
(21%)
10952
1462
(34%)
(21%)
< 3 months 3-6 months < 3 months 3-6 months

6-12 months Above 1 year 6-12 months Above 1 year
From the chart, it is evident that 1,177 SCNs (17 per cent) pertaining to Central
excise and 5,926 SCNs (19 per cent) pertaining to Service Tax were pending for
adjudication for more than one year as against the prescribed time limit of six
months in normal cases and one year in extended period of time. The
department did not maintain further age-wise details of cases pending for
more than one year.
5.8 Audit Findings
The following table 5.4 brings out the extent of deficiencies noticed in the
sample of SCN/adjudication related records, selected for detailed audit. The
extent of deviation from the law and rules ranges from 0.80 per cent to
45.92 per cent for various areas of focus selected for detailed audit.
Table No.5.4: Sample of files selected for detailed audit and deviations noticed
` In crore)
(`
Audit Sample No. of
Sl. Deficiencies as
Area Period deficiencies
No. No. Amount % of sample
noticed
1. SCN pending for adjudication As on 31 March 2019 4,457 29,672.96 1,407 31.57
2. SCNs adjudicated FY17 to FY19 3,335 17,208.40 968 29.03
3. SCNs pending in Call Books As on 31 March 2019 2,191 13,308.02 1,006 45.92
4. Remand back cases FY17 to FY19 622 3,358.21 65 10.45
5. Waiver of SCNs FY17 to FY19 1,020 1,155.69 32 3.14
Draft SCNs (DSCNs) pending
6. As on 31 March 2019 203 1,282.80 2 0.99
for issuance
7. CERA audit objections FY17 to FY19 373 912.15 3 0.80
SCNs & DSCNs transferred July 2017 to March
8. 500 523.26 5 1.00
due to GST restructuring 2019
As evident from the table 5.4, we noticed high rate of deviation from the
law/rules during detailed audit of SCNs pending in Call Books, SCNs pending
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for adjudication and SCNs that had been adjudicated during FY17 to FY19. We
noticed significant delays in adjudication of SCNs; delay in issuance of Orders-
In-Original (OIOs) within stipulated period after completion of last Personal
Hearing (PH); non-review of Call Book cases, periodically, non/delayed
retrieval of SCNs from Call Book, incorrect transfer of SCNs to Call Book etc.
The focus area wise audit findings are detailed in the following paragraphs.
5.9 Deficiencies noticed in SCNs pending for Adjudication
In the selected 116 offices, 11,723 SCNs were pending for adjudication as on
31 March, 2019. We examined 4,457 SCNs involving money value of
` 29,672.96 crore and noticed irregularities in 1,407 SCNs (31.57 per cent)
involving money value of ` 12, 162.53 crore. Deficiencies noticed pertain to
incorrect computation of demand in SCN, delay in adjudication and not taking
steps to reduce litigation etc. as detailed in the table 5.5 below:
Table No. 5.5: Deficiencies noticed in SCNs pending for adjudication
Sl. No. of Money value Deficiencies in %
Type of Deficiency
No. Deficiencies (in ` crore) of sample (No.)
Incorrect computation of demand in SCN
1. 161 36.63 3.61
resulting in Short demand raised
Late issuance of SCNs which may result
2. in demand getting time-barred in 71 30.17 1.59
adjudication
3. Delay in Adjudication 373 4,310.17 8.37
Non-intimation regarding settlement
4. 768 7,658.32 17.23
commission
5. Incorrect invocation of extended period 2 3.19 0.04
6. Abnormal delay in Preparation of SCNs 23 94 0.52
Short raising of demand due to delay in
7. 6 30.05 0.13
finalization of investigation
8. Incorrect issue of SCN 3 0.07
Total Deficiencies noticed 1,407 12,162.53 31.57
Total Cases examined by Audit 4,457 29,672.96
Total Cases pending for adjudication in
11,723
selected units
5.9.1 Incorrect computation of demand in SCN resulting in short raising of
demand
In seven Commissionerates71,four audit Commissionerates72 and one DGGSTI
Zonal Unit73, we noticed short raising of demand of ` 36.63 crore in 161 SCNs
(3.61 per cent), out of 4,457 cases examined in 116 selected offices, due to
71
Bhopal, Chennai North, Howrah, Mumbai South, Mumbai West, Pune-II and Raigad.
72
Pune, Bhopal, Nashik and Raigad.
73
Bhopal.
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non-verification of the relevant records, adoption of incorrect rate of tax and

non-verification of Income Tax Returns/Tax deducted at Source data etc.
When we pointed this out (November 2019 to December 2019), the Ministry
admitted the facts in 141 cases. The Ministry did not accept the audit objection
in 17 cases. Reply with respect to remaining three cases is awaited (December
2020).
One illustrative case is given below:
5.9.1.1 Issuance of SCN is a statutory requirement and it is the basic
document for settlement of any dispute relating to tax liability or any punitive
action to be undertaken for contravention of provisions of the Act. The Board,
in Master circular (March 2017) had, inter-alia, reiterated that SCN being
starting point of any legal proceedings against the party, it should be drafted
with utmost care. It is clarified in the circular that principles and manner of
computing the amounts due from the noticee are clearly laid down in the SCN.
In Pune II Commissionerate, an SCN was issued to an assessee in October 2018
for irregular availing of exemption and abatement in respect of works contract
service provided. Audit examination revealed that the department incorrectly
adopted gross value of service provided at ` 46.68 crore instead of
` 52.55 crore as indicated in ST-3 return. The error resulted in short
assessment of taxable service by ` 4.21 crore, after allowing admissible
abatement, with consequent short levy of Service Tax of ` 0.79 crore.
When we pointed this out (November 2019), the Ministry did not admit the
audit observation (December 2020) and stated that the SCN was issued based
on invoices issued to the government department only and not on all invoices
issued by the assessee. The reply of the Ministry is not acceptable as invoices
issued to customers other than Government departments had also been
included in the annexure attached to the SCN.
5.9.2 Late issuance of SCNs that may result in demand getting time-barred
in adjudication or exclusion of part-period demand
In four Executive Commissionerates74 and one Audit Commissionerate75, we
noticed late issuance of SCNs in 70 cases (1.57 per cent), out of 4,457 cases
examined in 116 selected offices, which may result in demand being declared
time-barred in adjudication. Further, we also observed exclusion of
part-period demand in SCN in one case. Thus, the overall demand of
` 30.17 crore in 71 SCNs may get time-barred due to late issuance of SCNs.
74
Allahabad, Kolkata North, Guwahati and Pune-II.
75
Bengaluru Audit
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When we pointed this out (November 2019 to December 2019), the Ministry
accepted the facts in one case and did not accept the facts in remaining cases
(December 2020).
5.9.2.1 The Internal Audit Party (IAP) of Bengaluru Audit-I Commissionerate,
in January 2017, had taken an observation on an assessee relating to
non-payment of Service Tax on services provided during January 2015 to
March 2016 as intermediary to a foreign company, its Principal company,
wrongly treating the same as export, amounting to ` 675.46 lakh. The Para was
initially presented in Monitoring Committee Meeting (MCM) held in January
2017 and ratified in MCM held in May 2017. However, at the time of
preparation of SCN, the IAP realised that the assessee had been rendering
marketing services even before the marketing services and post-sales support
services agreements were entered into with the their Principal Company
(1 April 2015). To examine this aspect the issue was transferred to Executive
Commissionerate after discussions in MCM held in September 2017 for further
investigation.
It was noticed that no SCN had been issued till date in spite of lapse of
35 months from the date of internal audit. The date of issue of SCN within
normal period had expired on 29 October, 2018, hence there was a risk of
whole demand becoming time barred.
The delay was, therefore, due to ineffective audit by the IAP, and the absence
of an effective system of monitoring by the Audit Commissionerate on the fate
of cases/SCNs transferred to Executive Commissionerates.
When we pointed this out (October 2019), the Ministry stated
(December 2020) that an SCN had been issued for the period November 2014
to April 2017 in May 2020 invoking extended period of time. As the last date
for submission of ST-3 return for half year ending March 2015 was in
April 2015, late issuance of SCN in May 2020, may result in time barring of
transactions up to March 2015.
5.9.3 Non-adjudication of SCN within prescribed time limit
In 22 offices76, we noticed that 373 SCNs (8.37 per cent), out of 4,457 cases
examined, involving revenue of ` 4,310.17 crore, were not adjudicated in the
76
Allahabad, Ahmedabad North, Bhopal, Chennai North, Delhi South, Bhubaneswar,
Bengaluru East, Ghaziabad, Gurugram, Howrah, Hyderabad, Jalandhar, Jamshedpur,
Kolkata North, Mangalore, Mumbai South, Mumbai West, Pune-II, Raigad,
Thiruvananthapuram, Vadodara-II and DGGSTI Headquarters Delhi.
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prescribed time limit of six months in normal cases and within the prescribed
time limit of one year (ST)/two years (CX) in extended period cases.
When we pointed this out (September 2019 to December 2019), the Ministry
admitted the facts in respect of all the cases except seven cases of Gurugram
Commissionerate and stated that the delays were due to shortage of staff and
heavy work load owing to introduction of GST (December 2020).
5.9.3.1 In case of an assessee, an SCN was issued vide No.
574/CE/12/2016/INV dated 04 October, 2016 involving duty of ` 18.08 crore.
The assessee filed writ petition in Delhi High Court against the SCN, which
ordered (January 2017) to set aside the said SCN and directed to issue fresh
SCN after clearly setting out what the proposed demands are. The department
filed appeal in the Supreme Court (May 2017) against the Delhi High Court’s
order. Supreme Court (December 2017) had restored the SCN and ordered to
conduct adjudication proceeding as per procedure. During audit we noticed
that no action has been taken by the department or personal hearing fixed to
adjudicate the case as of September 2019 i.e. even after more than 22 months
from the date of issue of orders of Apex Court.
When we pointed this out (September 2019), the Ministry admitted
(December 2020) the audit objection and stated that delays were due to
shortage of staff, heavy work load and introduction of GST. However, efforts
are being made to reduce the pendency.
5.9.4 Non-intimation regarding settlement of cases through Settlement
Commission
Para 14.1 of Master Circular dated 10 March, 2017, issued by CBIC, provides
that every show cause notice should be forwarded, along with a letter stating
that assessee can approach settlement of case through Settlement
Commission. Where the noticee approaches the Settlement Commission, the
matter needs to be transferred to Call Book till the matter is decided by
Settlement Commission.
In 27 offices77,we noticed that in 768 cases (17.23 per cent),out of 4,457 cases
examined in 116 selected offices, involving money value of ` 7,658.32 crore,
77
Agartala, Ahmedabad North, Chennai North, Delhi South, Ghaziabad, Gurugram,
Guwahati, Howrah, Hyderabad, Jalandhar, Kolkata North, Thiruvananthapuram,
Visakhapatnam Commissionerates, Bhopal Audit, Chennai Audit-I, Guwahati Audit-I,
Hyderabad Audit-I, Visakhapatnam Audit, DGGSTI Bhopal, DGGSTI Chennai, DGGSTI
Guwahati, DGGSTI Hyderabad, DGGSTI Kolkata, DGGSTI Lucknow, DGGSTI Pune, DGGSTI
Visakhapatnam and DGGSTI Headquarters Delhi.
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no intimation regarding settlement of cases through Settlement Commission

was forwarded to the noticees along with the SCNs.
When we pointed this out (October to December 2019), the Ministry
(December 2020) accepted the audit observation in 694 cases and assured for
compliance of the departmental instructions in future. Reply with respect to
remaining 74 cases is awaited (December 2020).
5.9.5 Incorrect invocation of extended period for issuance of SCN
In NOIDA Audit and Bengaluru Audit-I Commissionerates, we noticed that two
SCNs, with monetary value of ` 3.19 crore were issued for extended period.
However, the ingredients for invoking extended period were not clearly
detailed in the SCNs, and hence invocation of extended period may be held
invalid at the time of adjudication resulting in demand being declared time-
barred in adjudication.
The Ministry did not accept the audit objection (December 2020) and stated
that invocation of extended period was correct in both the cases. Reply of the
Ministry is not acceptable as the errors were already reflected in the ST-3
returns of the assesses, hence invocation of extended period was not correct.
5.9.6 Abnormal Delay in preparation and finalisation of SCN
In Nashik Audit Commissionerate, it was observed from Draft SCN register that
there was abnormal delay in finalisation of 23 draft SCNs ranging from 119 to
1,435 days. This had ultimately led to delay in adjudication and consequential
blockage of Government revenue to the tune of ` 94 crore. The reason for
delay in preparation and finalisation of draft SCN was apparently due to
absence of regular follow up by Audit Commissionerate.
When we pointed this out (December 2019), the Ministry stated
(December 2020) that the draft SCNs are received from audit groups, and as
they are continuously on field duty, clarifications, if any, are received from
them after their return to Headquarters. Further, for complying with the
queries, audit groups have to seek information from the assessees. The
Ministry further stated that from December, 2016 onwards, where the
demand is more than ` 50 lakh, pre SCN consultation was to be done. Due to
these factors it took some time to issue SCN, however the same were issued
to the party in time.
The Ministry’s reply is not acceptable as there were long delays in finalisation
of SCNs ranging from 119 to 1435 days leading to subsequent delay in
adjudication and blockage of Government revenue.
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5.9.7 Short raising of demand due to delay in finalization of investigation

In DGGSTI Zonal Unit Pune, we noticed short raising of demand of ` 30.05 crore
in six SCNs (0.13 per cent), out of 4,457 cases examined in the selected
116 offices, due to late finalization of investigation. An example is given below:
5.9.7.1 Abnormal delay in issuance of SCN leading to loss of revenue
DGGSTI, Pune Zonal Unit (earlier Regional Unit) had initiated investigation in
13 cases, in FY13, for taxation of service on deployment of Transit Mixtures for
transportation of Ready Mix Concrete from various plants of an assessee. In all
13 cases, the department had initiated proceedings to tax the said service by
classifying it under the ‘Cargo Handling Service’ (CHS) and the proposal was
accordingly sent to Mumbai Zonal Unit for approval (vide common incident
report). In October 2013, the Mumbai Zonal Unit opined that the service was
appropriately classifiable under the head ‘Supply of tangible Service (STG).’
After re-examination, Pune Zonal Unit in December 2013, intimated that it
would be appropriate if the service was taxed under ‘CHS’ instead of ‘STG’. It
was observed from the Pune Zonal Unit, that no action was taken in the matter
during 2014 to 2016. After the receipt of clarification from Mumbai Zonal unit
in April 2017, proceedings were initiated and five SCNs, demanding
` 17.99 crore, were issued between October, 2018 and April 2019 to eight
assessees covering the period FY14 onwards. Audit examination revealed that
in 2013, ` 30 crore Service Tax evasion was estimated by the department in
11 cases but since the investigation proceedings were abnormally delayed, the
department could not cover the period prior to March 2013 as the same was
time barred. Time barred demand in respect of all 13 cases could not be
determined by Audit as relevant records for earlier period were not available
in the respective files.
When we pointed this out (December 2019), the department replied
(December 2019) that owing to contradicting views on the classification of
service, the issue was kept in abeyance for want of suitable clarification
regarding classification of the said service.
The reply is not acceptable as the amount involved in the issue was very high
and therefore, prompt and appropriate action, within time, should have been
taken to determine the classification of service and to protect the revenue.
Reply of the Ministry is awaited (December 2020).
5.10 Deficiencies noticed in Adjudicated SCNs
In the selected 116 offices, 8,766 SCNs were adjudicated during FY17 to FY19.
We examined 3,335 cases involving money value of ` 17,208.40 crore and
noticed irregularities in 968 cases (29.03 per cent) involving money value of
124
` 9,006.86 crore. Deficiencies noticed pertained to incorrect computation of

demand in SCN, incorrect invocation of extended period of time for issuing
SCN, delay in adjudication, not taking steps to reduce litigation etc. as per the
table 5.6 below:
Table No.5.6: Deficiencies noticed in adjudicated SCNs during FY17 to FY19
Money Deficiencies in
Sl. No. of
Type of Deficiency value per cent of
No. Deficiencies
(in ` crore) sample (No.)
Invocation of extended period of time held irregular in
1. 10 17.32 0.3
adjudication
Invocation of extended period of time for issuing
2. periodical SCN which may be held irregular in further 9 4.94 0.27
appeal
Non-inclusion of demand for part period due to late
3. 4 8.26 0.12
issuance of SCN
Incorrect computation of demand resulting in short
4. 15 147.81 0.45
confirmation of demand in adjudication
5. Delay in adjudication 340 4,716.09 10.19
Delay in issuance of OIO within stipulation period after
6. 581 4,063.89 17.42
completion of last PH
Dropping of demand due to non-availability of Relied
7. 9 48.55 0.27
upon documents
Total Deficiencies noticed 968 9006.86 29.03
Total Cases adjudicated in selected units 8,766 ---
5.10.1 Invocation of extended period of time held irregular in adjudication

In four Commissionerates78, we noticed that invocation of extended period of
time for issuance of SCN was held irregular in 10 cases (0.30 per cent), out of
3,335 cases examined in 116 selected offices, involving revenue impact of
` 17.32 crore.
When we pointed this out (November 2019 to December 2019), the
department accepted the facts in two cases. Reply in remaining eight cases is
awaited (June 2020). Reply of the Ministry is awaited (December 2020).
5.10.1.1 An SCN was issued to an assessee in Kolkata North
Commissionerate in December, 2015, based on internal audit observations and
covered the demand period from December 2010 to October 2015. However,
the noticee contested the demand on merit as well as on point of limitation of
extended period. The adjudicating authority while passing the order
mentioned that there were no allegations of non-submission of monthly ER-1
Returns in the SCN; and that the Tariff Classification of the goods, and the
availing of benefit of the Notification were in the knowledge of the
department. The adjudicating authority further noted that as no allegation of
78
Kolkata North, Ghaziabad, Guwahati and Vadodara.
125
fraud, collusion, wilful mis-statement or suppression of facts against the

noticee was brought out in the SCN, the invocation of extended period was not
justified. As such, the noticee was liable for payment of Central Excise duty not
paid/short paid for the period of one year from the date of issue of SCN (dated
22 December 2015) i.e. from December 2014 to October 2015. Demand for the
rest of the period as mentioned in the SCN amounting to ` 3.83 crore was
dropped due to limitation of extended period.
We pointed this out in October 2019. The reply of the department is awaited
(June 2020). Reply of the Ministry is awaited (December 2020).
5.10.2 Invocation of extended period of time for issuing periodical SCN which
may be held irregular in further Appeal
In four Commissionerates79, we noticed that in nine cases (0.27 per cent), out
of 3,335 cases examined in selected 116 offices, involving revenue impact of
` 4.94 crore, periodical SCNs for subsequent period were issued by invoking
the extended period of time which were confirmed in the adjudication but the
same may be held time barred in appeal as the issue was already in the
knowledge of the department.
department accepted the facts in one case. The reply in remaining eight cases
is awaited (June 2020). Reply of the Ministry is awaited (December 2020).
5.10.2.1 Para 3.7 of the master circular of March, 2017 stipulates that after
the issue of first SCN invoking extended period, subsequent SCNs should be
issued within the normal period of limitation.
An SCN was issued to an assessee for non-payment of Service Tax of
` 1.86 crore for the period FY14 to FY16 by invoking the extended period of
time (October 2018) by the Additional Commissioner, CGST Commissionerate,
Ghaziabad. Further examination of records revealed that another SCN was
issued to the same assessee on the same grounds in January, 2015. Thus,
issuance of second SCN by invoking the extended period of time in October,
2018 was contrary to the provisions cited above. The Demand was confirmed
with equal amount of penalty under section 78 of the Finance Act, 1994 but
the assessee filed an appeal against the O-I-O.
When we pointed this out (August 2019), the department stated
(September 2019) that the CESTAT (December 2018) remanded the case for
79
Ghaziabad, Howrah, Mumbai South and Trichy.
126
fresh adjudication and proceedings, in this regard, were being initiated. Reply
of the Ministry is awaited (December 2020).
5.10.3 Non-inclusion of demand for part period due to late issuance of SCN
In four Commissionerates80, we noticed late issuance of SCNs in four cases
(0.12 per cent), out of 3,335 cases examined in selected 116 offices, which had
resulted in exclusion of part-period demand of ` 8.26 crore.
department accepted the fact in one case. The reply in remaining three cases
is awaited (June 2020). Reply of the Ministry is awaited (December 2020).
One example is given below:
5.10.3.1 In Nashik Commissionerate, it was observed that DGCEI Mumbai
Zonal Unit had initiated investigation in the case of an assessee in connection
with non-payment of excise duty on industrial promotion subsidy received. In
response to Mumbai Zonal unit’s enquiry, the assesse had furnished entire
details of subsidy received amounting to ` 202.54 crore in November, 2015.
Audit scrutiny revealed that DGCEI had concluded investigation and issued SCN
in June, 2017 to tax industrial promotion subsidy of ` 146.52 crore to tax. The
subsidy to the tune of ` 61.24 crore received by the assesse in March, 2012
was not considered due to time barring of demand of FY12 by the time of
issuing of SCN. As the relevant information was furnished by the assessee in
November 2015, the delay of 19 months by the department for issuing the SCN
had resulted in exclusion of revenue of ` 6.12 crore in the SCN and consequent
loss of revenue.
We pointed this out in December 2019. The reply of the department is awaited
5.10.4 Incorrect computation of demand leading to short demand being
raised in SCN
In six Commissionerates81, we noticed short raising of demand of
` 147.81 crore in 15 cases (0.42 per cent), out of 3,335 cases examined in
selected 116 offices, mainly due to incorrect adoption of taxable value by the
department while computing the demand in the SCN.
We pointed this out from November 2019 to December 2019. The department
did not accept the audit observation in one case. The reply of the department
in remaining 14 cases is awaited (June 2020). Reply of the Ministry is awaited
(December 2020).
80
Ghaziabad, Guwahati, Mumbai South and Nashik.
81
Agartala, Bhopal, Chennai North, Ghaziabad, Mumbai South and Mumbai West
127

5.10.4.1 In Mumbai South Commissionerate, while examining adjudication
order passed in the case of an assessee, it was observed, that, at the time of
framing SCN, the department held construction activity carried out by the
assesse as falling under works contract service, which was chargeable to tax
after allowance of abatement at the rate of 60 per cent. Audit scrutiny revealed
that the department had first allowed abatement at the rate of 75 per cent of
the value of flats towards cost of land and, thereafter, further abatement at
the rate of 60 per cent was allowed considering the service as ‘Works Contract
Service’, which was not in conformity with the Rule 2A(ii) of Valuation Rules,
2006. Since, the service was proposed to be taxed as works contract service,
the assessee was liable to pay Service Tax on 40 per cent of gross value without
allowance of additional abatement at the rate of 75 per cent. Though the error
was noticed by Adjudication Authority, as per the settled law, he was not able
to travel beyond the SCN and had to adjudicate the case as per the charges
framed in the SCN. Thus, the mistake in framing of SCN had led to loss of
revenue to the tune of ` 22.26 crore including mandatory penalty under
section 78 of the Finance Act, 1994.
We pointed this out in October 2019. The reply of the department is awaited
5.10.5 Inordinate delay in adjudication
In 14 offices82, we noticed that 340 SCNs (10.19 per cent), out of 3,335 cases
examined in selected 116 offices, involving revenue of ` 4,716.09 crore, were
not adjudicated in prescribed time limit of six months in normal cases and
within the prescribed time limit of one year (ST)/two years (CX) in extended
period cases.
When we pointed this out (September 2019 to December 2019), the
department in respect of Hyderabad, Visakhapatnam, Jaipur, Delhi South,
Ghaziabad, Pune-II, Raigad, Mumbai South Commissionerates and DGGSTI,
New Delhi accepted the delay in adjudication and stated that the delays were
due to heavy pendency of cases and frequent change in adjudicating
authorities.
Replies in respect of rest of the Commissionerates are awaited (June 2020).
82
Agartala, Allahabad, Bengaluru East, Delhi South, Ghaziabad, Hyderabad, Jaipur, Mumbai
South, Mumbai West, Pune-II, Raigad, Thiruvananthapuram, Visakhapatnam
Commissionerates and DGGSTI Headquarters Delhi.
128

5.10.5.1 A demand of ` 0.47 crore along with the penalty of same amount
under section 11 AC Central Excise Act, 1944 against an assessee was
confirmed83 (February 2001) by Commissioner Central Excise, Meerut.
Aggrieved by the order, the assessee filed an appeal in CEGAT New Delhi and
the tribunal vide its final order 292-94/2001-A dated 03 January 2001 upheld
the demand for the period from March 1994 to 14 January 1997. Regarding
penalty under section 11AC and interest under section 11 AB of the Central
Excise Act, 1944, the Tribunal held that the penalty and interest cannot be
imposed prior to the dates when the provisions of Section 11 AC and section
11 AB came into force, and accordingly directed adjudicating authority to
re-quantify the amount of duty, penalty and interest.
The party as well as the department filed appeal before Hon’ble Supreme
Court vide Civil Appeal Number 8529-8531/2001 and Civil Appeal Number
2008-2010 of 2002, respectively. Hon’ble Supreme Court, vide its final Decision
dated 27 October 2007, directed to implement the order passed by CEGAT by
re-adjudicating the case. However, it was noticed during audit that the case
was re-adjudicated84 by the Commissioner CGST Ghaziabad in 2018, i.e. after
11 years of the decision passed by Hon’ble Supreme Court by fixing the
personal hearing (PH) on 30 November 2017.
When we pointed this out (August 2019), the department replied
(September 2019) that when the appeal was filed in Supreme Court, the case
was under the jurisdiction of Meerut Commissionerate. Due to re-structuring
of the department, the case was transferred to Ghaziabad Commissionerate in
2002, which was again transferred back to the jurisdiction of Meerut
Commissionerate in the subsequent re-structuring of the department, held in
October 2014. However, the case was finally re-adjudicated by CGST
Commissionerate, Ghaziabad as the case was transferred back again to
Ghaziabad Commissionerate due to restructuring of the department in 2017,
owing to implementation of GST.
Reply of the Commissionerate is not acceptable as the case was decided by the
Hon’ble Supreme Court in 2007 and the case file was with the Ghaziabad
Commissionerate from 2007 to 2014. Hence, Ghaziabad Commissionerate
could have re-adjudicated the case and re-quantified the amount during the
seven years, when the case file was with them. Reply of the Ministry is awaited
(December 2020).
83
vide O-I-O Number 01/Commr/M-01/2001 dated 02 February 2001 for the period
March 1994 to March 1997 demanded by SCN Dated 19 March 1999.
84
Vide O-I-O Number V(15)/ADJ-01/51/99 334- 340 dated 31 January 2018
129
5.10.6 Non-issuance of adjudication orders within stipulated period after

completion of personal hearings
As per master circular dated 10 March 2017, personal hearing should be given
at least three times and where personal hearings are concluded, it is necessary
to communicate the decision as expeditiously as possible but not later than
one month from the date of last personal hearing, barring in exceptional
circumstances to be recorded in file. Further, the order is required to be
communicated to the assessee in terms of provisions of Section 37C of the CEA,
1944 which is applicable to Service Tax also as per Section 83 of Finance Act,
1994.
In 25 offices85, we noticed that O-I-Os in 581 cases (17.42 per cent) with
monetary value of ` 4,063.89 crore, were issued with delay beyond the
prescribed period of one month without any reasons being recorded in case
files. This has resulted in delayed initiation of recovery proceedings of
` 4,063.89 crore.
When we pointed this out (September to November, 2019), the Ahmedabad
North, Vadodara-II, Rajkot, Jaipur, Hyderabad, Visakhapatnam, Bangalore East,
Jalandhar, Gurugram, Delhi South, Kolkata North, Howrah, Bhubaneswar,
Guwahati, Agartala, Pune-II, Mumbai South, Mumbai West, Nashik, Bhopal
Commissionerates and DGGSTI Headquarters, Delhi had replied that the delay
in issue of O-I-Os beyond one month was due to verification of facts before
issuing orders, shortage of staff and heavy workload due to introduction of the
GST.
Replies of the Commissionerates are not acceptable as the circular clearly
specified that in exceptional cases where O-I-Os might not be issued within
one month, reasons had to be recorded in files. No justification was found
recorded in the adjudication files. Replies from the rest of the
Commissionerates are awaited (June 2020). Reply of the Ministry is awaited
(December 2020).
5.10.7 Dropping of demand due to non-availability of Relied upon
documents in SCN files
In the Kolkata-North, Howrah Commissionerate and DGGSTI headquarters, it
was noted that in nine cases (0.27 per cent), out of 3,335 cases examined,
demands amounting to ` 48.55 crore were dropped, as these demands raised
85
Allahabad, Agartala, Ahmedabad North, Bengaluru East, Bhopal, Bhubaneswar, Chennai
North, Delhi South, Ghaziabad, Gurugram, Guwahati, Howrah, Hyderabad, Jaipur,
Jalandhar, Kolkata North, Mumbai South, Mumbai West, Nashik, Pune-II, Rajkot,
Thiruvananthapuram, Vadodara-II, Visakhapatnam Commissionerates and DGGSTI
Headquarters Delhi.
130
under the SCNs were not supported by documentary evidence. The case
noticed in DGGSTI Headquarters is given below:
5.10.7.1 Master Circular No. 1053/02/2017-CX dated 10 March 2017, provides
that a Show Cause Notice and the documents relied upon in the Show Cause
Notice need to be served on the assessee for initiation of the adjudication
proceedings.
During scrutiny of files relating to adjudicated cases, it was noticed that an SCN
dated 21 March 1995, was issued by the Commissioner, Central Excise, New
Delhi. The case was adjudicated by confirming the demand against an assessee
(October 2013). Aggrieved with the said O-I-O, the assessee preferred appeal in
CESTAT and CESTAT remanded the cases back in October, 2013 for
re-adjudication considering the demand in the light of Relied Upon Documents
(RUDs). The case was assigned to Additional Director General (Adjudication),
DGCEI, New Delhi. The adjudicating authority vide order No. 60/2018-CE dated
31 March 2018, dropped the demand of ` 46.52 crore as 395 RUDs, out of
440 RUDs, were not available with the case files.
When we pointed this out (September 2019), the department replied
(December, 2019) that the adjudicating authority had decided the matter on
the basis of available documents and that the RUDs were not made available
to the noticee by the Commissioner, Central Excise, New Delhi. As a result, no
action could be initiated.
The reply is silent on the reasons as to why RUDs were not available with the
case files which led to the loss of revenue of ` 46.52 crore. Reply of the Ministry
is awaited (December 2020).
5.11 Monitoring of Call Book cases
The Board, vide Circular No. 162/73/95- CX.3, dated 14 December 1995 read
with Circular Nos. 992/16/2014-CX, dated 26 December 2014 and
1023/11/2016–CX dated 08 April 2016 and Master circular no.
1053/02/2017/CX dated 10 March 2017, has specified the categories of cases,
which cannot be adjudicated immediately due to certain specified reasons
such as department has filed appeal in similar case, injunction order has been
issued by the courts etc. and as a result adjudication of such cases is kept in
abeyance, which can be transferred to call book.
Further, CBIC, vide its circular86 dated 08 April 2016, intimated its field
formations that the procedure of transferring the show cause notices arising
out of contested CAG’s audit objections to Call Book had been discontinued
86
Circular No. 1023/11/2016-CX New Delhi dated 08 April 2016
131
and in the future no such show cause notice should be transferred to the Call
Book. The circular further stated that past SCNs kept in Call Books shall also be
reviewed and adjudicated in the manner as prescribed in the circular, ibid. The
Board vide D.O. letter dated 4 March 1992 had issued instructions to
Commissioners to periodically review the cases transferred to Call Books on
monthly basis.
Status of pendency of SCNs, of Call Book at the end of 31 March 2019 is given
in table 5.7 below:
Table No.5.7: Breakup of SCNs pending in Call Book
(` In crore)
No. of cases No. of cases
Category Amount Amount
(CX) (ST)
Cases in which department has
gone in appeal to the appropriate 20,687 64,530.92 14,516 54,677.94
authority
Cases where injunction has been
1,289 5,492.68 1,555 6,513.14
issued by SC/HC/Tribunal etc.
Cases where CERA Audit objections
704 2,263.04 401 938.59
are contested
Cases where Board has specifically
ordered the case to be kept in Call 288 2,081.04 546 3,348.92
Book/Others
Cases Where parties had filed
applications in Settlement 43 68.49 84 411.26
Commission, which are pending
TOTAL 23,011 74,436.17 17,102 65,889.84
It is evident from the table 5.7 above that as on 31 March 2019 Central Excise
duty of ` 74,736.17 crore and Service Tax of ` 65,889.84 crore were lying in
the form of un-confirmed demand in the Call Books. Further, it is noticed that
in spite of clear instructions of the Board, field formations did not retrieve the
SCNs based on contested CAG audit objections from the Call Book, indicating
lack of effective monitoring mechanism to review Call Book cases.
In the selected 116 offices, 5,491 SCNs were kept in Call Book as on
31 March 2019. We examined 2,191 cases involving money value of
` 13,308.02 crore and noticed irregularities in 1,006 cases (45.92 per cent)
involving money value of ` 6,918.57 crore. Deficiencies noticed pertained to
incorrect computation of demand in SCN, incorrect invocation of extended
period of time for issuing SCN, incorrect transfer of SCNs to Call Book,
non/delayed retrieval of SCNs from Call Book, non-intimation of transfer of
SCNs to the noticees etc. as per table 5.8 below:
132
Table No. 5.8: Deficiencies noticed in SCNs pending in Call Book
No. of Money value Deficiencies

Sl.
Type of Deficiency Deficiencies (in ` crore) in % of
No.
sample
Incorrect computation of
1. demand resulting in short raising 7 25.99 0.32
of demand in SCN
Incorrect Invocation of extended
2. period of time for issue of 4 307.78 0.18
periodical SCN
3. Non-issuance of periodical SCN 8 0 0.37
Incorrect transfer of SCNs to Call
4. 23 120.73 1.05
Book
Non-periodical review of Call
5. 370 2,251.92 16.89
Book Cases
Non/delayed retrieval of SCNs
6. 137 437.64 6.25
from Call Book
Non-intimation to the noticees
7. regarding transfer of SCNs to Call 415 3,225.17 18.94
Book
No prior approval of
8. Commissioner taken to transfer 10 13.18 0.46
cases to Call Book
Inordinate delay in issuance of
9. 32 536.16 1.46
periodical SCNs
Total Deficiencies noticed 1,006 6,918.57 45.92
Total Cases pending in Call Book
5,491 ---
in selected units
5.11.1 Short computation of demand in SCN kept in Call Book

In Trichy and Pune-II Commissionerates, we noticed short raising of demand of
` 25.99 crore in seven SCNs (0.32 per cent), out of 2,191 Call Book cases
examined in selected 116 units, due to adoption of incorrect rate of tax and
non-consideration of full amount.
When we pointed this out (August 2019 to December 2019), the department
accepted the facts in six cases and did not accept the audit observation in one
case. Reply of the Ministry is awaited (December 2020).
5.11.1.1 In Pune-II Commissionerate, we observed that an SCN was issued to
an assessee in March 2013, for non-payment of Service Tax of ` 6.55 crore for
the period 2010-11, in respect of services availed from abroad on reverse
charge basis. The assessee paid ` 1.21 crore under protest before issue of SCN,
paid balance amount of ` 5.34 crore subsequently, and availed CENVAT credit
of the entire amount of ` 6.55 crore. Since, the payment was made under
protest, the department objected to availing of the CENVAT under Rule 9(bb)
of CENVAT Credit Rules, 2004 and the short payment of tax was due to
suppression of facts with intention to evade payment of tax. Consequently, the
133
department issued fresh SCN in June 2016 seeking reversal/payment of

aforesaid CENVAT availed. Audit examination revealed that the SCN was issued
for ` 5.34 crore excluding payment of ` 1.21 crore made before issue of first
SCN. Since the case involved suppression of facts and the payment was made
under protest, the SCN was required to be issued for entire amount of CENVAT
availed of ` 6.55 crore invoking the extended period. Though the department
had further instructed the concerned division to verify availing of CENVAT of
` 1.21 crore, there was nothing on record to indicate that any action to rectify
the irregularity was initiated by the concerned Division, in order to protect the
interest of revenue. The omission had endangered Government revenue to the
extent of ` 1.21 crore.
When we pointed this out (December 2019), the department stated
(January 2020) that the amount of ` 1.21 crore was paid as service tax under
reverse charge before issuance of SCN dated 31/03/2013. Subsequently
availing of CENVAT credit thereof, is informed to the department. Hence, SCN
of ` 5.34 crore issued for irregular availment of CENVAT credit is legal and
correct.
The reply is not acceptable as the assessee had paid service tax under protest
after Internal Audit pointed out the non-payment of service tax. Hence,
CENVAT credit availed by the assesse should be disallowed as per Rule 9(1) (bb)
of the CENVAT Credit Rules, 2004 and the department should have issued SCN
of ` 6.55 crore instead of ` 5.34 crore. Reply of the Ministry is awaited
(December 2020).
5.11.2 Incorrect invocation of extended period of time for issue of
periodical SCNs/ non-issuance of periodical SCNs
In three Commissionerates87, we found incorrect invocation of extended
period of time for issue of periodical SCNs of ` 307.78 crore in four SCNs
(0.18 per cent) and non-issuance of periodical SCNs in eight SCNs
(0.37 per cent), out of 2,191 Call Book cases examined in 116 selected office.
We pointed this out from August, 2019 to December, 2019. The reply of the
department is awaited (June 2020). Reply of the Ministry is awaited
(December 2020).
5.11.2.1 An SCN was issued (December 2013) to an assessee, under Trichy
Commissionerate, engaged in the manufacture of cement falling under Tariff
item 2523 2910 and 2523 2930 of the First Schedule to the CE Tariff Act, 1985,
for the clearance of cement in 50 kg bags, to industrial customers, during the
87
Chennai, Mangalore and Trichy.
134
period from December 2008 to November 2013, invoking extended period

demanding duty of ` 89.01 crore. This is despite the fact that an SCN on the
same ground had already been issued (December 2008) covering the period
from December 2007 to October 2008. Hence, issuance of subsequent SCN by
invoking the extended period is incorrect as the matter was already in the
notice of the department and the demand may be held time barred at the time
of adjudication.
We pointed this out in August, 2019. The reply of the department is awaited
5.11.3 Incorrect transfer of SCN in Call Book
In six Commissionerates88, we found incorrect transfer of 23 SCNs
(1.05 per cent) involving money value of ` 120.73 crore, out of 2,191 Call Book
cases examined in Audit in the selected 116 units.
When we pointed this out (September 2019 to December 2019), the
department, accepted the facts in five cases. The Reply is awaited in remaining
18 cases (June 2020). Reply of the Ministry is awaited (December 2020).
5.11.3.1 In Gurugram Commissionerate, it was noticed that SCN No. 4867
dated 24 October 2008 for recovery of Service Tax for ` 2.12 crore along with
interest and penalty, was issued to an assessee by Addl. Director General
(DGCEI) with the direction to appear before Commissioner Central Excise
Delhi-III. The noticee submitted reply to the Commissioner, Service Tax New
Delhi on 30 December 2008. Thereafter, the case was assigned to the
Commissioner, Central Excise by the Chief Commissioner (Delhi Zone) Central
Excise New Delhi. Three PHs were fixed on 20 May 2009, 4 June 2009 and
12 June 2009. The noticee submitted its reply on 04 June 2009. No action was
taken by the department after that, and the case was transferred in Call Book
on 16 December, 2015 without mentioning any ground.
When we pointed this out (September 2019), the department admitted
(January 2020) the audit objection and noted the same for future compliance.
5.11.4 Periodical review of Call Book cases not done
The Board vide D.O. letter dated 4 March 1992 had issued instructions to
Commissioners to periodically review the cases transferred to Call Books on
monthly basis.
88
Delhi South, Ghaziabad, Gurugram, Jamshedpur, Kolkata North and Pune-II.
135
In 11 offices89, we noticed that 370 SCNs (16.89 per cent) were not reviewed
periodically, involving money value of ` 2,251.92 crore, out of 2,191 Call Book
cases examined in selected 116 units, in contravention of the instructions cited
above.
When we pointed this out (August 2019 to December 2019), the department
accepted the facts in 121 cases and did not accept the audit observation in
96 cases. Reply in remaining 153 cases is awaited (June 2020). Reply of the
Ministry is awaited (December 2020).
5.11.5 Non/delayed retrieval of cases from Call Book
In 13 Commissionerates90, we noticed non/delayed retrieval of 137 SCNs
(6.25 per cent), involving money value of ` 437.64 crore, out of 2,191 Call Book
cases examined in selected 116 units.
When we pointed this out (October 2019 to December 2019), the department
accepted the facts in 60 cases. The reply in remaining 77 cases is awaited
(June, 2020). Reply of the Ministry is awaited (December 2020).
5.11.5.1 In Chennai North Commissionerate, 532 Call Book cases, pending as
on 31 March 2019, were examined wherein the departmental appeals against
the assessees were pending in various judicial forums on similar issues. The
cases were verified by CAG Audit with respect to status of disposal of cases in
the official website of Honourable Supreme Court and Madras High Court. It
was noticed that 29 SCNs of Central Excise and 29 SCNs of Service Tax were still
kept in the Call Book wherein the similar cases were disposed off by the
judiciary. Therefore, these cases were fit for retrieval from Call Book for
adjudication, but the same were retained in Call Book irregularly.
This indicates that the Commissionerate did not monitor the cases pending in
appeal with the aim to retrieve the SCNs from Call Book, transferred on the
grounds of such appeal.
When we pointed this out (September 2019), the Commissionerate stated
(October 2019) that eight cases had been retrieved from the call book for
adjudication in September 2019; 12 cases had been retained in Call Book
pending outcome of the appeal before the Honourable Supreme Court; three
cases were under examination by legal section; and one case belonged to
89
Bhopal, Bhubaneswar, Ghaziabad, Hyderabad, Jalandhar, Kolkata North, Mumbai West,
Pune-II, Raigad, Visakhapatnam Commissionerates and DGGSTI headquarter New Delhi.
90
Bhubaneswar, Chennai North, Delhi South, Ghaziabad, Gurugram, Guwahati, Jalandhar,
Mangalore, Mumbai West, Pune-II, Raigad, Thiruvananthapuram and Visakhapatnam.
136
Mangalore Commissionerate. Reply in respect of remaining 34 cases is awaited

from the department. Reply of the Ministry is awaited (December 2020).
5.11.6 Non-intimation to the noticee regarding transfer of SCN to the Call
Book
As per para 9.4 of Master Circular dated 10 March 2017, issued by CBIC, a
formal communication should be issued to the noticee, where the case has
been transferred to the call book.
In eight offices91, we noticed that in 415 SCNs (18.94 per cent), involving money
value of ` 3,225.17 crore, out of 2,191 Call Book cases examined in selected
116 units, the noticees were not informed about transfer of their cases to the
Call Books.
accepted the facts in 54 cases. Reply is awaited in remaining 361 cases
5.11.7 Prior approval from the Commissioner not taken before transfer of
SCN to Call Book
The Board vide D.O. letter dated 4 March 1992 had instructed that SCNs should
be transferred to Call Books with the prior permission of the Commissioner.
We noticed that in 10 cases (0.46 per cent) involving money value of
` 13.18 crore, in Thiruvananthapuram and Delhi South Commissionerate, out
of 2,191 Call Book cases in the selected 116 units, prior approval of the
Commissioner was not taken before transferring the cases to Call Books.
We pointed this out from August 2019 to December 2019. The reply of the
(December 2020).
5.11.8 Abnormal delay in clarification from Board on the issue of levy of
Service Tax on brokerage charges, on services provided by Indian
Stock Brokers to Foreign Institutional Investors (FII), leading to
blockage of revenue
The stock brokers provide stock broking services to several Foreign
Institutional Investors (FIIs)/other foreign clients as well as domestic clients.
After the negative list regime, came into effect from 01 July, 2012, the stock
brokers stopped paying service tax for the services provided to FII & other
foreign clients, as the location of the service recipient was outside India. The
stock brokers stopped paying service tax on the stock broking services
91
Bhopal, Delhi South, Gurugram, Jalandhar, Pune-II, Thiruvananthapuram, Trichy
Commissionerates and DGGSTI Headquarters Delhi.
137
provided to their foreign clients from 01 July 2012 to 30 September 2014. They
started paying service tax from 01 October 2014 after the definition of the
term “intermediary” was amended to include facilitation of supply of goods
and consequently they being located in India, and acting as an intermediary,
the place of the provision of service was in India, as per clause (c) of Rule 9 of
the place of the provision of service Rules.
On the issue of taxability of brokerage charges for services provided to FII
during the intervening period from July 2012 to September 2014, Mumbai
Zone took stand that securities fall within the ambit of goods that are made
available in electronic form and hence taxable. Accordingly, in several stock
brokers’ cases, the department issued SCNs for levy of ST during the
intervening period. However, in the meantime Stock Brokers Association, Asia
Securities Industry & Financial Market Association (ASIFMA) made
representation to the Board in August, 2014, to avoid retrospective levy of
service tax on Stock Broking Services provided to Foreign Institutional
Investors.
From the records made available to Audit in Mumbai South Commissionerate,
it was observed that the Board in August 2016 called for certain details
regarding SCNs pending on this issue from all the zones. In response, the then
Pr. Commissioner ST-III, Mumbai, in October, 2016, intimated that, in Mumbai
Zone, 32 SCNs on this issue, involving revenue of ` 536.16 crore, had been kept
in Call Book for want of clarification from Board. It was observed that, in July,
2018, Chief Commissioner, Mumbai Zone had intimated its Commissionerates
that request of ASIFMA was rejected by the Board and instructed to take up
adjudication of these cases kept in call book.
In view of above, it is evident that the Board took around four year to provide
clarification to the Mumbai zone. This abnormal delay in issue of clarification
by the Board led to undue retention of cases in Call Book, to the tune of
` 536.16 crore in 32 SCNs, for four years in Mumbai Zone alone.
We pointed this out in December, 2019. Reply of the department is awaited
5.12 Deficiencies noticed in Remand Cases
In case of de novo adjudication in pursuance of order of appellate authority,
such cases should be decided by adjudicating authority of the same rank who
had passed the order, which was in appeal before the appellate authority,
notwithstanding the enhancement of power of adjudication of the officers. On
receipt of the order for de novo adjudication from the appellate authority, such
case should be shown as pending, in the list of cases pending adjudication of
138
such adjudicating authority, till it is decided by him. Remand cases should be

adjudicated in the same manner as adjudication of the fresh SCN.
In 13 offices92 748 SCNs were remanded back for adjudication during FY17 to
FY19. We examined 622 cases involving money value of ` 3,358.21 crore and
noticed irregularities in 65 cases (10.45 per cent) involving money value of
` 419.52 crore. Deficiency pertains to non/delay in adjudication of remand
cases.
accepted the facts in 15 cases. Reply in remaining 50 cases is awaited
Two illustrative cases are given below:
5.12.1 Commissioner Service Tax, Bengaluru confirmed (December 2012)
ineligible input service credit availed by an assessee of ` 5.20 crore. The
assesse preferred appeal to CESTAT, and CESTAT remanded93
(September,2014) back the case to the Original Adjudicating authority to verify
the related input service invoices and allow CENVAT credit to the assesse,
wherever eligible. It was noticed during audit that Assistant Commissioner,
East Division-I, Bengaluru East Commissionerate, submitted his verification
report to the Commissioner on 24 June, 2019, i.e. after a delay of almost five
years, stating that out of the total input service, CENVAT credit of only
` 2.29 crore was irregular. The case is still pending for adjudication. Thus, due
to late submission of the verification report by the division, the case was still
pending for adjudication resulting in pendency of huge amount under litigation
for a long period.
We pointed this out in September, 2019. The reply of the department is
awaited (June 2020). Reply of the Ministry is awaited (December 2020).
5.12.2 Non-adjudication of remanded case due to non-appointment of
Common adjudication authority
During scrutiny of records/SCN pending for adjudication at Delhi South
Commissionerate, it was noticed that in five cases, involving money value of
` 9.27 crore, the Hon’ble Supreme Court had dismissed the Departmental
appeal against the CESTAT order vide its judgement No. Civil Appeal Nos. 4964-
4976 of 2004 dated 29 April 2015, and remanded back the cases for
re-adjudication.
92
Agartala, Ahmedabad North, Bengaluru East, Bhopal, Chennai North, Delhi South, Jaipur,
Jamshedpur, Mangalore, Pune-II, Raigad, Thiruvananthapuram Commissionerates and
DGGSTI Headquarters Delhi
93
vide their final order No.21693/2014 dated 08 September, 2014
139
We observed that the Commissioner, Central Excise Delhi II fixed PH on

17 January 2017, wherein Counsel on behalf of above noticees requested that
common adjudicating authority may be appointed in eight similar cases,
(three of which are located in Greater Noida and five in Delhi) as the issue
involved was common, in order to maintain uniformity in the decision. The
Commissioner, Central Excise Delhi II on 23 January 2017 requested Chief
Commissioner, Central Excise Delhi Zone to take up the matter with the Board
for appointment of common adjudication authority. Similar requests were
made on 28 February 2017, 09 March 2017, 19 May 2017, 22 November 2017,
12 October 2018 and 20 March 2019. Despite several requests, the Board did
not appoint a common adjudication authority and the cases are still pending
for adjudication. As a result, Government Revenue to the tune of ` 9.27 crore
is yet to be adjudicated since 2015.
When we pointed this out (October 2019), the department stated (December,
2019) that the competent authority had been requesting the Board for
necessary approval and there was no lapse on its part as action could be taken
only after the Board appointed common adjudicating authority.
It can be seen from above, and from the department’s reply, that even after a
lapse of three years, the common adjudicating authority had not been
appointed for cases involving revenue of ` 9.27 crore. Reply of the Ministry is
awaited (December 2020).
5.13 Closure of cases on payment of duty/Tax demand before
issuance or within one month of issuance of SCN (Waiver of SCN)
Government vide Finance Act 2015 liberalized the penal provisions under the
Service Tax and Central Excise Act with effect from 14 May 2015, which
provides that, if an assessee is willing to pay duty/tax along with interest either
before issue of SCN or within 30 days of issue of SCN, there shall be:
(a) No penalty in case of non-fraud cases.
(b) Reduced penalty of 15 percent in fraud cases.
5.13.1 In the selected 116 offices, 17,095 SCNs were closed without issuance,
on payment of due amount during FY17 to FY19. We examined 1,020 cases
involving money value of ` 1,155.69 crore and noticed irregularities in 30 cases
(2.94 per cent) involving money value of ` 6.50 crore in Thiruvananthapuram
Commissionerate. The irregularities pertained to non-intimation to the
assessees regarding closure of the proceedings in their cases. We further
noticed in Noida Audit Commissionerate that in two cases, (DARs), proceedings
were closed before ensuring the payment of objected amount of ` 0.66 crore.
140
When we pointed this out (November 2019), the Noida Audit Commissionerate
(November 2019), recovered the objected amount in one case and details are
awaited in the second case. Reply of the Thiruvananthapuram
Commissionerate is awaited (June 2020). Reply of the Ministry is awaited
(December 2020).
5.14 Draft SCNs pending for issuance
In the selected 116 offices, 203 draft SCNs were pending for issuance as on
31 March 2019. We examined all 203 draft SCNs involving money value of
` 1,282.80 crore. We noticed irregularities in two cases (0.99 per cent)
involving money value of ` 35.06 crore in Pune II Commissionerate. One
illustrative case is given below:
5.14.1 Improper drafting of Draft SCN (DSCN)
As per the Board’s master Circular dated 10 March 2017, Show Cause Notice
(SCN) is the starting point of any legal proceedings against the defaulter. It lays
down the entire framework for the proceedings that are intended to be
undertaken and, therefore, it should be drafted with utmost care. Issuance of
SCN is a statutory requirement and it is the basic document for settlement of
any dispute relating to tax liability or any punitive action to be undertaken for
contravention of provisions of the Act and the rules made there under.
In Pune II Commissionerate, a draft SCN was prepared in the case of an
assessee demanding erroneous refund of ` 197.77 crore pertaining to the
period, October 2016 to March 2017. Audit examination revealed that while
granting the original refund, the department had held CENVAT credit to the
tune of ` 17.39 crore inadmissible. However, in the draft SCN, the department
omitted to demand reversal/payment of this ineligible CENVAT credit. This
omission was fraught with the risk of loss of revenue to the extent of
` 17.39 crore. It was further noticed that the department had issued an SCN,
in the month of May 2017, covering earlier period from April, 2016 to
September, 2016 demanding erroneous refund of ` 90.91 crore. In the said
SCN also, the department did not demand reversal/payment of inadmissible
CENVAT credit to the extent of ` 15.24 crore, which was held inadmissible
while granting original refund. This resulted in loss of revenue of ` 15.24 crore
to the exchequer.
We pointed this out in December, 2019. Reply from the department is awaited
5.15 Evaluation of internal controls
The Board vide letter dated 23 May 2003 had instructed the Commissioners
and Chief Commissioners to analyze the reasons for pendency of adjudication
141
cases and strengthen the monitoring system. MPR DPM-ST-1A and DPM-CE-1A
of the Monthly Progress Reports (MPR) incorporate information relating to
adjudication of pending cases and their disposal.
5.15.1 Non/improper Maintenance of Registers
The Board, in its Circular dated 24 December, 2008, envisaged the functions,
responsibilities and duties to be performed by Range Officers and Sector
officers under the Central Excise Act, 1944 and the rules made there under for
maintenance of proper records/registers and timely review and preparation of
monthly abstract.
During examination of records in 116 offices, we noticed non/irregular
maintenance of records, registers in Ghaziabad, Guwahati, Agartala, Mumbai
South, Pune-II, Nasik, Trichy, Chennai North, Bhopal, Delhi South,
Thiruvananthapuram, Ahmedabad North, Rajkot, Bhubaneshwar Audit, Nashik
Audit Commissionerates and Lucknow DGGSTI zonal unit. An example is given
below:
5.15.1.1 In CGST Range 28 under Ghaziabad Commissionerate, confirmed/un-
confirmed registers, needed to watch status of SCNs were not maintained. In
Mumbai South Commissionerate, Range IV under Division–VII, and Division-VII
under Pune–II Commissionerate, DSCN registers were not maintained. CERA
audit objection register to watch progress of action taken on audit objections,
was not found maintained in Pune-II Commissionerate.
In the selected 28 Commissionerates audited by us, we observed that monthly
abstracts of receipt and disposal of SCNs were not found maintained with the
signature of the competent authority. Due to non-maintaining of proper
registers, mismatch in the figures shown in the register and the MPRs were
noticed in Pune-II and Ghaziabad Commissionerates.
(December 2020).
5.16 Non-production of records to Audit
Despite Board’s instructions94 regarding cooperation with the C&AG during
audit, by procuring and providing complete and comprehensive information,
the department did not produce the complete records. The details of the
records not produced by the department for detailed examination during audit
are given below in table 5.9.
94
Board’s DO letter F.No.232/Misc DAPs/2018-CX-7, dated 26 April, 2018.
142
Table No. 5.9: Records not produced
Sl. Number of records not

Auditee Unit Nature of Records Sought
No. produced
Jamshedpur DSCN Files 13
1.
Commissionerate
2. Pune-II Commissionerate Waiver of SCN Case files 33
Jamshedpur SCNs pending for 24
3.
Commissionerate Adjudication
Pune-II Commissionerate SCNs pending for 6
4.
Adjudication
Raigad Commissionerate SCNs pending for 24
5.
Adjudication
Jamshedpur Adjudicated Cases 16
6.
Commissionerate
7. Agartala Commissionerate Adjudicated Cases 4
Jamshedpur Call Book 1
8.
Commissionerate
Delhi South Transfer of records due to List of records not provided
9.
Commissionerate GST
Gurugram Audit List of total records List of records not provided
10.
Commissionerate
559 case files received from
other field formations not
Bengaluru Audit-I Transfer of records due to provided. 115 case files
11.
Commissionerate GST transferred to other field
formations also not
provided.
Transfer of records due to
12. DGGSTI Headquarters List of records not provided
GST
DGGSTI Zonal Units
13. Waiver of SCN Case files 45
(Hyderabad and Kolkata)
Total 843
Non production of the records by the department not only prohibits Audit from
seeking assurance whether the codal provisions and due procedures were
followed in these cases, but it is also not in compliance with the Board’s
instructions regarding production of records to Audit.
(December 2020).
5.17 Conclusion
We noticed persistent compliance deviations with respect to issue of SCNs and
adjudication process. We noticed significant deviations from law/rules such as
incorrect computation of demand in SCNs, late issuance of SCNs, delay in
adjudications etc. during audit of SCNs that were pending for adjudication as
on 31 March 2019. As for SCNs adjudicated between FY17 to FY19, the
143
irregularities pertained to incorrect invocation of extended period,

non-inclusion of demand for part period due to late issuance of SCN, incorrect
computation of demand, delay in adjudication, delay in issuance of
adjudication order, non-availability of documents in the case file resulting in
the dropping of demand etc. As for SCNs kept in Call Book as on
31 March, 2019, the irregularities observed pertained to non-issuance of
periodical SCNs, short computation of demand in SCNs kept in Call Book,
incorrect transfer of SCNs in Call Book, non/delayed retrieval of cases from Call
Book, non-conducting the periodical review of Call Book, non-approval of
competent authority before transfer of SCNs to Call Book etc. Apart from this,
we also observed irregularities in remand cases, waiver of SCNs and draft SCNs
pending for issuance. We also reviewed transfer of adjudication records during
GST transition and did not notice any significant observation.
We identified lack of effective monitoring mechanism, inadequate
coordination among CBIC field formations, delay in issuing clarifications by the
Board, delay in investigation/ verification by CBIC field formations, delay in
appointment of common adjudicating authority, non-availability of records in
the case files etc. as the reasons for many irregularities noticed by Audit.
Further, the department cited transition to GST, shortage of staff, heavy
pendency of cases, frequent changes in adjudicating authority, delay in
transfer of records etc. as the reasons for delays in adjudication and other
irregularities observed in Audit.
5.18 Recommendations
In order to address persistent delays in adjudication process, manual mistakes,
and other irregularities noticed in Audit, and to strengthen monitoring of SCNs,
the department may consider end-to-end computerization/ automation of the
SCN and adjudication process, with following components:
(i) The process of issuance of SCN may be computerized with inbuilt
controls to ensure correct computation of demand, timely issuance of SCN,
valid invocation of extended period of time and correctness of the SCN issued.
(ii) Computerization of adjudication process with inbuilt controls to ensure
effective monitoring, conducting of personal hearings and timely issuance of
OIOs
(iii) Maintenance of Call Book may be computerized with inbuilt
mechanism to ensure issuance of periodical SCNs, timely retrieval of SCNs from
Call Book, intimation to the assessee regarding transfer of cases to Call Book,
prior approval of competent authority before transfer of SCNs to Call Book and
controls regarding transfer of valid cases to Call Book.
144

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Report No.

Chapter V: Show Cause Notices (SCNs) & Adjudication Process

Department Assessee voluntarily

Issue of Show Cause Notice

Time Limit Contents - SCN received by Assessee

5.3 Administrative set up for Issue of SCNs and adjudication process

Commissioner •Cases exceeding rupees two crore

Additional/ Joint •Above fifty lakh but not exceeding rupees

Deputy/ Assistant •Above ten lakh but not exceeding rupees

Superintendent •Not exceeding rupees ten lakh

5.4 Results of previous Audits

executive Commissionerates is more than ten, three Commissionerates have

Type of units Total number of Units selected as

We have selected 116 units under Executive Commissionerates, Audit

Audit Sample Sample as

2. SCNs adjudicated FY17 to FY19 8,766 3,335 17,208.40 38

4. Remand back cases FY17 to FY19 748 622 3,358.21 83

5. Waiver of SCNs FY17 to FY19 17,095 1,020 1,155.69 6

Draft SCNs(DSCNs) pending for As on 31

7. CERA audit objections FY17 to FY19 1,079 373 912.15 35

SCNs & DSCNs transferred due to July 2017 to

5.6.2 Audit Criteria

from 06 August 2014, SCNs issued in normal cases were to be adjudicated

Table No.5.3 (B) - Service Tax

Chart 5.4 – Age-wise pendency of SCNs

Central Excise Service Tax

< 3 months 3-6 months < 3 months 3-6 months

non-verification of the relevant records, adoption of incorrect rate of tax and

no intimation regarding settlement of cases through Settlement Commission

5.9.7 Short raising of demand due to delay in finalization of investigation

` 9,006.86 crore. Deficiencies noticed pertained to incorrect computation of

5.10.1 Invocation of extended period of time held irregular in adjudication

fraud, collusion, wilful mis-statement or suppression of facts against the

One illustrative case is given below:

One illustrative case is given below:

5.10.6 Non-issuance of adjudication orders within stipulated period after

Table No. 5.8: Deficiencies noticed in SCNs pending in Call Book

No. of Money value Deficiencies

5.11.1 Short computation of demand in SCN kept in Call Book

department issued fresh SCN in June 2016 seeking reversal/payment of

period from December 2008 to November 2013, invoking extended period

Mangalore Commissionerate. Reply in respect of remaining 34 cases is awaited

such adjudicating authority, till it is decided by him. Remand cases should be

We observed that the Commissioner, Central Excise Delhi II fixed PH on

Table No. 5.9: Records not produced

Sl. Number of records not

irregularities pertained to incorrect invocation of extended period,

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