2021 (4) TMI 520 - HC - Service Tax

Show-cause proceedings quashed for failure to hold mandatory pre-show-cause consultation; personal hearing must be afforded

HC held that proceedings initiated by issuance of a show-cause notice were non est in law because the respondents failed to hold the mandatory ... Pre-show cause notice consultation - exception for preventive or offence-related SCN - binding character of Board instructions and Master Circular - scope of 'preventive action' under the Master Circular - revival or issuance of fresh show cause notice subject to limitationPre-show cause notice consultation - exception for preventive or offence-related SCN - scope of 'preventive action' under the Master Circular - binding character of Board instructions and Master Circular - Whether the contesting respondents were required to hold a pre-show cause notice consultation under the 2017 Master Circular and 2015 instruction, and whether the impugned SCN fell within the exceptions for preventive or offence-related SCNs. - HELD THAT: - The Court examined paragraph 5 of the 2017 Master Circular (mirroring the 2015 instruction) which makes pre-show cause notice consultation by the adjudicating authority mandatory in cases involving demands above the specified threshold, subject only to stated exceptions for preventive action or offence-related SCNs. The impugned SCN (covering 01.10.2013 to 30.06.2017) was held to seek adjudication on the taxability of services rendered and not to be preventive in character; therefore the preventive exception did not apply. Relying on the principle that Board instructions/circulars are binding on departmental officers, the Court held that the Master Circular could not be ignored and that the mere fact of searches or the possibility of later penal consequences does not automatically convert an SCN into an offence-related exception. Applying the coordinate-bench reasoning in Amadeus India Pvt. Ltd., the Court found that the contesting respondents failed to undertake the mandatory pre-notice consultation and consequently the proceedings initiated by the impugned SCN are non est in law. [Paras 5, 6, 7]Pre-show cause notice consultation was mandatory and the impugned SCN did not fall within the preventive/offence exceptions; failure to consult renders the proceedings initiated by the SCN non est in law.Pre-show cause notice consultation - revival or issuance of fresh show cause notice subject to limitation - Directions as to further course of action following quashing of proceedings for failure to consult and treatment of limitation in view of the pending Supreme Court proceedings. - HELD THAT: - The Court remanded the matter to the contesting respondents with concrete directions: to serve notice of a pre-show cause consultation meeting, afford a personal hearing to the petitioner's authorised representative, permit submissions on merits and jurisdiction, and thereafter decide whether to continue proceedings. If the officer concludes proceedings should continue, he/she must decide whether to revive the impugned SCN or issue a fresh SCN in consonance with any decision the Supreme Court renders in the pending SLP concerning limitation. These directions were framed to preserve the question of limitation for determination in the light of the Supreme Court's order and to ensure compliance with the mandatory consultation requirement before any adjudicatory step is taken. [Paras 7]Matter remanded for mandatory pre-SCN consultation and further decision by the officers as directed; any revival or fresh SCN to be subject to the Supreme Court's decision on limitation.Final Conclusion: The writ petition is disposed of: the proceedings initiated by the impugned show cause notice are set aside as non est for failure to hold the mandatory pre-show cause notice consultation; the matter is remanded to the contesting respondents to conduct the consultation, hear submissions and decide whether to proceed, with revival or reissuance of any SCN to be governed by the Supreme Court's determination on limitation. Issues Involved:1. Adherence to the 2015 Instruction and 2017 Master Circular.2. Mandatory pre-show cause notice consultation.3. Applicability of preventive action exception.4. Export of services and service tax liability.5. Binding nature of circulars on tax authorities.Detailed Analysis:1. Adherence to the 2015 Instruction and 2017 Master Circular:The petitioner-company's primary grievance is the failure of the respondents to adhere to the provisions of the 2015 Instruction and the 2017 Master Circular issued by the Central Board of Indirect Taxes & Customs. The petitioner argues that the impugned show cause notice (SCN) violates paragraph 5 of the 2017 Master Circular, which mandates a pre-show cause notice consultation with the assessee.2. Mandatory Pre-Show Cause Notice Consultation:The petitioner contends that the respondents were required to hold a pre-show cause notice consultation as per paragraph 5 of the 2017 Master Circular. The petitioner cites the judgment in Amadeus India Pvt. Ltd. vs. Principal Commissioner, which supports the necessity of such consultation. The petitioner asserts that their case does not fall under the exceptions to this requirement, which are related to preventive action or offences committed by the noticee.3. Applicability of Preventive Action Exception:The respondents argue that the petitioner’s case falls under the preventive action exception, thus exempting them from the pre-show cause notice consultation requirement. They reference the intelligence gathered and subsequent search operations indicating non-payment of service tax by the petitioner, which they classify as preventive action.4. Export of Services and Service Tax Liability:The petitioner-company claims it provides accounting services to entities outside India and is not liable for service tax under Rule 6A of the Service Tax Rules, 1994, concerning 'Export of Services.' They dispute the respondents' reliance on Section 65B (44) Explanation-3(b) of the Finance Act, arguing that the services are provided to separate legal entities, not establishments of the petitioner-company.5. Binding Nature of Circulars on Tax Authorities:The court examines the binding nature of circulars issued by statutory authorities, referencing K.P. Varghese vs. Income-tax Officer and UCO Bank, Calcutta vs. Commissioner of Income Tax, W.B.. The court emphasizes that circulars are binding on tax authorities and cannot be ignored to the detriment of the assessee.Conclusion:The court concludes that the respondents were required to conduct a pre-show cause notice consultation with the petitioner-company. The court finds that the preventive action exception claimed by the respondents does not apply in this case. The court remands the matter to the respondents with specific directions to hold the mandatory consultation and decide on the continuation of proceedings based on the merits, including jurisdictional aspects.Directions:1. Communication for Consultation: The respondents must notify the petitioner-company of the date, time, and venue for the pre-show cause notice consultation.2. Personal Hearing: The concerned officer must provide a personal hearing to the petitioner-company’s authorized representative.3. Merits and Jurisdiction: The officer must allow submissions on the merits and jurisdiction before deciding on the continuation of proceedings.4. Revival or Fresh Notice: If proceedings are to continue, the officer must decide whether to revive the impugned show cause notice or issue a fresh one, in line with the Supreme Court’s decision in SLP (Civil) Diary No. 35886/2019.The writ petition is disposed of with these directions, and pending applications are closed.