2025 (10) TMI 68 - HC - Service Tax

Service tax show-cause notices quashed for failing mandatory CBEC Master Circular pre-consultation requirements; revenue permitted four weeks to initiate

Rochem Separation Systems (India) Pvt. Ltd., Pyramid Developers, Leighton India Contractors Pvt. Ltd., Abhyudaya Co-Operative Bank Ltd., M.R. Realtors, Galaxy Realtors, Dr Vinod Ranvirsing Vij Proprietor ‘Clinque Aesthetica’ Versus The Union of India Through its Secretary, Department of Revenue, Ministry of Finance, Government of India, New Delhi, The Principal Commissioner CGST & CX, Mumbai, The Joint Commissioner CGST & CX, Mumbai East, Commissioner of CGST & CX, Mumbai West Commissionerate, The Principal Commissioner CGST The Joint Commissioner CGST & CX, Mumbai East, The Central Board of Indirect Taxes and Customs, The Director General Directorate General of GST Intelligence Delhi, The Principal Additional Director General Directorate General of GST Intelligence Mumbai Zonal Unit.

HC held that show-cause notices demanding service tax were issued in violation of mandatory pre-consultation requirements in the CBEC Master Circulars and ... Violation of principles of natural justice - SCN raising demand of service tax issued to the Petitioners are not preceded by pre consultation which is mandatory as per circular issued by the Central Board of Excise and Customs - pre-consultation notice would be mandatory or not - HELD THAT:- Section 73 of the Finance Act, 1994, does not refer to the issue of any pre-consultation notice. However, the Central Board of Excise and Customs, New Delhi (CBEC) issued Circular No. 1053/02/2017-Cx-dated 10 March 2017 [Master Circular] consolidating the Circulars issued from time to time regarding show cause notices, adjudication and recovery proceedings. The Hon’ble Supreme Court in the case of K. P. Varghese Vs Income Tax Officer, Ernakulam And Anr. [1981 (9) TMI 1 - SUPREME COURT], Commissioner of Customs, Calcutta And Ors. Vs Indian Oil Corpn. Ltd. And Anr. [2004 (2) TMI 66 - SUPREME COURT], Union of India And Ors. Vs Arviva Industries India Limited And Ors. [2007 (1) TMI 6 - SUPREME COURT] has held that Circulars issued by the Central Board of Direct Taxes (“CBDT”) or the CBEC are binding upon the department. Another Division Bench of the Delhi High Court in the case of Back Office IT Solutions Pvt. Ltd. Vs Union of India [2021 (4) TMI 520 - DELHI HIGH COURT] held that pre-consultation before issuance of a show cause notice was mandatory and could not be deviated from, unless the case fell within the two exceptions provided in the Circulars. The requirement of a pre-consultative process cannot be dismissed as some empty formality. The master circular and the Circular of 19 November 2020 style this requirement as mandatory in cases where the tax demand exceeds Rs 50 lakhs, unless, of course, the case falls in any of the exceptions. Such circulars bind the Department. Apart from its binding character, we cannot ignore that such a requirement has been introduced as an important step towards trade facilitation and to promote necessary compliance, thereby reducing the need for issuing show-cause notices in every case - Accordingly, a case is made out to quash the impugned show cause notices because, admittedly, such show cause notices were issued without adopting the pre-consultation process mandated by the Master Circulars dated March 10, 2017, and November 19, 2020. No arguments were made on behalf of the Revenue to attract any of the exceptions provided in the Circulars. The impugned show cause notices are hereby quashed and set aside - The Revenue is given the opportunity to carry out the pre-consultative process by issuing a pre-consultation notice within four weeks from the date this order is uploaded. Petition disposed off. ISSUES PRESENTED AND CONSIDERED 1. Whether pre-show-cause consultation (pre-consultation) is mandatory before issuance of a show cause notice in cases where the demand of duty/service tax exceeds Rs. 50 lakhs, having regard to Section 73 of the Finance Act, 1994 and CBEC/CBIC Circulars dated 10 March 2017 and 19 November 2020. 2. Whether failure to comply with the pre-consultation requirement renders a subsequently issued show cause notice void or liable to be quashed. 3. Consequences of quashing show cause notices for non-compliance with the pre-consultation requirement, specifically the effect on limitation (time-bar) and whether the department may revive or re-issue notices without prejudice. 4. Whether circulars issued by the Board bind departmental officers and the extent to which decisions of various High Courts and the Supreme Court affect the binding nature or precedential value of the Master Circular requirement. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Mandatory character of pre-show-cause consultation Legal framework: Section 73 of the Finance Act, 1994 (service tax) prescribes issuance of show cause notices but does not mention pre-consultation. CBEC/CBIC Master Circular dated 10 March 2017 and Circular dated 19 November 2020 require pre-show-cause consultation by the adjudicating authority prior to issuance of SCNs in cases involving demands exceeding Rs. 50 lakhs (except preventive/offence-related matters). Precedent Treatment: Multiple High Court decisions (including those of Delhi, Gujarat, Madras and Bombay High Courts) have held the pre-consultation requirement to be mandatory in the statutory-administrative context; some other decisions at High Court level have taken contrary views or distinguished the applicability on facts. Supreme Court authorities (K.P. Varghese; Indian Oil; Arviva) establish that Board circulars bind the department. Interpretation and reasoning: The Court reads the Master Circular and the clarificatory Circular as imposing a mandatory pre-consultative process for demands above the stated monetary threshold, subject to enumerated exceptions (fraud, collusion, etc.). The Court relies on the binding character of Board instructions on departmental officers as established by higher authority and values the pre-consultation as an instrument of trade facilitation, voluntary compliance and alternate dispute resolution. Conflicting single-judge decisions are examined and distinguished on grounds of failure to consider binding precedents or co-equal decisions; factually limited Supreme Court orders do not negate the mandatory tenor of the Circulars. Ratio vs. Obiter: Ratio - pre-show-cause consultation is mandatory for demands above Rs. 50 lakhs (save stated exceptions) because Board Circulars bind the department and the Circulars expressly mandate consultation. Observations distinguishing certain authorities and factual analyses of other cases are largely obiter but supportive of the ratio. Conclusion: The Court holds that the pre-consultation requirement contained in the Master Circular and the 2020 clarification is mandatory in the stipulated circumstances and non-compliance vitiates subsequent show cause notices, unless an exception applies (none pleaded). Issue 2 - Effect of non-compliance: validity of show cause notices Legal framework: Administrative instructions and master circulars which bind departmental officers; principles of natural justice and adjudicatory fairness; power of the writ court to quash orders made in breach of mandatory procedural requirements. Precedent Treatment: High Courts (Delhi, Madras, Gujarat, Bombay) have quashed show cause notices issued without observing pre-consultation as mandated; some judgments refused relief where adequate or substantial compliance of procedural fairness was found on the facts. Interpretation and reasoning: The Court finds admitted non-compliance (no pre-consultation issued) in the present matters and no argument by Revenue invoking exceptions. Given the mandatory instruction in the Circulars and the departmental binding nature, the show cause notices issued in breach are vitiated. The Court emphasizes that pre-consultation is not a mere formality but a meaningful opportunity that may avert or narrow disputes. Ratio vs. Obiter: Ratio - show cause notices issued without required pre-consultation are liable to be quashed. Observations on the policy rationale and desirability of pre-consultation are explanatory (obiter) but underscore the mandatory finding. Conclusion: The impugned show cause notices are quashed for failure to follow the pre-consultation requirement. Issue 3 - Consequences of quashing: limitation, revival and moulding of relief Legal framework: Powers of the High Court under Article 226 to mould relief so as to prevent unfair advantage; principles from precedents allowing courts to remit matters to appropriate authorities after quashing for procedural defects without causing prejudice on limitation; specific supervisory guidance on exclusion of periods. Precedent Treatment: Courts (including Gujarat High Court in Dharamshil Agencies) have directed re-initiation of pre-consultation and excluded certain periods from limitation, while requiring parties not to take unfair advantage of the court's intervention. Interpretation and reasoning: The Court recognizes competing equities: protecting assessee from reopened stale demands and protecting Revenue from prejudice caused by court-ordered stays or mandated pre-consultation. The Court therefore quashes the SCNs but grants the department a structured opportunity to issue pre-consultation notices and, depending on outcome, fresh SCNs. The Court excludes the period from the date interim relief was granted until fresh SCNs are issued from computation of limitation, and allows other statutory exclusions to apply. The Court rejects the argument that a pending SLP on limited issues robs lower-court precedents of force; it finds the SLP concerned limitation implications, not the mandatory character of pre-consultation. Ratio vs. Obiter: Ratio - when SCNs are quashed for lack of mandatory pre-consultation, the Court may direct a fresh pre-consultation and exclude relevant periods from limitation so as to avoid unfair advantage or prejudice. Observations on specific timelines to be followed are operative for the matters at hand (ratio for remedial order) and illustrative for similar situations. Conclusion: Relief is moulded: SCNs set aside; Revenue permitted to issue pre-consultation notices within four weeks; assessees to reply within two weeks; pre-consultation to be completed within six weeks thereafter; fresh SCNs may follow; period from 30 January 2023 until fresh SCNs are issued (within timelines) is excluded from limitation, without prejudice to other statutory exclusions. Issue 4 - Binding nature of Board circulars and precedential interplay Legal framework: Doctrine that Board circulars/instructions bind departmental officers (as laid down by higher courts); distinction between binding effect on the Executive and non-binding nature on Courts; scope of judicial review where Executive deviates from Board instructions. Precedent Treatment: Supreme Court authorities confirm that Board instructions bind the department. Some High Court decisions have held otherwise on specific facts or limited reasoning, but these do not overrule higher precedent. Interpretation and reasoning: The Court reiterates that Circulars of the CBEC/CBIC bind the department and that prior High Court decisions holding the pre-consultation mandatory are consistent with that principle. Single-judge or fact-specific decisions that decline to follow the Master Circular are distinguished on grounds of failure to reconcile with binding Supreme Court authority or on peculiar facts that show substantial compliance. Ratio vs. Obiter: Ratio - Board circulars are binding on the department; where the circular mandates pre-consultation, departmental officers must comply absent a recognized exception. Distinctions drawn between conflicting High Court decisions are explanatory (obiter) but serve to uphold coherence with higher authority. Conclusion: The Master Circular and the clarificatory Circular bind the department; conflicting or contrary High Court decisions do not displace the mandatory requirement where consistent with Supreme Court precedents and absent factual exceptions.