Gujarat HC Quashes Excise SCNs for Failure of Pre-SCN Consultation

Jay Mahakali Industrial Service Vs Union of India & Ors. (Gujarat High Court)

The Gujarat High Court considered petitions challenging show cause notices issued without pre-show cause consultation required under the Board’s Instruction dated 21.12.2015 and Circular No. 1053/02/2017-CX dated 10.03.2017 for demands exceeding Rs.50 lakh. The Court noted that Circular No. 1079/03/2021-CX dated 11.11.2021 subsequently specified cases involving fraud, collusion, wilful misstatement, suppression of facts or specified contraventions where such consultation was not mandatory, but held that the word “reiterated” did not give the Circular retrospective effect. Relying on L AND T Hydrocarbon Engineering Ltd. Vs. Union of India, the Court held that absence of mandatory pre-show cause consultation was fatal. Except Special Civil Application No. 5685 of 2022, the show cause notices were quashed and set aside; in that matter, the notice was also found vague and a fresh show cause notice was required. The Court further directed that the Order-in-Original, if any, would also be quashed and set aside, with liberty to the Department to initiate proceedings or revive the original show cause notice subject to the outcome of pending Supreme Court proceedings and in accordance with law.

Issue Before the Gujarat High Court

The petitions were filed challenging show cause notices issued by the respondents-authorities without granting pre-consultation to the petitioners. The grievance concerned non-compliance with the requirement of pre-show cause notice consultation under the Master Circular dated 10.03.2017 where the demand of duty exceeded Rs.50,00,000/-.

On 27.09.2023, the Court had directed the respondent authorities to undertake the pre-consultation process, keeping the impugned show cause notice/order in original in abeyance, and place the outcome of such pre-consultation on record.

Pre-Show Cause Notice Consultation Requirement

The Court considered Circular No. 1053/02/2017-CX dated 10.03.2017, which stated that pre-show cause notice consultation by the Principal Commissioner/Commissioner prior to issuance of a show cause notice was mandatory in cases involving demands of duty above Rs.50 lakh, except preventive/offence-related SCNs.

The Court also considered Circular No.1079/03/2021-CX dated 11.11.2021, which specifically stated that pre-show cause notice consultation would not be mandatory in cases involving fraud, collusion, wilful misstatement, suppression of facts or specified contraventions with intent to evade payment of duties or taxes.

The Court held that the earlier Circular dated 10.03.2017 did not distinguish between suppression and non-suppression cases. According to the Court, Circular dated 11.11.2021, for the first time, specifically listed the categories in which pre-consultation was not mandatory. The use of the word “reiterated” could not, by itself, give the later Circular retrospective effect. Paragraph 6, requiring trade, industry and field formations to be suitably informed, also indicated that the change was intended for future reference.

Reliance on L AND T Hydrocarbon Engineering Ltd.

The Court relied upon its earlier decision in L AND T Hydrocarbon Engineering Ltd. Vs. Union of India, reported in 2022 (4) TMI 70, where the requirement of pre-show cause consultation was considered mandatory for demands above Rs.50 lakh. The Court also referred to Dharamshil Agencies Versus Union of India, reported in 2021 (7) TMI 1064.

The Court further referred to Amadeus India Pvt Ltd Vs. Principal Commissioner – 2019-TIOL-1027-HC-DEL-ST and Tube Investment of India Ltd. Vs. Union of India – 2018-TIOL-330-HC-MAD-CX in considering the mandatory nature of the pre-consultation procedure.

Show Cause Notices and Outcome of Pre-Consultation

The Court recorded that pre-consultation was granted pursuant to its order, except in Special Civil Application Nos. 1770 of 2022 and 3845 of 2022. The outcome of such consultation was not placed on record except in Special Civil Application No. 5685 of 2022.

In Special Civil Application No. 5685 of 2022, the respondents placed the outcome of the pre-consultation on record through an affidavit dated 13.09.2024. The Court found that the show cause notice dated 29.09.2020 referred only to liability of service tax based on information contained in Income Tax returns, Form 26AS and balance sheets, without reference to the type of services allegedly liable to service tax. The Court held that the show cause notice was vague.

The Court further noted that the Order-in-Original dealt with contentions raised during pre-consultation, although those grounds were not contained in the original show cause notice. In these circumstances, the respondents-authorities were required to issue a fresh show cause notice in accordance with law.

Final Decision

The Court held that, except Special Civil Application No. 5685 of 2022, none of the show cause notices could be sustained in the absence of pre-consultation notice. Even in Special Civil Application No. 5685 of 2022, the show cause notice referred only to the difference between the value of income as per Form 26AS and Form ST-3 returns.

Accordingly, the show cause notices issued in the respective petitions were quashed and set aside. Consequently, the Order-in-Original, if any, was also directed to be quashed and set aside. The Court granted liberty to the respondent-Department to initiate proceedings or revive the original show cause notice, subject to the outcome of the pending proceedings before the Hon’ble Supreme Court and in accordance with law. All petitions were disposed of and notice was discharged.

Cases Discussed

• Dharamshil Agencies Versus Union of India — 2021 (7) TMI 1064.
• L AND T Hydrocarbon Engineering Ltd. Vs. Union of India — 2022 (4) TMI 70.
• Amadeus India Pvt Ltd Vs. Principal Commissioner — 2019-TIOL-1027-HC-DEL-ST.
• Tube Investment of India Ltd. Vs. Union of India — 2018-TIOL-330-HC-MAD-CX.

FULL TEXT OF THE JUDGMENT/ORDER OF GUJARAT HIGH COURT

1. Heard learned advocate Mr.Anand Nainawati for the petitioners and learned advocate Mr.Utkarsh R.Sharma for the respondents.

2. Rule returnable forthwith. Learned advocate Mr.Utkarsh Sharma waives service of notice of rule on behalf of the respondents. With the consent of learned advocates for the respective parties, the matters are taken up for the final hearing, as the issue involved is very short.

3. These petitions are filed challenging the show cause notice issued by the respondents -authorities without granting pre- consultation to the petitioners.

4. Pursuant to the order passed by this Court, the respondents- authorities granted the pre-consonsultation except in Special Civil Application No.1770 of 2022 and Special Civil Application No. 3845 of 2022.

5. This Court passed the following order on 27th September, 2023:-

1. Heard learned advocate Mr.Anand Nainawati for the petitioners, learned advocate Mr.Priyank P. Lodha and learned advocate Mr.Nikunt K. Raval for the respective respondents.

2. The principal grievance raised in this petition is not abiding by the requirement of the pre-show cause notice consultation as provided in Master Circular dated 10th March, 2017, as demand of duty involves more than Rs.50,00,000/-.

3. The impugned show-cause notice/order in original in this

petition is issued without following the mandatory requirements of the Master Circular.

4. Learned advocates for both the sides referred to and relied upon the decision of this Court in case of Dharamshil Agencies Versus Union of India reported in 2021 (7) TMI 1064.

5. It was also pointed out by learned advocates for both the sides that the matter is also subjudice before the Hon’ble Supreme Court with regard to the issue of limitation if the impugned show cause notice is quashed and set aside by this Court.

6. Considering the above submissions, the respondent authorities are directed to undergo the process of pre-consultation keeping the impugned show-cause notice/order in original in abeyance and place the outcome of such preconsultation on record before the next date of hearing. Such exercise shall be completed within four weeks.

7. Stand over to 26th October, 2023.

6. Accordingly, the pre-consultation was granted and the respondents have not placed on record the outcome of the pre- consultation granted except in Special Civil Application No. 5685 of 2022.

7. The details of each of the petitioner are summarized as under:-

8. In Special Civil Application No.5685 of 2022, the respondents -authorities have placed on record the outcome of the pre- consultation provided to the petitioner by filing an affidavit dated 13th September, 2024.

9. On perusal of the outcome of the pre-consultation, it appears that considering the submissions made by the petitioners of Special Civil Application No.5685 of 2022, the respondent-Joint Commissioner, CGST & Central Excise, Rajkot opined that the contentions of the petitioners that they are eligible for exemptionth under Sr.No.12(a) of the Notification No. 25/2012-ST that on 20 June, 2012 as amended is not sustainable since petitioners are liable to pay service tax on the repair and maintenance services rendered to M/s.PGVCL during the period 2014-15 and 2015-16.

10. On perusal of the impugned show cause notice dated 29.09.2020, the only issue raised was with regard to liability of payment of service tax by the petitioners on the basis of information in form of copy of Income Tax returns and Form 26AS, Balance- sheets etc. referred to in paragraph No.3 of the show cause notice without reference to the type of services which is liable to service tax. The show cause notice itself is absolutely vague and without reference to any of the contentions which are raised by the petitioners in pre-consultation which is already decided by the respondents-authorities vide order dated 19.10.2023 passed disposing such contentions during the pendency of these petitions.

11. In the facts of the case, the Adjudicating Authority has also passed an Order-in-Original dealing with such contentions of the petitioners confirming the demand. However, the show cause notice dated 29th September, 2020 did not contain any of the grounds on which Order-in-Original is passed or the grounds on which the objections are disposed of in pre-consultation during the pendency of these petitions. In such circumstances, the respondents-authorities is required to issue a fresh show cause notice in accordance with law.

12. So far as the other petitions are concerned, on perusal of the show cause notices, none of the petitioners would fall within theth scope of para 5 of the Circular No.1079/03/2021-CX dated 11

November, 2021. The Circular 1079 of 2021 reads as under:-

“Subject: Clarification in respect of the Master Circular No. 1053/02/2017- CX dated 10.03.2017-reg.

As a trade-facilitation measure, a concept of pre-show cause notice consultation in Central Excise and Service Tax was introduced vide Board’s instruction dated 21.12.2015, issued vide F. No. 1080/09/DLA/MIS/15. Vide the said Instruction, it was clarified that “Pre-show couse notice consultation with the Principal Commissioner and Commissioner is being made mandatory prior to issue of show cause notice (SCN) in the case of demand of duty above Rs.50 Lakhs (except for preventive/offence related SCNS)”

2 Para 5.0 of the Master Circular No. 1053/02/2017-CX dated 10.03.2017 merely reiterates the principle of pre-show cause notice consultation enunciated vide aforementioned Instruction dated 21.12.2015. Further, vide Circular No. 1076/02/2020-CX dated 19.11.2020, it was clarified that “Pre-show cause notice consultation with assessee, prior to issuance of SCN in case of demand of duty is above Rs.50 Lakhs (except for preventive/offence related SCNs) is mandatory & shall be done by the Show cause notice issuing Authority”,

3. Subsequent to this, a reference has been received from the DGGI to clarify whether DGGI formations fall under the exception/exclusion category of the CBIC’s instruction supra dated 21.12.2015 or otherwise.

4. In this regard, it is hereby clarified that exclusion from pre- show cause notice consultation is case-specific and not formation specific

5. It is, therefore, retterated that pre-whow cause notice consultation shall not be mandatory for thuse cases booked under the Central Excise Act, 1944 or Chapter V of the Fosance Act, 1994 for recovery of Buties or taves not levind or paid or short levted or short pald or erroneously refunded by reason of

(a)fraud, or

(b) collusion, or (c)wilful mis-statement: or (d)suppression of facts or

(e) contravention of any of the provision of the Central Excise Act, 1944 or Chapter V of the Finance Act, 1994 or the rules made there under with the intent to evade payment of duties or taxes.

6 Trade, industry and field formations may be suitably informed

12.1 The aforesaid Circular came up for consideration before this Court in case of L AND T Hydrocarbon Engineering Ltd. Vs. Union of India reported in 2022 (4) TMI 70. This Court while considering the facts of the said case held as under:-

ABSENCE OF MANDATORY PRE-SHOW CAUSE NOTICE CONSULTATION IS FATAL TO THE PRESENT SHOW CAUSE NOTICE.

83 In view of the Circular No. 1053/2/2017-CX., dated 10th March 2017, it is clear that the Board had made the pre-show cause notice consultation mandatory for the Principal Commissioner/Commissioner prior to the issuance of show cause notice in cases involving the demands of duty above Rs.50 lakh. Such consultation is required to be done by the adjudicating authority with the assessee as an important step towards reducing the necessity of issuing show cause notice.

84 The contention of the learned A.S.G. that since the present case originated from the intelligence gathered from the DGGI such pre- consulting is not required. The said contention runs contrary to the C/SCA/11308/2019 JUDGMENT DATED: 03/02/2022 recent clarification issued by the Board. For the very objection now being raised, a clarification was sought by the DGGI office from the Board as to whether the DGGI formations will fall under the exclusion category of the master circular dated 10th March 2017 read with the circular dated 19th November 2020. The Board vide the Circular No. F.No.116/13/2020-CX-3 Dated 11.11.2021 clarified that the exclusion from the pre-show cause notice consultation is case specific and not formation specific. Therefore, merely because in the present case, the case originated on account of investigation of the DGGI will not be a sufficient ground for not following the mandatory procedure prescribed by the Board which is binding on the department. Therefore, it was mandatory for the adjudicating authority in the present case to conduct the pre-show cause notice consultation and in absence of the same the present proceedings could be said to be bad in law and deserves to be quashed and set aside.

85 (i) Amadeus India Pvt Ltd Vs. Principal Commissioner – 2019- TIOL-1027-HC-DEL-ST

12. It will be immediately noticed that there are two exceptions carved out for the Respondent to engage in a pre- SCN consultation. The first is that the SCN is preventive and the second is that it is related to an offence in terms of the Finance Act, 1994.

13. In the present case, as is evident from the impugned SCN, the alleged non-payment of service tax pertains to period between 2012- 2013 to 2016-2017. Consequently, there is no ‘preventive’ aspect involved in the SCN and this is not even disputed by learned counsel for the Respondent. However, what is urged before the Court by the Respondent is that since the SCN was preceded by a search that was conducted in the business premises of the Petitioner, and the Petitioner also rendered itself liable for penal action ‘for suppression of facts and contravention of various statutory provisions with intent to evade payment of due service tax’ and other incidental levies, the SCN partakes of the character of an ‘offence related’ SCN and therefore falls within the exceptions carved out under para 5.0 of the Master Circular.

14. The above submission runs contrary to the very object of para 5.0 C/SCA/11308/2019 JUDGMENT DATED: 03/02/2022 which is to narrow down the scope of the dispute by engaging the Assessee on specific areas where the Respondent may require information/clarification from the Assessee regarding alleged evasion of service tax. In the context of the present case, in relation to documents recovered during the search and statements recorded of representatives to the Petitioner in that process, several questions may have arisen for consideration by the Respondent which may require a clarification from the Petitioner as to its conduct. It is to facilitate this very exercise that para 5.0 finds place in the Master Circular. The mere possibility that at the end of the adjudication process, the Petitioner may have to face consequences for having committed an ‘offence’ under Finance Act, 1994 need not per se render the SCN itself as an ‘offence related’ SCN. If that were to be the logic, then in every case para 5.0 can be dispensed with on the ground that the adjudication of the SCN is likely to be lead to the noticee facing proceedings for having committed an offence. The exception would then become the rule and not vice versa, and the need for any pre-notice consultation being rendered redundant. Further, without the conclusion of the adjudication on the SCN, the Respondent would not be in a position to decide whether an offence is made out.

(ii) Tube Investment of India Ltd. Vs. Union of India – 2018-TIOL- 330-HC-MAD-CX

7. Admittedly, the above referred procedure, which has been held to be a mandatory by C.B.E. & C., has not been adhered to in the instant case. That apart, when the petitioner had been given an opportunity to submit the reply to the Audit Slip, which they had submitted by reply dated 16-12-2016, the same ought to have been considered by the fourth respondent prior to issuance of the show cause notice. If, for some reasons, the fourth respondent was of the opinion that the reply given by the petitioner to the Audit Slip is not satisfactory, then at least the same should have been dealt with in the impugned show cause notice, which has not been considered.

8. Thus, for the above reasons, this Court is inclined to entertain the present writ petition, challenging the show cause notice. In the result, the writ petition is allowed, the impugned notice is set aside and the matter is remanded to the fourth respondent, for fresh consideration. The fourth respondent is directed to afford an opportunity of personal hearing to the authorized representative(s) of the petitioner, consider the reply given by the petitioner dated 16-12-2016 to the Audit Slip and after affording full and effective opportunity, consider the case and then proceed in accordance with law. No costs. Consequently, connected miscellaneous petition is closed.

86.The above judgement of the Delhi High Court in Amadeus (Supra)also negatives the stance taken in the reply affidavit dated 5 th March 2021 of the respondents, wherein, it has been urged by the Respondent that the offence/preventive cases are outside the purview of the procedure relating to the pre-show cause consultation.

87 It would be appropriate at this stage to reproduce the relevant provisions of Sub-sections (1) and (4) of Section 11A of the Excise Act and they are as follows: “11A. Recovery of duties not levied or not paid or short-levied or short- paid or erroneously refunded.-

(1) Where any duty of excise has not been levied or paid or has been short-levied or short-paid or erroneously refunded, for any reason, other than the reason of fraud or collusion or any wilful mis-statement or suppression of facts or contravention of any of the provisions of this Act or of the rules made thereunder with intent to evade payment of duty,-

(a) the Central Excise Officer shall, within one year from the relevant date, serve notice on the person chargeable with the duty which has not been so levied or paid or which has been so short- levied or short-paid or to whom the refund has erroneously been made, requiring him to show cause why he should not pay the amount specified in the notice;

(4) Where any duty of excise has not been levied or paid or has been short-levied or short-paid or erroneously refunded, by the reason of-

(a) fraud; or

(b) collusion; or

(c) any wilful mis-statement; or

(d) suppression of facts; or

(e) contravention of any of the provisions of this Act or of the rules made thereunder with intent to evade payment of duty.

by any person chargeable with the duty, the Central Excise Officer shall, within five years from the relevant date, serve notice on such person C/SCA/11308/2019 JUDGMENT DATED: 03/02/2022 requiring him to show cause why he should not pay the amount specified in the notice along with interest payable thereon under section 11AA and a penalty equivalent to the duty specified in the notice.”

88 The case on hand by any stretch of imagination cannot be described as an offence/preventive case whatsoever. This is not a case where the goods have been removed illicitly without a statutory invoice. In the cases of offence, there is no dispute about the dutiability or taxability of the transaction. The only dispute is whether the transaction is put through. In other words, the only question is whether, the goods have been actually manufactured or removed. The dispute is whether on facts, the assessee has manufactured or cleared those goods. Those are offence/preventive cases mentioned in the circular dated 10th March 2017.

13. In all the petitions, except Special Civil Application No.1770 of 2022, the show cause notice is issued based on the difference in value of income as per Form 26AS issued under the Income Tax

Act, 1961 and Form ST3-return filed by the petitioners. In Special Civil Application No. 1770 of 2022, the show cause notice refers to the liability of service tax upon interpretation of the provisions of the Finance Act, 1994 read with various Notifications in relation to the issues as to whether the petitioner of the said petition constructed the roads for the general public or the private road and labour charges, TTA Charges, taxation which does not contain any of the ingreadients of the fraud, wilful mis-statement for separation of facts for collusion which would categorize such show cause notice in the exception curved out in para 5 of the Circular No 1079 of 2021.

14. In view of the facts of the case being squarely covered by the deicision of this Court in the case of L AND T Hydrocarbon Engineering Ltd. (Supra) wherein the reliance is also placed on the decision of the Hon’ble Delhi High Court in case of Amadeus India Pvt. Ltd. Vs. Principal Commissioner of Central Excise Services Tax & Central Tax reported in 2019(25) G.S.T.L (Del.) wherein, so far as the merits of the matter is concerned, the Hon’ble Apex Court has not interefered and issued the notice in SLP only for the purpose of as to whether the respondents are entitled to issue reviving of earlier show cause notice or not ? The order passed by the Hon’ble Apex Court, the proceeedings arising from the judgement of the Hon’ble Delhi High Court reads as under:-

ORDER

Delay condoned.

Learned Additional Solicitor General submits that if a fresh show cause notice is to be issued as directed by the High Court after pre- consultation, the Department may be given liberty to revive the earlier show cause notice to obviate any objection in regard to limitation.

Issue notice confined to the above issue, returnable in eight weeks.

14.1 As pointed out by learned advocate Mr. Nainawati that Special Leave Petition is still pending before the Hon’ble Apex Court for the aforesaid issue of revival of the show cause notice to obviate the objection with regard to limitation is only pending for adjudication.

15. Taking into consideration the above facts and in view of the decision of this Court in case of L AND T Hydrocarbon Engineering Ltd. (Supra), we are of the opinion that none of the show cause notice except Special Civil Application No. 5685 of 2022 can be sustained in absence of pre-consultation notice. Even in Special Civil Application No. 5685 of 2022, the show cause notice contained the ingredients of the issue of liability of the petitioner but it only refers to the difference in value of income as per Form 26AS and as per Form ST-3 returns filed by the petitioner. In such circumstances, the show cause notices issued in the respective petitions are hereby quashed and set aside and therefore as a consequence the Order-in-Original if any shall also be quashed and set aside, with a liberty to the respondent-Department to initiate the proceedings or to revive the original show cause notice subject to outcome of the pending proceedings before the Hon’ble Apex Court in accordance with law. All the petitions are accordingly disposed of. Notice is discharged.