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Whatever may be the basis of demand, issuance of show cause notice is a pre-condition before any demand is raised by the department. Therefore, to stop the unnecessary and avoidable issues, the “Tax Administration Reforms Commission” under the Chairmanship of Dr Parthasarathi Shome recommended the concept of ‘Pre-notice Consultation’ in the First Report of the Tax Administration Reform Commission (TARC).

Considering the importance of pre dispute consultation and acting on the recommendation of TARC report government brought the concept of Pre show cause consultation before issuance of final show cause notice with the idea to reduce the burden of unnecessary litigation which will help both department and tax payer.

The Central Board of Indirect Taxes and Customs (CBIC) vide its Circular dated December 21, 2015, made the ‘Pre-notice Consultation’ mandatory in all cases involving the demand of Rs. 50 lakhs or more. Again in 2017 CBIC vide master circular no. 1053/2/2017-CX. dated 10/03/2017 mandated to issue Pre show cause notice consultation. Vide the said Instruction, it was clarified by the CBEC that “Pre-show cause 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)”.

On 02/04/2018 CBIC for Customs law had published the Pre notice consultation regulations 2018 vide notification no. 29/2018- Customs (NT). Further, the Consultation Regulations also provides the manner of conducting pre-notice consultation.

CBIC, vide circular no.1079/03/2021-CX dated 11/11/2021 relating to high duty amount i.e above Rs.50 lakhs made it mandatory as per Clause 5 of the said Circular to issue pre-show-cause notice consultation.

The idea of Pre show cause consultation in Excise, Customs, Service Tax and now in Goods and Service Tax is to allow an open interaction between the department and tax payer so that the dispute can be resolved at early stage itself. Further, it will also help the government to generate the revenue.

In Goods and Service Tax Act a proper officer can issue a show-cause notice under the provisions of Section 73(1) or Section 74(1), as the case may be, of the CGST Act, 2017 (‘the Act’). The procedure for issuance of show cause notice is prescribed in rules more precisely under Rule 142 of CGST Rules. Vide Notification No. 49/2019-CT dated 09.10.2019, a sub-rule (1A) has been inserted in the said Rule 142 of the Rules. As per sub-rule (1A), before service of the show cause notice under Section 73 (1) or Section 74 (1) of the Act, the proper officer is required to communicate to the person concerned, the details of any tax, interest and penalty as ascertained by the said officer in Part-A of Form GST DRC-01A.

GST DRC – 01A , is carved out to unburden the tax officers from going into the unnecessary hassle of investigation. The Form DRC01A makes it clear to the tax payer its tax liability, if any. The provisions of Rule 142A makes the life of department officers easy (if they want to).

Unfortunately, even after making absolutely clear about the mandate of issuance of pre show cause consultation before raising final demand by issuing show cause notice,  department officers are not taking CBIC and their board circulars seriously. It is fact on record that numerous show cause notices have been issued by the department without considering the instructions made in all aforementioned circulars. Tax officers without fail are issuing show cause notices and completely disregarding the CBIC instructions in respect of pre show cause consultation.

So, to put the balm on bleeding tax payer and to show the department their right place Hon’ble High Courts passed judgments wherein the Hon’ble High Courts had categorically stated that department is bound by the circulars of board  and they cannot blindly ignore the various circulars issued by CBIC on pre show cause consultation and cannot directly issue the show cause notice. Further, issuing show cause notice without issuing pre show cause consultation will tantamount to violation of principle of natural justice.

The Hon’ble Delhi High Court, in the case of Amadeus India Pvt. Ltd. vs. Pr. Commissioner, C.Ex, ST & CT – 2019- TIOL-1027-HC-DEL-ST, has set aside the show cause notice issued to the Assessee, by observing that it was necessary in terms of para 5.0 of the Master Circular for the Respondent to have engaged with the Petitioner in a pre- show cause consultation.

Further, in the case of Back Office IT Solutions Pvt. Ltd. vs. UOI & others the Hon’ble Delhi High Court has hold the same view.

Though, after receiving hard hit from the Hon’ble High Courts some officers are now issuing GST Form DRC01A (Pre show cause consultations) but all they are doing is just empty formality. Recently the department made one such empty formality in the Case of M/s Dharamshil Agencies Vs Union of India (Gujarat High Court) Special Civil Application No. 8255 of 2019 wherein the department had issued a pre-show cause consultation notice letter dated 12/04/2019 calling upon Petitioner to remain present on the same day at 14 hrs for pre-show cause notice consultation. Due to such short notice, the Petitioner submitted a letter requesting the Department for another date for pre-show cause notice consultation. However, the Department issued the SCN on the same day i.e., 12/04/2019.

Pre-Notice Consultation – Face Off Between Tax Payer and Department

It was the case of department that the period of recovery of 5 years was to expire on 15/04/2019 therefore, to safeguard the interest of revenue the show cause notice was issued on same day.  The Hon’ble Court dismissed the Departments’ contention and stated that it was Department’s responsibility to issue pre-show cause consultation notice immediately after the final audit report issued on February 28, 2019, whereas department waited till the last date. The Court observed that illusionary pre-show cause consultation notice is not only arbitrary, but is in utter disregard and in contravention of the very object and purpose of the above Master Circular. Court has held that Petitioner was not granted an adequate opportunity for the consultation prior to the issuance of show cause notice.

Further, the Hon’ble High Court being in no mood to leave the department for disregarding the circular dated 10.03.2017 and settled position of law imposed the cost of Rs.20000/- on department.

Infact, the Hon’ble High Court of Gujarat in the case of Larsen & Toubro Ltd. going on one level up has held that the revenue cannot ignore the mandatory requirement of pre-consultation notice even if the demand is raised on the basis of any intelligence agency report. It was the case of department that the origin of the show cause notice was the intelligence gathered from the Additional Director General, therefore the case does not fall under the ambit of pre show cause consultation. On which, it was observed by the Court that merely because in the present case, the case originated on account of the 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,”.

Conclusion: Idea behind the Pre Notice Consultation is very good but in actual does department really following the same or the various circulars and notifications issued by government are just going in vain because of inability of the departmental officers to follow the same.

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