Appellant challenged the legal validity of the Show Cause Notice dated April 12, 2019. The facts of the case are that the Petitioner was issued a pre-show cause consultation notice letter dated April 12, 2019 consultation 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 dare for pre-show cause notice consultation. However, the Department issued the SCN on the same day i.e., April 12, 2019.
The Hon’ble Gujarat High Court noted that as per the settled legal position, the Circulars issued by the Board are binding to and have to be adhered to by the Department. In this regard Master Circular dated Match 10, 2017 was issued which stated that pre-show cause notice consultation is mandatory in cases involving the demands of duty above Rs.50 lacs.
Dismissed the Departments’ contention that the period of recovery of 5 years was to expire on April 15, 2021 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, and they waited till the last date on April 12, 2019.
Further, stated 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.
Set aside the SCN on the ground that Petitioner was not granted an adequate opportunity for the consultation prior to the issuance of SCN. Further, stated that the Petitioner would not be permitted to take unfair advantage on the ground that the demand made in the notice had now become time-barred in view of the statutory provisions.
Furthermore, directed the Department to issue fresh pre-show cause consultation notice.
Allowed the petition and asked the Department to deposit Rs. 20,000/- in the Court within eight weeks from today, out of which, the office shall pay Rs. 10,000/- to the Petitioner and remaining Rs. 10,000/- to Gujarat State Legal Services Authority.
FULL TEXT OF THE HIGH COURT ORDER /JUDGEMENT
1. The petitioners, by way of the present petition, have challenged the legality and validity of the show-cause notice dated 12.4.2019 (Annexure-D) issued by the respondent No.2 – the Additional Commissioner of Central Goods and Service Tax, Ahmedabad.
2. It may be noted that as stated in paragraph 3.7 of the petition, the petitioners have filed the petition not on the merits of the case, but have challenged the procedural infraction and the manner in which the impugned show-cause notice has been issued by the respondent authority. However, in order to understand the basic controversy it would be necessary to narrate the undisputed facts as transpiring from the record.
3. The petitioner No.1 is a partnership firm engaged in the business of purchase and sale of various textile machineries. The petitioner firm was registered under the erstwhile Sales Tax Regime, and now is also holding a valid and subsisting registration under the present GST Regime. The petitioner firm is holding the Service Tax Registration under the category of business auxiliary services and repair and maintenance services. In and around the year 2009, the petitioner firm had entered into an agreement with M/s.Arvind Limited for lease and demise of various machineries for a period of 8 years in consideration of rental payment by M/s.Arvind Limited. In terms of the said agreement exclusive right of possession and use was conferred upon the lessee with an option to purchase the said machines upon the conclusion of the said agreement. According to the petitioners, in terms of the provisions of the Central Sales Tax Act, 1965 read with Gujarat Value Added Tax Act, 2003, such transaction was to be treated in the nature of deemed sales and accordingly on the amount received under the said agreement, appropriate VAT/sales tax was discharged to the Government. Appropriate returns were also filed under the said Act evidencing payment of such tax under the transaction with M/s.Arvind Limited. However, during the course of audit for the year October 2013 to June 2017, the officers of the Service Tax Audit Team raised an objection that such consideration received from M/s. Arvind Limited was for supply of machineries and hence, was taxable service amenable to service tax. The Audit Team vide audit objection dated 28.2.2019 raised an objection for non-payment of service tax for the period 2016-17 to June 2017. Since it was not agreeable to the petitioner to the said view of the Audit Team, the said revenue para was concluded as “unsettled”. According to the petitioners, subsequent to the issuance of the said audit report, the petitioners had attempted to explain to the officers about the payment of appropriate sales tax for the transaction in question, however, all of a sudden the Superintendent of Central Tax Audit, Ahmedabad visited the office of the petitioners and handed over a copy of the letter dated 12.4.2019 at 13.55 hours, calling upon the petitioners to remain present on the same day at 14 hours before the respondent No.2. It was stated in the said letter/notice that if the petitioners did not appear for such pre-show-cause notice consultation, it would be presumed that the petitioners did not wish to be consulted before the issuance of show-cause notice. The petitioners, therefore, addressed a letter to the authority requesting for another date for pre-show-cause notice consultation as it was not possible to effectively make any representation on such a short notice. However, the respondent No.2 issued the show-cause notice on the same day demanding service tax to the tune of Rs.1,13,47,313/- along with interest and penalty on the premise that the transaction between the petitioners and M/s.Arvind Limited was in the nature of services rendered by the petitioners and amenable to the service tax, which was not discharged by the petitioners. The legality and validity of the said notice is under challenge in the present petition.
4. The learned Advocate Mr.Paritosh Gupta for the petitioners, placing heavy reliance on the Circulars issued by the Central Board of Excise and Customs from time to time and more particularly the Customs’ Circular dated 10.3.2017 on the show-cause notices, vehemently submitted that the said circulars mandate a pre-show-cause notice consultation before the issuance of show-cause notice, in order to promote voluntary compliance and to reduce the necessity of issuing show-cause notice, however, an illusory pre-show-cause notice was issued on 12.4.2019, delivering the same to the petitioner at 13.55 hours, calling upon the petitioner to remain present before the respondent No.2 at 16.00 hours for the pre-show-cause notice consultation. Mr.Gupta submitted that the petitioners requested the respondents to provide reasonable opportunity for effective pre-show-cause notice consultation as the time granted to the petitioner was too short, the respondent No.2 issued the show-cause notice on the same day on 12.4.2019. According to Mr.Gupta, such a conduct on the part of the respondent authority was not only arbitrary, high-handed and unjust, but in blatant violation of mandatory procedure and pre-condition prescribed by the Board for pre-show-cause notice consultation. He has placed reliance upon the decision of the Supreme Court in case of Paper Products Limited Vs. Commissioner of Central Excise, reported in 1999(112) ELT 765 (SC) and in case of Ranadey Micronutrients Vs. Collector of Central Excise, reported in 1996(87) ELT 19 (SC) to submit that the circulars issued by the Board are binding to the officers of the department and are mandatory in nature.
5. Per contra, the learned Advocate Mr.Dhaval Vyas for the respondents submitted that during the course of audit, certain deliberations and discussions had taken place with the petitioner firm to promote voluntary compliance, however, the clarification tendered by the petitioner firm having been found to be unsatisfactory by the audit officers, final audit report was issued on 28.2.2019 towards the non-payment of the service tax. According to Mr.Vyas, the respondent authorities had given ample opportunity to the petitioners and had even tried to reduce the need to issue the show-cause notice by adhering to the procedure envisaged in the Circular dated 10.3.2017. In view of the said Circular the petitioner firm was issued the pre-show-cause notice on 12.4.2019, however, the petitioners sought time with a view to see that the demand made by the respondent authorities gets time-barred, in light of the fact that the returns for the relevant period were filed on 15.4.2014 and the five years for invoking the Section 73(1) of the Finance Act, 1994 would be over on 15.4.2019. According to him, the Circular of the Board cannot be utilized by the petitioner assessee as a medium to assert or claim a right, as the instructions provided in such circulars are merely guidelines set out for the respondent authorities to act accordingly. Mr.Vyas drew the attention of the Court to the observations made by the Supreme Court in case of The Director of Inspection of Income-tax (Investigation), New Delhi and Anr. Vs. Pooran Mall and Sons and Anr., reported in AIR 1975 SC 67 in support of his submission that while quashing and setting aside the show-cause notice by the Court exercising jurisdiction under Article 226 of the Constitution of India on the ground that the petitioner was not granted adequate opportunity of hearing, the petitioner should not get any unfair advantage and the respondent authority should be permitted to issue a notice afresh even if the time limit for raising demand had statutorily expired, when the impugned show-cause notice was issued within the prescribed time limit.
6. As stated earlier, the broad facts as stated in the petition by the petitioners, are not in dispute. The petitioners have basically challenged the impugned show-cause notice dated 12.4.2019 on the ground of being violative of the master Circular dated 10.3.2017 issued by the Board (Annexure-E). The short question, therefore, that falls for consideration before the Court is, whether the pre-show-cause notice consultation dated 12.4.2019 (Annexure-D) calling upon the petitioners at 13.55 hours to remain present before the respondent No.2 at 16.00 hours on the same day, could be said to be an illusory or an eye-wash notice only with a view to show the compliance of the Circular dated 10.3.2017 issued by the Board ?
7. At the outset, it may be noted that as per the settled legal position, the Circulars issued by the Board are binding to and have to be adhered to by the respondent authorities. The Board had earlier issued circulars and instructions on the show-cause notices and issued the master circular dated 10.3.2017 (Annexure-E) consolidating the earlier circulars to ensure clarity and ease of reference. It has been mentioned in the said master circular that the said circular was issued as an effort to compile relevant legal and statutory provisions, circulars of the past and to rescind the circulars which had lost relevance. Paragraph 5 of the said Circular deals with the consultation with the noticee before issue of show-cause notice. The said paragraph being relevant reads as under:-
“5. Consultation with the noticee before issue of Show Cause Notice: Board has made pre show cause notice consultation by the Principal Commissioner/Commissioner prior to issue of show cause notice in cases involving demands of duty above Rs.50 lakhs (except for preventive/office related SCN’s) mandatory vide instruction issued from F. No.1080/09/DLA/MISC/15, dated 21st December 2015. Such consultation shall be done by the adjudicating authority with the assessee concerned. This is an important step towards trade facilitation and promoting voluntary compliance and to reduce the necessity of issuing show cause notice.”
8. In view of the afore-stated Circular, it is clear that the Board had made issuance of 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 lac and that such consultation was to be done by the adjudicating authority with the assessee as an important step towards the trade facilitation and for promoting necessary compliance, as also to reduce the necessity of issuing show-cause notice. Despite such mandatory requirement of the pre-show-cause notice consultation at the instance of the respondent authority, in utter disregard of the said mandate, and without considering the laudable object behind issuing such circular, the respondents issued the impugned pre-show-cause notice consultation dated 12.4.2019 delivering the same to the petitioner assessee at 13.55 hours and calling upon them to remain present before the respondent No.2 at 16.00 hours. The petitioners having requested for reasonable time for the effective consultation, without considering the said request, the respondent No.2 issued the show-cause notice on the same day i.e. on 12.4.2019. Such a high-handed action on the part of the respondent No.2, not only deserves to be deprecated but to be seriously viewed.
9. Though it was sought to be canvassed by the learned Advocate Mr.Vyas for the respondents that the petitioners had sought time to see that the demand for the relevant period gets time- barred as the returns for the relevant period were filed on 15.4.2014 and the demand for the recovery of service tax could be made within the period of five years, which was to expire on 15.4.2019, the Court does not find any substance in the same. It was the respondent authorities who had not issued the pre-show-cause notice for consultation immediately after the final audit report issued on 28.2.2019, and they waited till the last date on 12.4.2019, knowing fully well that the period of five years was to expire on 15.4.2019. If the respondents did not take any steps on time, and issued the pre-show-cause notice for consultation on the last date as an eye-wash, it could not be said that the petitioner assessee had requested for time to prevent the respondent authorities from making demand of the service tax, which was to expire on 15.4.2019. Such a pre-consultation notice and the impugned show-cause notice issued on 12.4.2019, being in contravention of the circular dated 10.3.2017 issued by the Board, the same cannot be sustained and deserve to be quashed and set aside.
10. It is required to be noted that as such the demand made in the impugned show-cause notice was within the prescribed time limit. Now, since the said notice is sought to be set aside on the ground that adequate opportunity of hearing was not given to the petitioners for consultation prior to the issuance of the said notice, the petitioners cannot be permitted to take unfair advantage on the ground that the demand made in the notice had now become time-barred in view of the statutory provisions. A precise observations made by the Supreme Court in this regard in case of The Director of Inspection of Income-tax (Investigation), New Delhi (supra) be reproduced as under:-
“6. … The Court in exercising its powers under Article 226 has to mould the remedy to suit the facts of a case. If in a particular case a Court takes the view that the Income-tax Officer while passing an order under s. 132(5) did not give an adequate opportunity to the party concerned it should not be left with the only option of quashing it and putting the party at an advantage even though it may be satisfied that on the material before him the conclusion arrived at by the Income-tax Officer was correct or dismissing the petition because otherwise the party would get unfair advantage. The power to quash an order under Article 226 can be exercised not merely when the order sought to be quashed is one made without jurisdiction in which case there can be no room for the same authority to be directed to deal with it. But in the circumstances of a case the Court might take the view that another authority has the jurisdiction to deal with the matter and may direct that authority to deal with it or where the order of the authority which has the jurisdiction is vitiated by circumstances like failure to observe the principles of natural justice the Court may quash the order and direct the authority to dispose of the matter afresh after giving the aggrieved party a reasonable opportunity of putting forward its case. Otherwise, it would mean that where a Court quashes an order because the principles of natural justice have not been complied with it should not while passing that order permit the Tribunal or the authority to deal with it again irrespective of the merits of the case. …”
11. In view of the above, without expressing any opinion on the merits of the demand raised in the impugned show-cause notice, the Court hereby sets aside the impugned notice dated 12.4.2019 (Annexure-D) on the ground that the petitioners were not granted an adequate opportunity for the consultation prior to the issuance of the said notice. The parties are relegated to the stage prior to the issuance of the impugned show-cause notice. The respondent No.2 will now issue afresh pre-show-cause notice for consultation in view of the Circular dated 10.3.2017 giving the petitioner a reasonable opportunity of making effective consultation, and the respondent No.2 shall issue the show-cause notice only on having been satisfied for issuance of the same. It is clarified that the petitioner shall extend full cooperation to the respondent authority by providing necessary information that may be asked for and shall not raise the issue of limitation in respect of the demand, if made, by the respondent authority, as the action of raising demand was taken by the respondent authority within the prescribed time limit, in view of the decision of the Supreme Court in case The Director of Inspection of Income-tax (Investigation), New Delhi (supra).
12. Before parting the Court is constrained to observe that such an action on the part of the respondent No.2 in issuing the illusory pre-show-cause notice for consultation only two hours before the hearing is not only arbitrary, but is in utter disregard and in contravention of the very object and purpose of the circular dated 10.3.2017, which mandated such consultation with the assessee as an important step towards trade facilitation, for promoting voluntary compliance and for reducing necessity of issuing show-cause notice. The action of the respondent authority in not taking timely action after the audit report and in issuing the impugned notice in contravention of the mandatory instructions given by the Board, therefore, is required to be seriously viewed. The present petition, therefore, is allowed, subject to the payment of cost of Rs.20,000/- to be deposited by the respondent in the Court within eight weeks from today. On such deposit being made, the office shall pay Rs.10,000/- (Rupees ten thousand only) to the petitioners and shall deposit the remaining Rs.10,000/- with the Gujarat State Legal Services Authority.
13. The petition stands allowed accordingly.
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