The Hon’ble High Court of Gujarat vide its Order dated 23 July 2021 in the matter of Dharamshil Agencies v. Union of India in R/Special Civil Application No. 8255 of 2019 held that it is mandatory on the part of the department to provide an opportunity of Pre-Show Cause Notice consultation to the assessee before service of Show Cause Notice (SCN).

The Petitioner preferred the Writ Petition before the Hon’ble High Court challenging the validity of SCN dated 12.04.2019, issued directly without giving a proper opportunity of Pre SCN consultation to the Petitioner. The challenge of the Petitioner is not with regard to the merits of the case but is with regard to the procedural infractions and the manner, the impugned SCN was issued by the respondent authority.

Facts –

• The Petitioner is a partnership firm engaged in the business of purchase and sale of various textile machineries. In 2009, the Petitioner entered into an agreement with M/s Arvind Mills for lease and demise of various machineries for period of 8 years, as per the agreement, the exclusive rights of possession and use was conferred to lessee with the option to purchase the said machines on conclusion of the agreement.
• The transaction being in the nature of deemed sale, the petitioner was duly discharging VAT on it, however, an audit was conducted by the officers of the department and during the audit, an objection was raised stating that the consideration received for the supply of machineries is amenable to Service Tax. Since the Petitioner was not agreed with the view of the audit team, the said revenue para was conclude as ‘unsettled’.
• Subsequently, the Superintendent of Central Tax, Ahmedabad visited the office of the Petitioner at 13:55 hours and handed over a letter dated 12.04.2019 calling upon the Petitioner to appear before the respondent for pre SCN consultation at 16:00 hours.
• The Petitioner through a letter requested the respondent to grant some more time as it would not be possible to represent the case properly at such a short notice, however, the respondent on the same day issued a Show Cause Notice demanding Service Tax of Rs 1,13,47,313/-.

Plea –

• The Petitioner relying on the CBEC Circular dated 10.03.2017 vehemently submitted that the said circular imposes a mandatory requirement of conducting a pre-SCN consultation before serving a SCN.
• An illusory pre-SCN consultation opportunity was granted to the petitioner on 12.04.2019 by delivering the letter at 13:55 hours and calling upon the petitioner to remain present at 16:00 hours, thus, requested for directions to the respondent authority to provide reasonable opportunity for pre-show cause notice consultation.
• The conduct of the respondent authority was not only arbitrary, high-handed, but in blatant violation of the mandatory procedure and pre-condition prescribed by the board.
• The Petitioner relying on the Supreme Court decisions in Paper Products Ltd. v. Commissioner of Central Excise, reported in 1999 (12) ELT 765 (SC) and on Ranadey Micronutrients v. Collector of Central Excise, cited in 1996 (87) ELT 19 (SC) submitted that the circulars issued by board are binding on the officers of the department and are mandatory in nature.

Held –

• The Circulars issued by the board are binding on the respondent authorities and the board earlier had issued circulars and instructions on SCNs, however, later issued the Master Circular dated 10.03.2017 consolidating the earlier circulars to ensure clarity and ease of reference.
• As per Para 5 of the aforesaid Circular dated 10.03.2017, the board made pre-SCN consultation mandatory prior to issuance of SCN in cases involving demand of more than 50 lacs.
• The respondent authority despite such mandatory requirement of the pre-SCN consultation, in utter disregard and without considering the object behind the issuance of Circular, issued the impugned the SCN dated 12.04.2019 without providing the Petitioner reasonable time for effective consultation.
• Such a high-handed action on the part of the respondent authority not only deserves to be deprecated but to be seriously viewed.
• With regard to the contention raised on the behalf of the respondent, the Hon’ble High Court observed that it was respondent authorities who did not issue pre-SCN consultation after the Final Audit Report (FAR) on 28.02.2019 and waited till the last day, i.e. 12.04.2019. Respondent was well aware of the fact that five years would expire on 12.04.2019.
• Issuing the pre-SCN consultation on the last day on which the period for making the demand through SCN ends is an eye-wash and such a pre-consultation notice and the impugned SCN, being in contravention of the Circular dated 10.03.2017 issued by the board, cannot sustain and deserves to be quashed and set-aside.

The Hon’ble High Court with the above findings without expressing any opinion on merits of the demand raised in the impugned SCN set aside the SCN dated 12.04.2019 and relegating the parties to the stage prior to issuance of impugned SCN, directed the respondent authority to issue a fresh pre-SCN consultation and provide the Petitioner reasonable opportunity for making effective consultation. Further the Hon’ble High Court observing that the action on the part of respondent authority is to be seriously viewed, imposed cost of Rs. 20,000/- on the Respondent.