Importance of Pre-SCN Consultation (Service Tax and Central Excise)

[Kashish Gupta]

Introduction

Show cause notice is the very foundation in any proceedings. It lays the basis on which the dispute is adjudicated. Time and again, various instructions and circulars are issued by the Board to ensure that adjudication proceedings are conducted to ensure trade facilitation and assessee’s are not subjected to the rigors of provisions related to penalty. In order to further these objectives, Board has made pre-SCN consultation a mandatory requirement in cases where the demand of tax is above ₹ 50 lacs. However, it is seen that at some instances no such consultation is done.

In this article, we have summed up the judicial position wherein adjudication authorities have not followed the mandatory requirement to have pre-SCN consultation. The courts in such cases has relegated the litigant to a stage just before issuance of show cause notice.

Opportunity should be an Effective Opportunity – Principles of natural justice

Principles of natural justice provides that the opportunity should be really effective in the sense that the aggrieved person should be in a position to state his case and object to the proposals on a hypothesis which has to be culled out from his own records and accounts books. In order to further the objectives of principles of natural justice, the Board made it mandatory to have pre-notice consultation with the noticee as per Circular Number 1053/02/2017-CX dated 10^th March 2017. The relevant provision reads as under:

5.0 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 ₹ 50 lakhs (except for preventive/ offence 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. 

As per section 37B of Central Excise Act, 1944 (= section 83 of the Chapter V of Finance Act, 1994), circulars are binding on the department officers.

Effects of not having pre-SCN consultation – Judicial Position

1. Attention in this regard is invited to the decision of Hon’ble Delhi High Court in the case of BACK OFFICE IT SOLUTIONS PRIVATE LIMITED VERSUS UNION OF INDIA & ORS. reported as 2021 (4) TMI 520 - DELHI HIGH COURT wherein court appreciated the provisions of section 37B and upheld that the adjudicating authorities are required to have pre-notice consultation and that the circular cannot be side-stepped causing the prejudice to the assessee. The relevant para is reproduced hereinbelow for reliance:

6.3. …….. The 2017 Master circular has been framed with the object of facilitating trade, cutting out, wherever possible, disputes, by exhorting assessees to voluntarily comply with the extant tax regime. In this context, tax administrators have to bear in mind the well-established dicta that circulars issued by the statutory authorities are binding on them, although, they cannot dictate the manner in which assessment has to be carried out in a particular case. A Circular cannot be side-stepped causing prejudice to the assessee by bringing to naught the object for which it is issued. [See: KP VARGHESE VERSUS INCOME-TAX OFFICER, ERNAKULAM, AND ANOTHER [1981 (9) TMI 1 - SUPREME COURT]; Also see: UCO BANK, TAMIL NADU INDUSTRIAL INVESTMENT CORPORATION LTD. VERSUS COMMISSIONER OF INCOME-TAX - 1999 (5) TMI 3 - SUPREME COURT].

2. The only exception to the pre-show cause notice consultation is that either the case set up is one concerning preventive action or should be relatable to an offence committed by the noticee. Generally, these kind of SCNs are very rare and the judicial authorities have also perused the cases on a very liberal approach specifically saying that if these arguments are to be allowed, then the provisions of para 5 of the Circular 1053 (supra) would practically be of no use. To quote, para 14 of the decision of Hon’ble Delhi High Court in the case of Amadeus India Pvt. Ltd. vs. Principal Commissioner, Central Excise, Service Tax and Central Tax Commissionerate reported as 2019 (5) TMI 669 - DELHI HIGH COURT is given below:

“14. 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 notice 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.”

3. Accordingly, the law in this regard has been laid down by the Hon’ble Delhi High Court in the case of Amadeus. For reference, the decision of Hon’ble Delhi High Court is reiterated below:

“18. In the present case, the Court is satisfied 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 SCN consultation, particularly, since in the considered view of the Court neither of the exceptions specified in para 5.0 were attracted in the present case.

19. Accordingly, without expressing any view on the merits of the case of either party in relation to the issues raised in the impugned SCN, the Court sets aside the impugned SCN dated 4th September, 2018 and relegates the parties to the stage prior to issuance of impugned SCN……………”

4. On an appeal being filed before Hon’ble Supreme Court against the decision of Amadeus (supra), the Supreme Court vide order dated 04.11.2019 passed in S.L.P (Civil) Diary No. 35886/2019, PRINCIPAL COMMISSIONER, CENTRAL EXCISE, SERVICE TAX AND CENTRAL TAX COMMISSIONERATE VERSUS AMADEUS INDIA PVT. LTD. [2019 (11) TMI 1602 - SUPREME COURT] has issued a limited notice in the matter. For the sake of convenience, the order passed by the Supreme Court is extracted hereafter:

“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.”

5. As per the proceedings convened before Hon’ble Supreme Court, the aspect of limitation is yet to be decided i.e. the date when the limitation should start. Recently, taking a note of the decision of Hon’ble Supreme Court, Hon’ble Delhi High Court in the case of Back Office IT Solutions (Supra) has issued following directions to the adjudicating authorities:

“7.1 ……….

(iv) If the concerned officer concludes that it is a fit case in which proceedings should continue against the petitioner-company, then, he/she would decide as to whether or not the impugned show cause notice should be revived or a fresh show cause notice should be issued in consonance with the decision that would be rendered by the Supreme Court in SLP (Civil) Diary No. 35886/2019.”

Concluding Remarks

It is a settled judicial position that cases of this kind shall be relegated to the stage prior to issuance of show cause notice and litigants/noticee/assessee should be provided an opportunity to have pre-notice consultation in terms of provisions of para 5.0 of the Circular 1053 (supra). In other words, the show cause notice(s) of such kind shall be quashed. However, it is important to note that the aspect of time limitation while issuing the fresh SCN or while reviving the SCN already issued is yet to be decided by the Supreme Court in case of Amadeus (Supra).

Nevertheless, the applicability of Hon’ble Supreme Court decision in Suo Motu Writ Petition (Civil) No. 3 of 2020 dated 08^th March 2021 IN RE: COGNIZANCE FOR EXTENSION OF LIMITATION - 2021 (3) TMI 497 - SC ORDER and 27^th April 2021 on the extension of period of limitation on institution of proceedings under any other law (saying here Excise and Services Tax) is a matter of debate and vulnerable to different opinions by various schools of law. The Author is of the opinion that these orders should not come to rescue the adjudicating authorities because proceedings which are inextricably linked with the litigation are sought to be covered. If it is accepted that the adjudication proceedings are quasi judicial proceeding, in author’s opinion, the benefit will accrue from 14.03.2021 but not before.

Article by:

CA. Kashish Gupta, Managing Partner, M/s Paksh Legal

FCA, LL.B, B.Com(H); kashish@pakshlegal.in; +91 85108-06440