Service Tax notice quashed as pre-show cause notice consultation was mandatory as per CBIC Master Circular. Exception not apply on mere possibility of offence
ABCAUS Case Law Citation:
ABCAUS 2915 (2019) (05) HC
Important Case Laws Cited/relied upon by the parties
Acquired Services Pvt. Ltd. v. Commissioner of Service Tax (2014) 36 STR 1148 (TRI-10).
State of Tamil Nadu v. India Cements Ltd. (2011) 13 SCC 247 (SC).
Tube Investment of India Ltd. v. Union of India
The Petitioner company provided, inter alia, computer data processing software used by travel agents and ticket booking entities in the Airline industry.
On the question whether the services provided by the Petitioner were amenable to service tax, the Customs Excise Services Tax Appellate Tribunal (CESTAT) had held that the services provided by the Petitioner to overseas entities did not constitute either business auxilliary services or export of services. The said decision was stated to be pending in appeal before the Supreme Court of India.
The Anti-evasion Unit of the Service Tax Commisionerate undertook a search of the registered premises of the Petitioner. During the course of search, statements of representatives of the Petitioner were recorded under Section 14 of the Central Excise Act, 1944 read with Section 83 of the Finance Act, 1994. In response to the queries raised by the Department, the Petitioner furnished details.
After nearly 2 years, fresh summons were issued to the Petitioner seeking the audited balance sheets, reconciliation statements of taxable value declared in ST-3 returns, month wise invoices copies of agreements between the Amadeus IT Group etc. According to the Petitioner, it had submitted the requisite information already .
Thereafter the impugned SCN was issued to the Petitioner, inter alia, alleging that tax was not paid on taxable services rendered by the Petitioner. The SCN specified an exorbitant quantum of tax that was required to be paid by the Petitioner. The Petitioner was also asked to show cause why penalty under Section 76 of the Finance Act, 1994 read with Section 174 of the Central Goods & Services Tax Act, 2017 (CGST Act) should not be levied, in addition to the recovery of interest under Section 75 of the Finance Act, 1994.
The Petitioner drew the attention of the Department to the Master Circular dated 10th March, 2017 read with an instruction dated 21st December, 2015 issued by the CBEC in terms of which a pre-show cause notice consultation was mandatory in cases involving demand of duty above Rs. 50 Lakhs. A reminder was again sent by the Petitioner.
The instant writ petition was filed when no response was received.
The Hon’ble High Court observed noted the background to the issuance of the Master Circular by the CBEC. The first report of the Tax Administration Reform Commission (TARC) made a recommendation that “It is desirable to avoid disputes where a collaborative approach can provide a solution. An administrative pre-dispute consultation mechanism may be instituted in both the organizations for resolving tax disputes at the pre-notice stage through an open dialogue with the taxpayer, in which both sides articulate and discuss their respective positions and views on the matter at hand. An amicable resolution would be possible when a common view emerges on the facts and the legal position. It is expected that this process, if followed in proper spirit, would lead to elimination of a large number disputes leaving only a few contentious matters in which mutual agreement is not reached. Such disputes would follow other legal channels.
The Hon’ble High Court further observed that the TARC was of the view that the tax officers should not be allowed to resort to coercive actions for recoveries during the consultation process. The TARC recommended that only those officers competent to issue notices should engage in such consulation; they should adopt “an open and receptive attitude and give full consideration to tax payer’s points of view first before formulating their own opinion.” This exercise was to narrowed down the issues and confine the notice only “in respect of unreserved issues‟. Further the points on which agreement has been reached should not be contested any further by either party.
The above recommendations were accepted and the CBEC which issued the Master Circular on 10th March, 2017 which mandated a 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/ offence related SCNs).
It was stated that 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.
The Hon’ble High Court noted 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.
However, the Department contended 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.
However, the Hon’ble High Court rejected such contention by observing that the submission ran contrary to the very object of para 5.0 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, the Hon’ble High Court opined that 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 was to facilitate this very exercise that para 5.0 finds place in the Master Circular.
The Hon’ble High Court stated that 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.
The Hon’ble High Court pointed out that 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.
Also, the Hon’ble High Court noticed that there was no noting in the file as to whether prior to issuing the impugned SCN, a decision was taken by the Respondent in the light of para 5.0 of the Master Circular not to undertake the pre-notice consultation to that effect. In other words, the Department completely ignored the Master Circular before proceeding to issue the impugned SCN.
Accordingly, the Hon’ble High Court set aside the impugned SCN and relegated the parties to the stage prior to issuance of impugned SCN.