2022 (5) TMI 1399 - HC - Service Tax

Validity of SCN and audit notes issued - mandatory pre-show cause notice contemplated under the Master Circular No.1053/02/2017 dated 10.03.2017 not issued - principles of natural justice - HELD THAT - The contention regarding absence of DIN raised by the petitioner is not significant and the learned counsel for the petitioner did not persist with the said argument and rightfully so. The respondents have pointed out that audit notes have been issued with the DIN, but containing an extra digit by a mistake. On a perusal of the audit notes issued as Ext.P1 and Ext.P2, it is noticed that the presence of DIN in the said documents cannot be disputed, but by an inadvertent mistake, an additional digit was erroneously added to the said DIN. The said extra digit does not ipso facto make the document null and void on the ground of absence of DIN. By master circular No.1053/02/2017 dated 10.03.2017, issued by the Central Board of Excise and Customs, it is mandatory to issue a pre-show cause notice for consultation, prior to issue of a show cause notice, in cases involving demands of duty above Rs.50,00,000/- - the pre-show cause notice consultation is made mandatory from 21.12.2015 onwards, which is regarded as an important step towards trade facilitation and promoting voluntary compliance and also to reduce the necessity of issuing show cause notices. A master circular issued by the department is binding upon its officers. The contention of the respondents, that the requirement of consultation contemplated therein is not binding upon Department as it is not a statutory requirement, cannot be countenanced. A circular issued by the department is binding upon the department and its officers. It is trite law that circulars are binding upon the department but not on the assessee or Courts. The issuance of Ext.P7 show cause notice without following the mandatory requirement of pre-show cause consultation is arbitrary and against the circulars - Petition allowed.

Summary

Issues:
1. Validity of show cause notice and audit notes.
2. Absence of mandatory pre-show cause notice.
3. Compliance with circular regarding consultation.

Analysis:

Issue 1: Validity of show cause notice and audit notes
The petitioner, engaged in construction, faced discrepancies noted during an audit for the period October 2016 to June 2017. Despite objections raised by the petitioner regarding the audit notes, a show cause notice was issued alleging service tax underpayment. The petitioner challenged the legality of the show cause notice and audit notes, claiming they were unauthorized and contrary to the law.

Issue 2: Absence of mandatory pre-show cause notice
The petitioner argued that the show cause notice was invalid due to the absence of a mandatory pre-show cause notice, as required by the Master Circular issued by the Central Board of Excise and Customs. The respondents contended that the audit notes did contain the required Document Identification Number (DIN), albeit with an additional digit due to an error. They justified the urgency of issuing the show cause notice to avoid time bar limitations.

Issue 3: Compliance with circular regarding consultation
The Court examined the mandatory requirement of pre-show cause notice consultation as per the circular issued by the Central Board of Excise and Customs. The circular emphasized the importance of consultation to promote voluntary compliance and reduce the necessity of issuing show cause notices. The Court held that the circular was binding on the department and its officers, citing relevant judgments.

In the judgment, the Court found the show cause notice issued without the mandatory pre-show cause consultation to be arbitrary and against the circular. Consequently, the Court set aside the show cause notice but granted liberty to the respondents to initiate fresh proceedings, starting from the pre-show cause notice consultation stage within 60 days. The writ petition was allowed, with the respondents given the opportunity to proceed afresh in compliance with the circular requirements.