Gujarat High Court Strikes Down Excise Show Cause Notices for Non-Compliance with Pre-SCN Consultation
Background and Context
The Gujarat High Court in Jay Mahakali Industrial Service Vs Union of India & Ors. examined a batch of writ petitions challenging show cause notices (SCNs) issued in Central Excise and Service Tax matters. The central grievance of the assessees was that the Department had raised substantial demands (above Rs.50,00,000/-) without first holding the pre-show cause notice (pre-SCN) consultation mandated under the Board’s instructions and circulars.
These petitions directly raised the question whether non-compliance with the pre-SCN consultation requirement vitiates the entire SCN and subsequent adjudication, particularly where the case does not fall within the specified exceptions such as fraud, collusion, wilful misstatement or suppression of facts.
Issue Before the Gujarat High Court
The primary legal issue was:
- Whether show cause notices demanding duty exceeding Rs.50 lakh, issued without granting pre-SCN consultation under the Master Circular dated 10.03.2017, are sustainable in law, especially when the case is not covered under the exception carved out in later Circular No. 1079/03/2021-CX dated 11.11.2021.
Along with this, in one of the petitions (Special Civil Application No. 5685 of 2022), the Court also examined whether an SCN that merely relies on differences between figures in Form 26AS and service tax returns, but does not clearly spell out the nature of services and grounds of liability, is valid or suffers from vagueness.
Court’s Interim Direction: Pre-SCN Consultation to Be Conducted
On 27.09.2023, the Gujarat High Court passed an interim order in these connected petitions. The Court recorded that:
- The central complaint of the assessees was non-compliance with the mandatory pre-SCN consultation envisaged under the Master Circular dated 10.03.2017, where the demanded amount was more than Rs.50,00,000/-.
- The impugned SCNs and/or orders-in-original had been issued without following this mandatory procedure.
Recognising that similar issues had been examined earlier in Dharamshil Agencies Versus Union of India — 2021 (7) TMI 1064, and noting that limitation issues arising from quashing of SCNs were already sub judice before the Hon’ble Supreme Court, the High Court directed:
- The Department must conduct pre-SCN consultation with the assessees.
- The impugned SCNs/orders-in-original would remain in abeyance in the meantime.
- The outcome of such pre-consultation was to be placed on record within four weeks.
Pursuant to this direction, pre-consultations were conducted in most matters, but the outcome of such consultations was not filed in all cases, except in Special Civil Application No. 5685 of 2022.
Pre-SCN Consultation Framework: Circulars Considered
Master Circular dated 10.03.2017 – Circular No. 1053/02/2017-CX
The Court examined Circular No. 1053/02/2017-CX dated 10.03.2017, which restated and operationalised the earlier Board instruction dated 21.12.2015. This Circular mandated:
- Pre-SCN consultation by the Principal Commissioner/Commissioner
- Prior to issuance of SCN
- In matters where the demand of duty exceeds Rs.50 lakh
- Subject to an exception for preventive/offence-related SCNs
This framework did not distinguish between “suppression” and “non-suppression” cases. It laid down a general rule that pre-consultation is compulsory for all large demand cases, except where the SCN is preventive/offence-related.
Circular No. 1079/03/2021-CX dated 11.11.2021
Later, the Board issued Circular No. 1079/03/2021-CX dated 11.11.2021 clarifying the scope of exclusion from pre-consultation. The Court reproduced and analysed the Circular, especially para 5, which states that pre-SCN consultation is not mandatory in cases booked for recovery of duties/taxes not levied or paid, etc., by reason of:
- (a) fraud
- (b) collusion
- (c) wilful mis-statement
- (d) suppression of facts
- (e) contravention of provisions with intent to evade duty or tax
The Circular further clarified that such exclusion is case-specific, not formation-specific (i.e., it applies based on the nature of the case, not on whether the case originates from DGGI or any particular formation).