Mandatory Pre-Consultation in High-Value Excise & Service Tax Matters: Madras High Court’s Ruling Explained

Background and Context

The Madras High Court in M/s. Tamilnadu Transmission Corporation Ltd. v. The Commissioner of GST & Central Excise (Audit), Coimbatore Audit Commissionerate & Ors. has delivered an important ruling on the requirement of pre-show cause notice consultation in Central Excise and Service Tax matters.

The dispute revolved around whether the pre-consultation procedure prescribed in CBIC Master Circular No. 1053/02/2017-CX dated March 10, 2017 and the subsequent Circular dated November 19, 2020 is compulsory in all high-value cases (demands exceeding ₹50 lakhs), including situations where the Department proposes to invoke the extended period of limitation on grounds such as fraud, suppression or wilful misstatement.

The High Court has categorically held that this pre-consultative mechanism is mandatory and cannot be sidestepped merely because the Department invokes the extended limitation period.

Parties and Proceedings

Assessee and Department

  • The assessee, M/s. Tamilnadu Transmission Corporation Ltd. (TANTRANSCO), is a State Government enterprise under TANGEDCO, engaged in the business of electricity transmission.
  • The Respondents were:
    • The Commissioner of GST & Central Excise (Audit), Coimbatore Audit Commissionerate, and
    • The Commissioner of Central GST & Central Excise, Salem.

Multiple central excise and service tax proceedings had been initiated against TANTRANSCO and other TANGEDCO group entities across different Commissionerates, primarily based on audit and departmental scrutiny. These culminated in issuance of show cause notices (“SCNs”) and, in certain cases, passing of orders-in-original, raising substantial duty and tax demands.

Nature of the Demands

The demands primarily related to treating various receipts as taxable consideration under the then prevailing central excise and service tax regime. The amounts in dispute exceeded the threshold of ₹50 lakhs. The receipts included, among others:

  • Liquidated damages recovered from counterparties,
  • Cheque dishonour charges,
  • Belated payment charges,
  • Forfeiture of earnest money deposits (EMD), and
  • Fines and penalties collected from consumers.

The Department alleged that these collections constituted consideration for taxable services or activities and were accordingly liable to central excise or service tax.

The writ petitions and writ appeals—21 writ appeals and 9 writ petitions filed by TANTRANSCO and other TANGEDCO entities—raised a common question:

Whether the pre-consultation process envisaged in CBIC Master Circular No. 1053/02/2017-CX dated March 10, 2017 and further clarified by Circular dated November 19, 2020 is mandatory before issuance of show cause notices or passing of orders-in-original in high-value central excise/service tax cases (including cases invoking extended period of limitation), and whether failure to conduct such pre-consultation renders the SCNs and orders-in-original liable to be quashed.

The matter thus involved interpretation of the binding nature and scope of the pre-SCN consultation mechanism prescribed by the CBIC.

Assessee’s Stand

The assessee argued that:

  1. Failure to follow mandatory pre-consultation

    • Under CBIC Master Circular No. 1053/02/2017-CX dated March 10, 2017, as read with Circular No. 1076/02/2020-CX dated November 19, 2020, pre-show cause notice consultation is mandated where the proposed demand exceeds ₹50 lakhs (with limited specified exceptions).
    • In the present case, no such consultation was undertaken prior to:
      • Issuance of SCNs, or
      • Passing of orders-in-original.

  2. Demands exceeded threshold

    • Since the demands were well above the threshold of ₹50 lakhs, the matter was squarely within the ambit of the mandatory pre-consultative framework.

  3. Violation of binding circulars

    • The Department was bound by the CBIC’s own Master Circular and subsequent instructions.
    • Ignoring the pre-consultation requirement amounted to a violation of these binding administrative directions, thereby vitiating the SCNs and the consequent orders-in-original.

Accordingly, the assessee sought quashing of the SCNs and orders-in-original and requested that the Department be directed to commence proceedings afresh from the stage of pre-consultation.

Department’s Stand

The Respondent Department sought to justify non-compliance with the pre-consultation procedure by relying primarily on Instruction F.No. 116/13/2020-CX-3 dated November 11, 2021. Their arguments were:

  1. Pre-consultation not mandatory in extended limitation cases
    • The 2021 Instruction purported to clarify that where the Department invokes the extended period of limitation on grounds such as fraud, suppression of facts, wilful mis-statement, collusion, etc., pre-consultation is not mandatory.
    • According to the Department, such cases could be treated as preventive/offence-related SCNs, which were excluded from the mandatory pre-consultation requirement.