JUNE 16, 2021

By Hans Raj Garg

IN a big boost to the ease of doing business and as a trade facilitation measure aimed at bringing down litigation and attendant cost, the Board issued Instruction vide F. No. 1080/09/DLA/MISC/15 dated 21.12.2015 for conducting pre-notice consultation (PNC). These instructions were followed by Master Circular No. 1053/02/2017-CX dated 10.03.2017 on Show Cause Notice (SCN), Adjudication and Recovery. Para 5 of the Master Circular made PNC mandatory to be conducted by the Principal Commissioner/ Commissioner prior to issue of SCNs in cases involving demands of duty above Rs. 50 lakh (except for preventive/ offence related SCNs). The expression "preventive/offence related SCNs" was neither explained nor any guidelines were laid down in this regard.

Binding Nature of Circulars

It is trite law that Circulars issued by the Board are binding on the field formations. In this regard, judgement of Hon'ble Supreme Court in the case of Ranadey Micronutrients vs. Collector of Central Excise - 2002-TIOL-184-SC-CX refers. Meaning thereby, a quasi-judicial officer may have his own personal opinion and his personal opinion cannot be substituted for the binding nature of the Circulars issued by the Board.

Pre-notice Consultation in Customs matters

While PNC for the Central Excise and Service Tax matters was implemented as early as 2015 through the Instruction dated 21.12.2015 and re-iterated in the Master Circular dated 10.03.2017, the same was brought in for Customs matters under the Customs Act, 1962 by way of insertion of a Proviso to Section 28(1)(a) vide the Finance Act, 2018 with effect from 29.03.2018 followed by the issuance of the Pre-notice Consultation Regulations, 2018 notified vide Notification No 29/2018-Cus (NT) dated 02.04.2018.

Difference between the pre-notice consultation for Customs matters and Central Excise & Service Tax matters

Under the Customs Act, 1962, the PNC is restrictive in nature and is limited to SCNs to be issued for normal period. Further, the PNC is to be held by the proper officer, who is authorised to issue the SCN considering the amount of the proposed demand.

In contrast, in Central Excise and Service Tax matters, the PNC is to be held for all the SCNs where demand amount is in excess of Rs. 50 lakh. The Instruction and the Master Circular do not make a distinction between normal period and extended period SCNs. Also the PNC has to be done by the Principal Commissioner/Commissioner irrespective of the SCN issuing authority.

Defeating the mandate of Pre-notice Consultation Regulations and inbuilt dichotomy

Sub-section (10B) of the Customs Act, 1962 came to be inserted under s28 of the Customs Act, 1962 vide Finance Act, 2018 and came into effect from 29.03.2018. In terms of the newly inserted sub-section (10B), a notice under sub-section 28(4) shall be deemed to have been issued under sub-section 28(1), if such notice demanding duty is held not sustainable in any proceedings, including appellate proceedings. Meaning thereby, the Regulations ibid can be overcome by wrongly invoking the ingredients of sub-section 28(4) without any risk attached because, in any case, the demand for normal period will get confirmed. Effectively, the Regulations can be bypassed by using this route. Hence, the author is of the considered view that the vires of the sub-section (10B) when juxtaposed with the proviso to s.28(1)(a) of the Customs Act, 1962, also inserted by the Finance Act, 2018, becomes a debatable point of contention.

Similarly, second Proviso to section 124 of the Customs Act, 1962 , inserted vide the Finance Act, 2018, provides for issuance of a Supplementary SCN. Customs (Supplementary Notice) Regulations, 2019 came to be notified vide Notification No. 42/2019-Customs (NT) dated 18.6.2019. In terms of Regulation 3 ibid, the same shall apply, inter alia, to the notices issued under s.28(1)(a) within the time limit i.e. two years on the grounds as set out in Regulation 4 ibid.

Grey Areas

There are certain grey areas in the matter of PNC which remain to be addressed as under:

(i) Is it mandatory on the part of the SCN issuing authority to set out the entire grounds on which the SCN, if any, is proposed to be issued?

(ii) Does the SCN issuing authority have the power to issue a SCN going beyond the grounds set out and communicated, particularly keeping in view the mind that the additional documents/grounds have emerged post the PNC?

(iii) Whether the SCN issuing authority is bound to share additional information and documents received post the PNC held, particularly keeping in view the time limit prescribed under the said Regulations in Customs matters?

(iv) Whether on receipt of the information and/or documents, which points out collusion; mis-statement and/or suppression of facts, post the PNC, is the SCN bound to be issued only on the grounds of dispute covered under the PNC?

(v) Will a PNC be required in case a supplementary SCN is to be issued keeping in view the time frame stipulated?

Position under the CGST Act, 2017

Sub-rule (1A) has been inserted in Rule 142 of the CGST Rules, 2017 vide Notification No. 49/2019-Central Tax dated 09.10.2019, according to which, before service of the SCN under Section 73 (1) or Section 74 (1) of the Act, the proper officer is mandatorily required to communicate to the person concerned, the details of any tax, interest and penalty as ascertained by the said officer in Part-A of Form GST DRC-01A. The insertion of this sub-rule had the trappings of PNC . However, the dilution of the sub-rule (1A) to Rule 142 was effected by Notification No. 79/2020-Central Tax dated 15.10.2020, inasmuch as by usage of the word "may" the proper officer has been vested with the discretionary power to communicate the details of any tax, interest and penalty as ascertained by the said officer, in Part A of Form GST DRC-01A, reducing the same to a mere formality.

Aim of pre-notice consultation

The purpose to introduce the PNC was utopian inasmuch as the PNC was supposed to eliminate or at least reduce unwarranted show cause notices and consequently the frivolous time consuming & costly litigation. However, the officers seldom resort to a fair play and the SCNs continue to be issued in a routine and mechanical manner, many a times without even holding the mandatory pre-notice consultation.

With 70-80% of the Orders-in-Original/Orders-in-Appeal being set aside by the Hon'ble Tribunal [Instructions issued by the Member (Law & Judicial and IT of the Board, with the approval of Revenue Secretary, vide F. No. 1080/09/DLA/Misc/15/751 dated 21.12.2015 refers ], there seems to be no improvement post the issuance of this Instruction also. Despite a dismal performance at the Tribunal level, it is a matter of concern and common experience that the SCN issuing authority routinely rejects the submissions made by the noticees in the PNC and proceeds to issue the SCN knowing very well that the success rate is terribly low. 

The C&AG Report No.17 of 2020 in Para 3.4.1.1 categorically brings out the non-compliance of the Regulations inasmuch as 82 SCNs involving Rs. 401.75 Crore were issued during 2018-19 without following PNC. The malaise of non-adherence to the PNC is not endemic to any one Commissionerate but spread all over the country.

Case laws on the Central Excise & Service Tax front.

Hon'ble Madras High Court in the case of Tube Investment of India Ltd. vs. UOI - 2018-TIOL-330-HC-MAD-CX set aside the SCN because Para 5.0 of the Master Circular was not adhered to prior to the issuance of the SCN. Hon'ble Delhi High Court in the case of Amadeus India Pvt. Ltd vs. Pr. Commissioner, Central Excise & Service Tax - 2019-TIOL-1027-HC-DEL-ST, relying on the Hon'ble Madras High Court judgment in Tube Investment of India Limited (supra), held in Para 18 of the judgment 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 PNC, particularly, since in the considered view of the Court neither of the exceptions specified in Para 5.0 were attracted in the present case. The matter was carried forward by way of filing of an Special Leave Petition (Civil) which is numbered as Diary No.35886/2019 wherein it was submitted by the Ld. Additional Solicitor General "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." Accordingly, it was ordered for issuance of a notice confined to the above issue. The matter is still sub judice.

Moving further, we find that in the case of Back Office IT Solutions Pvt. Ltd. vs. UOI -2021-TIOL-867-HC-DEL-ST, the Hon'ble Delhi High Court reiterated its own view as expressed in Amadeus India Pvt. Ltd. supra. Further, in the case of Omaxe Limited and another vs. UOI - 2021-TIOL-820-HC-DEL-ST, Hon'ble Delhi High Court disposed of the writ petitions, by issuing the directions similar to the ones which were issued in Back Office IT Solutions Pvt. Ltd. vs. UOI - 2021-TIOL-867-HC-DEL-ST.

In the case of Himachal Construction Company Pvt. Ltd. and another vs. UOI & others - Jharkhand High Court, it was held that the case of the Writ Petitioner fell within the exception carved out in Master Circular dated 10.03.2017.

In the case of Anand and Anand vs. UOI - 2020-TIOL-1922-HC-DEL-ST, it was pleaded by the Ld. Counsel for the Writ Petitioner "that since the impugned Show Cause Notice has been issued in breach of mandatory pre consultation with the assessee by the Commissioner/ Principal Commissioner, the same is liable to be quashed in terms of the judgment of this Court in Amadeus India Ltd" (supra). The matter is still sub judice.

Major effect of rulings of the Hon'ble High Courts of Delhi & Madras

(a) The SCN issuing authority is bound by the Instruction and Master Circular of the Board and cannot skip or by pass them.

(b) Non-compliance of the Instruction and the Master Circular may vitiate the SCN issued and as held by the Hon'ble Madras High Court, the proceedings can be quashed.

(c) Ingenious argument of the learned SPP appearing on behalf of the department that voluntary statements recorded during investigation constitute PNC merits rejection. Consultation entails discussion and deliberation. It was held that a 'voluntary statement is at best a one-way dialogue made before an authority which does not take a decision as to whether or not next steps in the matter is required to be taken'.

Key Takeaway from the Analysis

The judgments rendered by the Hon'ble High Courts of Madras and Delhi have far reaching consequences. Despite the Hon'ble High Court of Delhi relegating the Petitioner to the SCN issuing authority with the directions to hold a "consultation", would such a "consultation" tantamount to 'pre-notice consultation'? Further, when the SCN issuing authority sticks to his guns and reiterates the position, the PNC becomes a mere empty formality and a motion to be gone through.

However, what is certain is that the judgments rendered by both the High Courts would have a huge bearing on the SCNs issued without PNC and the noticees are bound to agitate this during the course of the adjudication proceedings or in appellate proceedings or even by filing Writ Petitions, if advised by their legal counsels.

Conclusion

The author is, hence, of the view that a SCN issuing authority has only limited option of withdrawing the SCN issued in the event of directions being passed for holding 'consultation' with the noticee inasmuch as pre-notice consultation are in the nature of pre-decisional hearing and a post decisional hearing cannot be a substitute for the pre-decisional hearing.

In any case, the Revenue's action, in issuing a fresh SCN vis à vis the issue of limitation of time or reviving the SCN already issued, would be bound by the outcome of the SLP filed in the case of Amadeus (supra).

A well-meaning measure, having being reduced to a stillborn on account of the poor receptivity and implementation, cries for help from being reduced to a farce.

[The author retired as Additional Director, DRI, Mumbai Zonal Unit and the views expressed are strictly personal.]