Bombay HC Quashes Rs. 1.26 Crore Service Tax Demand For Failure To Comply With Pre-SCN Process

The Bombay High Court on 12 March, quashed a service tax show cause notice, holding that failure to conduct mandatory pre-show cause notice (pre-SCN) consultation, as required under CBEC circulars, vitiates the entire proceedings.

A Bench of Justices G. S. Kulkarni and Aarti Sathe held that pre-SCN consultation, mandated by circulars issued under Section 37B of the Central Excise Act, is a binding requirement and cannot be bypassed merely because summons were issued to the taxpayer. The Bench observed:

“In the present case, it is quite clear that the mandate of the said circular has been completely breached, as no notice for a pre-show cause consultation was issued… Clearly, in view of the mandatory nature of the circulars, a notice requiring pre-show cause consultation was an essential prerequisite.”

Sheesha Sky Lounge Hospitality and Services Pvt. Ltd., the petitioner, challenged a show cause notice dated 30 December 2020 demanding service tax of over Rs. 1.26 crore for the period October 2014 to June 2017.

It contended that it operated non-air-conditioned restaurants and was entitled to exemption, and more importantly, that no pre-SCN consultation had been undertaken despite the demand exceeding Rs. 50 lakh.

The Court noted that CBEC Circular dated 10 March 2017 and Circular dated 19 November 2020 clearly mandate pre-SCN consultation in cases involving demands above Rs. 50 lakh, except in preventive or offence-related matters. These circulars, issued under Section 37B, are binding on departmental officers.

Rejecting the Revenue's contention that issuance of summons sufficed as prior intimation, the Court held that such a stand was contrary to the mandatory nature of the circulars and could not substitute the requirement of pre-consultation.

Relying on its earlier decision in Rochem Separation Systems (India) Pvt. Ltd. v. Union of India, the Court reiterated that non-compliance with mandatory pre-consultation renders the show cause notice unsustainable.

Accordingly, the Court quashed the impugned show cause notice but granted liberty to the Revenue to initiate fresh proceedings after following the pre-consultation process. It also directed exclusion of limitation for the period during which the writ petition was pending and disposed of the case.

Appearance for the Petitioner: Mr. Bharat Raichandani with Ms. Bhagrati

Appearance for the Respondents: Mr. Karan Adik with Mr. S. D. Deshpande