Introduction:
The Bombay High Court, in the case Rochem Separation Systems (India) Pvt. Ltd. v. The Union of India, Writ Petition No. 822 of 2021, delivered a landmark ruling clarifying the role and necessity of pre-show cause notice consultations in the context of service tax and excise proceedings. A division bench comprising Justice M.S. Sonak and Justice Advait M. Sethna dealt with the pivotal question of whether pre-consultation with the assessee was mandatory before issuing a show cause notice (SCN) where the tax demand exceeded ₹50 lakhs. The Court held that pre-SCN consultation is not an empty formality but a binding procedural safeguard, as stipulated in circulars issued by the Central Board of Excise and Customs (CBEC) and Central Board of Indirect Taxes and Customs (CBIC). These circulars mandated such consultation except in cases involving preventive or offence-related show cause notices. While the Revenue argued that Section 73 of the Finance Act, 1994, did not explicitly require such a step, the Court ruled that departmental circulars carried binding force and must be respected. Consequently, the bench set aside the impugned show cause notice for lack of mandatory pre-consultation and directed the Revenue to issue fresh notices after complying with the requirement.
Arguments of the Petitioner:
The petitioner company, represented by Advocate Prithviraj Choudhary along with Mr. Ankit Trivedi and Ms. Kausar Jahan Sayed, argued that the issuance of a pre-show cause notice consultation was a mandatory procedural safeguard in cases where the demand exceeded ₹50 lakhs. They relied on CBEC’s Master Circular No. 1053/02/2017-CX dated 10 March 2017 and CBIC’s Circular No. 1076/02/2020-CX dated 19 November 2020. These circulars explicitly required departmental authorities to hold a consultative process with the assessee before issuing an SCN in such cases, unless it fell under preventive or offence-related categories. The petitioner highlighted that the impugned SCN was issued without any such consultation, rendering it illegal and contrary to binding instructions.
The petitioner further contended that the pre-consultation process is not an optional formality but a meaningful exercise designed to reduce litigation, narrow down disputes, and possibly avoid unnecessary tax demands. By ignoring this requirement, the department not only violated its own binding circulars but also acted arbitrarily, infringing Article 14 of the Constitution. They submitted that departmental authorities are bound by circulars issued by CBEC/CBIC, and once such circulars style the requirement as mandatory, failure to comply invalidates subsequent proceedings.
The petitioner also argued that the purpose of pre-consultation was to avoid wastage of time, resources, and litigation expenses for both sides. The process could enable the department to understand the assessee’s position better and possibly revise or drop tax demands if found unsustainable. By skipping this step, the department effectively denied the assessee a vital opportunity to explain or settle the issue at the threshold. The petitioner thus prayed for the SCN to be quashed and set aside on the ground of non-compliance with mandatory pre-consultation requirements.
Arguments of the Respondent:
The Revenue, represented by Advocate Maya Majumdar along with Mr. Saket Ketkar, opposed the petition and defended the issuance of the SCN. They contended that Section 73 of the Finance Act, 1994, which provides for recovery of service tax not levied or paid or short-levied or short-paid, did not mandate the issuance of any pre-consultation notice. According to the Revenue, the statute was clear, and procedural requirements not mentioned in the legislation could not invalidate an SCN. The department maintained that while CBEC and CBIC circulars may guide officers, their absence could not override statutory provisions or invalidate proceedings otherwise authorized by law.
The Revenue argued that pre-SCN consultation was at best a facilitative measure, not a jurisdictional requirement. Failing to hold such consultation, though undesirable, would not render the SCN itself void or illegal. They also contended that the petitioner had suffered no prejudice because they had the opportunity to reply to the SCN and present their case during adjudication. According to the department, the insistence on pre-consultation being mandatory would elevate an administrative circular above statutory provisions, which was legally impermissible.
Additionally, the Revenue highlighted that administrative exigencies, volume of cases, and urgent requirements often made pre-consultations impractical. It was also submitted that the legislative scheme intended SCNs to be the primary mechanism of informing the assessee about tax demands and giving them an opportunity to contest. Adding another mandatory layer would unnecessarily complicate and delay proceedings. Therefore, the Revenue prayed for the petition to be dismissed, upholding the validity of the SCN issued.
Court’s Judgment:
After carefully considering submissions from both sides, the Bombay High Court emphasized that while Section 73 of the Finance Act, 1994, does not explicitly mandate pre-consultation, departmental circulars have made it a compulsory procedural step in cases where tax demand exceeds ₹50 lakhs. The Court referred to the CBEC Master Circular of 2017 and the CBIC Circular of 2020, which expressly styled pre-SCN consultation as mandatory. Unless the SCN falls under exceptions, such as preventive or offence-related cases, the department cannot skip this step.
The bench categorically rejected the Revenue’s contention that the requirement was a mere formality. It observed that the very purpose of pre-consultation is to avoid unnecessary litigation, reduce disputes, and provide clarity both to the assessee and the department. During such consultations, the assessee may be persuaded to accept liability, or the department may be convinced that its demand is unsustainable. In either case, issues are clarified at an early stage, avoiding wastage of judicial and administrative resources. By dismissing pre-consultation as an optional or insignificant step, the department would defeat the very objective of the circulars.
The Court also reiterated the principle that circulars issued by CBEC/CBIC bind the department. They are not mere advisories but directions that officers must follow. Once the circulars declare the requirement as mandatory, the department cannot disregard them at will. Ignoring such binding instructions would make the SCN vulnerable to judicial scrutiny and invalidation.
The bench further clarified that time spent on the pre-consultation process should not be counted for the purpose of limitation under Section 73. This ensures that the mandatory requirement does not prejudice the department’s ability to issue SCNs within statutory time limits.
In conclusion, the Court set aside the impugned SCN for failure to comply with mandatory pre-consultation and directed the Revenue to issue fresh SCNs after following the consultative process. This ruling reaffirms the importance of procedural safeguards and ensures greater fairness in tax administration.