Isabella Mariam

The High Court of Bombay, Division Bench of Justice M.S. Sonak and Justice Advait M. Sethna held that pre-show-cause-notice consultation is a mandatory requirement, not an empty formality, before issuing service-tax notices where the demand exceeds ₹50 lakh. Addressing whether such prior consultation was compulsory, the Bench quashed several show-cause notices issued to entities including Rochem Separation Systems and Pyramid Developers for lack of compliance with this requirement. The Court directed the Revenue to conduct the prescribed consultation within four weeks and allowed it to issue fresh notices thereafter, while excluding the intervening period from the computation of limitation.

The petitions before the Bombay High Court arose from service-tax demands raised by the Revenue against several petitioners, including Rochem Separation Systems (India) Pvt. Ltd., Pyramid Developers, Leighton India Contractors Pvt. Ltd., Abhyudaya Co-operative Bank Ltd., M.R. Realtors, Galaxy Realtors, and Dr. Vinod Ranvirsing Vij. These demands, each exceeding ₹50 lakh, were challenged on the ground that the show-cause notices were issued without conducting the pre-consultation process mandated by departmental circulars.

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The core issue identified by the Division Bench of Justice M.S. Sonak and Justice Advait M. Sethna was whether the issuance of a pre-consultation notice was a mandatory prerequisite before serving show-cause notices in cases involving service-tax demands above ₹50 lakh. The petitioners contended that the Central Board of Excise and Customs (CBEC), through its Master Circular dated 10 March 2017 and the subsequent circular dated 19 November 2020, expressly required that the adjudicating authority conduct a pre-show-cause consultation with the assessee in such cases. They argued that the omission of this step rendered the show-cause notices invalid.

The Revenue opposed the petitions, asserting that the requirement for pre-consultation was not mandatory under Section 73 of the Finance Act, 1994, which governs the issuance of show-cause notices for service-tax recovery. The Revenue contended that the circulars could not override the statute and that failure to conduct pre-consultation did not invalidate the notices. It also relied on certain High Court judgments, including those from the Madras and Patna High Courts, to argue that the consultation requirement was directory rather than mandatory.

The petitioners, in support of their challenge, referred to several judicial precedents, including decisions of the Delhi and Gujarat High Courts, which had held that pre-show-cause consultation was a mandatory procedural safeguard aimed at facilitating voluntary compliance and reducing unnecessary litigation. They argued that these circulars, being executive directions issued under statutory authority, were binding on departmental officers.

No evidence of pre-consultation was produced by the Revenue in any of the cases before the Court. The Revenue did not argue that the cases fell within the exceptions to the consultation requirement, such as those involving fraud, collusion, or willful misstatement.

The statutory provisions principally relied upon were Section 73 of the Finance Act, 1994, which provides for the issuance of show-cause notices in service-tax matters, and the CBEC circulars of 10 March 2017 and 19 November 2020. The dispute thus centered on the procedural validity of the notices rather than the substantive merits of the tax demands.

The Bench examined Section 73 of the Finance Act, 1994, and the CBEC circulars of 2017 and 2020. It recorded that the 2017 Master Circular stated: “Consultation with noticee before issue of Show Cause Notice is mandatory for claim above fifty lakhs… This is an important step towards trade facilitation and promoting voluntary compliance and to reduce the necessity of issuing Show Cause Notice.” The 2020 Circular reiterated that such consultation “is mandatory and shall be done by the Show Cause Notice issuing authority.”

The Court observed that several High Courts—including Delhi, Gujarat, and Madras—had consistently held that pre-consultation was mandatory. Citing Amadeus India Pvt. Ltd., the Court noted that “the requirement was mandatory and traced the mandatory character of the Master Circular to Section 83 of the Finance Act, 1994, which makes Section 37B of the Central Excise Act, 1944 applicable.” The Bench further referred to Dharamshil Agencies v. Union of India, where the Gujarat High Court held that a consultation two hours before issuance of the show cause notice was “high-handed, arbitrary, and contrary to the very object and purpose of the Master Circular.”

The Bombay High Court rejected the respondents’ contention that the Delhi High Court’s view in Amadeus India lost its precedential value due to the pending SLP. It stated that “the Supreme Court’s order dated 4 November 2019 confined notice only to the issue of limitation, and therefore no dent was made to the position of the mandatory character of the requirement of issuing a pre-consultation notice.” It stated that the order did not stay the Delhi High Court’s judgement.

The Court disagreed with the Madras High Court’s decision in Brilliant Corporate Services Pvt. Ltd., observing that the judgment “did not take into account the binding nature of CBEC circulars on the department” and was contrary to prior coordinate bench judgements in Tube Investment and Hitachi Power Europe. The Court recorded: “The requirement of a pre-consultative process cannot be dismissed as some empty formality… Such circulars bind the Department and promote voluntary compliance, reducing unnecessary issuance of show cause notices.”

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The Court directed: “The impugned show cause notices are hereby quashed and set aside. The Revenue is given the opportunity to carry out the pre-consultative process by issuing a pre-consultation notice within four weeks from the date this order is uploaded.” It further stated that if such notices were issued, “the assessees must file their replies within two weeks of their receipt,” and that “the pre-consultation process must be completed one way or the other, in accordance with law, within a further six weeks from the date of receipt of the assessees’ replies.”

The Bench clarified that depending on the outcome of such consultation, the Revenue could issue fresh show cause notices. Importantly, it recorded that “the period of limitation from 30 January 2023 until the fresh show cause notices are issued (if at all) shall not be counted for the purpose of limitation.” The Court also held that this exclusion “shall be in addition to any other exclusion or extension that the Revenue can claim under law, including exemptions or extensions granted due to the COVID-19 pandemic.”

Advocates Representing the Parties
For the Petitioners: Mr. Prithiviraj Choudhary, Mr. Ankit Trivedi, Ms. Kausar Jahan Sayed i/b Vashi Associates; Mr. Bharat Raichandani, Mr. Mahesh Raichandani, Ms. Dhanishta Kawale i/b UBR Legal; Mr. Prakash Shah, Senior Advocate with Mr. Mihir Mehta, Mr. Mohit Raval i/b PDS Legal.
For the Respondents: Ms. Maya Majumdar, Mr. Saket Ketkar; Mr. J.B. Mishra, Ms. Sangeeta Yadav, Mr. Dhananjay B. Deshmukh, Mr. Abhishek Mishra, Mr. Rupesh Dubey, Ms. Mamta Omle; Mr. Satyaprakash Sharma, Ms. Harpreet Kaur; Mr. Yashodeep Deshmukh.

Case Title: Rochem Separation Systems (India) Pvt. Ltd. & Ors. v. Union of India & Ors.
Neutral Citation: 2025: BHC-OS:16404-DB
Case Number: Writ Petition No. 822 of 2021 (with connected matters)
Bench: Justice M.S. Sonak and Justice Advait M. Sethna