Failure to conduct mandatory pre-show-cause consultation vitiates proceedings where the requirement applies.

The Department issued a show-cause notice dated 10 April 2018 demanding ₹3,25,78,600 in Service Tax for FY 2015–16 and 2016–17, principally on the basis of discrepancies between the appellant’s ST-3 returns and GAR-7 challans.

The appellant, a registered service provider, disputed the demand and relied on revised ST-3 returns, reverse-charge treatment for manpower and works contract services, and an SEZ exemption.

After the Tribunal remanded the matter for verification of the revised returns, the adjudicating authority again confirmed the demand, interest and penalties, without meaningfully addressing those returns.

The Tribunal found that the notice did not clearly reconcile its several allegations with the aggregate demand and that the Department had not independently verified the underlying transactions.

1. Whether the demand was sustainable where it was based principally on return and payment data, without adequate investigation, clear quantification, or meaningful consideration of the revised returns after remand.

2. Whether the appellant’s claims concerning reverse charge, works contract classification and valuation, and services connected with SEZ authorised operations displaced the demand on the merits.

3. Whether the failure to conduct pre-show-cause-notice consultation, required under the applicable Board instructions, vitiated the proceedings.

The Tribunal considered the Finance Act, 1994, including Sections 76 and 77 concerning penalties, and the Service Tax (Determination of Value) Rules, 2006, including Rule 2A on works contract valuation and the provisions invoked concerning consumables and pure-agent claims.

It considered Notification No. 7/2015-S.T. dated 1 March 2015 in relation to reverse charge for manpower and works contract services, and Notification No. 40/2012-S.T. dated 20 June 2012 concerning SEZ-related benefits.

It applied the principle that a tax demand must be supported by an intelligible factual and computational basis; discrepancies in returns may prompt investigation but do not, without verification of the transactions and applicable tax treatment, establish a short-payment.

The Tribunal further relied on the Board’s instructions dated 21 December 2015 and 10 March 2017, and Jay Mahakali Industrial Service v. Union of India and SIS Ltd. v. Principal Commissioner of CGST & C.X., for the requirement of pre-show-cause consultation in the circumstances addressed by those authorities.

It also treated the earlier remand direction as requiring a reasoned examination of the revised returns.

The demand lacked a clear service-wise or allegation-wise reconciliation, and the record disclosed no adequate inquiry into the contracts, services, recipients, or statutory tax treatment underlying the figures.

The adjudicating authority’s statement that the revised returns had been considered in the 2018 notice was inconsistent with the record: the returns were filed in 2019, and the authority did not explain their effect despite the remand direction.

On the merits, sample invoices and other documents supported the appellant’s claims concerning manpower supply to body corporates, works contract classification and partial reverse charge, and services connected with SEZ operations; the Tribunal also accepted the appellant’s reconciliation supported by a Chartered Accountant’s certificate.

Separately, the Department had issued the notice without the applicable pre-notice consultation. Given the appellant’s response to the Department’s initial request, the nature of the discrepancies and the prejudice from the lost opportunity to clarify them, the Tribunal held that the omission vitiated the proceedings.

It set aside the impugned order, including the demand, interest and penalties, allowed the appeal, and granted consequential relief in accordance with law.