Master Reply (KEY ISSUES HANDLED IN GST)

1. Whether Supplier Registration cancelled post invoice date has relevance?

2. Whether ITC reversal can be sought on the sole ground that registration of the Supplier has been cancelled from retrospective effect?

3. Whether High Court Judgements holding buyer bone fide is relevant?

4. How to handle time gap between inquiry and date of SCN?

5. Whether SCN not served in online mode and/or accompanied with summary in Form DRC-01 is valid SCN?

6. Whether an illusionary opportunity given for Pre SCN consultation is valid?

7. Whether extended period can be invoked under section 74?

8. Whether penalty can be imposed under section 74?

9. Whether another penalty under Section 122 can be imposed along with penalty under Section 74/73?

STATEMENT OF FACTS

1. The Noticee is a proprietorship firm situated at XXXX and is registered under GST regime vide GSTIN – XXXXXX Copy of the Registration Certificate of the Noticee in Form GST REG 06 is enclosed as Annexure – A.

2. The Appellant is leading trader of wide range of XXXX including XXXXetc. The Appellant specialises in plastic raw materials and is the leading supplier of the same.

3. That an inquiry was initiated against M/s XXXX by CGST XXX Commissionerate and on further investigation conducted by the department it was concluded that the firm M/s XXXX was floated solely for the purpose of facilitating the fraudulent passing of the input tax credit. Therefore, it was held by the department that ITC availed by the buyers on strength of invoices issued by M/s XXXX does not appear to be admissible and is liable to be recovered from such suppliers.

4. That CGST XXX Commissionerate issued a letter to the XXX Commissionerate for a follow up action on recipients of ITC pertaining to M/s XXXX vide letter dated XXXX wherein the Name of the Noticee was also mentioned as a recipient of ITC amounting to Rs. XXXX/-

5. Thus, acting on the said information, an enquiry was initiated against the Noticee by way of issuance of summons along with visit by the departmental officers at the registered premise of the Noticee. Also, Statement of Sh. XXXX, proprietor of the Firm on XX March XXXX19 wherein he inter alia submitted that –

The Noticee does not have direct relationship with M/s XXXX and all the dealings with the said firm were done through an agent. The agent is responsible for arranging the goods from M/s XXXX.
Further, details of the Agent including his name and contact number was also provided to the department by the proprietor of the Noticee.
Also, the proprietor of the Noticee categorically informed the department that the goods were actually received by the Noticee from M/s XXXX.

Copy of the Statement of the proprietor of the Noticee on XX March XXXX19 is enclosed as Annexure – B.

6. Further, another letter dated XX June XXXX19 was issued by XXXX Commissionerate to XXXX Commissionerate wherein it was intimated that during the visit to M/s XXXX Impex and M/s XXXX Overseas, they were allegedly found non-existing at their registered premise and requested for follow up action on recipients of ITC who have availed ITC on account of supplies made by the said suppliers. The name of the Noticee also appeared in the said list and therefore, it was alleged that the ITC availed by the Noticee on account of purchase made from such suppliers is also liable to be reversed.

7. Thereafter, for further inquiry, the Noticee was examined with the GAIN tool available and the details of input availed by the Noticee from the period XXXX18 to XXXX22 was analysed. On the basis of result of the GAIN report it was held that Noticee had taken ITC from the various firms during the period XXXX18-22.

8. Subsequently, after a longtime gap of almost 3 years, letter dated XXXX April XXXX22 was issued upon the Noticee directing to reverse the ineligible ITC that has been availed by the Noticee amounting to Rs. 5.90 Crore on the allegation that Noticee has only received the invoices from the following suppliers instead of actual receipt of goods –

M/s XXXX Sales Corporation (XXX)
M/s XXXX(GSTIN – XXX)
M/s XXXXX(GSTIN – XXXX)
M/s XXXXX (GSTIN – XXXXX)

9. The Noticee, in response to letter dated XX April XXXX22, submitted that the Noticee has deposited Rs. XXX Lakhs under protest vide multiple DRC 03 and the same was intimated to the department vide Letter dated XX May XXXX22. The details of amount deposited by the Noticee vide various DRC – 03(s) is as per the following table –

S. No.	FY	date of deposit	ARN no.	Amount of deposited (Amount in lacs)			Remarks
				CGST	SGST	Total
1	XXXX17-18	XX-03-XXXX22	XXXXX	XXX	XXX	XXXX	Through ITC Credit

Copy of Letter dated XX April XXXX22 along with reply filed by the Noticee on XX May XXXX22 is enclosed as Annexure – C.

10. Further, the department sought confirmation from the jurisdictional offices of the GST department about the status of various suppliers on account of whom the Noticee has availed ITC during the period under dispute and based on the replies received from jurisdictional offices, quantification of ITC availed by the Noticee which is alleged to be inadmissible was done by the SCN issuing Authority.

11. Also, inter – alia, CGST Delhi XX Commissionerate vide letter dated XX March XXXX21 informed the jurisdictional officer of the Noticee, that the Noticee has availed ITC amounting to Rs. XX/- on account of invoice issued by M/s XXXXand others whereas the said firm was non-existent and therefore, ITC availed by the Noticee is liable to be reversed. However, it is pertinent to mention that SCN dated XXXX October XXXX23 mentions that the Noticee has availed ITC pertaining to M/s XXXXand others, whereas which suppliers are covered in others are ascertainable from the RUD 13 attached with the SCN dated XXXX October XXXX23 i.e., XX (GSTIN:) and XXXX(GSTIN: XXXXX).

12. Thus, based on the above-mentioned allegations/information received by the jurisdictional office of the Noticee, it is alleged that the Noticee is liable to reverse ITC already availed by the Noticee on account of following suppliers –

S. No.	Name Of suppliers	Jurisdictional GST Formation	Verification Report	ITC Availed (in Lakh)
1	XXXX	XXX	XXXX	XXXX
2	XXXX	XXXX	XXXX	XXX
Total Inadmissible ITC				XXXX

* The others include ITC pertaining to suppliers namely M/s XXX (GSTIN: XXXX) amounting to Rs. xXXXX/- and M/s XXXXX (GSTIN: XXXXX) amounting to Rs. XXXX/-.

13. The main allegation levied by the department is that the Noticee has availed ITC based on invoice issued by above mentioned suppliers without actual supply of goods and as some of the firms as mentioned above are non-existent, said firms cannot pass ITC and thus the ITC availed by the Noticee on account of such suppliers is liable to be reversed.

14. Thereafter, the revenue issued a Notice in Form DRC–01A bearing F. No. XXXX/XXX/XXXX22-CGST-RANGE-XXXX dated XX October XXXX23 (Pre SCN-Notice dated XX October XXXX23”) intimating the Tax liability to the Noticee based on the above-mentioned enquiry proceedings and the allegations as discussed The Pre SCN-Notice dated XX October XXXX23 ascertained the tax liability of the Noticee to Rs. XXXX lakhs but no details or supplier wise quantification of ITC held inadmissible was mentioned in the Pre SCN-Notice dated XXX October XXXX23. Further, no concrete allegation was mentioned in the Pre SCN-Notice dated 10 October XXXX23 as to why the Noticee is liable to reverse the ITC as mentioned therein. It was only mentioned that the Noticee has taken ITC from the 12 non-existent/cancelled GSTIN firms, therefore, the same is liable to be reversed but no provision which provides for such contravention was mentioned in the Pre SCN-Notice dated XX October XXXX23.

Copy of Pre SCN-Notice dated XX October XXXX23 is enclosed as Annexure – D.

15. In response to the Pre SCN-Notice dated XX October XXXX23, the Noticee filed a detailed reply dated XX October XXXX23 in Part B of Form DRC – 01A wherein, inter – alia it was submitted that –

The Noticee has availed ITC as per conditions enumerated in Section 16(2) of the Act and to substantiate the same copy of all the supporting documents were submitted by the Noticee.
Further, it was submitted that no such condition that the Noticee is liable to reverse ITC in case the registration of the supplier is cancelled is mentioned in the entire GST law.
Also, the Notice dated XX October XXXX23 is vague as the department has failed to provide any basis based on which amount of Rs. XXXX lakhs were arrived at by the department while issuing Pre SCN-Notice dated XX October XXXX23.
Also, out of the total 12 suppliers highlighted by the revenue based on which reversal is sought the date of transaction entered by the Noticee with such supplier is before the date of cancellation of registration of such supplier and no transaction has been entered into with such suppliers post cancellation of their GST registration.
Also, the issue that Noticee cannot be asked to reverse ITC in case the registration of the supplier is cancelled retrospectively is already settled by various High Courts both in the erstwhile regime as well as present GST regime.
Also, with respect to three suppliers ( XXX) whose registration has been cancelled retrospectively i.e., w.e.f. 01 July XXXX17 has also filed their returns during the period in which the Noticee has availed ITC on account of such suppliers meaning thereby, the Noticee is not liable to reverse the ITC as the tax has already reached the Government exchequer.
Therefore, the Noticee is not liable to reverse ITC amounting to Rs. XXX lakhs as mentioned in Pre SCN-Notice dated XX October XXXX23.

Copy of Reply letter dated XX October XXXX23 submitted by the Noticee is enclosed as Annexure – E.

16. However, it is pertinent to mention that without even considering the submissions made by the Noticee vide Reply letter dated XX October XXXX23, the department issued Show Cause Notice bearing reference no. XXXX dated XXXX October XXXX23 i.e., the very next day of submission of reply which means the department has already made up his mind for issuance of Show Cause Notice and Pre SCN consultation was mere a formality on part of the department.

Copy of SCN dated XXXX October XXXX23 is enclosed as Annexure – F.

17. Also, the SCN dated XXXX October XXXX23 summed up the allegations in just single para and the same are as under –

That the proprietor of the Noticee itself admitted in his statement that he was not sure that whether the goods were received from the registered premise of M/s XXXX Sales Corporation or not. Also, he is not sure that whether the same is received by the Noticee or not.
That reliance is placed on the report received by the jurisdictional offices wherein it was informed that the Noticee has availed ITC pertaining to suppliers whose registration has been cancelled and it appears that the Noticee have availed ITC on the basis of invoice only as there is no actual supply of goods.
Further, the contention of the Noticee that the Noticee has made payments to its suppliers and received goods as well as invoices is not tenable as the said suppliers are non-existent or their registration has been cancelled. Thus, the Noticee is liable to reverse the ITC availed by the Noticee pertaining to such suppliers.

18. In response to the allegations as set out in the SCN dated XXXX October XXXX23, the Noticee submits that the findings of the concerned authority are not in line with the legal matrix and factual positioning of the case. A detailed reply to the allegations made in the said SCN dated XXXX October XXXX23 is produced in the following paragraphs.

ANNEXURE II

NOTICEE’S SUBMISSIONS

At the outset, the Noticee denies all the allegations made in the impugned SCN and regards them as incorrect and unsustainable on the basis of following submissions which are independent and without prejudice to each other.

1. PRE SCN-CONSULTATION WAS MERE A FORMALITY AND THUS, RENDERS THE ISSUANCE OF SCN DATED XXXX OCTOBER XXXX23 BAD IN LAW

The Noticee humbly submits that the revenue issued Tax Intimation Cum Demand Notice in Form GST DRC 01A bearing F. No. XXXX6/XXXX22-CGST-XXXX-DIV-XXXXX dated XX October XXXX23 (“Tax Intimation Notice dated XX October XXXX23”) intimating the Noticee that the Noticee is liable to reverse ITC availed from 11 suppliers who have found non-existent/cancelled and therefore, the Noticee is liable to reverse ITC availed pertaining to such suppliers along with applicable interest.

The Noticee duly replied to the Tax Intimation Notice dated XX October XXXX23 vide its reply letter dated XX October XXXX23 wherein inter alia the Noticee submitted in detail that the Noticee was not liable to reverse ITC on supplies highlighted in Notice dated XX October XXXX23 and various supporting documents in this regard were submitted by the Noticee for perusal of the authority.

However, to the surprise of the Noticee on the very next day of the submission of the reply to Tax Intimation Notice, the revenue issued the present Show Cause Notice on XXXX October XXXX23, meaning thereby, the revenue has pre-determined mind that SCN has to be issued in any case and issuing Pre SCN was nothing but a futile exercise and just one added step in the litigation stage as the same has not resulted in any positive outcome neither for the department or for the taxpayer and has been conveniently ignored by the department.

In reality, no one could have analysed all the documents submitted by the Noticee in a single day as the Noticee has submitted all the ledgers of the suppliers, GSTR 2A of the Noticee, invoices of such suppliers, XXX etc. and it is difficult to believe that the revenue considered all the submissions made by the Noticee and perused as well as verified all the supporting documents provided by the Noticee and then proceeded to issue the present SCN dated XXXX October XXXX23.

Reliance in this regard is placed on the decision of Hon’ble High court of Gujrat in the case of Dharamshil Agencies v. Union of India cited in 2021 Taxo.online 813 wherein identical facts are involved. Hon’ble Court held that issuing the illusory pre-show cause notice for consultation only two hours before the hearing is arbitrary and not a judicial approach. Relevant extract of judgement is reproduced verbatim as under –

“12. Before parting the Court is constrained to observe that such an action on the part of the respondent No. 2 in issuing the illusory pre-show cause notice for consultation only two hours before the hearing is not only arbitrary, but is in utter disregard and in contravention of the very object and purpose of the circular dated 10-3-XXXX17; which mandated such consultation with the assessee as an important step towards trade facilitation, for promoting voluntary compliance and for reducing necessity of issuing show cause notice. The action of the respondent authority in not taking timely action after the audit report and in issuing the impugned notice in contravention of the mandatory instructions given by the Board, therefore, is required to be seriously viewed. The present petition, therefore, is allowed, subject to the payment of cost of Rs. XXXX,000/- to be deposited by the respondent in the Court within eight weeks from today. On such deposit being made, the office shall pay Rs. 10,000/- (Rupees Ten Thousand only) to the petitioners and shall deposit the remaining Rs. 10,000/- with the Gujarat State Legal Services Authority.”

Hon’ble High court of Karnataka in the case of IPC Packaging Company Private Limited vs Addl. C.C., ICD, Bangalore cited in 2017 Taxo.online 84 (Kar.) held that–

“5. Having heard the learned counsel for the parties, this Court is satisfied that the principles of natural justice have not been followed in the present case and Respondent-Authority appears to have passed the said order in a hot haste without giving a reasonable and breathing time to the petitioner-Company for taking its defence before the said Authority and verify the relevant evidence produced by them. The said order, therefore, cannot be sustained and deserves to be set aside.

6. This Court is also constrained to observe that the Quasi Judicial Revenue Authorities while assigned the job of collection of Revenue in accordance with law need not act in a rash manner and throw the principles of natural justice to winds like it has been done in the present case and this Court does not find any justification for fixing three consecutive dates for personal hearing on 6-10-XXXX15, 7-10-XXXX15 and 8-10-XXXX15 and then closing the opportunity for the petitioner-Company to defend its case and passing an ex parte order. The ends of justice cannot be met merely because an order raising a demand of tax or duty is passed by the Authority concerned but such orders also have to show that not only the adequate opportunity has been given to the assessee concerned but also there has been due and reasonable application of mind on the part of the Authority concerned before raising such demand. Such Authorities who pass such kind of orders only add to the volume of litigation for the Constitutional Courts or higher Appellate Authorities rather than genuinely serving the cause of the Revenue or the Government. Such tendency of the quasi-judicial Authorities cannot be encouraged. Their powers to pass orders within the frame work of law is understood and appreciated, but exceptionally when the Courts take up such cases for scrutiny under extraordinary jurisdiction, if the breach of principles of natural justice is glaring, the Courts cannot shut its eyes and leave the parties to fend for themselves in the long channels of appellate litigation under the Act. The present case is a glaring example of misuse of powers by the Respondent Authority.”

(Emphasis Supplied)

Hon’ble High court of Allahabad in the case of S.M. Sugar v. Commissioner (Appeals) Of Central Excise cited in XXXX09 (248) E.L.T. 49 (All.) held that –

“12. From a bare perusal of the aforesaid facts it is quite clear that the Commissioner (Appeals) decided the stay-cum-waiver application ex parte without providing any opportunity to the petitioner of hearing and did not take into account the adjournment application filed by the petitioner though admittedly it was received in the office of the respondent-Commissioner (Appeals) on 16-8-04, and this fact appears to have not come to his knowledge on 17-8-04. The aforesaid facts clearly shows that the Commissioner (Appeals) showed undue haste in dismissing the waiver/stay application, which led to the dismissal of the appeal of the petitioner. The approach of the Commissioner (Appeals) should be justice oriented and doctrine of fairness is complimentary to principles of natural justice to ensure rule of law and to prevent failure of justice which is evolved to ensure rule of law and to prevent failure of justice. The Commissioner has committed a manifest error and a serious procedural illegality by not granting reasonable opportunity to the petitioner. The order passed should be in conformity with the principle of justice, equity and good conscious. The undue haste and speed with which the impugned order has been passed, in our opinion, should be discouraged.

13. In view of the above, the order dated 27-9-04, 19-8-04 and 14-9-04 passed by the Commissioner (Appeals), Central Excise, Meerut-II, respondent No. 1 are hereby quashed and the appeal filed by the petitioner before the respondent No. 1 is restored.

14. The petitioner undertakes to file a certified copy of this order within a period of 30 days from today before the respondent No. 1, Commissioner (Appeals), Central Excise, Meerut-II, who shall pass appropriate orders on the stay/waiver application of the petitioner in accordance with law within a period of three months from today after giving proper opportunity of hearing to the petitioner.”

(Emphasis Supplied)

Accordingly, based on the above made submissions, it is submitted that Impugned SCN dated XXXX October XXXX23 must be set aside as SCN was issued in haste, thereby, violating principles of natural justice as Pre SCN consultation was reduced to a mere formality by passing the SCN on the next date, i.e., after submission of reply to Pre SCN-Notice by the Noticee without giving due regard to submissions made by the Noticee.

2. NO SUCH CONDITION THAT THE NOTICEE IS LIABLE TO REVERSE ITC IN CASE THE REGSITRATION OF THE SUPPLIER HAS BEEN CANCELLED IS MENTIONED IN SECTION 16 OF THE ACT

The Noticee humbly submits that the revenue while issuing the impugned SCN dated XXXX October XXXX23 has held that the Noticee’s submission that the Noticee has received invoices and made payments to such suppliers is not tenable though not countering the said submission and therefore, the Noticee is liable to reverse ITC on account of such non-existent or cancelled suppliers in terms of Section 16 of the Act. The relevant extract of SCN dated XXXX October XXXX23 is as under –

“15. Whereas, it is on record that the proprietor of M/s. XXXX vide statement dtd.29.03.XXXX19 categorically stated that the firm has not maintained physical stock register, inward register and outward register in GST period and he was not sure whether the goods were received from the registered premises of M/s. XXXX corporation or not; that he cannot explain whether the material received against the invoice supplied by M/s. XXXX Sales Corporation or otherwise. Further, as per intelligence and verification report received from concerned jurisdictional GST formation of suppliers of M/s. XXXX, it is learnt that 11 suppliers/vendors as mentioned in para 13 above, have been found to be non-existent and cancelled and appears that the taxpayers have availed ITC in respect of such suppliers on the strength of fake ITC/goodsless invoice without actual supply of goods. Hence, the noticee’s submission merely that they have made payments to its suppliers and received invoices from their above said suppliers is not tenable and ITC availed in respect of such non-existent or cancelled suppliers appears to be inadmissible in terms of section 16 of

CGST Act, XXXX17.”

In this regard, the Noticee submits that before dwelling into submissions, it is imperative to highlight the conditions as prescribed in Section 16(2) of the Act for availing ITC which is as under –

“Section 16(2): Notwithstanding anything contained in this section, no registered person shall be entitled to the credit of any input tax in respect of any supply of goods or services or both to him unless, ––

(a) he is in possession of a tax invoice or debit note issued by a supplier registered under this Act, or such other tax paying documents as may be prescribed.

(b) he has received the goods or services or both.

Explanation: For the purposes of this clause, it shall be deemed that the registered person has received the goods or, as the case may be, services–

(i) where the goods are delivered by the supplier to a recipient or any other person on the direction of such registered person, whether acting as an agent or otherwise, before or during movement of goods, either by way of transfer of documents of title to goods or otherwise;

(ii) where the services are provided by the supplier to any person on the direction of and on account of such registered person;

(c) subject to the provisions of section 41 or section 43A, the tax charged in respect of such supply has been actually paid to the Government, either in cash or through utilization of input tax credit admissible in respect of the said supply; and

(d) he has furnished the return under section 39”

From the plain reading of the Section as mentioned supra, it can be inferred that Credit of input taxes paid shall be available to the registered person, if the following conditions are satisfied –

The recipient should be in possession of tax invoice or debit note or such other taxpaying documents issued by a registered supplier as may be prescribed under Rule 36 of the CGST Rules.
The recipient should have received the goods or services or both.
The supplier should have actually paid the tax charged in respect of the supply to the government and;
The recipient should have furnished the return under section 39 (GSTR- 3B)

The Noticee humbly submits that all the conditions of Section 16(2) as mentioned supra has been duly satisfied by the Noticee. The detailed submissions in this regard are mentioned in the following paras.

With respect to condition that recipient must be in possession of invoice – The Noticee has duly received the invoices from the suppliers which are highlighted in the Notice dated XX October XXXX23. Since the number of invoices pertaining to these 12 vendors/suppliers is huge, of invoices issued by such suppliers to the Noticee on sample basis is enclosed as Annexure – G. [However, if the Ld. Authority requires each & every invoice for verification, the same will be produced immediately upon communication]

With respect to condition that goods must be received and the same shall be intended to be used for the purpose of business, the Noticee submits that the same has been duly satisfied by the Noticee. In order to prove that the Noticee has received the actual delivery of goods from such suppliers, copy of E way bills evidencing movement of goods is enclosed as Annexure – H.

Further, the fact that Noticee has received goods from such suppliers is also evident from the Statement of the Proprietor of the Noticee recorded on XX March XXXX19 wherein the Proprietor of the Noticee itself mentioned that the Noticee has received the material against the invoices on the basis of which ITC has been availed by the Noticee. The relevant extract of the Statement of Proprietor of the Noticee is reproduced verbatim as under –

“Question 23. Since no business activity ever happened at the registered business premises of M/s XXXX Sales Corporation, as explained above, there is a genuine doubt about the genuineness of the invoices issued by M/s XXXX Sales Corporation, and actual supply of goods against such invoices by M/s XXXX Sales Corporation itself. In such a case, the material received by you, as claimed above. have been supplied by some other vendor/supplier and only invoices have been provided by M/s XXXX Sales Corporation. Please explain and provide proof to the contrary, if available.

Answer. I cannot explain whether the material received against the invoices was supplied by M/s XXXX Sales Corporation or otherwise. I can only provide the invoices, bilty, e-way bills, etc. in support of my claim that we had received the materials against the invoices issued by M/s XXXX Sales Corporation.”

However, the department while issuing the impugned SCN dated XXXX October XXXX23 totally ignored the said submission made by the proprietor of the Noticee and merely mentioned that goods against the said invoices are not received by the Noticee, whereas, no evidence that how the department arrived at such conclusion is provided in the entire SCN dated XXXX October XXXX23.

Thus, the allegation levied upon the Noticee that Noticee has not received any goods against the invoices issued by the suppliers is not sustainable as the department has merely looked the statement of the proprietor of the Noticee in a way that a case has to be framed upon the Noticee, whereas, the part in which the Noticee clearly mentioned that goods have been received is totally ignored by the SCN issuing authority.

Hence, it can be seen that the condition that the Noticee has actually received the goods is also satisfied by the Noticee.

Further, with respect to the condition that tax has been actually paid to the Government, i.e., the supplier must have filed its GSTR 3B return for the period, the Noticee submits that this condition also stands fulfilled in the instant case as the entire credit availed by the Noticee against supplies made by these 11 vendors/suppliers is reflected in GSTR-2A of the Noticee, meaning thereby, all these vendors have duly furnished their statement of outward supplies in Form GSTR-1 showing all supplies made to the Noticee. Further, when GSTR-1 has been filed by the supplier showing taxable supplies made to the Noticee, no question of non-filing of GSTR-3B arises as by way of filing GSTR-1 containing details, GST department is already in knowledge of tax liability payable by said supplier. Copy of GSTR 2A of the Noticee for the period XXXX17 – 18 to XXXX22 – 23 enclosed as Annexure – I.

Also, with respect to last condition, i.e., the recipient shall file its return in Form GSTR 3B, the Noticee submits that this condition is also fulfilled by the Noticee as no such allegation has even been levied upon the Noticee that the Noticee has not filed its return in Form GSTR 3B.

Moreover, copy of bank statements on sample basis highlighting payments made to the said suppliers through proper banking channels is enclosed as Annexure – J.

It is pertinent to mention that no such condition is prescribed in Section 16 of the Act which prescribes that the Noticee is liable to reverse ITC in case the registration of the supplier is cancelled retrospectively by the department. Therefore, the approach of the department that the taxpayer shall reverse ITC in case the registration of the supplier is cancelled retrospectively by the department is not in view of Principles of Natural Justice as the Noticee cannot be held liable for the default committed by others.

Accordingly, demand of ITC reversal amounting to Rs. XX.73 lakhs pertaining to 3 vendors, namely XXXXXXX proposed solely on the grounds that their GST registration is cancelled is bad in law and must be set aside.

3. THE DATE OF TRANSACTION ENETERED INTO BY THE NOTICEE WITH 9 SUPPLIERS IS BEFORE THE DATE OF CANCELLATION OF REGISTRATION OF SUCH SUPPLIERS, THEREFORE THE NOTICEE IS NOT LIABLE TO REVERSE ITC AVAILED BY THE NOTICEE ON ACCOUNT OF SUCH SUPPLIERS

The Noticee humbly submits that the revenue failed to analyse that whether the Noticee has availed any ITC from a vendor/supplier after the date of cancellation of registration of said supplier/vendor or whether the entire transaction which is under dispute pertains to period when the registration of such supplier was active and still shows active on GST portal (as on date of transaction).

That to analyse the above submission, the following table showcasing the details of 9 suppliers on account of which reversal has been sought needs to be referred –

Sr. No.	GSTIN	TRADE NAME	LEGAL NAME	*Amount of ITC reversal sought vide* SCN dated XXXX October XXXX23**	DATE OF cancellation	Last date of transaction of Noticee with said supplier
1	XXXXX	XXXXX	XXXXX	XXXXX	XXXXX	XXXXXX
2	XXXXXX	XXXXX	XXXXX	XXXXX	XXXXX	XXXXX
Total				XXXXX lakhs

To substantiate the same copy of screenshot of the GST portal is enclosed as Annexure – K.

The Noticee vehemently submits that the Noticee has entered into transactions with the above-mentioned suppliers before the date of cancellation of their respective GST registration only and no transaction has been entered into by the Noticee with such suppliers after the registration of such suppliers has been cancelled by the department. To substantiate the same copy of self-attested ledgers of those 9 suppliers for the period July XXXX17 to 30 September XXXX23 is enclosed as Annexure – L.

Further, the said fact is also evident from the copy of GSTR-2A already enclosed as Annexure supra, that the entries pertaining to such suppliers are only appearing in months in which the suppliers were duly filing its GST return in Form GSTR-1. Moreover, the Noticee has availed ITC on account of such suppliers only during the months in which entries were appearing in GSTR-2A of the Noticee only.

Without prejudice to above, it is submitted that revenue has sought reversal of ITC pertaining to various vendors (as given in impugned SCN). It is pertinent to mention that registration of such suppliers (Sr. No 1 to 8) was cancelled suo moto by the department and supplier (mentioned at Sr. No. 9) was cancelled on application of taxpayer after due verification and analysis from a date as mentioned in table Therefore, the department is itself admitting that before the date of cancellation of the GST registration of such suppliers were genuine and following due process of law.

Hence, when revenue has itself held supplier to be in default post the date of cancellation of GST registration of such suppliers, holding the ITC availed by the Noticee prior to such date as inadmissible is contradictory & unsustainable.

Therefore, concluding the above submissions, it can be seen that the Noticee is not liable to reverse ITC on account of 9 suppliers as mentioned supra as the date of transaction entered into by the Noticee with the said suppliers is before the date of cancellation of registration of the suppliers and therefore, the Noticee has availed ITC during the period when the department itself accepted that the said suppliers were fulling all the requirements of the GST law as their registration status was active at that time.

Furthermore, the Noticee fulfilled all the conditions prescribed under the GST law for availing the said credit and the same is not in dispute in the present case. Also, all the suppliers as mentioned by the department in the Notice dated XXXX October XXXX23 were having valid GST registration at the time when ITC was availed by the taxpayer and in case their registration has been cancelled after the date of availment of ITC by the Noticee, reversal of ITC already availed by the taxpayer cannot be sought from the Noticee.

If this approach is to be accepted, then in case the department cancels GST registration of supplier retrospectively say after 5 years for any reason, then every taxpayer who has bona-fidely availed ITC on account of supplies made by such taxpayer at any point of time shall be asked to reverse the said ITC due to fault committed by others which is not the judicious approach as no one should be punished for the fault committed by others. Moreover, as per this approach the ITC availed by the taxpayer shall always be under scanner and the same was never the intent of the legislature behind bringing GST.

Moreover, the genuineness of the Noticee in availing such credit is also proved from the fact that the Noticee has recorded all the transaction with such suppliers in the books of account and has made the payment to such suppliers thorough a proper banking channel. The fact that the Noticee has fulfilled the obligation of paying applicable GST to such suppliers is not in question in the instant matter and the fact that the Noticee has paid applicable taxes to such suppliers can also be seen from the ledger of such suppliers in the books of account of the Noticee.

4. Department itself accepted the application for cancellation of registration of the supplier named XXXXXX

The Noticee humbly submits that GSTIN status of vendor named M/s XXXXX shows “cancelled on application of Taxpayer (effective from XX/10/XXXX19)”. Reference in this regard is invited upon Section 29 of CGST Act which vide sub-section (1) provides for the provision where a taxpayer can apply for cancellation of its GST registration. Sub-section (1) of Section 29 provides that –

“(1) The proper officer may, either on his own motion or on an application filed by the registered person or by his legal heirs, in case of death of such person, cancel the registration, in such manner and within such period as may be prescribed, having regard to the circumstances where,–

the business has been discontinued, transferred fully for any reason including death of the proprietor, amalgamated with other legal entity, demerged or otherwise disposed of; or

there is any change in the constitution of the business; or

the taxable person is no longer liable to be registered under section 22 or section 24 or intends to optout of the registration voluntarily made under sub-section (3) of section 25:

Provided that during pendency of the proceedings relating to cancellation of registration filed by the registered person, the registration may be suspended for such period and in such manner as may be prescribed.”

(Emphasis Supplied)

The manner of filing application for cancellation of GST registration by a taxpayer is provided in Rule XXXX and sub-rule (3) of Rule 22 of CGST Rules, which provides that –

“Rule XXXX. Application for cancellation of registration.

A registered person, other than a person to whom a registration has been granted under rule 12 or a person to whom a Unique Identity Number has been granted under rule 17, seeking cancellation of his registration under sub-section (1) of section 29 shall electronically submit an application in FORM GST REG-16, including therein the details of inputs held in stock or inputs contained in semi-finished or finished goods held in stock and of capital goods held in stock on the date from which the cancellation of registration is sought, liability thereon, the details of the payment, if any, made against such liability and may furnish, along with the application, relevant documents in support thereof, at the common portal within a period of thirty days of the occurrence of the event warranting the cancellation, either directly or through a Facilitation Centre notified by the Commissioner:”

“Rule 22. Cancellation of registration.

…………………

(3)Where a person who has submitted an application for cancellation of his registration is no longer liable to be registered or his registration is liable to be cancelled, the proper officer shall issue an order in FORM GST REG-19, within a period of thirty days from the date of application submitted under rule XXXX or, as the case may be, the date of the reply to the show cause issued under sub-rule (1), or under sub-rule (2A) of rule 21A cancel the registration, with effect from a date to be determined by him and notify the taxable person, directing him to pay arrears of any tax, interest or penalty including the amount liable to be paid under sub-section (5) of section 29.”

From the perusal of above provision, it can be seen that –

While applying for cancellation of GST registration, a taxpayer is required to furnish various details for verification by Proper Officer; and,
Proper Officer after conducting due verification can either accept or reject the application filed by the taxpayer.
Where Proper Officer accepts the application of the taxpayer, it shall intimate the taxpayer of any arrears of tax, interest or penalty to be recovered from such taxpayer basis the verification carried out.

With the above background, it is submitted that in the present matter, the supplier applied for cancellation of its GST registration and after carrying out due verification, its application was accepted by the Ld. Proper Officer and GST registration thereof was cancelled by GST department. It is imperative to mention here that in terms of sub-rule (3) of Rule 22, Proper Officer, may have also communicated certain liability/arrears of tax payable by the vendor, while allowing its application for GST registration cancellation.

Thus, when GST department itself is accepting that said vendor is a bona-fide person during the period when the Noticee availed ITC (FY XXXX18 – 19) and has also paid its entire arrears (as only after that GST registration of the said supplier would have been cancelled by the department) and its application has been accepted after carrying out due verification, it cannot be alleged that the Noticee has availed any fraudulent ITC.

Hence, ITC availed by the Noticee pertaining to M/s XXXXXX amounting to Rs. XXX lakhs must be dropped on this ground only.

Further, the Hon’ble Calcutta High Court in the matter of M/s Gargo T raders vs The Joint Commissioner, Commercial Taxes (State Tax) & ors. cited in 2023 Taxo.online 616 held that in case the registration of the supplier was active at the time when such ITC was availed by a taxpayer and all the payments have been made through proper banking channel, the taxpayer cannot be asked to reverse the ITC in case the registration of the supplier is cancelled retrospectively. The relevant extract of the judgement is re-produced verbatim as under –

“12. The main contention of the petitioner that the transactions in question are genuine and valid and relying upon all the supporting relevant documents required under law, the petitioner with due diligence verified the genuineness and identity of the supplier and name of the supplier as registered taxable person was available at the Government Portal showing its registration as valid and existing at the time of transaction.

13. Admittedly at the time of transaction, the name of the supplier as registered taxable person was already available with the Government record and the petitioner has paid the amount of purchased articles as well as tax on the same through bank and not in cash.

14. It is not the case of the respondents that there is a collusion between the petitioner and supplier with regard to the transaction.

15. This Court finds that without proper verification, it cannot be said that there was any failure on the part of the petitioner in compliance of any obligation required under the statute before entering into the transactions in question.

16. The respondent authorities only taking into consideration of the cancellation of registration of the supplier with retrospective effect have rejected the claim of the petitioner without considering the documents relied by the petitioner.

17. The unreported judgment passed in the case of M/s Law Industries Limited & Ors. (supra) is squarely applicable in the present case.

18. In view of the above, the impugned orders are set aside. The respondent

19. It is directed to consider the grievance of the petitioner afresh by taking into consideration of the documents which the petitioner intends to rely in support of his claim.”

(Emphasis Supplied)

Moreover, similar view was also taken in the following judicial pronouncements –
M/s LGW Industries Limited & ors. versus Union of India & ors. cited in 2021 Taxo.online 1325 . It was held that –

“If it is found upon considering the relevant documents that all the purchases and transactions in question are genuine and supported by valid documents and transactions in question were made before the cancellation of registration of those suppliers and after taking into consideration the judgments of the Supreme Court and various High Courts which have been referred in this order and in that event the petitioners shall be given the benefit of input tax credit in question.”

Sanchita Kundu vs Assistant Commissioner of State Tax, Bureau of Investigation, South Bengal cited in 2022 Taxo.online 506, The Hon’ble High Court held that –

“6. Considering the submission of the parties and on perusal of records available, these writ petitions are disposed of by setting aside the aforesaid impugned orders and remanding these cases of the petitioners to the respondents officer concerned to consider afresh on the issue of their entitlement of benefit of Input Tax Credit in question by considering the documents which the petitioners intend to rely in support of their claim of genuineness of the transactions in question and the respondent concerned shall also consider as to whether payments on purchase in question along with GST were actually paid or not to the suppliers (RTP) and also to consider as to whether the transactions and purchases were made before or after the cancellation of registration of the suppliers and also to consider as to compliance of statutory obligation by the petitioners in verification of identity of the suppliers (RTP).”

Therefore, concluding the submissions made above and in lieu of judgements as relied upon by the Noticee, it is concluded that Noticee is not liable to reverse the ITC as sought by the department vide SCN dated XXXX October XXXX23 as at the time when ITC was availed by the Noticee, the registration of the supplier was active and thus, Noticee has correctly availed ITC which must not be denied on the sole allegation that GST registration of its vendors is cancelled.

Henceforth, concluding the submissions made above, the Noticee submits that reversal on account of ITC sought from the Noticee on account of 9 suppliers as mentioned supra amounting to Rs. XXXX lakhs is not tenable and must be dropped in lieu of submissions made

5. THE SUPPLIERS ON ACCOUNT OF WHICH REVERSAL HAS BEEN SOUGH HAS ALSO DEPOSITED THE TAX AMOUNT WITH THE GOVERNMENT EXCHEQUER VIDE RETURN IN FORM GSTR 3B

The Noticee humbly submits that the revenue sought reversal of ITC from the Noticee on account of remaining 3 suppliers on the allegation that these suppliers are non-existent as their registration has been cancelled retrospectively effective from the date of registration of such supplier. The details of such suppliers are as under –

Sr. No.	GSTIN	Trade Name	Legal Name	*Amount of ITC reversal sought vide* SCN dated XXXX October XXXX23**	Effective date of registration	Date of Cancellation
1	XXXX	XXXXX	XXXXX	XXXXX	XXXXX	XXXXX


Total				XXXXX

Copy of Screenshot of the GST portal is enclosed as Annexure – M.

The Noticee humbly submits that though the Noticee was genuine at the time of entering into transaction and all the precautions were duly complied with by the Noticee. Further, it is settled principle that even if registration of the vendor is cancelled retrospectively, ITC cannot be denied to the recipient in cases where the transaction were genuine and supported by various documents. Reliance in this regard is placed on following judicial pronouncements –
M/s Gargo Traders vs The Joint Commissioner, Commercial Taxes (State Tax) & ors. – 2023 Taxo.online 616
M/s LGW Industries Limited & ors. versus Union of India & ors. cited in 2021 Taxo.online 1325 – Calcutta High Court
Sanchita Kundu vs Assistant Commissioner of State Tax, Bureau of Investigation, South Bengal cited in 2022 Taxo.online 506

Further, to support that the Noticee was genuine in entering into transactions with such vendors, copy of self- attested ledgers of these suppliers in the books of the Noticee for the period July XXXX17 to September XXXX23 is enclosed as Annexure – N.

Further, it is important to highlight here that the such suppliers have duly filed all its returns in Form GSTR 1 as well as tax collected by such suppliers from the Noticee is also deposited with the Government treasury as the such supplier have filed their return in Form GSTR 3B for the month in which the Noticee has availed ITC, meaning thereby, tax collected from the Noticee has been paid by the Supplier to the Government. To substantiate the same, copy of report Generated from Bill Mantra Software showing return filing status of these vendors is enclosed as Annexure – O.

Moreover, without prejudice to above, though GSTR-3B has been filed by the vendors in instant case, however, in numerous cases, various judicial authorities have held that ITC cannot be denied to the recipient in cases where GSTR-3B is not filed by the vendors provided tax has been paid by the recipient to the supplier. Reliance in this regard is placed on following judicial pronouncements –

M/s D. Y. Beathel Enterprises versus The State Tax Officer (Data Cell), (Investigation Team) Commercial Tax Building, Tirunelveli cited in 2021 Taxo.online 309 – Madras High Court

“11. It can be seen therefrom that the assessee must have received the goods and the tax charged in respect of its supply, must have been actually paid to the Government either in cash or through utilization of input tax credit, admissible in respect of the said supply.

12.Therefore, if the tax had not reached the kitty of the Government, then the liability may have to be eventually borne by one party, either the seller or the buyer. In the case on hand, the respondent does not appear to have taken any recovery action against the seller / Charles and his wife Shanthi, on the present transactions.

13.The learned counsel for the petitioners draws my attention to the order, dated 27.10.XXXXXXXX, finalising the assessment of the seller by excluding the subject transactions alone. I am unable to appreciate the approach of the authorities. When it has come out that the seller has collected tax from the purchasing dealers, the omission on the part of the seller to remit the tax in question must have been viewed very seriously and strict action ought to have been initiated against him.”

Arise India Limited and others Vs. Commissioner of Trade & Taxes, Delhi and others (W.P.(C) 2106/XXXX15) cited in 2017 Taxo.online 85

“53. In light of the above legal position, the Court hereby holds that the expression dealer or class of dealers occurring in Section 9 (2) (g) of the DVAT Act should be interpreted as not including a purchasing dealer who has bona fide entered into purchase transactions with validly registered selling dealers who have issued tax invoices in accordance with Section 50 of the Act where there is no mismatch of the transactions in Annexures 2A and 2B. Unless the expression dealer or class of Arise India Limited vs Commissioner Of Trade & Taxes, … on 26 October, XXXX17 Indian Kanoon – http://indiankanoon.org/doc/50881698/ 22 dealers in Section 9 (2) (g) is read down in the above manner, the entire provision would have to be held to be violative of Article 14 of the Constitution. 54. The result of such reading down would be that the Department is precluded from invoking Section 9 (2) (g) of the DVAT to deny ITC to a purchasing dealer who has bona fide entered into a purchase transaction with a registered selling dealer who has issued a tax invoice reflecting the TIN number. In the event that the selling dealer has failed to deposit the tax collected by him from the purchasing dealer, the remedy for the Department would be to proceed against the defaulting selling dealer to recover such tax and not deny the purchasing dealer the ITC. Where, however, the Department is able to come across material to show that the purchasing dealer and the selling dealer acted in collusion then the Department can proceed under Section 40A of the DVAT Act. 55. Resultantly, the default assessment orders of tax, interest and penalty issued under Sections 32 and 33 of the DVAT Act, and the orders of the OHA and Appellate Tribunal insofar as they create and affirm demands created against the Petitioner purchasing dealers by invoking Section 9 (2) (g) of the DVAT Act for the default of the selling dealer, and which have been challenged in each of the petitions, are hereby set aside. 56. The writ petitions and applications are disposed of in the above terms but, in the circumstances, with no orders as to costs.”

Commissioner of Central Excise, Jalandhar Vs. M/s. Kay Kay Industries cited in 2016 Taxo.online 12

“24. In the case at hand, there is no dispute that a declaration was given by the manufacturer of the inputs indicating that the excise duty had been paid on the said inputs under the Act. It is also not in dispute that the said inputs were directly received from the manufacturer but not purchased from the market. There is no cavil over the fact that the manufacturer of the inputs had declared the invoice price of the inputs correctly in the documents. It is perceivable from the factual matrix that the only allegation is that at the time of MODVAT verification it was found that the supplier of the inputs had not discharged full duty liable for the period covered under the invoices. This lapse of the seller is different and not a condition or rather a pre-condition postulated in the notification.

25. Mr. Prasad, learned counsel for the revenue has vehemently urged that it was requisite and, in a way imperative, on the part of the assessee to verify from the concerned authority of the department whether the excise duty had actually been paid or not. The aforesaid submission leaves us unimpressed. As we notice Rule 57A (6) requires the manufacturer of final products to take reasonable care that the inputs acquired by him are goods on which the appropriate duty of excise as indicated in the documents accompanying the goods, has been paid. The notification has been issued in exercise of the power under the said Rule. The notification clearly states to which of those inputs it shall apply and to which of the inputs it shall not apply and what is the duty of the manufacturer of final inputs. Thus, when there is a prescribed procedure and that has been duly followed by the manufacturer of final products, we do not perceive any justifiable reason to hold that the assessee-appellant had not taken reasonable care as prescribed in the notification. Due care and caution was taken by the respondent. It is not stated what further care and caution could have been taken. The proviso postulates and requires “reasonable care” and not verification from the department whether the duty stands paid by the manufacturer-seller. When all the conditions precedent have been satisfied, to require the assessee to find out from the departmental authorities about the payment of excise duty on the inputs used in the final product which have been made allowable by the notification would be travelling beyond the notification, and in a way, transgressing the same. This would be practically impossible and would lead to transactions getting delayed. We may hasten to explicate that we have expressed our opinion as required in the present case pertaining to clauses 4 and 5 of the notification.

26. Consequently, we concur with the view expressed by the High Court and accordingly the appeals, being devoid of merit, stand dismissed without any order as to costs.”

(Emphasis Supplied)

Commissioner of Central Excise, East Singhbhum vs Tata Motors Ltd. as cited in 2016 Taxo.online 114 (Jharkhand)

“7. This argument does not appeal to us. Once a buyer of inputs receives invoices of excisable items, unless factually it is established to the contrary, it will be presumed that when payments have been made in respect of those inputs on the basis of invoices, the buyer is entitled to assume that the excise duty has been/will be paid by the supplier on the excisable inputs. The buyer will be therefore entitled to claim Modvat credit on the said assumption. It would be most unreasonable and unrealistic to expect the buyer of such inputs to go and verify the accounts of the supplier or to find out from the department of Central Excise whether actually duty has been paid on the inputs by the supplier. No business can be carried out like this, and the law does not expect the impossible.”

High Court of Orissa in the matter of Bright Star Plastic Industries vs Additional Commissioner of Sales Tax as cited in 2021 Taxo.online 1088

“19. To attribute fraud in such circumstances to the Petitioner, as a purchasing dealer, the Department would have to satisfy a high threshold of showing that the purchaser indulged in the transactions with the full knowledge that the selling dealer was non-existent. The Department would have to show that somehow the purchasing dealer and selling dealer acted in connivance to defraud the revenue. This threshold has not been made in the present case. In other words, the Department has failed to show that the Petitioner as a purchasing dealer deliberately availed of the ITC in respect of the transactions with an entity knowing that such an entity was not in existence.

XXXX. For the aforementioned reasons, the impugned order of the LPO rejecting the Petitioner's application for revocation of its cancellation of registration and the impugned appellate order dated 5th April, XXXX21 rejecting the Petitioner's appeal are hereby set aside. The Department is now directed to restore the Petitioner's registration forthwith by issuing appropriate orders/directions not later than one week from today. The Petitioner will correspondingly now be permitted to file all the return which it could not file on account of the cancellation of the registration.”

Also, in a recent judgement pronounced by the Hon’ble Calcutta High Court in the matter of Suncraft Energy Private Limited and another versus The Assistant Commissioner, State Tax, Ballygunge Charge and others cited in 2023 Taxo.online 721 affirmed the position set out in the matter of Arise India mentioned supra that reversal of credit cannot be sought from the recipient in case the supplier has failed to deposit the tax with the government exchequer despite collecting it from the recipient.

Therefore, when the courts have granted benefit to the recipients in cases where tax was also not paid to the treasury of the Government, benefit of ITC cannot be denied to the Noticee in the instant case as the tax in the instant matter has been duly paid by the suppliers to the Government exchequer by filing return in Form GSTR-3B.

Alternate Grounds

6. ENTIRE INQUIRY PROCEEDINGS IN THE PRESENT MATTER IS TIME BARRED SINCE IT WENT ON FOR A LONG PERIOD OF MORE THAN 4 YEARS AND THUS, IMPUGNED SCN IS NULL & VOID

It is pertinent to mention that, the inquiry proceedings against the Noticee were initiated during the year XXXX19 as Statement of the Proprietor of the Noticee was recorded on 29 March XXXX19 during a visit of departmental officers to the premise of the Noticee.

It is pertinent to mention that department kept silent for 3 years and in the year XXXX22, department again issued letter dated XXXX April XXXX22 to the Noticee directing the Noticee to pay/reverse the ineligible ITC in respect of initially ascertained alleged fake entities.

Further, after another 1.5 years of the said letter Pre SCN in Form DRC 01A dated XX October XXXX23 was issued to the Noticee intimating the Noticee to pay the liability ascertained vide Pre SCN dated XX October XXXX23 and surprising within 1 day of filing of reply to Pre SCN Notice, department proceeded to issue the impugned SCN dated XXXX October XXXX23.

The issuance of impugned SCN dated XX October XXXX23 clearly shows that the same was done in haste as it is difficult to believe that the Ld. Officer had analyzed all the submissions made by the Noticee in a single day and then proceeded to issue the impugned SCN.

It is submitted that there is a gap of more than 4 years and there has been an inordinate delay on the end of revenue to conclude the proceedings which were initiated in XXXX19 and later done in haste merely to make a case against the Noticee.

Attention is drawn towards the decision of Apex Court, wherein, Hon’ble Supreme Court of India in the matter of V. Mahadevan v. M.D. Tamil Nadu Housing Board cited in 2016 Taxo.online 39 while disposing off Appeal No. 4901 of XXXX05 held that it is necessary to draw the curtain and to put an end to the enquiry. Relevant para of the Judgement is re-produced verbatim for your kind consideration –

“Under the circumstances, we are of the opinion that allowing the respondent to proceed further with the departmental proceedings at this distance of time will be very prejudicial to the appellant. Keeping a higher government official under charges of corruption and disputed integrity would cause unbearable mental agony and distress to the officer concerned. The protracted disciplinary enquiry against a government employee should, therefore, be avoided not only in the interests of the government employee but in public interest and also in the interests of inspiring confidence in the minds of the government employees. At this stage, it is necessary to draw the curtain and to put an end to the enquiry. The appellant had already suffered enough and more on account of the disciplinary proceedings. As a matter of fact, the mental agony and sufferings of the appellant due to the protracted disciplinary proceedings would be much more than the punishment. For the mistakes committed by the department in the procedure for initiating the disciplinary proceedings, the appellant should not be made to suffer.

We, therefore, have no hesitation to quash the charge memo issued against the appellant. The appeal is allowed. The appellant will be entitled to all the retiral benefits in accordance with law. The retiral benefit shall be disbursed within three months from this date. No costs.”

(Emphasis Supplied)

There is plethora of judgements on the aspect of the delay in framing charges/allegations and concluding proceedings, some of which are relied upon as below –

Hon’ble Supreme Court of India in the matter of State of Madhya Pradesh v. Bani Singh and as reported in 2016 Taxo.online 40 held that there was no satisfactory explanation for the inordinate delay and held that it would be unfair to order departmental enquiry to proceed further.

Hon’ble Supreme Court of India in the matter of State of Punjab and others Vs. Chaman Lal XXXX, as reported in 2016 Taxo.online 41 held as under: –

“9. Now remains the question of delay. There is undoubtedly a delay of five and a half years in serving the charges. The question is whether the said delay warranted the quashing of charges in this case. It is trite to say that such disciplinary proceeding must be conducted soon after the irregularities are committed or soon after discovering the irregularities. They cannot be initiated after lapse of considerable time. It would not be fair to the delinquent officer. Such delay also makes the task of proving the charges difficult and is thus not also in the interest of administration. Delayed initiation of proceedings is bound to give room for allegations of bias, mala fides and misuse of power. If the delay is too long and is unexplained, the court may well interfere and quash the charges. But how long a delay is too long always depends upon the facts of the given case. Moreover, if such delay is likely to cause prejudice to the delinquent officer in defending himself, the enquiry has to be interdicted. Wherever such a plea is raised, the court has to weigh the factors appearing for and against the said plea and take a decision on the totality of circumstances. In other words, the court has to indulge in a process of balancing…”

Hon’ble Supreme Court of India in the matter of V. Bijlani v. Union of India and other, reported in XXXX06 (5) SCC 88 quashed the order of removal from service, confirmed by the appellate authority on various grounds particularly, on the ground that initiation of disciplinary proceedings after six years and continuance thereof, for a period of seven years prejudiced the delinquent officer.

Hon’ble Madras High Court in the matter of Sekar Vs. Commissioner of Social Welfare, Ezhilagam, Chennai reported in XXXX10 (1) MLJ 7 held as under:-

“11. Also, it is a settled proposition that while considering whether the delay has vitiated the disciplinary proceedings, the Court has to consider the nature of charge, its complexity and on what account the delay has occurred. If the delay is unexplained, prejudice to the delinquent employee is writ large on the face of it. It could also be seen as to how much the disciplinary authority is serious in pursuing the charges against its employee. It is the basic principle of administrative justice that an officer entrusted with a particular job has to perform his duties honestly, efficiently and in accordance with the rules. If he deviates from this path, he is to suffer a penalty prescribed. Normally, disciplinary proceedings should be allowed to take its course as per relevant rules; but then, delay defeats justice. Delay causes prejudice to the charged officers unless it can be shown that he is to blame for the delay or when there is proper explanation for the delay in conducting disciplinary proceedings. Ultimately, the Court is to balance these two diverse considerations”. In the above reported case, there was a delay of 12 years in concluding the disciplinary proceedings and that there was no explanation for such delay.”

Hon’ble Bombay High Court in the matter of Parle International Limited Versus Union of India and Others as cited in 2020 Taxo.online 1087 – BOMBAY HIGH COURT held that inordinate delay in adjudication of SCN is invalid as under:-

“Petitioner cannot be faulted for taking the view that respondents had decided not to proceed with the show-cause notices. An assessee or a dealer or a taxable person must know where it stands after issuance of show-cause notice and submission of reply. If for more than 10 years thereafter there is no response from the departmental authorities, it cannot be faulted for taking the view that its reply had been accepted and the authorities have given a quietus to the matter.

Also, respondents had not taken any action pursuant to the show-cause notices for long 13 years till issuance of notice for personal hearing on 13.08.XXXX19. After the petitioner approached this Court by filing the present writ petition on 06.09.XXXX19 with due intimation to the respondents, respondent No.3 went ahead and passed the order-inoriginal dated 11.11.XXXX19. We fail to understand when the respondents could wait for 13 long years after issuance of the show-cause notices, there could not have been any earthly reason to proceed at such great speed and pass the order-in-original before the Court could adjudicate on the correctness of the action of the respondents.

There are no hesitation to hold that respondents were not justified in commencing adjudication proceeding 13 years after issuance of the show-cause notices dated 01.06.XXXX06 and 28.11.XXXX06. Such adjudication proceeding is therefore, held to be invalid – petition allowed – decided in favor of petitioner.”

In the light of the foregoing, prolonged departmental enquiry not only delay the justice but also, lead to unnecessary pressure upon the honest taxpayer, therefore as there has been an unexplained and unreasonable delay in the issuance of impugned SCN from the stage of initiation of enquiry, i.e., after more than 4 years, inquiry proceedings and resultant SCN is liable to be set aside on the ground of these delay and laches.

7. SCN DATED XXXX OCTOBER XXXX23 SUFFERS FROM CERTAIN INFIRMITIES WHICH RENDER THE PRESENT PROCEEDINGS NULL & VOID

Without prejudice to submissions on merits given in succeeding paras, it is submitted that SCN dated XXXX October XXXX23 suffers from certain infirmities as the said SCN was not served upon the Noticee in the format prescribed by law which renders the entire proceedings null & void.

In the present case, Show Cause Notice dated XXXX October XXXX23 was not preceded by a summary in Form GST DRC-01 and therefore, is in contradiction to the procedure prescribed under Rule 142 of the CGST Rules. Relevant extract of Rule 142 of the CGST Rules is reproduced herewith for kind perusal –

“(1) The proper officer shall serve, along with the

(a)Notice issued under section 52 or section 73 or section 74 or section 76 or section 122 or section 123 or section 124 or section 125 or section 127 or section 129 or section 130, a summary thereof electronically in FORM GST DRC-01,

(b)statement under sub-section (3) of section 73 or sub-section (3) of section 74, a summary thereof electronically in FORM GST DRC-02, specifying therein the details of the amount payable.

……………….

(4) The representation referred to in sub-section (9) of section 73 or sub-section (9) of section 74 or sub-section (3) of section 76 or the reply to any Notice issued under any section whose summary has been uploaded electronically in FORM GST DRC-01 under sub-rule (1) shall be furnished in FORM GST DRC-06.

(5) A summary of the order issued under section 52 or section 62 or section 63 or section 64 or section 73 or section 74 or section 75 or section 76 or section 122 or section 123 or section 124 or section 125 or section 127 or section 129 or section 130 shall be uploaded electronically in FORM GST DRC-07, specifying therein the amount of tax, interest and penalty, as the case may be, payable by the person concerned.

(6) The order referred to in sub-rule (5) shall be treated as the Notice for recovery.

…………….”

(Emphasis Supplied)

On bare perusal of aforementioned provision, it can be seen that Rule 142(1)(a) of the CGST Rules provides that any notice issued under various Sections (73/74/129, etc.) of the CGST Act has to be issued electronically along with summary thereof in prescribed form. It is important to note here that words used in Rule 142(1) are “shall” and not “may” which make it mandatory for every proper officer to follow the procedure for issuance & service of SCN as stipulated therein.

Whereas in the present matter, it is submitted that neither the SCN were accompanied with a summary in Form DRC-01 format respectively and thus, procedure as stipulated in statute read with rules is not followed in the present case which renders SCN & consequent demand as null & void.

Hon’ble High Court of Madras in the matter of M/s Shri Tyres State Tax Officer as reported in 2021 Taxo.online 1382 , held that demand order not preceded by Form GST DRC-01 and Form GST DRC-01A should be set aside. Relevant text of judgment is re-produced herewith for your kind reference:

“12. A careful perusal of Section 73 of the CG&ST Act in conjunction with Rule 142 makes it clear that non-adherence to Rule 142 had caused prejudice to the writ petitioner qua impugned order and therefore it is a rule which necessarily needs to be adhered to, if prejudice is to be eliminated in the case on hand. In other words, it is not a mere procedural requirement but, on the facts, and circumstances of this case, it becomes clear that it tantamount to trampling the rights of writ petitioner.

13. In the light of the narrative thus far, the following order is passed:

a) The impugned order dated 25-8-XXXX21 bearing reference No. GST-01/XXXX18-19, is set aside, solely on the ground of non-adherence to Rule 142 of the CG&ST Rules, XXXX17 and all other procedural requirements;

b) As the impugned order is set aside solely on the ground Rule 142 of CG&ST Act, XXXX17, though obvious it is made clear that no view or opinion on the merits of the matter have been expressed in the instant order;

c) As sequitur, the respondent shall commence proceedings afresh i.e., de-novo and complete the exercise by adhering to the requirements more particularly requirements under Rule 142 of CG&ST Rules, XXXX17.

d) The above de-novo exercise shall be commenced and concluded as expeditiously as the business of the respondent would permit and in any event within twelve weeks from today, i.e., on or before 14-12-XXXX21.

14. Captioned Writ Petition is disposed of with the above directives. Consequently, Writ Miscellaneous Petition is also disposed of as closed. There shall be no order as to costs.”

Hence, in view of the above submission, it is submitted that Show Cause Notice dated XXXX October XXXX23 was not accompanied with summary thereof in Form DRC-01, therefore, SCN dated XXXX October XXXX23 becomes invalid and is liable to be set aside.

8. JUSTIFICATION FOR NON-LEVY OF INTEREST UNDER SECTION 50 OF THE ACT

Interest is levied under Section 50 of the Act which reads as under –

“(1) Every person who is liable to pay tax in accordance with the provisions of this Act or the rules made thereunder, but fails to pay the tax or any part thereof to the Government within the period prescribed, shall for the period for which the tax or any part thereof remains unpaid, pay, on his own, interest at such rate, not exceeding eighteen per cent, as may be notified by the Government on the recommendations of the Council:

Provided that the interest on tax payable in respect of supplies made during a tax period and declared in the return for the said period furnished after the due date in accordance with the provisions of section 39, except where such return is furnished after commencement of any proceedings under section 73 or section 74 in respect of the said period, shall be payable on that portion of the tax which is paid by debiting the electronic cash ledger.

(2) The interest under sub-section (1) shall be calculated, in such manner as may be prescribed, from the day succeeding the day on which such tax was due to be paid.

(3) Where the input tax credit has been wrongly availed and utilised, the registered person shall pay interest on such input tax credit wrongly availed and utilised, at such rate not exceeding twenty-four per cent. as may be notified by the Government, on the recommendations of the Council, and the interest shall be calculated, in such manner as may be prescribed.”

Thus, in terms of sub-section (1) & (3) of Section 50, interest is levied when a person –
Fails to pay tax or any part thereof to Government; or,
Wrongly avails and utilizes Input Tax Credit (ITC)

However, as already submitted in Ground(s) supra that Noticee is not liable to reverse ITC as proposed vide SCN dated XXXX October XXXX23, question of demanding Interest does not arise. Accordingly, Interest demand is also liable to be set aside.

9. JUSTIFICATION FOR NON-LEVY OF PENALTY UNDER SECTION 74 OF THE ACT OR WRONGFUL INVOCATION OF EXTENDED PERIOD OF LIMITATION UNDER SECTION 74 OF THE ACT

Before dwelling into submissions, it is imperative to understand the provisions of Section 74 of the Act in order to know that in which cases penalty under Section 74 can be levied upon a taxpayer. Therefore, relevant extract of Section 74 of the Act is reproduced for ready reference –

“(1) Where it appears to the proper officer that any tax has not been paid or short paid or erroneously refunded or where input tax credit has been wrongly availed or utilised by reason of fraud, or any willful-misstatement or suppression of facts to evade tax, he shall serve notice on the person chargeable with tax which has not been so paid or which has been so short paid or to whom the refund has erroneously been made, or who has wrongly availed or utilised input tax credit, requiring him to show cause as to why he should not pay the amount specified in the notice along with interest payable thereon under section 50 and a penalty equivalent to the tax specified in the notice.”

On bare perusal of the above-mentioned provision, it can be seen that penalty under Section 74 of the act can be levied on a taxpayer in case the taxpayer fails to pay any tax or short pays the tax or where ITC has been wrongly availed and utilised due to below mentioned reasons –

Fraud;
Wilful misstatement; or
Suppression of facts

Further, the word suppression is defined under explanation 2 of Section 74 of CGST Act, XXXX17.The relevant extract is reproduced for your kind perusal –

“Explanation 2. For the purposes of this Act, the expression “suppression” shall mean non-declaration of facts or information which a taxable person is required to declare in the return, statement, report or any other document furnished under this Act or the rules made thereunder, or failure to furnish any information on being asked for, in writing, by the proper officer.”

Thus, on bare perusal of definition of term suppression, it can be seen that Section 74 can only be invoked when the Noticee has not declared the facts or information which the Noticee is liable to do in its return, statement, report or any other document furnished under the act. However, contrary to above contentions, the Noticee duly cooperated with the department during the entire proceedings and also all the facts that Noticee has availed ITC from which parties was already available with the department. Therefore, Section 74 cannot be invoked in the instant matter of the Noticee.

Further, the for levy of penalty under Section 74 of the Act, the ingredients as mentioned in Section 73 of the Finance Act, 1994 in the erstwhile regime of indirect taxes is required. The Hon’ble Supreme Court in the matter of Pushpam pharmaceuticals Co. vs. CCE, Bombay cited in 2016 Taxo.online 46, while interpreting the term ‘suppression’ held that –

“The meaning of the word both in law and even otherwise is well known. In normal understanding it is not different than what is explained in various dictionaries unless of course the context in which it has been used indicates otherwise. A perusal of the proviso indicates that it has been used in company of such strong words as fraud, collusion or wilful default. In fact, it is the mildest expression used in the proviso. Yet the surroundings in which it has been used it has to be construed strictly. It does not mean any omission. The act must be deliberate. In taxation, it can have only one meaning that the correct information was not disclosed deliberately to escape from payment of duty.”

Therefore, as per the ratio laid down by the Hon’ble Apex Court in the matter of Pushpam Pharmaceuticals it can be seen that in the suppression shall be deliberate and mere omission cannot be said to be suppression. Moreover, in the instant case of the Noticee, the information based on which the entire case is framed upon the Noticee, were always available with the GST department and thus, it cannot be in any way said that there was wilful suppression on part of the Appellant.

Further, various judicial authorities across the country had held that the burden to prove that there is wilful suppression or malafide intent to evade payment of taxes is on the department. Reliance in this regard is placed on following judicial pronouncements –
Uniworth Textiles Ltd. v. Commissioner of Central Excise, Raipur, cited in 2013 Taxo.online 4
Simplex Infrastructures Ltd. v. Commissioner of S.T., Kolkata, cited in 2016 Taxo.online 3
Chattisgarh State Industrial Development Corporation Ltd. v. C.C.E. & S.T., Raipur cited in MANU/CE/0199/XXXX16; XXXX16 (44) STR 642 (Tri. – Del.)
Anand Nishikawa Co. Ltd. v. CCE cited in 2005 Taxo.online 1
Collector of Central Excise v. Chemphar Drugs & Liniments reported in 1989 Taxo.online 1
Godrej Foods Ltd v. Union of India, cited in 2016 Taxo.online 42

Also, the Noticee in the instant case cooperated with the department during the entire proceedings as the Noticee replied to all the letters duly appeared before the authorities as and when required which clearly showcase that the Noticee was genuine and never had any intention to suppress anything from the department.

Moreover, various judicial authorities across the country has held that when the taxpayer cooperated during the entire proceedings, department cannot allege that there was intention on part of the Noticee to suppress any material information from the department. Reliance in this regard is placed on following judicial pronouncements –
Simplex Infrastructures Ltd. v. Commissioner of S.T., Kolkata cited in 2016 Taxo.online 3 wherein it was held that –

“57. From the aforesaid it appears that the petitioner was diligent in responding to all the notices issued by the Department and in its replies, the petitioner clearly explained the nature and scope of its business. Specimen copies of contracts entered into by the petitioner when its clients were also made available to the Department. In my view there was full and sufficient disclosure of the nature of the petitioner’s business to the Department and it cannot be said that the petitioner suppressed material facts to keep the Department in the dark with an intent to evade payment of service tax.

58. It is also pertinent to note that it is stated in the impugned show cause notice itself that the same has been issued on the basis of the records submitted by the petitioner. Hence, there appears to be no basis in the Department’s contention that the petitioner suppressed material facts with an intent to evade payment of service tax. Suppression of fact in the context of this case can only mean non-disclosure of correct information deliberately to evade payment of service tax. There must be an element of fraud and dishonest motive before a non-disclosure simplicitor can be called “suppression of facts”. In the present case, the petitioner suppressed nothing and maintained all throughout that it did not carry on business as consulting engineer and as such was not liable to pay service tax under that head. Even if such perception of the petitioner was founded to be erroneous subsequently still the same would not, in my mind, amount to suppression of fact. Unless a party deliberately conceals material facts with a dishonest motive of eroding some liability or making some unlawful gain, he cannot be said to be guilty of suppression of facts.

60. The petitioner furnished all information that was called for by the Department from time to time. Once the information is supplied pursuant to the directions of the Revenue authority and information so supplied has not been questioned, a belated demand has to be held to be barred by limitation. This proposition finds support from the judgment of the Supreme Court in case of Commissioner of Central Excise, Chandigarh v. Punjab Laminates Pvt. Ltd. reported in XXXX06 (XXXX2) E.L.T. 578.

61. In this connection one may also refer to the judgment of the Hon’ble Apex Court in the case of Commissioner of Central Excise, Chennai v. Chennai Petroleum Corporation Ltd. reported in XXXX07 (211) E.L.T. 193, where it was held in effect that where the Department was aware of the activities of the assessee and nothing prevented the Department from visiting the assessee’s site to make enquiries, it had to be held that there was no suppression on the part of the assessee to warrant invocation of the extended period of limitation.”

Commissioner of C. Ex., Chandigarh v. Punjab Laminates Pvt. Ltd. reported in 2006 Taxo.online 5

“16. At no point of time, the Revenue doubted the correctness or otherwise of the manufacturing process or the ingredients disclosed by the Respondent. The stand of the Respondent that the Industry as such had adopted the same manufacturing process and had been extended the benefit of the Exemption Notification of 1989 has not been called in question. If the stand of the manufacturer is correct, there was no reason as to why it should be singled out.

18. It is not a case where the Respondents had not disclosed the activities of manufacturing products carried out by them by declaration or otherwise. They responded to each and every query of the Appellant, as and when called upon to do so. The authorities of the Appellant must have verified the said disclosures. At least they are expected to do so. The disclosure made by the Respondent was acceptable to them. Their bona fide was never questioned.”

Therefore, the Noticee submits that the department failed to prove that the Noticee availed ITC in a fraudulent manner and also has suppressed material information from the department, Section 74 cannot be invoked in the instant matter of the Noticee.

Thus, concluding the submissions made above, firstly Noticee is not liable to make any reversal of the ITC as per the submissions made above, therefore, Noticee is not liable for penal action under Section 74 of the Act. Secondly, the ingredients for invoking Section 74 of the Act is missing in the instant case. Hence, demand for penalty amounting to 100% of the amount in dispute shall be dropped on this ground only.

10. JUSTIFICATION FOR NON-LEVY OF PENALTY UNDER SECTION 122 OF THE ACT

The SCN dated XXXX October XXXX23 proposed to levy penalty under Section 122(1)(vii); Section 122(1)(x) and Section 122(3)(d) of the Act which is as under –

“Where a taxable person who-

(vii) Takes or utilises input tax credit without actual receipt of goods or services or both either fully or partially, in contravention of the provisions of this Act or the rules made thereunder;

(x) Falsifies or substitutes financial records or produces fake accounts or

documents or furnishes any false information or return with an intention to evade payment of tax due under this Act;

he shall be liable to pay a penalty of ten thousand rupees or an amount equivalent to input tax credit availed of or passed on, whichever is higher.

(3) Any person who –

(d) fails to appear before the officer of central tax, when issued with a summon for appearance to give evidence or produce a document in an inquiry;

shall be liable to a penalty which may extend to twenty-five thousand rupees.”

With respect to penalty under Section 122(1)(vii), the Noticee humbly submits that the said penalty is not leviable in the instant matter of the Noticee and all the submissions in this regard is already made by the Noticee in the paras supra. Therefore, penalty as applicable under Section 122(1)(vii) is not leviable upon the Noticee.
Further, with respect to Section 122(1)(x), the Noticee submits that the entire case in the instant case was built up on the basis of information received from the jurisdictional offices of the department based on various reports as mentioned in Notice dated XXXX October XXXX23. No documents were even sought from the Noticee during the enquiry proceedings and when any document was sought the same was duly supplied by the Noticee. Therefore, penalty as mentioned under Section 122(1)(x) is not applicable in the instant case of the Noticee.

Further, as mentioned in Statement of Facts supra, the Noticee duly appeared before the authorities as and when requested and also the Statement of the Proprietor of the Noticee was also recorded by the revenue which is also admitted in the SCN dated XXXX October XXXX23. Thus, penalty under Section 122(3)(d) is not leviable in the instant matter of the Noticee.

Penalty under Section 122 of the Act cannot be levied in case Penalty under Section 74 of the Act is proposed upon the Noticee

The Noticee humbly submits that as per Section 75 of the Act, the legislature itself has specifically mentioned that in case proceedings under Section 73 and Section 74 of the Act are initiated against the taxpayer, penalty under no other section can be levied upon the Noticee. Relevant extract of Section 75 of the Act is reproduced verbatim as under –

“(13) Where any penalty is imposed under section 73 or section 74, no penalty for the same act or omission shall be imposed on the same person under any other provision of this Act.”

Thus, when already penalty under Section 74 of the Act is imposed upon the Noticee (though the same is challenged in the grounds mentioned supra), penalty under Section 122 cannot be levied upon the Noticee.

Further, the said view was also clarified by the Central Board of Indirect Taxes and Customs vide circular bearing no. 171/3/XXXX22 – GST dated 06 July XXXX22. The relevant extract of circular dated 06 July XXXX22 is reproduced verbatim as under –

“Further, as per provisions of section 75(13) of CGST Act, if penal action for fraudulent availment or utilization of ITC is taken against ‘B’ under section 74 of CGST Act, no penalty for the same act, i.e., for the said fraudulent availment or utilization of ITC, can be imposed on ‘B’ under any other provisions of CGST Act, including under section 122.”

Hence, penalty as proposed under Section 122 of the Act proposed upon the Noticee must be dropped on this ground only.

ANNEXURE III

PRAYER

In light of foregoing, it is prayed that the Ld. Adjudicating Authority may be pleased to:

1. Set aside the impugned SCN dated XXXX October XXXX23;

2. Set aside the demand of GST amounting to XXX/- lakhs proposed vide Impugned SCN dated XXXX October XXXX23;

3. Set aside the demand of interest under Section 50 of the Act proposed vide Impugned SCN dated XXXX October XXXX23;

4. Set aside the demand of penalty under Section 74 of Act proposed vide SCN dated XXXX October XXXX23;

5. Set aside the demand of penalty under Section 122 of the Act proposed vide SCN dated XXXX October XXXX23;

6. To allow further information, documents or other submission during or after proceedings, if required to do so;

7. To grant an opportunity of personal hearing; and,

8. To pass such other order or order (s) as may be deemed fit and proper in the light of facts and circumstances of the case.

The Noticee further reserves their right to file additional submissions, delete or amend these submissions and reply upon additional documents, if necessary.

Signature of Authorised Signatory

Name –

Designation/Status –

Date –

Place –

Master Reply (KEY ISSUES HANDLED IN GST)

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