ADVISORY JURISDICTION OF GST AUTHORITIES

Section 74 of the Central Goods and Services Tax Act, 2017 (‘Act’ for short) provides for the determination of tax not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilized by reason of fraud or any willful misstatement or suppression of facts. 

Section 74(1) of the Act provides that a notice may be issued by the proper officer if he is of the opinion that the input tax credit has been wrongly availed or utilized by reason of fraud, or any willful misstatement or suppression of facts, to the person who has wrongly availed or utilized the 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.

Section 74(5) of the Act provides that the persons chargeable tax may, before service of notice, pay the amount of tax along with interest and a penalty equivalent to 15% of such tax on the basis of his own ascertainment of such tax or the tax as ascertained by the proper office and inform the proper officer in writing of such payment.

Section 74(9) of the Act provides that the proper officer shall, after considering the representation, if any, made by the person chargeable with tax, determine the amount of tax, interest and penalty due from such person and issue an order.

Section 74 provides the procedure for the determination of tax by issuing a notice under the provisions to the tax payer with directions  to give reply.  On receipt of reply from the petitioner, the proper officer is to determine the amount of tax, interest and penalty due from the taxable person and issue an order.  The section gives such powers to the proper officer.  The section does not give ‘advisory jurisdiction’ to the proper officers to advise the taxable person to pay the tax, interest and penalty without following the due procedure given in section 74 of the Act.

In M/S. DEEM DISTRIBUTORS PRIVATE LTD VERSUS UNION OF INDIA [2021 (8) TMI 405 - TELANGANA HIGH COURT] the petitioner is a partnership firm engaged in dealing in goods and services relating to ferrous waste and scrap, remelting scrap ingots of iron or steel, flat rolled products of iron or non-alloy steel of a width of 600 mm or hot rolled, not clad, plated or coated etc.

The 4^th respondent issued a letter on 25.04.2009 to the petitioner informing that the petitioner has availed input tax credit on the fake invoices issued by fictitious suppliers.  There is no movement of goods in such cases.  The petitioner was requested to reverse the input tax credit to the extent of ₹ 1.52 crores immediately.

The 3^rd respondent sent an intimation of tax ascertained and the tax payable is ₹ 1.17 crores on 22.01.2021.  In that intimation the petitioner was advised to pay the tax payable failing which a show cause notice would be issued to the petitioner under section 74(1) of the Act.  Against this the petitioner filed the present writ petition before the High Court.

The petitioner contended the following before the High Court-

• The petitioner was advised to pay the tax for the availment of input tax credit at the stage of summons itself without following the due procedure.
• The petitioner paid a sum of ₹ 10 lakhs on 30.04.2019 and ₹ 25 lakhs on 13.09.2019 to buy piece with the department.
• The tax liability cannot be determined by the Department before conducting enquiry when even the investigation is incomplete
• When no enquiry has been initiated, the petitioner cannot be compelled to pay the amount coercively which violates the Articles 14 and 300A of the Constitution of India.

The petitioner filed an interim application before the High Court with the prayer to stay all further proceedings on the demand issued by the 4^th respondent on 25.04.2019 and the summon issued to the petitioner.

The High Court initially granted interim stay of all further proceedings pursuant to the demand dated 25.04.2019 issued by the 4^th respondent and also the summons to the petitioner. 

The Department admitted that the investigation proceedings were still going on against the petitioner and have not been concluded.  The action is taken by the Authorities on the base of the intelligence and on that basis summons has been issued to the petitioner.  Statements were also recorded from the Director of the Firm. Pending investigation the petitioner was advised to pay the amount of tax with applicable interest and penalty under section 74(5) of the Act.  Since no investigation is under progress no notice for a tax demand has been made or raised under section 74 of the Act.

The High Court observed that there is no doubt that summons have been issued to the Director of the petitioner firm under section 70 of the Act to give evidence/depose statement and to produce certain purchase orders and to appear on 24.12.2020 and 25.01.2021 vide summons dated 22.12.2020 and 22.01.2021.  The investigation against the petitioner was not complete.  No notice under section 74(1) has also t been issued to the petitioner by the Department.

The High Court further observed that a conclusion appears to have been drawn on the basis of incomplete investigation already done that the petitioner had availed input tax credit and raised invoices by certain fictitious suppliers without actual receipt of goods.

The High Court raised a question as to how a demand for reversal of input tax credit or payment of tax with interest or penalty can be raised by the Department without there being a determination of liability of the petitioner in any enquiry conducted under the Act. 

The High Court was of the opinion that Section 74(5) of the Act gives a choice to the taxpayer to make any payment if he chooses but it does not confer any power on the respondents to make a demand as if there has been a determination of liability of the petitioner and demand tax along with interest and penalty.

The High Court held that the Department could not have issued the letter dated 25.04.2019 to the petitioner asking him immediately reverse the input tax credit to the extent of ₹ 1.52 crores before ascertainment of liability.  The High Court also held that there  is no advisory jurisdiction conferred on the respondents to issue any ‘advise’ of the nature issued to the petitioner by the 3^rd respondent on 22.01.2021 asking to pay ₹ 1.17 crores.  The High Court also held that no tax demand can be issued or raised when an investigation is pending and still in progress.  The High Court allowed the writ petition filed by the petitioner.  The respondents are restrained from coercing the petitioner to make any payment without issuing notice under section 74(1) of the Act and following the procedure therein.  The High Court also directed the department to refund ₹ 25 lakhs paid by the petitioner with 7% interest per annum.

The High Court, however, held that the Department can proceed with the investigation as well as the enquiry under the provisions of the Act against the petitioner and act strictly in accordance with the provisions of the Act.