2024 (3) TMI 1277 - HC - GST

Jurisdiction to issue show cause notice for wrongful input tax credit utilisation denied; employee notice quashed as unsustainable

Challenge concerned whether respondent had jurisdiction to issue a show cause notice invoking penalty provisions for wrongful utilisation of input tax ... Jurisdiction to issue SCN - Levy of penalty equivalent to the tax - wrongful utilization of Input Tax Credit - Section 122(1A) and Section 137 of the CGST Act - whether the invocation of the provisions of Section 122 (1-A) of the CGST Act as also Section 137(1) and 137(2) would stand attracted in their applicability to the petitioner, so as to confer jurisdiction on respondent no. 3, to issue the impugned show cause notice against the petitioner, who is merely an employee of MLIPL and a power of attorney of Maersk? - HELD THAT:- A plain reading of section 122 clearly implies that it provides for levy of penalty for “certain offences” by taxable person. Such taxable person would render himself liable for a penalty for acts provided in clauses (i) to (xxi) of sub-section (1). Insofar as sub-section (1-A) of Section 122 is concerned, it provides that any person (who would necessarily be a taxable person), retains the benefit of the transactions covered under clauses (i), (ii), (vii) or clause (ix) of sub-section (1), and at whose instance, such transaction is conducted, “shall be liable to a penalty of an amount equal to the tax evaded or input tax credit availed of or passed on”. This necessarily implies that sub-section (1-A) applies to a taxable person, as it specifically speaks about the applicability of the provisions of clauses (i), (ii), (vii) or clause (ix) of sub-section (1), with a further emphasis added by the words - This clearly depicts the intention of the legislature that a person who would fall within the purview of sub-section(1-A) of Section 122 is necessarily a taxable person as defined under section 2(107) of the CGST Act read with the provisions of section 2( 94) of the CGST Act and a person who retains the benefits of transactions covered under clauses (i), (ii), (vii) or clause (ix) of sub-section (1) of Section 122. Section 122 (1-A) also cannot be attracted qua the person, in a situation when any person does not retain the benefit of a transaction covered under clauses (i), (ii), (vii) or clause (ix) of sub-section (1) and/or it is applicable at whose instance such transactions are conducted, could be the only person, who shall be liable to a penalty of an amount equivalent to the tax evaded or input tax credit, wrongly availed of or passed on. There is no material to support that any of the ingredients as specified in sub-section (1-A) of Section 122 would stand attracted so as to confer jurisdiction on respondent no. 3 to adjudicate any allegations/charges as made under sub-section (1-A) of Section 122. This is abundantly clear from the bare contents of paragraphs 20 and 5.19.1 of the show cause notice. It is clear from the relevant contents of the show cause notice that the basic jurisdictional requirements / ingredients, are not attracted for issuance of the show cause notice under Section 74 of the CGST Act so as to inter alia invoke Section 122 (1-A) and Section 137 against the petitioner. Even otherwise, it is ill-conceivable to read and recognize into the provisions of Section 122 and Section 137, of the CGST Act any principle of vicarious liability being attracted. There could be none. Thus, Respondent no. 3 clearly lacks jurisdiction to adjudicate the show cause notice in its applicability to the petitioner. Thus qua the petitioner, the impugned show cause notice is rendered bad and illegal, deserving it to be quashed and set aside. It is highly unconscionable and disproportionate for the concerned officer of the Revenue to demand from the petitioner an amount of Rs. 3731 crores, which in fact is clearly alleged to be the liability of Maersk, as the contents of the show cause notice itself would demonstrate. The petitioner would not be incorrect in contending that the purpose of issuing the show cause notice to the petitioner who is merely an employee, was designed to threaten and pressurize the petitioner. Petition allowed. Issues Involved:1. Validity of show cause notice issued u/s 74 of the CGST Act demanding penalty from the petitioner.2. Applicability of Section 122(1A) and Section 137 of the CGST Act to the petitioner.Summary:Issue 1: Validity of Show Cause NoticeThe petitioners, employees of a shipping company, challenged a show cause notice issued u/s 74 of the CGST Act demanding Rs. 3731 crores as penalty for tax evasion by their employer. The court noted that the show cause notice was issued to the petitioners for allegedly aiding and abetting the tax evasion by Maersk, their employer, and retaining the benefits of such evasion. The petitioners contended that they were merely employees and power of attorney holders and did not personally benefit from the evasion. The court found that the show cause notice lacked jurisdiction and was issued without proper application of mind, as the petitioners were not taxable persons under the CGST Act who could retain the benefits of the transactions in question.Issue 2: Applicability of Section 122(1A) and Section 137The court examined the applicability of Section 122(1A) and Section 137 of the CGST Act to the petitioners. Section 122(1A) applies to taxable persons who retain the benefits of certain transactions and at whose instance such transactions are conducted. The court found that the petitioners, being mere employees, did not fall within the purview of this provision. Similarly, Section 137, which pertains to offences by companies, was found inapplicable to the petitioners as they were not in charge of or responsible for the conduct of the business of Maersk. The court held that the invocation of these sections against the petitioners was without jurisdiction and amounted to an abuse of power.Conclusion:The court quashed the show cause notice issued to the petitioners, stating that it was arbitrary, illegal, and issued without jurisdiction. The court emphasized that the provisions of Section 122(1A) and Section 137 of the CGST Act did not apply to the petitioners, who were merely employees and did not personally benefit from the alleged tax evasion. The court allowed the petitions and ruled that the show cause notice was invalid. The judgment also clarified that these observations were specific to the petitioners and did not apply to other noticees involved in the case.