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 credit and equivalent tax levy. The court analysed statutory language and held the penalty provision applies only to a taxable person who retains benefit of specified transactions; absence of such ingredients meant impugned notice could not validly invoke the penal provisions nor impose vicarious liability on an employee who neither retained benefits nor was the taxpayer. Consequence: show cause notice against the employee quashed as lacking jurisdiction and manifestly disproportionate where liability was alleged to belong to the principal.

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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 Notice

The 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 137

The 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.

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