2024 (6) TMI 479 - HC - GST

GST demand of Rs. 3.73 crore with penalty upheld for non-payment on cotton purchases under Section 9(3)

Gujarat HC dismissed petition challenging GST demand of Rs. 3,73,95,300 with equal penalty under Section 122(2) for non-payment of tax on Reverse Charge ... Reverse charge mechanism - Notification No. 43 of 2017 specifying raw cotton liable to reverse charge - application of section 9(3) as charging provision versus section 9(4) - determination under section 73 and enhanced jurisdiction under section 74 for suppression - penalty for willful-misstatement or suppression under section 122(2)Reverse charge mechanism - Notification No. 43 of 2017 specifying raw cotton liable to reverse charge - application of section 9(3) as charging provision versus section 9(4) - Liability to pay GST on reverse charge basis for raw cotton purchased from agriculturist from 15.11.2017 - HELD THAT: - The Court examined the statutory scheme of Section 9 and the Notifications. Notification No. 43 of 2017, issued under Section 9(3) with effect from 15.11.2017, inserted an entry making raw cotton (Tariff Item 5201) purchased from an agriculturist taxable on reverse charge, making the registered recipient liable to pay tax. The petitioner's purchases of raw cotton from agriculturists therefore attract GST on RCM from 15.11.2017. The contention that absence of a notification under Section 9(4) absolves the petitioner is unsustainable because Notification No. 43 operates under Section 9(3) and is a charging specification applicable to the petitioner's purchases. [Paras 6, 7, 11]The petitioner is liable to pay GST on reverse charge basis for raw cotton purchased from agriculturists from 15.11.2017 as per Notification No. 43 of 2017 issued under Section 9(3).Determination under section 73 and enhanced jurisdiction under section 74 for suppression - Validity of invoking Section 74 after earlier proceedings under Section 73 - HELD THAT: - The Court compared the earlier intimation under Form GST DRC-01A (Section 73) and the subsequent notice under Section 74. It found that further investigation disclosed additional suppression of purchases for Financial Year 2018-19 beyond the matters initially intimated for 2017-18. Where suppression is found, the proper officer may invoke Section 74, which confers an extended period for assessment. Thus, issuance of the Section 74 show cause notice was not rendered impermissible merely because an earlier notice or intimation arose under Section 73. [Paras 9]Invocation of Section 74 was valid in view of further suppression discovered, and the subsequent notice under Section 74 does not suffer from jurisdictional infirmity.Application of section 9(3) as charging provision versus section 9(4) - Effect of referring to Section 9(4) in the show cause notice when Notification under Section 9(3) is the operative basis - HELD THAT: - The Court observed that both the show cause notice and the impugned order expressly referred to Notification No. 43 of 2017, which operates under Section 9(3). A clerical or referential mention of Section 9(4) in the notice does not vitiate the proceedings where the operative legal basis and the notification invoked are those under Section 9(3). The petitioner was on notice that Notification No. 43/2017 applied to raw cotton purchases from agriculturists and hence could not successfully contend that the notice was incompetent on that ground. [Paras 10, 12]Mention of Section 9(4) in the show cause notice does not vitiate the notice or order where Notification No. 43 of 2017 under Section 9(3) is the operative basis for RCM liability.Reverse charge mechanism - Whether revenue-neutrality by export (refund of IGST) absolves the petitioner from RCM liability - HELD THAT: - The Court rejected the submission that the petitioner's significant exports (circa 80%) would render the exercise revenue-neutral and therefore obviate the RCM liability. The RCM liability under Section 9(3) is a charging obligation independent of subsequent refund or export treatment; partial export does not negate the liability, and entitlement to refund under IGST/Section 54 does not absolve the petitioner from being charged tax under the Act. [Paras 13]Revenue-neutrality by way of export and potential refund does not absolve the petitioner from its charging obligation to pay GST on RCM.Penalty for willful-misstatement or suppression under section 122(2) - determination under section 73 and enhanced jurisdiction under section 74 for suppression - Imposability and sustainment of penalty under Section 122(2) - HELD THAT: - The Court reviewed the record and the respondent's reasoning that the petitioner had been put on notice since 2022 regarding non-payment of GST under RCM and nonetheless did not discharge the obligation. Having found suppression and deliberate non-payment in the light of Notification No. 43/2017, the Court held that the respondent furnished cogent reasons justifying imposition of penalty under Section 122(2). The Court declined to interfere with the penalty decision. [Paras 17]The penalty imposed under Section 122(2) was justified on the facts and does not call for interference.Final Conclusion: Writ petition dismissed. The High Court upheld the show cause notice and the order of the assessing authority: the petitioner is liable to pay GST on reverse charge for raw cotton purchased from agriculturists from 15.11.2017 (per Notification No. 43/2017), invocation of Section 74 was permissible for additional suppression, the notice was not vitiated by reference to Section 9(4), revenue-neutrality by export does not absolve RCM liability, and the penalty under Section 122(2) was sustainable. Issues Involved:1. Validity of the notice issued u/s 74(1) of the CGST Act.2. Applicability of GST on Reverse Charge Mechanism (RCM) for raw cotton purchased from agriculturists.3. Imposition of penalty u/s 122(2) of the CGST Act.Summary:1. Validity of the Notice Issued u/s 74(1) of the CGST Act:The petitioner challenged the notice dated 30.8.2023 issued in Form GST DRC-01 u/s 74(1), 122(2), and 125 of the CGST Act, read with Rule 142(1) of the CGST Rules, for FY 2017-18 and 2018-19. The petitioner argued that the notice u/s 74(5) could not have been issued as an earlier notice was already issued u/s 73(5) for the same issue. The Court held that the notice issued u/s 74(1) was valid as there was further suppression of facts by the petitioner regarding non-payment of GST on RCM for FY 2018-19, allowing the respondent authority an extended period of 5 years for assessment.2. Applicability of GST on RCM for Raw Cotton Purchased from Agriculturists:The petitioner contended that they were not liable to pay GST on RCM for raw cotton purchased from agriculturists. The Court referred to Notification No. 43 of 2017 dated 14.11.2017, which specifies that registered persons purchasing raw cotton from agriculturists are liable to pay GST on RCM w.e.f. 15.11.2017. The Court found that the petitioner was liable to pay GST on RCM basis under Section 9(3) of the CGST Act. The Court also dismissed the argument that the entire exercise would be revenue neutral, noting that the petitioner is not a 100% EOU but exports only 80% of its product.3. Imposition of Penalty u/s 122(2) of the CGST Act:The petitioner argued against the imposition of a penalty, claiming there was no fraud or misrepresentation. The Court upheld the penalty imposed u/s 122(2), stating that the petitioner had deliberately not paid GST on RCM for raw cotton purchased from agriculturists, contrary to Notification No. 43 of 2017 issued u/s 9(3) of the CGST Act. The Court found that the respondent authorities had given cogent reasons for the penalty, and no interference was warranted.Conclusion:The petition was dismissed, and the impugned order dated 28.12.2023, which confirmed the demand of unpaid tax amounting to Rs. 3,73,95,300/- along with an equal amount of penalty u/s 122(2) of the CGST Act, was upheld. The Court found no merit in the petitioner's arguments and discharged the notice. Consequently, Civil Application No. 1 of 2023 was also disposed of.