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 Mechanism (RCM) on cotton purchases from agriculturists. Court held petitioner liable under Section 9(3) CGST Act read with Notification No. 43/2017, rejecting revenue neutrality argument as petitioner was not 100% EOU but exported only 80% of products. Penalty upheld as petitioner deliberately ignored notices since 2022 and failed to respond substantively to show cause notice.

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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.

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