GST assessment order quashed for procedural lapses and inadequate consideration of petitioner's objections regarding SEZ supplies

The HC set aside a GST assessment order and remanded the matter for fresh consideration. The tax authorities failed to properly consider the petitioner's objections regarding SEZ supplies without proper endorsements, classification of services under SAC code 9963, and reliance on Trial Balances that may have included inter-state supplies. The Court found the authorities wrongly invoked penal provisions under Sections 74, 122(2), and 125 of CGST Act without establishing fraud or willful suppression. The assessment was quashed due to procedural lapses and inadequate consideration of evidence, with directions for re-appreciation of grounds and proper verification of documents.

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The core legal questions considered by the Court in this matter include:

(i) Whether the tax authorities were justified in taxing the petitioner for supplies made to Special Economic Zone (SEZ) units on the ground of non-furnishing of proof of authorized operations certified by the Specified Officer;

(ii) Whether the short-payment of tax on supplies classified under SAC code 9963 was correctly determined;

(iii) Whether the petitioner wrongly availed Input Tax Credit (ITC) on invoices issued by an input service distributor in contravention of Section 20 of the Central Goods and Services Tax (C.G.S.T.) Act, 2017 and related rules;

(iv) Whether the tax authorities were justified in invoking penal provisions under Sections 74, 122(2), 125 of the C.G.S.T. Act, 2017 and Section 50 of the G.S.T. Act, 2017 for non/short levy of tax based on discrepancies between turnover as per Trial Balance and G.S.T. returns;

(v) Whether the tax authorities properly considered the objections and evidence submitted by the petitioner, including the applicability and reliability of Trial Balances and invoices;

(vi) Whether the penal provisions could be invoked absent any fraud, willful misdeclaration or suppression of turnover.

Issue-wise detailed analysis:

1. Taxation of supplies to SEZ units without proof of authorized operations:

The relevant legal framework involves the provisions relating to zero-rated supplies to SEZ units under the GST regime, which require certification by the Specified Officer to exempt such supplies from tax. The petitioner contended that in the initial period of GST implementation (2017-2018), the invoices did not bear the stamp or endorsement certifying authorized operations, but subsequently submitted invoices with proper endorsement.

The Court observed that the tax authority (3rd respondent) rejected the petitioner's submissions and invoices with endorsements, holding that the absence of stamp on earlier invoices disqualified the supplies from zero-rated treatment. The Court noted that the 3rd respondent failed to consider the petitioner's evidence adequately and did not appreciate the transitional difficulties in obtaining endorsements during the initial GST period.

The Court concluded that the rejection of the petitioner's claim for zero-rated supplies was not justified without proper consideration of the endorsed invoices submitted by the petitioner.

2. Treatment of supplies under SAC code 9963 and short-payment of tax:

The petitioner argued that supplies under SAC 9963 were made pursuant to catering services agreements and that certain stock transfers to other branches were wrongly treated as taxable supplies. The legal framework includes the classification of services under SAC codes and the GST treatment of stock transfers versus supplies.

The Court found that the 3rd respondent did not adequately address the petitioner's objections regarding the nature of supplies and the applicability of SAC code 9963. The tax authority failed to distinguish between genuine supplies and non-taxable stock transfers.

This indicated a lack of proper appreciation of the facts and GST provisions relating to classification and taxability of such transactions.

3. Wrong availment of Input Tax Credit on invoices issued by input service distributor:

Section 20 of the C.G.S.T. Act, 2017, along with the relevant rules, governs the distribution of input tax credit by input service distributors. The petitioner was alleged to have wrongly availed ITC on invoices issued by the input service distributor.

The Court did not elaborate in detail on this issue but noted that the 3rd respondent had relied on documents obtained from the petitioner's own office, including Trial Balances and invoices, to arrive at findings. The petitioner contested the correctness of such reliance, particularly the indiscriminate use of Trial Balances.

The Court recognized that the petitioner's objections regarding the authenticity and applicability of these documents were not properly considered by the 3rd respondent.

4. Reliance on Trial Balances and discrepancy in turnover figures:

The 3rd respondent had obtained Trial Balances from the petitioner's office and used them to determine turnover and tax liability. The petitioner contended that these Trial Balances included supplies made outside Andhra Pradesh and hence could not be used to assess tax liability within the State. Further, the petitioner argued that the 3rd respondent selectively accepted certain figures from the Trial Balances while rejecting others without explanation.

The Court found that the 3rd respondent failed to address these objections and did not clarify whether the Trial Balances pertained solely to Andhra Pradesh supplies or included inter-state supplies. The Court noted the lack of reasoned consideration for rejecting certified accounts and Trial Balances submitted by the petitioner's Chartered Accountants.

This non-consideration amounted to a procedural lapse and failure to properly appreciate the petitioner's evidence.

5. Invocation of penal provisions under GST laws:

The petitioner challenged the invocation of penal provisions under Sections 74, 122(2), 125 of the C.G.S.T. Act, 2017 and Section 50 of the G.S.T. Act, 2017, arguing that there was no fraud, willful misdeclaration or suppression of turnover. The petitioner contended that mere disagreement over turnover figures did not justify penal action.

The Court observed that the 3rd respondent invoked penal provisions without adequately establishing the requisite mens rea elements such as fraud or willful suppression. The Court emphasized that penal provisions should not be invoked lightly or merely on the basis of differing views on turnover figures.

The Court found merit in the petitioner's contention that the penal provisions were invoked without justification.

Treatment of competing arguments and final conclusions:

The tax authorities relied heavily on Trial Balances and other documents obtained from the petitioner's own records, asserting these documents revealed true facts. The petitioner challenged the correctness and applicability of these documents, emphasizing incomplete or inter-state nature of the data and the lack of proper endorsement on invoices for SEZ supplies.

The Court found that the 3rd respondent did not adequately consider the petitioner's objections and evidence. The failure to address whether Trial Balances included inter-state supplies, ignoring endorsed invoices for SEZ supplies, and invoking penal provisions without establishing fraud or willful misdeclaration, amounted to procedural and substantive infirmities.

Accordingly, the Court set aside the order of assessment dated 05.02.2025 and remanded the matter back to the 3rd respondent for fresh consideration. The 3rd respondent was directed to re-appreciate the petitioner's grounds, verify invoices and documents, and reconsider the applicability of penal provisions after affording the petitioner an opportunity of hearing.

Significant holdings and core principles established:

"A case of non-consideration of objections, filed by the petitioner, is made out."

"The 3rd respondent had not adverted to some of the issues raised by the petitioner on the question of whether the Trial Balances obtained from the 3rd respondent related only to the turnover of supplies made within the State of Andhra Pradesh or whether the related supplies made outside the State of Andhra Pradesh were also included."

"The 3rd respondent has not taken into account the invoices produced by the petitioner, with the necessary endorsement, in relation to the supplies made to the SEZ unit."

"The penal provisions of Section 74 and other provisions mentioned above could not be invoked without justification, particularly in the absence of fraud, willful misdeclaration or suppression of turnover."

"It would be appropriate to set aside the order of assessment and remand the matter back to the 3rd respondent for re-appreciation of the grounds raised by the petitioner and for a verification of the invoices and other documents produced by the petitioner for claiming reduction of liability."

The Court's final determination was that the impugned assessment order was liable to be quashed due to failure to consider material objections and evidence, and improper invocation of penal provisions. The matter was remanded for fresh adjudication in accordance with law and after giving the petitioner a fair hearing. The period between the impugned order and the receipt of the Court's order was excluded for limitation purposes. No costs were imposed.

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