2025 (9) TMI 1205 - HC - GST

Show cause notice under Section 74 CGST quashed: mere valuation errors, wrong rate don't prove wilful tax suppression

M/s. Ncs Pearson Inc. Versus Union of India, Joint Director Directorate General of GST Intelligence Chennai Zonal Unit, Chennai, Additional Commissioner/Joint Commissioner Central Tax And Central Excise, Bengaluru, Central Board of Indirect Taxes And Customs, The GST Council New Delhi, Government Of Karnataka.

Karnataka HC quashed the show cause notice issued under Section 74 of the CGST Act, holding the jurisdictional requirement of wilful suppression to evade ... Extended Period of limitation - Classification of services - online Information Data Base Access and Retrieval Services (OIDAR services) or not - Type-II Tests - Type-III Tests - wilful suppression of facts - HELD THAT:- A perusal of the impugned SCN will indicate that Section 74 of the CGST Act cannot be invoked in cases involving the mere omission to pay tax or the mere omission to give correct information, without there being any intention to evade tax; the allegations of wilful suppression of appropriate GST not being paid and the failure of the petitioner to mention the value of services correctly in the GSTR-5A returns and failing to apply the correct GST rate, ignores the fact that the very mens rea element of consciously or deliberately suppressing information/details for the purpose of evading the payment of tax which forms the sine qua non of Section 74 of the CGST Act, is not satisfied in the instant case; the jurisdictional fact for invoking the stringent provisions of Section 74 of the CGST Act, that is of wilful suppression with a view to evade payment of tax are neither satisfied nor fulfilled in the impugned SCN, which deserves to be quashed on this ground also. In the case of Cosmic Dye Chemical vs. Collector of Central Excise, Bombay [1994 (9) TMI 86 - SUPREME COURT], the Apex Court held that the word ‘wilful’, which precedes suppression, requires the existence of an intent to evade duty. In the case of Eastland Combines vs. CCE [2003 (1) TMI 107 - SUPREME COURT], the Apex Court held that wilful suppression postulates a positive act and that a mere failure to pay duty which is not due to any suppression of facts is not sufficient to attract the extended period of limitation and that the mere default or failure of the assessee to pay duty, without the existence of any intent to wilfully suppress information/details in itself would attract the extended period of limitation. The impugned Show Cause Notice dated 12.02.2024 issued under Section 74 of the CGST Act, by the 2nd respondent is illegal and arbitrary being manifestly violative of the law for want of satisfaction of the jurisdictional facts contemplated in Section 74 of the CGST Act and that the impugned show cause notice is wholly without jurisdiction or authority of law as the foundational jurisdictional facts to trigger / invoke Section 74 of the CGST Act i.e., existence of wilful suppression to evade / avoid payment of GST in relation to Type – III tests has not been satisfied by the respondents and the impugned show cause notice deserves to be quashed. The impugned Show Cause Notice at Annexure-A dated 12.02.2024 issued by the 2nd respondent under Section 74 of the CGST Act, 2017 is hereby quashed - Petition allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether a show-cause notice issued under Section 74 of the CGST Act can be sustained where the foundational jurisdictional fact of 'wilful suppression' (Explanation 2) is not satisfied. 2. Whether material and granular details of the impugned supplies being within the knowledge of Revenue (by virtue of participation in AAR/AAAR proceedings) precludes a finding of suppression and hence invocation of the extended limitation under Section 74. 3. Whether issuance of a Section 74 notice in respect of a question of classification/taxability that is sub-judice before a higher forum (pending writ with interim orders) is permissible. 4. Whether mens rea (intent to evade tax) is an essential element for invoking Section 74 and the extended period of limitation, and how established authorities on 'wilful suppression' apply. 5. Ancillary: challenges to certain Notifications and Circulars relied upon by Revenue (not finally decided - left open). ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of show-cause notice under Section 74 where 'wilful suppression' is alleged Legal framework: Section 74 provides for extended time limits where tax is not paid by reason of fraud or any wilful-misstatement or suppression of facts to evade tax; Explanation 2 defines 'suppression' as non-declaration of facts required to be declared in returns or failure to furnish information when asked in writing by a proper officer. Precedent treatment: The Court relied on settled authorities holding that 'wilful suppression' postulates a positive, deliberate act with intent to evade tax and must be strictly construed (cases treating suppression as jurisdictional fact; examples: decisions holding that mere omission or incorrect statement without intent is insufficient). Authorities emphasise that the extended period can be invoked only upon proof of positive act/fraud/collusion/wilful misstatement. Interpretation and reasoning: The Court treated 'wilful suppression' as a jurisdictional fact which must exist objectively before Section 74 can be invoked. A plain reading of Explanation 2 requires non-declaration of facts required to be declared, or failure to furnish information when asked. Where Revenue had participatory knowledge of the transactions and the taxpayer had engaged with Revenue via advance rulings and furnished particulars, the essential element of non-declaration or failure to furnish information was found absent. The Court held that invocation of Section 74 in such circumstances would be arbitrary and without jurisdiction. Ratio vs. Obiter: Ratio - the existence of wilful suppression is a condition precedent (jurisdictional fact) for invoking Section 74; in absence of such suppression the notice under Section 74 is invalid. Obiter - factual permutations where suppression might be inferred (not applied here). Conclusion: The impugned Section 74 notice, alleging wilful suppression, was quashed for want of the jurisdictional fact of suppression. Issue 2 - Effect of Revenue's prior knowledge through AAR/AAAR participation on suppression and limitation Legal framework: Principles governing suppression under Section 74 and interplay with the Revenue's knowledge and advance rulings; extended limitation is available only where suppression is established and not where material facts were known to Revenue. Precedent treatment: The Court applied established decisions which hold that suppression cannot be held where the relevant facts were known to Revenue; extended limitation cannot be invoked if pre-conditions (suppression known/established) are not satisfied. Authorities cited demonstrate that when both parties (assesses and Revenue) are aware of the facts, omission by the assessee is not suppression. Interpretation and reasoning: The Court found undisputed documentary and procedural facts showing Revenue's active participation in AAR and AAAR proceedings, and that Revenue had knowledge of the modalities and particulars of the supplies under dispute. Given that the Department had full knowledge from the AAR/AAAR record, the sine qua non of nondisclosure was absent. The Court reasoned that it is impermissible to treat an assessee as having 'wilfully suppressed' facts when those facts were already within the Department's knowledge and had been placed before Revenue in the advance ruling process. Ratio vs. Obiter: Ratio - where material facts are within Revenue's knowledge (e.g., by participation in advance ruling proceedings), the element of suppression requisite for extending limitation under Section 74 is absent. Conclusion: Knowledge of the transactions by Revenue negated the allegation of suppression; extended limitation under Section 74 could not be invoked on that basis and the notice was invalidated. Issue 3 - Issuance of Section 74 notice despite pendency of judicial proceedings challenging classification (sub-judice) and interim orders Legal framework: Principles of adjudicatory restraint and relevance of pending higher forum proceedings; effect of interim orders restraining precipitative recovery action. Precedent treatment: Courts have recognised that initiation of recovery or invoking penal/extended powers in the face of pending adjudication of the same question and interim protection may be impermissible; jurisprudence treats question of limitation and jurisdictional facts as open to judicial review where wrongly assumed. Interpretation and reasoning: The Court noted that the issue of classification/taxability was the subject of an ongoing writ petition with interim orders restraining precipitative action. The classification had not attained finality (AAR and AAAR reached opposite conclusions; matter pending before this Court). In that factual matrix, invoking Section 74 to demand tax for the disputed period was held to be inappropriate and contrary to the state of flux on the core legal question; Section 74 invocation required an established suppression or fraud which was not present while the substantive classification was sub-judice and covered by interim protection. Ratio vs. Obiter: Ratio - issuance of extended-period notices on the very question that is sub-judice and covered by interim protection, without satisfaction of jurisdictional facts, is improper. Conclusion: The pendency of judicial challenge and interim orders weighed against sustaining the Section 74 notice; this was a further ground for quashing the notice. Issue 4 - Mens rea requirement for 'wilful suppression' and application of authorities on positive act versus omission Legal framework: 'Wilful' qualification in statutory language requires intent to evade tax; mere omission, negligence, or wrong interpretation does not satisfy the standard for fraud/suppression requisite for extended limitation. Precedent treatment: The Court followed authorities holding that 'wilful suppression' requires a positive, deliberate act and cannot be equated with mere omission or an incorrect statement made without intent. Decisions emphasise that burden lies on Revenue to prove suppression and that bona fide belief or reasonable dispute on interpretation negates mens rea. Interpretation and reasoning: Applying those principles to the facts, the Court found no positive act of concealment; the petitioner had sought advance rulings and furnished detailed material, and there was a bona fide dispute as evidenced by conflicting rulings. The Court observed that mere errors in return valuation or rate application, absent deliberate intent, do not supply the mens rea for Section 74. The Revenue failed to establish that the petitioner acted with intent to evade tax. Ratio vs. Obiter: Ratio - mens rea (intent to evade) is essential to sustain a Section 74 demand; mere omission or differing legal view does not suffice. Conclusion: Lack of evidence of deliberate intent or positive act of suppression meant Section 74 could not be invoked; notice quashed on this ground as well. Issue 5 - Challenges to Notifications and Circulars relied upon by Revenue (left open) Legal framework: The petitioner challenged various Notifications and a Circular as ultra vires; resolution requires detailed adjudication. Precedent treatment: The Court declined to decide these contentions in the present order given the primary finding on Section 74. Interpretation and reasoning: Having quashed the Section 74 notice for lack of jurisdictional fact, the Court considered it appropriate to keep all other claims, contentions and reliefs open for determination in an appropriate case rather than express any opinion in the instant order. Ratio vs. Obiter: Obiter - these challenges were explicitly reserved for future adjudication. Conclusion: Other challenges to Notifications/Circulars remain undecided and are left open for adjudication in an appropriate forum. FINAL CONCLUSION (as to matters decided) The Court held that the impugned show-cause notice issued under Section 74 was illegal, arbitrary and without jurisdiction for want of the jurisdictional fact of wilful suppression (including absence of requisite mens rea), for the reason that Revenue had knowledge of the material facts through advance-ruling proceedings and because the classification/taxability issue was sub-judice with interim protection; consequently the Section 74 notice was quashed. All other contested instruments and issues were left open for determination in appropriate proceedings.