Orissa
High Court’s Landmark Judgment on GST Registration Cancellation: A Detailed
Analysis
By Yogesh Verma (CS/LLB) / 2 min read / GST Case Law
Introduction
The Goods and Services Tax (GST) regime in India has brought
significant changes to the taxation system, ensuring transparency and
compliance. However, taxpayers often face challenges when the authorities take
stringent actions, sometimes without substantial justification. One such issue
is the cancellation of a dealer’s GST registration due to the alleged fraud
committed by their suppliers.
A recent case, M/s. Bright Star Plastic Industries vs.
Additional Commissioner of Sales Tax, Orissa High Court, highlights the
judicial stance on this matter. The Orissa High Court ruled that a purchasing
dealer’s GST registration cannot be cancelled solely because a supplier was
later found to be non-existent. This decision is crucial for businesses dealing
with multiple suppliers and reinforces the principle that buyers cannot be
penalized for sellers' actions if they have complied with legal provisions.
This article delves into the details of the case, examining
the facts, legal provisions, arguments presented by both parties, and the
court’s reasoning in setting aside the cancellation of the petitioner’s GST
registration.
Case Details
- Case
Name: M/s. Bright Star Plastic
Industries vs. Additional Commissioner of Sales Tax
- Case
Number: W.P.(C) No. 15265 of 2021
- Court: Orissa High Court
- Judges: Chief Justice Dr. S. Muralidhar and Justice B.P.
Routray
- Date
of Judgment: October 4, 2021
- Petitioner’s
Counsel: Mr. P.K. Harichandan
- Respondent’s
Counsel: Mr. S.S. Padhy and Mr. S.
Mishra, Additional Standing Counsel for the Department
Facts of the Case
M/s. Bright Star Plastic Industries, a registered dealer
under the Odisha GST Act, is engaged in the manufacturing and trade of Poly
Vinyl Chloride (PVC) pipes, polyethylene pipes, and iron scraps.
Chronology of Events:
1.
Show Cause
Notice (SCN) Issued:
o On August 14, 2020, the department issued an SCN in
Form GST REG-17 under Rule 22(1) of the OGST Rules, 2017, stating that the
petitioner obtained GST registration through fraud, misstatement, or
suppression of facts.
o The petitioner responded, leading to the cancellation
proceedings being dropped on August 25, 2020.
2.
Second SCN
for ITC Fraud:
o On the same day, a fresh SCN was issued, alleging that the
petitioner claimed ITC of ₹2,04,650.06 against fake invoices from a
non-existent supplier, M/s. Pawansut Enterprises.
3.
Petitioner’s
Response:
o The petitioner provided a detailed reply on August 31,
2020, explaining that the supplier was registered at the time of purchase.
o The transactions were reflected in GST returns, and no
mismatch was reported.
4.
Tax Demand
Notice:
o On October 17, 2020, the department issued an
intimation in Form GST DRC-01A, demanding tax, interest, and penalty totaling ₹3,48,066.
o The petitioner sought documentary evidence but received no
response.
5.
Cancellation
of Registration:
o On December 3, 2020, the department cancelled the
petitioner’s registration with the remark: “Clarification submitted not
satisfactory.”
6.
Appeal and
Rejection:
o The petitioner applied for revocation on December 10,
2020, but it was rejected on January 7, 2021.
o The appeal before the Additional Commissioner was dismissed
on April 5, 2021.
7.
Writ
Petition Before High Court:
o The petitioner approached the Orissa High Court,
challenging the cancellation order and seeking restoration of GST registration.
Legal Issues and Provisions Involved
1.
Section 16
of the OGST Act, 2017:
o Specifies conditions for claiming ITC.
o The petitioner argued that they met all legal requirements
while claiming ITC.
2.
Rule 21 of
the OGST Rules, 2017:
o Lists circumstances under which GST registration can be
cancelled, including:
§ Not conducting business from the declared place.
§ Issuing invoices without actual supply of goods.
o The petitioner contended that none of these conditions
applied to them.
3.
Section
74(1) of the OGST Act, 2017:
o Deals with tax demand due to fraud, suppression, or
misrepresentation.
o The department alleged that the petitioner knowingly engaged
in fraudulent ITC claims.
Arguments by Both Parties
Petitioner’s Arguments:
1.
No
Knowledge of Supplier’s Non-Existence:
o The supplier’s GST registration was cancelled on October
1, 2019, whereas the petitioner’s purchases were made in April and August
2018.
o The petitioner had no means to verify future compliance of
the supplier.
2.
Genuine
Transactions:
o The transactions were documented, tax invoices were
available, and GST returns were filed.
o The department failed to prove that the petitioner colluded
in fraud.
3.
Violation
of Principles of Natural Justice:
o The department cancelled the registration without providing
adequate reasoning.
o The appellate authority failed to consider the petitioner’s
response.
4.
Reliance
on Judicial Precedents:
o Cited On Quest Merchandising India Pvt. Ltd. v.
Government of NCT of Delhi (2017), where the Delhi High Court held that
buyers cannot be penalized for seller’s fraud.
o Referred to Vimal Yashwantgiri Goswami v. State of
Gujarat (2020), where the Gujarat High Court ruled against arbitrary
cancellation of GST registration.
Respondent’s Arguments:
1.
Field
Visit Findings:
o During a visit on July 1, 2019, M/s. Pawansut
Enterprises was found non-existent.
o The department concluded that the petitioner’s transactions
with the supplier in 2018 were fraudulent.
2.
Preventive
Measure:
o The cancellation was necessary to prevent future fraudulent
ITC claims.
Court’s Findings and Judgment
Findings:
1.
No
Automatic Cancellation for Supplier’s Fraud:
o The GST law does not mandate cancellation of a purchaser’s
registration due to a supplier’s fraud.
2.
Lack of
Justification in Cancellation Order:
o The cancellation was based on a vague statement: “Clarification
submitted not satisfactory.”
o No detailed reasoning was provided.
3.
Failure to
Prove Fraudulent Intent:
o The department did not establish that the petitioner
knowingly engaged in fraudulent transactions.
o The burden of proof was on the department, which it failed
to discharge.
4.
Support
from Other High Court Judgments:
o The court relied on the Gujarat and Telangana High Court
rulings that set aside similar cancellation orders.
Judgment:
1.
Cancellation
Order Set Aside:
o The court quashed the April 5, 2021 appellate order
and directed the department to restore the petitioner’s GST registration.
2.
Restoration
of Registration:
o The department was ordered to restore the registration
within one week.
3.
Permission
to File Returns:
o The petitioner was allowed to file pending GST returns
due to the cancellation.
4.
No Costs
Imposed:
o The petition was allowed, but no costs were awarded.
Conclusion
The Orissa High Court’s judgment in Bright Star Plastic
Industries vs. Additional Commissioner of Sales Tax reinforces the legal
principle that a purchaser cannot be penalized for a supplier’s non-compliance
if the purchaser has adhered to GST laws.
This ruling sets a crucial precedent for businesses affected
by arbitrary GST registration cancellations. It highlights the need for tax
authorities to provide clear reasoning and ensure fair procedural
safeguards before taking punitive action.
Disclaimer: All the Information is based on the notification, circular and order issued by the Govt. authority and judgement delivered by the court or the authority information is strictly for educational purposes and on the basis of our best understanding of laws & not binding on anyone.
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