Retrospective Cancellation of Supplier GST Registration Does Not
Automatically Establish Fraud — GSTAT Examines Section 74 in Jay Technical
Services Case
Summary of
the Case
The Revenue had issued a
consolidated show cause notice dated 8 January 2024 invoking Sections 73
and 74 of the CGST Act, 2017 for multiple financial years.
The first allegation
concerned excess availment of ITC of approximately ₹20.92 lakh based on
comparison between GSTR-3B and GSTR-2A.
The second and more
significant allegation concerned ITC of ₹43,44,046/-, allegedly availed
on the basis of invoices issued by 13 suppliers who were subsequently found
to be non-existent. The Revenue invoked Section 74, alleging fraudulent
availment of ITC.
The third allegation
concerned alleged short payment of approximately ₹6.45 lakh under RCM in
relation to various expenses.
The adjudicating
authority confirmed substantial portions of these demands. On appeal, the first
appellate authority modified the order and, among other findings, held that the
Revenue had not established fraud, wilful misstatement or suppression of facts
necessary for invoking Section 74 in relation to certain demands.
The Revenue thereafter
challenged the appellate order before the GSTAT.
Relevant
Provisions
Section 16 of the CGST
Act, 2017
Section 16 prescribes the
conditions subject to which a registered person is entitled to claim Input Tax
Credit.
The case particularly
involved the requirement relating to receipt of goods or services and the
taxpayer's burden to establish the genuineness of the ITC claim.
Section 73 of the CGST
Act, 2017
Section 73 applies to
determination and recovery of tax where tax has not been paid, has been short
paid, or ITC has been wrongly availed or utilised in circumstances not
involving fraud, wilful misstatement or suppression of facts.
Section 74 of the CGST
Act, 2017
Section 74 applies where
tax has not been paid or has been short paid, or ITC has been wrongly availed
or utilised by reason of fraud, wilful misstatement or suppression of facts
to evade tax.
The Tribunal specifically
examined whether the facts on record were sufficient to establish the
ingredients necessary for invoking Section 74.
Section 155 of the CGST
Act, 2017
Section 155 places the
burden of proving eligibility for ITC upon the person claiming the credit. The
Tribunal considered this provision while examining whether the taxpayer had
established the genuineness and actual movement of goods.
Facts of
the Case
Jay Technical Services
was engaged in the business of repair and maintenance of heavy equipment at
Kolkata.
The department issued a
show cause notice covering several financial years. One allegation was that the
taxpayer had availed excess ITC of ₹20,92,513/- by comparing ITC claimed
in GSTR-3B with ITC appearing in GSTR-2A.
Another allegation
involved ITC of ₹43,44,046/- relating to 13 suppliers. According to the
Revenue, these suppliers were non-existent and the invoices issued by them were
fake.
The taxpayer disputed the
allegation. It submitted that at the time of purchasing the goods, the GST
registrations of the suppliers were active on the GST portal. The taxpayer
claimed that the supplies had actually been received and that payments had been
made through banking channels.
The taxpayer also argued
that the subsequent retrospective cancellation of the suppliers' registrations
could not, by itself, establish that the transactions were fictitious or that
the taxpayer had colluded with the suppliers.
The third issue related
to an alleged RCM liability of approximately ₹6.45 lakh. The taxpayer
explained that several expenses, including local conveyance, freight,
travelling expenses and professional charges, were not liable to GST under RCM
in the manner alleged by the department.
Order of
the Adjudicating Authority
The adjudicating
authority passed an order dated 29 April 2024.
In relation to the ITC
mismatch issue, ITC of ₹17,22,513/- was confirmed along with interest
and penalty.
In relation to the
alleged fake invoices, ITC of ₹43,44,046/- was disallowed under Section
74 and an equivalent penalty was imposed.
In relation to the RCM
issue, tax of ₹5,30,976/- was confirmed along with interest and
equivalent penalty under Section 74.
The taxpayer challenged
the order before the first appellate authority under Section 107.
Findings of
the First Appellate Authority
The first appellate
authority examined the records and modified the adjudication order.
In respect of the
GSTR-2A/GSTR-3B mismatch, the authority examined the returns and DRC-03
payments and determined the remaining liability.
Regarding the alleged
fake invoices, the appellate authority observed that although the suppliers'
registrations had been retrospectively cancelled, the Revenue had not
established active connivance between the taxpayer and the suppliers.
The appellate authority
therefore held that, in the circumstances, the invocation of Section 74 was
not justified in the absence of proof of fraud, wilful misstatement or
suppression of facts to evade tax.
With respect to RCM,
after examining the relevant expenses, the appellate authority reduced the
liability substantially and confirmed only ₹10,236/- CGST and ₹10,236/- SGST,
along with applicable interest and penalty.
Revenue's
Submission Before GSTAT
The Revenue challenged
the appellate order before GSTAT.
The Revenue argued that
the taxpayer had deliberately availed ITC on fake invoices issued by
non-existent suppliers and that this conduct demonstrated fraudulent intention.
It was further argued
that the taxpayer had failed to establish actual receipt and physical movement
of the goods and therefore had not discharged the burden applicable to an ITC
claim.
The Revenue also
challenged the appellate authority's treatment of the RCM liability and
questioned whether the appellate authority could itself modify and determine
the tax liability after holding that Section 74 was not applicable.
Submission
by the Taxpayer
The taxpayer opposed the
Revenue's appeal.
It submitted that there
was no evidence establishing fraud, wilful misstatement or suppression of
facts.
The taxpayer pointed out
that the suppliers were registered on the GST portal when the transactions took
place and that payments were made through banking channels against invoices.
It was specifically
argued that retrospective cancellation of the suppliers' GST registrations
could not, by itself, establish that the taxpayer had connived with those
suppliers.
The taxpayer also
submitted that reversal of a particular amount of ITC could not automatically
be treated as an admission of fraudulent conduct.
GSTAT's
Findings on GSTR-2A and GSTR-3B Mismatch
The Tribunal examined the
findings of the first appellate authority regarding the ITC mismatch.
It noted that the
appellate authority had undertaken a detailed comparison of GSTR-2A and GSTR-3B
and had also considered the DRC-03 payments made by the taxpayer.
The Tribunal further
observed that Section 75(8) empowers the Appellate Authority, Appellate
Tribunal or Court to modify the amount of tax determined by the proper officer
and that interest and penalty are correspondingly modified according to the
revised tax amount.
Accordingly, the Tribunal
found no merit in the Revenue's objection regarding the modification of the tax
liability by the first appellate authority.
GSTAT's
Findings on RCM Liability
The Tribunal also
examined the RCM issue.
The first appellate
authority had found that several expenses were not liable to RCM in the manner
alleged by the department.
For example, local
conveyance expenses relating to labourers, employees and workers were found not
to attract the alleged RCM liability. Certain freight expenses were also
examined with reference to the documents submitted by the taxpayer.
The appellate authority
also found that payments made to a Chartered Accountant for professional work
and travelling expenses supported by railway tickets were not taxable under RCM
in the manner alleged.
After examining the
records, the appellate authority concluded that only ₹20,472/-,
comprising ₹10,236/- CGST and ₹10,236/- SGST, remained payable.
The GSTAT agreed with the
finding that Section 74 could not be invoked for this RCM demand because
deliberate suppression of material information with an intention to evade tax
had not been established.
The Tribunal relied upon
the Supreme Court's decision in Pushpam Pharmaceuticals Company v. Collector
of Central Excise, Bombay, where the meaning of "suppression" in
taxation law was considered.
GSTAT's
Important Finding on Fake Invoices and Non-Existent Suppliers
The most significant
issue before the Tribunal concerned ITC of ₹43,44,046/- relating to
invoices issued by 13 suppliers.
The taxpayer relied upon
the fact that the suppliers had GST registrations which were active when the
transactions took place and that payments had been made through banking
channels.
However, the Tribunal
examined the actual evidence relating to the physical movement of goods.
The Tribunal noted that no
material was available to establish the actual physical movement of goods from
the alleged suppliers to the taxpayer.
The Tribunal relied upon
the Supreme Court judgment in State of Karnataka v. Ecom Gill Coffee Trading
Private Limited, concerning the burden of proving the correctness and
genuineness of an ITC claim.
The principle considered
by the Tribunal was that merely producing tax invoices or showing payment
through cheques is not, by itself, sufficient where the actual transaction and
physical movement of goods are required to be established.
The purchaser may need to
establish the transaction through supporting evidence such as transportation
details, freight payment, delivery acknowledgement and other relevant
documents.
Why Section
74 Was Held Applicable for the Fake-Invoice Demand
The Tribunal
distinguished the fake-invoice issue from the RCM issue.
In this case, the show
cause notice contained specific allegations regarding the 13 suppliers. The
Revenue had stated that investigations found the suppliers to be non-existent
and that their registrations had been cancelled from the date of registration.
The Tribunal noted that
there was no evidence of actual physical movement of goods corresponding to the
ITC claimed from those suppliers.
After considering the
material placed on record, the Tribunal concluded that the facts established
the necessary circumstances for invoking Section 74 in respect of the ₹43,44,046/-
ITC demand.
Thus, the case
demonstrates an important distinction: retrospective cancellation of a
supplier's registration, considered in isolation, was not treated as
sufficient; however, where the department's investigation and the record also
established non-existence of the suppliers and absence of actual physical movement
of goods, the Tribunal found grounds supporting Section 74.
Consolidated
Show Cause Notice for Multiple Financial Years
The taxpayer had also
raised an objection against the consolidated SCN covering several financial
years.
The Tribunal considered
the provisions of Section 74 and the language referring to a notice for
"any period" and "such periods".
The Tribunal referred to
the decision of the Delhi High Court in Ambika Traders v. Additional
Commissioner, Adjudication, DGGSTI, CGST, Delhi North, concerning
consolidated notices for multiple financial years.
Accordingly, the
objection to the consolidated SCN was considered in the context of the
statutory language and the judicial position referred to in the order.
Decision of
GSTAT
The GSTAT examined the
Revenue's challenge issue-wise.
On the GSTR-2A/GSTR-3B
mismatch, the Tribunal found no reason to interfere with the appellate
authority's determination.
On the RCM issue, the
Tribunal agreed that Section 74 could not be invoked in the absence of proof of
deliberate suppression or other ingredients required for the extended
provision.
However, in relation to
the Rs. 43,44,046/- ITC claimed on invoices issued by non-existent suppliers,
the Tribunal found that the material on record established circumstances
supporting the allegation that the transactions were not genuine and that the
ITC had been wrongly availed.
The Tribunal therefore
accepted the Revenue's case on this issue.
Conclusion
The decision in Atanu
Mondal v. Partner, Jay Technical Services provides an important distinction
in GST proceedings involving ITC and Section 74.
A taxpayer cannot be
subjected to Section 74 merely by mechanically alleging fraud, wilful
misstatement or suppression. The statutory ingredients must be supported by
facts and material on record.
At the same time, the
judgment makes it clear that the taxpayer claiming ITC carries the burden of
establishing the correctness and genuineness of the ITC claim. In the present
case, the Tribunal considered the absence of evidence regarding actual
physical movement of goods, coupled with the department's findings
concerning the non-existent suppliers, as significant evidence in determining
the applicability of Section 74.
The case is therefore
particularly relevant in GST litigation involving retrospective cancellation
of supplier registration, alleged fake invoices, ITC eligibility, physical
movement of goods and the distinction between Sections 73 and 74.
The important practical
lesson from the order is that an ITC dispute should not be examined solely from
the perspective of whether the supplier's GSTIN was active on the portal. The
complete transaction trail—including invoices, payment records, transportation
documents, delivery evidence and proof of actual receipt of goods—can become
critical in establishing the genuineness of the ITC claim.
Disclaimer: All the Information is strictly for educational purposes and on the basis of our best understanding of laws & not binding on anyone.
Click here
