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On 04.10.2021, a landmark ruling came to be delivered by Hon’ble Orissa High Court on the issue of input tax credits based on alleged bogus invoices. It is pertinent to note that the aforesaid issue of bogus invoices, has been a subject matter of heated debate and one which is plaguing the economy ever since the introduction of the goods and services tax regime in the country.
The ruling was pronounced in the matter of M/s Bright Star Plastic Industries v. Additional Commissioner of Sales Tax (Appeal) & Ors., Citation: 2021 (10) TMI 256- Orissa High Court; W.P. (C) No. 15265 of 2021 (Orissa High Court).
As per the facts of the matter, M/s Bright Star Plastic Industries (hereinafter referred to as “Petitioner”) purchased G.P. Sheets from one vendor namely, M/s Pawansut Enterprises, which the Department averred was a non-existent entity and that in fact there was no purchase. It was the averment of the Department that Petitioner availed input tax credit without there being any purchase at all, and that input tax credits were availed on the basis of bogus bill. Basis this averment, the Department issued an SCN proposing cancellation of registration of the Petitioner on the ground: “you have claimed ITC (Input tax credit) of Rs. 2,04,650,06 (sic) against fake invoices issued by non existent supplier”.
The proposed cancellation was confirmed by virtue of the impugned order dated 03.12.2020, with the remark: “clarification submitted not satisfactory, hence cancelled.”
The appeal filed by the Petitioner against the cancellation order, came to be rejected, with the remark: “the preventive measure has been taken by the LPO (Learned Proper officer) by cancellation of the registration of the appellate to prevent future fraud or to prevent from recurrence for such the regular claims of the ITC and that is the interest of the Government revenue”.
Accordingly, aggrieved by the aforesaid impugned order of cancellation, and also the impugned order of the Appellate Authority, the Petitioner approached the Hon’ble High Court, challenging the action of the Respondent authorities.
Arguments of the Petitioner
The counsel for the petitioner confined his submissions to the restoration of the Petitioner’s registration.
His submissions are enumerated point-wise as under:
1. That there is no provision in the Act read with Rules, that would empower the proper officer/ Adjudicating Authority to cancel the registration of the Petitioner on the basis of alleged fraud committed by selling dealer.
Note: In this respect, it is pertinent to note that the alleged contraventions took place in the months of April and August 2018.
2. Cancellation of the registration of selling dealer took place only on 01.10.2019, i.e. long after the dates of the purchases made by the Petitioner.
3. Basis the above argument, it was averred that there was no way that the Petitioner would have known that at some future point of time, the registration of the selling dealer was going to be cancelled.
Submissions on behalf of Department
The submissions made by the Learned Additional Standing Counsel for the Department are enumerated point-wise below:
1. That the address shown for the selling dealer, was found to have been occupied by some other person and not the selling dealer.
2. On the basis of the visits to the alleged address of the selling dealer on 01.07.2019, a conclusion was drawn that the transactions entered into by the Petitioner were fake transaction.
Hon’ble Court’s ruling
The Hon’ble High Court’s ruling was delivered focusing on four questions of law, which are discussed hereinunder;
A. Non-meeting of statutory pre-requisites for cancellation of the registration of the petitioner
The Hon’ble High Court held that for the fraud committed by the selling dealer, which formed the basis for the cancellation, there can not be any automatic cancellation inasmuch as the three circumstances outlined in Rule 21 of the Orrisa GST Rules, were not attracted. That the three circumstances, were as under:
21. Registration to be cancelled in certain cases.-
The registration granted to a person is liable to be cancelled, if the said person,-
(a) does not conduct any business from the declared place of business; or
(b) issues invoice or bill without supply of goods or services in violation of the provisions of the Act, or the rules made thereunder; or
(c) violates the provisions of section 171 of the Act or the rules made thereunder.
Note: The above provision was subsequently amended to also include availing ITC in contravention of Section 16 as also the ground for cancellation of registration, which was inserted as Clause (e) of Rule 21 vide Notification No. 94/2020-CT dated 22.12.2020. However, the case at hand discussed the law as it stood for the period April and August 2018.
B. Non reasoned order
The Hon’ble High Court held that the impugned order passed by the Adjudicating Authority did not offer any reasons for cancellation of the registration of the Petitioner. Furthermore, the appellate order also failed to discuss the explanation offered by the Petitioner.
C. On the date that the purchases took place, there was no means for the Petitioner to know that entity which had a valid GST number, was in fact non-existent
D. Onus on Department of showing mens rea
The Hon’ble Court deciphered the finding given by the Department while cancelling the registration of the Petitioner, holding in other words, that the Purchasing dealer could not be penalized until and unless the Department proved that the purchasing and selling dealer acted in connivance to defraud the revenue. To quote:
19. To attribute fraud in such circumstances to the Petitioner, as a purchasing dealer, the Department would have to satisfy a high threshold of showing that the purchaser indulged in the transactions with the full knowledge that the selling dealer was non-existent. The Department would have to show that somehow the purchasing dealer and selling dealer acted in connivance to defraud the revenue. This threshold has not been made in the present case. In other words, the Department has failed to show that the Petitioner as a purchasing dealer deliberately availed of the ITC in respect of the transactions with an entity knowing that such an entity was not in existence.
That the Hon’ble Court laid down an important principle of law namely, that to attribute fraud to the Petitioner, the Department needs to satisfy a high threshold of showing that the purchaser indulged in the transaction with the full knowledge that the selling dealer was non-existent. That in this respect, the Hon’ble Court implanted a well known principle of criminal law, namely mens rea.
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