The Madras High Court ruled that the Revenue Department cannot blindfolded issue a show cause notice under Section 74 of the GST Act, if no criminal motive can be attributed against the manufacturer & supplier (petitioner). Accordingly, the Court quashed the SCN, and clarified that the petitioner’s case, at worst, could be considered a case of tax not paid or short-paid without any fraudulent intent, which would attract proceedings under Section 73 of the Act, not Section 74. However, since the short payment and interest were remitted before the issuance of any notice, no action was warranted.
The Court also clarified that Section 74 can only be invoked where tax has not been paid or has been short-paid by reason of “fraud, or any wilful misstatement or suppression of facts to evade tax. The absence of these elements renders an SCN issued under this section as being without jurisdiction.
A Single Judge Bench of Justice Krishnan Ramasamy found that no criminal motive, such as fraud, wilful misstatement, or suppression of facts, could be attributed to the petitioner. The short payment was a result of genuine confusion prevalent in the industry regarding the classification of the supply. The petitioner’s voluntary communication on January 07, 2019, expressing its intent to pay the differential tax, demonstrated a lack of intent to evade tax.
The Bench rejected the argument for inapplicability of Section 39(9), holding that the petitioner’s intention to rectify and pay the tax was communicated on January 07, 2019, which was prior to the commencement of the DGGI investigation on January 21, 2019. Therefore, the bar under Section 39(9) was not attracted.
Briefly, the petitioner, MRF Ltd., is a manufacturer and supplier of tyres, tubes, and flaps (TTF). The dispute arose over the correct classification and payment of GST on the supply of these items when they were sold together in a “carry strapping form”. With the introduction of GST, all three items were taxed at 28%. Subsequently, the GST rate for tubes was reduced to 18%, and for flaps, it was reduced to 18%. There was however confusion among industries as to whether the supply of TTF together constituted a “composite supply” (taxable at the rate of the principal supply, i.e., tyres at 28%) or an “individual supply” (where each item is taxed at its respective rate).
Initially, the petitioner raised separate invoices and paid tax at the respective rates for each item. However, to avoid litigation and buy peace, the petitioner decided to treat the supply as a “composite supply.” On 07.01.2019, the petitioner communicated its intention to the tax authorities to pay the differential tax (the additional 10% for tubes and flaps) along with applicable interest. The entire differential tax amount with interest was paid on Feb 21, 2019, which was the due date for filing the monthly GSTR-3B return.
Later, the Directorate General of GST Intelligence (DGGI) initiated an investigation into the matter, which was subsequent to the petitioner’s communication but prior to the actual payment, and issued an SCN under Section 74 of the CGST Act, 2017, alleging wrongful availment of Input Tax Credit (ITC) and seeking to impose a penalty.
Appearances:
Advocates V. Lakshmikumaran, R. Charulatha, Raghav Rajeev, Nirmal Ali, Preeti Mohan, and Sagarika Shankar, for the Petitioner/ Taxpayer
ASG AR.L. Sundaresan, along with SPC Rajinish Pathiyil and K. Mohanamurali, for the Respondent
