April 27, 2022

GST registration of purchasing dealer can’t be cancelled for fraud committed by selling dealer

Held by Hon’ble Orissa High Court

In the matter of M/S. BRIGHT STAR PLASTIC INDUSTRIES VERSUS ADDITIONAL COMMISSIONER OF SALES TAX (APPEAL) AND OTHERS vide W.P.(C) No.15265 of 2021 dated 4th October 2021.

The petitioner was registered under Odisha GST Act. GST registration of the petitioner was cancelled by the department on the ground that ITC was claimed against fake invoices issued by the non-existent supplier. The Appellate Authority upheld the order of proper officer on the ground that Proper officer has taken only a preventive measure by cancelling GST registration to prevent fraud and recurrence of such ITC Claims. Therefore, the petitioner filed an appeal before the Hon’ble High Court.

The Petitioner contended that purchases were made from a registered dealer and ITC was claimed on the basis of tax invoices in accordance with provisions of GST Law. Further, As per section 16 of CGST Act read with Rule 21 CGST Rules, no provisions enable cancellation of GST registration of purchase dealer for fraud committed by selling dealer. Hon’ble High Court held that as per Rule 21, cancellation of GST registration of supplier due to fraud does not automatically invoke GST cancellation of purchasing dealer. To attribute fraud to the Petitioner, the Department would have to satisfy 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. However, in the given case, the respondent failed to prove that the petitioner has deliberately availed ITC in respect of the transactions with an entity knowing that such an entity was not in existence.

Therefore, order of cancellation of GST registration and appellate Authority order are liable to be set aside. The department was directed to restore the GST registration of the petitioner.

1. Brief Facts of the case

M/s Bright Star Plastic Industries (“The Petitioner”), a dealer registered under Odisha GST Act, is engaged in the business of manufacturing and trading of PVC pipes, scape iron angles etc.
The petitioner received a notice from CT & GST officer in form GST REG-17-” Show Cause Notice for Cancellation of Registration” on the ground that registration was obtained by means of fraud, willful misstatement and suppression of facts.
The petitioner filed a reply for the same and cancellation proceedings were dropped by the respondent. However, on the very same day, another notice was issued to the petitioner again in form GST REG-17 on the ground that fake ITC is claimed against invoice issued by a non-existent supplier.
In response to such notice, the petitioner contended that purchases were made from the dealer registered under GST and ITC was claimed on the basis of tax invoices in accordance with law.
The respondent issued an intimation in GST DRC-01A directing the petitioner to pay tax on account of “‘ITC claimed it was against fake invoices issued by nonexistent supplier’. Later, the respondent cancelled GST registration of the petitioner with remarks “clarification submitted not satisfactory, hence cancelled”.
The petitioner applied for revocation of cancellation of GST registration but the respondent rejected it.
The petitioner filed an appeal before Additional Commissioner CT & GST (Appeals) against the cancellation order but such appeal was rejected on grounds that Proper Officer has taken only a preventive measure by cancelling GST registration to prevent fraud and recurrence of such ITC Claims.

2. Relevant Legal Extracts

Relevant Extracts of GST law are reproduced below for ready reference:

Rule 21 of CGST Rules, 2017:

“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.”

3. Contention of the Petitioner

The Petitioner contented following points:

The petitioner has disclosed the disputed purchases in GSTR-3B and no mismatch was intimated to the petitioner. Also, purchases were made from a registered dealer and ITC was claimed on the basis of tax invoices in accordance with provisions of GST Law.
The petitioner also relied on precedence of Hon’ble High Court in the matter of Quest Merchandising India Pvt. Ltd. v. Government of NCT of Delhi (2017) 64 GST 623 (Delhi) wherein it was held that the buyer cannot be put in jeopardy when he has complied with provisions. Also, purchasing dealers have no means to ascertain and secure compliance of the selling dealer.
Further, out of all purchases, notice for ITC claimed against fake invoices is issued for purchase from one dealer only.
As per section 16 of CGST Act read with Rule 21 CGST Rules, no provisions enables cancellation of GST registration of purchase dealer for fraud committed by selling dealer.
Further, GST registration of selling dealer was cancelled a lot after the transaction with the petitioner. Therefore, on the date of purchase, the petitioner had no information of a future point that registration of selling dealer will be canceled.

4. Findings and discussion of the Hon’ble High Court

Hon’ble court made following discussions:

As per Rule 21 of CGST Rules, 2017, GST registration of a person can be cancelled if registered person:
- does not conduct any business from the declared place of business: or
- issues an invoice or bill without supply of goods or services or
- violates the provisions of Section 171 of the Act
However, in the given case, none of the above-mentioned grounds of cancellation of GST registration is present.
Therefore, the contention of the petitioner is correct that cancellation of GST registration of supplier due to fraud does not automatically invoke GST cancellation of purchasing dealer.
The Hon’ble High Court also relied on following precedences:
- Gujarat High Court dated 10th December 2020 in Special Leave Application No.15508 of 2020 (Vimal Yashwantgiri Goswami v. State of Gujarat), where in it was held that:
  - cancellation of registration was made without any reason.
  - LPO did not provide any reason for cancellation of registration. Further, The appellate order also only proceeds on the basis that this is a preventive measure. It fails to discuss the explanation offered by the Petitioner.

High Court of Telengana at Hyderabad in W.P.No.7063 of 2021 (M/s. Deem Distributors Private Ltd. v. Union of India) wherein it was held that:
- on the dates of purchases, the GST registration of the supplier was not cancelled. Cancellation of GST registration of the supplier took place on a much later date.
- Therefore, on the date the purchases took place there was no means for the Petitioner to know that the entity which had a valid GST number, was in fact non-existent.

To attribute fraud to the Petitioner, the Department would have to satisfy 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.
In the given case, the respondent failed to prove that the petitioner has deliberately availed ITC in respect of the transactions with an entity knowing that such an entity was not in existence.

5. Conclusion

Hon’ble High Court delivered following precedence based on above discussion:

the impugned order of the LPO and appellate order are liable to be set aside.
The Department is also directed to restore the GST registration of the Petitioner and he will be permitted to file all the return which it could not file on account of the cancellation of the registration.

DISCLAIMER: The views expressed are strictly of the author and VJM & Associates LLP. The contents of this article are solely for informational purpose. It does not constitute professional advice or recommendation of firm. Neither the author nor firm and its affiliates accepts any liabilities for any loss or damage of any kind arising out of any information in this article nor for any actions taken in reliance thereon.

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