No GST Liabilities during Investigations until ascertained by GST authorities or assessee

1. Summary: No GST Liabilities until ascertained by GST authorities or assessee

The petitioner is engaged in manufacturing and trading of pulses, flour and dals. Investigation was conducted at the premises of the petitioner and the Respondent seized papers and documents in the course of investigation.

Further, Managing director of the petitioner signed an undertaking admitting short payment of GST and also agreed to pay such liability in decided 7 installments and balance amount after determination of GST liability by the respondent. As decided, the petitioner deposited the first installment on the date of investigation itself and also deposited the second installment after sometime.

Thereafter, the petitioner filed Writ petitioner before Hon’ble High Court contending that the petitioner forcefully made the payment of GST under influence of coercion, threat and stress.

The petitioner relied upon various legal precedents issued under pre-GST regime wherein it was held that the amount collected during investigation should be refunded if any final demand amount is not determined against the assessee.

The respondent contended that payment of GST during investigation is validated by Section 74(5) of CGST Act and also relied on precedents were issued during pre-GST regime when no provision was given for payment of taxes during investigation proceedings.

The Hon’ble Madras High Court held that Section 74(5) of CGST Act does not provide for advance payment of GST when final GST liability is not determined. For the purpose of payment under Section 74(5), Final GST liability must be ascertained by either the assessee or the proper officer.

Precedents relied upon by the petitioner hold validity under GST regime also. Records in the given case do not ascertain any Final tax liability and therefore, the condition of “Ascertainment” of tax liability under section 74(5) is not fulfilled.

Therefore, petition was allowed and the respondent was directed to refund deposited tax.

1. Brief facts of the case

1. Shri Nandhi Dhall Mills India Pvt. Ltd. (“the Petitioner”) is a dealer in pulses, flour and dhals also manufactures food products, grain mill products and Dhal.
2. For trading purposes, the petitioner was using various trademarks. However, the petitioner voluntarily forgoes actionable claims or enforceable rights against marks. To this effect, the petitioner also filed an affidavit with Jurisdictional A.O. in terms of Schedule VI of CGST Act, 2017.
3. The petitioner is a Small Scale Industry registered under MSME Act and also registered under CGST Act 2017.
4. The investigation was conducted in the premises of the petitioner by the Director General of Goods and Service Tax (DGGST) (“The Respondent”) and various documents and records were seized during such proceedings.
5. During the course of proceedings, a statement was recorded from the managing director to the effect that the petitioner has not discharged its GST liability correctly and assured that the liability will be discharged as early as possible with applicable interest.
6. In line with the same, a scheme was prepared wherein different due dates were provided for payment of GST liability. According to such a scheme, the petitioner was required to deposit the first installment of INR 1,00,00,000 on the date of investigation itself. 6 installments of INR 1,00,00,000 each were also set for different dates and balance amount was required to be paid after determination of liability by the respondent.
7. In accordance with such scheme, the petitioner deposited INR 1,00,00,000 on the date of investigation through DRC-03 and also deposited a second instalment of Rs. 1,00,00,000 after some time.
8. Later on the petitioner made following submission with the respondent that
   • The petitioner was dealing in exempted/Nil rated goods and the petitioner was forced to make payment of GST of INR 1,00,00,000 under influence of coercion and threat on the date of investigation itself.
   • Further, despite regular follow ups, the respondent failed to provide working of GST liability determination to the respondent.
   • The Managing Director signed the MAHAZAR under the influence of Coercion, threat and panic and he was not given an opportunity to read MAHAZAR.

9. Aggrieved by action of the respondent, The petitioner filed a writ petition before Hon’ble High Court of Madras demanding that:

• Mandamus* refraining the respondent from asking any amount except the amount payable in accordance with provisions of CGST Act, 2017.
• Refund of tax payment of INR 2,00,00,000 made by the petitioner with interest and 
• Return of documents seized during investigation.

* a judicial writ issued as a command to an inferior court or ordering a person to perform a public or statutory duty.

2. Relevant Legal Extracts

Relevant extract of Section 74 of CGST Act is reiterated below:

“Section 74 of CGST Act – Determination of tax not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilised by reason of fraud or any wilful misstatement or suppression of facts.….

(5) The person chargeable with tax may, before service of notice under sub-section (1), pay the amount of tax along with interest payable under section 50 and a penalty equivalent to fifteen per cent. of such tax on the basis of his own ascertainment of such tax or the tax as ascertained by the proper officer and inform the proper officer in writing of such payment.

(6) The proper officer, on receipt of such information, shall not serve any notice under sub-section (1), in respect of the tax so paid or any penalty payable under the provisions of this Act or the rules made thereunder

(7) Where the proper officer is of the opinion that the amount paid under subsection (5) falls short of the amount actually payable, he shall proceed to issue the notice as provided for in sub-section (1) in respect of such amount which falls short of the amount actually payable. ..”

3. Contention of the Petitioner

The petitioner made following submission to support his appeal

1. The petitioner has no liability for tax and it was forced to accept the liability of tax.
2. The investigation was on the festival of Deepawali and  investigation was carried out in an intrusive and acrimonious manner.
3. The petitioner relied on various legal precedents in support of its contention that any amount collected during investigation should be refunded if any final demand amount is not determined against the assessee.

4. Contention of the respondent / Department

The respondent made following submission

1. The respondent has denied all allegations made by the petitioner and alleged that the petitioner was indulged in a large scale of tax evasion and it was not paying legitimate tax liability.
2. Further, the petitioner has not only remitted one installment rather it has paid 2 installments and if the first installment was paid under coercion then the petitioner could have stopped the 2nd payment.
3. Further, there was no cooperation provided by the petitioner in proceedings and also no appearances were made for the summon issued and therefore, proceedings were delayed.
4. The respondent contended that relied precedences were issued during the pre-GST regime when there was no provision given for deposition of amount during investigation proceedings. However, under GST regime, express provisions are given under Section 74(5) of CGST Act, 2017.
5. Further, during the pre-GST regime, officials of DRI and customs were famous for collection of taxes from assessee under coercion in the course of investigation itself. However, with introduction of Section 74(5) of CGST Act, this practise has got statutory sanction.
6. The petitioner has deposited 2 installments on self ascertainment basis under section 74(5). The petitioner is aware that its transactions are liable to GST and any payment of tax will be adjusted against his final tax liability.   

5. Issue before Hon’ble High Court

1. Hon’ble High Court refused the enter into question of facts and clearly set out that the respondent is required to provide full and fair hearing opportunities to the petitioner and in case of non cooperation from the petitioner, the respondent can complete the assessment in accordance with provisions of law.
2. Further, in case of unbranded products, the petitioner is not liable to pay GST. For this purpose, the petitioner filed Affidavit with Jurisdictional Assessing officer. However, correctness of this affidavit is to be carried by A.O. himself.

Therefore, Hon’ble High Court only entertained following questions of law:

• “Whether the collection of any amount during the process of investigation is statutorily permitted?”
• “whether the petitioner is entitled to the refund of the amounts paid during investigation?”

6. Interpretation made by Hon’ble Madras High Court

The Hon’ble High Court made following interpretations:

6.1 Comment on Section 74 of CGST Act, 2017

1. The Hon’ble Madras High Court mentioned that Section 74(1) to (4) contains provisions related to manner and time limit of issuance of show cause notice in case of tax evasion due to fraud, willful misstatement or suppression of facts.
2. Further, Section 74(5) of the CGST Act 2017 provides an opportunity to the assessee to pay an amount of tax, interest and penalty upto 15% of the tax amount on the basis of self -ascertainment or ascertainment made by the Proper officer. However, it must be done before issuance of SCN under section 75(1) of CGST Act.
3. On payment of such amount, as per section 74(6), no SCN shall be issued to the assessee.
4. Therefore, even in case of fraud, misrepresentation of facts and wrongful intention, section 74(5) and (6) provides for closure of proceedings against assessee on the self ascertainment by the assessee and acceptance by the revenue.
5. As per section 74(7) of CGST Act, where A.O. is not satisfied with the amount deposited by the assessee then he may still issue SCN to the assessee.
6. Further, Section 74(8) provides where a SCN is issued to the assessee then he may opt for payment of the entire tax amount, interest and penalty to the extent of 25% of tax amount within 30 days of issuance of SCN.
7. As per Rule 142 of CGST Rules read with Section 74(5), payment of GST has to be made through DRC-03.

6.2 Validity of precedents relied upon by the petitioner

1. The Hon’ble Court did not provide its agreement with that fact that section 74(5) provides payment of advance tax when final tax liability is pending for determination.
2. Precedents relied upon by the petitioner holds that no collection can be insisted upon prior to determination of final tax liability and this decision still holds validity.
3. Section 74(5) provides opportunity for payment of tax liability, interest and penalty prior to issuance of Final SCN and such amount should be ascertained by assessee himself or by proper officer.
4. In the given case, the assessee has offered payment of GST liability in installment and decided to deposit the balance amount as and when determined by the proper officer. 
5. If deposition would have made under section 74(5) then following 3 instances must have occurred:
   • Assessee ascertained GST Liability
   • Revenue has made its own calculation and decides that amount determined by the assessee is not correct
   • The respondent must have determined the final amount payable after considering advance payment of INR 7,00,00,000.
6. Records in the given case do not ascertain any Final tax liability and therefore, the condition of “Ascertainment” of tax liability under section 74(5) is not fulfilled.
7. Merely because the assessee has signed a statement admitting tax liability under stress of investigation and also made few payments, it can’t be said as self-ascertainment.
8. Further, if the amount was deposited under section 74(5) then no further SCN should be issued or proceedings should be initiated as per section 74(6). However, in the given case, enquiry and investigation was going on, personsal hearing have been afforded and both parties were informed about issuance of SCN and taking matter forward.

Therefore, application of Section 74(5) is completely misconceived.Hon’ble High Court relied on the Judgement of apex court in the matter of Clear trip Private Ltd. and Ors. (supra) wherein following matter was decided:

1. Provisions of Act and law are very clear that coercive measures including arrest can be used only when investigation is completed and prosecution has been launched.
2. Under Finance Act, 1994, only because investigations are underway, the arrest would not be affected. 
3. Only when investigations concluded then the authorities would be in a position to take a decision whether to launch any prosecution. 

Further, under GST regime itself, in the matter of M/s.Bhumi Associate vs. Union of India through the Secretary ) SCA.No.3196 of 2021, Gujarat High Court directed CBIC and Customs to issue following guidelines for resolution of issue under discussion:

1. No recovery, by cheque/cash/adjustment of input tax credit should be made at the time of search/inspection proceedings under Section 67 of the Central/Gujarat Goods and Services Tax Act, 2017 under any circumstances. 
2. Even if the assessee wants make voluntary payment through DRC-03 then he should be advised to file such Form on the next day after the end of search proceedings and after the officers of the visiting team have left the premises of the assessee. 
3. Facility of filing complaint/grievance after the end of search proceedings should be made available to the assessee in case the assessee was forced to make payment during the pendency of the search proceedings. 
4. If complaint/ grievance is filed by assessee and the officer is found to have acted in defiance of the aforestated directions, then strict disciplinary action should be initiated against the concerned officer.”

7. Conclusion

Considering the interpretation made, the Hon’ble High Court held that Section 74(5) of CGST Act does not sanction advance payment of GST when determination of final tax liability is pending.

Hence in the instant case the court directed the Respondent to refund the amount of Rs. 2 crores collected during investigation within a period of 4 weeks of this judgement.

Further, the Respondent restrained from demanding any amount other than following due process of law.