ITC cannot be denied to buyer if registration of seller has been canceled

Orissa High Court: In order to bring an entity within the realms of Rule 21 of the CGST Rules and to attribute fraud in such circumstances to the 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 and that the purchasing dealer and selling dealer acted in connivance to defraud the revenue

M/s Bright Star Plastic Industries vs Additional Commissioner of Sales Tax (Appeal) and Ors.: W.P.(C) no. 15265/2021; High Court of Orissa; 04.10.2021

The Petitioner approached this court by way of Writ Petition against the rejection of Petitioner’s application for revocation of cancellation of his registration under section 30(2) of the Odisha GST Act.

Facts:

• The Petitioner is carrying on the business of manufacturing and trade of Poly Vinyl Chloride (PVC) pipes, and several other polythelene pipes and iron scraps etc.
• On 14.08.2020, CT & GST Officer, Bhubaneswar (Opposite Party No.2) issued a show cause notice (SCN) in Form GST REG-17 under Rule 22(1) of the OGST Rules, 2017 for cancellation of Petitioner’s registration on the ground that “in case, Registration has been obtained by means of fraud, willful misstatement or suppression of facts”
• After receiving a reply, vide order dated 25.08.2020, the CT & GST Officer, Bhubaneswar, dropped the proceedings for cancellation of the registration. However, on the very same day, the Opposite Party No.2 issued another SCN for cancellation of registration, this time on the ground that: “you have claimed ITC (Input Tax Credit) of Rs.2,04,650,06 against fake invoices issued by nonexistent supplier”.
• On 17.10.2020, an intimation was issued is Form GST DRC-01A Part-A under section 74(5) of the OGST Act read with rule 142(1A)of the OGST Rules by CT & GST Officer, Bhubaneswar calling upon the Petitioner to pay the tax, interest and penalty amount aggregating to Rs.3,48,066/- on the ground that the ‘ITC claimed was against fake invoices issued by nonexistent supplier’.
• A reply was submitted in regard the aforesaid before the CT & GST Officer, however, the said officer, cancelled Petitioner’s registration with effect from 3rd November, 2020 with the remark “clarification submitted not satisfactory, hence cancelled.
• On 10.12.2020, Petitioner applied under section 30 of the OGST Act for revocation of the cancellation of registration. On 07.01.2021, the CT & GST Officer rejected the said application.

Petitioner’s contention:

• Out of 21 transactions of purchase made by the Petitioner during the relevant period, it is only the purchase from one dealer viz., M/s. Pawansut Enterprises, that has attracted the SCN issued to the Petitioner by Opposite Party No.2 on the ground that ITC had been claimed against a fake invoice.
• On a collective reading of section 16 of the OGST Act with Rules 21 of the OGST Rules 2017, there is no provision that enables the cancellation of the registration of the purchasing dealer for any fraud committed the selling dealer. Secondly, he points out that the cancellation registration of the selling dealer M/s. Pawansut Enterprises took place only on 1st October, 2019 i.e., long after the dates of the purchases made by the present Petitioner from the said dealer. He, therefore, submits that on the date of purchases took place, there was no way that the Petitioner would have known that at some future point in time, the registration of the selling dealer was going to be cancelled.

Observations and findings:

• The Court found merit in the contention of the Petitioner that for the fraud committed by the selling dealer, which resulted in cancellation of a selling dealer’s registration, there cannot be an automatic cancellation of the registration of the purchasing dealer.
• None of the 3 circumstances outlined in Rule 21 of the OGST Rules, in clauses (a), (b) & (c) are attracted in the present case. Consequently, rule 21 of the OGST Rules cannot be invoked by the Department, in circumstances such as the present, to cancel the registration of the purchasing dealer.
• In Vimal Yashwantgiri Goswami vs State of Gujarat; Special Leave Application No. 15508/2020 the Gujarat High Court was pleased to conclude in similar facts and circumstances, that the cancellation of registration was without any reason and the explanation offered by the registered dealer in response to the SCN issued for cancellation of registration was not even discussed. Here too apart from simply stating that the explanation offered was not ‘satisfactory’, no reasons have been given by the LPO for cancellation of the petitioner’s registration. 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.
• In the present case, on the dates that the Petitioner entered into the transactions of purchase with M/s. Pawansut Enterprises i.e. April and August, 2018, the GST registration of M/s. Pawansut Enterprises had not been cancelled. That was to take place much later on 1st October, 2019. Therefore, on the date 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.
• 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.

Held:

For the aforementioned reasons, the impugned order of the LPO rejecting the Petitioner’s application for revocation of its cancellation of registration was set aside. And the Department was directed to restore the Petitioner’s registration forthwith by issuing appropriate orders/directions. And the Petitioner was further permitted to file all the returns which it could not file on account of the cancellation of the registration.

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