Buyer not responsible for contravention of GST Law by Seller: HC

In the matter of Fairdeal Metals Limited Vs Asst. Commissioner Of Revenue, State Tax WPA/170/2024; Calcutta High Court has said that buyer, who is no way connected with any of the allegations made against seller, cannot be made liable to pay penalty for wrong doings of seller.

Facts of the case

• The specific case of the petitioner is that there is no allegation against the petitioner but the entire allegation has been made against the supplier from whom the petitioner procured the goods.
• Show cause notice mentions that the supplier of the petitioner was registered recently under the GST Act. The proper officer after perusal of the documents of supplier opined that he was involved in receiving and passing on fictitious/bogus ITC to other parties. The said Company has been set up solely for the purpose of circulating bogus ITC. The goods were observed to be of suspicious origin and the purchase was merely a ‘paper sale’ to hide the original supplier with the intention of evading payment of tax.
• Penalty was calculated and the petitioner was directed to show cause within four days as to why the proposed tax and penalty should not be payable failing which further proceeding would be initiated.
• The supplier paid the alledged Fake input tax in the cash ledger. An order was passed against the petitioner directing payment of penalty.

Contention of Petitioner:

• The specific contention of the petitioner is that the petitioner was not supposed to know the antecedents of the supplier Company.
• As the supplier Company was a registered taxable person in the State of Assam, the petitioner did not have any information or did not have any mechanism to verify the details of the supplier Company.
• There is no allegation of tax evasion against the petitioner. In such a situation, it was absolutely improper for the respondent authority to direct payment of penalty by the petitioner.

Contention of Department:

Reliance was placed on the Standard Operating Procedure, which was published by the Commissioner, Central Board of Indirect Taxes and Customs, GST Investigation Wing, on May 12, 2019.

GST frauds involving fake invoices

• One of the salient features of the GST frauds involving fake invoices mentioned in the said SOP is that in many cases dummy firms are credited/floated to commit the fraud.
• The addresses are often incorrect/incomplete and the details revealed in the registration forms are also false.
• As entry barrier is very low, and there is a lack of a proper system of scrutiny and verification of registration data, fraudsters are able to commit frauds with impunity.
• The respondents claim that the supplier is a dummy firm created only for committing the fraud.

Observations:

• The non-existence of the supplier company was alleged, leading to non-deposit of the input tax credit but prior to issuing of the show cause notice the supplier Company already deposited the input tax.
• Assuming there was an intention to evade tax on the part of the supplier, but later on by way of payment of tax, the allegation of intention to evade tax falls flat.
• The petitioner being no way connected with any of the allegations that has been levelled against the supplier Company, cannot be made liable to pay penalty as has been assessed.

Order:

In view of the above, the order of detention and the subsequent order imposing penalty are liable to be set aside and quashed.