Orissa HC Sets Aside GST Cancellation Order Over Lack of Proofs Against Purchaser

The Orissa High Court has, in one of its significant rulings, quashed the GST registration cancellation order, saying that a purchaser cannot be penalised for a supplier’s fault if the purchaser is not involved.

The petitioner, M/s. Bright Star Plastic Industries manufactures and sells Poly Vinyl Chloride (PVC) pipes, high-density polyethylene and low-density polyethylene pipes, scrap iron angles, iron scraps, etc. They received a show cause notice in Form GST REG-17 from the CT & GST Officer, Bhubaneswar (Opposite Party No. 2). This SCN was for the GST registration cancellation of the petitioner and the GST authority claimed that the registration was obtained by fraud, wilful misstatement or suppression of facts. The proceedings of this cancellation were dropped after the petitioner submitted a reply dated 19.08.2020.

However, the petitioner again received an SCN on the same day, saying that the ITC claim of Rs 2,04,650,06 on the fake invoices issued by a fake, non-existent supplier. The petitioner was demanded to pay the tax, interest and penalty amount of Rs 3,48,066. Even after the petitioner submitted detailed records, including records of purchases and GST payments, the registration was cancelled on 3rd December 2020, saying that the “clarification submitted was not satisfactory“. The petitioner also filed a revocation application, but it was rejected by the Opposite Party No. 2. Therefore, the petitioner filed a writ petition before the Orissa High Court requesting the court to restore the Petitioner’s registration.

The advocate of the petitioner argued that there is no rule that allows the authorities to cancel a purchaser’s registration for the fraud done by the seller. He further submitted that only one out of 21 transactions, involving M/s. Pawansut Enterprises, attracted the SCN issued on the ground that the ITC had been claimed against a fake invoice.

The petitioner’s advocate also highlighted that at the time of the supplier, it was a registered dealer and its registration was cancelled only on 1st October 2019, which is after the purchase was made by the petitioner. He submits that there is no way the buyer could have known the seller’s registration was going to be cancelled.

The Orissa High Court noted that Rule 21 of the OGST Rules was not applicable in the present case, as none of its clauses (a), (b), or (c) were attracted in this case. The High Court also referred to an earlier judgement of the Gujarat HC in the case of Vimal Yashwantgiri Goswami v. State of Gujarat, which supports the present case of the petitioner. The court concluded that the GST authorities did not give any proper reason for the cancellation of registration.

The court also observed that the purchases were made after the GST registration of M/s Pawansut was cancelled, and there was no way for the petitioner to know that the entity was non-existent. The department also failed to prove that the purchaser was involved in the transaction with the knowledge that the selling dealer was non-existent.

Therefore, the court set aside the order dated 7th January 2021 and the appellate order dated 5th April 2021. It directed the court to restore the petitioner’s registration by issuing appropriate orders within one week. The court also allowed the petitioner to submit all the returns that they could not file due to the cancellation of registration.