Issues Related to GST Audit: Understanding Challenges and Legal Insights

Introduction

Navigating the complexities of Goods and Services Tax (GST) audits poses significant challenges for businesses across India. This article delves into critical issues arising from recent legal cases, highlighting key aspects that taxpayers and professionals need to be aware of.

PBL Transport Corporation Pvt. Ltd. – Andhra Pradesh High Court (2024) 14 CENTAX 303

Violation of Natural Justice Principles

Introduction

Recently, the Andhra Pradesh High Court delivered a significant judgment in the case of PBL Transport Corporation (P.) Ltd. vs Assistant Commissioner (ST), addressing critical issues of procedural fairness in GST audit proceedings. This article provides a comprehensive analysis of the case, highlighting the court’s decision to quash the Final Audit Report due to the non-consideration of the taxpayer’s response.

Facts of the Case

PBL Transport Corporation contested the Final Audit Report dated 22.12.2023 issued by the Assistant Commissioner (ST). The crux of the matter revolved around the petitioner’s claim that they had submitted a detailed response on 19.12.2023 to a discrepancy notice issued during the audit process. Despite this submission, the Final Audit Report did not acknowledge or incorporate their response.

Issue

The primary issue at hand was whether the authorities had failed to adhere to Rule 101(4) of the Andhra Pradesh Goods and Services Tax/Central Goods and Services Tax Rules, 2017. This rule mandates that the proper officer must duly consider and take into account any replies furnished by the registered person during the audit proceedings.

Held

In its order dated 02.01.2024, the Andhra Pradesh High Court underscored the critical procedural lapse wherein the petitioner’s response had been inadvertently overlooked. The court highlighted the significance of upholding principles of natural justice, emphasizing that the failure to consider the petitioner’s submission constituted a violation of statutory provisions.

The Government Pleader for Commercial Tax, during the proceedings, acknowledged the oversight in not addressing the petitioner’s response in the Final Audit Report. This acknowledgment further reinforced the petitioner’s argument regarding procedural fairness and compliance with legal obligations.

Consequently, the court quashed the Final Audit Report dated 22.12.2023, directing the authorities to reevaluate the petitioner’s response and finalize the audit report in accordance with the prescribed rules and principles of natural justice.

Nestle India Ltd. – Rajasthan High Court (2024) 81 GSTL 224

Legal Challenges in Issuing Multiple Notices

Introduction

Nestle India Ltd. recently achieved interim relief from the Rajasthan High Court against a second show cause notice issued under the CGST Act. This article delves into the details of the case, highlighting the grounds of challenge and the court’s decision that marks a significant development in GST litigation.

Facts of the Case

Nestle India Ltd. filed a petition challenging the legality of a second show cause notice issued by the Union of India under the CGST Act. The dispute centered around the interpretation of Section 65(7) of the CGST Act, which mandates that only one ‘proper officer’ should apply their mind to the Audit Report before issuing a show cause notice. Nestle argued that subsequent issuance of notices based on the same Audit Report violated this provision.

Issue

The primary issue raised was whether the issuance of multiple show cause notices based on a single Audit Report is permissible under Section 65(7) of the CGST Act. Nestle contended that the unity of the Audit Report should result in a consolidated show cause notice, not multiple notices targeting different aspects of the same report.

Held

In its decision dated 18/12/2023, the Rajasthan High Court acknowledged the validity of Nestle India’s arguments. The court granted interim relief by staying the adjudication proceedings related to the contested second show cause notice. This stay order effectively halts further action until the court makes a final determination on the matter.

The court’s decision reflects its appreciation of Nestle’s contention regarding the proper interpretation of Section 65(7) of the CGST Act. By staying the proceedings, the court signaled its initial agreement with Nestle’s position that the Audit Report should not be bifurcated into multiple notices, thereby upholding procedural fairness and statutory intent.

Rays Power Infra Pvt. Ltd. – Telangana High Court (2024) 84 GSTL 146

Excess Jurisdiction in Raising Demands

Introduction

The Telangana High Court’s recent ruling in the case of M/S. Rays Power Infra Pvt. Ltd. vs. Superintendent of Central Tax has significant implications for GST proceedings. This article explores the court’s decision and its impact on taxpayers’ liabilities under the GST Act.

Facts of the Case

Rays Power Infra Pvt. Ltd., engaged in electricity generation through solar plants, underwent GST audits for FY 2017-18 and FY 2018-19. Following the audit, on October 14, 2021, the company was informed of additional taxes due, which they promptly paid along with interest by October 28, 2021.

Despite the payment, a show cause notice (SCN) was issued on April 20, 2022, under Section 74(1) of the CGST Act, alleging irregularities in Input Tax Credit (ITC) claimed. The company responded on September 04, 2023, explaining the prior payment and reversal of ITC.

After a personal hearing, the Impugned Order was issued on November 15, 2023, demanding payment via FORM DRC-07, prompting Rays Power Infra Pvt. Ltd. to file a writ petition challenging the order and SCN’s validity.

Issue

The core issue was whether the authorities can proceed under Section 74 of the CGST Act if all tax liabilities, including interest, are settled by the taxpayer before the issuance of a show cause notice.

Held

In its judgment on February 28, 2024, the Telangana High Court emphasized that under Section 73(5) of the CGST Act, if a taxpayer clears all tax liabilities, including interest, before the issuance of an SCN, no further penalties or interest can be imposed. The court highlighted that Section 73(5) mandates that once the taxpayer has paid all dues, proceedings cannot be initiated under Section 74 unless there is evidence of fraud, misstatement, or suppression of facts.

The court underscored that the issuance of the SCN under Section 74 must be supported by substantial evidence of fraud or deliberate misstatement by the taxpayer. Since Rays Power Infra Pvt. Ltd. had already settled their tax obligations and interest before the SCN, the court ruled that further proceedings under Section 74 were unwarranted.

The ruling clarified that Sections 73(5) and (6) of the CGST Act provide a protective shield to taxpayers who proactively clear their dues before any formal SCN. It affirmed that the tax authorities cannot reinitiate proceedings solely based on a technical issue once the tax liability and interest have been settled, thereby safeguarding taxpayers’ rights against unnecessary litigation.

1. P. Buildcon Pvt. Ltd. – Calcutta High Court AIRONLINE 2022 CAL 1187

Coordination Among Audit Wings

Introduction

The case of M/S R.P. Buildcon Private Limited vs. The Superintendent, CGST & CX, Circle-II, Group – 10 & Ors. addresses the issue of parallel proceedings initiated by different wings of the same department for the same period under the GST Act. This article explores the facts, issues, and the court’s decision in this significant legal matter.

Facts of the Case

M/S R.P. Buildcon Private Limited filed an appeal before the Hon’ble Division Bench of the Calcutta High Court against an order dated September 19, 2022, in W.P.A. No. 20025 of 2022. The appeal sought to quash notices issued by CGST & CX Headquarters, Anti Evasion, Kolkata, North Commissionerate, and CGST & CX, Range – III, Barrackpore Division, Kolkata North Commissionerate. These notices pertained to the financial years 2017-2018 to 2019-2020, following audits conducted under Section 65 by CGST & CX, Circle – II, Kolkata Audit – I Commissionerate.

The appellant contended that scrutiny of returns under Section 61 of the CGST Act cannot proceed once an audit under Section 65 has commenced for the same period.

Issue

The primary issue was whether multiple wings of the department could initiate proceedings for the same period when audit proceedings had already been conducted by one wing.

Held

After considering the submissions and facts, the Hon’ble Calcutta High Court found that three different wings of the department had initiated proceedings against the appellant for the financial years 2017-2018, 2018-2019, and 2019-2020. The court noted that the Audit Commissionerate had first issued notices under Section 65 of the CGST Act on November 9, 2021, to which the appellant had responded with necessary details. Despite this, parallel proceedings were pursued by the Anti-Evasion wing and the Range Office.

The court questioned why such parallel actions were taken when electronic communication within the department could have prevented duplication of efforts. Emphasizing the need for procedural consistency, the court ruled that once audit proceedings under Section 65 commence, they should be carried through to completion. Therefore, proceedings initiated by the Anti-Evasion wing and Range Office for the same period were deemed impermissible.

In its verdict, the court allowed the appeal and associated applications, overturning the Single Bench’s order. It directed the Audit Commissionerate and CGST & CX Headquarters to issue show cause notices to the appellant within six weeks, allowing for a personal hearing and submission of relevant documents. Simultaneously, it restrained the Anti-Evasion wing and Range Office from proceeding further for the financial years 2017-2018 to 2019-2020, clarifying that this direction applied only to the specified period.

Bimal Auto Agency – Tribunal Calcutta 2023-TIOL-614-CESTAT-KOL

Suppression Allegations and Preceding Audits

Introduction

In the realm of tax disputes, the case of Bimal Auto Agency Vs Commissioner of CGST & CX (CESTAT Kolkata) marks a significant milestone. The Customs, Excise and Service Tax Appellate Tribunal (CESTAT) Kolkata’s ruling has far-reaching implications concerning the Department of GST & CX’s ability to allege suppression based on income reconciliation discrepancies in statutory returns.

Facts of the Case

Bimal Auto Agency, embroiled in a legal battle with the Commissioner of CGST & CX, contested a substantial service tax demand. The crux of the matter involved discrepancies related to the taxation of incentives and discounts received from Maruti Suzuki India Ltd (MSIL), alongside differences in the declared taxable value in their ST-3 return.

Issue

The primary issue before CESTAT Kolkata was whether discrepancies between income reconciliations in books and ST3 returns warranted allegations of suppression by the Department of GST & CX.

Held

CESTAT Kolkata delivered a pivotal judgment, addressing the following critical aspects:

Analysis

Nature of Incentives and Discounts: Bimal Auto Agency argued that incentives received from MSIL were discounts related to trading activities, not services subject to service tax. They substantiated their claim with a detailed reconciliation statement highlighting differences between income as per their books and the values declared in the ST-3 return.

Legal Precedents: The tribunal referenced various precedents, including the BM Autolink Vs. C.C.E. – Kutch case, to determine the taxability of incentives and discounts. It concluded that these incentives did not qualify as services under service tax provisions, thereby rejecting the tax demand based on this premise.

Suppression Allegations: Addressing the discrepancies in income reconciliations, CESTAT Kolkata ruled that such differences do not necessarily indicate suppression. It emphasized that the department cannot invoke the extended period of limitation solely based on income reconciliation variances between books and statutory returns.

Conclusion

In conclusion, navigating GST audits involves addressing multifaceted legal challenges and ensuring procedural adherence to safeguard taxpayer rights. Each case discussed highlights specific issues and legal interpretations that shape the landscape of GST compliance and audit practices in India.