GST Order Must Disclose Factual Basis For Statutory Ingredients, Not Merely Reproduce Provision: Delhi High Court

The Delhi High Court has held that an adjudication order invoking Section 74 of the Central Goods and Services Tax (CGST) Act must disclose the factual basis on which the statutory ingredients of the provision are said to have been satisfied.

The Division Bench of Justices Anil Kshetarpal and Bharat Parashar observed that mere reproduction of the statutory language, without supporting particulars, would not demonstrate the requisite application of mind.

It thus set aside an order confirming a demand of ₹3.34 crore towards Input Tax Credit (ITC), along with interest and an equivalent penalty, against Petitioner.

Section 74 of the CGST Act applies where tax has not been paid or has been short-paid, or where refund has been erroneously made or ITC has been wrongly availed or utilised, by reason of fraud, wilful misstatement or suppression of facts to evade tax.

“Where an authority invokes Section 74, the adjudication order must disclose the factual basis on which the statutory ingredients of the provision are said to have been satisfied. The mere reproduction of the statutory language, without particulars supporting such satisfaction, would not, by itself, demonstrate the application of mind necessary to sustain an order under Section 74,” the Court held.

The dispute arose from an audit concerning the period between July 1, 2017 and March 31, 2021. The authorities alleged that the Petitioner had availed ITC on supplies received from suppliers whose GST registrations had allegedly been cancelled retrospectively, with the cancellation taking effect before the dates of issuance of the relevant invoices.

Petitioner contended that the transactions were genuine and that the suppliers were registered and had active GST registrations at the relevant time. It also argued that the ingredients necessary for invoking Section 74 were absent.

The High Court found that the impugned order did not disclose the names or GSTINs of the suppliers concerned. It also failed to specify, supplier-wise, the relevant invoice dates, the dates from which the registrations were cancelled, the quantum of ITC attributable to each supplier, or the material on the basis of which the cancellation dates had been ascertained.

It further noted that there was no specific finding demonstrating how Petitioner had committed fraud, made any wilful misstatement, or suppressed any material fact with an intent to evade tax.

It distinguished between the eligibility condition under Section 16(2)(c) of the CGST Act and the separate requirements for invoking Section 74. While the Supreme Court had already rejected the challenge to the constitutional validity of Section 16(2)(c), that did not dispense with the requirement for the adjudicating authority to independently satisfy the statutory conditions for invoking Section 74, it held.

“Where a demand is sought to be sustained on the basis of retrospective cancellation of supplier registrations, the adjudication must disclose the factual material demonstrating the connection between the alleged cancellation and the particular ITC transactions forming the subject matter of the demand,” it added.

The Court held that the omission to disclose these particulars was not a mere technical defect, as Petitioner was deprived of an effective opportunity to meet the case against it.

As such, the Court set aside the demand and remanded the matter for fresh adjudication.

For Petitioner: Advocate Abhishek Garg

For Respondents: Advocate Aditya Singla, SSC along with Arya, Dhananjay Gautam, Akhil Sharma,Sakshi Chandna and Nehaol.