S.74 CGST | Plea in Supreme Court Challenges GST Demands On Allegations Of Fraud In Cases Where Dept Alleges No Supply

A plea has been filed in the Supreme Court challenging the invocation of Section 74 of the Central Goods and Services Tax Act, 2017, a provision that allows tax authorities to raise demands of tax, interest, and penalty in cases of fraud or suppression, in situations where the department itself alleges that no taxable supply of goods or services ever took place.

A Division Bench of Justice Pamidighantam Sri Narasimha and Justice Vijay Bishnoi took up the matter on January 30. The Bench directed the petitioners to serve a copy of the writ petition on the office of the Additional Solicitor General and said the ASG would assist the court on the next date of hearing. The matter has been listed for the following week.

The petition has been filed by Everflow Petrofils Ltd. and several connected entities and individuals who have been issued multiple show cause notices and adjudication orders by GST authorities across different commissionerates. These proceedings arise from allegations of circular trading and fake invoicing, with the department claiming that invoices were issued and input tax credit was availed even though there was no actual movement or supply of goods.

According to the plea, this very allegation makes Section 74 unavailable. The petition states that the show cause notices and orders are “founded entirely on the allegation that the transactions in question involved 'fake invoices' without any actual movement or supply of goods.”

Once the authorities proceed on that admitted premise, the plea says, “the existence of a taxable supply is ruled out,” and as a result, “the charging provision under Section 9 of the CGST Act is not attracted.”

The plea frames this as a foundational jurisdictional issue. It says Section 74 “necessarily presupposes the existence of a taxable event,” and where the department itself alleges that no supply ever occurred, “the machinery under Section 74 stands rendered wholly inapplicable.”

The absence of a taxable supply, the petition adds, “goes to the root of the jurisdiction and vitiates the entire proceedings.”

The petitioners have also relied on a circular issued by the Central Board of Indirect Taxes and Customs on July 6, 2022. That circular, the plea points out, “categorically mandates that the cases involving fake invoicing without actual supply shall not be taken up under Sections 73 or 74 of the CGST Act.”

Instead, only independent penal action, where permissible, may be initiated under Section 122 through the procedure prescribed under Section 127. The plea stresses that this circular is binding on tax officers and “operates as a clear limitation on the exercise of jurisdiction.”

Despite this clarification, the petition alleges that authorities across multiple commissionerates invoked Section 74, raised demands of tax, interest, and penalty, and proceeded to adjudicate the matter.

This, the plea says, amounts to “an arbitrary and unlawful assumption of authority.” It describes the action as a “colourable exercise of jurisdiction,” resulting in the imposition of tax and penalty “without authority of law,” in violation of Articles 14 and 265 of the Constitution.

The plea also highlights inconsistent outcomes across commissionerates dealing with the same alleged transactions. According to the petition, some authorities dropped tax demands under Section 74 while others confirmed them. This, it says, has led to “uncertainty, arbitrariness and unequal treatment among similarly placed taxpayers.”

Apart from the challenge to the invocation of Section 74, the petitioners have also sought a declaration that Section 122(1A) of the CGST Act cannot be applied retrospectively. The plea points out that this provision, which provides for penalties on persons who retain the benefit of tax evasion or aid and abet such conduct, came into force only on January 1, 2021. It says the provision “cannot be retrospectively applied for the assessment years of 2017 to 2020.”

The petition further challenges the practice of clubbing or bunching multiple show cause notices into a single proceeding. According to the plea, the notices in the present case pertain to different assessment years and involve distinct tax periods, limitation timelines, stages of adjudication, tax demands, and penalties.

Their consolidation, the petition says, is “arbitrary, illegal, and unsustainable in law” and “consequently vitiates the impugned proceedings, causing grave prejudice and undue hardship to the petitioners.”

The petitioners have therefore prayed the top court to quash the show cause notices and adjudication orders issued under Section 74, restrain tax authorities from initiating or continuing similar proceedings in no-supply cases, bar the retrospective application of Section 122(1A), and prevent the consolidation of distinct proceedings across multiple years. 

For Petitioner: Advocate Sriram Parakkat, Advocate B. Shravanth Shanker (AOR)