SCN issued after FAR

A Show Cause Notice (SCN) was issued to a taxpayer under Section 74(1) of the CGST Act, 2017. This Notice mandates the taxpayer to respond to several allegations and demands.

The taxpayer's response outlines several critical arguments, challenging the legitimacy of the current Show Cause Notice based on established legal principles and prior departmental actions.

1. Principle of Double Jeopardy / Res Judicata:

• Prior Proceedings: An earlier Show Cause Notice concerning the identical subject matter was issued to the taxpayer, who was listed as a co-noticee (No. 67). The main noticee in that previous SCN was a separate entity, M/S. Symphony Overseas.

• Favourable Prior Order: Importantly, an Order-in-Original dated 21.07.2023 dropped the proceedings against the taxpayer. This order, specifically in paragraph 15(ix), explicitly held that penalty proposals against the taxpayer under Section 122(1)(vii) of the CGST Act were liable to be dropped. This decision was based on the taxpayer's submission of invoices, E-way bills, ledger copies, bank statements showing payment, and an Audit Report (FAR) dated 15th June 2023 for FY2017-18 to FY2021-22. The Order concluded that the taxpayer had substantiated their receipt of goods.

• Legal Implication: The current Notice, issued after this definitive prior order, is argued to be contrary to and in violation of the earlier order. The principle of Double Jeopardy or Res Judicata dictates that proceedings once concluded cannot be reopened for the same cause, effectively barring re-litigation of already settled issues. This is supported by judicial precedent, such as Hitachi Nest Control Systems Pvt Ltd Writ Petition No 633 of 2024, where the Karnataka High Court underscored that reopening proceedings after a significant delay without justifiable reasons is impermissible.

2. Departmental Awareness and Final Audit Report (FAR):

• Prior Audit: The taxpayer asserts that they have already presented all evidence of compliance through a final audit conducted by the CGST Audit-II for the impugned period. This audit supports their position that they have adhered to all tax regulations.

• Established Facts: The department is already aware of all facts relevant to the case, as evidenced by the taxpayer's Final Audit Report, which was conducted by the department itself. This argument draws parallels to cases like Service Tax 189 Of 2010, where the CESTAT noted that the department was already aware of all facts.

3. Challenges to the Additional Penalty of Rs 66,10,207/- Related to GSTIN Cancellations:

This penalty is based on allegations regarding GSTIN cancellations of recipients. The taxpayer makes the following submissions:

• Lack of Communication/Incorrect Data: If GSTIN cancellations of recipients were not communicated to the taxpayer or were based on incorrect data at the time of generating tax invoices, it invalidates the claim against them. The taxpayer issued valid tax invoices according to the requirements under the CGST Act, 2017.

• Recipient's Responsibility & No Mens Rea: The inability of recipients to confirm receipt or supply of goods might stem from factors or failures on the recipients’ end, which should not penalise the supplier. The taxpayer demonstrated no mens rea (guilty mind or criminal intent) in generating tax invoices and filing their statutory returns.

• Principle of Substantial Compliance:

  • Minor procedural errors should not result in the loss of benefits intended by legislation.

  • The doctrine of substantial compliance applies even to claims for ITC benefits, as established in Commissioner of GST and Central v. Bharat Electronics Ltd. (Madras High Court, 2021, para 24).

  • The GST framework aims to facilitate compliance, not penalise taxpayers for minor infractions. Cases like Suguna Cutpiece Vs Appellate Deputy Commissioner (ST)(GST) (2022, paras 216-219) reiterate that keeping taxpayers out of the GST framework serves no useful purpose and that adequate safeguards exist to prevent abuse.

  • The taxpayer's compliance has been verified by the Final Audit Report conducted by the department.

• No Evasion by Taxpayer: While the government aims to prevent tax evasion, if the taxpayer can demonstrate compliance with essential requirements (as confirmed by the Final Audit Report), the cancellation of a recipient's registration should not automatically lead to ITC reversal or supplier penalty. This aligns with Kottaiyenthal Kanmai v. The State Tax Officer (Madras High Court, 2023, para 218), which emphasised that the GST framework should not allow taxpayers to evade tax obligations while still benefiting from the system.

• Substantive Entitlement vs. Technicalities:

  • Strict adherence to procedural requirements should not negate the underlying entitlement.

  • The denial of ITC based on technicalities could undermine the beneficial nature of the GST regime, even if conditions for claiming ITC must be strictly observed, as noted in Mall of Joy Pvt Limited v. Union of India (Kerala High Court, 2024, para 77).

  • The taxpayer's substantive compliance for the impugned period has already been cleared by the Final Audit Report, which is available with the department.

• Retrospective Effect of Cancellation: The concept of retrospective ab initio cancellation of GSTINs of buyers cannot punish the seller for actions considered compliant at the time they were executed.

• Reliance on Publicly Available Information: The responsibility for ensuring ITC eligibility cannot entirely rest on the supplier without considering the accountability of recipients. The taxpayer relied on publicly available information or GST portal data for confirmation of the recipient's registration status at the time of transaction. If the GST system did not reflect the cancellation statuses, the taxpayer should not be penalised years later. It is a settled legal principle that procedural errors should not negate substantive entitlements under the law.