Assessment is not a pre-requisite for arrest under GST – Bombay HC

The Bombay High Court in the case of Mr. Ashok Kumar & Mrs. Sheela vs Commissioner CGST & Central Excise, Navi Mumbai Commissionerate rejected the petitioners bail and though the officers under the CGST Act, could not seek custody of the arrested persons for completing the investigation, applicant’s detention in custody was necessary to prevent him from causing the evidence of the offence to disappear or tampering such evidence.

HC was not inclined to exercise discretion under Section 439 of the Criminal Procedure Code which pertains to Special powers of High Court or Court of Session regarding bail.

Facts of the Case

• The Applicants were partners of M/s. Sheela Sales Corporation, a ‘registered person’, engaged in the business of trading. Applicant no.1 is husband of applicant no.2.
• Applicant no.1 claimed that applicant no.2 (his wife) being dormant partner, did not participate in the business of the firm at all.
• Form – GSTR-3B, filed by the applicants’ firm revealed that the said firm had availed, Input Tax Credit (ITC). It was the respondent’s case that, GSTR-3B returns were filed belatedly.
• Upon noticing the gross irregularities committed by M/s. Sheela Sales Corporation, Officer of the respondent no.1 initiated a preliminary enquiry wherein it was found that ITC was availed by applicant’s firm on the basis of invoices said to be issued by M/s. Jai Bajrang Traders, a firm located at Uttar Pradesh.

• Further, investigation revealed that, M/s. Jai Bajrang Traders was not a genuine firm and the applicants’ firm had also failed to produce proof of movement of goods, such as copies of e-way bills or any other proof of receipt or storage of goods.
• The applicants had also failed to furnish, proof of payment made to M/s. Jai Bajrang Traders within 180 days.

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What was the Case of the Respondent?

• It was the respondent’s case that, as per Section 16(2) of CGST Act, recipient has to make payment to the supplier of goods within 180 days of issue of invoice, and if he fails to make payment, then an amount equal to ITC availed by the recipient shall be added to the tax liability.
• According to Section 37(1) read with Rule 59 of CGST Act, every supplier has to furnish details of outward supply of goods in Form GSTR-I.
• On the basis of GSTR-1 filed by the supplier, Form GSTR-2A is auto-populated at the end of the recipient, wherein all details of inward supplies are captured.
• During the course of preliminary investigation, though efforts were made to generate GSTR-2A of the applicant’s firm from GSTN Portal, the same could not be generated.

• The investigation further revealed that the applicant’s firm after availing the ITC without any actual receipt of goods has also passed on the said ITC to six firms, out of which five firms were closely held entities of M/s. Sheela Sales Corporation.
• Investigation also revealed that, above referred five firms have availed and passed on the said credit to 360 other firms located in various parts of the country.
• Applicant’s firm had not only availed fraudulent ITC without any actual receipt of goods but also passed on the same to six firms out of which five firms are closely held entities of their firm.
• In essence, therefore the main allegation of the respondents was that, applicants were guilty of circular trading by claiming Input Tax Credit on the materials never purchased and passing on such ITC to companies to whom they never sold any goods.
• The availment of ITC without actual receipt of goods in contravention of Section 132(1)(b) and (c) is a cognizable and non-bailable offence under Section 132(5) and punishable with imprisonment for a term which may extend to five years and with a fine under Section 142(1)(i) of the CGST Act.

Observations of the High Court w.r.t E-way rules

• As per the provisions of Rule 138 of CGST Act, 2017 (E-Way Rules), generation of E-way bill is mandatory in case of inter-state supply of goods from 1st April, 2018.
• According to Rule 138(4) of CGST Act, 2017 a unique E-way bill number (EBN) generated on the common portal is also made available to the supplier, recipient and the transporter of goods.
• However, applicants had failed to produce EBN particulars, transporter’s details, proof of receipt of goods either by himself or his agent or warehouse keeper and payment proof either by himself or by agent or otherwise
• Applicant no.1 in his statement admitted, that neither his firm has received goods from M/s. Jai Bajrang Traders nor, had made any payment to M/s. Jai Bajrang Traders.
• In terms of Section 136 of the CGST Act, disclosure in the statement is “relevant” for proving any offence under the said Act.
• Applicants had not retracted the statements. Under these circumstances, contention of respondents that, fraudulent ITC claim was a matter of grave concern and required thorough investigation for which applicants’ presence is absolutely necessary.
• The applicants instead cooperating with the ongoing investigation by submitting relevant documents and making themselves available for recording the statements filed an anticipatory bail application before the District and Sessions Court and thereafter before the Bombay High Court.

Observations of the High Court on the applicants’ contention that, unless returns GSTR-3B are verified and liability is determined, prosecution cannot be lodged.

• Chapter-XIX of the CGST Act, states out offences committed by the registered person and penalties to be imposed whereas, Chapter-XII lists out, modes of “assessments”.
• According to Section 2(11), “Assessment” means determination of tax liability in this Act and includes self-assessment, re-assessment, provisional assessment, summary assessment and best judgment assessment.
• Upon reading the provisions contained in Chapter-XIX, it was stated that scheme of the Act, did not make provisions of Section 122 to 138 applicable, subject to “assessment”.
• Both the Chapters, i.e. Chapter XIX and Chapter-XII were distinct and application of the provisions there under were distinct and not subject to each other. Therefore, the contention was rejected

Observations of the High Court on the applicants’ contention that registration of FIR is a condition precedent for arresting the person

• Section 69 empowers Commissioner to order and authorize to arrest a person if he has “reason to believe” that person has committed any offence specified in Clause (a) or Clause (b) or Clause (c) or Clause (d) of section 132(1).
• The facts of the case suggested that Commissioner has had, reason to believe, the applicant’s complicity in committing the offence under Clause (b) and (c) of Section 132(1) of the CGST Act was thus was empowered to arrest the applicant.

Observations of the High Court on the applicants’ inability to produce bills/invoices

• The applicants in their written submissions filed before the HC submitted that they were in possession of all the relevant documents in support of ITC claim and they were ready and willing to submit the same to the Officer of respondent no.1.
• Another contention raised for the first time was that applicants had purchased material only after receiving the required OTP of transaction.
• These two submissions were an afterthought, as respondents had afforded sufficient opportunities by issuing seven summonses to applicant no.1 and four to applicant no.2.
• However, they did not produce any document to substantiate, that at the time of claiming ITC, they were in possession of invoice and/or there was movement of goods from the supplier to the applicant’s firm or to their assignees.
• In fact, applicant no.1 in his statements recorded in response to summons had admitted that M/s. Sheela Sales Corporation did not receive material from M/s. Jai Bajrang Traders, a supplier located in UP.
• Neither any e-way bill was generated by M/s. Jai Bajrang Traders in the name of M/s. Sheela Sales Corporation. This admission/statement was not retracted by the applicant till date.
• Moreover, applicants did not produce invoice and transport receipts. On the backdrop of these facts, invoice and transport bills produced at the eleventh hour, was nothing but an attempt to prolong the proceedings, so that interim pre-arrest protection granted by the HC would continue to operate till the bills are verified.

• Applicants in their written submissions did not explain why applicants could not produce invoices and other documents before the respondent.
• Applicants ought to have been explained and furnish the explanation in view of the fact that, M/s. Jai Bajrang Traders, the sole supplier has lodged FIR against the applicants for forging the invoices.
• When respondents were confronted with these invoices and transport receipts, he submitted that invoices and transport bills were submitted to him recently.
• Some of the invoices and transport bills were verified by the Officer which revealed that, many of the vehicle numbers are bogus and further also found that vehicle’s registration date is latter then the lorry receipt dates.

Thus taking into consideration, the facts of the case, though the officers under the CGST Act, could not seek custody of the arrested persons for completing the investigation, respondent’s contention that applicant’s detention in custody was necessary to prevent him from causing the evidence of the offence to disappear or tampering such evidence was well founded.

In view of the facts of the case and in the interest of the public and the State, in serious cases like this, HC was not inclined to exercise discretion under Section 439 of the Criminal Procedure Code in favour of applicant (husband).

As far as the 2^nd applicant (wife) was concerned, material on record indicated and suggested that, the wife was a dormant and sleeping partner and was not participating in the day to-day business of the firm. Having regard to these facts, a pre-arrest bail was granted to the wife. However, the pre-arrest bail application of 1^st applicant (husband) was rejected.

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