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September 1, 2020

MP High Court grants Bail against GST offence

by CA Shivam Jaiswal in GST, GST Circular Notification

MP High Court grants Bail against GST offence

If the Commissioner of GST believes a person has committed an offence u/s 132, he can be arrested by any authorised GST officer. Offenses u/s 132 where arrest provisions become applicable are-

  • A taxable person supplies any goods/services without any invoice or issues a false invoice
  • He issues any invoice or bill without supply of goods/services in violation of the provisions of GST
  • He collects any GST but does not submit it to the government within 3 months
  • Even if he collects any GST in contravention of provisions, he still has to deposit it to the government within 3 months. Failure to do so will be an offense under GST
  • He has already been convicted of an earlier offence u/s 132

Let us refer to the case of Jagdish Arora and another Vs Union of India (Madhya Pradesh HC) where a bail application was filed under Section 439 of the Code of Criminal Procedure [CrPC] on behalf of the applicants who were taken into judicial custody in respect of the offence punishable under Section 132(1)(a) read with section 132(1)(i) of the Central Goods and Service Tax Act, 2017

Facts of the Case:-

  • Som Distilleries Pvt. Ltd [SDPL] was a private limited company engaged in the business of manufacture and sale of alcohol based products and has made its mark across the country, primarily on account of consistently and uniformly manufacturing high quality products.
  • Prior to March, 2020 SDPL was not manufacturing sanitizers. In March, 2020 the Government of India directed the Chief Secretaries of all States to initiate steps to enhance production of hand sanitizers and further accord necessary permission to sanitizer manufacturers and distilleries, which on account of having existing infrastructure and ability to manufacture alcohol based products, could easily manufacture sanitizers.  This was done to meet the increased demand in order to curb the spread of the COVID-19 pandemic.
  • Accordingly the State of Madhya Pradesh issued a license to the SDPL to manufacture hand sanitizer.
  • The applicants were taken into custody by the CGST Department under Section 69 of the CGST Act and they were in jail since.
  • The instant case arose out of proceedings initiated by the CGST Department in relation to evasion of GST by SDPL leviable and evaded on account of production and sale of sanitizers.

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Claim by the Petitioners that the applicants were not directors of the company

  • Petitioners claimed that they were not Directors/ Managers/Officers/employees or authorized representatives of the SDPL and as such, they were not responsible for the day-to-day business affairs of the Company. In fact, both the applicants had resigned their Directorship from the SDPL nearly 11 years ago.
  • A reference was made to Section 137(1) of the CGST Act, which stipulated that a person who at the time of the offence was in charge of, and was responsible to, the Company for the conduct of business of the Company, as well as the Company, shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly.
  • In the present case the applicants cannot be observed to be persons in charge of and responsible to the Company for the conduct of business of the Company and hence, be deemed guilty of the alleged offence.
  • It was, therefore, submitted that the applicants were wrongly accused in the instant case. The applicants were not the Directors and therefore they could not be held responsible for the GST tax evasion, if any, by the Company.

Claim by the Petitioners that the search proceedings were carried out in disrespect of the law

  • The GST Department carried out search and seizure proceedings at the premises of the SDPL. It was the case of the applicants that the search proceedings were carried out in complete derogation of the procedure envisaged in law and in violation of COVID-19 Guidelines.
  • The search warrants were not served to responsible persons, documents were been seized without proper inventory and without providing copies thereof, stock was taken randomly without the aid of SDPL’s Store Manager and proper panchnamaswere not prepared and served by the respondent. Due to such irregularities, several employees of the Company were abused, humiliated and even assaulted.
  • They were being interrogated rigorously till late hours and are were not allowed to go home, nor were allowed to meet their lawyers. Further, the employees of the Company were physically tortured and beaten up inhumanly.

Claim by the Petitioners that the CGST authorities had committed deliberate errors in valuation of the GST liability

  • It was contended that the levy of GST in the present case was illegal as the GST was to be paid on the actual amount of sale consideration.
  • A dispute was raised about the GST to be paid by the Company as both, the quantity and the valuation were based on hypothetical reasoning’s.
  • The action of the CGST authorities was also challenged as they had committed deliberate errors in valuation of the GST liability, in order to bring the alleged acts within the purview of Section 132(5) of the CGST Act.
  • The GST authorities had committed mischief in valuation of the hand rub sanitizer manufactured by the SDPL with the sole motive of taking the alleged tax evasion above Rs 500 lakhs.
  • The case of the GST Department was completely contrary to the figures certified by the Excise Department. A comparative chart of CGST and actual figures of the Excise Department was reproduced in the application.
  • On the basis of the figures in the chart it was submitted that the figure for total production, supply and closing stock of sanitizer, as estimated by the CGST, was not correct and the same was based on hypothetical reasoning.
  • The basis of calculation made by the GST Department was completely erroneous and contrary to law.
  • Reliance was placed upon the judgments of the Gujarat High Court in Akshay Dinesh Patel vs. Commissioner of Central Goods and Services Tax and the Calcutta High Court in the case of Sanjay Kumar Bhuwalka vs. Union of India, wherein benefit of bail was granted to the accused persons on deposit of certain portion of disputed liabilities/dues.

Reference made to Section 107(7) by the Petitioner

  • Reference was made to Section 107(7) of the CGST Act, which states that where the appellant has paid the amount under sub-section (6), the recovery proceedings for the balance sum, shall be deemed to be stayed.
  • The statutory provision under the CGST Act permits the applicants to prefer an appeal against the amount of tax in dispute upon depositing of such amount and further stays the recovery proceedings during the pendency of such appeal.
  • It was urged that the applicants could have conveniently preferred such an appeal by depositing 10% of the amount in dispute. However, it was pertinent to note that to show their authenticity, the Company had deposited the entire disputed amount under protest.

Claim by the Petitioners that their arrest was bad in law as the final assessment & adjudication was not initiated.

  • Reliance was placed on the judgment passed by the Madras High Court in Jayachandran Alloys Pvt. Ltd. vs. Superintendent of GST and Central Excise, wherein it was clarified that power of arrest can be exercised only after the liability is quantified upon due assessment.
  • Thus, it was submitted that the procedure adopted in the instant case, where arrest has been made without completion of assessment proceedings, runs counter to the established provisions of law.

The arrest of the applicants under Section 69(1) of the CGST Act was criticized to be bad in law as there was failure on the part of the prosecution to provide reasons to believe.

  • It was submitted that the power to arrest was conferred on the Commissioner under Section 69(1) of the CGST Act.
  • It was stated that in complete disregard to Section 69 of the CGST Act, the GST authorities failed to provide the “reasons to believe” and “grounds of arrest” in respect of the alleged offence punishable under Section 132(1)(a) to (d) of the CGST Act.
  • In the present case, there was no intelligible nexus between the reasons to believe for the applicants committing the alleged offence. The reasons to believe cannot be equated with the reasons to suspect.
  • Reliance was placed on the judgment rendered in the case of Nagendra Rao and Co. vs. State of A.P, wherein the Supreme Court observed that the expression “reason to believe” means that even though formation of opinion may be subjective, but it must be based on material on the record. It cannot be arbitrary, capricious or whimsical. It is, thus, a check on exercise of power to seize the goods.
  • In the present case, the GST authorities had not placed on record any material whatsoever, to support such “reason to believe” against the applicants. Such reason to believeshould be recorded by the Commissioner of CGST himself with application of mind.

Prayer for grant of bail has also been made on medical grounds.

  • It was stated that the applicants were an old and infirm persons and were also heart patients.
  • They were suffering from an extreme form of Asthma and as such, were highly vulnerable to the COVID-19 virus.
  • Despite these ailments, with a view to demonstrate his authenticity, they joined the proceedings and after fully co-operating with the Department, he gave a written intimation humbly requesting to be excused from personal appearance on account of his health condition and his peculiar vulnerability on account of COVID-19 pandemic.
  • Copies of medical documents have been placed on record.

Submissions by Respondent

  • The respondent submitted that the entire exercise undertaken was in accordance with the provisions of Sections 67 and 69 of the CGST Act.
  • There was sufficient material to establish direct involvement of the applicants in the 3 Companies under investigation.
  • Intelligence was received from the Director General (DGST), Intelligence Headquarter that several distilleries (including the SDPL) across India engaged in manufacture of Ethanol from grains, were involved in GST evasion.
  • Acting on the said intelligence, a reasonable belief was formed that the SDPL had evaded GST on the taxable product and the documents received for investigation have been searched in the premises.
  • During search, the statements of employees of the Company were recorded. They informed that the actual control of the Company was in the hands of the applicants.

Observations of High Court (HC)

  • HC went through the record in order to ascertain the existence of “reasons to believe” for the proceedings being initiated against the applicants.
  • HC did not find any material evidence, except the statement of the employee – Binay Kumar Singh.
  • There was no documentary material evidence produced on record to show that the present applicants were legally in charge and responsible for the day-to-day working of the Company.
  • They had already resigned legally from the Directorship of the Company. Merely on a statement of an employee of the Company, it cannot be held that the present applicants were in charge and responsible for the functions of the Company.
  • HC carefully considered the nature and gravity of the allegations made against the applicants and the specific evidence collected in respect of the allegations.
  • According to HC, elaborate discussion would not be apt, as it may adversely affect the interest of either party.
  • Therefore, without commenting on the merits of the case, the application for grant of bail to the applicants was allowed.

It was directed that the applicants to be released from custody on their furnishing a personal bond.

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