GST Registration cancellations must be based on objective criteria and not be a mechanical process

Sharda Metal Works through its proprietor Mr. Dilip Kumar Vs Commissioner Central Goods and Services Tax (Delhi High Court)

Introduction: The Delhi High Court recently delivered a significant judgment on the cancellation of GST registration with retrospective effect in the case of Sharda Metal Works, represented by its proprietor Mr. Dilip Kumar, versus the Commissioner of Central Goods and Services Tax. The court scrutinized the order dated 02.05.2023, along with the Show Cause Notice issued on 06.09.2022, and provided insights into the legal intricacies surrounding such cancellations.

Show Cause Notice and Impugned Order: The petitioner contested the cancellation of registration, challenging both the Show Cause Notice and the subsequent order dated 02.05.2023. The Notice cited reasons related to the issuance of invoices or bills without the supply of goods and/or services, potentially leading to the wrongful availment or utilization of input tax credit or tax refunds.

Lack of Specifics in Show Cause Notice: One noteworthy aspect highlighted by the court was the lack of specific details in the Show Cause Notice. While the Notice mentioned potential violations, it did not provide particulars or reference any specific invoices or bills allegedly issued without corresponding supplies.

Template Usage by Respondents: The court raised concerns about the respondents using a template for issuing notices without offering clear particulars. The absence of clarity regarding whether the petitioner issued invoices without supply or if their actions led to wrongful availment of tax benefits added to the legal ambiguity.

Retrospective Cancellation and Lack of Reasoning: The impugned order sought to cancel the registration retrospectively from 27.06.2018. The court emphasized that such retrospective cancellations must be based on objective criteria and not be a mechanical process. The absence of reasoning and particulars in both the Show Cause Notice and the order rendered them unsustainable.

Objective Criteria for Retrospective Cancellation: The court referred to Section 29(2) of the Central Goods and Services Tax Act, 2017, highlighting that the proper officer may cancel registration retrospectively based on objective criteria. Mere non-filing of returns does not warrant retrospective cancellation, and the officer’s satisfaction must be reasoned.

Consequences and Proper Officer’s Role: The judgment underlined that consequences such as denial of input tax credit to the taxpayer’s customers must be considered before canceling registration retrospectively. The proper officer must evaluate such aspects based on objective criteria to ensure a fair and warranted decision.

Set Aside Show Cause Notice and Impugned Order: Given the lack of specifics, reasoning, and clarity, the court set aside both the Show Cause Notice and the impugned order. However, it granted the respondents the option to take further actions in accordance with the law, provided a proper Show Cause Notice and an opportunity for the petitioner to present their case.

Conclusion: The Delhi High Court’s judgment in the Sharda Metal Works case emphasizes the importance of objective criteria and reasoning in the retrospective cancellation of GST registration. The court’s decision to set aside the Show Cause Notice and the impugned order underscores the need for clarity and fairness in such legal proceedings. While leaving room for further actions by the respondents, the court ensures that any future steps align with legal procedures and uphold the petitioner’s right to a fair hearing. This case serves as a precedent for businesses facing similar issues with GST registration cancellations and highlights the significance of a transparent and reasoned approach in tax-related matters.

FULL TEXT OF THE JUDGMENT/ORDER OF DELHI HIGH COURT

1. Petitioner impugns order dated 02.05.2023 and Show Cause Notice dated 06.09.2022. Vide Show Cause Notice dated 06.09.2022, petitioner was called upon to show cause as to why the registration be not cancelled for the following reasons:

“Issues any invoice or bill without supply of goods and/or services in violation of the provisions of this Act, or the rules made thereunder leading to wrongful availment or utilization of input tax credit or refund of tax.”

2. Vide impugned order dated 02.05.2023, the registration of the petitioner has been cancelled with effect from the date of its registration on 27.06.2018.

3. We may note that though the Show Cause Notice states that invoice or bill has been issued by the petitioner without supply of goods and/or services leading to wrongful availment or utilization of No input tax credit or refund of tax. particulars or details have been mentioned in the Show Cause Notice. There is no reference to any invoice or bill which the petitioner is alleged to have issued without making any supplies. It appears that the Show Cause Notice extracts the reason in a standard format as there are several other options mentioned in the reason i.e. “without supply of goods and/or services” and “leading to wrongful availment or utilization of input tax credit or refund of tax”.

4. It appears that the respondents are using a template for issuing said notices without providing any particulars. There is no clarity as to whether the petitioner has issued invoices or bills without supply or the action of the petitioner has led to wrongful availment or utilization of input tax credit or refund of tax.

5. Further, the Show Cause Notice also does not mention the quantum of wrongful availment of input tax credit or any refund claimed on the said account. The impugned order also does not state any reasons for cancellation of the GST registration retrospectively except to state that no reply to the show cause notice has been received. Both the show cause notices and the impugned order are bereft of any reasoning and particulars and are accordingly not sustainable.

6. The impugned order also seeks to cancel the registration with effect from 27.06.2018. There is no material on record to show as to why the registration is sought to be cancelled retrospectively. There is no material to show that there was any wrongful availment or utilization of input tax credit effective from the date of registration till the issuance of the show cause notice.

7. In terms of Section 29(2) of the Central Goods and Services Tax Act, 2017, the proper officer may cancel the GST registration of a person from such date including any retrospective date, as he may -section are deem fit if the circumstances set out in the said sub satisfied. The registration cannot be cancelled with retrospective effect mechanically. It can be cancelled only if the proper officer deems it fit to do so. Such satisfaction cannot be subjective but must be based on not filed the some objective criteria. Merely, because a taxpayer has returns for some period does not mean that the taxpayer’s registration is required to be cancelled with retrospective date also covering the period when the returns were filed and the taxpayer was compliant.

8. It is important to note that, according to the respondent, one of the consequences for cancelling a tax payer’s registration with retrospective effect is that the taxpayer’s customers are denied the by the tax input tax credit availed in respect of the supplies made payer during such period. Although, we do not consider it apposite to examine this aspect but assuming that the respondent’s contention in this regard is correct, it would follow that the proper officer is also required to consider this aspect while passing any order for cancellation of GST registration with retrospective effect. Thus, a taxpayer’s registration can be cancelled with retrospective effect only where such consequences are intended and are warranted.

9. Further, the Show Cause Notice also does not put the petitioner to notice that the registration is liable to be cancelled retrospectively. Accordingly, the petitioner had no opportunity to even object to the retrospective cancellation of the registration.

10. In view of the above, the Show Cause Notice as well as the impugned order are set aside.

11. It would be, however, open to the respondent to take further inter alia action in accordance with law , cancellation of registration with retrospective effect. However, the same would be in accordance with law and pursuant to a proper Show Cause Notice and an opportunity of hearing being given to the petitioner.

12. Respondents are also not precluded from taking any steps for recovery of any tax, penalty or interest that may be due from the petitioner in accordance with law.

13. The petition is accordingly disposed of in the above terms.