Employees Not Liable for Employer’s GST Evasion: SC

Supreme Court’s Landmark Judgement: SCN to Employees Unjustifiable Under GST & Scope of Section 122(1A) of CGST Act, 2017

Summary: The Supreme Court of India upheld the Bombay High Court’s ruling in Union of India v. Shantanu Sanjay Hundekari & Anr., confirming that employees and power of attorney holders cannot be held liable for their employer’s alleged GST evasion under Section 122(1A) of the CGST Act. The case involved employees of Maersk Line India Pvt. Ltd. (MLIPL), who were issued a show cause notice (SCN) for a tax demand of ₹3,731 crores due to wrongful Input Tax Credit (ITC) claims. The court determined that the petitioners were not “taxable persons” as defined under GST law and had not personally benefited from the alleged tax evasion. The Bombay High Court ruled that Section 122(1A) applies only to taxable persons who retain benefits from tax evasion. Since the petitioners were neither taxable persons nor beneficiaries, the invocation of this section was deemed unlawful. Additionally, Section 137, which deals with offenses by companies, could not be applied alongside Section 122(1A), as they fall under different legal categories. Consequently, the SCN under Section 74 was quashed. The Revenue Department challenged the ruling in the Supreme Court through a Special Leave Petition (SLP), but the apex court upheld the High Court’s verdict and dismissed the appeal. This judgment clarifies that penal provisions cannot be invoked against employees or power of attorney holders unless they are directly responsible and personally benefit from tax evasion.

SC Judgment Link: Union of India & Ors. Vs Shantanu Sanjay Hundekari & Anr. Etc. (Supreme Court of India); Special Leave Petition (Civil) Diary No. 55427/2024; 24/01/2025

Bombay HC Judgment Link: Shantanu Sanjay Hundekari Vs Union of India (Bombay High Court); Writ Petition (L) No. 30198 of 2023; 28/03/2024

Introduction:

The Employees are the one of the most important pillars of any organization and responsible for overall growth of the organization. But are they liable for the alleged tax evasion made by the employer? In the recent judicial precedent, Hon’ble Supreme Court of India has adjudicated the matter in the case of Union of India v. Shantanu Sanjay Hundekari & Anr. Etc. (Special Leave Petition (Civil) Diary No.55427/2024)

Brief Facts of the Case

1. Employees (petitioners) of Maersk Line India Pvt. Ltd. (MLIPL), including Shantanu Sanjay Hundekari, were issued a SCN under Section 74 of CGST Act wherein a demand amounting to Rs. 3,731 crores was initiated against the petitioners alleging the tax evasion due to wrongful Input Tax Credit (ITC) claims and incorrect invoices. Assessing Authority invoked Sections122(1A) and 137 of the CGST Act against the petitioners.

2. The petitioners, acting as power of attorney holders for MLIPL, were not involved in the company’s day-to-day operations and were not personally benefitted by the alleged tax evasion.

3. The petitioners contend that the invocation of these provisions is erroneous, as they were not directly responsible for the alleged tax evasion, and assert that they should not be held accountable for MLIPL’s corporate liabilities under the given circumstances.

Legal Issues of the Case

• The primary legal issue was whether Sections 122(1A) and 137 of the CGST Act could be invoked against the petitioners, who were merely employees and power of attorney holders of Maersk, and not the primary beneficiary of the alleged tax evasion.
  • Specifically, the High Court had to consider the interpretation of Section 122(1A) regarding whether it could be applied to a person who does not retain the benefit of the transaction.
  • The applicability of Section 137, concerning offenses by companies, to the employees and power of attorney holders of the company was also a key issue.
• A crucial point was whether the show cause notice issued under section 74 could be used to initiate proceedings under section 137 of the CGST Act, which is a penal provision.

Arguments of the Petitioners

• The petitioners argued that the show cause notice was arbitrary and illegal because the basic ingredients of Section 122(1A) were not satisfied, as they did not personally benefit from the ITC.
• The petitioners contended that they were merely power of attorney holders and not in charge of Maersk’s business. They argued that Section 137(1) and (2) had no application to them because they were not responsible for the conduct of Maersk’s business.
• The petitioners further argued that they were not “taxable persons” under Section 2(107) of the CGST Act, making Section 122(1A) inapplicable to them.
• It was submitted that there was no incriminating role or reason in the show cause notice to support the allegation that the petitioners aided and abetted in the commission of an offense by Maersk.
• The petitioners also highlighted that Section 137 had no application as the benefit of Rs. 3,731 crores was not retained by them.

Arguments of the Respondents

• The respondents argued that the petitioners were responsible for Maersk’s affairs and could not disown their involvement in the loss of revenue.
• They stated that the petitioners, as power of attorney holders and senior tax managers, were responsible for ensuring compliance with GST laws.
• The respondents contended that the petitioners were aware of the tax evasion by Maersk and therefore were equally liable for the evasion.
• The respondents argued that the company was not coming forward to clear the tax dues and therefore the show cause notice was rightly pressed against the petitioner.
• The respondents submitted that the final determination of the show cause notice was to be made by the adjudicating authority after considering the petitioner’s reply to the show cause notice.

Verdict of Hon’ble High Court of Bombay:

• The court found that the petitioners, being employees and power of attorney holders, were not “taxable persons” as they are not registered under Section 22 or Section 24 of the Act and could not be held liable under Section 122(1A).
• Section 122(1A) applies to a “taxable person” as it is in continuation of Section 122(1) which starts with “where a taxable person”. This necessarily implies that Section 122(1A) applies to a taxable person, as it specifically speaks about the applicability of the provisions of clauses (i), (ii), (vii) or clause (ix) of Section 122(1).
• Further, it was also held that Section 122(1A) applies to a “taxable person” who retains the benefit of the transactions and at whose instance the transactions are conducted and since the petitioners were not taxable persons nor personally benefitted from the alleged tax evasion, section 122(1A) cannot be invoked qua petitioners as the basic requirement of the aforesaid section is that the person must be personally benefitted from the tax evasion. Therefore, invoking Section 122(1A) is perverse and without jurisdiction and liable to be set aside in the interest of justice.
• Also, the court noted that the invocation of Section 137, concerning offenses by companies, was also not tenable in the eyes of law, as it cannot be applied with section 122(1A) which comes under the Chapter XV “Demand and Recovery” whereas Section 137 comes under the Chapter XIX “Offences & Penalties”.
• For the reasons mentioned hereinabove, the SCN notice under Section 74 of the CGST Act was quashed.

Verdict of Hon’ble Supreme Court of India:

• Revenue department approached SC through Special Leave Petition (SLP) against the ruling of Hon’ble High Court of Bombay.
• However, Hon’ble Supreme Court upholds the judgement of Hon’ble High Court of Bombay and dismissed the SLP filed by the department.

Conclusion:

1. The ruling clarifies that vicarious liability cannot be automatically applied under GST laws to employees or power of attorney holders for the actions of their employers. There has to be a clear link between the person’s actions and the tax evasion, and they must be a “taxable person” who benefits from the evasion.

2. In order to invoke the provisions of Section 122(1A), there must be a “taxable person” against whom the provisions were to be imposed and such “taxable person” must be personally benefitted from the alleged evasion as specified under Section 122(1A).

3. Penal sections cannot be invoked with recovery sections through a demand cum show-cause notice.

4. Violation of any of the above-mentioned rules would result in abuse of jurisdiction which is a ground for quashing the show-cause notice.