Can a Certificate issued under CGST Rule 89(2)(m) by a CA, be made a basis, for Arrest u/s 69 read with section 132 of the CGST Act?

The recent unfortunate development of the arrest of two CAs by the Officers of CGST, Gurugram Commissionerate, on 18.5.2022, on the ground of alleged issuance of false Certificate in fraudulent availment of Input Tax Credit (ITC) and consequent refunds of around Rs.15 crores to the beneficiary party (whereabouts still unknown), has raised some serious concerns and apprehensions on the correct interpretation and implementation of the corresponding legislative provisions in respect of the power of arrest, as contained in section 69 read with section 132 of the CGST Act, 2017.

This is duly evident from a bare perusal of the Arrest Memo, issued u/s 69, by the CGST, Gurugram Commissionerate, in this unfortunate incident. It is pertinent to mention here that the said Arrest Memo, has been shared in various social media platforms, and as such is available in public domain.

In the said arrest memo, issued u/s 69, on 18.5.2022, it has been stated in computer typed words, that the competent authority i.e., the Principal Commissioner, has reason to believe, that the concerned CA has committed an offence specified in clause (a) or (b) or (c) or (d) of subsection (1) of section 132 of the CGST Act, 2017, and as such the concerned CA has been placed under arrest and he has been explained the grounds of his arrest.

In the same arrest memo, the concerned CA, has also written, in his own handwriting that his family has been informed about his arrest, for sharing of UDIN Generation OTP.

However, whether, such an action of arrest u/s 69 read with section 132 of the CGST Act, 2017, is in accordance with Law or not, this is a matter of grave concern.

Hence, in this article, a sincere and honest attempt is being made to analyse and interpret the real purport of such legislative provisions concerning the invoking the power of arrest u/s 69 read with section 132 of the CGST Act, in the context of issuance of the prescribed Certificate by a Chartered Accountant under Rule 89 of the CGST Rules, 2017.

In order to have clear understanding of the issue under consideration, it is but essential to first know and understand as to what exactly has been stipulated in sections 69 and 132 of the CGST Act, 2017, containing the legislative provisions, in respect of the power of arrest.

Accordingly, the relevant legislative provisions in respect of the power of arrest, as contained in section 69 read with section 132 of the CGST Act, 2017, are being reproduced below, for ready reference.

^“Section 69. Power to arrest. –

(1) Where the Commissioner has reasons to believe that a person has committed any offence specified in clause (a) or clause (b) or clause (c) or clause (d) of sub-section (1) of section 132 which is punishable under clause (i) or (ii) of sub-section (1), or sub-section (2) of the said section, he may, by order, authorise any officer of central tax to arrest such person.

(2) Where a person is arrested under sub-section (1) for an offence specified under sub- section (5) of section 132, the officer authorised to arrest the person shall inform such person of the grounds of arrest and produce him before a Magistrate within twenty four hours.

(3) Subject to the provisions of the Code of Criminal Procedure, 1973 (2 of 1974),-

(a) where a person is arrested under sub-section (1) for any offence specified under sub-section (4) of section 132, he shall be admitted to bail or in default of bail, forwarded to the custody of the Magistrate;

(b) in the case of a non-cognizable and bailable offence, the Deputy Commissioner or the Assistant Commissioner shall, for the purpose of releasing an arrested person on bail or otherwise, have the same powers and be subject to the same provisions as an officer-in-charge of a police station.

Section 132. Punishment for certain offences.-

(1) Whoever commits, or causes to commit and retain the benefits arising out of, any of the following offences, namely:-

(a) supplies any goods or services or both without issue of any invoice, in violation of the provisions of this Act or the rules made thereunder, with the intention to evade tax;

(b) issues any invoice or bill without supply of goods or services or both in violation of the provisions of this Act, or the rules made thereunder leading to wrongful availment or utilisation of input tax credit or refund of tax;

(c) avails input tax credit using the invoice or bill referred to in clause (b) or fraudulently avails input tax credit without any invoice or bill;

(d) collects any amount as tax but fails to pay the same to the Government beyond a period of three months from the date on which such payment becomes due;

Thus, a simple and plain reading of the above legislative provisions of section 69 and 132 of the CGST Act, makes it duly evident and amply clear that the power of arrest u/s 69, can be invoked only if the Commissioner has reason to believe that a person has committed an offence as specified in any of the four clauses (a), (b), (c) or (d) of subsection (1) of section 132 of the CGST Act.

Therefore, a person can be arrested u/s 69 only, if he has committed or cause to be committed an offence of supply of any goods or service, without issuing any invoice, or issuing any invoice without supply of goods or services, or availing or fraudulently availing input tax credit, or collecting any amount of tax but not depositing it within a period of three months.

In this present case, firstly, in the said arrest memo dated 18.5.2022, the exact reason has not been specified and it has been simply stated that the arrest is being undertaken, on any of the four reasons as contained in clauses (a) or (b) or (c) or (d) of subsection (1) of section 132 of the CGST Act, 2017. Thus, on this reason alone, the said arrest appears to have become vitiated and without jurisdiction.

Secondly, the handwritten content by the concerned CA, on the said arrest memo, clearly suggests, that the reason for his arrest which has been communicated to him and his family, does not fall under any of the four specified reasons as contained in clauses (a) or (b) or (c) or (d) of subsection (1) of section 132 of the CGST Act, 2017. So, on this ground also, the said arrest memo, appears to be inconsistent, with the legislative provisions of the CGST Act.

It is pertinent to mention here that in the instant case, in the subsequent Remand Application dated 19.5.2022, issued after the above mentioned Arrest Memo dated 18.5.2022, an additional enabling provision, for making the said arrest, has been added i.e., clause (f) of subsection (1) of section 132 of the CGST Act, 2017.

For ready reference, the text of the said clause (f) of subsection (1) of section 132 of the CGST Act, 2017, is also being reproduced, as under:

“Section 132. Punishment for certain offences.-

(1) Whoever commits, or causes to commit and retain the benefits arising out of, any of the following offences, namely:-

(f) falsifies or substitutes financial records or produces fake accounts or documents or furnishes any false information with an intention to evade payment of tax due under this Act.”

Thus, perhaps, in order to make good the inconsistencies in the impugned Arrest Memo dated 18.5.2022, the above additional ground for making the impugned arrest has been added in the subsequent Remand Application.

However, even after the inclusion of the said additional ground as per section 132(1)(f) of the CGST Act, the fact that the Chartered Accountant, is having a very limited statutory role in the elaborate provisions and procedure of the grant of refund, as stipulated in the CGST Act, can’t be brushed aside or denied.

In order to understand and appreciate the fact of limited role of a Chartered Accountant, in the elaborate and detailed prescribed procedure of the grant of refund to the beneficiary party, under the CGST Act, 2017, it is desirable to understand the legislative provisions, as contained in the relevant section 54 of the CGST Act, 2017, and the corresponding Rule 89 of the CGST Rules, 2017.

The relevant text of section 54 of the CGST Act and Rule 89 of the CGST Rules, is being reproduced below, for ready reference:

“Section 54. Refund of Tax

(1) Any person claiming refund of any tax and interest, if any, paid on such tax or any other amount paid by him, may make an application before the expiry of two years from the relevant date in such form and manner as may be prescribed:

Provided that a registered person, claiming refund of any balance in the electronic cash ledger in accordance with the provisions of sub-section (6) of section 49, may claim such refund in such form and manner as may be prescribed.

(2) A specialised agency of the United Nations Organisation or any Multilateral Financial Institution and Organisation notified under the United Nations (Privileges and Immunities) Act, 1947 (46 of 1947), Consulate or Embassy of foreign countries or any other person or class of persons, as notified under section 55, entitled to a refund of tax paid by it on inward supplies of goods or services or both, may make an application for such refund, in such form and manner as may be prescribed, before the expiry of two years from the last day of the quarter in which such supply was received.

(3) Subject to the provisions of sub-section (10), a registered person may claim refund of any unutilised input tax credit at the end of any tax period:

Provided that no refund of unutilised input tax credit shall be allowed in cases other than-

(i) zero rated supplies made without payment of tax;

(ii) where the credit has accumulated on account of rate of tax on inputs being higher than the rate of tax on output supplies (other than nil rated or fully exempt supplies), except supplies of goods or services or both as may be notified by the Government on the recommendations of the Council:

Provided further that no refund of unutilised input tax credit shall be allowed in cases where the goods exported out of India are subjected to export duty:

Provided also that no refund of input tax credit shall be allowed, if the supplier of goods or services or both avails of drawback in respect of central tax or claims refund of the integrated tax paid on such supplies.

(4) The application shall be accompanied by-

(a) such documentary evidence as may be prescribed to establish that a refund is due to the applicant; and

(b) such documentary or other evidence (including the documents referred to in section 33) as the applicant may furnish to establish that the amount of tax and interest, if any, paid on such tax or any other amount paid in relation to which such refund is claimed was collected from, or paid by, him and the incidence of such tax and interest had not been passed on to any other person:

Provided that where the amount claimed as refund is less than two lakh rupees, it shall not be necessary for the applicant to furnish any documentary and other evidences but he may file a declaration, based on the documentary or other evidences available with him, certifying that the incidence of such tax and interest had not been passed on to any other person.

(5) If, on receipt of any such application, the proper officer is satisfied that the whole or part of the amount claimed as refund is refundable, he may make an order accordingly and the amount so determined shall be credited to the Fund referred to in section 57.

(6) Notwithstanding anything contained in sub-section (5), the proper officer may, in the case of any claim for refund on account of zero-rated supply of goods or services or both made by registered persons, other than such category of registered persons as may be notified by the Government on the recommendations of the Council, refund on a provisional basis, ninety per cent. of the total amount so claimed, excluding the amount of input tax credit provisionally accepted, in such manner and subject to such conditions, limitations and safeguards as may be prescribed and thereafter make an order under sub-section (5) for final settlement of the refund claim after due verification of documents furnished by the applicant.

(7) The proper officer shall issue the order under sub-section (5) within sixty days from the date of receipt of application complete in all respects.

Rule 89. Application for refund of tax, interest, penalty, fees or any other amount.-

(1) Any person, except the persons covered under notification issued under section 55 claiming refund of any tax, interest, penalty, fees or any other amount paid by him, other than refund of integrated tax paid on goods exported out of India, may file 10[subject to the provisions of rule 10B, an application electronically in FORM GST RFD-01 through the common portal, either directly or through a Facilitation Centre notified by the Commissioner:

Provided that any claim for refund relating to balance in the electronic cash ledger in accordance with the provisions of sub-section (6) of section 49 may be made through the return furnished for the relevant tax period in FORM GSTR-3 or FORM GSTR-4 or FORM GSTR-7, as the case may be:

Provided further that in respect of supplies to a Special Economic Zone unit or a Special Economic Zone developer, the application for refund shall be filed by the –

(a) supplier of goods after such goods have been admitted in full in the Special Economic Zone for authorised operations, as endorsed by the specified officer of the Zone;

(b) supplier of services along with such evidence regarding receipt of services for authorised operations as endorsed by the specified officer of the Zone:

Provided also that in respect of supplies regarded as deemed exports, the application may be filed by, –

(a) the recipient of deemed export supplies; or

(b) the supplier of deemed export supplies in cases where the recipient does not avail of input tax credit on such supplies and furnishes an undertaking to the effect that the supplier may claim the refund

Provided also that refund of any amount, after adjusting the tax payable by the applicant out of the advance tax deposited by him under section 27 at the time of registration, shall be claimed in the last return required to be furnished by him.

(1A) Any person, claiming refund under section 77 of the Act of any tax paid by him, in respect of a transaction considered by him to be an intra-State supply, which is subsequently held to be an inter-State supply, may, before the expiry of a period of two years from the date of payment of the tax on the inter-State supply, file an application electronically in FORM GST RFD-01 through the common portal, either directly or through a Facilitation Centre notified by the Commissioner:

Provided that the said application may, as regard to any payment of tax on inter-State supply before coming into force of this sub-rule, be filed before the expiry of a period of two years from the date on which this sub-rule comes into force.]

(2) The application under sub-rule (1) shall be accompanied by any of the following documentary evidences in Annexure 1 in FORM GST RFD-01, as applicable, to establish that a refund is due to the applicant, namely:-

(a) the reference number of the order and a copy of the order passed by the proper officer or an appellate authority or Appellate Tribunal or court resulting in such refund or reference number of the payment of the amount specified in sub-section (6) of section 107 and sub-section (8) of section 112 claimed as refund;

(b) a statement containing the number and date of shipping bills or bills of export and the number and the date of the relevant export invoices, in a case where the refund is on account of export of goods;

(c) a statement containing the number and date of invoices and the relevant Bank Realisation Certificates or Foreign Inward Remittance Certificates, as the case may be, in a case where the refund is on account of the export of services;

(d) a statement containing the number and date of invoices as provided in rule 46 along with the evidence regarding the endorsement specified in the second proviso to sub-rule (1) in the case of the supply of goods made to a Special Economic Zone unit or a Special Economic Zone developer;

(e) a statement containing the number and date of invoices, the evidence regarding the endorsement specified in the second proviso to sub-rule (1) and the details of payment, along with the proof thereof, made by the recipient to the supplier for authorised operations as defined under the Special Economic Zone Act, 2005, in a case where the refund is on account of supply of services made to a Special Economic Zone unit or a Special Economic Zone developer;

[(f) a declaration to the effect that tax has not been collected from the Special Economic Zone unit or the Special Economic Zone developer, in a case where the refund is on account of supply of goods or services or both made to a Special Economic Zone unit or a Special Economic Zone developer;]

(g) a statement containing the number and date of invoices along with such other evidence as may be notified in this behalf, in a case where the refund is on account of deemed exports;

(h) a statement containing the number and the date of the invoices received and issued during a tax period in a case where the claim pertains to refund of any unutilised input tax credit under sub-section (3) of section 54 where the credit has accumulated on account of the rate of tax on the inputs being higher than the rate of tax on output supplies, other than nil-rated or fully exempt supplies;

(i) the reference number of the final assessment order and a copy of the said order in a case where the refund arises on account of the finalisation of provisional assessment;

(j) a statement showing the details of transactions considered as intra-State supply but which is subsequently held to be inter-State supply;

(k) a statement showing the details of the amount of claim on account of excess payment of tax;

(l) a declaration to the effect that the incidence of tax, interest or any other amount claimed as refund has not been passed on to any other person, in a case where the amount of refund claimed does not exceed two lakh rupees:

Provided that a declaration is not required to be furnished in respect of the cases covered under clause (a) or clause (b) or clause (c) or clause (d) or clause (f) of sub-section (8) of section 54;

(m) a Certificate in Annexure 2 of FORM GST RFD-01 issued by a chartered accountant or a cost accountant to the effect that the incidence of tax, interest or any other amount claimed as refund has not been passed on to any other person, in a case where the amount of refund claimed exceeds two lakh rupees:

Provided that a certificate is not required to be furnished in respect of cases covered under clause (a) or clause (b) or clause (c) or clause (d) or clause (f) of subsection (8) of section 54.”

Thus, a bare perusal of the above reproduced legislative provisions for the grant of refund, as contained in section 54 of the CGST Act read with Rule 89 of the CGST Rules, makes it duly evident and crystal clear that in the elaborate and comprehensive legislative scheme of the grant of refund, a Chartered Accountant is having a very limited role of issuing a Certificate, under section 54(2) of the CGST Act, read with Rule 89(2)(m) of the CGST Rules, and it is a trite position that refunds can’t be granted, merely on the basis of a CA Certificate.

Further, the said Certification as prescribed in Rule 89(2)(m) of the CGST Rules, 2017, is only to the extent of the effect that the incidence of tax, interest or any other amount claimed as refund has not been passed on to any other person, in a case where the amount of refund claimed exceeds two lakh rupees.

In other words, the specified CA Certificate is only to the effect that no refund is being claimed by the applicant, which the applicant has already collected from his/her customers, and as such the said CA certificate can’t be made a benchmark or basis to determine the authenticity and genuineness of the availment of Input Tax Credit (ITC) by such applicant.

Therefore, in view of the above analysed legislative provisions of the CGST Act and the CGST Rules, the impugned arrest of the two CAs on the ground of alleged issuance of false Certificate in fraudulent availment of Input Tax Credit (ITC) and consequent refunds, appears to be inconsistent with the mandate and legislative intent of the Legislature, more so, when till date, the real culprits i.e., the beneficiary of such fraudulent refunds, and other concerned colliding persons, have not been arrested.

It is also imperative to mention here that in the Official Statement released by the Regulatory Body ICAI, dated 20.5.2022, it has been mentioned that the Council Members have expressed their strong resentment on the matter in which certain investigating officers are treating CAs and directly resorting to arrests. The Council was also apprised of the strong feelings of members throughout the country regarding ill-treatment being meted to certain members rather than taking strong action against the actual perpetrators. The Council of ICA has resolved to form a Group comprising of its members to interface with authorities in order to ensure that just and fair treatment is meted out to Chartered Accountants and that they are not made soft targets.