Frivolous- Vague GST Notices- How to deal?

 CA Madhukar N Hiregange
CA Lakshman Kumar Kadali

Introduction: It’s been almost 7 years since the introduction of GST in India. This One single tax replaced seventeen taxes and thirteen cesses imposed by the Central and the State Governments. It was widely publicized that one of the objectives of the introduction of GST was to follow a uniform process across the country, minimize the compliance burden on the taxpayer, and improve ease of doing business. However, on the ground, this aspect has been ignored possibly to further rent-seeking.

Similar to the pre-GST regime, the GST regime has also provided the time limes for completing the assessments for each Financial Year. Due to initial teething issues, the time limit for filing the GSTR-09 has been extended which indirectly extended the time limit for completion of assessments. Subsequently, due to the advent of COVID-19, the time limits were extended multiple times. The extended due dates for the period starting from July 2017 are as follows

Despite of above-referred extensions, most of the GST officers have initiated the assessments, audits, investigations, and enquiries only during late 2021-23. Considering the limited time available for issuing the notices, most of the officers have been violating Section 61, Section 65, Section 67, Section 73, 74 and 75 of the CGST Act, 2017 while raising the demands. It is also pertinent to recollect the fact that the time limit between completion of the assessment for each of the first 3 Financial Years from July 2017 is only 3-4 months. The rush to adhere to stringent deadlines led to many officers overlook the following:

A. Return scrutiny procedure prescribed under Section 61- Not Followed

B. Audit procedure prescribed under Section 65 – Not Followed

C. Multiple notices for the same financial year have been issued (certain taxpayers received a minimum of 5 separate SCNs for each Financial Year)

D. Duplication of demands on the same issues in multiple SCN’s

E. Many of the SCNs issued are completely vague and lack details (Difference between GSTR-1 and GSTR-09 where the turnovers mentioned in SCNs do not match with information available in the GST portal). Also, Denial of the entire ITC availed by merely referring to Section 155 which provides for the burden of proof regarding ITC and proposal of assessing the turnover at the highest rate of tax i.e, 28%.

F. Issuance of Notices based on mere assumptions and presumptions (Denial of Sec 17(5) ITC based on GSTR-2A though ITC is not availed in GSTR-3B returns, entire ITC considered as common ITC for Rule 42 reversal, Nonverification of payments made through DRC-03)

G. Proper verification of information available in the GST Portal and information submitted by the taxpayer during audit/investigation is not being done

H. Issuance of SCN even for the periods where the audit is already completed

I. Notices are generated using the system without giving proper logic (SCNs have been issued even in case of excess payment in GSTR-09. Sometimes the understanding of numbers mentioned in SCN itself is a mammoth task as no relied-upon documents are served to taxpayers)

J. No specific allegations have been made in SCN’s except giving reference to statutory provisions

K. Automated reminders were sent to taxpayers despite submitting the reply on the GST portal which is nothing but misuse of technology to comply with the law (To comply with 3 personal hearings under Section 75 of CGST Act, 2017)

L. The time limit for submitting the replies only ranges from 7 to 15 days violating the time limit prescribed of 30 days in Section 73

M. Different interpretations by different officers in the same division on the same issues.

N. Issuance of SCN by State tax department when taxpayer allocated to Centre

O. Issuance of SCNs without understanding the Financial Statements (in many cases demands have been proposed on the closing balance of advances, sundry creditors, gross income etc)

P. Issuance of SCNs by different authorities for the same period (Division office, audit office, enforcement office) etc

Q. Discrepancies in the amounts mentioned in Summary SCN and detailed SCN

All the above-referred compromises made by the proper officers are creating significant challenges for taxpayers as these notices often fail to provide specific details, leaving recipients uncertain about the issues and how to address them.

It is pertinent to understand that the law not only provides powers to the officers but also provides the rights to the taxpayers. Those should be exercised wherever it is necessary. We can imagine the fate of the entities which are having registrations in all the States and receive multiple vague notices for each Financial Year. Handling 75 to 80 notices (3 per State) across the country for each Financial Year not only increases the compliance burden but also increases the compliance cost which is against the basic objective of the introduction of GST. This gives rise to the question of whether the GST is for the business or the business is for the GST compliance.

Further, the adjudication of these notices has been done in a hurry and without affording a reasonable time to the taxpayers ending with illegal hefty demands. It is a known fact that litigation under GST is very costly considering the pre-deposit payment of 10% at the first appellate stage and 20% at the tribunal stage. These deposits may impact the working capital and may lead to the closure of business in many cases.

Considering all the above issues, it is very important to deal with the notices cautiously. The best defence is to put forward all possible legal arguments at the first stage itself considering the embargo under Section 160(2) of CGST Act, 2017. This would not only help at the adjudication stage but also help the taxpayer to explore alternative legal remedies in subsequent stages. Some of the arguments that can be taken against the above referred common mistakes/procedural errors committed by the tax officers while submitting the reply

A. The return scrutiny procedure prescribed under Section 61 is not being followed

Section 61 read with Rule 99 provides the procedure to be followed for scrutiny of returns and intimation of the discrepancies to the taxpayers in ASMT-10 and seek explanation in ASMT-11. An SOP for scrutiny is also provided by CBIC vide Instruction No. 02/2022-GST dated March 22, 2022, for 2017–18 and 2018–19 and Instruction No.02/2023-GST dated 26^th May 2023 for FY 2019-20 onwards. If no satisfactory explanation is received within 30 days, the proper officer can proceed to take action under Sections 65, 66, 67 or Section 73 or 74.

However, in most of cases, the department has been issuing SCNs under Section 73/74 based on scrutiny of returns by violating Section 61 of the CGST Act, 2017.  In these instances, various High Courts held that such SCN’s are invalid and few of such decisions are Vadivel Pyrotech Pvt Ltd Vs Assistant Commissioner (ST), Circle-II, CTD, Sivakasi West 2022 (10) TMI 784 – Madras High Court, Amutha Metal Industries v. Deputy State Tax Officer 2022 (6) TMI 358 – Madras High Court, Syska Led Lights Private Limited v. Union of India 2021 377 ELT 33 (Bom).

It is pertinent to note that there are a few adverse decisions in this regard by certain High Courts. However, considering the objective of introducing the scrutiny module to reduce the regular litigation, we hope the condition of conducting the scrutiny of returns before the issuance of SCN will be upheld by the Supreme Court.

B. Audit procedure u/S 65 -not followed

Section 65 provides that the proper officer can conduct the audit by giving 15 days prior intimation in Form ADT-01. On completion of the audit, the proper officer shall inform the discrepancies to the taxpayer and afford the opportunity to the taxpayer to file their reply. After considering the submissions of the taxpayer, the officer shall finalise the findings of the audit within 30 days from the completion of the audit. If the findings result in the detection of short payment or irregular availment of ITC, action under Section 73 or 74 can be initiated.

However, in several instances, the taxpayers have been issued audit intimation in Form ADT-01 requesting to submit the information. On submissions of information, the officers have been issuing the notices under Section 73 or 74 directly without following the above-referred procedure prescribed under Section 65 of the CGST Act, 2017. The omission of these critical steps makes the legal validity questionable. The Orissa High Court in the case of M/s. Simon India Ltd. Vs CT and GST Officer [2022 (11) TMI 552 – ORISSA HIGH COURT] held that the Final Audit Report is to be set aside due to a violation of the Principles of Natural Justice.

Further, it is pertinent to know that when a law provides a particular thing to be done in a particular way, the same should be done in that way only. Any other procedure adopted or the procedure deviated or not followed would be illegal inasmuch as one has to proceed only in the manner prescribed under law. The argument is supported by the decisions in case of Vee Excel Drugs & Pharmaceuticals Pvt. Ltd vs. Union of India – 2014 (305) E.L.T. 100 (All.); Jharkhand & Others v. Ambay Cements & Another – 2005 (1) SCC 368 = 2004 (178) E.L.T. 55 (S.C.); Dhananjaya Reddy v. State of Karnataka – 2001 (4) SCC 9; Commissioner of Income Tax, Mumbai v. Anjum M.H. Ghaswala – 2002 (1) SCC 633; Captain Sube Singh & others v. Lt. Governor of Delhi & others – 2004 (6) SCC 440; Competent Authority v. Barangore Jute Factory & others – 2005 (13) SCC 477;

C. Multiple notices for the same financial year have been issued (certain taxpayers received a minimum of 5 separate SCNs for each Financial Year) and Duplication of demands on the same issues in multiple SCNs

In these cases, it is important to provide a detailed submission explaining clearly how there is a duplication of demand with documentary evidence. In case of M/s. Nestle India Limited Vs UOI 2024 (2) TMI 1065 – Rajasthan High Court, issuance of multiple show-cause notices based on one single audit report under Section 65 (7) of the Central Goods and Services Tax Act, 2017 has been challenged and the issue is pending before High Court. Taxpayers can also rely on decisions in case of Chemrow India Private Limited Vs Commissioner of Delhi, 2024 (5) TMI 551 – Delhi High Court; Kandla Port Trust Versus Commissioner Of Central Excise & S.T., Rajkot 2019 (24) G.S.T.L. 422 (Tri. – Ahmd.); Simplex Infrastructures Ltd. Versus Commissioner Of Service Tax, Kolkata 2016 (4) TMI 548 – Calcutta High Court; Hindustan Copper Ltd. Versus Commr. Of C. Ex., Ranchi/Jamshedpur 2010 (259) E.L.T. 287 (Tri. – Kolkata) for duplication of demands.

D. The SCN’s issued are vague and lack details

It is a settled position of law that the show cause notice is the foundation on which the department has to build up its case. If the allegations in the show cause notice are not specific and are on the contrary vague, lacking details and/or unintelligible that is sufficient to hold that the noticee was not given the proper opportunity to meet the allegations indicated in the show cause notice. It is a violation of the principles of natural justice. Support available from the decisions in case of CCE v. Brindavan Beverages (2007) 213 ELT 487(SC); RKEC Projects Limited Vs Additional Commissioner 2024 (2) TMI 235 – Andhra Pradesh High Court; Glaxosmithkline Consumer Health Care Limited VS Deputy Commissioner of State Tax 2023 (12) TMI 994 – Telangana High Court; Elecon Trading Company Vs The Deputy State Tax Officer 2023  (10) TMI 575 – Telangana High Court; Durga Metals Vs Appellate Authority 2023 (5) TMI 749 – Madhya Pradesh High Court;

 E. Issuance of Notices based on mere assumptions and presumptions

The SCNs have been issued proposing for denial of Sec 17(5) ITC based on GSTR-2A though ITC is not availed in GSTR-3B returns, the entire ITC is considered as common ITC for Rule 42 reversal. It is a settled position of law that notices cannot be issued based on assumptions and presumptions, it is the duty of the adjudicating authority to verify the information before the issuance of SCN. Also, the proposals made in the SCN cannot be prejudged. Otherwise, the SCN becomes invalid. This was confirmed in the cases of Oudh Sugar Mills Limited v. UOI, 1978 (2) ELT 172 (SC) and Oryx Fisheries Pvt. Ltd. v. Union of India — 2011 (266) E.L.T. 422 (S.C.).

F. Issuance of SCN even for the periods where the audit is already completed

It is settled law that the audit is a comprehensive process which covers all the aspects, thereby, the same can be considered as extensive. Also, it is pertinent to note that scrutiny of return is one of the aspects which needs to be considered while concluding the audit. Most of the duplicated notices are issued based on the scrutiny of returns which cannot be accepted. Hence, the issuance of SCN after the completion of the audit is illegal. It is important to remember the fact that re-opening of the already adjudicated assessment is not permitted in law which was held in the case of UOI v. Vicco Laboratories 2007 (218) E.L.T. 647 (SC).

Also, two assessments are not permissible in law for the same period, especially on the same issue and same period. This was confirmed in the decisions of Duncans Industries Ltd. v. CCE 2006 (201) E.L.T. 517 (SC); Ambey Mining Pvt. Ltd. vs. Commissioner of State Tax, Dhurwa 2023 (76) G.S.T.L. 191 (Jhar.); V.S. Enterprises vs. State of UP 2022 (56) G.S.T.L. 287 (All.); Core Health Ltd. Vs. Union of India 2006 (198) E.L.T. 21 (Guj.); R.P Buildcon Private Ltd. Vs Superintendent CGST 2022(10) TMI 501(Cal.);

G. Unsigned Notices/Orders:

The authenticity and validity of any show cause notice are contingent upon it being duly signed. A signature either manually or through DSC on the documents serves as the prima facie evidence necessary to establish its legitimacy. Therefore, if a show cause notice is issued without a signature, it lacks the foundational element of authenticity, rendering it legally invalid and unenforceable. This is confirmed in the following decision: Marg Erp Limited Vs Commissioner of Delhi Goods And Service Tax, Delhi & Anr. 2023 (2) TMI 395 – Delhi High Court; Silver Oak Villas Vs Assistant Commissioner 2024 (4) TMI 367 – Telangana High Court;

H. Issuing Time barred Notices/Orders:

The officers were issuing notices and orders to the taxpayers taking shelter from the following Notifications:

a. Notification No. 13/2022 dated 05.07.2022 (First extension) for the FY 2017-18 to FY 2019-20

b. Notification No. 09/2023-C.T dated 31.03.2023 (second extension) for the FY 2018-19 & 2019-20

c. Notification No. 56/2023-CT dated 28.12.2023 (Third extension) for the FY 2018-19 & 2019-20.

An extension of the time period prescribed for issuance of show cause notice under Section 73 (10) of the Goods and Service Tax Act, 2017 is not sustainable in law, in as much as COVID restrictions were lifted long back in the year 2022 and the revenue had sufficient time to complete the scrutiny and audit process. Further, the ‘force majeure’ is as defined u/s. 168A, ibid was never occurred from 2022 till the expiry of the above-said extended due dates. Recently, the Allahabad High Court in the case of Graziano Transmissioni Vs Union of India 2024 (6) TMI 233 – Allahabad High Court has upheld the validity of above-referred Notification. However, it is suggested to continue taking the ground stating that the time extension is not correct. If the Supreme Court holds in favour of the taxpayer, the decision can be applied in your case.

I. Other precautions to take care of while submitting the reply

a. Explain the nature of business in a clear manner with supporting documents. Making the officer understand the business is critical for getting the desired relief.

b. If the ITC is being disputed, provide the necessary reconciliations with sufficient documentary evidence; [ CA certificate for verification]

c. Evidence is very important in the course of adjudication, therefore, enclose the documentary evidence for each of the factual arguments taken in the reply SCN. Otherwise, there is a probability of rejecting the submissions made by merely stating that the taxpayer had not provided sufficient documentary evidence supporting the submissions;

d. Take an extension for submitting the reply wherever is required. A minimum of 30 days time is required to be given by the proper officer for filing the reply and the same was held in Raymond Limited Vs UOI 2023 (11) TMI 1205- Madhya Pradesh High Court.

e. Support the arguments on merits with decisions under GST and pre-GST laws. Wherever the provisions are pari materia, the decisions under pre-GST laws are equally applicable under GST as well.

f. There are many other arguments that need to be taken and the same shall depend on how the SCN is framed and the allegations raised by the proper officer.

In conclusion, the challenges faced by taxpayers due to vague and ambiguous notices issued by tax officers are primarily due to inefficiencies of the past. This highlights the need for a more structured and transparent approach to tax administration.  May take another 5-10 years!! The rush to meet deadlines and the failure to follow prescribed audit and scrutiny procedures have led to errors and inconsistencies in the issuance of notices and orders, causing confusion and hardship for taxpayers.

It is imperative for officers to adhere strictly to statutory procedures, verify information thoroughly, and provide clear justifications in notices to ensure fairness and accuracy in tax assessments. Legitimate demands of taxes not paid, excess ITC would also end up being lost due to not following these procedures.

Taxpayers must also be aware of their rights and legal remedies to address procedural errors and defend their interests effectively. By addressing these common mistakes and procedural errors, both tax officers and taxpayers can contribute to a more efficient and equitable tax system.

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Acknowledgements to Ms. Lakshmi Sree M for helping the author in writing this article.

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