Show Cause Notices and consequent orders by the department in matters of fake invoicing are very common in the GST regime on multiple fronts, viz. at the issuer’s end, at the recipient’s end, and even against persons linking the alleged chain.
However, what has piqued my interest recently is the scheme of provisions of the CGST Act, 2017 (“the Act”) governing these proceedings. It has been observed that numerous SCNs and consequent orders have been issued / passed against persons involved in issuance of tax invoices without actual corresponding supply of goods or services or both (“fake invoices”) under section 122 of the Act.
This practice perhaps draws its legitimacy from Circular No. 171/03/2022-GST dated 06.07.2022, whereby the CBIC issued clarifications on various issues relating to applicability of demand and penalty provisions under the Act in respect of transactions involving fake invoices. Sl. No. 3 of the said circular clarifies that where a person issues invoices without actual supply of goods and/or services, no demand and recovery can be made against him under sections 73 / 74 of the Act as there is no underlying supply within the meaning of section 7 of the Act and thus, no tax is required to be paid by him in respect of the same. However, he shall be liable for penal action under section 122(1) of the Act.
Interestingly, the said circular is silent in respect of provisions under which the said penal action shall be undertaken. In my understanding, section 122 of the Act is a substantive section providing for levy of penalties, whereas sections like 73 and 74 are proceedings sections providing for the procedure and manner of imposition.
The Parliament, as a part of its legislative policy, creates penalty liability on persons who commit/omit to perform certain actions; whereas, the proper officer, in discharge of his functions, imposes the appropriate leviable penalty on specific persons who have actually committed/omitted from performing the said actions.
In view of the same, this difference between ’substantive and proceedings provisions’ or the ‘levy and imposition events’ must be appreciated by the department when proceeding against issuers of fake invoices. Since section 122 is a substantive / penalty levying section only; it does not provide for determination and imposition of penalty by its very nature. Every provision in the statute serves a specific purpose e.g. definition/interpretation clause, charging clause, proceedings provision, liability-creating provision, etc. Hence, powers conferred under the statute must be used judiciously, having regard to the entire scheme of the statute.
Hence, SCNs and orders against issuers of fake invoices can appropriately be issued under the proper proceedings provision only, which is – section 127 of the Act, which provides that in cases where the proper officer is of the view that a person is liable to a penalty and the same is not covered under any proceedings under … sections 73 or 74 … [as clarified in the said circular], he may issue an order levying [rather, imposing*] such penalty after giving a reasonable opportunity of being heard to such person.
In this regard, clause (a) of sub-section (1) of rule 142 of the Rules suitably provides for issuance of GST DRC-01 along with notice under … section 127. Further, sub-section (5) of rule 142 suitably provides for issuance of GST DRC-07 along with order issued under … section 127. On a side note, it further follows that rule 142, inasmuch it provides for issuance of DRC-01 and DRC-07 along with SCN and order issued under section 122, is beyond the scope of the parent statute, and thus, liable to be struck down as being ultra vires the Act.
Therefore, it is concluded that such SCNs and orders against issuers of fake invoices must be passed under appropriate imposition-proceedings provision only, i.e. section 127; failure whereof may perhaps prejudice the propriety of the order itself.
However, a note may be taken of several judicial pronouncements that draw a presumption in favour of official acts done by the authorities. The Supreme Court in N. Mani v. Sangeetha Theatre held that – “if an authority has a power under the law, then merely because while exercising that power the source of power is not specifically referred to or a reference is made to a wrong provision of law, that by itself does not vitiate the exercise of power so long as the power does exist and can be traced to a source available in law.”
Similarly, the Supreme Court in Mohd. Shahabuddin v. State of Bihar reiterated that – “when an authority passes an order which is within its competence, it cannot fail merely because it purports to be made under a wrong provision, if it can be shown to be within its power under any other provision or rule, and the validity of such impugned order must be judged on a consideration of its substance and not its form.”
It thus appears that – while the department is expected to diligently follow the proper procedure laid down by the statute, the failure thereof would perhaps be saved by the ‘substance-over-form’ doctrine.
 (2004) 12 SCC 278.
 (2010) 4 SCC 653.
* The author is a 4th-year student pursuing B.A. L.L.B. (Hons) from Gujarat National Law University and can be reached at email@example.com.