Does State GST authority, after initiating a search against a taxpayer, have authority to transfer proceedings to DGGI?
Overview
The concepts of cross-empowerment and parallel proceedings under the GST regime have become the talk of the town. Hon’ble Supreme Court has recently issued notice to respondent in Special Leave Petition (SLP) filed by the department against the judgment of the Jharkhand High Court in Vivek Narsaria v. State of Jharkhand. Legal doyens are expected to present their most compelling arguments and perspectives on this matter in time to come.
Simultaneously, a significant issue has come before the Punjab & Haryana High Court, raising the legal question of whether the State GST authorities, after initiating a search against a taxpayer, possess the authority to transfer the proceedings to the Directorate General of GST Intelligence (DGGI). In this article, our Partner, CA Jignesh Kansara, has provided an in-depth analysis of the judgment delivered by the Punjab & Haryana High Court in the case of M/s Stalwart Alloys India Pvt. Ltd. vs. Union of India and Others [CWP No. 1661 of 2022 (O&M) & CWP No. 7411 of 2023 (O&M)].
Facts of the case
In the first round of litigation, an inquiry for the period from 01.07.2017 to 31.12.2018 was initiated by the Haryana State GST Department (hereinafter referred to as “State GST authority”) against the petitioner company, alleging wrongful availment of Input Tax Credit (ITC). During a search conducted by the State GST authority, various records were seized, and a Show Cause Notice (SCN) under Section 74 of the CGST/HGST Act (“Act) was issued to the petitioner. Simultaneously, multiple Zonal Units of the Directorate General of GST Intelligence (DGGI) have started conducting parallel inquiries on the same matter. Aggrieved by this multiplicity of proceedings, the petitioner approached the High Court through a writ petition. To conclude the first round of litigation, the Hon’ble Court held that search & seizure by the State GST authority was prior in point of time (than DGGI which started the investigations later in point of time). Moreover, all the proceedings were interrelated therefore only State GST authority should continue with the proceedings against the petitioner.
Meanwhile, based on intelligence that inadmissible ITC had been passed on to the petitioner without any supply of underlying goods or services, the DGGI Meerut Zonal Unit conducted search and seizure proceedings, and a panchnama was drawn on 19.02.2021. Surprisingly, on 15.03.2022, the State GST authority transferred the ongoing proceedings to the DGGI for further action.
The second round of Legal dispute
The petitioner filed a fresh writ petition challenging the State GST authority’s decision to transfer the proceedings to the DGGI.
Petitioner’s Arguments
a. Violation of Section 6(2)(b) of the Act
The petitioner argued that the Order passed by State GST authority transferring proceedings to DGGI violates Section 6(2)(b) of the Act. The petitioner asserts that, under the said section, the “proper officer” for the case is the officer who initiated the proceedings. In the present case, the initiation of an investigation by the State GST authority under Section 67 of the Act constitutes the commencement of proceedings. Furthermore, the issuance of a SCN under Section 74 by the State GST authority reinforces that he is the proper authority. Therefore, state GST authority can’t lawfully transfer records/proceedings to the DGGI, nor can the DGGI usurp the powers vested in the “proper officer” as defined by the Act.
b. Absence of express provisions in GST law for transfer of proceedings
The petitioner further contended that, while enabling provisions exist under various taxation laws such as Sections 32C and 35P of the Central Excise Act, 1944, Section 131B of the Customs Act, 1962, Section 25 of the Central Sales Tax Act, 1956, and Section 434 of the Companies Act, 2013 allowing for the transfer of proceedings, no such provision exists under the GST framework to permit the transfer of proceedings between the State and Central authorities.
Department’s Arguments
Counsel for the department raised several arguments in support of the transfer of proceedings to the DGGI. Some of the key arguments are as follows:
a. Pan-India Jurisdiction & superior reach of the DGGI
The department argued that DGGI enjoys authority and jurisdiction over Pan-India while the State GST authority would be unable to carry out investigation outside the State. Given that several suppliers who allegedly supplied fake ITC to the petitioner company are located across multiple states, DGGI is a more competent authority to examine such issues.
b. Separate Time Periods
The department further contended that, since the State GST authority had initiated proceedings only for the period up to July 2019 regarding the wrongful availment of ITC, the DGGI should be permitted to initiate separate proceedings for the subsequent period from August 2019 to January 2022 on the same subject matter, i.e., fraudulent availment of ITC.
Extract of Relevant Legal Provisions
For the sake of ease of understanding relevant legal provisions/clarifications are extracted hereunder:
a. Section 6(2)(b) of the CGST Act read as follows
“ Where a proper officer under the State Goods and Services Tax Act or the Union Territory Goods and Services Tax Act has initiated any proceedings on a subject matter, no proceedings shall be initiated by the proper officer under this Act on the same subject matter.”
Please note there are similar pari materia provisions under Section 6 of the various State GST Acts, regarding the authorization of CGST Officers for the purpose of respective State GST Act.
b. Section 70(2) of the CGST Act stipulates as under
“ Every such inquiry referred to in Section 70(1) shall be deemed to be a “judicial proceedings” within the meaning of section 193 and section 228 of the Indian Penal Code (Central Act 45 of 1860).”
Take note that Section 70(1) deals with the power to issue summon to persons to give evidence and produce documents.
c. Section 72 of the CGST Act reads as under
“72. Officers to assist proper officer (1) All officers of Police, Railways, Customs and those officers engaged in the collection of land revenue, including village officers, officers of Central Tax shall assist the proper officers in the implementation of this Act”
d. Para 3 of CBIC Clarification vide D.O.F. No. CBEC/20/43/01/2017-GST (Pt.) dated 05.10.2018 is extracted hereunder
“ It is accordingly clarified that the officers of both Central tax and State tax are authorized to initiate intelligence-based enforcement action on the entire taxpayer’s base irrespective of the administrative assignment of the taxpayer to any authority. The authority which initiates such action is empowered to complete the entire process of investigation, issuance of SCN, adjudication, recovery, filing of appeal, etc. arising out of such action.”
e. Para 3.2 of CBIC clarification vide F. No. CBEC-20/10/07/2019-GST, dated 22-6-2020 is extracted as follows
“ Thus in terms of sub-section (1) of section 6 of the CGST Act and sub-section (1) of section 6 of the respective State GST Acts respective State Tax officers and the Central Tax officers respectively are authorised to be the proper officers for the purposes of respective Acts and no separate notification is required for exercising the said powers in this case by the Central Tax Officers under the provisions of the State GST Act. It is noteworthy in this context that the registered person in GST are registered under both the CGST Act and the respective SGST/UTGST Act”
Observations of the High Court
Hon’ble Punjab & Haryana High Court observed as under:
a. Once a Judicial proceeding is initiated on the subject matter, no proceeding by another proper office on the same subject matter.
The Court observed that, in terms of Section 70(2) of the Act, every inquiry shall be deemed to be judicial proceedings. Issuance of SCN is the point of commencement of any legal proceedings. Since in the present case, State GST Authority has initiated proceedings as per Section 6(2)(b) of the Act, on a subject matter, no proceedings can be initiated by another proper officer on the same subject matter.
b. GST law debars transfer proceeding
The court remarked that, unlike other taxation laws, GST law nowhere provides for transferring the proceedings from one proper officer to another. On the other hand, it debars the same. Therefore, neither authority has the power to transfer the case from its own jurisdiction to another nor any other authority can direct for transfer of an investigation/ proceeding already undergoing before the proper officer in terms of Section 6(2)(b) of the Act.
c. Pan-India jurisdiction of DGGI can’t be justification for transfer proceeding
The Court observed that merely because the DGGI has information relating to similar fraudulent availment of ITC by other firms who may be related to the petitioner company itself would not be sufficient ground to presume that the State GST authority would not be able to conduct the proceedings or examine the culpability of the petitioner against whom proceedings under Section 74 of the Act have been initiated. The court further articulated that there is no concept of joint proceedings.
d. Interpretation of CBIC Circular dated 05.10.2018
Court observed that in a situation where an inquiry has already been initiated by the State GST authority, and a subsequent investigation by the Central GST authority becomes necessary, the proceedings conducted by the State GST authority should not be transferred to the Central GST authority. Instead, the Central GST authority’s investigative report, particularly concerning pan-India matters, should be submitted to the State GST authority, which initiated the proceedings. As a proper officer, the State GST authority retains the power to issue summons and warrants of arrest, enforceable across India.
e. Analysis of CBIC Circular dated 22.06.2020
The court analysed that it is apparent that the State and the Central Governments have the same powers under the CGST/ respective State GST Acts and if one of the officers has already initiated proceedings, the same cannot be transferred to another and he/she alone be allowed to issue process under the Act and on the same subject matter no proceedings shall be initiated by another officer.
f. Meaning of the term “Subject Matter” explained
The Court provided a comprehensive interpretation of the term “subject matter” under Section 6(2)(b), holding that it refers to the nature of the proceedings. In the present case, thus, it would mean the proceedings initiated for wrongful availment of ITC by fraudulent means. The court observed if the State GST authority has already initiated proceedings by issuing notice under Section 74 of the Act for the period up to July 2019, for the same subject matter, the DGGI cannot be allowed to initiate proceedings for the availment of ITC by fraudulent means for the period from August 2019 to January 2022. Any new information which DGGI has gathered relating to fraudulent availment or passing on can always be informed to the State GST authority in the present case.
Court’s Verdict
Finally, the Hon’ble High Court quashed the order issued by the state GST authority for the transfer of proceedings to DGGI and directed the State Tax authority to proceed and conclude the proceedings in terms of the provisions of the Act.
Our Remarks
The observations made by the Hon’ble Court in this case are likely to have a profound impact on the conduct of GST proceedings. The Court’s interpretation of “subject matter” safeguards taxpayers from being subjected to multiple proceedings by different authorities on the same issue, even if the periods differ. This judgment may be regarded as a landmark decision in the history of GST, offering crucial protections to taxpayers and limiting the overreach of various GST authorities.
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