SECTION 74(1) CANNOT BE INVOKED MERELY ON ACCOUNT OF NON PAYMENT OF GST

[Mr. M. GOVINDARAJAN]

Section 74(1) of the Central Goods and Services Tax Act, 2017 (‘Act’ for short) provides that where it appears to the proper officer that any tax has not been paid or short paid or erroneously refunded or where input tax credit has been wrongly availed or utilized by reason of fraud, or any willful-misstatement or suppression of facts to evade tax, he shall serve notice on the person chargeable with tax which has not been so paid or which has been so short paid or to whom the refund has erroneously been made, or who has wrongly availed or utilized input tax credit, requiring him to show cause as to why he should not pay the amount specified in the notice along with interest payable thereon under section 50 and a penalty equivalent to the tax specified in the notice.

Thus section 74(1) can be invoked when the tax has not been paid only by reason of fraud or willful misstatement of suppression of facts to evade tax.

In C.C.,C.E. & S.T. – BANGALORE (ADJUDICATION) ETC. VERSUS M/S NORTHERN OPERATING SYSTEMS PVT LTD. - 2022 (5) TMI 967 - SUPREME COURT , (‘NOS’ case for short) the Supreme Court considered the issue of nature of secondment of employees by overseas employees and its service tax implications.  The Supreme Court also took note of the various facts of the case like the agreement between NOS and overseas group companies.  The Supreme Court held that the secondment of employees by the overseas group company to NOS was a taxable service of 'manpower supply' and Service Tax was applicable on the same.   Secondment as a practice is not restricted to Service Tax and issue of taxability on secondment shall arise in GST also.  The Supreme Court’s emphasis is on a nuanced examination based on the unique characteristics of each specific arrangement, rather than relying on any singular test.

The Board received many a representation from the tax payers that subsequent to the aforesaid judgment of Supreme Court, many field formations have initiated proceedings for the alleged evasion of GST on the issue of secondment under section 74(1) of the Act.  ‘The industry alleged that in many cases involving secondment, the field formations are mechanically invoking extended period of limitation under section 74(1) of the  Act.

In the above said judgment the Supreme Court considered the issue of invocation of extended period of limitation by the Department.  The revenue’s argument is that the assessee had indulged in willful suppression.  The Supreme Court relied on its own judgment in M/S. UNIWORTH TEXTILES LTD. VERSUS COMMISSIONER OF CENTRAL EXCISE. RAIPUR - 2013 (1) TMI 616 - SUPREME COURT.  In this case the Supreme Court held that the conclusion that mere non-payment of duties is equivalent to collusion or willful misstatement or suppression of facts” is “untenable”.

Since many representations were received the Board examined this matter.  The Board observed that it appears that the Supreme Court in its judgment inter-alia took note of the various facts of the case like the agreement between NOS and overseas group companies, and held that the secondment of employees by the overseas group company to NOS was a taxable service of 'manpower supply' and Service Tax was applicable on the same. It is noted that secondment as a practice is not restricted to Service Tax and issue of taxability on secondment shall arise in GST also.

The Board also relied on the judgment of the Supreme Court in COMMISSIONER OF CENTRAL EXCISE, MUMBAI VERSUS M/S FIAT INDIA PVT LTD & ANR - 2012 (8) TMI 791 - SUPREME COURT.  In this case the Supreme Court held that .each case depends on its own facts and a close similarity between one case and another is not enough because either a single significant detail may alter the entire aspect. In deciding such cases, one should avoid the temptation to decide cases (as said by Cardozo) by matching the color of one case against the color of another. To decide, therefore, on which side of the line a case falls, the broad resemblance to another case is not at all decisive.

The Board observed that there may be multiple types of arrangements in relation to secondment of employees of overseas group company in the Indian entity.  In each arrangement, the tax implications may be different, depending upon the specific nature of the contract and other terms and conditions attached to it.   Therefore the Board was of the view that the decision of the Supreme Court in the NOS judgment should not be applied mechanically in all the cases.  The Board considered that investigation in each case requires a careful consideration of its distinct factual matrix, including the terms of contract between overseas company and Indian entity, to determine taxability or its extent under GST and applicability of the principles laid down by the  Supreme Court’s judgment in NOS case.

The Board analyzed the provisions of Section 74(1) of the Act. The Board is of the view that that section 74(1) can be invoked only in cases where there is a fraud or willful mis- statement or suppression of facts to evade tax on the part of the said taxpayer.  The said section cannot be invoked merely on account of non-payment of GST, without specific element of fraud or willful mis-statement or suppression of facts to evade tax.  Only in the cases where the investigation indicates that there is material evidence of fraud or willful misstatement or suppression of fact to evade tax on the part of the taxpayer, provisions of section 74(1) of the Act may be invoked for issuance of show cause notice, and such evidence should also be made a part of the show cause notice.

The Board, in its circular dated 13.12.2023 advised the field formations to consider while investigating such cases and issuing show cause notices.