Taxmann's How to Deal with GST Show Cause Notices with Pleadings

About the Author A Jatin Christopher, is a Chartered Accountant, Cost Accountant and Law graduate. He qualified as a Chartered Accountant in 1996 and has been in practice since 2000 specializing in indirect tax advisory and litigation matters in, both, Central and State tax legislations. He is a resource person for ICAI and Government in the areas of Customs, Foreign Trade Policy and GST. His views and contributions are well published in several respected fora. He practices in a full-service firm based in Bangalore.

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Preface “Truth does not matter, facts do” – this divides the entire population of tax litigants and places them in two groups – those taxpayers who are distraught at the way GST has taken shape in the statute without any regard to the ‘basic features’ behind its implementation, and those taxpayers who are unmoved by the barrage of notices demanding only that this law be implemented within the ‘four corners’ of the statute without any regard to extra legislative means of delivering justice.

Explanation of the deliberation under each head or topic is interesting but examples make for more efficient illustration of the point in the deliberations. This book relies on examples to illustrate than burden readers with elaborate textual deliberations wherever it may be more efficient to convey the point of deliberation.

Tax laws must be interpreted strictly. Only Courts are free to travel outside the express words of the statute and declare the interpretation. It would be perilous, especially for young professionals, to rely on purposive construction of the statute. And all too often they are heard saying “intention of Legislature is” as if they were secretly privy to some conversation with Legislature or had direct access into Legislature’s thoughts. With an Executive, willing to correct, with great humility and retrospectively even, any inept words used to express that intention, no taxpayer can claim to have an understanding beyond the express words in the statute.

Case law precedent is a bulwark against disparate treatment of identical facts. Judicial declaration of interpretation is considered ‘authority’ that must be followed by lower judiciary and all administrative functionaries responsible for adjudication. Taxpayers cite case law on a given topic as if to silence any further discussion on that topic. Unless the authority is from the Apex Court, interpretation must expose the ratio decidendi to find wider acceptance, not only for the superiority of the authority furnishing the interpretation but also the consensus that the ratio facilitates. ‘Obedience’ is adherence to a sovereign authority, but ‘observation’ is adherence is to a meritorious ratio. Unless a decision offers a clear ratio for the interpretation ascribed to the express words of the statute, it cannot be ‘case law’. Another

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PREFACE

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error while citing case law, is that arguments of either sides are cited as ‘authority’ without showing that it had the Court’s approval.

“When the answer is long, it is most likely wrong” is not a rule but it cautions against this common proclivity to submit reams of submissions without making a single clinching point. It may impress the taxpayer but only till it is summarily discarded in adjudication. Repetition and irrelevant case law citation are the hallmarks of a long and winded reply. Far more good can come from an ex parte order than elaborate submissions that may do disservice to taxpayers case which could be got just by ‘rejecting’ the allegations and ‘disputing’ the demand. After all, undisputed arrears do not require any further investigation or proof to support the demand.

Decision to ‘accept and discharge’ or ‘dispute and litigate’ must be made by taxpayers and no one else. This decision is a commercial one, like all others in business and is taken, by weighing the pros and cons – likelihood of success, duration of litigation, potential interest and penalties, and cost of litigation. Another factor that is often not considered which can greatly alter the metrics to be weighed are – discrepancies and deficiencies in the notice – which are incurable and fatal to the demand. To know this, the decision (above) must be deferred until the notice is actually issued. And until the notice is issued, overenthusiastic response to preliminary enquiry can be counterintuitive, imparting more information than necessary to meet the ends of that enquiry. Remember, a question is often put not to be satisfied with the response but to collect the response and find fault with it.

Specific Officers are designated with specific authority under specific provisions of the law. Just because all are ‘Officers of the law’ does not mean anyone can discharge anyone else’s duties. And when ‘who can do what’ is precisely stated in the law, it implies that ‘no one else but one, can do this’.

It therefore demands to know ‘who’ can initiate enquiry about ‘what’. “Under which section?” is the key to knowing ‘who’, ‘what’ and therefore ‘how far’ does any enquiry go. Each provision of law lays down the extent of enquiry permitted and therefore indicates the extent of response merited. Taxpayers have come to believe that parading their innocence will suffice until experience teaches otherwise. Knowledge is to know what to say, wisdom is to know when.

This is a work that draws from years of making mistakes so that no one needs to make the same old ones. Attempt is to prune these learnings and align them to the exacting standards of GST law in an attempt to ‘learn and share’ and not just explain the statutory provisions in simple language. And if the language is not simple enough, probably because the learning has not been so. Hope it helps!

Acknowledgements and Dedication This work is attempted as a responsibility to bare mistakes committed over several years and share the illumination that followed the initial disappointment when cases were lost. It has taken more years to learn from mistakes which could easily have been learned from a teacher. But mistakes have been the most-sincere teacher of all, in this field of tax litigation. And Revenue has made no small contribution in imparting knowledge and understanding about tax litigation, with innovative interpretation canvassed every time.

Special thanks to Mahaveer, Srikanth (Shriky) and Srikanth (Balki) for all the support and encouragement over the years. Starting practice was because there was no firm then which saw the potential in indirect taxation, unlike today. And the need was to offer every area of expertise in one firm.

Gratitude to everyone in JCSS for being there and quietly making invaluable contribution. There are too many friends to name all.

Today, there are so many young professionals launching themselves into the deep-end of tax practice that they could do well with some pointers to take this ‘bull by the horns’ and locate the areas of deep study needed to develop mastery in the field of tax litigation.

Tax professionals often suffer from the burden of misplaced loyalties – to Client (taxpayer) or Revenue (tax Officers). Over the years, this one thing has become clear that loyalties must be to the ‘law’ and to the ‘craft’ that each professional exerts. There is a generation that has arrived who cannot be left to fault the ones before for failing them by not letting them in on these pointers, which can still be learnt by committing mistakes begrudgingly.

This is generation is better, smarter and more motivated to serve society altruistically, with the field of tax litigation being their canvas. This work is dedicated to them. And if it was worthwhile, to pass it forward!

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Chapter-heads PAGE

About the Author

I-5

Preface

I-7

Acknowledgements and Dedication

I-9

Contents

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DIVISION ONE

NOTICES UNDER GST CHAPTER 1

Background

3

CHAPTER 2

Notices under sections 25 and 29

18

CHAPTER 3

Notice under section 63

30

CHAPTER 4

Notice under section 73

40

CHAPTER 5

Notice under section 74

63

CHAPTER 6

Notice under section 76

78

CHAPTER 7

System Generated Notices I-11

85

CHAPTER-HEADS

I-12 PAGE

CHAPTER 8

Refund Notice

92

CHAPTER 9

Notice for e-way bill

104

CHAPTER 10

Notice for penalty

113

CHAPTER 11

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124

CHAPTER 12

Preparation to reply

130

CHAPTER 13

Jurisprudence of Adjudication

167

CHAPTER 14

Reply to notices

189

CHAPTER 15

Relief in Adjudication

234

CHAPTER 16

Outcome in Adjudication

250

CHAPTER 17

Remedy of Appeal

263

CHAPTER 18

‘Sequel Notice’ by Appellate Authority

274

CHAPTER 19

Relief in Appeal

288

CHAPTER 20

Revisionary Proceedings

306

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CHAPTER-HEADS

PAGE

CHAPTER 21

Appellate Tribunal

331

CHAPTER 22

Applicable Jurisprudence

345

DIVISION TWO

PLEADINGS IN GST CHAPTER 23

Pleadings

389

Contents PAGE

About the Author

I-5

Preface

I-7

Acknowledgements and Dedication

I-9

Chapter-heads

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DIVISION ONE

NOTICES UNDER GST

1 BACKGROUND 1.1

Introduction

3

1.2

Procedures established by law

4

1.3

Due process

4

1.4

Abuse of process

7

1.5

Spot recovery

8

1.6

Demand in GST

9

1.7

Principles of natural justice

10

1.8

Cause of action

11

1.9

Allegation and evidence

13

1.10

No Presumption flows from GSTN data

14

1.11

Effect of non-denial

14

1.12

Vagueness of denial

15

1.13

Rights, remedies and safeguards

16

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CONTENTS

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2 NOTICES UNDER SECTIONS 25 AND 29 2.1

Overview

18

2.2

Anatomy of a notice

19

2.3

Limitations of scope

19

2.4

Rejection of application

20

2.5

Repeated applications without reply to notice

21

2.6

Option for composition

21

2.7

Option for provisional assessment

22

2.8

Suspension of registration

23

2.9

Suo Motu cancellation

25

2.10

Revocation of cancellation

26

2.11

Voluntary cancellation

28

2.12

Appealable orders

28

2.13

Circulars and instructions

29

3 NOTICE UNDER SECTION 63 3.1

Overview

30

3.2

Section 63 not competing with section 67

32

3.3

Taxable person not holding registration on date of notice

33

3.4

Authority to investigate absent

35

3.5

Registration ousts jurisdiction of proper officer

36

3.6

Best judgment is not wild guesswork

36

3.7

Basis of Best Judgment

37

3.8

Interest and Penalty Not imposable

38

3.9

Reply more onerous

38

3.10

Pre-emptive powers imperil taxpayers

39

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CONTENTS

PAGE

4 NOTICE UNDER SECTION 73 4.1

Overview

40

4.2

Anatomy of a notice

40

4.3

Pre-notice consultations

43

4.4

Limitation

45

4.5

Statement of demand

46

4.6

Accompanying summary

48

4.7

Service of notice

49

4.8

Validity of service

50

4.9

Concessional penalty

52

4.10

Burden of proof

52

4.11

Deficiencies in notice

55

4.12

Discrepancies in notice

56

4.13

Omission to object

57

4.14

Non-denial implies admission

58

4.15

Post-adjudication penalty

60

4.16

Demand for interest or penalty only

61

5 NOTICE UNDER SECTION 74 5.1

Overview

63

5.2

Special circumstances

64

5.3

Anatomy of a notice

67

5.4

Exception to pre-notice consultations

69

5.5

Pre-notice penalty

69

5.6

Post-notice penalty

70

5.7

Post-adjudication penalty

71

5.8

Additional aspect about evasion

72

5.9

Disputed tax period

73

5.10

Implication of ‘cum tax’ demand

75

5.11

Circulars and instructions

76

CONTENTS

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6 NOTICE UNDER SECTION 76 6.1

Overview

78

6.2

Pre-requisites to notice

79

6.3

Composite demand notice

81

6.4

Absence of limitation

82

6.5

Recovery of credit loss

82

7 SYSTEM GENERATED NOTICES 7.1

Validity

85

7.2

Rule 88C and Rule 142B

85

7.3

Options for response 1

87

7.4

Rule 88D

88

7.5

Options for response 2

88

7.6

Validity of adverse inference

89

7.7

Service and belated response

90

7.8

Effective date and period of coverage

90

8 REFUND NOTICE 8.1

Overview

92

8.2

Pre-requisites to notice

92

8.3

Purpose of notice

93

8.4

Unjust Enrichment

95

8.5

Mischief of credit notes

96

8.6

Second round of refund proceedings

97

8.7

Composite refund notice

99

8.8

Protective action

100

8.9

Protective Notice

102

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CONTENTS

PAGE

8.10

Refund to unregistered Persons

103

8.11

Circulars and instructions

103

9 NOTICE FOR E-WAY BILL 9.1

Overview

104

9.2

Binary verification

105

9.3

Alteration of scope by circular

106

9.4

Extra legislative enquiry

106

9.5

Cryptic notice

107

9.6

Misplaced responses

107

9.7

Pleading for lenience

108

9.8

Secure release immediately

109

9.9

Essential fact to be documented

110

9.10

Remediation in appeal

111

9.11

Risks of revisionary proceedings

111

9.12

Circulars and instructions issued

112

10 NOTICE FOR PENALTY 10.1

Overview

113

10.2

Pre-requisites to notice

114

10.3

Exception to pre-notice consultations

115

10.4

Accompanying summary

116

10.5

Notice under alternative sections

116

10.6

Statutory definition of infraction

117

10.7

Concept of animus

120

10.8

General discipline on penalty

121

10.9

Personal penalty to Director

121

10.10 Penalty under section 52

122

10.11 Waiver of penalty notice

122

10.12 Circulars and instructions issued

123

CONTENTS

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11 NOTICE FOR CONFISCATION 11.1

Overview

124

11.2

Seizure must for confiscation

124

11.3

Exigencies absent

125

11.4

Waiver of demand notice

126

11.5

Redemption fine

127

11.6

Provisional release

127

11.7

Appellate remedy

128

12 PREPARATION TO REPLY 12.1

Overview

130

12.2

Test the notice

132

12.3

Scrutinize allegation and supporting evidence

133

12.4

Construct of allegation

135

12.5

Allegations by presumption

136

12.6

Contradictory allegations

137

12.7

Rejection of taxpayer’s records

138

12.8

Merits of rejecting taxpayer’s books

139

12.9

Taxing ingredients

140

12.10 Acting under compulsion

142

12.11 Acting under dictation

143

12.12 Internal validation

144

12.13 External validation

145

12.14 Influence of allied laws

146

12.15 Post-notice continuation of enquiry

148

12.16 Fatal errors in pre-notice stage

149

12.17 Taxpayer’s statements recorded

150

12.18 Taxpayer’s assertions rejected

151

12.19 Cross-examination

152

12.20 Elaborate reply

154

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CONTENTS

PAGE

12.21 Short reply

155

12.22 Benefits of ex parte orders

157

12.23 Reply other than on merits

158

12.24 Case laws overload

158

12.25 Case laws from earlier tax regime

159

12.26 Reliance on AARs

160

12.27 Case laws from overseas

160

12.28 Assumptions about GST

162

12.29 Fallacy about existence of basic features

162

12.30 Vague is not arbitrary

166

13 JURISPRUDENCE OF ADJUDICATION 13.1

Overview of section 75

167

13.2

Limitation on disposal

167

13.3

Impatience in adjudication

168

13.4

Belated adjudication

169

13.5

Wisdom in adjournment

170

13.6

Reasons for adjournment

171

13.7

Personal hearing

172

13.8

Authorized representative

173

13.9

Grounds in notice and order

174

13.10 Facts-in-issue

176

13.11 Irrefutable facts

177

13.12 Irrelevant facts

178

13.13 Grounds modified or withdrawn

179

13.14 Bar on improvement

180

13.15 Relief in absence of special circumstances

180

13.16 Remand sans power of remand

181

13.17 Orders to be ‘speaking’

182

13.18 Consequential demand order

185

13.19 Interest automatic, not penalty

185

CONTENTS

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13.20 Plurality of penalty barred

186

13.21 Limitation not to commence

187

13.22 Circulars and instructions issued

188

14 REPLY TO NOTICES 14.1

Overview

189

14.2

From strength to strength

190

14.3

Statutory provision dictates approach

192

14.4

Jurisdiction and Proper Officer

193

14.5

Illegal evidence

195

14.6

Bona fide demand in mala fide proceedings

196

14.7

Question-the-question

197

14.8

Revenue’s evidence

200

14.9

Impeaching Revenue’s evidence

201

14.10 Admissibility of evidence

203

14.11 Statements on oath

206

14.12 Probative value of evidence

207

14.13 Evidence impeached by denial

209

14.14 Rebuttal and evidence

209

14.15 Discussion on facts

213

14.16 Reply to restore facts

215

14.17 Reply to expose conjecture

215

14.18 Reply to summarize facts-in-issue

216

14.19 Discussion on law

217

14.20 Evidence via Affidavit

217

14.21 Binding nature of circulars

219

14.22 Binding nature of decisions

220

14.23 Prayer on findings to be reached in adjudication

221

14.24 Personal hearing

222

14.25 Readiness for later proceedings

222

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CONTENTS

PAGE

14.26 Introducing new material

223

14.27 Relevance of circulars

225

14.28 Case law authorities - More

227

14.29 Case law authorities - Less

227

14.30 Essentials in a reply

229

14.31 ‘Without prejudice’ replies

230

14.32 ‘With prejudice’ replies

231

14.33 ‘Alternate pleas’ replies

232

14.34 Circulars and instructions issued

233

15 RELIEF IN ADJUDICATION 15.1

Relevance in replying to notices

234

15.2

Pleadings

235

15.3

No relief beyond pleadings

235

15.4

Moulding relief

236

15.5

Injustice inherent in ‘due process’

236

15.6

Creature-of-statute effect

237

15.7

Decisions distinguished

237

15.8

Non-binding circulars

238

15.9

Adjudication in offence cases

240

15.10 Perspective bias

241

15.11 Shortest route to favourable decision

243

15.12 Adverse Orders

245

15.13 Defective Orders

246

15.14 Non-speaking Orders

248

15.15 Consequential relief

248

16 OUTCOME IN ADJUDICATION 16.1

Relevance in replying to notices

250

16.2

Revised notice or fresh notice

251

CONTENTS

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16.3

Person aggrieved

251

16.4

Remedies to aggrieved persons

252

16.5

Taxpayer’s appeal

253

16.6

Restrictions under section 121

254

16.7

Maintainability of appeal

254

16.8

Payment under Protest

255

16.9

Direct writ petition

256

16.10 Perils of pre-deposit in court

261

17 REMEDY OF APPEAL 17.1

Relevance in replying to notices

263

17.2

Standard Operating Procedure

264

17.3

Purpose of appeal to Appellate Authority

265

17.4

Departmental appeal

266

17.5

Taxpayers exposure in counter

267

17.6

Condonation of delay

267

17.7

Defective appeal

268

17.8

Burden of Appellate Authority to verify evidence

269

17.9

Curative powers of Appellate Authority

270

17.10 Framing of facts-in-issue

271

17.11 Exclude irrelevant facts

271

17.12 Good reason to be confident

272

17.13 Withdrawal of appeal

272

18 ‘SEQUEL NOTICE’ BY APPELLATE AUTHORITY 18.1

Introduction

274

18.2

Fact-Finding via Further Inquiry

275

18.3

Update Original Demand

276

18.4

DRC1A Bypassed

277

18.5

Acquiescence not curative

278

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CONTENTS

PAGE

18.6

First Proviso

279

18.7

Second Proviso

280

18.8

Calling of Books Barred

281

18.9

Update notice v. Upgrade notice

283

18.10 Altogether new notice barred

283

18.11 Sequel not free from defects

285

18.12 Safety of Limitation

285

18.13 Safety of Original Grounds

286

18.14 Readiness for Tribunal

286

19 RELIEF IN APPEAL 19.1

Standard Operating Procedure

288

19.2

Scope of permissible relief

288

19.3

Limitations in powers of Appellate Authority

289

19.4

Relief limited by pleadings and prayer

291

19.5

Inherent powers

292

19.6

Scope for review and appeal

293

19.7

Directions of Appellate Tribunal or Court

294

19.8

Consequential effects of relief in appeal

294

19.9

Dismissal, if appeal does not merit interference

295

19.10 Strict v. Beneficial interpretation

297

19.11 Interpretation of tariff v. Exemption notification

298

19.12 Time limits - Limitation or prescription

300

19.13 Suo motu Writ Petition by SC

301

19.14 Circulars - Distinguishable or binding

302

19.15 Case law authority - Distinguishable or binding

303

19.16 Questions about jurisdiction

304

19.17 Proceedings in appeal

304

19.18 Speaking Orders

305

CONTENTS

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20 REVISIONARY PROCEEDINGS 20.1

Relevance in replying to notices

306

20.2

Decision or order

306

20.3

Officer subordinate

307

20.4

Suo motu

308

20.5

Information received

309

20.6

Request from Commissioner of State Tax

310

20.7

Resolution of conflict with section 107(2)

310

20.8

Call for and examine

311

20.9

Prejudicial to interests of revenue

312

20.10 Illegal (decision or order)

314

20.11 Improper (decision or order)

315

20.12 Not taken into account pre-existing factors

316

20.13 Not taken into account post-arising factors

317

20.14 Adverse observation by CAG

318

20.15 Prerequisites to invoke powers

318

20.16 Doctrine of election

320

20.17 Stay operation (of such decision or order)

320

20.18 After making such further inquiry

321

20.19 Immediately ‘stay’ operation of Orders

322

20.20 Pass such new ‘substitutionary’ Orders

322

20.21 Enhance (said decision or order)

323

20.22 Modify (said decision or order)

323

20.23 Annul (said decision or order)

324

20.24 Bar on revisionary proceedings

324

20.25 Mischievous appeals

325

20.26 Limitation (time bar) for Revision

327

20.27 Appeal against Revision

327

20.28 Limitation ‘extension’ for Revision

327

20.29 Enhanced remedy for Revenue

328

20.30 Checklist

328

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CONTENTS

PAGE

21 APPELLATE TRIBUNAL 21.1

Relevance in replying to notices

331

21.2

Creatures of the statute

331

21.3

Structure of GSTAT

332

21.4

Full bench or division bench

332

21.5

Single member bench

333

21.6

Reference to third member

334

21.7

Appealable orders

334

21.8

Appeal filed before erroneous bench

334

21.9

Types of appeals

335

21.10 Limitation

336

21.11 Pre-deposit

336

21.12 Statement of facts

337

21.13 Grounds of appeal

337

21.14 Paper-book

339

21.15 Departmental representative

340

21.16 Limitations in powers of appellate tribunal

340

21.17 Power of inquiry by appellate tribunal

340

21.18 Fruits of earlier preparations

342

21.19 Law of precedent

342

21.20 Conclusion

343

22 APPLICABLE JURISPRUDENCE 22.1

Justice v. Fairness

345

22.2

Power of moulding relief

345

22.3

Notice ends inquiry

346

22.4

Purposive construction

347

22.5

Doctrine of merger

349

22.6

Tax avoidance

350

22.7

Mandatory or Directory

351

CONTENTS

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22.8

Litigation in anticipation of amnesty

354

22.9

Appropriateness of forum selection

355

22.10 Understanding taxpayer’s business

356

22.11 Authorities that illuminate understanding

357

22.12 Illustrative formats

358

22.13 Index of decisions

358

DIVISION TWO

PLEADINGS IN GST

23 PLEADINGS 23.1

Replying to notices

389

23.2

Relief prayed

390

23.3

Burden of proof

390

23.4

Accept and discharge

391

23.5

Dispute and litigate

392

23.6

Reject allegations

393

23.7

Burden on taxpayer

394

23.8

Options to reply

394

23.9

Departmental observations

395

23.10 Payments made via DRC-3 1

396

23.11 Payments made via DRC-3 2

397

23.12 Mismatch of GSTR-2A with GSTR-3B 1

399

23.13 Mismatch of GSTR-2A with GSTR-3B 2

403

23.14 Interest on belated filing of GSTR-3B

405

23.15 URP-RCM unpaid in 2017-18

406

23.16 RCM unpaid 1

408

23.17 RCM unpaid 2

410

23.18 RCM unpaid 3

413

23.19 Invoice of earlier tax periods included in current GSTR-3B

415

23.20 Tax paid in excess and adjusted

416

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CONTENTS

23.21 Credit notes (with GST) received

418

23.22 Credit notes (without GST) received 1

421

23.23 Credit notes (without GST) received 2

423

23.24 Debit notes issued

425

23.25 Output tax on debit notes discharged belatedly with credit

426

23.26 Credit notes issued for domestic sales

428

23.27 Credit notes issued for zero-rated supplies

430

23.28 Non-disclosure of exempt turnover

431

23.29 Mismatch of EWB and GSTR-1/3B

433

23.30 Mismatch of GSTR-1 with GSTR-3B

435

23.31 Mismatch of GSTR-7 with GSTR-1/3B

440

23.32 Mismatch of GSTR-8 with GSTR-1/3B

442

23.33 Non-reversal of common credits

444

23.34 Blocked credits availed

446

23.35 Matched credits from absconding Suppliers

448

23.36 Mismatch of TRAN-1 credit

450

23.37 Claim of TRAN-1 credit in GSTR-3B

451

23.38 Interest on TRAN-1 credit reversed

454

23.39 Composition taxpayer collecting tax

454

23.40 Composition taxpayer with service turnover

456

23.41 Composition taxpayer exceeding threshold

457

23.42 Composition taxpayer with credit balance

458

23.43 Disposal of capital goods

459

23.44 Write-off of inputs and capital goods

460

23.45 Refund of unmatched credits to exporter

461

23.46 Credit claimed after due date

462

23.47 Credit claimed when payment not made to Suppliers

465

23.48 Output tax payable on ‘other income’

467

23.49 Credit blocked under rule 86A

469

23.50 Output tax in cash under rule 86B

471

14 CHAPTER

REPLY TO NOTICES 14.1 OVERVIEW ‘Due process’ of adjudication is not a ‘friendly match’. It is adversarial litigation process, in every sense of the word. Neither side should assume quiet surrender or crude settlement of the dispute. Proper Officer is not the ‘last authority’ who will sit in judgment over the lis. In fact, notice and reply is just the beginning of proceedings that will conclude when a decisive ruling on the lis comes to be rendered by an authority named in the law or when one of the adversaries concedes at any interim stage. Taxpayers are generally averse to litigation. But taxpayer’s confidence to litigate is directly linked to the exuding confidence of the expert who is to advise, assist and offer representation in these proceedings.

Reply to notice is not the last step. It is the place where defences are put forward with eyes set firmly on a ‘day in Court’ when findings reached by Proper Officer in adjudication will be put to the test. After all, adjudication is not the search for the truth but a trial of the interpretation canvassed by Revenue.

Example Taxpayer urged in appeal that Proper Officer’s actions are without jurisdiction since SCN is issued by Officer of State GST department under section 73 when taxpayer is registered with Central GST department. No proceedings under section 67 were undertaken. Grounds urged was dismissed citing failure to put forward this objection in earlier proceedings and by replying to SCN on merits, taxpayer has acquiesced and rendered ‘valid’ the SCN (and consequent Adjudication Order) as per section 160(2). As such, appeal taken up for consideration on merits.

Outcome of litigation is unlikely to be final at the end of adjudication. Where a notice is issued, Revenue is barred from ‘giving up without a fight’, that is, no demand (in a notice) can attain finality unless every possible avenue 189

Para 14.2

REPLY TO NOTICES

190

to sustain that demand has been tested and by more than one authority.

Revenue has the following avenues to wrestle with the demand: (a) Adjudication by a Proper Officer; (b) Departmental appeal before First Appellate Authority; (c) Revision of orders prejudicial to Revenue by Revisionary Authority; (d) Departmental appeal before Appellate Tribunal; and (e) Statutory appeal to High Court/Supreme Court on question of law.

Taxpayer too has several avenues to follow. But taxpayer’s willingness is directly tied to awareness. And grounds to be urged in adjudication are vastly different from those to be urged in appeal. Like everything in business, reply to notice must be approached with a strategy. One that entertains the possibility of adverse outcome, at least, in early rounds in this process. Therefore, each round must be approached based on the relief that authority is empowered to allow.

Examples Constitutional validity of the provisions, say, section 16(4) raised before Proper Officer demanding demand to be dropped in adjudication. Proper Officer being a ‘creature of the statute’, is barred from sitting in judgment over the vires of the law being administered. This ground - questioning vires of provision - is for High Court to entertain. And since this is the only ground urged before Proper Officer then, demand stands confirmed.

Verification of computation of input tax credit reversal under rule 42 urged before Appellate Authority. Since the same has already received consideration by Proper Officer and there being no point of disagreement about the computation except to demand fresh consideration and verification of reversal computation, appeal is dismissed.

Taxpayers must understand the several rounds that nearly every notice will need to pass. And not even a favourable order in adjudication is anything to celebrate because Revenue is free to carry such order in departmental appeal within six (6) months from Order or upset it in revisionary proceeding up to three (3) years from Order. When no favourable order merits celebration unless the last avenue available for Revenue has lapsed, taxpayer cannot view any notice to conclude in ‘round one’ itself. And if it will be carried to ‘multiple rounds’, reply to notice must be approached with a strategy. If truth is all there is, experience will show that justice is loosely connected with truth and more firmly with facts in the notice and approach in the reply.

14.2 FROM STRENGTH TO STRENGTH Approach to reply involves carrying the case from ‘strength to strength’ as it passes through the entire process from adjudication to appeal. It needs to be

191

FROM STRENGTH TO STRENGTH

Para 14.2

nurtured and cared for, preserved and guarded even from taxpayers giving up midway and accepting a ‘compromise’. Care must be taken to guard the notice against private and parallel engagement of taxpayers with Proper Officers to secure a ‘short cut’ resolution that does not exist in this law.

Adjudication is unlikely to procure favourable outcome for the simple reason that the interpretation canvassed in the notice is not without understanding tax position adopted by taxpayer. It is to challenge taxpayer’s interpretation.

And unless adjudication confirms the interpretation of Revenue, it will not receive full consideration that it deserves. Taxpayers must embrace the fact that adjudication is the beginning. And those willing to contribute more than that lawfully due and reluctant to resist the error of this new interpretation, will not be turned away. After all, no one can force a taxpayer to avail rights, remedies and safeguards available in this law, at least in adversarial litigation.

As the allegations are ‘chipped away’ at each stage in the entire process, the outcome will become clearer. Adjudication being trial of the interpretation canvassed in the notice, it requires perseverance and patience with the entire ‘due process’ to eventually establish validity of taxpayer’s own interpretation of this law.

Taxpayer’s ’ assumption i n about b case progress s A

Reality of case e progress

B

Adjudication Stage

Appellate Stage

There is a mismatch between ‘assumption’ and ‘reality’. And taxpayers who are averse to litigation, will stop and even abandon further efforts along line A-B (in diagram above) due to alarm and disappointment at the outcome in adjudication, and failure to appreciate ‘reality’ of progress in the case.

Therefore, questions that taxpayer’s need to address are: (a) Are the right objections placed on record at this stage? (b) Have the allegations and evidence in support put to test?

Para 14.3

REPLY TO NOTICES

192

(c) Is the scope of notice contained or expanded by new material? (d) Do the findings reached narrow down the facts-in-issue(s) involved? (e) Are grounds urged (in appeal) sharpen focus on findings to reach? (f) What avenues are still left open that may ‘save the demand’? (g) Does the record bear correct facts, eliminates irrelevant facts and revolve around the correct statutory provisions? (h) Is the correct relief prayed?

And then consider, “what is the truth, what are the merits?”.

14.3 STATUTORY PROVISION DICTATES APPROACH “Which section?” is the most important question to be addressed because answer to this question reveals the approach to be followed in replying to the notice. Notice issued under section 63 requires one approach and this approach cannot be applied if the notice is issued under section 76.

There are notices issued under section 35 alleging that books and records are not properly maintained. Right to question the validity of any notice will be lost by delay and by omitting to question its validity due to the embargo in section 160(2). Whether this embargo can really overcome the right to valid notice, is yet to be tested but as it stands today, acquiescence validates an otherwise invalid notice (and hence, rest of the proceedings).

“Which section?” also dictates “which Officer?”. Not every Officer is the Proper Officer. When Officer is not ‘proper’, notice and everything that follows will be ‘improper’. And all this avails to a vigilant taxpayer and not one who is dormant about rights in law. Perhaps taxpayer does not want support of these rights in law and believes that merits alone are sufficient to secure justice. There is room in this law for taxpayer of every hue.

But ‘due process’ of law demands, with the several rounds of adversarial litigation laid down in the law, that sights be set on the ‘next round’ while working on the reply in ‘this round’. Relief that can be easily allowed in appeal may be impossible in adjudication.

Example SCN issued under section 74 rejecting books and estimating liability.

Adjudication concluded on ex parte basis. Appeal allowed due to admission in SCN that estimates and guesswork used to arrive at demand. Use of estimates and guesswork compatible with SCN under section 63, not section 74.

Outcome in appeal can be favourable because it may be impossible to ‘save the demand’ within the confines of the grounds in the notice (discussed earlier). After all, adjudication is not a search for the truth, but a trial of ‘view’ canvassed in the notice.

193

Para 14.4

JURISDICTION AND PROPER OFFICER

14.4 JURISDICTION AND PROPER OFFICER Administrative demands on Proper Officers is complex. And to ensure swift and prompt action, specific Officers are empowered to invoke powers under specific provisions (sections and rules). In so doing, the entire population of taxable persons are allocated based on geographic territory also. Often ‘jurisdiction’ is misunderstood to be limited to ‘territorial jurisdiction’ only.

Reference to section 6(2) shows that with respect of anti-evasion action under section 67, simultaneous jurisdiction is vested in officers of Central and State (or UT) GST departments. This opens the question of ‘jurisdiction qua each provision’ in the law. That is, Officer who has granted registration to taxpayer is designated as Proper Officer to initiate proceedings under section 61. Registered taxpayers who are ‘mapped’ to Central GST department must be subjected to audit proceedings under section 65 by Proper Officer in the Central GST Audit Commissionerate only. Officers from the State (or UT) GST department are NOT authorized to initiate audit proceedings in respect of registered taxpayers who are fall within the administrative jurisdiction of Central GST department. And the same is true of registered taxpayers who fall withing the administrative jurisdiction of State (or UT) GST department.

This brings us to the question of “validity of jurisdiction” which must be tested and confirmed. And if there is any doubt, Proper Officer must explain exercise of jurisdiction when validity of notice is questioned in a plain-paper letter in view of the mandate in section 160(2).

Uncertainty about ‘validity of jurisdiction’ goes to the heart of notice and any invalidity can impair and bring the entire proceedings to be grinding halt.

And where jurisdiction is lacking, notice is incurable and must be dropped immediately (or eventually if pursued), to avoid vice of highhandedness, abuse of statutory powers and misapplication of law, even if there is merit in underlying demand which is not exposed by prematurely ‘entering into merits’ in the reply.

Jurisdictional Table Notice issued

Registration of taxpayer

Underlying proceeding

Proper Officer

Note

Section 52

Centre

Section 61

Centre

1

Section 63

None

NIL

Either A

2

Sections 73-74

Centre

Sections 61-65

Centre

1

Sections 74-76

Centre

Section 67

Either B

3

Section 122

None

Section 67

Either B

2+3

Section 129

Either or none

Section 68

Either A

2

Para 14.4

194

REPLY TO NOTICES

Notice issued

Registration of taxpayer

Underlying proceeding

Proper Officer

Note

Section 130

Either or none

Section 67

Either B

2+3

Note 1: State and State Officer

Note 2: Within respective territory

Note 3: Authorized in INS1

Any good book on Administrative Law and Writ Remedies would help realize the importance of this question about ‘jurisdiction’ and ‘due process’ which are, all too often, glossed over. Taxpayers are gripped with fear that they fail to notice that Officer overcome by enthusiasm has omitted to secure specific authorization to initiate said proceedings. In addition, certain States (or UTs) have a further procedure to issue taxpayer-specific authorization to issue notices.

Example Although ‘Deputy Commissioner’ is the rank of Officer empowered to issue SCN under sections 73 and 74, in the State Karnataka, there is an administrative procedure for Joint Commissioner to issue ‘Assignment’ to such Deputy Commissioner to issue such SCN (i) in respect of specific distinct person (ii) for specific tax period(s) (iii) either under section 73 or 74 and (iv) for pecuniary limit of demand to be raised, will all be specified in such authorization. Taxpayer must demand copy of said Assignment be test for correctness and completeness of the procedure followed, which is essential before SCN is entertained by way of replying, even if demand is disputed.

Unless every single step in the jurisdiction table is tested and satisfied, taxpayer is welcome not to enter into merits in reply to notice. And it would be most expeditious to include in the preliminary letter (discussed earlier) to demand copy of said authorization.

Question of jurisdiction is not ‘simple’ jurisdiction but ‘compound’ jurisdiction as it touches “territory + administrative mapping + statutory provision + specific authorization”. Omission to be mindful of this jurisdictional pyramid can cause irreparable prejudice to taxpayer’s interest.

Jurisdictional Pyramid Territorial jurisdiction Unregistered taxable person

Registered taxable person Administrative mapping (Centre or State/UT) Statutory jurisdiction under the relevant provision of law

Administrative authorization (i) qua taxable person and (ii) qua tax period

195

ILLEGAL EVIDENCE

Para 14.5

Just because statutory duties are being performed, even if there is strong suspicion of revenue leakage, except by following the due process of invoking specific powers conferred within specified boundaries to its exercised and with necessary checks and balances, passionately proceeding with enquiry or inquiry are as much illegal as are proceedings of a roving nature. It may be worthwhile to recount that what power is given to be a particular thing, that thing must be done in that particular manner or not at all. This is the mandate to the Executive by Legislature and the attendant possibilities of loss of revenue is inherently accepted in permitting (i) self-assessment to taxpayer and (ii) permitting authority to intervene but within the boundaries laid down in specified provisions.

14.5 ILLEGAL EVIDENCE Evidence obtained illegally are NOT barred from being relied upon to issue notice. Objections as to use of illegal means to collect evidence (to support allegations in notice to be issued later) must be objected right at the point when such illegal attempts are observed. ‘Illegal’ in this context does not refer to evidence collected in collusion, but evidence collected using ‘extra legislative’ methods due to misapplication of prescribed procedure for evidence collection.

Most alarming provisions used to collect incriminating evidence are: (a) Inspection of books of account under section 71 without any ‘reasons to believe’ that there may be some outstanding liability; (b) Inspection of premises under section 67 and demanding ‘voluntary’ submission of books and records containing reference to some outstanding liability; (c) Summons issued under section 70 without any authorization under section 67 to conduct ‘inquiry’ in respect of any evasion of tax; (d) Letters of instruction issued under section 61 calling for books and records to be submitted in relation of ASMT10 issued; (e) Survey of unregistered persons conducted, and verbal instructions issued to ‘voluntarily’ submit books and records in respect of any outstanding liability to be used in proceedings to be issued under section 63; (f) Verbal instructions during proceedings for grant of registration in respect of outstanding liability for period prior to registration to be used in proceedings to be initiated under section 63; (g) Verbal instructions during ‘test purchase’ under section 67(12) to expose stocks for physical verification to unaccounted stock under section 35(6) and initiate proceedings under section 73 or 74; and

Para 14.6

196

REPLY TO NOTICES

(h) Notices are issued akin to summons calling for ‘information’ under section 150 and then initiate proceedings under section 74. ‘Information return’ under section 150 is applicable only to larger carriers of data such as Indian Railways, banks, statutory authorities, mobile operators, etc. And no such ‘information return’ has been notified as yet (discussed earlier) but still, section 150 is relied upon to call for elaborate information and records.

‘Outstanding liability’ referred above, includes any of the following areas that even registered taxpayers are likely to have missed since 2017-18: Output tax

Input tax credit

Interest

RCM under section 9(3)

Credit mismatch

RCM under section 9(4) (up to 13 Oct 2017)

Inward supplies not used Arrears discharged in business belatedly

Deemed supply

Time barred credits

(multi-GSTIN-holders)

Unpaid arrears

Tax discharged on debit notes via 3B

Staff recoveries (credits in Reversal of common Interest paid on ‘net tax’ expense accounts) credits basis (liability paid via DRC3) Other income in P&L

Blocked credits

Value adjustments

Where evidence is collected through such ‘extra legislative’ methods, followed by notice of demand, notices will not disclose the ‘source’ of said evidence.

Example SCN contains preliminary recitals like “intelligence has been developed by the department that Noticee has indulged in……….” or “certain intelligence has been developed that indicates that Noticee has engaged in transactions that are mala fide and intended to evade payment of tax. As such, it is hereby proposed to……………..”.

Background to intelligence gathered by Revenue is not open for questioning (or disclosure in discovery) by taxpayer (Noticee). Excessive or erroneous detailed in these recitals can be valuable in preparation of defence.

14.6 BONA FIDE DEMAND IN MALA FIDE PROCEEDINGS When proceedings are ‘tainted’, it does not matter if the underlying demand is real and due. When it comes to ‘validity’ of proceedings, not even a bona fide demand can legitimize mala fide proceedings. While this is a rule of Administrative Law, there is yet another rule that relief NOT pleaded cannot be allowed, not even in the interests of justice. Justice, therefore, properly understood is not the eventual outcome, especially in taxation matters, but

197

QUESTION-THE-QUESTION

Para 14.7

the lawful process of getting to the outcome. And ‘lawfulness’ is not something that will be taken lightly by Revenue or but easily neglected by taxpayers.

Taxpayers are overcome by the bona fides of the demand that they overlook the Legislative mandate that ‘no demand is permitted except by issuing a notice as per law’ and gladly pay up even when the demand cannot lawfully be made.

Examples There are no statutory provisions in Central GST Act to issue SCN demanding interest on inadmissible transition credit availed, utilized and repaid.

There are no statutory provisions for jurisdictional Proper Officer to call for books and records even if discrepancies in the returns are blatant or obvious.

After a reply in ASMT11 from taxpayer, jurisdictional Proper Officer is permitted to refer the matter for audit under section 65 or 66 or for inspection under section 67 or proceed with issuing SCN under section 73 or 74.

There are no statutory provisions in Central GST Act for Proper Officer conducting audit under section 65 to direct taxpayer to “submit detailed reply to observations in report issued under section 65(6)”. And taxpayer is not obliged to reply to such audit report in ASDT2 but await pre-notice consultations vide DRC1A because section 65(7) renders Proper Officer ‘functus officio’ once ADT2 is released.

It is seen that a report containing ‘observations’ are issued ‘under section 65(6)’ but not titled ADT2. Consequence in law remains the same once section 65(6) is invoked. Taxpayers remain hopelessly hopeful that ‘detailed reply’ will make the (imminent) notice ‘go away’. Taxpayer will have prejudiced their (future) defence by exposing the grounds available prematurely.

Taxpayers must ensure that ‘facts’ are not misunderstood by Revenue and ‘interpretation of facts’ is beyond taxpayer’s control.

14.7 QUESTION-THE-QUESTION All the deliberations up to this point about reply to notices, lead to this inescapable truth that ‘before launching to answer the question, it is most prudent for taxpayer to question-the-question’ because ambiguity about the question will expose taxpayer to perils of: (a) Forfeiture of right to demand that Revenue satisfactorily discharge its ‘burden of proof’ about interpretation canvassed in the notice; (b) Implicit admission of allegation (in the notice) left undisputed; and (c) Shifting of ‘onus of proof’ onto taxpayer for introducing new or additional material and information.

And questions will be answered overlooking invalidity of the notice or questions will be left unanswered exposing imputation of wrongdoing without

Para 14.7

REPLY TO NOTICES

198

properly bringing home the allegations or actionable causes. In either case, the question itself will limit any curative attempts in ensuing proceedings.

It would help to recollect that adjudication is not the search for the truth but to put Revenue’s case on trial to examine if the view canvassed is more accurate and sustainable than that adopted in self-assessment. After all, determination that no tax is payable and hence no requirement to even obtain registration can be the result of self-assessment. And taxpayer may not be consciously aware that the result of examination of facts, taxability, exemption, if any, and decision to remain unregistered, need not be an elaborate and pointed exercise but one that was swiftly decided after a short conversation with someone who has already carried out a thorough exercise, whether an expert or a fellow-taxpayer, it still remains taxpayer’s own assessment of the implications of this law to that business. This is the result of authority in section 59, duly exercised.

No prejudice will be caused to Revenue if taxpayers were to submit preliminary objections allowing Revenue opportunity to consider defects, deficiencies and discrepancies found in notice and either deny them or avail the last opportunity to clarify their position. Sometimes it is thought that no clarifications are warranted once notice is issued. Even then, request for clarification sought and turned down, places taxpayer in a position where the consequences of these defects, deficiencies and discrepancies (in the notice) become compelling grounds of defence.

Examples Demand for CGST-SGST without specifying ‘place of supply’ and its basis, will result in demand being biased, arbitrary and erroneous, formed purely based on presumption and conjecture.

Demand for output tax without specifying ‘HSN code’ is fatal to a well-reasoned confirmation of the demand in adjudication.

Demand for RCM without specifying ‘time of supply’ is incurable and no demand for tax and certainly not for interest can be made. And to demand interest from 31 Mar 20XX would imply that ‘time of supply’ has been assumed to be on the last day of financial year.

It is important for taxpayer, not necessarily by way of defence, to be sure that the allegations in the notice are correctly and completely understood.

Taxpayer’s exude so much confidence that they ‘already know the question’, but that is not the role of taxpayers. Taxpayer’s role is to ‘answer the question’.

And to be able to do this right, taxpayers cannot be ‘imagine the question, and then proceed to answer’. Taxpayers might recognize the actionable cause.

That will not do. Taxpayers must grasp exactly ‘what’ is the allegation and ‘how’ has it been supported in the notice.

How to Deal with GST Show Cause Notices with Pleadings AUTHOR

:

PUBLISHER

:

A JATIN CHRISTOPHER TAXMANN

DATE OF PUBLICATION

:

JANUARY 2024

EDITION

:

3RD EDITION

ISBN NO

:

9789357787970

NO. OF PAGES

:

504

BINDING TYPE

:

PAPERBACK

Rs. 1050 | USD 44

Description This book effectively demonstrates how to deal with various types of GST Show Cause Notices.

It discusses the complexities of GST Show Cause Notice and its impact on taxpayers. The book addresses the divisive stance on GST’s implementation, categorizing tax litigants into those distressed by the law’s disregard for its foundational principles and those demanding strict adherence to the statute.

With a focus on clarity and practicality, the book emphasizes using real-world examples over dense text, aiding readers in grasping the intricacies. The author showcases solutions to the mistakes committed over the years of his litigation practice. This book is divided into two divisions: u

Notices under GST

u

Pleadings in GST

The Present Publication is the 3rd Edition and has been amended up to 31st December 2023.

This book is authored by A Jatin Christopher, with the following noteworthy features: u

[Do’s & Don’ts while Replying to Notices] that are extensively illustrated with hypothetical facts curated to suit the GST context and expose the nuances of replying to Notices

u

[Checklists, Visualizations & Templatized Answers] are included in this book to share experiences gathered in a short period since the introduction of GST

u

[Suggestions for Additional Reading & Reference] are made in this book to help

u

[Simplistic Language] that revolves in & around the statutory provisions, without

the reader extend their study of the subject matter repeating the bare provisions of the statute u

[Chapter on System-generated Notices] that have recently been enabled on Common Portal discusses the swift response that is required to keep aggressive action at bay

u

[50+ Draft Pleadings] on real-life issues with alternate answers in each instance that is relevant whether the occasion to provide a response is in the pre-notice stage– scrutiny or audit – or in the post-notice stage when notice of demand is issued

ORDER NOW