No auto cancellation of Registration of Recipient for fraud by the Supplier - Orissa High Court

Brief Facts of the Case

1. The petitioner is GST registered carrying on the business of manufacturing and trading of various types of pipes, scrap iron angles etc.
2. On 14.8.2020, the dealer is served with SCN by the GST department for cancellation of Registration on the ground that the registration is obtained by fraud, wilfulful misstatement etc.The dealer filed reply on 19th August and the proceedings were dropped by an order dated 25th August. On the same day another SCN was issued for cancellation of registration on the ground that "You have claimed ITC (Input Tax Credit) of Rs.2,04,650,06 against fake invoices issued by nonexistent supplier”.
3. The dealer filed reply on 31st August. The three invoices were dated 11th April, 2018, 30th April, 2018 and 13th August, 2018 were in question.
4. On 17th October, an intimation was issued u/s 74 in the Form DRC 01A to pay tax, interest and penalty on the ground of ITC claimed on fake invoices.
5. On 2nd November, the dealer filed reply asking for the material relied upon by the department.
6. On 10th December December the department cancelled his registration effective 3rd November. The dealer applied for revocation of cancellation but on 7th January,2021 the department rejected the above application for revocation.
7. The dealer filed writ petition in the high court which was disposed with the directions to the dealer to file appeal with the Appellate Authority. This appeal was then rejected by the Appellate authority.

Arguments by the Petitioner

1. Against the 21 purchases made by the petitioner during the relevant period only the purchases from one supplier has attracted the SCN.
2. A collective reading of Section 16 of the OGST Act with Rule 21 of the OGST Rules 2017 provides that there is no provision that enables the cancellation of the registration of the purchasing dealer for any fraud committed by the selling dealer.
3. The supplier's registration was cancelled on 1st July 2019 i.e. much after the relevant purchases made by the Petitioner so the purchases were made when the supplier's registration was valid.

Arguments by the respondent

• When the field was done by the GST officers at the supplier's premises then the some other person was only found at the premises and hence the supplies made by the supplier were fake.

Observations by the Court

1. There are 3 situations given under rule 21 for which the registration granted to a person is liable to be cancelled, if the said person,-

a) does not conduct any business from the declared place of business: or
(b) issues invoice or bill without supply of goods or services in violation of the provisions of the Act, or the rules made thereunder; or
(c) violates the provisions of Section 171 of the Act or the rules made thereunder.”

2. None of the three circumstances outlined above, in Clauses (a), (b) & (c) are attracted in the present case.

3. The order didn't consider the reply submitted by the petitioners.

4.On the date the purchases took place there was no means for the Petitioner to know that entity which had a valid GST number, was in fact non-existent.

5. To attribute fraud in such circumstances to the Petitioner, as a purchasing dealer, the Department would have to satisfy a high threshold of showing that the purchaser indulged in the transactions with the full knowledge that the selling dealer was non-existent.

The Order

The appeal order and the order of the LPO is set aside. Issued directions to the department to forthwith restore the registration of the Petitioner.

• Ref- WP no.15265 of 2021.
• Date of the Order - 4.10.2021
• Bright Star Plastic Industries Vs Additional Commissioner of Sales Tax (Orissa High Court at Cuttack)