2025 (4) TMI 1159 - HC - GST

Validity of demand confirmed beyond the scope of SCN - Challenge to order passed under Section 73 of the Central/West Bengal Goods and Services Tax Act 2017 - reversal of ITC - HELD THAT - Upon hearing the learned advocates appearing for the respective parties since it would appear from the materials on record that no show cause in relation to fastening of liability on assessable value of the outward supply on inward receipt of taxable goods was made the aforesaid determination and/or fastening liability to the above extent whereby the proper officer had determined a sum of Rs. 13, 27, 328.40 i.e. @ 12% on the assessable value of the outward supply on Rs. 2, 21, 22, 140.00 in relation to Narmada Gelatines Ltd. (Kolkata) and Rs.1, 66, 219.74 for CGST and SGST @12% on Rs.27, 70, 329.00 being the assessable value of the outward supply on inward receipt of taxable goods in respect of Alivira Animal Health Limited appears to be beyond the show cause and Rs.69552.60 on account of CGST and WBGST @5% in respect of other supplies on the basis of the data available with him which also do not find place in the show cause in my view cannot be sustained and the same are accordingly set aside. The period between 29th April 2024 being the date of order under Section 73 of the said Act and 10th April 2024 being the date of disposal of the writ petition or the date of receipt of certified copy of this order whichever is later shall stand excluded while computing the period of limitation for initiation of any proceeding against the petitioners. Petition disposed off.

Summary

The core legal question presented for consideration is whether the proper officer, in proceedings initiated under Section 73 of the Central/West Bengal Goods and Services Tax Act, 2017, could validly fasten liability on the petitioners for tax on the assessable value of outward supplies made on inward receipt of taxable goods from specified suppliers, when such a determination and liability were not explicitly included in the show cause notice issued to the petitioners. The challenge specifically concerns the reversal of Input Tax Credit (ITC) proportionate to exempt supplies and the consequent tax liability on outward supplies made from inward taxable goods received from two suppliers, namely Narmada Gelatines Ltd. and Alivira Animal Health Limited. Additionally, the correctness of tax treatment on other supplies bearing HSN 2306 and the adequacy of disclosure in GST returns are questioned.

The first issue revolves around the scope and content of the show cause notice issued under Section 73 of the GST Act and whether the subsequent determination of tax liability on the assessable value of outward supplies, as calculated by the proper officer, falls within the ambit of the notice. The petitioners contend that the show cause notice only indicated reversal of ITC found reversible in proportion to exempt supplies, specifying amounts for IGST, CGST, and SGST, but did not mention or indicate any liability based on the assessable value of outward supplies on inward receipt of taxable goods. The respondents, on the other hand, have proceeded to determine tax liability on such outward supplies at specified rates and amounts, which exceed the figures mentioned in the show cause notice.

Secondly, the issue of classification and taxability of goods received from the two suppliers is examined. The proper officer's findings indicate that certain goods described as "DCP (Poultry Feed)" and other feed supplements were incorrectly classified as exempt or nil-rated, whereas the officer determined them to be taxable at 12% based on the GST Council's notifications and the absence of proper documentation such as IS specifications. The officer also found discrepancies in the HSN codes and descriptions, leading to the conclusion that the goods are taxable and that the petitioners are liable to pay tax on the outward supplies made from these inward taxable goods. Additionally, the officer found short disclosure of taxable outward supplies bearing HSN 2306, which were declared at zero-rated tax but are taxable at 5%, leading to further tax liability on undisclosed turnover.

Regarding the first issue, the relevant legal framework is Section 73 of the GST Act, which governs the determination of tax not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilized. The procedure mandates issuance of a show cause notice specifying the grounds on which liability is proposed to be fastened, followed by an opportunity to the assessee to reply before passing an order. The principle of natural justice and statutory mandate require that the show cause notice must clearly state the case against the assessee, enabling them to make an effective defense. Precedents emphasize that an order passed beyond the scope of the show cause notice is liable to be quashed as it violates procedural fairness.

The Court's interpretation is that since the show cause notice specifically mentioned reversal of ITC amounts found reversible in proportion to exempt supplies but did not mention or indicate any liability on the assessable value of outward supplies on inward receipt of taxable goods, the subsequent determination and imposition of tax liability on such basis by the proper officer is beyond the scope of the show cause notice. The Court noted that the amounts determined by the officer on this basis are also higher than those indicated in the show cause notice, further underscoring the procedural infirmity.

The key evidence includes the show cause notice dated 29th December 2023, which enumerates the ITC reversal amounts, and the order dated 29th April 2024 passed under Section 73, which contains detailed findings on classification of goods, tax rates applicable, and calculation of assessable values and tax liabilities. The officer's reliance on GST Council notifications, IS specifications, and data from GST Back Office and E-waybill records form the factual matrix for the findings.

Applying the law to the facts, the Court held that the failure to include the determination of tax liability on outward supplies in the show cause notice renders the imposition of such liability unsustainable. The principle that the order must be confined to the grounds stated in the notice was applied strictly. However, the Court clarified that this procedural defect does not preclude the authorities from initiating fresh proceedings based on the same assertions, provided such proceedings comply with statutory requirements.

On the second issue concerning classification and taxability of goods, the Court examined the officer's reasoning that "DCP (Poultry Feed)" described with HSN 2309 and not charged GST is not exempt, as the chemically defined Dicalcium Phosphate (DCP) of animal feed grade is exempt only when conforming to IS specification No. 5470:2002 under HSN 2835. The absence of such specification and mismatch in description and HSN led to the conclusion that the goods are taxable at 12%. Similarly, goods from Alivira Animal Health Limited described under HSN 23099090 and not charged GST were found taxable due to lack of evidence of exemption. The Court accepted the officer's application of GST Council's tax rates and the method of determining assessable value based on inward supplies, outward supplies, and profit margin.

The competing arguments from the petitioners likely centered on the correctness of classification, applicability of exemption, and the methodology for assessing outward supply value. The Court, however, did not interfere with these substantive findings, focusing instead on the procedural infirmity regarding the notice. The Court's decision to set aside the tax liability imposed on this basis was strictly on procedural grounds, not on merits of classification or taxability.

The third issue on short disclosure of taxable outward supplies bearing HSN 2306 at zero-rated tax instead of 5% was similarly found to be a matter not included in the show cause notice, and the consequent liability imposed was set aside. The Court noted the discrepancy between E-waybill data and GST returns but held that the order imposing tax on this basis without prior notice is unsustainable.

In conclusion, the Court held that the determination and fastening of tax liability on the assessable value of outward supplies on inward receipt of taxable goods, as well as on undisclosed taxable supplies bearing HSN 2306, are beyond the scope of the show cause notice issued under Section 73 and are therefore not sustainable. The relevant portions of the order imposing such liability are set aside. However, the Court preserved the rights of the tax authorities to initiate fresh proceedings in accordance with law, ensuring adherence to procedural safeguards. The period between the date of the impugned order and the date of disposal of the writ petition is excluded for limitation purposes for any fresh proceedings.

Significant holdings include the following verbatim reasoning by the Court: "... since it would appear from the materials on record that no show cause in relation to fastening of liability on assessable value of the outward supply on inward receipt of taxable goods was made, the aforesaid determination and/or fastening liability ... appears to be beyond the show cause ... and ... cannot be sustained and the same are accordingly set aside."

The core principle established is the strict adherence to the scope of the show cause notice under Section 73 of the GST Act, mandating that any liability imposed must be clearly indicated in the notice to satisfy principles of natural justice and statutory compliance. The Court reaffirmed that procedural fairness is paramount and that orders imposing tax liability beyond the notice are liable to be quashed, though fresh proceedings may be initiated afresh with proper notice.

Final determinations on each issue are: (1) The tax liability imposed on the assessable value of outward supplies on inward receipt of taxable goods from Narmada Gelatines Ltd. and Alivira Animal Health Limited is set aside for being beyond the show cause notice; (2) The liability on undisclosed taxable supplies bearing HSN 2306 is also set aside on the same ground; (3) The reversal of ITC as indicated in the show cause notice remains unaffected; and (4) The authorities retain the right to initiate fresh proceedings compliant with legal requirements.