Margin of Error – A GST Case Study

Ms. Rakshitha gets her Board exam results, with a score of 24 marks in Physics. The whole family and the teachers were shell-shocked to see the marks. Based on her past performance and her expectation, she should have got at least, if not more, 85% marks. She applied for revaluation and a pleasant surprise was waiting for her. She secured 97% marks.

When you hear this story, what is your immediate reaction? “How can such an error take place” “Is it not negligence of the examiner? Shouldn’t he be punished for his irresponsibility?”

Here is another story – On 6^th January 2018, the Anti Evasion Department of GST visits the factory premises of M/s Metenere Limited at Noida for verification of the records. As the company had maintained some records at the factory premises and remaining records in their Head Office at Ghazipur, they could not exhibit all the records asked by the department in the factory premises. (However, this way of keeping records in Head Office is acceptable under GST Law). It is further stated by the company that all the records sought by the Officers were produced later on various dates starting from 16^th Jan 2018 to 31^st Jan 2018.

Despite production of records and documents, the GST department were of the opinion that the company was running the business without maintaining adequate records. Hence it seized stocks worth Rs.109 Crores and issued a Show Cause Notice (SCN) asking the company why they can’t be penalized for not maintaining the records/accounts related to the input tax credit, production, inward and outward supply of goods, output tax payable and paid, etc, which are mandatory to be maintained under Section 35(1) of the CGST Act 2017 at their principal place of business/additional place of business.

Aggrieved by the SCN, the company preferred a Writ petition before the High Court. The Court directed the department on 15^th March 2019 to decide the issue within 3 weeks.

Based on this direction, the department had passed an Order giving an option to the company to redeem (take back) the stocks by paying a redemption fine of Rs.12 Crores. In addition to this, it levied a penalty of Rs.19 Crores to the Company and Rs.50,000 to the Directors.

Again, the Company filed a Writ petition before the High Court against the above-said order.

The Court passed the judgment on 17^th December 2020, after extensive hearing of the case, arguments from both the sides as –

• for the sake of argument, that the documents were not maintained at the registered office or the other place of business, there is no finding to the effect that any supply was made with an intent “to evade payment of tax”
• there is nothing on record to establish that the petitioner did not account for any goods on which he is liable to pay tax
• It has not been established that there was any contravention of any provision or any Rules with an “intent to evade payment of tax”
• Thus, none of the ingredients which are required for confiscation existed in the present case and thus, the confiscation itself was wholly arbitrary and illegal.

“Thus, it is clear that the penalty imposable for the offenses specified here is Rs. 10,000/- or the “amount of tax evaded…….

I have no hesitation in holding that in the given facts and circumstances of the case for the violations alleged and established against the Petitioner, the maximum penalty that could be imposed upon the petitioner is Rs. 10,000/- “

A quick recap – The search happened on 6/1/2018 and the final order was passed on 17/12/2020; The initial demand was for Rs.30 Crores, finally Court ordered to collect Rs.10,000/-. Just imagine the damage caused to the Company during the 3 years period.

Originally, Rakshitha was awarded 24 marks, she got 97 after revaluation. During the process (original result to revaluation result) she missed admission to premier institutes. Just imagine the mental torture she underwent!

Everything is in Black and White, nothing else to add from my side.

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