Section 74(1) of the Central Goods and Services Tax Act, 2017 states that if the proper officer suspects non-payment, short payment, erroneous refund, or wrongful availing/utilization of input tax credit due to fraud, willful misstatement, or suppression of facts to evade tax, they must serve a notice to the person liable for the unpaid tax or erroneous refund.
The notice requires the person to explain why they should not pay the certain amount mentioned in the notice, along with applicable interest under Section 50 and a penalty equal to the tax mentioned.
Hence, Section 74(1) can be invoked solely when tax non-payment is a result of fraud or willful misstatement/suppression of facts to evade tax.
In the case of C.C., C.E. & S.T. – Bangalore (Adjudication) Etc. Vs. M/s Northern Operating Systems Pvt. Ltd. – 2022(5) TMI 967 – Supreme Court, (NOS case for short) the Supreme Court examined the nature of secondment of employees by overseas companies and its implications on service tax.
| Case Title | C.C., C.E. & S.T. – Bangalore (Adjudication) Etc. Vs. M/s Northern Operating Systems Pvt. Ltd. |
| Citation | Civil Appeal Nos.2289-2293/2021 |
| Date | 19.05.2022 |
| Counsel For Appellant | Mr. Balbir Singh, ASG, Mr. Akshay Amritanshu, Adv. Ms. Swati Ghildiyal, Adv. Mr. Divyansh H. Rathi, Adv. Mr. Shyam Gopal, Adv. Ms. Preeti Rani, Adv. Mr. Mukesh Kumar Maroria, AOR |
| Counsel For Respondent | Mr. V. Sridharan, Sr. Adv. Mr. Ravi Raghavan, Adv. Mr. Aditya Bhattacharya, Adv. Ms. Mounica Kasturi, Adv. Ms. Apeksha Mehta, Adv. Ms. Sudeshna Banerjee, Adv. Ms. Charanya Lakshmikumaran, AOR |
| Supreme Court | Read Order |
The court considered various factors, such as the agreement between NOS and overseas group companies. The Supreme Court concluded that the secondment of employees from the overseas group company to NOS was determined as a taxable service of ‘manpower supply’ and was subject to Service Tax.
The concept of secondment is not limited to Service Tax and the question of taxability in the context of GST may also come into play. The Supreme Court stated the need for a thorough analysis based on the specific features of each arrangement, rather than relying on a single test.
The Board received numerous representations from taxpayers expressing concerns about field formations initiating proceedings for alleged GST evasion related to secondment under Section 74(1) of the Act, following a Supreme Court judgment.
The industry alleged that field formations were mechanically invoking the extended period of limitation in these cases.
In the aforementioned judgment, the Supreme Court examined the invocation of the extended period of limitation by the Department. The revenue argued that the assessee had willfully suppressed information.
The Supreme Court referred to its own judgment in the case of M/s. Uniworth Textiles Ltd. Vs. Commissioner of Central Excise, Raipur – 2013 (1) TMI 616 – Supreme Court, where it held that the mere non-payment of duties does not necessarily indicate collusion, willful misstatement, or suppression of facts.
| Case Title | M/s. Uniworth Textiles Ltd. Vs. Commissioner of Central Excise |
| Citation | CIVIL APPEAL NO. 6060 OF 2003 |
| Supreme Court | Read Order |
Considering the numerous representations received, the Board examined the case. The Board noted that the Supreme Court, in its judgment, took into account various factors such as the agreement between NOS and overseas group companies.
The court determined that the secondment of employees from the overseas group company to NOS was determined as a taxable service of ‘manpower supply’ and was subject to Service Tax.
It is important to recognize that secondment as a practice is not limited to Service Tax, and the question of the taxability of secondment may also arise in the context of GST.
The Board also leaned on the Supreme Court’s ruling in the case of COMMISSIONER OF CENTRAL EXCISE, MUMBAI VERSUS M/S FIAT INDIA PVT LTD & ANR – 2012 (8) TMI 791 – SUPREME COURT. Here, the Supreme Court emphasized that each case hinges on its unique set of facts; mere similarity between cases isn’t sufficient as a single crucial detail can completely change the scenario.
| Case Title | Commnr. of Central Excise Versus M/s. Fiat India (P) Ltd. & ANR. |
| Citation | CIVIL APPEAL NO(s). 1648-1649 OF 2004 |
| Date | 29.08.2012 |
| Counsel For Appellant | Mr.B.Bhattacharya, ASG. Mr.Ashok Bhan, Sr.Adv. Mr.Rahul Kaushik, Adv. Mr.K.Swami, Adv. Mr.Krishna Kumar, Adv. Mr.Ajay Singh, Adv. Mr.Judy James, Adv. for Mr. B. Krishna Prasad,Adv. |
| Counsel For Respondent | Mr.Joseph Vellapally, Sr.Adv. Mr.Tarun Gulati, Adv. Mr.Sparsh Bhargava, Adv. Mr.Rohan Batra, Adv. For Mr. S. Hariharan, Adv. Mr. V.Lakshmi Kumaran, Adv. Mr.Alok Yadav, Adv. Mr.Krishna Mohan K.Menon, Adv. For Mr. Rajesh Kumar, Adv. |
| Supreme Court | Read Order |
The Court cautioned against the inclination to match one case with another, quoting Cardozo, and urged against deciding cases solely based on apparent similarities. Hence, in determining the alignment of a case, a broad resemblance to another case holds no decisive value.
The Board noted various possible setups regarding the secondment of employees from an overseas group company to an Indian entity. Each of these arrangements could result in different tax implications, contingent upon the specific details within the contract and accompanying conditions.
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Consequently, the Board emphasized that the Supreme Court’s decision in the NOS case shouldn’t be mechanically applied across the board. It stressed the necessity for individual scrutiny in each instance, considering the unique factual background, including the contractual terms between overseas and Indian entities.
This careful examination is crucial to ascertain the taxation aspect or its scope under GST and to appropriately apply the principles outlined in the Supreme Court’s NOS case judgment.
The Board scrutinized Section 74(1) of the Act and concluded that its invocation is applicable solely in situations where there exists evidence of fraud, intentional misrepresentation, or deliberate concealment of facts by the taxpayer to evade tax.
This section cannot be triggered solely due to non-payment of GST unless there is a specific indication of fraud, willful misrepresentation, or the intentional hiding of facts to evade tax.
Only when investigations reveal substantial evidence of such misconduct by the taxpayer can Section 74(1) of the Act be employed to issue a show cause notice. Additionally, any such evidence should form an integral part of the show cause notice itself.
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The Board circular on 13.12.2023 recommended the field formations for acknowledging at the time of investigating these cases and issuing the show cause notices.