Background:

One of the common woes of an assessee facing an investigation, under the Central Goods and Service Tax Act, 2017 (‘CGST Act’) is that they are often compelled to make payments during the pendency of the investigation, mostly only to buy peace temporarily. A few instances have come to light where assessees have made payments under supposed coercion under Section 74(5) of the CGST Act, in the absence of any adjudication of liability or issuance of show cause notice. Recently, a division bench of the Karnataka High Court in Union of India v. Bundl Technologies Pvt. Ltd. [2022 (3) TMI 625 Kar.] had the occasion to consider a situation where the assessee claimed refund of the amount paid involuntarily during investigation.

Facts of the Case:

M/s. Bundl Technologies Pvt Ltd (‘Assessee’) operates an e-commerce platform under the brand name of ‘Swiggy’ through which consumers can place orders for delivery of food from nearby restaurants. The assessee’s delivery module involved pickup and delivery partners (PDP) directly engaged by the Company as well as temporary delivery executives (‘Temp Des’) engaged through third party service providers. The Assessee procured Temp DEs from one such third-party service provider against valid tax invoices and upon payment of GST and later availed input tax credit (‘ITC’) in terms of Section 16 of the CGST Act.

Initiation of investigation:

An investigation was initiated by the Director General of Goods and Services Tax Intelligence, Hyderabad Zonal Unit (‘DGGI’) on the ground that the third-party service provider was a non-existent entity and consequently, the ITC availed by the Assesses and the GST component paid by it against the invoices raised by the third-party service provider were fraudulent.

During the investigation, which was spread over three days, the DGGI Officers issued spot summons to the Directors of the Assessee and recorded their statements. A sum of INR 15 Crores was deposited by the Assessee at about 4.00 a.m.  Thereafter, the Directors were summoned to appear before the DGGI office, where they were retained until early next day. The Assessee made a further payment of INR 12 Crore at this stage. Subsequently, the Assessee filed an application for refund of the amount deposited during investigation. Since the application failed to evoke any response, the Assessee was constrained to file a Writ Petition which was ruled in favour of the Assessee, against which the Department preferred an intra-court appeal.

Findings of the Court:

The principal issue for consideration before the Division Bench of the Hon’ble Karnataka High Court was whether the payments made by the Assessee were voluntary payments made under Section 74(5) of the CGST Act or involuntary payments made under coercion and threat of arrest. In this regard the Court placed reliance on the interim order passed by the division bench of the Hon’ble Gujarat High Court in Bhumi Associates v. Union of India [2021 (46) GSTL 36 (Guj)], where the Hon’ble Court had directed the CBIC to enforce the following guidelines:

1. No recovery in any mode should be made at the time of search / inspection proceedings under Section 67 of the CGST Act under any circumstances.
2. Even if the assessee comes forward to make voluntary payment by filing Form DRC 03, the assesee should be advised to file such Form DRC 03 on the next day after the end of search proceedings and after the officers of the visiting team have left the premises of the assessee.
3. Facility of filing complaint / grievance after the end of search proceedings should be made available to the assessee if the assessee was forced to make payment in any mode during the pendency of the search proceedings.
4. If complaint / grievance is filed by assessee and officer is found to have acted in defiance of the afore stated directions, then strict disciplinary action should be initiated against the concerned officer.

The Court observed that there was no material on record to suggest that the above guidelines were followed during the investigation. Further, the Hon’ble Court took cognizance of the fact that the payments were made at odd hours of 4 p.m. and 1 a.m. during the pendency of the investigation. Additionally, there was no communication in writing from the Assessee to the proper officer as contemplated under Section 74(5) of the CGST Act. On the contrary, the Assessee had clearly mentioned in its form GST DRC – 03 that the payments were made as a gesture of good will without prejudice to their rights and the same should not be regarded as an admission of liability. It was also observed that the Assessee has been regularly filing service tax returns. Considering the above findings, the Hon’ble Court held that the payments made by the Assessee were not voluntary and thus, they were entitled to a refund.

The Court further relied on Vodafone Essar South Ltd v. Union of India [2009 (237) ELT 35 (Bom)] to reiterate that an assessee should not be forced to pay any amount during investigation without any adjudication of liability.[1]

In the present case, it was held that the Department cannot retain the amount collected during investigations without a show cause notice having been issued.[2] It is reassuring that the Hon’ble Court emphasized on how statutory powers must be exercised reasonably and in good faith, and not with a view to instill fear in the mind of the taxpayers.

Contra ruling in Yasho Industries

The division bench of the Gujarat High Court, while considering a similar issue in Yasho Industries Ltd. v Union of India [2021 (54) GSTL 19 (Guj)], took a narrow view of the orders passed in Bhumi Associates (supra) and held that the guidelines would be applicable only in a search and seizure proceedings under Section 67 of the CGST Act. It further took note that the Form GST DRC-03 filed by the assessee mentioned the cause of payment as ‘voluntary’ and the reasons column in the form had recorded ‘enquiry in connection with the incorrect claim of double benefit, that is exemption of IGST, Advance Authorization and Refund of IGST: under protest’. The Court held that even though the reasons recorded ‘under protest’ there was no complaint made by the petitioner before the grievance cell or before any authority that the payment was made under duress. Consequently, the payment was held to be voluntary in that case.

Conclusion:

The GST authorities are vested with vast powers under the CGST Act in respect of search, seizure and investigations. While it is necessary for the assesses to co-operate with the authorities, it is imperative for one to also adopt a balanced strategy so as to mitigate liability without foreclosing any legal rights. From the above jurisprudence, an assessee may bear the following points in mind while facing a search and seizure proceeding under section 67 of the CGST Act:

• There is no obligation to pay any amounts during the pendency of an investigation without any adjudication of liability.
• Payments made at odd hours during inquiry and investigation could be considered as a factor in inferring that the same was forced and involuntary.
• If any payment is made during investigation, it is imperative to record in the relevant returns that the same is made without admission of liability and without prejudice to the assessee’s rights.
• A prompt communication or complaint made to the grievance cell explicitly stating that the payment made was involuntary.
• Timely filing of refund application without laches is imperative to get a refund of the amount paid under coercion and duress.

As an added step, assessees may wield their right to seek legal representation at all stages, to seek copies of the statement recorded by the investigating officer(s) and to seek cross-examination of a statement. It is relevant for assessees to understand their rights relating to retraction of statements and redressal in extreme situations.

[The authors are Senior Associate and Associate, respectively, in Lakshmikumaran & Sridharan Attorneys, Chennai]

1. [1] Similar view taken in Makemytrip (India) Pvt. Ltd v. Union of India [2016 (44) STR481 (Del)]
2. [2] Relied on Century Knitters (India) Ltd. v. Union of India [2013 (293) ELT 504 (P&H)] and Concepts Global Impex v. Union of India [2019 (365) ELT 32 (P&H)].