GST Penalty of Rs. 3731 Crores on an employee!
APRIL 17, 2024
By Vijay Kumar
MR. SHANTANU Sanjay Hundekari, Senior Tax Operations Manager of Maersk Line India Pvt. Ltd. ("MLIPL") had the singular distinction of receiving a Notice from the Directorate General of Goods and Service Tax Intelligence, dreadfully referred to as DGGI, to show cause as to why penalty amounting to 3731,00,38,326/- (yes, 3731 CRORES) should not be imposed upon him under Section 122(1A) of the CGST Act, 2017.
Assuming he gets a salary of one crore rupees per annum (which is most unlikely), that is his total salary for 3731 years! The charge was that his company, Maersk had evaded GST and he was liable to this small penalty.
If this is from a stand-up comedy show, perhaps you would go for a calculator to know the number of zeros in the astronomical demand, before starting to laugh. But this is reality.
There was no way Shantanu Sanjay Hundekari could pay this kind of money and so he approached the Bombay High Court. Mr. Harish Salve, the top lawyer of the country, no, the world appeared for him and submitted:
(i) The impugned show cause notice is wholly arbitrary and illegal, inasmuch as, in foisting on the petitioner a penalty of Rs.3,731 crores purportedly under section 122(1A) of the CGST Act, the basic ingredients of the said provision are not satisfied, as there was no material to the effect that primary benefit of the ITC was in any manner availed by the petitioner. The show cause notice is thus an abuse of the powers vested with the concerned officer, which is in fact designed to threaten and intimidate junior employees of the company, so that they do not assist the assessee in the proceedings initiated by the respondents.
(ii) None of the essential requirements under Section 122(1A) or under section 137 of CGST Act would stand attracted, as the petitioner is not a taxable person within the meaning of Section 2(107) of the CGST Act, who could be a person registered or liable to be registered under section 22 or 24 of the CGST Act.
(iii) The impugned show cause notice is not only an abuse of the process of law but it is violative of Articles 21, 14 and 19(1)(g) of the Constitution.
The question before the High Court was whether the invocation of the provisions of Section 122(1-A) of the CGST Act as also Section 137(1) and 137(2) would stand attracted in their applicability to the petitioner, so as to confer jurisdiction to issue the impugned show cause notice against the petitioner, who is merely an employee of MLIPL.
The Court observed: 2024-TIOL-518-HC-MUM-GST
1. A plain reading of section 122 clearly implies that it provides for levy of penalty for "certain offences" by taxable person.
2. It provides that any person (who would necessarily be a taxable person), retains the benefit of the transactions and at whose instance, such transaction is conducted, "shall be liable to a penalty of an amount equal to the tax evaded or input tax credit availed of or passed on". This necessarily implies that it applies to a taxable person.
3. Such person can only be a taxable person as defined under Section 2(107) of the CGST Act, who would be in a legal position, to retain the benefit of tax on the transaction covered and at whose instance, such transaction is conducted.
4. In the absence of these basic elements being present, any show cause notice of the nature as issued, would be rendered illegal, for want of jurisdiction as also would stand vitiated by patent non application of mind.
5. Thus, the designated officer invoking the said provision against the petitioner is an act wholly without jurisdiction.
6. A provision, which ex-facie is inapplicable to the petitioner who is an individual, has been invoked and applied in issuing the impugned show cause notice.
7. Section 137 concerns "Offences by Companies".
8. As to how Section 137 can form part of any invocation against the petitioner that too along with the provision of Section 122(1-A), qua the petitioner cannot be comprehended, this more particularly for the reason that the show cause notice is issued under section 74 of the CGST Act. Certainly Section 74 is not a penal provision, whereas Section 137 falls under Chapter XIX which provides for ‘offences and penalties'.
9. Thus, as to how such penal provision in Section 137 could be foisted against the petitioner, when the show cause notice is itself a demand cum show cause notice, is also quite intriguing, which in our opinion, also touches the very jurisdiction in issuance of such notice. This aspect is not explained by the respondents much less satisfactorily.
And the High Court held:
1. The basic jurisdictional requirements/ingredients are not attracted for issuance of the show cause notice under Section 74 of the CGST Act so as to inter alia invoke Section 122(1-A) and Section 137 against the petitioner.
2. Even otherwise, it is ill-conceivable to read and recognize into the provisions of Section 122 and Section 137, of the CGST Act any principle of vicarious liability being attracted.
3. The impugned show cause notice is rendered bad and illegal, deserving it to be quashed and set aside.
The High Court further observed:
1. It is highly unconscionable and disproportionate for the concerned officer of the Revenue to demand from the petitioner an amount of Rs.3731 crores.
2. The petitioner would not be incorrect in contending that the purpose of issuing the show cause notice to the petitioner who is merely an employee, was designed to threaten and pressurize the petitioner.
While allowing the petition, the High Court was compassionate and did not impose any cost on the Revenue.
As of now Mr. Shantanu Sanjay Hundekari can sleep peacefully assured that he does not owe Rs.3731 crores to the Government – that is if the Revenue does not appeal to the Supreme Court!
This is not exactly a new phenomenon unique to the GST era. I will take you to a case that happened more than twenty five years ago. Here are the details of this interesting story.
A show cause notice dated 14-10-1998 was issued to Mr. Z.U. Alvi, Dy. General Manager of BHEL requiring him to show cause why personal penalty to the extend permissible under Rule 209A of Central Excise Rules, 1944 should not be imposed on him. He submitted his objections to the notice. After overruling all his contentions, Commissioner Mr. Subhash Chander, by Order-in-Original dated 31-3-1999 imposed a personal penalty of Rs. 50 Crores under Rule 209A.
Can you imagine a personal penalty of Rs. 50 Crores on a PSU employee, twenty five years ago? The Commissioner had his reasons .
"As per Rule 209A of the Rules, the maximum penalty permissible is three times the value of such goods or five thousand rupees, whichever is greater. In the instant case the value of goods involved in the ten show cause notices referred to above is Rs. 22.67 Crores and so the maximum penalty that could be imposed on Shri Alvi in this case is Rs. 68 Crores. I know that a person working in a Public Sector Undertaking cannot afford to pay a huge amount of penalty, even then I am compelled to impose here a greater amount of penalty so that the law of the land may not be faulted by anybody in such a blatant manner as has been done by Shri Z.U. Alvi and be it known to the concerned authorities that it is their duty to follow the law of the land sincerely and need not follow the duty evasion/avoidance/deferrement modus operandies of this type."
What would have happened if he had to make a pre-deposit while filing an appeal against this order? Anyway, they were good olden days and he could reach to the Tribunal without a pre-deposit.
The Tribunal observed, (2002-TIOL-281-CESTAT-DEL)
This is a classic instance to show how an Officer entrusted with a quasi-judicial function can become crazy and cause untold miseries in blatant violation of law with no regards for the rule of law. According to us if such an Officer is entrusted with quasi-judicial duties, he will resort to arbitrary exercise of power which will compel the victims to approach higher tribunals for extricating them from the illegal orders. The predicament of such an Officer is quite evident from the fate of the appellant before us. This case on hand is a classic example of the vagaries of a Government servant who can misuse his powers. The Officer acted in an arbitrary and illegal manner in exercise of his so-called judicial powers.
We do not find any semblance of support even from any legal provision warranting the conclusion that has been arrived at by the Commissioner in the impugned order. Ld. DR could not place reliance on any provision of law in his attempt to justify the action of the Commissioner. We have no hesitation, therefore, in quashing the order under challenge.
Appeal is allowed. The impugned order is set aside in its entirety. A copy of this order will be sent to the Secretary (Finance), holding charge of Department of Revenue so that he may understand how his subordinates at the field are enforcing the law. A copy of this order will also be sent to the concerned Commissioner wherever he is posted.
Interestingly in this case, the penalty imposed on BHEL was Rs. 251. Yes 251 rupees on the company and 50 crores on the employee! You know what happened to the Commissioner? He got promoted as Chief Commissioner.
And what became of ZU Alvi? He became a lawyer and established a big practise in taxation and also became a professor in a National Law University. He doesn't talk much about this case and carries no grouse against the tax department. Why should he? After all, the department made him a leading lawyer!
I called up Mr. Alvi and informed him that his paltry record of Rs. 50 crores was broken by Shantanu Sanjay Hundekari who got a demand for Rs. 3731 crores. He already knew that his record of a quarter of a century is shattered!
Until next week
