A writ petition challenging the invocation of Section 74 of the Central Goods and Services Tax (CGST) Act, 2017—which empowers tax authorities to raise demands of tax, interest, and penalty in cases involving fraud or suppression—has come up before the Supreme Court in a significant challenge to the scope of GST enforcement powers.
The petition questions whether Section 74 can be applied in cases where the tax department itself alleges that no taxable supply of goods or services ever took place.
Bench Issues Notice, ASG to Assist Court
A Division Bench comprising Justice Pamidighantam Sri Narasimha and Justice Vijay Bishnoi took up the matter on January 30. The Bench directed the petitioners to serve a copy of the writ petition to the office of the Additional Solicitor General (ASG) and observed that the ASG would assist the Court at the next hearing. The case has been listed for hearing in the following week.
Petition Filed by Everflow Petrofils and Connected Parties
The petition has been filed by Everflow Petrofils Ltd., along with several connected entities and individuals. The petitioners have been issued multiple show cause notices and adjudication orders by GST authorities across different commissionerates.
These proceedings stem from allegations of circular trading and fake invoicing, where the department claims that invoices were raised and input tax credit (ITC) was availed without any actual movement or supply of goods.
Core Argument: No Supply, No Tax, No Section 74
At the heart of the challenge is a jurisdictional objection. According to the petition, once the department proceeds on the allegation that the invoices were “fake” and that no supply ever occurred, the very foundation for invoking Section 74 collapses.
The plea argues that Section 74 presupposes the existence of a taxable event. Where the department’s own case is that there was no supply, the charging provision under Section 9 of the CGST Act is not attracted, rendering the entire proceedings without jurisdiction.
“This goes to the root of the matter,” the petition states, adding that the absence of a taxable supply vitiates the proceedings in their entirety.
Reliance on CBIC Circular of July 6, 2022
The petitioners have placed strong reliance on a Central Board of Indirect Taxes and Customs (CBIC) circular dated July 6, 2022. The circular explicitly clarifies that cases involving fake invoicing without actual supply should not be proceeded with under Sections 73 or 74 of the CGST Act.
Instead, the circular mandates that where permissible, authorities may initiate independent penal action under Section 122, following the procedure laid down in Section 127.
The plea asserts that the circular is binding on GST officers and operates as a clear limitation on their jurisdiction. Despite this, the petition alleges that authorities across multiple commissionerates continued to invoke Section 74, raised demands of tax, interest, and penalty, and proceeded to adjudicate the matter.
Allegation of Arbitrary and Colourable Exercise of Power
According to the petition, the continued invocation of Section 74 in no-supply cases amounts to an arbitrary and unlawful assumption of authority. The action has been described as a “colourable exercise of jurisdiction”, resulting in the levy of tax and penalty without authority of law.
Such action, the petition claims, violates Article 14 (equality before law) and Article 265 (no tax except by authority of law) of the Constitution.
Inconsistent Decisions Across Commissionerates
The petition also highlights inconsistent outcomes across different GST commissionerates in respect of the same alleged transactions. While some authorities dropped tax demands under Section 74, others confirmed them.
This inconsistency, the petition argues, has resulted in uncertainty, arbitrariness, and unequal treatment of similarly placed taxpayers.
Challenge to Retrospective Application of Section 122(1A)
Apart from challenging proceedings under Section 74, the petitioners have also sought a declaration that Section 122(1A) of the CGST Act cannot be applied retrospectively.
Section 122(1A), which imposes penalties on persons who retain the benefit of tax evasion or aid and abet such conduct, came into force only on January 1, 2021. The petition contends that it cannot be invoked for assessment years between 2017 and 2020.
Objection to Clubbing of Multiple Show Cause Notices
The petition further challenges the practice of clubbing multiple show cause notices into a single adjudication. According to the plea, the notices pertain to different assessment years, involve distinct tax periods, limitation timelines, stages of adjudication, and varying tax demands and penalties.
Their consolidation, the petition argues, is arbitrary, illegal, and unsustainable in law, causing grave prejudice and undue hardship to the petitioners and vitiating the proceedings.
Reliefs Sought
The petitioners have urged the Supreme Court to quash the show cause notices and adjudication orders issued under Section 74 in no-supply cases; restrain tax department from initiating or continuing similar proceedings; bar the retrospective application of Section 122(1A); and prevent the consolidation of distinct proceedings across multiple assessment years
Appearance
The petitioners are represented by Advocate Sriram Parakkat, along with Advocate B. Shravanth Shanker (AOR).
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