Introduction:

In a significant judgment, the Allahabad High Court has clarified the independent applicability of penalty proceedings under Section 122 of the Central Goods and Services Tax (CGST) Act, 2017, even when proceedings under Section 74 have been dropped. This ruling came in the case concerning M/s Patanjali Ayurved Limited, where the court emphasised that the cessation of proceedings under Section 74 does not automatically nullify the penalty proceedings under Section 122.

Background of the Case:

M/s Patanjali Ayurved Limited operates three manufacturing units located in Haridwar (Uttarakhand), Sonipat (Haryana), and Ahmednagar (Maharashtra). These units, though registered in different locations, share the same Permanent Account Number (PAN) but have distinct Goods and Services Tax (GST) numbers. The company came under scrutiny when M/s S.G. Agro India Industry was suspected of tax liabilities exceeding ₹2 crores and wrongful utilisation of input tax credit (ITC). Investigations suggested that Patanjali was involved in circular trading, where invoices were generated without the actual supply of goods.

Consequently, show cause notices were issued under Sections 74 and 122 of the CGST Act and Section 20 of the Integrated Goods and Services Tax (IGST) Act, 2017, for the tax period from April 2018 to March 2022. Patanjali challenged these notices in the High Court, which granted interim protection and directed the company to respond to the notices. Eventually, proceedings under Section 74 were dropped for the Sonipat and Ahmednagar units, and the Haridwar unit was also exonerated. However, penalty proceedings under Section 122 continued for all units.

Arguments Presented:

Petitioner’s Arguments:

The counsel for Patanjali contended that once the proceedings under Section 74 were dropped, the penalty proceedings under Section 122 should also abate. They argued that Section 122 is intrinsically linked to Sections 73 and 74, and without an established tax liability, penalty proceedings cannot be sustained.

Respondent’s Arguments:

The respondents, representing the Union of India and others, argued that Section 122 outlines specific contraventions and associated penalties that are independent of the tax determination under Sections 73 and 74. They emphasised that the dropping of proceedings under Section 74 does not preclude the initiation or continuation of penalty proceedings under Section 122.

Court’s Analysis and Judgment:

The bench, comprising Justice Shekhar B. Saraf and Justice Vipin Chandra Dixit, delved into the nuances of the CGST Act. They noted that Section 74 deals with the determination of tax not paid or short paid due to fraud, willful misstatement, or suppression of facts. In contrast, Section 122 enumerates various offences and prescribes penalties for each, irrespective of the tax determination under Section 74.

The court highlighted that the CGST Act’s framework allows for penalty proceedings under Section 122 to be initiated independently. They observed that the offences listed under Section 122(1) encompass a range of contraventions, such as issuing invoices without supply of goods or services, availing ITC without actual receipt of goods or services, and others, which can attract penalties even if no tax liability is determined under Section 74.

Furthermore, the court referred to Explanation 1(ii) to Section 74, which states that the conclusion of proceedings against the main person under Sections 73 or 74 shall also conclude the proceedings against all persons liable to pay a penalty under Sections 122 and 125. However, the court clarified that this applies only when the proceedings under Sections 73 or 74 are concluded with a determination of tax liability. If such proceedings are dropped without any determination, the penalty proceedings under Section 122 can still proceed independently.

In light of these observations, the court dismissed the writ petition filed by Patanjali, affirming that the penalty proceedings under Section 122 were maintainable despite the dropping of proceedings under Section 74.

Conclusion:

This judgment underscores the independent nature of penalty proceedings under Section 122 of the CGST Act. It clarifies that even if tax determination proceedings under Section 74 are dropped, penalty proceedings for specific contraventions can continue. Taxpayers must recognise that compliance with GST provisions extends beyond mere tax payments and includes adherence to procedural and documentation requirements. The ruling serves as a reminder that violations of these provisions can attract penalties, irrespective of the outcome of tax liability determinations.