Coercive Action Stayed in ITC Fraud Case Due to Pending Supreme Court Challenge on Underlying Circular.

Coercive Action Stayed in ITC Fraud Case Due to Pending Supreme Court Challenge on Underlying Circular.

Issue:

Whether a show cause notice and adjudication order based on a specific GST circular should lead to coercive recovery action, when the validity of that circular is under challenge before the Supreme Court.

Facts:

A show cause notice and subsequent adjudication order were issued to the assessee, alleging tax or ITC involvement in fraud and suppression of facts (under Section 74 of the CGST/UPGST Act, 2017) based on Circular No. 80/54/2018-GST, dated December 31, 2018. The assessee submitted that this circular had been set aside by a High Court in another matter, and a Special Leave Petition (SLP) challenging that High Court decision (and thus, implicitly, the validity of the circular) was pending before the Supreme Court in Pearl City Marine Products (P.) Ltd. v. Union of India [Special Leave Petition (Civil) No. 5573 of 2024].

Decision:

Partly in favor of the assessee: The court noted that the circular, which formed the very basis for the show cause notice and the adjudication order, was indeed pending consideration before the Supreme Court. The court also observed that in similar matters, directions had been given not to take any coercive steps. In light of this, the court directed that the matter be listed, counter-affidavits be filed, and in the meantime, no coercive action was to be taken against the assessee for recovery pursuant to the impugned order.

Key Takeaways:

• Impact of Supreme Court Pendency on Subordinate Matters: When a foundational legal instrument (like a Circular) underlying a tax demand is under challenge before the Supreme Court, lower courts or authorities generally adopt a cautious approach. While they may not outright quash the proceedings (as the Circular’s validity is still in question), they often grant interim protection, such as staying coercive recovery.
• Precedence and Consistency: The court’s decision to stay coercive action is influenced by the fact that similar directions were issued in other analogous cases where the same circular was under dispute. This reflects a desire for consistency in the application of law, especially when higher judicial pronouncements are awaited.
• “Partly in Favour of Assessee” Significance: The decision is “partly in favour of the assessee” because the demand order itself was not quashed or set aside on merits. Instead, the court provided crucial interim relief by preventing coercive recovery, allowing the assessee to await the Supreme Court’s final decision on the circular’s validity. The proceedings are effectively put on hold for recovery purposes.
• Legal Status of Circulars: Circulars are administrative instructions issued by the Board for uniform application of the law. While binding on revenue authorities, they cannot override statutory provisions. If a High Court sets aside a circular, its legal validity is questionable, and if challenged further in the Supreme Court, the outcome of that challenge will have a widespread impact on all similar cases.
• Section 74 (Fraud, Suppression, etc.): Demands under Section 74 (for tax or ITC involving fraud, willful misstatement, or suppression of facts) carry a longer limitation period and higher penalties. However, even in such cases, if the very basis of the demand (like a circular dictating classification or taxability) is legally challenged and pending before the apex court, interim protection against coercive action may be granted.