Failure to consider Reply on Alleged Circular Trading and RCM: Madras HC sets aside GST Demand Order [Read Order]

The Madras High Court has quashed a demand order issued by the State Tax Officer ( STO ) to the petitioner in a case where the department failed to consider the petitioner's reply on allegations of circular trading and non-payment of Reverse Charge Mechanism ( RCM ) charges.

The writ petition, filed by Tvl. Urayur Cotton Company, challenged a demand order issued by the State Tax Officer, Pollachi ( West ) Assessment Circle. The demand order arises from a show cause notice received by the petitioner.

The first defect related to alleged circular trading by the petitioner and the consequential unlawful availment of Input Tax Credit (ITC). The second issue is related to the payment of professional charges on a reverse charge mechanism basis.

The petitioner filed a reply, contesting the allegations. The petitioner asserted that the management of the petitioner and M/s. Santhanalakshmi Mills India LLP ( Santhanalakshmi Mills ) is not common and provided particulars of the partners in both firms.

They further stated that the common premise is specified as an additional place of business in the petitioner's registration certificate. Copies of the rental agreement and registration certificate were included with the reply.

The petitioner explained that a sum of Rs.2,50,000/- pertains to the TNVAT period and a sum of Rs.5,85,000/- related to the IGST tax invoice. It was claimed that the remaining liability under the reverse charge mechanism was Rs.4,18,000/- and that this amount was discharged.

S.Ramanathan, counsel for the petitioner, argued that the tax proposal relating to defect no.1 was confirmed solely on the ground that the two entities use a common place of business without taking into account the reply of the petitioner or the documents annexed thereto. Similarly, as regards professional charges, he submitted that the reply was totally disregarded and the total tax proposal value of Rs.12,53,000/- was confirmed.

Justice Senthilkumar Ramamoorthy observed that “as regards defect no.1, the petitioner asserted that the two entities are not under the same management. Particulars of partners of Santhanalakshmi Mills are set out. A copy of the rent agreement and registration certificate of both Urayur Cotton Company and Santhanalakshmi Mills appears to have been enclosed with the reply.” The court found that the reply and documents annexed thereto had not been taken into consideration.

“As regards professional charges, the petitioner stated that reverse charge mechanism liability was limited to Rs.4,18,000/- and that this amount was paid. This reply was also completely disregarded in the impugned order”, the bench added.

Consequently, the court set aside the impugned order and remanded the matter for reconsideration. The petitioner was permitted to submit additional documents within two weeks of receiving the court order. The respondent was directed to provide a reasonable opportunity to the petitioner for a personal hearing before issuing a fresh order within three months of receiving any additional documents.

To Read the full text of the Order CLICK HERE

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