GST DRC-13 Cannot be issued against Independent Company Merely Due to Common Director: Karnataka HC orders Refund with Interest [Read Order]

The Karnataka High Court has ruled that demand cannot be raised against an independent or third party company merely on grounds that the taxpayer company and the third party company have common directors.

JusticeS. R. Krishna Kumar clarified that without being a garnishee, a third party entity cannot be held liable for the GST dues.

M/s Ramms India Private Limited filed a petition through its Authorised Representative Gautam Chowdhury before the Karnataka High Court seeking to quash the Form GST DRC-13 and to refund an amount of Rs. 24.73 lakhs which was recovered by the department from the petitioner.

The notice means to recover the dues from the Petitioner’s bank account even though the original show cause notice and adjudication order under Section 73 of the GST Act were issued against Xylem Resource Management Private Limited (XRMPL), a separate company.

According to the Petitioner’s counsel, Adv. Lakshmi Menon they are neither the taxable person nor the garnishee of the defaulting company. The sole link between the two companies was the common director. And the same cannot invoke the garnishee proceedings.

However the state defended the recovery by contending that the presence of a common director empowers to initiate the garnishee proceedings.

The High Court rejected this contention. It observed that both companies were independent juristic entities, incorporated separately under the Companies Act, and liable to be assessed and proceeded against independently.

The Court held that the existence of a common director does not dilute corporate separateness, nor does it authorise the tax department to recover dues of one company from another.

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“Merely because Gautam Chowdhury happens to be the Director of both petitioner-Company and XRMPL, the said circumstance could not have been made basis to seek recovery of dues from the petitioner-Company by purporting to lift the corporate veil, which is impermissible in law” said the high court.

In the case of SJ Prime Corporation Pvt. Ltd., the court noted that the similar situation has been dealt by the Karnataka High Court itself. In this case, the high court ruled that issuing DRC 13 to block the bank is illegal. Therefore, the high court granted the refund.

Similarly, considering the terms taken by the court in the SJ Prime Corporation Pvt. Ltd case, in the instinct case, the bench directed the GST department to refund the amount recovered with interest.

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