Prima Facie Satisfaction Sufficient to Invoke Section 74 of CGST Act: Madras High Court Rules in Fastenex Case

Overview

The Madras High Court has delivered a significant ruling addressing a fundamental question of GST law — whether the Proper Officer must conclusively establish fraud before issuing a show cause notice under Section 74 of the Central Goods and Services Tax Act, 2017 ("CGST Act"). In a batch of nearly 250 writ petitions, the Court ruled decisively that only a prima facie satisfaction is required at the threshold stage, and conclusive proof of fraud, wilful misstatement, or suppression of facts is not a prerequisite for initiating proceedings under Section 74 of the CGST Act.

Case Background: Fastenex Private Limited & Ors. v. State Tax Officer & Ors.

Facts of the Case

M/s. Fastenex Private Limited ("the Petitioner") was subjected to an inspection conducted by the Intelligence Wing of the State GST Department on September 13, 2024 under Section 67 of the Tamil Nadu Goods and Services Tax Act ("TNGST Act"). The inspection revealed multiple deficiencies, including:

  • The Registration Certificate was not displayed at a prominent place
  • Books of accounts were not properly maintained and original purchase invoices were not produced
  • The staff did not co-operate during inspection
  • Separate financial statements for the second plant were not furnished
  • The Petitioner had classified and paid tax on its goods at the rate of 18% instead of 28% applicable to automotive parts

Following these findings, the State Tax Officer ("the Respondent") issued Intimations in Form GST DRC-01A dated September 18, 2024 under Rule 142(1A) of the Tamil Nadu Goods and Services Tax Rules, 2017, covering Financial Years 2021-22 to 2024-25.

The Petitioner filed a reply dated October 03, 2024 in response to these intimations. The Respondent, not being satisfied with the reply, proceeded to issue Show Cause Notices in Form GST DRC-01 dated October 15, 2024 ("the Impugned SCNs") under Section 74 of the TNGST Act, proposing an aggregate demand of approximately ₹18.43 crores across the relevant tax periods.

Petitioner's Contentions

The Petitioner challenged the Impugned SCNs by way of writ petitions on two primary grounds:

  1. That the Impugned SCNs suffered from pre-determination of the issue
  2. That proceedings under Section 74 of the CGST Act cannot be initiated unless the foundational/jurisdictional facts of fraud, wilful misstatement or suppression of facts are first conclusively established by the Proper Officer

Reliance was placed on the judgments of the Hon'ble Supreme Court in Oryx Fisheries Private Limited v. Union of India [(2010) 13 SCC 427] and Siemens Limited v. State of Maharashtra [(2006) 12 SCC 33].

Revenue's Position

The Revenue countered that the expression "where it appears" employed in Sections 73 and 74 of the CGST Act demands only a prima facie satisfaction of the Proper Officer. The correctness of the underlying allegations, the Revenue argued, is a matter to be determined through the adjudication process after considering the assessee's reply.

Whether the Proper Officer is required to conclusively establish fraud, wilful misstatement or suppression of facts before invoking Section 74 of the CGST Act, or whether a prima facie satisfaction based on the expression "where it appears" is sufficient to issue a show cause notice under Section 74 of the CGST Act?

Key Holdings of the Madras High Court

The Hon'ble Madras High Court in W.P. Nos. 35967, 35970, 35974 and 35976 of 2024 & Ors. rendered the following determinations:

1. The "Where It Appears" Standard — A Consciously Lower Threshold

The Court observed that the phrase "where it appears" occurring in Sections 73 and 74 of the CGST Act consciously prescribes a lower jurisdictional threshold as compared to Section 11A of the Central Excise Act, 1944, Section 28 of the Customs Act, 1962 and Section 73 of the Finance Act, 1994, under which a notice invoking the extended period could be issued only on the basis of definite information of non-payment or short-payment of duty/tax.