Supreme Court declines interference in fraudulent ITC dispute, directs assessee to pursue GST appeal

Background of the dispute

The controversy arises from proceedings initiated against CL International & Anr. based on intelligence gathered by the Directorate General of Goods and Services Tax Intelligence (DGGI). The DGGI alleged large-scale fraudulent availment of Input Tax Credit (ITC) by using fake invoices and sham transactions without any actual movement or supply of goods.

The assessee challenged:

  • an Order-in-Original dated 31 January 2025 passed by the Commissioner, Central Tax (Delhi West); and
  • a Show Cause Notice (SCN) dated 2 August 2024,

by way of a writ petition under Article 226 of the Constitution before the Delhi High Court.

The Department’s case was that several connected entities, including C.L. Products India Private Limited and other concerns, were found to be non-existent or non-functional. On scrutiny of registration particulars, returns, and related data, the authorities concluded that these entities were bogus and that the ITC claimed on the basis of transactions with them was inadmissible. Searches had also been carried out as part of the investigation.

Assessee’s submissions before the High Court

In the writ proceedings, the assessee raised multiple procedural and substantive grievances, including:

  • Non-supply of Relied Upon Documents (RUDs): It was argued that documents that formed the basis of the SCN and the adjudication were not furnished to the assessee.
  • Failure to return non-RUDs: The assessee complained that documents which were not treated as relied upon (non-RUDs) had not been returned.
  • Non-consideration of reply: Although a detailed reply to the SCN had been filed and was even reproduced in the Order-in-Original, the assessee contended that the Adjudicating Authority failed to apply its mind to the submissions and evidence placed on record.

The assessee therefore requested that the High Court exercise its writ jurisdiction to quash the Order-in-Original and the SCN on the ground of violation of principles of natural justice and arbitrary adjudication.

High Court’s approach: writ vs statutory appeal

The Delhi High Court declined to entertain the writ petition, emphasizing that the dispute involved a dense and complicated factual matrix. The Court underscored that the matter required:

  • examination of multiple interconnected entities,
  • verification of promoters, directors, and addresses,
  • analysis of layers of transactions and linkages, and
  • review of voluminous records gathered during investigation.

Complex factual questions in fake ITC matters

The High Court reiterated its consistent position in cases of alleged fraudulent ITC that writ jurisdiction should not ordinarily be invoked where:

  • there are detailed factual controversies,
  • large-scale evidence has been collected by investigative agencies, and
  • a thorough fact-finding exercise is essential.

The Court highlighted that fake ITC allegations typically involve tracing transactions through various entities, evaluating whether entities are genuine, examining documentary trails, and determining whether there was any actual supply of goods or services. Such issues, in the Court’s view, are best addressed by the statutory appellate forums rather than through a writ petition under Article 226.

Importance and vulnerability of ITC under GST

The High Court acknowledged that ITC is a crucial pillar of the GST framework and a key facilitation mechanism under Section 16 of the CGST Act.