Your GST Supplier is Fake – Are You Liable? This Case Could Save Your Business.

Introduction

The Arhaan Ferrous & Non-Ferrous Solutions Pvt. Ltd. vs. State of Andhra Pradesh GST Case study—whether authorities can penalize a bona fide purchaser for buying goods from a supplier they later find to be non-existent or fraudulent. This case sets a legal precedent on the extent of a buyer’s responsibility in verifying the legitimacy of a supplier and the applicability of Section 129 (detention of goods) and Section 130 (confiscation of goods) under the CGST Act, 2017.

Case Background:

Facts of the Case:

• 1st Petitioner: Arhaan Ferrous & Non-Ferrous Solutions Pvt. Ltd., a registered trader in iron scrap.
• 2nd Petitioner: Owner of the vehicle transporting the goods.
• 4th Respondent: Supplier from whom the 1st petitioner purchased iron scrap under a valid GST invoice.
• Transaction: The 1st petitioner resold the iron scrap to M/s Radha Smelters Pvt. Ltd., Medak, Telangana and arranged transportation through the 2nd petitioner.

Incident Leading to Legal Dispute:

• The tax authorities intercepted the goods at Auto Nagar, Vijayawada, during transit.
• The proper documents were present, including:
  • Tax Invoice
  • E-Way Bill
  • Weighment Slip
• Despite this, the GST authorities detained the goods and vehicle, alleging that:
  • The supplier (4th respondent) had no place of business in Vijayawada.
  • The authorities suspected the supplier to be a bogus/fake entity.
  • There were no purchase details supporting the origin of goods.

Government’s Actions:

• The authorities suspended the supplier’s GST registration on June 13, 2023, after an investigation found it to be a non-existent business.
• Authorities claimed that since the supplier was a fake entity, the buyer (petitioner) must establish the legitimacy of the transaction.

Petitioner’s Arguments:

• The 1st petitioner had conducted due diligence by verifying the supplier’s GSTIN on the GST portal before purchase.
• Proper tax invoices and bank transactions supported the transaction.
• Under GST law, authorities cannot hold a buyer responsible for the supplier’s fraudulent activities as long as the buyer has exercised reasonable care.
• The authorities did not follow the correct legal procedure before confiscating the goods:
  • The authorities did not issue any GST MOV-02 to MOV-09 notices before passing the confiscation order.
  • The action was against the supplier (4th respondent) and not the buyer.
  • Under Section 129, the authorities should have issued a notice to the petitioner before taking action.
• Denial of justice: The authorities had arbitrarily detained the goods and vehicle, causing commercial losses.

Key Legal Issues:

1. Can the GST department confiscate a genuine buyer’s goods if they later find the supplier to be fraudulent?
2. Should the authorities have initiated action under Section 129 (detention and penalty) before proceeding under Section 130 (confiscation)?
3. What level of due diligence must a buyer perform when dealing with a supplier?

Court’s Analysis and Judgment:

• Distinction Between Section 129(Detention of goods) and Section 130(confiscation). The court referred to previous judgments, including M/s Rajeev Traders v. Union of India (Karnataka High Court) and Synergy Fertichem Pvt. Ltd. v. State of Gujarat, which held that:
  • Section 129 governs the detention of goods in transit for tax violations and allows authorities to impose penalties.
  • Section 130 deals with confiscation, which is a more severe action, requiring proof of intent to evade tax.
  • Court’s ruling: The authorities cannot directly invoke Section 130 without first initiating action under Section 129.
• Verification of Supplier’s GST Registration is Sufficient Due Diligence
  • The petitioner verified the supplier’s GSTIN on the GST portal before purchasing goods.
  • The court ruled that buyers should verify the supplier’s GST registration but should not be required to investigate their entire business operations.
  • Court’s ruling: If the buyer has taken reasonable steps, they cannot be penalized for the supplier’s fraud.

• GST Authorities Must Initiate Proceedings Against the Correct Party
  • The confiscation order was issued against the supplier (4th respondent), but goods were taken from the petitioner.
  • The court found this approach legally incorrect because the 1st petitioner was the actual owner of the goods at the time of seizure.
  • The authorities should have issued a notice to the petitioner under Section 129 before taking action.
  • Court’s ruling: The authorities must initiate a separate action against the petitioner if they doubt the legitimacy of their purchase.

Final Verdict:

The High Court ruled in Favor of the petitioner and set aside the confiscation notices.
The GST department was directed to release the goods and vehicle upon:

• Deposit of 25% of the value of goods by the petitioner.
• Execution of personal security bonds for the remaining amount.
• The department was given the option to initiate fresh proceedings under Section 129 within two weeks if necessary.

Impact of the Judgment on Businesses:

• Relief for Genuine Buyers:
  • Businesses that follow due diligence (verifying GST registration, obtaining invoices, and making payments through banks) cannot be penalized for supplier fraud.
• Stricter Compliance for GST Authorities:
  • Authorities must follow due process and cannot confiscate goods arbitrarily under Section 130 without first taking action under Section 129.
• Protection for Legitimate Transactions:
  • This judgment ensures that taxpayers are not unfairly penalized for supplier fraud if they act in good faith.

Key Takeaways for Businesses Dealing Under GST:

• Always verify the GSTIN of suppliers on the GST portal before making purchases.
• Ensure transactions are backed by proper documentation, including tax invoices, E-Way Bills, and bank payments.
• In case of goods detention, demand that authorities follow due process and issue notices under Section 129 before taking action under Section 130.
• Businesses should challenge wrongful confiscation and seek legal recourse if authorities do not follow proper procedures.

Conclusion:

The Arhaan Ferrous & Non-Ferrous Solutions Pvt. Ltd. vs. State of Andhra Pradesh case establishes an important legal precedent in GST law, emphasizing that purchasers who follow due diligence should not face penalties for supplier fraud. The ruling protects businesses from arbitrary enforcement actions, ensuring that tax compliance is fair and legally sound. This case serves as a crucial reference for businesses dealing in the GST framework, emphasizing the importance of documentation and procedural compliance in taxation.

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This article is only a knowledge-sharing initiative and is based on the Relevant Provisions as applicable and as per the information existing at the time of the preparation. In no event, RMPS & Co. or the Author or any other persons be liable for any direct and indirect result from this Article or any inadvertent omission of the provisions, update, etc if any.

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