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[Delhi HC] S. 83 of the CGST Act Cannot Be Invoked to Secure the Revenue of Another Taxable Person

Introduction

In the case of Zhudao Infotech Private Ltd. v. Principal Additional Director General[i], the DGGI passed an order for the provisional attachment of the bank account of Zhudao Infotech Private Limited (‘ZIPL’) under s. 83 of the Central Goods & Services Tax Act, 2017 (‘CGST Act’), to secure the revenue of another taxable person, i.e., the merchants using ZIPL’s platform were found to be fake. In response, ZIPL filed a writ petition under a. 226/227 of the Constitution of India, challenging the impugned attachment orders issued by the DGGI. The High Court of Delhi (‘Court’) held in favour of ZIPL stating that s. 83 of the CGST Act cannot be invoked to secure the revenue of another taxable person.

Brief Facts

  • ZIPL operates as a payment aggregator platform, facilitating online transactions for various merchants.

  • DGGI searched ZIPL’s premises and directors. The order attaching the current account and Escrow/ Nodal account of ZIPL was passed.

  • ZIPL raised objections under r. 159(5) of the Central Goods & Services Tax Rules, 2017 (‘CGST Rules’), seeking to unfreeze attached bank accounts. The objection was rejected by the DGGI, stating that it was not in the prescribed format.

  • Aggrieved by the order, ZIPL approached the Court and filed a writ petition to set aside the order. The Court directed DGGI to pass a speaking order on objections within a period of two weeks.

  • The DGGI scheduled a personal hearing for ZIPL regarding payments from an Escrow/Nodal account. ZIPL provided details for 106 merchants, but some funds remained unaccounted for. Funds linked to verified merchants were approved for release, with instructions for ZIPL and Yes Bank to notify recipient banks or seek an NOC before transferring funds. Additional verification was required for funds associated with non-existent merchants or those with discrepancies. ZIPL’s objections under r. 159(5) of the CGST Rules were rejected.

  • ZIPL filed a petition under Articles 226/227 of the Constitution of India, challenging the orders that attached its bank accounts under s. 83 of the CGST Act and the order that rejected its objection raised under r. 159(5) of the CGST Rules.

The Court’s Observation

  • The DGGI filed an affidavit justifying their actions of attaching ZIPL’s bank accounts based on allegations of regulatory violations and illegal activities associated with ZIPL’s operations. They cited ongoing investigations revealing irregularities in ZIPL’s application process with the RBI and potential contraventions of FEMA.

  • However, the Court emphasised the scope of the present petition, which is limited to determining whether the impugned orders were in accordance with s. 83 of the CGST Act.

  • The learned counsel for the DGGI acknowledged that there was no tangible evidence against ZIPL regarding its CGST liability. The main reason for attaching ZIPL’s accounts was to secure assets related to the merchants on its platform.

  • The Court ruled favouring ZIPL, setting aside the impugned orders.

  • The Court determined that the attachment of ZIPL’s assets was not justified under s. 83 of the CGST Act, as there were no issues regarding ZIPL’s liability under the Act. The Court emphasized that the provisions of s. 83 could only be invoked to attach the assets of a taxable person, not to secure the revenue of another taxable person.

Conclusion

The Court analysed s. 83 of the CGST Act and correctly came to the observation that the provision could not be invoked to attach the assets of a taxable person, such as ZIPL, for the purpose of securing the revenue of another taxable person, in this case, the merchants using ZIPL’s platform. The Court, therefore, held that the actions of the DGGI were beyond the scope of s. 83, as there was no evidence of CGST liability on the part of ZIPL itself. Consequently, the court ruled in favour of ZIPL, setting aside the impugned orders for the provisional attachment of its bank accounts.





End Note

[i] W.P.(C) 3428/2023 dated 22.05.2023.





Authored by Nitish Solanki, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinion.

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