GST Penalty Notices Sent Back for Fresh Hearing — Who Really Owes the Tax

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Case Name

K.J. Mathew v. State of Kerala & Others

Court Name: High Court of Kerala at Ernakulam

Case No.: WP(C) No. 1764 of 2020(U)

Decided on: 28th January 2020

Before: The Hon’ble Mr. Justice Alexander Thomas

Key Takeaways

1. Contractual shifting of GST liability is legally possible — If a contract clearly states that the service recipient (not the provider) will bear the GST, that arrangement can be legally valid, as supported by Supreme Court precedent.

2. Penalty notices under Section 122 of the State GST Act are not final orders — They are just notices at a preliminary stage. The petitioner had not even responded to them yet!

3. The court refused to quash the notices prematurely — Since the petitioner hadn’t filed written objections, the court felt it was too early to interfere.

4. A liquidator can be treated as a “dealer” under tax law — meaning the liquidator of HNL could potentially be held liable for GST obligations of the company.

5. All parties (petitioner, HNL, and the liquidator) must be heard before a final decision is made by the tax officer.

6. The entire process must be completed within 3–4 months from the date of production of the certified copy of the judgment.

Issue

The central legal question is:

Is K.J. Mathew (the service provider/petitioner) liable to pay GST for the 20 items of services covered under Exhibit P2 work contract, when the contract itself places the GST liability on Hindustan Newsprint Limited (the service recipient)?

And a related question:

Were the penalty notices (Exhibits P3 and P4) issued under Section 122 of the State GST Act legally valid and enforceable against the petitioner?

Facts

• K.J. Mathew is a 58-year-old businessman from Ernakulam who runs a manpower supply business. He is a registered GST taxpayer with GSTN 32AEMP3886J1Z1.

• Back in 2015, he entered into a contract with Hindustan Newsprint Limited (HNL) — a Government of India enterprise — for upkeeping of various plants. This contract covered two sets of services:
• 42 items — where the petitioner was responsible for paying taxes.
• 20 items — where the petitioner was not responsible for paying taxes.

• When GST was introduced in 2017, HNL issued two separate work orders (one for each set of services), valid from 01.07.2017 to 31.03.2018.

• After those expired, HNL issued fresh work contracts for 01.07.2018 to 31.03.2019:
• Exhibit P1 (42 items): Clearly stated that the petitioner must pay GST.
• Exhibit P2 (20 items): Did NOT include any clause making the petitioner liable for GST.

• The petitioner honestly believed that HNL (and its liquidator, since winding-up proceedings had begun) was paying the GST for the 20 items as per the contract.

• However, the 5th respondent (State Tax Officer) issued two penalty notices:
• Exhibit P3 — Notice dated 22.11.2019 under Section 122 of the State GST Act for the period 2017–2018.
• Exhibit P4 — Notice dated 22.11.2019 under Section 122 of the State GST Act for the period 2018–2019.

• The petitioner was shocked and filed this writ petition challenging those notices.

Arguments

Petitioner’s Arguments (K.J. Mathew):

(a) Contract clearly shifts GST liability:

Under Exhibit P1, the petitioner accepted GST liability for 42 items. But under Exhibit P2, there is no such clause — meaning the liability for the 20 items stays with HNL (the service recipient).

(b) Supreme Court supports contractual shifting of tax burden:

The petitioner relied on the Supreme Court judgment in Rashtriya Ispat Nigam Limited v. M/s Dewan Chand Ram Saran [2012 (5) SCC 306], which held that:

“Nothing in law prevents a statutory assessee from entering into agreement with another party that burden of any indirect tax arising out of obligations of promisor under contract would be borne by promisor…”

And further: “Service tax is an indirect tax, and it is possible that it may be passed on. Therefore, an assessee can certainly enter into a contract to shift its liability of service tax.”

(c) Section 51(2) of the Central GST Act, 2017 makes HNL liable:

Section 51(2) of the Central Goods and Services Tax Act, 2017 states that the amount deducted as tax must be paid to the Government by the deductor (i.e., the service recipient — HNL) within ten days after the end of the month of deduction. So HNL, as the deductor, should be paying the GST — not the petitioner.

(d) The liquidator cannot escape liability:

Relying on Asst. Commissioner, Ernakulam v. Hindustan Urban Infrastructure Ltd. and others [2015 (3) SCC 745], the petitioner argued that the 4th respondent (liquidator) is treated as a “dealer” under tax law and therefore cannot escape the GST liability of HNL.

(e) The notices are illegal:

The penalty notices (Exhibits P3 and P4) were issued ignoring the contractual arrangement and the liability of HNL and its liquidator.

Respondents’ Arguments (State of Kerala / Tax Officer):

(a) Notices are not final orders:

The Government Pleader, Smt. M.M. Jasmine, clarified that Exhibits P3 and P4 are only notices — no final decision has been made yet. The petitioner simply hasn’t responded to them!

(b) No coercive action has been taken:

Since the matter is still at the notice stage, there is no question of any enforcement action being taken. The petitioner’s fear of coercive steps is premature.

(C) Petitioner must respond first:

The proper course of action is for the petitioner to file written objections/submissions before the tax officer, who will then decide the matter after hearing all parties.

Key Legal Precedents

1. Rashtriya Ispat Nigam Limited v. M/s Dewan Chand Ram Saran [2012 (5) SCC 306] — Supreme Court of India

This is the most important precedent cited. The Supreme Court held that:

• A statutory assessee can contractually shift the burden of indirect tax to another party.
• Since service tax (and by extension, GST) is an indirect tax, it can be passed on.
• Therefore, if a contract says Party B will bear the tax, that is legally valid.

How it was applied here: The petitioner used this to argue that since Exhibit P2 did not place GST liability on him, the burden legally stayed with HNL.

2. Asst. Commissioner, Ernakulam v. Hindustan Urban Infrastructure Ltd. and others [2015 (3) SCC 745] — Supreme Court of India

This case held that a liquidator of a company is treated as a “dealer” under the General Sales Tax Act.

How it was applied here: The petitioner argued that the 4th respondent (liquidator of HNL) cannot escape GST liability just because HNL is under liquidation. The liquidator steps into the shoes of the company for tax purposes.

Key Statutory Provisions Referenced:

Section 122 of the State Goods and Services Tax Act

Penalty provisions — basis for issuing Exhibits P3 and P4 notices to the petitioner

Section 51(2) of the Central Goods and Services Tax Act, 2017

The deductor (service recipient) must pay deducted tax to the Government within 10 days after month-end

Judgment

The court did not quash the notices, but it also did not uphold them. It essentially said: “This dispute needs to be properly adjudicated by the tax officer first.”

What the Court Ordered:

1. The petitioner must respond to Exhibits P3 and P4 by filing written objections/submissions within 2 weeks from the date of production of the certified copy of the judgment.

2. The 5th respondent (State Tax Officer) must issue notices to all three parties:

• The petitioner (K.J. Mathew)
• R3 (Hindustan Newsprint Limited)
• R4 (the Liquidator of HNL)

3. The liquidator must also submit a report on the factual aspects raised by the petitioner regarding Exhibit P2.

4. The counsel for R3 must forward a copy of the writ petition memorandum and this judgment to R4 (the liquidator) without delay, so R4 can submit written submissions to R5 (the tax officer).

5. The 5th respondent must afford reasonable opportunity of hearing to all parties and then render a considered decision on the matters raised in Exhibits P3 and P4.

6. The entire process must be completed within 3–4 months from the date of production of the certified copy of the judgment.

7. The writ petition was finally disposed of with these observations and directions — meaning the court closed the case at this stage.

Court’s Reasoning:

The court felt it was premature to adjudicate the merits of the case because the petitioner had not even responded to the notices yet. The proper legal process — filing objections, hearing all parties, and then deciding — had not been followed. The court wanted to ensure due process was followed before any final determination.

FAQs

Q1: Did the petitioner win or lose this case?

Neither, really! The court didn’t decide who was right. It sent the matter back to the tax officer to decide properly after hearing everyone. Think of it as a “reset” button being pressed.

Q2: Why didn’t the court just quash the penalty notices?

Because the petitioner had never even responded to the notices! The court felt it would be wrong to quash notices that the petitioner hadn’t formally objected to through the proper channel yet.

Q3: Can a contract really shift GST liability from one party to another?

Yes! The Supreme Court in Rashtriya Ispat Nigam Limited v. M/s Dewan Chand Ram Saran [2012 (5) SCC 306] confirmed that indirect taxes like GST can be contractually shifted. But whether that actually happened here will be decided by the tax officer.

Q4: What happens to the petitioner now?

He must file his written objections to the penalty notices within 2 weeks. Then the tax officer will hear all parties (including HNL and its liquidator) and make a final decision within 3–4 months.

Q5: What about HNL being under liquidation — does that affect things?

The court addressed this! Based on Asst. Commissioner, Ernakulam v. Hindustan Urban Infrastructure Ltd. and others [2015 (3) SCC 745], the liquidator is treated as a “dealer” under tax law and cannot simply escape tax liability. The liquidator must also submit a report to the tax officer.

Q6: What is Section 122 of the State GST Act?

It’s the penalty provision under the State GST Act. The tax officer used this section as the basis for issuing the penalty notices (Exhibits P3 and P4) to the petitioner.

Q7: What is Section 51(2) of the Central GST Act, 2017?

It requires the deductor (the party receiving services, i.e., HNL) to pay the deducted tax amount to the Government within 10 days after the end of the month of deduction. The petitioner used this to argue that HNL — not him — should be paying the GST.

Q8: Could the petitioner face coercive action (like asset seizure) right now?

No! The Government Pleader confirmed that since the notices are not yet finalized, there is no question of any enforcement or coercive action at this stage.

The case set up in the W.P.(C.) is as follows :

That the petitioner is engaged in the business of providing supply of

man power to various establishments as per their respective requisitions.

Petitioner is a tax assesse having GSTN 32AEMP3886J1Z1. The 3rd

respondent is subsidiary of Hindustan Paper Corporation Limited, a

Government of India Enterprise. The winding up proceedings of the 3rd

respondent company has been initiated and the 4th respondent herein was

appointed as the Liquidator.

The petitioner had entered in to an agreement with the 3rd

respondent in the year 2015 for up-keeping of various plants. As per the

terms of agreement, the petitioner has remitted tax for 42 items for the

various services mentioned therein. Similarly, the petitioner had also

entered in to an agreement with the 3rd respondent for 20 items of services.

As per the terms of the contract, the petitioner is not remitting tax for 20

items. The said agreements were subsequently extended from time to time.

In the year 2017, when Goods and Service Tax (hereinafter called

GST) was introduced, the 3rd respondent has issued two separate work

orders to the petitioner for two different types of services. With regard to

the services of 42 items, as mentioned above, a work order has been issued

with effect from 01.07.2017 till 31.03.2018. Similarly, with regard to the 20 items of services, the 3rd respondent has issued a separate work contract

and the validity of the said work contract is also with effect from 01.07.2017 to 31.03.2018. Thereafter, on the expiry of those work contracts, the 3rd respondent has issued Exhibits-P1 and P2 work contracts for the period from 01.07.2018 to 31.03.2019 for the said 42 and 20 items of services respectively.

On a perusal of Exhibit P1 work contract, it can be seen that the

liability to pay Goods and Service Tax has been included as a statutory

liability from the part of the petitioner herein. In compliance of the said

terms of agreement, the petitioner has remitted GST for the 42 items

mentioned in Exhibit P1. At the same time in Exhibit P2 work contract,

which pertains to 20 items of services, the liability to pay GST has not been stipulated as a liability from the part of the petitioner. The petitioner being the service provider is not liable to pay GST in respect the said 20 items of services as per the terms of contract. The 3rd respondent being the service recipient is obliged to remit the GST in respect of 20 items of services in compliance of the terms and conditions of Exhibit P2 work contract.

The petitioner was under the bonafide belief that the respondents 3

and 4 have strictly complied the terms and conditions of the work contracts

and are paid GST in respect of 20 items stated in Exhibit P2 work contract

without any fail. However, now the 5th respondent has issued Exhibits-P3

and P4 notices under Section 122 of the State Goods and Services Act

demanding penalty for the year 2017-2018 and 2018-2019.

Exhibits P3 and P4 have been issued by the 5th respondent

overlooking the liability of the respondents 3 and 4 to remit the GST for the said periods in terms of work contract. However, the 5th respondent is of the opinion that unless it is clarified by a court of law, they are unable to exempt the petitioner from paying the amount as demanded in Exhibits P3 and P4. The petitioner is highly aggrieved by Exhibits P3 and P4 notices issued by the 5th respondent.

2. The main contentions urged by the petitioner are as follows :

(a) As per the terms of Exhibit P1, the work contract for 42 items of

services, the petitioner is liable to pay all taxes and duties including GST at the prevailing rate. At the same the liability to pay GST is absent in Exhibit P2, the work contract for 20 items of services. Obviously, in terms of Exhibit P1 contract, the petitioner is bound to pay the GST applicable to

him. On the other hand, in terms of Exhibit P2, petitioner is not liable to

pay GST.

(b) That the Apex Court in Rashtriya Ispat Nigam Limited V.

M/s Dewan Chand Ram Saran reported in 2012 (5) SCC 306 has

held that “Nothing in law prevents a statutory assesse from entering into

agreement with another party that burden of any indirect tax arising out of

obligations of promisor under contract would be borne by promisor and the

contractor is liable to bear service tax in discharge of his obligations under contract.” The dictum also says that “Service tax is an indirect tax, and it is possible that it may be passed on. Therefore, an assessee can certainly enter into a contract to shift its liability of service tax.” Here in the case on hand, by stipulating a condition that the petitioner has to bear all taxes and duties including GST, the burden of the respondents 3 and 4 has been shifted as per Exhibit-P1 contract. However, in the absence of such clause in Exhibit-P2 contract, it cannot be said that the burden of the respondents 3 and 4 has been shifted to the petitioner.

(c) That Section 51 (2) of the Central Goods and Services Tax Act,

2017 “the amount deducted as tax under this section shall be paid to the

Government by the deductor within ten days after the end of the month in

which such deduction is made, in such manner as may be prescribed.”

Therefore, being the deductor (service recipient) the 3rd respondent is

bound to pay GST to the Government. Hence the issuance of Exhibits-P3

and P4 issued to the petitioner (service provider) ignoring the terms of

work contracts are illegal and unjustifiable.

(d) That as per the dictum laid by the Apex Court in Assistant

Commissioner, Ekm V. Hindustan Urban Infrastructure Ltd.

And Others reported in 2015 (3) SCC 745, Liquidator is a dealer

under the provisions of General Sales Tax Act. Hence being the liquidator,

the 4th respondent cannot wriggle out from his liability to pay GST

applicable for the 3rd respondent company.

3. In the light of these averments and contentions, the petitioner

has filed the instant W.P.(C.) with the following prayers :

(i) “Issue a writ of certiorari or any other appropriate writ, direction or order,quashing Exhibits P3 and P4 notices,

(ii) Declare that the petitioner is not liable to pay Goods and Service Tax as demanded in Exhibits P3 and P4 as the petitioner had already shifted his burden to pay the same to the 3rd and 4th respondents in terms of work contract,

(iii) Issue a writ of mandamus or any other appropriate writ, direction or order,directing the respondent Nos. 1,2 and 5 to drop the coercive steps pursuant to Exhibits P3 and P4.

(iv) Issue a writ of mandamus or any other appropriate writ, direction or order directing the 3rd and 4th respondents to remit the Goods and Service Tax as demanded in Exhibits P3 and P4 within a time frame to be fixed by this Hon'ble Court.

(v) And grant such other and further reliefs as this Hon'ble Court may deem fit and proper in the facts and circumstances of the case.”

4. Heard Sri.M.P.Prajeesh, learned counsel appearing for the

petitioner, Smt.M.M.Jasmine, learned Government Pleader appearing for

the respondents 1 and 5, Sri.V. Krishna Menon, learned counsel appearing

for R3 and Sri.P.Vijayakumar, learned Assistant Solicitor General

appearing for R2, Union of India. In the nature of the orders proposed to

pass in this petition, notice to R4 will stand dispensed with.

5. The respondent No.5, who has issued impugned Exts. P3 and

P4, was directed to furnish instructions. Today, when the matter has been

taken up for consideration, Smt.M.M.Jasmine, learned Government

Pleader appearing for respondents 1 and 5 would submit on the basis of

instructions of the 5th respondent that Exts. P3 and P4 are only notices and

decisions thereon has not been finalized in accordance with the law and it

is for the petitioner to immediately respond to the same by filing his

written objections and submissions in the matter, if any, without any

further delay and thereafter, the matter will be decided, after affording

reasonable opportunity of being heard to the petitioner etc.

6. The learned counsel appearing for the petitioner has made

certain submissions that this Court may also order that before finalization

of Exts. P3 and P4 proceedings, further coercive steps for the enforcement

of the said proceedings may be kept in abeyance. The learned Government

Pleader would submit that the said submission made by the petitioner is

based on a misconception of fact and that Exts. P3 and P4 are only notices

and as the matter has not so far been finalized, there is no question of

setting in motion any steps for enforcement of the proposal therein, as it is only at the notice stage, which is yet to be finalized and it could not be finalized only because the petitioner has not so far responded to the same by submitting his written submissions in the matter.

7. The petitioner’s main contention appears to be that going by the

terms and conditions of Ext.P2 works contract agreement that the

petitioner is only the subject provider, who is not liable to pay GST in

respect of 20 items of services mentioned in Ext.P2 as per the terms of the

contract therein and that as per the said terms and conditions of Ext.P2,

the 3rd respondent being the service recipient is legally obliged to remit GST in respect of the said 20 services in compliance with the terms and

conditions of Ext.P2 works contract.

8. In that regard, Sri.M.P.Prajeesh, learned counsel appearing for

the petitioner would place strong reliance on the judgments of the Apex

Court in Rashtriya Ispat Nigam Ltd v. M/s.Dewan Chand Ram

Saran [2012 (5) SCC 306] that nothing in law prevents the statutory

assessee from entering into agreement with another party that burden of

any indirect tax arising out of obligations of the promisor under the

contract would be borne by promisor and the contractor is liable to bear

service tax in discharge of his obligations under contract and that therein it has also been held that service tax is also indirect tax and it is possible that it may be passed on and therefore, an assessee can certainly enter into contract to shift its liability of service tax etc.

9. Further, the counsel for the petitioner would point out that

decisions of the Apex Court as in Asst. Commissioner, Ernakulam v.

Hindustan Urban Infrastructure Ltd. and others [2015 (3) SCC

745], wherein it has been held that a liquidator of a company under

liquidation, is a dealer under the provisions of General Sales Tax Act and

accordingly, it is contended that the 4th respondent, who is now appointed

as the liquidator by the company law tribunal as per the provisions of the

Companies Act, 2013, cannot wriggle out from the liability to pay the GST

applicable from the 3rd respondent-company for whom he is now appointed

as the liquidator.

10. After hearing both sides, this Court is of the view that there is

no necessity for this Court to adjudicate the abovesaid contentions raised

by the petitioner regarding the merits of the matter. As rightly pointed out

by the learned Government Pleader, the petitioner has not so far responded

to the impugned notice as per Exts.P3 and P4 and it is for the petitioner to

immediately respond to the same by giving his written submissions/written

objections in the matter without any delay, at any rate, within a period of 2 weeks from the date of production of the certified copy of this judgment.

11. Further it is also ordered that the 5th respondent will have to

issue notices to the petitioner as well as to R3 (M/s. Hindustan Newsprint

Ltd.) and R4 (who is stated to be the liquidator of R3 Company) and the 5th

respondent in its notice may direct the 4th respondent to give a report

regarding the factual aspects raised by the petitioner on the basis of Ext. P2 and also the constitutional contentions raised by the petitioner thereon as aforementioned. In that regard, it is also ordered that for the purpose of convenience and easy reference, the counsel for R3 will ensure that a copy of the memorandum of this W.P.(C.) along with the copy of this judgment

is forwarded to R4, without any further delay, so that R4 can give written

submissions in the matter to R5, without any further delay.

12. Thereafter, respondent No.5 will afford reasonable opportunity

of being heard to the petitioner, R3 and R4 and after adverting to and

considering the various contentions of the petitioner as noted hereinabove

and contentions and submissions, if any of the other parties concerned,

may render a considerable decision on the matters raised in the impugned

Exts. P3 and P4 notices, without much delay. The entire process in this

regard may be duly completed by the 5th respondent within 3-4 months

from the date of production of the certified copy of this judgment.

With these observations and directions, the above W.P.(C.) will stand

finally disposed of.

Sd/-

ALEXANDER THOMAS,

JUDGE