GST Registration Cancelled for Circular Trading — High Court Dismisses Writ, Directs Appeal

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Case Name

M/S M.S. Retail Private Limited vs. Union of India & Others

Case No.: W.P. No. 9041 of 2020 (T-RES)

Court Name: High Court of Karnataka at Bengaluru

Decided on: 7th September, 2020

Before: Hon’ble Mr. Justice M.I. Arun

Key Takeaways

1. Circular Trading is a Serious Violation: The tax authorities cancelled the GST registration because the company allegedly issued invoices without actual supply of goods (circular trading) for the period July 2017 to December 2018.

2. Cancellation and Recovery are Separate Actions: The court confirmed that cancellation of GST registration and recovery of tax dues are two independent proceedings — you don’t need to finish one before starting the other.

3. Writ Petition is Not the Right Path When a Statutory Appeal Exists: Since the petitioner dropped its constitutional challenge, the High Court said the correct remedy was to file an appeal under Section 107 of the CGST Act, not a writ petition.

4. COVID-19 Was a Factor: The company missed the initial hearing because of the COVID-19 lockdown starting 22.03.2020, which led to the ex-parte cancellation of its registration.

5. Natural Justice Was Followed: The court found that the petitioner was given proper notices, a personal hearing, and a reasoned order — so the claim of violation of natural justice was rejected.

Issue

• Was the cancellation of GST registration by the tax authorities legally valid?
• Did the authorities have proper jurisdiction to issue the show cause notices and cancellation orders?
• Was the rejection of the application for revocation of cancellation in violation of principles of natural justice?
• Can a writ petition be maintained when a statutory appeal remedy is available under Section 107 of the CGST Act?

Facts

Who is the Petitioner?

M/S M.S. Retail Private Limited is a private limited company based in Bangalore, engaged in trading bath fittings and sanitary ware. It was registered under the CGST Act with GSTIN 29AAFCM9224N1ZU.

Timeline of Events:

July 2017 – Dec 2018: Alleged circular trading (invoices without actual supply of goods)

23.12.2019: Show cause notice issued by Commissioner of Central Tax for recovery of amounts

18.03.2020: Show cause notice for cancellation of registration issued in Form GST-REG 17 under Rule 22(1) of CGST Rules

22.03.2020: COVID-19 lockdown begins; company unable to respond06.06.2020GST registration cancelled

09.06.2020: Petitioner requests revocation of cancellation

W.P. No. 8167/2020: First writ petition filed; Court grants liberty to apply for revocation

03.07.2020: Respondent No. 4 issues notice under Section 30 read with Section 29, Rules 21(b) and 23 of CGST/KGST Acts

06.07.2020: Petitioner submits reply

10.07.2020: Application for revocation rejected

21.07.2020: Communication sent intimating rejection

W.P. No. 9041/2020: Present writ petition filed challenging all the above orders

Arguments

Petitioner’s Arguments (M/S M.S. Retail Private Limited):

1. Pending Adjudication: A show cause notice dated 23.12.2019 for recovery of amounts was still pending adjudication. Without deciding that first, the authorities should not have proceeded to cancel the GST registration.

2. Jurisdictional Error: The notice dated 03.07.2020 issued by Respondent No. 4 under Section 30 read with Section 29, Rules 21(b) and 23 was bad in law.

3. Violation of Natural Justice: The order dated 10.07.2020 rejecting the revocation application was against principles of natural justice and erroneous.

4. Contradictory Communication: The communication dated 21.07.2020 wrongly stated that the petitioner had not replied within time, which was factually incorrect.

5. No Current Violation: The alleged circular trading was for the period July 2017 to December 2018 — there was no allegation of any violation during the current period when the cancellation order was passed.

6. Harsh Action: The impugned orders were disproportionate and violated all known principles of natural justice.

Respondents’ Arguments (Union of India & Tax Authorities):

1. Writ Not Maintainable: Since the petitioner dropped the constitutional challenge, the writ petition was not maintainable because Section 107 of the CGST Act provides a statutory appeal remedy.

2. Proper Jurisdiction: All show cause notices and orders were passed by the proper officer having jurisdiction. There was no jurisdictional error.

3. Cancellation and Recovery are Independent: The show cause notice dated 23.12.2019 was for recovery under Section 16(2)(b), Section 31 read with Rule 36, Sections 74, 50 and Section 122(1)(ii) of the CGST Act. Recovery and cancellation are two separate actions — one need not wait for the other.

4. Cancellation was Under Section 29(2)(a): The cancellation was legally done under Section 29(2)(a) of the CGST Act and the rejection of revocation was under Section 30 of the CGST Act.

5. Natural Justice Was Followed: The petitioner was given a personal hearing, submitted a reply on 06.07.2020, and a speaking (reasoned) order was passed on 10.07.2020. The communication of 21.07.2020 was merely an intimation of that decision.

6. Earlier Orders Already Challenged: The show cause notice dated 18.03.2020 and the cancellation order dated 06.06.2020 were already challenged in W.P. No. 8167/2020 and cannot be re-challenged in the present writ petition.

Key Legal Provisions Referenced

Note: The judgment does not cite prior case law precedents from other courts. It primarily references statutory provisions. Here are all the key legal provisions mentioned:

Section 29(2)(a) of the CGST Act: Cancellation of GST registration by proper officer

Section 30 of the CGST Act: Revocation of cancellation of registration

Section 107 of the CGST Act: Appeals to Appellate Authority against any decision or order

Rule 22(1) of the CGST Rules, 2017: Procedure for cancellation of registration (Form GST-REG 17)

Rule 21(b) of the CGST Rules: Grounds for cancellation of registration

Rule 23 of the CGST Rules: Revocation of cancellation of registration

Section 16(2)(b) of the CGST Act: Conditions for availing input tax credit

Section 31 read with Rule 36 of the CGST Act/Rules: Tax invoice requirements

Section 74 of the CGST Act: Determination of tax not paid (fraud/suppression cases)

Section 50 of the CGST Act: Interest on delayed payment of tax

Section 122(1)(ii) of the CGST Act: Penalty for issuing invoices without supply of goods

Articles 226 and 227 of the Constitution of India: High Court’s writ jurisdiction

Judgment

The writ petition was DISMISSED.

1. The petitioner dropped its strongest argument — the constitutional challenge to Sections 29 and 30 of the CGST Act and Rules 21, 22, and 23 of the CGST Rules. Once that was withdrawn, the court said the remaining arguments about jurisdictional errors were not convincing.

2. A statutory appeal remedy exists: Since Section 107 of the CGST Act provides a clear appeal mechanism, the petitioner should use that route rather than approaching the High Court directly through a writ petition.

3. Natural justice was not violated: The petitioner received notices, submitted a reply, got a personal hearing, and received a reasoned order. The communication dated 21.07.2020, though worded incorrectly, was merely an intimation of the earlier order dated 10.07.2020.

Orders Made by the Court:

• Writ petition dismissed
• Petitioner given liberty to file an appeal under Section 107 of the CGST Act within 30 days from the date of the order
• No opinion expressed on the merits of the case — the appellate authority will decide afresh
• If an appeal is filed, the appropriate authority will take a decision on its own merits

FAQs

Q1: Why did the company’s GST registration get cancelled in the first place?

The tax authorities alleged that the company was involved in “circular trading” — issuing invoices without actual supply of goods — for the period July 2017 to December 2018, which is a violation of the CGST Act.

Q2: Why didn’t the company respond to the initial show cause notice?

The show cause notice was issued on 18.03.2020, and the company was asked to appear on 23.03.2020. However, the COVID-19 lockdown began on 22.03.2020, making it impossible for the company to respond.

Q3: What is “circular trading” in GST context?

Circular trading refers to the practice of issuing invoices or bills for transactions without any actual supply of goods. This is done to fraudulently claim Input Tax Credit (ITC) and is a serious violation under Section 122(1)(ii) of the CGST Act.

Q4: Can the tax authorities cancel GST registration without first deciding the pending tax demand?

Yes! The court confirmed that cancellation of registration and recovery of tax dues are two separate and independent proceedings. One does not need to wait for the other to be completed.

Q5: Why did the High Court dismiss the writ petition?

Because the petitioner dropped its constitutional challenge, and a statutory appeal remedy under Section 107 of the CGST Act was available. The court found no jurisdictional error or violation of natural justice that would warrant interference through a writ petition.

Q6: What happens next for the company?

The company has been given 30 days to file an appeal under Section 107 of the CGST Act. The High Court has not expressed any opinion on the merits, so the appellate authority will consider the case fresh.

Q7: Was the communication dated 21.07.2020 a separate order?

No. The court clarified that the communication dated 21.07.2020 was merely an intimation of the decision already taken on 10.07.2020 by Respondent No. 4. Even though it was worded incorrectly, it did not constitute a separate order.

Q8: What is the significance of Section 107 of the CGST Act?

Section 107 of the CGST Act provides the right to appeal to an Appellate Authority against any decision or order passed under the CGST Act. The court emphasized that this is the proper and adequate remedy that the petitioner should have used instead of directly approaching the High Court.

Heard.

2. Aggrieved by the action of respondent nos.3 to 5 in issuing show cause notice and subsequently canceling the registration of the petitioner under the Central Goods and Services Tax Act, 2017 (hereinafter referred to as ‘the CGST Act’) and thereafter refusing to revoke the cancellation of registration, the petitioner has preferred this writ petition.

3. The petitioner is a private limited company engaged in the business of trading in bath fittings and sanitary ware. It was duly registered as ‘taxable person’ under the provisions of the CGST Act read with the Karnataka Goods and Services Tax Act (hereinafter referred to as ‘the KGST Act’). The registration number of the petitioner is GSTIN29AAFCM9224N1ZU.

4. It is the contention of the petitioner that it has been regularly filing its monthly returns disclosing the trading transactions and also paying the GST tax liability within the due dates.

5. On the ground that the petitioner had violated certain provisions of the CGST Act and the Rules, a show cause notice dated 18.03.2020 in Form GST-REG 17 read with Rule 22(1) of the Central Goods and Services Tax Rules, 2017 (hereinafter referred to as ‘the CGST Rules’) was issued to the petitioner by respondent no.3. The notice directed the petitioner to appear before respondent no.3 on 23.03.2020.

6. It is stated that due to COVID situation, the petitioner

was unaware of the notice and there was a complete lock

down of the business from 22.03.2020. Consequently, the

petitioner could not appear before the authorities as

stipulated in the notice. The authorities passed an order for

cancellation of the registration of the petitioner with effect

from 06.06.2020.

7. On realizing that its registration was cancelled, the

petitioner submitted a request to respondent no.3 on

09.06.2020 to revoke the order of cancellation. As there

was no response from the authorities, the petitioner

preferred W.P.No.8167/2020 before this Court. The said

writ petition was disposed of granting liberty to the

petitioner to file necessary applications seeking revocation

of cancellation of the registration and respondent no.3-

Assistant Commissioner of Commercial Taxes, Bengaluru

was directed to consider the same and pass appropriate

orders.

8. Pursuant to the order passed in W.P.No.8167/2020,

respondent no.4, who is the Officer with competent

jurisdiction, issued a notice under Section 30 read with

Section 29, Rules 21(b) and 23 of the CGST Act and the

KGST Act and the Rules, 2017 to the petitioner asking him

to show cause in respect of cancellation of its registration

and a personal hearing was also afforded to the petitioner.

9. The petitioner submitted a reply on 06.07.2020

justifying its actions and prayed for revocation of the order

of cancellation of registration and for restoration of the

registration certificate. After hearing the petitioner,

respondent no.4 by an order dated 10.07.2020 rejected the

application for revocation of cancellation of registration.

Subsequently, another communication dated 21.07.2020

has been issued to the petitioner intimating about the

rejection of its application for revocation of cancellation.

10. Aggrieved by the issuance of show cause notice dated

18.03.2020, the order of cancellation of registration with

effect from 06.06.2020, issuance of show cause notice

dated 03.07.2020 by the authorities pursuant to the order

of this Court in W.P.No.8167/2020 and the order of

rejection of the application for revocation of cancellation

dated 10.07.2020 and the communication dated

21.07.2020, the petitioner has challenged the said orders in

the present writ petition. Further, the petitioner has also

prayed for holding the provisions of Sections 29 and 30 of

the CGST Act read with Rules 21, 22 and 23 of the CGST

Rules as unconstitutional.

11. In the course of the proceedings, on 27.08.2020, the

learned counsel for the petitioner submitted that he is not

pressing the prayer (f) sought in the writ petition i.e. the

prayer seeking to hold certain provisions of the CGST Act

and the Rules there under as unconstitutional. Accordingly,

the said prayer of the petitioner has not been considered in

the present writ petition.

12. Section 107 of the CGST Act provides for appeals to

Appellate Authority against any decision or order passed

under the CGST Act.

13. As the petitioner has withdrawn his challenge to the

provisions of the CGST Act as unconstitutional and in the

light of an appeal being provided in the Statute, the

petitioner has confined his arguments as to error in

jurisdiction in issuance of show cause notice and the order

of cancellation of registration and the order of rejection of

his application to revoke the order of cancellation.

14. It is the contention of the petitioner that apart from

the show cause notices and the orders passed by the

respondents, the office of Commissioner of Central Tax,

Bengaluru had issued a show cause notice dated

23.12.2019 in respect of demand of certain amounts from

the petitioner for alleged violation of various provisions of

the CGST Act and the same is yet to be adjudicated.

Without adjudicating the same, the respondents ought not

to have proceeded for cancellation of GST registration of the

petitioner.

15. It is further contended that respondent no.3 issued

the show cause notice for cancellation of registration on

18.03.2020 and its registration was cancelled with effect

from 06.06.2020 and the petitioner had challenged the

same by way of W.P.No.8167/2020 wherein this Court

granted the liberty to the petitioner to file necessary

application seeking revocation of cancellation of its

registration and has directed the respondents to consider

the same in accordance with law. This required the

petitioner to make a representation to the authorities as to

why the order of cancellation passed by them with effect

from 06.06.2020 ought to be revoked. However,

respondent no.4 issued a notice dated 03.07.2020 under

Section 30 read with Section 29, Rules 21(b) and 23 of the

CGST and KGST Acts and the Rules pursuant to the order of

the writ petition which is bad in law. It is further contended

that the order dated 10.07.2020 passed by respondent no.4

rejecting the request of the petitioner to revoke the order of

cancellation is erroneous and against the principles of

natural justice and in violation of the CGST Act and the

CGST Rules. It is further contended that after passing of

the order dated 10.07.2020, another order dated

21.07.2020 has been passed rejecting the application for

revocation of cancellation, which wrongly states that the

petitioner has not replied to the notice within the specified

time and its application is rejected. It is further contended

that admittedly, the orders have been passed for the

alleged act of the petitioner in indulging in circular trading

i.e., invoices or bills have been issued without supply of

goods in violation of the provisions of the CGST Act and the

CGST Rules for the period from July 2017 to December

2018 and there was no allegation of violation of any law for

the current period when the order of canceling the

registration was issued. It is further contended that the

impugned orders are in violation of all known principles of

natural justice and are very harsh. For the said reasons,

the petitioner has sought them to be set aside.

16. Per contra, the respondents have contended that once

the petitioner has given up the challenge to the

constitutional validity of the provisions of the CGST Act and

the CGST Rules made there under, the writ petition is not

maintainable as Section 107 of the CGST Act, provides for

appeals to Appellate Authority against any decision or order

passed and sought for dismissal of the writ petition.

17. It is contended that the show cause notices and the

orders passed by the respondents are in accordance with

law and are passed by proper officer having jurisdiction over

the same. There is no error in jurisdiction or violation of the

principles of natural justice as alleged. It is also contended

that the violation of any provisions under the CGST Act or

the CGST Rules can lead to cancellation of the registration

and recover all amounts that become due as per the

provisions of the CGST Act and the CGST Rules there under.

The show cause notice dated 23.12.2019 issued to the

petitioner is towards recovery of the amounts. The

amounts are sought to be recovered from the petitioner

under the provisions of Section 16(2)(b), Section 31 read

with Rule 36, Sections 74, 50 and Section 122(1)(ii) of the

CGST Act and the CGST Rules. The cancellation of

registration in the instant case is under Section 29(2)(a) of

the CGST Act and the order rejecting the application for

revocation of cancellation is passed under Section 30 of the

CGST Act. The recovery and cancellation are two separate

actions and it is not a pre-requisite to decide the liability of

payment of the petitioner under the CGST Act to cancel its

registration.

18. It is not in dispute that the show cause notices, the

order of cancellation and the order rejecting the application

for revocation of cancellation are passed by proper officer.

The show cause notice dated 18.03.2020 and the order of

cancellation of registration dated 06.06.2020 have already

been challenged before this Court in W.P.No.8167/2020 and

cannot be challenged in the present writ petition. Pursuant

to the order passed in W.P.No.8167/2020, respondent no.4

has issued the notice dated 03.07.2020 to the petitioner.

There is no jurisdictional error in the said notice. The

petitioner has made his representation on 06.07.2020 and

has been given a personal hearing by respondent no.4 and

thereafter, he has passed the order dated 10.07.2020.

Thus, the said order is a speaking order and it records the

reasons for rejecting the application of the petitioner for

revocation of cancellation of registration. The intimation to

the petitioner dated 21.07.2020 is pursuant to the order

dated 10.07.2020 and it has to be construed as an

intimation of the decision taken on 10.07.2020 by

respondent no.4, though the reason assigned in the said

intimation and the manner in which the same is styled may

be erroneous. Even otherwise, the order dated 10.07.2020

is a reasoned order and the same cannot be held as without

jurisdiction and in violation of any principles of natural

justice. If the petitioner is aggrieved by the said order, it

ought to have filed an appeal under Section 107 of the

CGST Act. The petitioner cannot challenge the same by way

of a writ petition.

19. However, it is noticed that the petitioner has filed the

writ petition because it initially challenged certain provisions

of the CGST Act and the CGST Rules which could not have

been done by way of an appeal. However, for the reasons

best known to the petitioner, it has given up the said prayer

and has confined its arguments to erroneous exercise of

jurisdiction by the respondents which this Court finds

untenable for the aforementioned reasons. However, the

Court is of the opinion that the petitioner cannot be bereft

of its right of appeal as contemplated under the CGST Act.

Hence, the following:

ORDER

The writ petition is hereby dismissed. The petitioner

is at liberty to prefer an appeal as contemplated under

Section 107 of the Central Goods and Services Tax Act,

2017, if it so desires, within thirty days from today.

It is made clear that no opinion has been expressed

upon the merits of the case. If the petitioner prefers an

appeal, it is for the appropriate authority to take a decision.