Fake Invoicing: What does it mean? What does Courts say about it?

Goods and Services Tax Act does not define ‘Fake Invoicing.’ However, the general understanding means invoices against which actual supply has not been made or supplies against which invoices have not been issued and alike.

Recently, the department has been very vigilant on such fraudulent transactions. Specific actions can lead to raising of suspicion by the department like multiple registrations on a single address or PAN, the mismatch between invoice and actual transaction, the mismatch between transporter details in the e-way bill and precise, standard contact details for multiple registrations, the mismatch between parties in invoice and as declared in return, etc.

There are certain sections introduced to prevent fraudulent Availment of ITC and instances of Fake Invoicing:

• Section 132 of Central Goods and Services Tax Act, 2017 (CGST Act) – Punishment for certain offenses. It talks about the consequences of violations related to supply of goods without an invoice, issue of invoice without supply, and Availment of its credit or Availment of credit without an invoice.
• Section 69 of the CGST Act talks about the power to arrest by the commissioner on reasons to believe of committing an arrestable offense u/s 132. The arresting officer shall inform the grounds of arrest and produce the arrested person before a Magistrate within 24 hours.
• Lastly, Rule 86A of Central Goods and Service Tax Rules, 2017 (CGST Rules) talks about the powers of a commissioner/officer authorized to impose restrictions on Input Tax Credit, also called blocking of credit.

Department may resort to the following to identify cases of fake invoicing during an investigation:

Know the Judicial Pronouncements concerning Fake Invoicing and Fraudulent ITC, which will become stepping-stones for future litigations:

Judgments where relief has been granted to the petitioners by the Court:

• M/s. Jayachandran Alloys (P) Ltd. {[2019] 105 taxmann.com 245 (Madras)}
  The Hon’ble Madras High Court provided interim protection to the petitioner to prevent the department from invoking the arrest provisions u/s 69 r.w.s. 132 of CGST Act.
  
  The Court held that the power to punish u/s 132 would stand triggered once it is established that an assessee has ‘committed’ an offense that has to necessarily be post-determination of demand due from an assessee, that itself has to follow the process of an assessment necessarily.
• Meghraj Moolchand Burad {[2019] 21 GSTL 125 (Bombay HC) and (Appeal Crl. Nos.244/2019, dated 09.01.2019) in Supreme Court}
  The assessee was issued summon alleging him for wrongful Availment of credit and enriching himself by adopting illegal methods. The assessee made a petition before HC for pre-arrest bail. The Hon’ble HC rejected an anticipatory bail application, considering the applicant’s conduct, the gravity of the offense, and the serious allegations made.
  
  This order has traveled to the Supreme Court (Appeal Crl. Nos.244/2019, dated 09.01.2019) wherein the Bench granted interim protection on terms that the petitioner shall not be arrested, provided he appears before the Directorate General of GST Intelligence and in the event of his arrest, he shall be released on bail on furnishing security to the satisfaction of the competent authority.
• Pawan Goel and Anr. {2021-TIOL-1318-HC-DEL-GST}
  The assessees were alleged for wrongful Availment of ITC. The assessees made an anticipatory bail application before Patiala House Court, which was rejected. Aggrieved from the order, the assessees made a petition before Hon’ble Delhi High Court wherein the Bench granted bail to the petitioners on the grounds that they were cooperating in the investigation and were not regular offenders.
• M/s. Mili Enterprise {2021 (7) TMI 303 (Gujarat)}
  The input tax credit has been blocked, and the petitioner has not been served with any notice or reasons for blocking of credit. The Hon’ble Gujarat High Court held that if the powers are exercised u/r 86(A) of CGST Rules, 2017, then also, the concerned authority is required to give reasons for blocking the credit.
  
  A similar ruling was made in the case of M/s North End Food Marketing Pvt Ltd {2021-TIOL-1769-HC-ALL-GST}.
• M/s. Aryan Tradelink {2021 (6) TMI 182 (Karnataka)}
  The Hon’ble Karnataka High Court held that without entering into the merits of the order blocking the electronic credit ledger (ECL), the blocking could not be extended beyond one year in light of Rule 86A(3). Thus, the action of the respondents in continuing the blocking of ECL is set aside and directed for restoring credit to the ECL.
  Similar judicial pronouncements:
  M/s AS Steel Traders VSP Pvt Ltd. {2021-TIOL-1802-HC-AP-GST}
  M/s Vimal Petrothin Private Limited {2021 (7) TMI 127 (Uttarakhand)}
  Contradictory Judgements where the Courts have not granted relief:
• Rakesh Arora {2021-TIOL-251-HC-P&H-GST}
  At Chandigarh, the Hon’ble High Court of Punjab and Haryana held that the petitioner had availed fraudulent ITC by creating bogus firms. However, the application of the bail is rejected by the Court as the grounds raised by the petitioner in the writ are not enough, and the nature of accusations on the petitioner cannot be overlooked.
• Amit Dua {2021 (9) TMI 111 – Patiala House Courts}
  In the present case, the assessee was alleged for the Availment of irregular credits and was arrested for the same on 23.07.2021. Ld. ASJ has dismissed the bail application of the co-accused on 31.08.2021. The other co-accused persons are still absconding. The role of the accused is at the same footing with the other accused persons whose application is dismissed by Ld. ASJ.
  
  The Court observed that the grant of bail depends upon a complex of facts and referred to the case of Dipak Shubhash Chandra Mehta v. CBI [2013 (6) TMI 105 – Supreme Court] where it was held that:
  
  ‘The Court granting bail should judiciously exercise its discretion and not as a matter of course. Though at the stage of granting bail, a detailed examination of evidence and elaborate documentation of the merits of the case need not be undertaken, there is a need to indicate in such orders reasons for prima facie concluding why bail was being granted, particularly where the accused is charged with having committed a serious offense.’
  
  Thus, it was held that the allegations against the accused are serious, and an investigation is still underway. If the accused is released at this juncture, he will interdict with the fair investigation given the fact that he may protect the absconding accused persons. Thus, the Application of bail was dismissed.

Have we reached a Conclusion?

• There is no definition of ‘Fake Invoicing’ as per the GST Acts and General Clauses Act.
• Punishment u/s 132 triggers only once ‘coffensel of offense’ is established.
• Despite exercising Rule 86(A) of CGST Rules, 2017, the concerned authority must justify blocking the credit.
• The department can invoke Rule 86A of CGST Rules, 2017 to block the Input Tax Credit in ECL subject to the conditions laid down in the rule.
• Most of the High Courts of the nation preferred not to intervene in the matters of Blocked Input Credit. However, certain courts have granted relief when the credit has been blocked beyond one year, and in some instances of arrest, the petitioner is cooperative.