Siddharth Mandavia vs Union Of India And 6 Ors on 3 November, 2020

Summary of Judgment: Siddharth Mandavia vs Union Of India

1. Outcome

This is an interim order where the Bombay High Court granted partial relief to the petitioner. The key outcomes are:

• Bank Accounts: The court ordered the immediate unfreezing of the bank account held solely by the petitioner's wife and the joint accounts held with his wife and minor son. The joint accounts were, however, subjected to a 50% debit freeze on the existing balance. For the remaining accounts, the petitioner was given the liberty to file an objection with the GST authorities.
• Importer Exporter Code (IEC): The court directed the authorities to forthwith withdraw the blockage of the petitioner's IEC, holding it to be prima facie unauthorized and without jurisdiction.

2. Core Issue

The core legal issues examined by the court were:

1. Whether the provisional attachment of bank accounts under Section 83 of the CGST Act, 2017, can extend to accounts not belonging exclusively to the "taxable person," such as those held jointly with family members or solely by a spouse, without specific allegations of fund diversion.
2. Whether GST/Customs authorities have the power to "block" a trader's Importer Exporter Code (IEC), and if such an action is legally valid when the specific procedure for suspension or cancellation under the Foreign Trade (Development and Regulation) Act, 1992 has not been followed by the competent authority.

3. Key Facts

• The petitioner, Siddharth Mandavia, is the proprietor of M/s. XS Components, an exporting firm.
• In September 2019, Customs authorities initiated an investigation into export incentives claimed by the petitioner, conducted searches, seized documents, and blocked his Importer Exporter Code (IEC).
• The petitioner deposited Rs. 30 lakhs with the authorities without prejudice.
• In February 2020, the Directorate General of GST Intelligence (DGGI) began a parallel investigation into the fraudulent availment of Input Tax Credit (ITC).
• In July 2020, while the petitioner was in Dubai, the DGGI provisionally attached 12 bank accounts belonging to the petitioner, his firm, his wife, his minor son, and joint accounts, under Section 83 of the CGST Act.
• Aggrieved by the freezing of bank accounts and the continued blocking of his IEC, the petitioner filed a writ petition before the High Court.

4. Arguments

Petitioner's Arguments (Dr. Sujay Kantawala):
* The provisional attachment of bank accounts belonging to family members, who are not the "taxable person," is illegal and beyond the scope of Section 83 of the CGST Act.
* The attachment is a harsh and drastic measure for which the due procedure was not followed, especially when the petitioner had already deposited Rs. 30 lakhs.
* The petitioner's statement recorded by the authorities was given under duress and was not voluntary.
* The blocking of the IEC is unlawful and has brought the petitioner's business to a complete standstill, preventing him from realizing export proceeds and paying suppliers.

Respondents' Arguments (Mr. Pradeep S. Jetly):
* The investigation revealed that the petitioner's firm fraudulently availed and utilized fake ITC of over Rs. 9.32 crores based on invoices from non-existent suppliers.
* The provisional attachment under Section 83 was necessary to protect government revenue, as there was an apprehension that the petitioner would siphon off the fraudulently obtained refunds.
* The pre-conditions for invoking Section 83 were met, as proceedings under Sections 67 and 74 of the CGST Act were pending against the petitioner.
* The order for attachment was passed in the prescribed Form GST DRC-22 by the competent authority (Principal Additional Director General).
* The petitioner had an alternative and efficacious remedy under Rule 159(5) of the CGST Rules to file an objection against the attachment, which he failed to avail.

5. Court’s Reasoning

The High Court's reasoning was two-fold:

A. On Provisional Attachment of Bank Accounts (Section 83, CGST Act):
* The Court analyzed Section 83 and affirmed that it is a drastic power, intended solely to protect government revenue during the pendency of specified proceedings.
* It emphasized that the provision explicitly allows for the attachment of property "belonging to the taxable person."
* The Court observed that the petitioner's wife and minor son were not the "taxable persons" under investigation. The respondents made no specific allegation that funds belonging to the petitioner's firm were diverted to their accounts.
* Therefore, the Court held that the prima facie attachment of bank accounts held solely by the petitioner's wife or jointly with his family members was not justified.
* For the remaining accounts, the court directed the petitioner to avail the statutory remedy of filing an objection under Rule 159(5) of the CGST Rules.

B. On Blocking of Importer Exporter Code (IEC):
* The Court identified the Foreign Trade (Development and Regulation) Act, 1992 (FTDR Act) as the governing statute for the IEC.
* It highlighted that Section 8 of the FTDR Act provides a specific, detailed procedure for the suspension or cancellation of an IEC, which includes issuing a written notice, providing grounds, and giving a reasonable opportunity of being heard.
* Crucially, this power can only be exercised by the Director General of Foreign Trade (DGFT) or an officer authorized by him. The respondents (GST/Customs officials) were not the competent authority.
* The Court noted that the law provides for "suspension" or "cancellation," but not for "blocking" of an IEC.
* It applied the legal principle that "when a law requires a thing to be done in a particular manner, it has to be done in that particular manner and recourse to any other manner is necessarily forbidden."
* Since the respondents were not the competent authority and did not follow the prescribed procedure, the Court concluded that the blocking of the IEC was prima facie unauthorized, unwarranted, and without jurisdiction.

6. Statutory References

• Constitution of India: Article 226
• Central Goods and Services Tax Act, 2017 (CGST Act):
  • Section 83 (Provisional attachment to protect revenue)
  • Sections 62, 63, 64, 67, 73, 74 (Specified proceedings for invoking Section 83)
  • Section 2(107) (Definition of "taxable person")
• Central Goods and Services Tax Rules, 2017 (CGST Rules):
  • Rule 159 (Procedure for provisional attachment of property)
  • Form GST DRC-22 (Order for provisional attachment)
• Foreign Trade (Development and Regulation) Act, 1992:
  • Section 7 (Grant of Importer-exporter Code Number)
  • Section 8 (Suspension and cancellation of Importer-exporter Code Number)

7. Precedents Cited

• Patran Steel Rolling Mill Vs. Assistant Commissioner of State Tax, 2019 (20) GSTL 732 (Gujarat High Court): Cited to emphasize that while exercising powers under Section 83, authorities must balance the interest of revenue with the need to allow the dealer to continue their business. Bringing a business to a halt does not serve the interest of revenue.