In a landmark decision, the Supreme Court of India ruled that employees and authorized signatories of a company cannot be held liable under Sections 122(1-A) and 137 of the Central Goods and Services Tax Act, 2017 (CGST Act) for penalties imposed on corporate tax liabilities. This ruling emerged from the Special Leave Petition (SLP) filed by the Union of India in the Maersk GST fraud case involving a recovery demand of ₹3,731 crore.

Background of the Case

The case arose when the GST authorities issued a show-cause notice (SCN) to Shantanu Sanjay Hundekari, a senior tax operations manager at Maersk, alleging that he facilitated tax evasion for the Danish shipping giant. The authorities claimed that Hundekari, as an authorized signatory of the company, aided in evading tax liabilities and thus bore liability for penalties.

The SCN invoked Section 122(1-A), which penalizes individuals for fraudulent tax actions, and Section 137, which addresses offenses and penalties under the CGST Act. The Bombay High Court, however, quashed the SCN, noting that the penalties pertained to Maersk’s corporate liabilities and could not be imposed on its employees. Aggrieved by this decision, the Revenue escalated the matter to the Supreme Court.

Chronology of the Legal Battle

  1. Initiation of Proceedings: The GST authorities issued an SCN to Maersk employees, holding them accountable for aiding tax evasion.

  2. Bombay High Court Ruling: The court ruled in favor of the employees, quashing the SCN and stating that corporate liabilities could not be imposed on individuals without statutory backing.

  3. Special Leave Petition: The Union of India filed an SLP in the Supreme Court, contesting the High Court’s interpretation of the CGST Act.

  4. Supreme Court Hearing: The case was heard by a bench comprising Justice J.B. Pardiwala and Justice R. Mahadevan, which upheld the Bombay High Court’s ruling.

Technical Analysis of the Case

The pivotal legal question revolved around the interpretation of Sections 122(1-A) and 137 of the CGST Act.

  • Section 122(1-A): This section imposes penalties on individuals involved in fraudulently availing or utilizing tax credits. However, the provision is limited to individuals actively participating in fraud.

  • Section 137: It deals with offenses by companies, specifying that directors or officers can only be held liable if they were directly responsible for the conduct of business at the time of the offense.

The Supreme Court noted that vicarious liability could not be ascribed to employees unless expressly stated in the statute. It emphasized that penal provisions must be strictly interpreted, and extending liability to employees for corporate actions would be disproportionate and unconscionable.

Supreme Court Judgment

The Supreme Court dismissed the SLP filed by the Revenue, affirming the Bombay High Court’s ruling. The court observed that:

  • Shantanu Hundekari was an employee and authorized signatory, not the decision-maker for Maersk’s tax strategies.

  • Liability under Sections 122(1-A) and 137 cannot be attributed to employees unless there is clear evidence of fraudulent intent or direct involvement in tax evasion.

  • The demand of ₹3,731 crore from an individual employee was unreasonable and beyond the statutory provisions of the CGST Act.

Implications of the Judgment

This ruling sets a crucial precedent in protecting employees and authorized signatories from being unfairly penalized for corporate tax liabilities. Key takeaways include:

  1. Clarity on Vicarious Liability: Employees cannot be held liable unless there is explicit statutory backing or evidence of their active role in fraudulent actions.

  2. Protection for Employees: Authorized signatories will now have stronger legal protection against disproportionate demands by tax authorities.

  3. Impact on Enforcement: Tax authorities will need to exercise greater caution and adhere strictly to statutory provisions when attributing liability.

This judgment reinforces the principle that penal provisions must be interpreted narrowly, ensuring fairness and accountability in tax enforcement. It underscores the importance of due process and statutory safeguards in protecting individuals from undue legal burdens stemming from corporate actions.

Bombay High Court Order