Provisional attachment on sub-contractor’s escrow account lifted as sub-contractor is not a taxable person

The Hon'ble Bombay High Court in Abhi Engineering Corporation Pvt. Ltd. And Anr. v. Union of India and Ors. [Writ Petition (L) No. 5842 of 2020 decided on February 9, 2021] held that where the proceedings under Section 74 of the Central Goods and Services Tax Act, 2017 ('CGST Act') have been initiated against the principal contractor only, the sub-contractor's share in escrow account cannot be attached since no action was taken against the sub-contractor and the sub-contractor was not the taxable person.

Facts

Abhi Engineering Corporation Pvt. Ltd. and Anr. ('the Petitioner') is a contractor engaged in construction activities. Pursuant to tender floated by the Maharashtra State Power Generation Company Limited ('MSPGCL') for landscaping and plantation work at various locations, Principal Contractor i.e., M/s Creative Business Associates ('the Respondent No. 3') was declared as the successful bidder. The Respondent No. 3 appointed the Petitioner as sub-contractor in this regard.

One of the essential conditions of the sub-contractor agreement was that an escrow account shall be opened with a mutually agreed bank wherein MSPGCL shall transfer the amount pertaining to running account bills. Accordingly, a joint account was opened in this regard in the Bank ('the Respondent No. 4') and it was agreed that out of the deposits made in the escrow account, 3% shall be transferred to the Respondent No. 3 and 97% shall be transferred to the Petitioner.

MSPGCL credited an amount of ₹ 81,96,823.00 in the escrow account. The Petitioner was entitled to 97% out of this receipt and therefore by letter informed the bank to transfer the amount to the Petitioner's account. The Petitioner received a reply from the bank that the escrow account was blocked due to debit freeze instructions received from the Commissioner of Central Goods and Services Tax and Central Excise, Mumbai ('the Respondent No. 2') in view of legal proceedings initiated by the Respondent No. 2 against the Respondent No. 3.

The escrow account was provisionally attached under instructions of the Respondent No. 2, dated September 27, 2019. Since one year had elapsed since passing of the provisional attachment order dated September 27, 2019, fresh provisional attachment order dated September 22, 2020 was passed by the Respondent No. 2 in respect of the said escrow account.

The present petition was filed to challenge the provisional attachment order dated September 22, 2020. 

Petitioner's Contentions

• Provisional attachment of escrow account under Section 83 of the CGST Act can be exercised only if any proceedings referable to Sections 62, 63, 64, 67, 73 or 74 of the CGST Act have been initiated against the taxable person. In the present case, no such proceedings were initiated against the Petitioner.
• There was no direct nexus nor privity of contract between the Petitioner and the MSPGCL in so far as contractual obligation was concerned. The Petitioner was permitted to be appointed as a sub-contractor by MSPGCL and as per the MOU and sub contract agreement. Therefore, attachment of the Petitioner's share in the escrow account is arbitrary, illegal and high handed.
• There was no inquiry contemplated against the Petitioner under the provisions of the CGST Act, neither any inquiry was initiated nor is pending.
• The Petitioner require the funds to carry on its business and more importantly the remittance in the escrow account pertains to running account bill, work for which has been completed by the Petitioner and there can be no justification for attaching the Petitioner's share of 79,50,918/- i.e., 97% of the total amount credited by MSPGCL.

Respondent's Contentions

• The Respondent No. 2 contended that there is no cause of action for the Petitioner to file the writ petition as no cause of action has been taken by the Respondent No. 2 against the Petitioner. The dispute is between the Petitioner and the Respondents No. 3 and therefore, the Respondent No. 2 has no role to play
• Enquiry has been initiated against the Respondent No. 3 and on being satisfied the proper officer has attached the bank account of the Respondent No. 3 to safeguard government revenue.
• Department is well within its right to issue a fresh order for provisional attachment on expiry of the period of one year if the appropriate authority is of the opinion that such an attachment is further required to protect the interest of government revenue it may issue a fresh order subject to compliance of Section 83(1) of the CGST Act.

Issue

Whether the provisional attachment of the Petitioner's share in escrow bank account is valid in the eyes of law?

Held

The Hon'ble Bombay High Court in Writ Petition (L) No. 5842 of 2020 decided on February 9, 2021 has held as under:

• Power under Section 83 of the CGST Act can be exercised only if proceedings under Sections 62, 63, 64, 67, 73 or 74 of the CGST Act have been initiated against the taxable person. In the present case, the 'taxable person' is the Respondent No. 3 and the proceedings under the CGST Act have been initiated against the said R
• Proceedings have been launched under Section 74 of the CGST Act to determine the tax and any amount due in order to protect the interest of the revenue. It is also imperative to note that in respect of escrow account, standing instructions were given by the Respondent No. 3 to the Respondent No. 4 that out of the total receipts received in the said account the share of the Respondent No. 3 would be 3% only. The balance 97% would have to be transferred to the Petitioner's account.
• Observed that, the rights of the Petitioner have adversely affected by action taken by the Respondent No. 2 (attaching of escrow account) against the Respondent No.
• Held that, the Petitioner is not the taxable person. Lifted the provisional attachment in so far as the Petitioner's share in the escrow account is concerned subject to maintaining credit balance of 5,00,000/- by the Petitioner out of its share.
• Directed that the Respondent No. 4 would be at liberty to transfer/remit the proportionate amount due to the Petitioner to his account.
• Further held that, remaining 3% share belonging to the Respondent No. 3 in the escrow account shall continue to remain attached in terms of the provisional attachment order.
• Hence, disposed off the writ petition.

Our Comment

Section 83(1) of the CGST Act is proposed to be amended vide Clause No. 106 of the Finance Bill, 2021 to read as under:

'83. Provisional attachment to protect revenue in certain cases

(1) Where, after the initiation of any proceeding under Chapter XII, Chapter XIV or Chapter XV, the Commissioner is of the opinion that for the purpose of protecting the interest of the Government revenue it is necessary so to do, he may, by order in writing, attach provisionally, any property, including bank account, belonging to the taxable person or any person specified in sub-section (1A) of section 122, in such manner as may be prescribed.'

The scope of Section 83(1) of the CGST Act is proposed to be widened, so as to provide for provisional attachment of property in case of any action being initiated by authorities pertaining to assessment, inspection, search, seizure & arrest and demand & recovery, whereas, earlier, the attachment could only be made while during the pendency of any proceedings under specified Sections viz., Section 62 (assessment of non-filers of returns) or Section 63 (assessment of unregistered persons) or Section 64 (summary assessment in certain special cases) or Section 67 (power of inspection, search and seizure) or Section 73 (determination of tax in non-fraud cases) or Section 74 (determination of tax in fraud cases) of the CGST Act.

Thus, while earlier the provisions listed were more of those undertaken to check tax evasions (inspection, search, seizure, adjudication of SCN), the amended provision provides for such coercive measure even in case of regular proceedings in case of regular taxpayers like scrutiny of returns, provisional assessment, access to business premises etc. Further, such power can now be exercised even at the stage of summon.

Seemingly, such wide powers can increase the misuse of this provision by Revenue even more, when casual exercise of powers under Section 83 of the CGST Act is still under scanner of various High Courts which have time and again held in plethora of judgments that an order of provisional attachment cannot be as a matter of course. It is one of the drastic measures which the authority may be compelled to take if the situation demands for the purpose of protecting the interest of the Government Revenue. Recently, the Gujarat HC in Vinodkumar Murlidhar Chechani v. State of Gujarat [R/Special Civil Application No. 12498 of 2020 decided on February 3, 2021] has directed Government to issue appropriate instructions or guidelines at the earliest w.r.t to excise of power of provisional attachment under Section 83 of the CGST Act. Thus, some strict framework for exercising Section 83 needs to be put in place.

Relevant Provision

Section 83 of the CGST Act

'(1) Where during the pendency of any proceedings under section 62 or section 63 or section 64 or section 67 or section 73 or section 74, the Commissioner is of the opinion that for the purpose of protecting the interest of the Government revenue, it is necessary so to do, he may, by order in writing attach provisionally any property, including bank account, belonging to the taxable person in such manner as may be prescribed.

(2) Every such provisional attachment shall cease to have effect after the expiry of a period of one year from the date of the order made under sub-section (1).'