Rav Singh

Section 129 Need Not be Invoked in Every Case of Search and Seizure: Uttarakhand HC

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In a crucial decision[1], the Uttarakhand High Court observed that every case of search and seizure of vehicles need not necessarily lead to imposition of penalties under Section 129, CGST Act, 2017. The High Court referred to the legislative history of Section 129 and noted that the provision may be invoked only when contravention of provisions may require payment of tax, else penalties should be imposed under Section 122, CGST Act, 2017. 

Facts  

The petitioner in the impugned case was in the business of manufacturing PC wires and purchased raw materials from Steel Authority of India Limited, Kolkata. The goods were transported from West Bengal to Kanpur through a railway wagon, which was taken into custody by the petitioner for further transport to Bazpur. For the transport to Bazpur two vehicles were used. The entire transport happened against invoices. When the vehicles were intercepted, it was found that the vehicles did not carry the delivery challans as required under Rule 55, CGST Rules, 2017. Orders were passed wherein separate penalties were imposed on both the vehicles under Section 129, CGST Act, 2017. Against the said orders, the petitioners approached the Uttarakhand High Court. 

Arguments 

The petitioner’s case was that not carrying the delivery challan was only a procedural irregularity or impropriety and there was no element of evasion of tax. The petitioners contended that imposition of penalty under Section 129, CGST Act, 2017 was disproportionate. The petitioners emphasised that the tax had been paid for the goods transported from Bengal to Bazpur, e-way bills were generated, and the Revenue Department had all the relevant information about the transport of goods. In the absence of any intent to evade taxes, the imposition of penalty under Section 129 was challenged as disproportionate. 

The Revenue Department, on the other hand, argued that Rule 55 mandated that the vehicles need to be accompanied by a delivery challan and the intent is to prevent leakage of taxes. It was further highlighted that Section 129 begins with a non obstante clause and thus has an overriding effect over all other provisions of CGST Act, 2017 including Section 122 which prescribes penalties for certain offences.       

The Uttarakhand High Court framed the dispute as one involving determination of the relevance of Section 122 vis-à-vis Section 129. Both the provisions prescribe that penalties could be leived on the assessee under certain circumstances, the question was which provision is more relevant under certain circumstances including in the impugned case. 

Decision 

The Uttarakhand High Court referred to the relevant provisions and observed that Rule 55(5) requires that the vehicles should be accompanied by a delivery challan. At the same time, Rule 138-A(1)(a) also mentions that the person in charge of a conveyance can carry an invoice or a bill of supply or a delivery challan, ‘as the case may be’. The High Court noted that an invoice and a delivery challan were clearly interchangeable under the Rule, and further noted that the State counsel had admitted that no additional information would be found in any of the other two documents. While the petitioner clearly violated the requirement of Rule 55(5), the High Court adopted a purposive and harmonious interpretation by noting that Rule 138-A(1)(a) mentions that delivery challan was act a substitute for invoice under certain circumstances.  

The Uttarakhand High Court accepted almost all the petitioner’s contentions and observed that it was not the case that delivery challan was not carried along to evade tax since the tax had already been paid. And further observed that the principle of harmonious construction suggests that a statute should be interpreted to give life to each provision. Adopting this principle, the High Court noted that if every non-compliance with respect to documents of a vehicle would lead to imposition of penalty under Section 129, it may render Section 122 redundant. 

Accordingly, the Uttarakhand High Court referred to the legislative history of Section 129  – and its amendment in 2022 – to make the following observations: 

First, that Section 129 envisages situations where there is an element of tax and thus vehicles may be released by the proper officer on payment of tax. 

Second, Section 122 makes a person liable to tax if taxable goods are transported without documents. Mere non-production of documents is punishable under the provision. 

Third, Section 130 would come into play if both intention and tax are involved. 

Accordingly, the High Court held that in the impugned case, there was only a violation of Rule 55(5), the petitioner had supplied all other information to the Revenue Department. Thus, the authorities should have proceeded to levy a penalty under Section 122 of CGST Act, 2017 instead of Section 129. The High Court also made it clear that not every interception of vehicle in anticipation of contravention of the statutory provisions should lead to imposition of penalty under Section 129. The officers should invoke the relevant provisions as per the facts and circumstances of the case. 

ConclusionThe Uttarakhand High Court’s observations are a welcome exposition of the law and the interplay of Sections 122, 129, and 130 of CGST Act, 2017. The High Court’s interpretation of the provisions with an apt use of the principle of harmonious construction introduces much needed clarity as to which provision is relevant under which circumstances. Of course, many fact situations may not be straightforward and the officers will be tempted to invoke Section 129 frequently, but the impugned decision nonetheless provides clarity on the scope of the relevant provisions.      

[1] M/s Prestress Steel LLP v Commissioner, Uttarakhand State GST and Others TS-662-HCUTT-2023-GST.  

Delhi High Court Orders Refund of Tax Paid Under Protest

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In a recent decision[1] the Delhi High Court ordered that the tax paid by assessee under duress should be refunded. The High Court cited CBIC’s Instructions to reason that no recovery of tax dues can be made before passing an adjudication order and that no taxes can be paid while the search and seizure of assessee’s premises is ongoing, unless the tax is paid voluntarily by the assessee. 

Facts 

The petitioner was a company engaged in supply of services in New Delhi and registered under the CGST Act, 2017. Search operations were conducted on the premises of the petitioner on 20.10.2021 by the anti-evasion Dept of GST under Section 67(2). During the search, the petitioner, paid an amount of Rs 2,30,00,000/- and acknowledgement of the payment was issued by the Revenue Department via FORM GST DRC-03. On 21.10.2021 the petitioner wrote an email to the concerned Joint Commissioner that the said payment had been made under protest and the petitioner reserved the right to seek its refund. 

On 23.06.2022, the Revenue Department issued a Show Cause Notice (‘SCN’) to the petitioner under Section 74 read with Section 20 of CGST Act, 2017 demanding payment of GST amounting to Rs 36,53,359/- and sought to appropriate the amount of Rs 2,30,00,000/-. The petitioner under Section 54 had filed for refund of Rs 2,30,00,000/- paid under protest but the same was denied as the Revenue Department issued deficiency memos, i.e., memos indicating that the documents supplied by the petitioner in support of its refund claims were insufficient. Citing the insufficiency of documents, the application for refund was rejected twice. Against the order of refusal of refund, the petitioner approached the Delhi High Court. 

Issues and Decision 

The main issue before the Delhi High Court was whether the petitioner paid Rs 2,30,00,000/- voluntarily or under protest. While the petitioner’s raised other issues regarding the legality of deficiency memos, the High Court’s decision hinged on determining if the payment was made voluntarily or under protest. The High Court concluded that the payment was made under protest and ordered a refund of the amount.

The Delhi High Court noted the relevant facts: that the petitioner made a deposit of cash through cash ledger on 20.10.2021 at 8:41pm. The search operations had started at 3:45pm on 20.10.2021 and continued well beyond business hours until 3am on 21.10.2021. Thus, the cash of Rs 2,30,00,000/- was paid by the petitioner while the search and seizure operation was undergoing. The High Court further noted that it was an admitted fact that the petitioner never admitted its liability to pay the tax and merely deposited the said amount under duress and compelling circumstances. The High Court then referred to Section 73(5) and 73(6) of the CGST Act, 2017. Section 73(1) states that a proper officer may serve a SCN on a person where it appears to the proper officer that the person has not paid the tax or short paid the tax or wrongly availed ITC. Section 73(5) states that: 

The person chargeable with tax may, before service or notice under sub-section (1) or, as the case may be, the statement under sub-section (3), pay the amount of tax along with interest payable thereon under section 50 on the basis of his own ascertainment of such tax or the tax as ascertained by the proper officer and inform the proper officer in writing of such payment.   

Section 73(6) that on receipt of the information, the proper officer shall not serve any notice on the said person. 

The Delhi High Court observed that the above provisions are clearly for the benefit of the taxpayer and voluntary payments can be made before issuance of SCN. However, once the taxpayer pays tax under Section 73(5) but subsequently refutes that  the payment was not voluntary, it must be accepted that the payments were not made voluntarily. The High Court also pointed that the Revenue Department did not follow the requisite procedure in the impugned case as the petitioner was not issued FORM GST DRC-04, which follows the issuance of acknowledgement FORM GST DRC-03. 

Finally, the Delhi High Court cited CBIC’s Instructions wherein it is clearly stated that unpaid tax or short paid tax can only be collected after following the due process, i.e., issuance of SCN and passing of an adjudication order. And no recovery of tax dues can take place during the search or seizure proceedings unless the taxpayer makes the payment voluntarily. 

Conclusion

The Revenue Department in the impugned case inter alia also tried to resist the issuance of refund on the ground that the SCN had been issued to the petitioner after the search proceedings and refund shall only be granted after the proceedings were complete. The High Court endorsed the petitioner’s argument that adjudication of SCN is not a pre-requisite for issuance of refund and that issuance of refund cannot be withheld merely because SCN was issued after the deposit. It is interesting that the Revenue Department tends to make certain claims that have no basis in law, e.g., no refund can be issued until SCN is adjudicated. And it is appreciable that the Courts, at times, if not always, tend to see the ridiculousness of such claims and reject them. 

[1] Sapphire Intrex Ltd v Union of India & Ors 2023: DHC: 8978-DB. 

Cancellation of GST Registration Needs to be Accompanied by Reasons

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Short Note

In a recent decision[1], the Delhi High Court held that the cancellation of an assessee’s registration under GST cannot be done in an arbitrary fashion and needs to be accompanied by objective reasons. 

Facts 

The assessee in the impugned case was carrying on the business as a sole proprietorship under the name ‘M/s P.S. Metal’ but closed business on 11.11.2019 on account of her ill health. The assessee filed an application on the same date for cancellation of her registration and her application was acknowledged, but not processed. Thereafter, on 12.021.2021, the proper officer issued a showcause notice to the petitioner proposing to cancel the assessee’s registration on the ground of non-filing of returns for a period of six months. The assessee was requested to appear before the proper officer failing which the case would be decided ex parte. The proper officer thereafter passed an ex parte order cancelling the petitioner’s registration, with the order stating that no reply was received to the showcause notice. However, the order did not mention any reasons for cancelling the registration even though the petitioner’s registration was cancelled with retrospective effect from 01.07.2017.  

The assessee challenged the order on various grounds: while the showcause notice asked the assessee to appear for a personal hearing, it did not mention the date, time or venue for personal hearing, the order for cancellation of registration was passed in violation of principles of natural justice, and that the order does not contain any reasons for cancellation of the assessee’s registration. 

Decision

The Delhi High Court accepted the assessee’s contention. The High Court referred to Section 29(2), CGST Act, 2017 which states that the proper may cancel the registration of a person from such date, including any retrospective date, as he may deem fit. The provision specifies various grounds under which the registration may be cancelled with retrospective effect including the registered person having contravened any of the provisions of the Act or not having filed returns for a financial year beyond three months from the due date, etc. The High Court observed that the discretion provided to the proper officer under Section 29(2) cannot be exercised arbitrarily and the decision to cancel registration from retrospective effect must be accompanied with some objective criteria. (para 6)

The Delhi High Court specifically noted the Revenue’s contention that cancellation of registration would have the effect of denying ITC to customers of assessee. The High Court observed that assuming that such a contention is true, it is incumbent on the proper officer to be ‘fully satisfied’ that the registration needs to be cancelled, and that too with retrospective effect. Though in the instant case no reason for cancellation of registration was provided, let alone a reason for cancellation of registration with retrospective effect. 

Accordingly, the Delhi High Court granted the assessee’s request that her registration be cancelled w.e.f. 11.11.2019 since she ceased her business from the said date. 

Conclusion

The Delhi High Court’s succinct decision in the impugned case throws light on certain practices that the Revenue Department sometimes tends to adopt: issuance of a showcause notice without providing adequate details to the person such as the date and venue for hearing on the notice and the exercise of discretion without providing adequate reasons. The officers have been granted wide and extensive powers under the GST laws to assist in implementation of GST laws and it is necessary that the same are exercised prudently.      

[1] Pratima Tyagi v Commissioner of GST & Anr 2023: DHC: 9025-DB. 

Delhi HC Clarifies Powers of AO Under Section 142(2C), IT Act, 1961 

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In a recent decision[1], the Delhi High Court clarified that the power granted to the Assessing Officer (‘AO’) under Proviso to Section 142(2C), IT Act, 1961 cannot be abdicated to a superior officer. Thus, the decision of the superior officer, even if it was arrived at on the recommendation of AO was not valid. 

Facts 

The brief facts of the case are that the assessee was subjected to a search action under Section 132, IT Act, 1961 on 19.02.2008 and thereafter the AO issued a notice to the assessee under Section 153A. Eleven months later, the AO issued a notice to the assessee seeking a response for conduct of special audit of its affairs in exercise of its powers under Section 142(2A). The objections of the assessee to the notice were rejected and thereafter the Commissioner of Income Tax (‘CIT’) approved the conduct of audit and appointed an auditor and the same was communicated to the assessee. The time frame of 120 days was also fixed for completion of the audit. 

The auditor so appointed thereafter requested for an extension and the request was forwarded by the AO to the Assistant CIT who in turn forwarded it to the CIT. On considering the request, the CIT granted an approval and the AO communicated the extension of time period to the auditors. 

The question before the Delhi High Court was whether the extension of time period for audit was lawfully granted by the CIT under Proviso to Section 142(2C), IT Act, 1961.

Arguments 

Before I summarise the arguments, the two relevant provisions for consideration are: 

Briefly put, Section 142(2A) states that if at any stage of the proceedings the AO is of the opinion that it is necessary to get the accounts of the assessee audited he may with the prior approval of the Principal Chief Commissioner or Chief Commissioner or Commissioner direct the assessee to get the accounts audited by an accountant nominated by the Principal Chief Commissioner or Chief Commissioner or Commissioner. The AO is required to form such an opinion based nature and complexity of accounts, volume of accounts, doubts about correctness of accounts and interests of the revenue. And once the auditor is nominated, the AO shall direct the assessee to get the accounts audited and furnish a report if such audit in the prescribed form duly signed and verified by such accountant and setting forth such particulars as the AO may require. 

Proviso to Section 142(2C) states that:

… the Assessing Officer may, Suo motu, or on an application made in this behalf by the assessee and for any good and sufficient reason, extend the said period by such further period or period as he thinks fit; so, however, that the aggregate of the period originally fixed and the period or periods so extended shall not, in any case, exceed one hundred and eighty days from the date on which the direction under sub-section (2A) is received by the assessee.     

The recommendation for extension of time for the audit was made by CIT once the AO forwarded the auditor’s request letter to the CIT. The Revenue argued that the extension of time period was an administrative act and whatever functions a subordinate authority can perform a superior authority can also undertake on the administrative side. The Revenue further argued that the CIT had the power to appoint an auditor under Section 142(2A) and in doing so it exercises an administrative power. And in extension of the same power, the CIT can also amend the time within which the audit needs to be completed. The Revenue further added that if the prior approval of CIT is needed for appointment of an auditor under Section 142(2A), there is no infirmity in seeking the opinion of CIT for extension of the time for such audit under Proviso to Section 142(2C). The Revenue was trying to read the power to nominate an auditor under Section 142(2A) and the power to grant an extension for audit under Proviso to Section 142(2C) as the same or in a continuum.  

The assessee, on the other hand, disputed that the power was an administrative power and argued that the audit proceedings are part of assessment proceedings which are judicial in nature. The assessee argued that the AO abdicated its powers under Proviso to Section 142(2C) in favor of CIT since AO did not seek approval of CIT for extension of the time but abdicated the entire decision to CIT. Further, it was pointed that the approval of CIT is not needed for extension of time under Proviso to Section 142(2C). The approval is only needed to appoint an auditor under Section 142(2A). The assessee was thus treating both the provisions are independent of each other and the powers so provided as distinct.  

Decision 

The Delhi High Court decided in favor of the assessee by strictly interpreting Proviso to Section 142(2C).  The High Court observed that the Proviso to Section 142(2C) makes it abundantly clear that the AO has the discretion to extend the initial timeframe allotted for submission of the audit report. And it noted that: 

Thus, it is evident from a plain reading of the provisions mentioned above that both the discretion to trigger the process for issuance of a direction to the assessee for getting the accounts audited within a specified timeframe and the extensions, if any, that are granted is that of the AO. Both sub-sections (2A) and (2C) read with the proviso appended to the latter make that abundantly clear. (para 11) 

The Delhi High Court correctly noted per Section 142(2A) the CIT or other authority was only the nominating authority for auditors. The time frame for submission of audit, the details in the audit reports, etc. were all to be decided by the AO. The High Court was categorical in its assertion that Section 142(2A) was ‘AO-centric’, since the AO was performing the dual role of an adjudicator and the inquisitor. (par 13.1)

The Delhi High Court concluded that the facts clearly show that the AO did not exercise its power to extend the timeframe, instead merely transmitted the request for extension to the CIT and made a recommendation which was not in accordance with Proviso to Section 142(2C). The High Court noted that ‘since the legislature vested the discretion to extend the timeframe solely in the AO, he could not have abdicated that function and confined his role to only making a recommendation to the CIT.’ (para 20) 

Finally, the Delhi High Court also agreed with the assesee’s contention that since the appointment of auditor was part of the assessment proceedings, it had civil consequences and it was clearly not an administrative power. Though the High Court did add that the distinction between administrative and quasi-judicial powers has been obliterated since they have civil consequences. 

Conclusion 

The Delhi High Court correctly interpreted the Proviso to Section 142(2C) wherein only the AO has the power to extend the timeframe for the audit though two things are worth mentioning: first, the fact that the AO decides the original time allotted under Section 142(2A) is not expressly provided in the provision though the High Court interpreted it to be so; second, the High Court’s opinion on the distinction between administrative and quasi-judicial powers and the obliteration of their difference is not entirely clear. While on one hand it termed the power as quasi-judicial while on the other hand it seemed to suggest that distinction between both kinds of powers had obliterated, making at least one observation redundant. 

[1] Pr. Commissioner of Income Tax Central v Soul Space Projects Ltd 2023:DHC:8835-DB. 

Delhi High Court Reiterates the Law on Interface of IBC and Tax

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The Delhi High Court in a recent case[1] reiterated the legal position relating to outstanding tax of an entity which has or is undergoing the insolvency process under IBC, 2016. In the impugned case, the Revenue Department claimed that the petitioner owed it taxes despite such the Revenue Department’s claims not being part of the approved resolution plan. The High Court relying on relevant precedents stated that tax claims that were not part of the approved resolution plan stand extinguished and the Revenue Department is also bound by the resolution plan approved under IBC, 2016. 

Facts 

The petitioner, TUF Metallurgical Pvt Ltd, took over the management of the erstwhile corporate debtor in accordance with the terms of the resolution plan which was approved by the NCLT under Section 31(1), IBC, 2016 via order dated 05.11.2019. The public advertisement regarding commencement of the Corporate Insolvency Resolution Process (CIRP) was issued under Section 15, IBC, 2016 stating that the last date for filing of claims was 21.01.2019. But until the said date the Revenue Department did not submit any claim. It was on 12.12.2019 that the Revenue Department passed an order against the petitioner qua Assessment Year 2017-18. The petitioner’s claim was that the tax demand was barred after the approval of resolution plan was rejected by the Revenue Department which issued a Demand Notice and levied a penalty on the petitioner. Against the said order, the petitioner filed a writ petition before the Delhi High Court. 

Arguments 

The arguments of the petitioner and the Revenue Department were straightforward. The petitioners argued that the Revenue Department ignored the legal and factual ramifications which ensued on conclusion of any insolvency process. The petitioner stated that once the resolution plan was approved by the concerned authority, it was not open to the Revenue Department to open stale claims which were settled upon conclusion of the insolvency proceedings. The Revenue Department, on the other hand, argued that it stood on a ‘different footing’ from other creditors and that the tax claims of the Revenue Department would not be affected by the provisions of IBC, 2016. (para 4)

Decision 

Given that the argument of the Revenue Department did not have a legal leg to stand on, the decision of the Delhi High Court did not involve unravelling a complex legal web. The High Court’s conclusion rested on Supreme Court’s observations in Ghanshyam Mishra’s case[2], where the Supreme Court categorically observed that once the resolution plan has been approved by the adjudicating authority under Section 31(1), IBC, 2016, the claims as provided in the resolution plan shall stand frozen and shall be binding on the corporate debtor, its employees, members, Central Government, State Government, guarantors and other stakeholders. It was clarified by the Supreme Court that claims that are not part of the resolution plan shall stand extinguished and no person shall be entitled to initiate or continue proceedings in respect of claims which were not part of the resolution plan. It was further clarified that the said bar also applies to tax due to the Central or State Government. 

The conclusion, based on the findings in Ghanshyam Mishra case is that if the Revenue Department fails to respond to the public advertisement in time, its claims will not be part of the resolution plan. And subsequently, the Revenue Department cannot initiate proceedings in respect of taxes due prior to initiation of insolvency proceedings on the ground that it stands on a different footing than other creditors. Courts and IBC, 2016 do not acknowledge, and rightly so, that the Revenue Department is not bound by terms of the resolution plan. Accordingly, the Delhi High Court in the impugned case allowed the petitioner’s writ petition and set aside the demand and orders by the Revenue Department.     

Conclusion It is indeed a case of unending mystery that why does the Revenue Department does not respond to the public notices relating to commencement of insolvency process on time. And if it for some reason fails to respond to the notices on time, why does it initiate proceedings against the assessees, when the law clearly states that the provisions of IBC, 2016 shall override all other laws,[3] which of course also includes tax legislations. And more specifically, if the Revenue Department’s claim was not part of the approved resolution plan, the claim stands extinguished. The Revenue Department does not stand on a ‘different’ footing from other creditors. The IBC, 2016 certainly does not state so. It is a self-image that the Revenue Department has conjured with no legal basis.    

[1] TUF Metallurgical Pvt Ltd v Union of India & Anr 2023:DHC:8856-DB.

[2] Ghanshyam Mishra & Sons Pvt Ltd v Edelweiss Asset Reconstruction Co Ltd (2021) 9 SCC 657. 

[3] Section 238, IBC, 2016. 

Bombay High Court Adopts ‘Purposive Interpretation’: Permits Rectification of GSTR-1

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In a recent decision[1], the Bombay High Court permitted the petitioner to rectify their GSTR-1 despite even though statutory deadline for rectification of such return had expired. The High Court cited the relevant provisions – Sections 37, 38, and 39 of CGST Act, 2017 – and stated that they need to be interpreted purposively and the law cannot be interpreted to mean that there is no room for correcting inadvertent errors in returns. 

Facts 

The petitioner, Star Engineers (I) Pvt Ltd, designed, manufactured, and supplied wide range of electronic components for industrial purposes. The petitioner was a regular supplier of the components to Bajaj Auto Limited and during the Financial Year 2021-22 supplied various components to third party vendors on ‘Bill-to-Ship-to-Model’ on instructions of Bajaj Auto Limited. The aforesaid Model allows a supplier to ship the goods to one entity, while issue the bill in favor of another entity. In this case, the petitioner was supplying goods to third party vendors and invoices were issued in the name of Bajaj Auto Limited. However, while filing GSTR-1 for the period July 2021, November 2021, and January 2022, the petitioner inadvertently mentioned GSTIN of the third-party vendors instead of Bajaj Auto Limited.

The above error in filing GSTR-1 meant that the supplies made by the petitioner for the said period were not reflected in GSTR-2B of Bajaj Auto Limited but in the GSTR-2B of the third-party vendors. Accordingly, Bajaj Auto Limited was unable to claim ITC for the said supplies. To compensate itself for the same, Bajaj Auto Limited reduced the payment amount to the petitioner equivalent to the GST stating its inability to claim ITC to that extent. 

In September 2023, the petitioner approached the Deputy Commissioner of Sales Tax requesting that it be allowed to rectify the error in GSTR-1 for the supplies made during the Financial Year 2021-22 as it was causing prejudice to the petitioner. However, the Deputy Commissioner rejected the request on the ground that while rectification of the error would not cause any loss the Government exchequer, it was past the due date prescribed under the statute. Against, the said decision the petitioner approached the Bombay High Court. 

Purposive Interpretation of Sections 37, 38, and 39 of CGST Act, 2017 

The Bombay High Court noted the relevant provisions of the CGST Act, 2017 which mandate the filing of returns and prescribe the outer time limit for rectification of errors that may creep into such returns at the time of filing. 

Section 37(1) requires all registered persons to furnish electronically all details of their outward supplies and the said information will be communicated to the recipient of such supplies. This provision has translated into the registered person filing GSTR-1 stating their outward supplies and the recipient receiving an auto-drafted ITC statement based on the information disclosed in GSTR-1. Section 37(3) allows for rectification or omission in the returns, but the Proviso states that no rectification shall be allowed after 30 November following the end of financial year to which the returns pertain.  Section 38 states that the details of outward supplies provided under Section 37 shall be communicated to the recipient. Section 39(1) also contains a similar obligation regarding both the input and output supplies and ITC paid or payable. While Section 39(9) allows rectification of errors and omissions. Proviso to Section 39(9) prescribes a similar outer time limit as Proviso to Section 37(3). 

The Bombay High Court perusing the above provisions observed that they ‘need to be purposively interpreted.’ (para 12) What did purposive interpretation mean in this context? The High Court elaborated that Section 37(3) cannot be interpreted to mean that the assessee cannot be allowed to rectify errors in returns and reflect an accurate record. Not allowing rectification of errors would lead to preservation of inaccurate records consisting of errors, which the High Court observed would not be in consonance with the purpose of GST. The High Court stated that the proviso cannot be allowed defeat the intent of provision especially if rectification of the error would not lead to loss of revenue. 

The Bombay High Court also reasoned that GST regime had inaugurated a regime where returns are completely online. It stated that there are a wide variety of traders in India and many may have limited resources and expertise as a result of which inadvertent errors may creep into the returns and the keeping the same in mind, assessees should be allowed to rectify errors in their returns and the provisions of law ‘should be alive’ to such considerations. (para 20)

Similar Judicial Precedents 

The Bombay High Court in allowing the petitioner to their rectify GSTR-1 beyond the due date followed a slew of precedents – M/s Sun Dye Chem v Assistant Commissioner (ST) & Ors[2], Pentacle Plant Machineries Pvt Ltd v Office of GST Council & Ors[3], Shiva Jyoti Constructions v Chairperson, CBEC & Ors[4], Mahalaxmi Infra Contract Ltd v GST Council & Ors[5] – where various High Courts have awarded a similar relief to the assessees. The High Court did cite the precedents in support of its reasoning and conclusion. In these precedents none of the High Courts expressly invoked purposive interpretation, but instead the relief was provided based on facts and Court’s satisfaction that errors of assesses in their returns were bona fide. Further, the common thread in all the cases is that the High Courts were convinced that the rectification of the returns would not lead to loss to the Government exchequer. The latter issue weighed with the High Court in the impugned case as well.    

Conclusion 

The Bombay High Court’s decision in the impugned case invoked the bona error of the petitioner, the fact that no illegality involved, and that the rectification of GSTR-1 would cause no loss to the exchequer. It was not a simple case of purposive interpretation wherein the High Court went beyond the statutory provisions to allow the petitioner to rectify returns even after expiry of the statutory deadline. In the absence of even one of the three factors mentioned above, the High Court’s decision could have been different. Finally, it is important to underline here that reliefs such as in the impugned case are ordinarily and perhaps can only be granted by Courts. Officers allowing rectification of returns after expiry of statutory deadlines is a possibility that is hard to foresee. 

[1] Star Engineers (I) Pvt Ltd v Union of India 2023:BHC – AS: 37549-DB. 

[2] 2020 TIOL 1858 HC MAD GST. 

[3] 2021-TIOL-604-HC-MAD-GST. 

[4] MANU/OR/0522/2023. 

[5] MANU/JH/1003/2022. 

Bombay High Court Decides a ‘Peculiar Case’: Orders Refund of Tax Paid Under Protest

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The Bombay High Court recently adjudicated a case[1] it termed as ‘peculiar’ and ordered that the Revenue Department should refund the tax paid by petitioner under protest. The High Court invoked the doctrine of unjust enrichment and precedents on taxes paid under a mistake of law to support its conclusion. 

Facts 

The facts of the case are straightforward: the petitioner, The Hongkong and Shanghai Banking Corporation, filed a writ petition regarding an amount of Rs 56,19,84,075/- it deposited with the Revenue Department. The petitioner claimed that the payment was without any authority in law and not a tax payable by the petitioner. The Revenue Department undertook audit of petitioner’s books and accounts from March 2007 to April 2012 and raised certain objections on non-payment of service tax by the petitioner for ‘interchange income’. As a fallout of the objections, despite no showcause notice being issued by the Revenue Department or a demand being raised, the petitioner deposited Rs 56,19,84,075/- as tax under protest. The petitioner’s letter that accompanied the deposit clearly stated that the payment of tax was ‘under protest’ and as a matter of good faith to co-operate with the Revenue Department. The petitioner was categorical in its assertion that it was not liable to pay service on the interchange income and payment of tax was only to buy peace with the Revenue Department. 

After the deposit of the said amount, the Revenue Department never took any steps to ascertain the tax liability of the petitioner as no showcause notice was issued to the petitioner as regards its interchange income regarding which objections were raised during the audit. Since the Revenue Department never took any steps for ascertaining the tax liability of the petitioner, the petitioner filed an application for a refund of the amount citing lack of action by the Revenue Department and arguing that the payment was made under protest and should not be considered as payment of tax regarding interchange income. 

The petitioner argued that the retention of the said amount by the Revenue Department would amount to violation of Article 14 of the Constitution as well as Article 265 of the Constitution, the latter forming the crux of its case. 

The Revenue Department’s reason for rejecting the application for refund was that the matter regarding levy of service tax on interchange fee had been referred to a Supreme Court bench and admissibility of refund can only be considered after the bench pronounces its final verdict. The Supreme Court in Citibank N.A. case[2]had delivered a split verdict on taxability of interchange fee and the matter had been referred to a larger bench which had yet to pronounce its verdict. Citing the pendency of the matter before a larger bench of the Supreme Court, the Revenue Department denied a refund. 

Bombay High Court Decides 

The Bombay High Court ordered a refund of the tax paid under protest by the petitioner. As per the High Court, for the Revenue Department to satisfy requirements of Article 265 of the Constitution, i.e., ‘No tax shall be levied or collected except by authority of law’, it needs to demonstrate that it has power to withhold/appropriate the amount towards tax. However, i was not the case as in the impugned case the amounts were received by the Revenue Department by fortuitous circumstance wherein the petitioner voluntarily deposited the amount. 

The Bombay High Court reasoned that since the payment of tax by the petitioner was under protest, it did not preclude the Revenue Department from taking steps to realise the tax and in the absence of such steps such as issuance of showcause notice, the payments made by the petitioner retained the character of tax under protest and not tax collected under authority of law under Article 265 of the Constitution. (paras 25-27) In the absence of any provisions under Finance Act, 1994 – under which service on interchange income was supposedly due – which authorized the Revenue Department to retain the said amounts, the High Court held that retaining such amounts violated Article 265 of the Constitution. The High Court cited relevant precedents to reiterate that even if the amounts were paid under a mistake of law, the petitioner was allowed to claim refunds. And it further underlined that the refusal to refund the tax paid under protest would amount to unjust enrichment on behalf of the Revenue Department.  

What about the pending case before the Supreme Court? The Bombay High Court held that it was not relevant to the issue of refund more so because no show cause notice was issued for the period in question. (para 30) Also, the High Court endorsed petitioner’s argument that even if a recovery is initiated against the petitioner, it is not the case that the Revenue Department will not be in a position to recover the dues given that the petitioner is a reputed bank with large scale operations in the country. 

The Department’s stubborn refusal to refund the amount paid in the impugned case was curious, if not surprising. The reason that a case on taxability of interchange income is pending before the Supreme Court was flimsy to begin with. Even if the Supreme Court in the pending case eventually decides in favor of the Revenue Department, there was nothing to stop it from recovering the said tax dues from the petitioner as the High Court rightly pointed out. And if the Revenue Department was convinced of the taxability, why was no showcause notice issued in the first place after auditing the petitioner’s books? I guess we will never know the answer to this.    

Conclusion 

The Bombay High Court’s conclusion rested on three important points: first, that the amount paid by the petitioner was not under any law, but under protest and lack of action by the Revenue Department ensured that the payment retained the character of tax under protest; second, that retention of tax under protest would amount to violation of Article 265 of the Constitution since a tax can only be collected under a authority of law and any tax paid under protest or a mistake of law is liable to be refunded; third, the High Court also alluded to the doctrine of unjust enrichment and held that if the Revenue Department does not refund the tax paid under protest it would amount to unjust enrichment, a concept that loosely ties in with the mandate of Article 265, but is articulated separately by Courts.             

[1] The Hongkong and Shanghai Banking Corporation v Union of India 2023:BHC-OS:13826-DB. 

[2] Commissioner of GST and Central Excise v M/s Citibank N.A. Civil Appeal No. 8228 of 2019 dated 09.12.2021. 

Delhi High Court Holds Explanations 6 and 7 Added to Section 9 in 2015 are Retrospective in Nature

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In a recent decision[1], the Delhi High Court has held that the Explanations 6 and 7 added to Section 9, IT Act, 1961 via Finance Act, 2015 are retrospective in nature despite the amendment not expressly stating so. A brief recall to the Finance Act, 2012 which inter alia amended Section 9 along with adding Explanation 5 to it, to overcome the effect of Supreme Court’s decision in Vodafone International Holdings.[2] The amendment clearly stated that Explanation 5 would have effect w.e.f. 1.04.1962. However, such an express declaration was missing when Explanations 6 and 7 were added in 2015. Nonetheless, the Delhi High Court held that Explanations were retrospective in nature by referring to their legislative history. 

Facts 

The respondent, August Capital PTE Ltd, was a company incorporated in Singapore in 2011. Between January 2013 and March 2014 the respondent invested in equity and preference shares of Accelyst Pte Ltd (‘APL’), incorporated in Singapore. In March 2015 the respondent sold its investment to an Indian company. In the return of the income for the particular Assessment Year, i.e, 2015-16, the respondent showed its income as nil. The respondent was issued a showcause notice as to why its income from the sale of shares should not be taxed in India. The respondent’s explanation was that it had only acquired 0.05% of ordinary share capital and 2.93% of preference share capital and had no rights of management and control concerning the affairs of APL and thus the capital gains arising out of the transfer of shares was not taxable in India. 

The Assessing Officer, Dispute Resolution Panel decided in favor of the Revenue Department wherein the respondent’s taxable income was pegged at a little more than Rs 36 crores. The tribunal ruled in favor of the respondent and directed deletion of the income and against the tribunal’s decision, the Revenue filed an appeal before the Delhi High Court. 

The respondent was sought to be taxed under Explanation 5 that was added to Section 9, IT Act, 1961 via the Finance Act, 2012. Explanation 5 added via Finance Act, 2012 with retrospective effect stated that:

            … an asset or a capital asset being any share or interest in a company or entity registered or incorporated outside India shall be deemed to be and shall always be deemed to have been situated in India, if the share or interest derives, directly or indirectly, its value substantially from the assets located in India;     

The above Explanation was unambiguously added to tax Vodafone like transactions. However, immediately after its insertion there were specific concerns about the uncertain nature of the terms ‘share and interest’ and ‘substantially’. A Committee chaired by Mr. Parthsarthy Shome recommended that the term ‘substantially’ used in Explanation 5 be defined precisely to avoid interpretive difficulties. The narrow concern was that Explanation 5 may also include within its scope small investors wherein even if a single share of a company is transferred – and such company derived its value substantially from assets located in India – it would result in taxable gains under the Explanation 5. 

Explanations 6 and 7 were added to address the above concerns and effectively provided a benefit to small investors. For example, Explanation 6 states that for the purpose of this clause, it is hereby declared that the share of interest, referred to in Explanation 5 shall be deemed to derive its value substantially from the assets (whether tangible or intangible) located in India, if, on the specified date, the value of the assets exceeds the amount of ten crore rupees and represents at least fifty per cent of the value of all the assets owned by the company or entity, as the case may be. A minimum threshold was prescribed to indirectly define the term ‘substantially’ used in Explanation 5.  

Similarly, Explanation 7 inter alia states that for the purposes of this clause no income shall be deemed to accrue or arise to a non-resident from transfer, outside India, of any share of, or interest in, a company or an entity, registered or incorporated outside India referred to in Explanation 5 if the such company or entity directly owns the assets situated in India at any time in the twelve months preceding the date of transfer, neither holds the rights of management or control in relation to such company or entity, nor holds voting power or share capital or interest exceeding five per cent of the total voting power. 

Arguments and Decision

The respondent in the reply to showcause notice had clearly stated that it had no control and management rights in APL and further argued before the Delhi High Court in the same vein. The respondents argued that the Explanations 6 and 7 should have retrospective effect since Section 9(1)(i) read with Explanations 4,5,6, and 7 form a complete code. They referred to the context and reason for introductions of Explanations 6 and 7 and argued that the reason for introduction of these Explanations was to cure the unintended effect of Explanation 5 and given this context, Explanations 6 and 7 should also be given a retrospective effect even if Finance Act, 2015 did not expressly state that these Explanations would have retrospective effect. 

The Revenue, on the other hand, argued that Explanations 6 and 7 brought a substantial change in the law and were not merely clarificatory amendments. And added that even a clarificatory amendment need not necessarily have a retrospective effect. 

The Delhi High Court cited the Shome Committee recommendations and the text of Finance Minister’s speech while explaining the introduction of Explanations 6 and 7. Both these sources led to the straightforward conclusion that the Explanations 6 and 7 were added to cure the limitations of Explanation 5, and thus the Delhi High Court concluded that the insertion of Explanations 6 and 7 was a curative step to cure the vague expressions used in Explanation 5. The High Court noted that: 

The argument advanced on behalf of the appellant/revenue, shorn of gloss, boils down to the fact that the insertion of Explanations 6 and 7 via FA 2015 was to take effect from 01.04.2016 and could only be treated as a prospective amendment. The argument advanced in support of this plea was that Explanations 6 and 7 brought about a substantive amendment in Section 9(1)(i) of the Act. In our view, this submission is misconceived because Explanations 6 and 7 alone would have no meaning if they were not read along with Explanation 5. Therefore, if Explanations 6 and 7 have to be read along with Explanation 5, which concededly operates from 01.04.1962, they would have to be construed as clarificatory and curative. (para 20)

The Delhi High Court reasoned that the legislature took recourse to the mischief rule else Explanation 5 offered no legislative guidance to the assessing officer and was in danger of being struck down as arbitrary. The High Court concluded that though the Finance Act, 2016 stated that the Explanations 6 and 7 were to take effect from 01.04.2016, the legislative history provides authority to conclude that they could be treated as retrospective. 

Conclusion The Delhi High Court relied almost solely on legislative history and context of the introduction of Explanations 6 and 7 to Section 9 to hold that the Explanations had a retrospective effect. This is novel territory because the Finance Act, 2015 clearly does not state that the Explanations 6 and 7 will have retrospective effect. Alternately, one could also argue that the Delhi High Court adopted holistic approach in interpreting the effect of Explanations 6 and 7. It is undoubtedly true from the legislative history, as the High Court cited, that the Explanations 6 and 7 were intended to overcome the shortcomings of Explanation 5. And as standalone, Explanations 6 and 7 do not contain much substance. Thus, if Explanations 6 and 7 are to be read in tandem with Explanation 5, there is little reason to suggest that only Explanation 5 should have a retrospective effect while Explanations 6 and 7 operate prospectively.   

[1] The Commissioner of Income Tax, International Taxation-I v Augustus Capital Pte Ltd 2023:DHC:8521-DB. 

[2] Vodafone International Holdings B.V. v Union of India & Anr (2012) 1 SCR 573. 

Bombay High Court Upholds Amendment to Definition of Income under IT Act, 1961 

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In a significant decision[1], the Bombay High Court upheld the amendment made to definition of income in Income Tax Act, 1961 (IT Act, 1961) via which all forms of subsidy granted by the Central or State Government, in cash or kind, are now considered income and taxable under the IT Act, 1961. The petitioner’s core challenge to the amendment was that it removed the distinction between revenue and capital subsidy while latter had been held by Courts to be non-taxable. The Bombay High Court did not engage with several arguments of the petitioners that traversed issues of legislative competence and fundamentals of income tax jurisprudence, but instead reasoned that the challenge was because of petitioner’s reduced profits and therefore was unwarranted. 

Facts 

Petitioner was a biotechnology company and had a manufacturing plant in Hadapsar, Pune. It was eligible for concessions on electricity duty and VAT/GST/ subsidy under the State of Maharashtra’s ‘Package Scheme of Incentives, 2013’ which came into effect from 1 April 2013. Petitioner was entitled to the subsidies from 1 January 2015 to 31 March 2045, having fulfilled the eligibility conditions prescribed under the Scheme. 

The Finance Act, 2015 amended the definition of income under Section 2(24), IT Act, 1961 wherein clause (xviii) was added. The clause stated: 

            assistance in the form of a subsidy or grant or cash incentive or duty drawback or waiver or concession or reimbursement (by whatever name called) by the Central Government or a State Government or any authority or body or agency in cash or kind to the assessee; 

other than, –

  • The subsidy or grant or reimbursement  which is taken into account for determination of the actual cost of the asset in accordance with the provisions of Explanation 10 to clause (1) of section 43; or 
  • The subsidy or grant by the Central Government for the purpose of the corpus of a trust or institution established by the Central Government or a State Government, as the case may be;  

Clearly, any incentives in the form of subsidies or otherwise provided to companies or assessees in general were included in the definition of income and made exigible to tax. The significance of this amendment can be appreciated through a brief understanding of the history of income tax under which revenue receipts are by default taxable, but capital receipts are taxable only if there is an express provision to that effect. Income tax laws have evolved in the past few decades in such a manner that a large variety of capital receipts have been expressly made taxable and the distinction between revenue and capital receipts though still in existence, has been blurred to a large extent. The above cited clause is another step towards rendering the distinction between revenue and capital receipts otiose. 

The petitioner’s case was built on this distinction which has been upheld by Indian Courts in numerous decisions.[2] The petitioner’s arguments also raised important issues of legislative competence and arguments that alluded to fiscal federalism, which unfortunately went unaddressed by the Bombay High Court. Some of the petitioner’s arguments were: the amendment does not create any distinction between capital and revenue subsidy though only the latter is taxable under Sections 4 and 5 of IT Act, 1961; that IT Act, 1961 levies tax only on ‘real’ income and the definition of income cannot be extended to include every kind of subsidy especially when it is received on capital account; the subsidy given by a State Government is by forsaking its own revenues and taxing the same in the hands of the petitioner amounts indirect tax on revenue of the State in violation of Article 289; the amendment was also challenged as violative of Article 14 for being arbitrary and discriminatory as well as Article 19(1)(g) of the Constitution for causing unreasonable hardship on the petitioner as it had made a huge investment in a backward region on the promise of subsidy and now the Union may take away 30-40% of the subsidy via income tax. 

The petitioner’s cited a bevy of cases to underline the fact that the distinction between subsidy received on revenue and capital account has been acknowledged by Courts and only the former has been held to be taxable and not the latter. The Revenue, on the other hand, invoked the argument that Courts should be deferential in matters of economic law as it involves complex decision-making impinging on economic and fiscal policy of the country. Accordingly, it argued that the legislature has wide leeway in drafting provisions on taxation of income and can choose to levy tax on certain persons and Article 14 cannot be invoked against tax laws casually. Similarly, reduction of profits of the petitioner, the Revenue argued, cannot be a ground to invoke violation of Article 19(1)(g).  

Bombay High Court Focuses on Reduced Profits 

The spectrum of issues highlighted by the petitioner were ultimately futile, as the Bombay High Court upheld the amendment by relying on and focusing on one strand, i.e., Article 19(1)(g) and reduction of profits of the petitioner. The High Court did cite the relevant judicial precedents that distinguished capital and revenue receipts and the ‘purpose test’ enunciated by the Supreme Court in various cases, but only for ornamental reasons. (para 17-21) The High Court used the well-entrenched doctrine in Indian jurisprudence that in matters of economic laws – by extension tax laws – the legislature has a wide latitude. It cited the relevant precedents on this point as well to underline its agreement with the approach that courts cannot intervene unless there is manifest arbitrariness and violation of Article 14 or if the restrictions were unreasonable thereby contravening Article 19(1)(g) of the Constitution. (paras 24-25) 

The latter particularly was conclusive in influencing the Bombay High Court’s conclusion that the amendment to definition of income was constitutional. The High Court noted that the petitioner’s argument about withdrawal of fiscal incentives tends to conflate the issue with fiscal immunity. And that the profits as well as incentives are subject to fluctuation and the amendment reflects a recalibration of fiscal advantages in tune with the broader economic policy considerations. And that diminution or even drastic reduction in profits cannot amount to violation of Article 19(1)(g) of the Constitution. (para 31) The High Court concluded that: 

The policy of tax in its effectuation, might, of course, bring in some hardship in some individual cases. That is, inevitable. Every cause, it is said, has its martyrs. Mere excessiveness of a tax or even the circumstances that its imposition might tend towards the diminution of the earnings or profits of petitioner, per se and cannot constitute violation of constitutional rights. If in the process a few individuals suffer severe hardship that cannot be helped, for individual interests must yield to the larger interests of the community or the country as indeed every noble cause claims its martyr. (para 38) 

The doctrine of deference in matters of economic law proved decisive in the Bombay High Court finally upholding the amendment to the definition of income. While the merits of this doctrine are beyond the scope of this post, it is crucial to mention that the sacrosanct status accorded to this doctrine is preventing Courts from engaging in a fundamental analysis of the violation of Fundamental Rights and other well established doctrines in taxation law in this case the well founded distinction between revenue and capital receipts and the promise of IT Act, 1961 to only tax ‘real’ income. The High Court was especially remiss in interlinking the two aspects, i.e., if subsidy on capital account did not constitute ‘real’ income, then is it still within legislative competence to levy tax on such subsidy?    

Conclusion 

The Bombay High Court’s decision falls short primarily on not engaging with the various arguments put forth by the petitioners. In my view, there is considerable merit in determining the scope of income and whether IT Act, 1961 can be amended by the Union to include any form and kind of receipt as income. Historically, capital receipts have not been taxed under IT Act, 1961 but there is no express bar in including such receipts within the fold of income. However, the related concern in this case was that a portion of subsidy benefits extended by the State Government, would end up being paid as taxes to the Union. Apart from a constitutional question, this issue also raises the point of efficacy of such subsidies and grants provided by the State Government. It is unlikely that any Court will read a limitation on the Union’s legislative power on that ground, but it is worth examining from the perspective of efficacy of policies providing tax exemptions. Finally, it is worth noting that though the distinction between revenue and capital receipts has been significantly blurred via numerous provisions expressly taxing the latter, the question of whether it amounts to ‘real’ income as opposed to hypothetical income has not been answered conclusively in this context. Courts have opined that mere accounting entries cannot be relied on to state that the assessee has received income, ‘real’ income that can be taxed. A similar analysis in the context of revenue and capital receipts is amiss, as it is possible to suggest that not every capital receipt amounts to a ‘real’ income taxable under the IT Act, 1961.   

[1] Serum Institute of India Pvt Ltd v Union of India TS-723-HC-2023-BOM. 

[2] See, for example, CIT v Chapalkar Brothers 400 ITR 279 (SC); CIT v Shree Balaji Alloys 7 ITR-OL 50 (SC). 

Tea is an Agricultural Produce: Bombay High Court Rules

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In a recent decision[1], the Bombay High Court ruled that tea qualifies as an agricultural produce warehousing services in relation to it are exempt from GST as specified in Notification No. 12 of 2017. The writ was filed by the petitioner against rulings of advance and appellate advance ruling authorities which held that tea which underwent process of blending/mixing ceased to be an agricultural produce. The High Court also made a pertinent observation about the scope of a CBIC Circular and whether it can dilute a statutory Notification. 

Facts 

The petitioner was licensed for carrying the warehouse business under the Bombay Warehouses Act, 1959. The petitioner had let one if its warehouse to M/s Unilever India Export Ltd (‘Unilever’). Unilever would procure tea at public auctions and directly from manufacturers and would undertake blending and packing of the tea at the petitioner’s warehouse. The petitioner was of the view that tea was an agricultural produce under Clause 2(d) of the Notification No. 12 of 2017 and thus warehousing services provided to such a product were exempt form GST as specified under Serial No. 54(e) of the said Notification. 

The relevant portions of the Notification No. 12 of 2017 state that: 

Clause 2(d):

“agricultural produce” means any produce out of cultivation of plants and rearing of all life forms of animals, except the rearing of horses, for food, fibre, fuel, raw material or other similar products, on which either no further processing is done or such processing is done as is usually done by a cultivator or producer which does not alter its essential characteristics but makes it marketable for primary market;” 

And, Serial No. 54(e) of the Notification No. 12 of 2017 exempts from GST the loading, unloading, packing, storage or warehousing of agricultural produce. 

Reading both the provisions together suggests that warehousing services related to agricultural produce were exempt from GST. The petitioner’s primary contention was that manufacturing and packaging of tea undertaken by Unilever did not alter the essential characteristics of tea and were undertaken to make it fit for human consumption and marketable. It was further argued that every agricultural product undergoes some treatment to make it fit for human consumption, save it from perishing and to make it fit for transportation. The ‘minimal’ processes undertaken by Unilever, as per the petitioner, did not change the nature of tea and it retained the character of an agricultural produce. The Revenue, on the other hand, argued that the kind of processes undertaken by Unilever required plant and machinery and cannot be categorized as minimal processes undertaken to make tea fit for primary market. And that tea ceased to an agricultural produce after undergoing the processes undertaken by Unilever.  

High Court Relies on Supreme Court Decision

The Bombay High Court, in determining the nature of processes undertaken by Unilever and their effect on tea relied cited D.S. Bist and Sons case [2] (which was relied on heavily by the petitioners) where it was held that tea leaf that underwent the process of withering, roasting, crushing and fermentation continued to be an agricultural produce since the process was to ensure that the flavor and color of tea leaves was brought out, but tea still retained its essential characteristics. The High Court held that the facts and observations in D.S. Bist and Sons case should have persuaded the advance ruling authorities and appellate advance ruling authorities to have come to a similar conclusion. (para 26) As per the High Court tea, an agricultural produce, retained its essential characteristics even after the processes undertaken on it by Unilever. The High Court observed: 

In so far as the impugned orders are concerned, on a perusal of the orders passed by the AAR the emphasis appears to be more on the issue that the process by which the tea leaves are dried which results in emergence of a manufactured product, and therefore, tea ceases to be an agricultural produce. In our opinion, such reasoning would in fact go contrary to the decisions of the Supreme Court as noted above for the reason that the essential characteristic of the tea being an ‘agricultural produce’ would not stand extinguish by mere processing and packing in whatever form. (para 31)

Circular Cannot Go Beyond Statutory Notification 

Another issue that the Bombay High Court addressed in its judgment was the interplay and effect of a Circular on the contents of a statutory Notification. The Revenue contended that their stance that tea that underwent the processes of fermentation, etc. was not an agricultural produce was in accordance with a CBIC Circular issued on 15 November 2017. The High Court, however held that a Circular cannot whittle down or scuttle an Exemption Notification. (para 29) What was the basis of High Court’s opinion? As per the High Court the Exemption Notification No. 12 of 2017 was issued in exercise of power under Section 11, CGST, Act, 2017 wherein the Government can grant exemption from tax on satisfaction in public interest and on recommendations of the GST Council. Thus, the clarification issued in Circular dated 15 November 2017 cannot amend a statutory Notification so as to take tea as an agricultural produce from the ambit of exemption. There is a precedent[3] to this effect, but the underlying premise of the High Court’s opinion is interesting in the context of GST. The Circulars issued by CBIC, admittedly in exercise of its administrative powers, often issue clarifications or state its interpretations of various clauses contained in a statutory Notification, i.e., a Notification issued in exercise of powers under a statutory provision. The High Court’s opinion on the scope of such Circulars will be tested in future as well to determine if a Circular is merely ‘interpreting’ a Notification and issuing a ‘clarification’ or does the Circular go beyond what the Notification states. In the impugned case, the Bombay High Court correctly held it to be the latter. However, it will be a tricky exercise and results are likely to be determined by facts of each case, but the High Court has opened doors for an examination of the scope of what a Circular can state in the context of GST. 

Conclusion The High Court’s observations in the impugned case are welcome and provide clarity on two crucial issues: the scope of the term agricultural produce and the scope of a Circular in terms of what kind of clarifications and interpretive clarities it can provide. Both these facets are likely to occupy judicial attention in the future as well and the dust is far from settled. However, we have a welcome decision that can become a reference point for future disputes. 

[1] Nutan Warehousing Company Pvt Ltd v The Commissioner, Central Tax, Pune – II, 2023: BHC-AS: 37052: DB. 

[2] Commissioner of Sales Tax, Lucknow v D.S. Bist and Sons, Nainital (1979) 4 SCC 741. 

[3] Sandur Micro. Circuits, Ltd v Commissioner of Central Excise, Belgaum (2008) 14 SCC 336. 

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