Rav Singh

Patna High Court Directs Substantive Compliance with Section 129, CGST Act, 2017 

by

Short Note

In a concise judgment[1], a Division Bench of the Patna High Court provided relief to a taxpayer who was made liable under Section 129, CGST Act, 2017 for transporting goods on an expired e-way bill. The High Court held that the proper officer levied penalty without application of mind. 

The petitioner was transporting goods without a valid e-way bill. The petitioner argued that since the vehicle broke down it could not travel the State of Bihar before the expiry of the e-way bill. And that the petitioner’s bona fide reason was not considered by the authorities which levied a penalty mechanically. To emphasise the latter point, the petitioner highlighted that the notice and order of penalty were issued on the same date.  The proper officer issued a notice to the petitioner on 28.03.2022 and followed it by levying a penalty on the petitioner under Section 129(3) by an order dated 28.03.2022 itself.

The Revenue, on the other hand, argued that the e-way bill was valid only upto 16.03.2022 while the petitioner’s vehicle was intercepted on 23.03.2022 when the goods were still in movement. The State argued that under Section 129, CGST Act, 2017 the petitioner had a window of 8 hours to renew an expired e-way bill and thus was liable to face penalty for transporting goods accompanied by an expired e-way bill. 

The Patna High Court took cognizance of the fact that the proper officer had issued the notice and order imposing penalty simultaneously. It also noted that the order passed by the proper officer did not record the presence or hearing of the petitioner prior to passing of the order. 

Further, the High Court observed that: 

This Court would find that the notice issued under Section 129(1)(a) was nothing more than an empty formality as no time/opportunity has been allowed pursuant to the notice, and immediately, on the same date, penalty has been recorded under Section 129(3). The determination of penalty under Section 129(3) is, therefore, in contravention of the statutory requirement under Section 129 of the Act. The requisite compliance with principles of natural justice, inherent in Section 129(4) has thus been violated. (para 9)

The order imposing penalty was thus held to be unsustainable and was quashed. The High Court noted that the petitioner’s response to the notice should be considered and an opportunity of being heard should be provided as per the statutory mandate. 

It is important to highlight that Section 129 mandates the proper officer to not only issue a notice to the taxpayer before imposing a penalty, but also provide an opportunity of being heard to the taxpayer before passing an order imposing penalty. In the impugned case, the Patna High Court clearly endorsed that the issuance of notice should not be a mechanical exercise and providing an opportunity of being heard to the taxpayer cannot be dispensed with. Hopefully, the latter will not be adhered to in a mechanical fashion by the Revenue.   

[1] M/S Sangam Wires v The State of Bihar. Available at https://www.livelaw.in/pdf_upload/ca825b59-583c-4d04-995d-6b0436d311ea-481343.pdf

Provisional Attachment under GST: Bombay HC Clarifies Scope of Section 83 

by

Introduction 

In a judgment[1] pronounced on 30.06.2023, a Division Bench of the Bombay High Court interpreted the law on provisional attachment under GST. While the law on provisional attachment has been sufficiently elaborated by the Supreme Court in Radha Krishan case[2], High Courts have had to consistently interpret the relevant provisions to remind the Revenue of the limits of its powers of provisional attachment. In the impugned case, the Bombay High Court clarified an obvious point, i.e., the order of provisional attachment expires after one year as stated in Section 83(2), CGST Act, 2017. And a new order needs to be issued after one year to legally continue the provisional attachment. The High Court also clarified scope of the Revenue’s power of provisional attachment, i.e., persons whose property can be attached under Section 83.   

To begin with, the Revenue argued that the petitioner cannot file a writ petition against an order dismissing its objections against provisional attachment. The petitioner, in the impugned case, filed objections against provisional attachment but the same were disposed by an order under Rule 159(5), CGST Rules, 2017. Relying on Radha Krishan case, the Bombay High Court agreed with the petitioner that the order dismissing the petitioner’s objections was not an appealable order and the only remedy available to the petitioner was to invoke writ jurisdiction of the High Court under Article 226 of the Constitution. It therefore admitted the petition dismissing the Revenue’s objections against its maintainability. As regards the merits, there were two issues that the High Court elaborated on, which I discuss below.    

Issue I: Expiry after One Year 

Section 83(2), CGST Act, 2017 provides that an order of provisional attachment passed under Section 83(1) expires after a period of one year. In the impugned case, the order for provisional attachment was passed on 21.04.2022 and ceased to have effect on 21.04.2023. The Revenue issued a letter to the bank on 19.04.2022, with a copy marked to the petitioner informing them about the continuance of the provisional attachment effectuated on 21.04.2022. The Revenue contended that a copy of the order sheet reflected that a fresh order was passed on 21.04.2023, making the provisional attachment valid. The Bombay High Court’s dismissed the Revenue’s contention.

The Bombay High Court observed that the order sheet recorded the date of noting as 21.04.2022 and formed the basis of the first provisional attachment order. There was no fresh order passed by the Revenue on 19.04.2023, which was merely a letter by way of communication to the bank to continue provisional attachment of the bank account. The High Court observed that mere notings in the file cannot constitute a formal order and the latter is a requirement under the law.    

Since no fresh order was passed to provisionally attach the petitioner’s bank account, the Bombay High Court rightly held that there was no provisional attachment of the petitioner’s bank account after 21.04.2023, from any angle. The extension of provisional attachment via communication letter dated 19.04.2023, was quashed.  

Issue II: Attaching Bank Account of Any Other Person  

In a similar writ petition, which was decided alongside the previous petition, the petitioner objected to provisional attachment of their bank account on jurisdictional grounds. The petitioner argued that they were a resident of Chennai and their bank account was also in Chennai and the Maharashtra GST authorities did not have jurisdiction to order provisional attachment of their bank account. The Bombay High Court disagreed with the petitioner and correctly interpreted Section 83. Section 83(1), CGST Act, 2017 states as follows:

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 (1-A) of section 122, in such manner as may be prescribed. (emphasis added)

Elaborating on the scope of Section 83(1), the Bombay High Court observed that it contemplated two persons: taxable and any person specified in Section 122(1-A). The High Court observed that Section 122(1-A) provides that any person who is the beneficiary of certain specified transactions shall be liable to penalty of sum equivalent to tax evaded or ITC availed or passed on. The High Court held that Maharashtra GST authorities can exercise their powers under Section 83(1) in respect of person who may not be within their territorial jurisdiction and stated two reasons: 

First, it would lead to a situation where a person who is beneficiary of a transaction involving tax evasion is in a different State other than the one where the transaction occurred, will not be examined by the latter State since he is not a resident there and will not be examined by the State where he is resident since the transaction did not happen in that State. It emphasised on the term ‘any person’ used in Section 122-A and held that the provision does not contemplate that the person should be in the State where the transaction occurred. 

Second, the Bombay High Court held that the ‘context of the legislation’ is vital too. The High Court held that Section 1(2), CGST Act, 2017 states that it shall be operational throughout the country and the Commissioner as defined under Section 2(24) should be understood in light of the said provision. The High Court held that the power of Commissioner under Section 83(1) extends to ‘any person’ and concluded that: 

There cannot be any other reading of the legislative scheme flowing through a conjoint reading of Section 83(2) read with Section 122(1-A) and Section 2(24) of the Act, moreover, a contrary reading of the said provisions would defeat the legislative intention. (para 6) 

Thus, the petitioner’s objection to provisional attachment on grounds of jurisdiction was rejected since the Bombay High Court correctly interpreted the scope of Section 83 read with Section 122(1-A) of CGST Act, 2017.  

Conclusion

While the Bombay High Court’s findings on Issue II were rendered moot because it quashed the communication letter dated 19.04.2023 and 21.04.2023, its observations provide an important insight into the Revenue’s territorial jurisdiction qua provisional attachment. The High Court was not incorrect in referring to GST as a nationwide levy operational throughout the country but the said fact on its own did not offer enough legal force to support an expansive jurisdiction of the Commissioner qua provisional attachment. Similarly, the reliance on legislative mandate and intent was not incorrect and but at the same time was key to provide support to the High Court’s observations about the expansive scope of Section 83. It will be interesting to observe, if the High Court’s observations have any observable effect on the Revenue’s approach towards provisional attachment; a power that the Revenue tends to interpret liberally and invoke more frequently than required.   

[1] Bharat Parihar v State of Maharashtra 2023 (6) TR 7547. 

[2] Radha Krishan Industries v State of Himachal Pradesh (2021) 6 SCC 771.  

Limits of Deeming Fiction: Intermediaries under GST – II

by

Constitutionality of Section 13(8)(b) and Section 8(2), IGST Act, 2017

Introduction

As elaborated in the first of this two-part post, the constitutionality of Section 13(8)(b), IGST Act, 2017 has attracted varied judicial opinions that deploy superficial and sub-par reasoning. Nonetheless, a Division Bench of the Bombay High Court delivered a split verdict on the constitutionality of Section 13(8)(b) and referred the issue to a third judge. Justice G.S. Kulkarni in his opinion[1] has adopted a unique perspective towards the issue and in the process arrived at a novel conclusion, whose implications are not entirely clear. The conclusion of Justice Kulkarni is that Section 13(8)(b) and Section 8(2) of IGST Act, 2017 are legal, valid, and constitutional if their operation is confined in their operation to IGST Act only and same cannot be made applicable for levy of tax on services under Central and Maharashtra GST legislations (‘CGST Act’ and ‘MGST Act’ respectively). I examine the reasoning and approach of Justice Kulkarni in the following paragraphs. Please refer to the first part for an introduction to the issue.    

Arguments

The Revenue justified Section 13(8)(b), IGST Act, 2017 by articulating several reasons. The Revenue argued that the place of service for intermediaries was the location of intermediary under the service tax regime as well and a similar legal position has been adopted under GST. Also, it referred to the fact that value addition in case of services by intermediaries happens at the location of intermediary. The Revenue also stated – in my view the real reason for Section 13(8)(b) – that if the location of intermediary was not made the place of service under the impugned provision, then the transaction would have escaped the tax net. (para 13)

The petitioners relied on Article 246A, 269A and 286 of the Constitution to argue that the impugned provision, i.e., Section 13(8)(b), IGST Act, 2017 was violative of the Constitutional limits. The petitioners, for example, argued that by deploying the deeming fiction under Section 13(8)(b), IGST Act, 2017 the Revenue was trying to convert the actual place of supply which was in foreign territory to the place of supplier and tax it as an intra-State supply. And the use of deeming fiction contravened Articles 246A, 269A and 286. The other arguments of the petitioners can be enlisted as follows: the levy of IGST on export of services is de hors the fundamental principle of GST as a destination-based tax, its violates the restrictions imposed by Article 286 which forbid States from levying a tax on transactions which take place in the course of import and the Parliament cannot authorize States to levy tax on export of services by deeming it to be a local supply, the levy is extra-territorial and violative of Article 245. Further, the petitioners also alleged that the levy via Section 13(8)(b) was arbitrary, discriminatory, and violative of Article 14.    

Decision

Justice Kulkarni noted that there is no dispute that the transaction undertaken by taxpayers constitutes an export of service. He agreed with the petitioners and stated that: 

In my opinion, the contention of the petitioners appears to be correct that the transactions in question of the petitioners are in fact a transactions of export of service, as the recipient of service is the foreign principal. The destination/consumption of the services as provided by the petitioners takes place in a foreign land. This completely satisfies the test of “export of service” as defined under Section 2(6) of the IGST Act, also as there is no contra indication that “factually” it can be regarded as either inter-State or intra-State sale of services.(para 60)

Justice Kulkarni relied on the definition of export of services under Section 2(6), IGST Act, 2017 and observed that all the ingredients of were satisfied in the impugned case. Section 2(6), IGST Act, 2017 defines export of services to mean when: (i) the supplier of service is located in India; (ii) the recipient of service is located outside India; (iii) the place of supply of service is outside India; (iv) the payment for such service has been received by the supplier of service in convertible foreign exchange; and (v) the supplier of service and the recipient of service are not merely establishments of a distinct person in accordance with Explanation 1 in section 8. Strictly speaking, the third ingredient, i.e., place of supply of service is not satisfied in the impugned case by virtue of Section 13(8)(b), IGST Act, 2017. However, since that was the centrepiece of the petitioner’s case, accepting it on face value would have prevented engagement with the petitioner’s argument.   

Justice Kulkarni stated that the contention of petitioners is that Section 13(8)(b), IGST Act, 2017 is being read into the Central and State GST legislations, i.e., CGST Act and MGST Act to tax export of services indirectly by treating them as a local supply. He framed the issued as: provisions of IGST Act were being imported into CGST Act and MGST Acts. The framing of the issuing as interplay of two distinct legislations rather than as an issue of legislative competence is crucial. By treating the issue of deeming fiction under Section 13(8)(b), IGST Act, 2017 he was able to address the petitioner’s grievance and yet managed to not situate it completely within the Constitutional context. Thus, Justice Kulkarni engaged with inter-connectedness of various GST legislations as the central issue making the petitioner’s argument of the Parliament’s competence to enact the impugned provision as an allied issue.   

Once Justice Kulkarni framed the issue as discussed above, he elaborated on the different spheres of CGST Act, 2017, IGST Act, 2017 and various State GST legislations. He agreed with the petitioner’s argument that the deeming fiction incorporated in Section 13(8)(b), IGST Act, 2017 would amount to double taxation and linking of two separate transactions. He observed that the commission is subsumed in the transaction that the foreign principal undertakes with Indian importer. And that the transaction between Indian intermediary and foreign principal cannot be understood be part of the transaction foreign principal and Indian importer. Interlinking of the two independent transactions would be contrary to the destination-based character of GST. He noted that if Section 13(8)(b), IGST Act, 2017 would be applied to CGST and MGST Acts, it would ‘in my opinion, it would lead not only to a consequence of double taxation but also to an implausible and illogical effect, in recognizing two independent transactions to be one transaction for the purpose of levy of CGST and MGST as intra-State trade and commerce.’ (para 79)

Developing on the issue of distinct but inter-relatedness of the two transactions and legislations, Justice Kulkarni highlighted that there was a tension in IGST Act, 2017 itself. He specifically cited Section 7(5), IGST Act, 2017 which provides that if supplier is located in India and place of supply is outside India then such supply shall be treated as in the course of inter-State trade or commerce. He observed that there is a dichotomy since on one hand the petitioner’s transaction of export of services is treated as inter-State under Section 7(5) while it is treated as intra-State under Section 13(8(b). The aforesaid comparison and ‘dichotomy’ is not a conclusive reason to not accept the deeming fiction incorporated under Section 13(8(b) since a legislation can incorporate a rule and its exception. Justice Kulkarni was however convinced that operation of both provisions would lead to absurdity and uncertainty in the operation of IGST Act, 2017. (para 82)

Based on the above reasoning Justice Kulkarni concluded that inter-State transactions should be confined to IGST Act and intra-State transactions only to CGST Act and MGST Act. He observed: 

Necessarily transactions which are intra-State transactions and those which are inter- State transactions (trade or commerce) are required to be compartmentalized, so as to be recognized under the separate regimes and without creation of any fictional incongruity in regard to the regimes, they need to be taxed, in the given facts and circumstances. It will be too harsh and not fair to the assessees to suffer any uncertainty in regard to the regimes the assessee’s would be taxed. Such uncertainty is neither conducive to trade or commerce nor of any real benefit to the interest of the revenue. (para 83) 

However, Justice Kulkarni did not hold Section 13(8)(b) and Section 8(2), IGST Act, 2017 to be unconstitutional. Relying on a spate of precedents he observed that if a provision could be read down and made workable to further the intent of legislation, Courts should adopt that path instead of striking down a provision as ultra-vires. And in his opinon the impugned provision could be made workable and reflect legislative intent if its operation was confined solely to IGST Act, 2017 and was not imported into CGST and MGST Act. (paras 84 and 89)   

Conclusion

A straightforward and pithy conclusion of Justice Kulkarni’s opinion is that Section 13(8)(b) and Section 8(2), IGST Act, 2017 is not unconstitutional but its operation has been confined to provisions of IGST Act only and cannot be made applicable to tax on services under CGST and MGST Acts. What does this mean? One immediate implication is that Section 13(8)(b) of IGST Act cannot be used to levy GST on intermediary services provided to a foreign principal by treating their export of services as a local/intra-State supply. This also means that such intermediary services cannot be subjected to IGST since exports are ordinarily speaking, not taxed under the destination-based principle of GST. And Justice Kulkarni has noted expressly that the petitioner’s intermediary services amount to export of services. Any further implications are likely to be revealed in due time as and when the CBIC issues some communication from its end. 

It is important to note that the exclusive domains and compartmentalization that Justice Kulkarni refers to is an appropriate approach to understand the multiple GST legislations, their operation and their respective spheres of operation. Justice Kulkarni through his judgment has brought home the fact that while the entire legislative matrix of GST operates on same fundamental principles, e.g., destination-based tax; they intend to levy tax on different transactions. IGST Act is applicable to inter-State transactions while CGST Act and State GST Acts are applicable on intra-State transactions. Going forward, it would be interesting to watch if the strict compartmentalization advocated by Justice Kulkarni would admit of some exceptions and the circumstances when the dilution of such compartmentalization may be allowed.   

Finally, it is worth noting that the opinion of Justice Kulkarni is a satisfactory resolution to the taxation of intermediary services and their treatment as intra-State supplies. However, given the way Justice Kulkarni chose to frame the issue some of the Constitutional questions raised by the petitioners remain unanswered or unsatisfactorily resolved. For example, we are unsure of the applicability of Articles 249A, 269A, and 286 to GST legislations and how the three vital Constitutional provisions interact with each other. Neither do we have a clear view as to the aforesaid Constitutional provisions constrain the Parliament or otherwise the scope of their influence on GST laws.     

[1] Dharmendra M. Jani v Union of India 2023 SCC OnLine Bom 852. 

Revenue Mistakes Buying for Selling: Bombay High Court Quashes Order

by

Short Note

In a recent judgment[1], the Delhi High Court provided a remedy to the assessee that should have ordinarily not required judicial intervention. The High Court reminded the Revenue that the assessee had purchased and not sold the immovable property, eliminating the question of assessee declaring any capital gains for the transaction. 

The assessee was first issued a notice under Section 133(6), IT Act, 1961 on 25.03.2021 and thereafter under Section 148A(b) on 19.05.2022. In both notices, the assessee was required to explain why the capital gains on sale of immovable property was not disclosed. In reply to each of the notices, the assessee had furnished information that it had not sold the immovable property in question but had purchased it.    

AO passed an order on 28.07.2022 inter alia alleging that the assessee had not disclosed the acquisition of property and thorugh unexplained sources. The Bombay High Court agreed with the assessee that the order suffered from lack of application of mind by the assessee and relevant materials were not considered by the AO before passing the order. 

Adjudicating on the issue, the Bombay High Court concluded that:

Having regard to the aspects noted hereinabove, we are of the view, that if at all, the AO deems it fit to carry out a fresh exercise, it would be from the stage prior to the issuance of notice under Section 148A(b) of the Act. Clearly, the AO has missed the most crucial part of the transaction, that it was a purchase and not a sale transaction. (para 16)

The Bombay High Court set aside the order passed on 28.07.2022 in pursuance of the notice issued on 19.05.2022. Though the High Court did not set aside the notice issued on 19.05.2022, the paragraph cited above does mandate the AO to re-start the proceedings from the stage prior to issuance of such notice.    

The judgment, while not a landmark or major development under IT Act, 1961 indicates the approach of certain assessing officers (‘AO’). To begin with, the Bombay High Court remarked, it is indeed surprising that while the assessee on 22.04.2021 disclosed information to the Revenue  – in response to the first notice issued under Section 133(6) – about purchase of the immovable property, the AO issued a notice on 19.05.2022 under Section 148A(B), IT Act, 1961 alleging that the assessee had sold the property and not disclosed capital gains.  Further, once the AO realised it had mistook purchase for sale, an order was issued against the assessee alleging assessee’s failure to disclose the purchase of property, which also proved false. Instead of acknowledging the initial mistake, the order issued by the AO alleged assessee’s failure to meet various statutory obligations was an attempt to justify the initial issue of notice.  In this case, the Revenue and more specifically the AO in question did not acknowledge its initial mistake, which are unavoidable during the scrutiny process, instead it doubled down on its mistake. Consequently, we have a situation where refusal and disinclination to admit a mistake led to unnecessary litigation and required the Court to remind the Revenue to adopt a more prudent approach in such situations.     

[1] Krishna Diagnostic Private Limited v Income Tax Office Ward 143 Delhi TS-353-HC-2023 (DEL). 

Revenue Cannot Dispute Singapore Tax Certificate: Bombay High Court Interprets India-Singapore DTAA Correctly 

by

Short Note

In a recent judgment[1], the Bombay High Court interpreted the exemption condition under the India-Singapore DTAA and held that the limitation of benefit provision would not apply to the assessee. The Assessing Officer (‘AO’) had taken an unduly restrictive view of the exemption provision to deny the assessee the rightful benefit. And the High Court rightfully refused to accept the AO’s view.   

Issue

The assessee was a Foreign Institutional Investor registered with the Securities and Exchange Board of India (‘SEBI’). The assessee was investing in debt instruments in India and its return for the Assessment Year 2010-2011 declared a capital gains from the sale of such debt instruments. The assessee claimed exemption under Article 13(4), India-Singapore DTAA for the capital gains. The impugned provision stated that the gains from the sale of a property (dent instrument in this case) would be taxable only in the State of which the assessee was a resident. The assessee in this case was a resident of Singapore and thus it argued that the capital gains were only taxable in Singapore and were exempt from taxation in India by virtue of Article 13(4).

The AO, however, relied on Article 24(1) of the India-Singapore DTAA and denied the assessee’s exemption claim. Article 24(1) stated that:

Where this Agreement provides (with or without other conditions) that income from sources in a Contracting India State shall be exempt from tax, or taxed at a reduced rate III that- Contracting State and under the laws in force in the other Contracting State, the said income is subject to tax by reference to the amount thereof which is remitted to or received in that other Contracting State and not by reference to the full amount thereof, then the exemption or reduction of tax to be allowed under this Agreement in the first-mentioned Contracting State shall apply to so much of the income as is remitted to or received in that other Contracting State. (emphasis added)

The AO did not pay attention to the phrase underlined above and stated that the assessee was entitled to claim exemption only to the extent the capital gains were remitted to Singapore. However, the assessee argued that the amount that was remitted to Singapore was irrelevant as the assessee was liable to tax for its worldwide income in Singapore since it was a tax resident of Singapore.   

Bombay High Court Upholds Assessee’s Claim of Exemption 

The Bombay High Court endorsed the assessee’s position and stated that the AO insisting on evidence of repatriation was an inaccurate statement. The High Court stated that the assessee had placed on record a certificate from the Singapore Tax Authorities stating that the income of assessee from debt instruments in India would be taxable in Singapore irrespective of the amount received or remitted in Singapore. And that the said income of assessee would be treated as accruing in or derived from Singapore. Accordingly, the High Court concluded that: 

Therefore, Singapore authorities have themselves certified that the capital gain income would be brought to tax in Singapore without reference to the amount remitted or received in Singapore. The AO could not have come to a conclusion otherwise. (para 13)

The High Court cited Circular No. 789 which was issued on 13 April 2000 which inter alia stated that certificates of residence issued by the treaty partner are to be accepted as valid. While the Circular was issued under the India-Mauritius DTAA, the High Court noted that its implication and import was sufficiently clear; and it held that the certificates issued by the Singapore Tax Authorities will constitute sufficient evidence for accepting the legal position. The High Court also supported its conclusion by citing the Madras High Court’s judgment in Lakshmi Textile Importers Ltd[2] where a similar principle was reiterated, i.e., the certificate issued by Singapore Tax Authorities should be treated as sufficient evidence of the position of law in Singapore and AO should not try to interpret the law of Singapore. 

The Bombay High Court adopted the correct view and reminded AO that once a treaty partner has issued a certificate stating the position of law in their jurisdiction, it is not open to the AO to dispute the correctness of that legal position. In the impugned case, the AO was interpreting the tax law of Singapore contrary to the legal position stated in the certificate issued by Singapore Tax Authorities. Such an attempt by AO belied acceptable interpretive approaches adopted towards tax treaties and domestic tax statutes.       

[1] Commissioner of Income Tax v M/s Citicorp Investment Bank. Income Tax Appeal No. 256 of 2018, decided on 21.06.2023. Available at https://www.livelaw.in/high-court/bombay-high-court/capital-gain-taxed-singapore-bombay-high-court-exemption-fii-231459?infinitescroll=1  

[2] Commissioner of Income Tax v Lakshmi Textile Importers Ltd 245 ITR 522.

No Whisper in Reasons to Believe: Bombay High Court Quashes Reassessment Notice

by

The Bombay High Court in a judgment[1] delivered on 09.06.2023, quashed a reassessment notice issued to the assessee. The High Court inter alia observed that the notice had been issued without any justification and the assessing officer lacked any reason to believe that any income chargeable to tax had escaped assessment. Instead, the reassessment notice was based on the change of opinion of the assessing officer. 

Introduction 

In January 1993, the petitioner filed its return of income for the Assessment Year 1992-1993. During the assessment proceedings, the petitioner responded to queries by the assessing officer. The latter also obtained information from third parties and conducted a special audit of the petitioner to conclude the assessment in September 1995. The assessment order of the petitioner was further revised, which it appealed before the Commissioner of Income Tax in January 1998. While the appeal was pending, the Finance Act, 1998 introduced the Kar Vivad Samadhan Scheme (‘KVSS’) to declog the litigation and give assesses an opportunity to pay certain amounts and settle all their tax issues. 

The petitioner took advantage of the KVSS to settle all tax disputes and issues and paid amounts in full and final settlement of its arrears under the relevant provisions of the Finance Act, 1998. And the petitioner was accordingly issued a certificate. 

On 15.01.2000, the petitioner was issued another notice alleging that certain income for the Assessment Year 1992-93, has escaped assessment. The petitioner was accordingly asked to file a return for the said Assessment Year within a period of 30 days. The petitioner that the notice issued on 15.01.2000 should be quashed.    

Petitioner Challenges Reassessment Notice 

The petitioner assailed the validity of the reassessment notice on various grounds. The petitioner argued that the order under KVSS was passed after considering all the facts, was final for all heads of income, and also provided petitioner immunity from prosecution and imposition of penalty. The petitioner argued that the Revenue could not used the reassessment notice to ‘turn back the clock’. It is important to note that under Section 93(1), Finance Act, 1998 the designated authority was empowered to issue an order determining the tax arrears and sum payable by the taxpayer. And Section 93(3), Finance Act, 1998 stated that:

Every order passed under sub-section (1), determining the sum payable under this Scheme, shall be conclusive as to the matters stated therein and no matter covered by such order shall be reopened in any other proceeding under the direct tax enactment or indirect tax enactment or under any other law for the time being in force. 

The petitioner had a justifiable and legally sound reason to resist the issuance of reassessment order if the rationale of KVSS and its underlying statutory provisions were reasonably interpreted. To further reinforce their case, the petitioner made an alternate argument, i.e., during the assessment proceedings the assessing officer made certain queries from the petitioner which were answered by it. Therefore, it follows that the reply was subject of consideration while finalizing the assessment order and thus re-opening assessment on same subject matter cannot constitute a reason to believe that income has escaped assessment.

The Revenue defended the issuance of notice by arguing that there was misdeclaration by the petitioner. And that Section 93(1), Finance Act, 1998 permitted revival of proceedings in case the declaration by the petitioner under KVSS was found to be false. 

Bombay High Court Quashes Reassessment Notice 

The Bombay High Court rejected the Revenue’s argument and quashed the reassessment notice issued against the petitioner. The High Court cited various reasons for its conclusion. 

First, the High Court noted that it was never the State’s case that the petitioner had mis-declared income and the certificate/form issued to the petitioner under KVSS was never withdrawn. 

Second, the High Court relied on Killick Nixon case[2], where the Supreme Court adjudicated on a similar set of facts and engaged with similar arguments. The Supreme Court in Killick Nixon case had held that the determination by designated authority under Section 90, Finance Act, 1998 was conclusive in respect of tax arrears and sums payable after such determination which shall be considered as full and final settlement of tax arrears. In the said case, the Supreme Court held that the assessing officer had no jurisdiction to reopen the assessment and issue a notice under Section 148, IT Act, 1961 unless it was found that the information furnished by the assessee was false. The High Court held that only on the strength of the Supreme Court’s observations, the petitioner deserved to succeed.  

Third, the High Court also accepted the petitioner’s alternate argument and held that once the petitioner had furnished a detailed reply during the assessment proceedings and same had been considered during the assessment order; the reopening of assessment was based on a mere change of opinion by the assessing officer and not because there was any justification/reason to believe for issuance of the reassessment notice.  

Conclusion

While the impugned case was squarely covered by the Supreme Court’s decision in Killick Nixon case and was sufficient for the petitioner to succeed. The High Court, nonetheless, went a step ahead to engage with the petitioner’s alternative argument to clarify that mere change of opinion cannot constitute a reason to believe. Section 148, IT Act, 1961 empowers an assessing officer to issue a reassessment notice on if there is a reason to believe that income of the assessee has escaped assessment. Courts have in various decisions opined that mere change of opinion cannot amount to a reason to believe, but the Revenue needs frequent reminders of the threshold prescribed. Lastly, the High Court also observed that since the Revenue issued a notice under Section 148, IT Act, 1961 after expiry of four years from end of relevant assessment year:

… the onus is on the Assessing Officer to show that income chargeable to tax has escaped assessment by reason of the failure on the part of assessee to disclose fully and truly all material facts necessary for its assessment for that assessment year. There is not even a whisper in the reasons to believe that there was any such failure on the part of petitioner to disclose fully and truly all material facts necessary for its assessment.(para 17) (emphasis added) 

Accordingly, the Bombay High Court correctly quashed the reassessment notice.  

[1] Citibank N.A. v S.K. Ojha [2023] 151 taxmann.com 234. 

[2] Killick Nixon Ltd v Deputy Commissioner of Income Tax, Mumbai and Ors (2003) 1 SCC 145. 

Time Period for Filing Appeals under GST: Kerala HC Adopts Strict Interpretation

by

Short Note

In a concise judgment[1], the Kerala High Court dismissed writ petition of a taxable person and held that an appeal under CGST Act, 2017 must be filed before the appellate authority in a time bound manner. The High Court held that the time prescribed for appeal under CGST Act, 2017 must be interpreted strictly. 

Introduction 

The petitioner/taxable person did not file its GST returns in a time bound manner due to COVID-19. The proper officer exercised the power under Section 29(2)(c), CGST Act, 2017 wherein the registration of a taxable person can be cancelled if returns are not filed for a continuous period of six months. The petitioner filed an appeal against the order of cancellation of registration, but after the time prescribed under CGST Act, 2017. Section 107(4), CGST Act, 2017 states as follows: 

“The Appellate Authority may, if he is satisfied that the appellant was prevented by sufficient cause from presenting the appeal within the aforesaid period of three months or six months, as the case may be, allow it to be presented within a further period of one month.” 

Thus, the appellate authority has, in certain cases, the power to extend the time of appeal only by one month after the expiry of initial 3/6 months, whichever is applicable. The taxpayer had filed an appeal even after the additional one month had expired. 

High Court Denies the Claim of Petitioner 

The Kerala High Court relied on a couple of precedents[2] where the Supreme Court while interpreting similar provisions under the Central Excise Act, 1944 had held that the provisions prescribing an outer time limit for filing appeals operated to the exclusion of Limitation Act, 1963. The High Court observed that Section 107(4), CGST Act, 2017 was analogous to the provisions of Central Excise Act, 1944 and concluded that: 

            The Central Goods and Services Tax Act is a special statute and a self-contained code by itself. Section 107 is an inbuilt mechanism and has impliedly excluded the application of the Limitation Act. It is trite, that the Limitation Act will apply only if it is extended to the special statute. It is also rudimentary that the provisions of a fiscal statute have to be strictly construed and interpreted. (para 10)

Accordingly, the High Court dismissed the petitioner’s argument that the Revenue dismissing its appeal against cancellation of registration was arbitrary. 

Conclusion 

The Kerala High Court’s judgment establishes with clarity that the taxpayer is bound to obey the time limit prescribed under CGST Act, 2017 and cannot rely on extraneous factors to extend the time period prescribed for filing appeals before the appellate authorities. In this case, the petitioner was indirectly invoking COVID-19 as an excuse, which was not accepted by the High Court. Further, the High Court, in accordance with the well-established precedents in pre-GST regime held that the Limitation Act cannot come to the rescue of petitioners in extending the time period for filing appeals. CGST Act, 2017, the High Court clarified, operates like a self-contained code for the purpose of time period for filing appeals. Though it would be interesting to observe if the Courts interpret any exceptions to the outer time period if the taxpayer has a genuine hardship and is able to establish it convincingly before Courts.    

[1] Penuel Nexus Pvt Ltd v The Additional Commissioner Headquarters (Appeals) 2023 LiveLaw (Ker) 280. 

[2] Singh Enterprises v Commissioner of Central Excise, Jamshedpur and Others (2008) 3 SCC 70; CCE & Customs v Hongo India (P) Ltd (2009) 5 SCC 791. 

Uncertain Purchaser Obligations under GST: ITC Claims Hit a Roadblock

by

On 12.06.2023, the Calcutta High Court pronounced a judgment[1] urging the Revenue to thoroughly review the petitioner’s supporting documents before rejecting its ITC claim. In the impugned case, the Revenue disallowed the petitioner’s ITC claim because the supplier’s registration had been cancelled with retrospective effect. The case is an example of how, in certain situations, the Revenue unjustifiably burdens the purchaser for the supplier’s lack of bona fide, even though it is the Revenue that belatedly discovers the supplier’s deficient credentials. I examine the High Court’s judgment and suggest that the Courts need to take a sterner view of the Revenue’s approach when it disallows an ITC claim based on inadequate examination of relevant documents.   

Introduction

The petitioner filed ITC claim against supplies purchased from its various suppliers including a certain Global Bitumen (‘supplier’). Petitioner’s ITC claim for purchases from the supplier was rejected by the Revenue. The Revenue’s reasons for rejection were as follows: the supplier was fake, non-existent, and opened its bank account based on fake documents. The Revenue alleged that the petitioner did not verify the credentials of supplier, claimed ITC without the support of any relevant documents and further asked the petitioner to pay penalty and interest under the relevant provisions of GST laws.

There are two specific claims of the Revenue that are worth noting: first, that the petitioner did not ascertain and verify genuineness of the supplier; second, that the supplier’s registration has been cancelled with retrospective effect covering the period of petitioner’s ITC claim. 

The petitioner, on the other hand, argued that the Revenue did not consider the documents which proved that it had purchased goods from the supplier, evidenced the transport of goods and proved that it had made payment to the supplier. The petitioner argued that the failure of supplier to pay the GST to the State cannot be attributed to it since at the time of transaction, the supplier had a valid registration and its status as a GST-registered supplier was reflected on the Revenue’s portal.       

High Court Dismisses Revenue’s Claims 

The Calcutta High Court observed that foundation of the petitioner’s case was that its transaction with the supplier was a genuine transaction. The High Court observed that it was not possible to determine whether the petitioner had failed to meet any of its statutory obligation unless all the petitioner’s documents relating to the purchase were examined by the Revenue. The High Court noted that the Revenue only took into consideration the retrospective cancellation of the supplier’s registration to disallow ITC claim; but did not consider other documents presented by the petitioner. Accordingly, the Revenue’s orders were set aside, and the High Court directed the Revenue to take up petitioner’s case afresh by taking into consideration other documents relating to the transaction in question.

Purchaser Obligations under GST 

The Calcutta High Court, in its judgment, relied on a precedent, i.e., M/s Lgw Industries case[2], where the Calcutta High Court adjudicated a similar set of facts and ordered the Revenue to consider the petitioner’s ITC claim afresh by scrutinizing its documents to verify if the transactions in question were genuine or not. The Revenue was also directed to ascertain if the transactions in question took place before or after the cancellation of registration and whether the purchaser fulfilled its statutory obligation to verify the identity of the supplier.

It is important to note that the purchaser’s obligation extends to establishing the genuineness of the supplier’s identity which includes checking the supplier’s registration status at the time of entering the transaction. If subsequently, the Revenue finds that the supplier lacks bona fide and cancels the registration retrospectively, why should the purchaser’s ITC be blocked for transactions entered before the cancellation of registration? Blocking purchaser’s ITC is especially unfair if the Revenue is not alleging and proving collusion between the purchaser and supplier.

If the purchaser transacts with the supplier after cancellation of latter’s registration, the Revenue has a good reason to deny the purchaser’s ITC claim. However, if the Revenue cancels the supplier’s registration retrospectively, it should not invalidate the purchaser’s ITC claim if the purchaser is able to prove genuineness of the transaction. And if purchaser can establish that at the time of transaction it inquired into and verified that the supplier was validly registered. 

While the Calcutta High Court in both the above-mentioned cases has taken a favorable approach towards petitioners, I suggest that the Revenue needs to be made accountable in a more meaningful manner for treating ITC claims in a casual manner. In both the above cases, the Revenue dismissed ITC claims without taking into consideration the documents presented by the purchaser. Not considering relevant documents is a cavalier way of judging ITC eligibility and gives the impression of pre-judging purchaser’s claims. The High Court directing the Revenue to consider the case afresh is a necessary but not sufficient reprimand to prevent occurrence of similar instances in the future. Courts need to consider if, in certain cases, erring officials should pay damages for not performing their statutory duties.          

[1] M/s Gargo Traders v The Joint Commissioner, Commercial Taxes WPA 1009 of 2022, available at https://www.livelaw.in/pdf_upload/ms-gargo-traders-476282.pdf

[2] M/S Lgw Industries Ltd & Ors v Union of India & Ors, Available at https://indiankanoon.org/doc/109803748/

Limits of Deeming Fiction: Intermediaries under GST-I

by

Constitutionality of Section 13(8)(b), IGST Act, 2017

Introduction

Constitutionality of Section 13 (8)(b), IGST Act has attracted the attention of different Courts. The reason for suspect constitutionality of Section 13 (8)(b), IGST Act is that incorporates a deeming fiction whereby the place of supply for services by an intermediary is in India, i.e., place of service provider instead of the place of recipient. The petitioner’s case was that Section13(8)(b), IGST Act departs from the destination-based character of GST, violates Fundamental Rights under Art 14 and Art 19(1)(g) of the Constitution, and is beyond the Parliament’s competence. There are multiple and varied judicial opinions on the issue and I will explore them in a two-part post. In the first part of this post, I will focus on the judgment pronounced by the Gujarat High Court and by a 2-Judge Bench of the Bombay High Court, both of which leave a lot to be desired. I argue that both decisions engage with the underlying issue superficially and adopt less than adequate reasoning to support their conclusions.    

The Gujarat High Court Upholds GST on Intermediaries

In Material Recycling Association of India case[1], petitioners challenged the constitutional validity of Section 13 (8)(b), IGST Act, 2017. Petitioners were intermediaries providing services to their clients located outside India and earning in foreign convertible currency. As per Section 13 (8)(b), IGST Act, 2017 if a supplier provides intermediary service to a person situated outside India, place of supply of services is deemed to be where the supplier is located. This deeming fiction thereby treats such a transaction as liable to GST. The petitioner challenged the provision as ultra vires of Art 265, 286, Art 14, and Art 19 of the Constitution. Petitioner’s various arguments were underpinned by the central idea that their services constituted as export of services. And export of services or goods could not be subjected to GST since it was a destination-based tax whereunder exports were zero-rated. Further, since the supply of services took place outside India the Parliament lacked competence to enact such a provision.

The Gujarat High Court’s analysis is pithy, and essentially gives a free pass to the legislature by stating that the petitioner’s services could not be considered as an export of services ‘in order to levy CGST and SGST’ and that:

            … it would not qualify to be export of services, more particularly when the legislature has thought it fit to consider the place of supply of services as place of person who provides such service in India. (para 66)

It then curiously did not even agree with the petitioner that the provision in question was a deeming provision and instead upheld the constitutionality of the provision by relying on the fact that a similar situation existed in the pre-GST regime and noted: 

            Therefore, this being a consistent stand of the respondents to tax the service provided by intermediary in India, the same cannot be treated as “export of services” under the IGST Act, 2017 and therefore, rightly included in Section 13(8)(b) of the IGST Act to consider the location of supplier of service as place of supply so as to attract CGST and SGST. (para 67)

Both reasons collapse under the burden of scrutiny. First, let’s decode ‘legislature’s wisdom’. As per the Gujarat High Court, the legislature ‘thought it fit’ to include various transactions in the scope of GST to maximize revenue collection. Legislature enacting provisions to increase revenue collection in no way precludes Courts from examining if the provisions under challenge transgress the Constitution. In fact, one would argue that the primary function of a constitutional Court is to examine if the legislature is enacting provisions within the constitutional limits. For example, in this case, it was incumbent on the Gujarat High Court to examine if the impugned provision satisfied the requirements of Art 286 and/or Art 269A of the Constitution, and whether Art 14 and Art 19(1)(g) were not violated; but the judgment is completely bereft of any such analysis. 

The second reason proffered by the Gujarat High Court was that a similar legal position prevailed in the pre-GST regime. To conclude that a similar provision existed in the pre-GST regime is evidence of the constitutionality of a provision enacted under the IGST Act, 2017 is an unwarranted and unreasonable statement especially when the High Court could not cite any precedent that squarely covered the issue. The Gujarat High Court’s reliance on the fact that similar provision existed in service tax regime to conclude that the Revenue Department has a ‘consistent stand’ and creates a presumption of constitutionality in favour of the provision is a dereliction of duty by a constitutional Court. And, even if there was a judicial decision that upheld the constitutionality of the pre-GST provision, it was incumbent on the Gujarat High Court to examine if the decision remained valid after the constitutional changes that accompanied GST. Nonetheless, the Gujarat High Court’s decision did not conclusively settle this matter as a similar matter was argued before a Division Bench of the Bombay High Court.       

Division Bench of The Bombay High Court Issues a Split Verdict 

The Bombay High Court in Dharmendra M. Jani case[2] decided a similar petition almost a year after the Gujarat High Court’s decision in Material Recycling Association of India case, but it ended in a stalemate with the Division Bench rendering a split decision.  

Justice Ujjal Bhuyan, held that Section 13 (8)(b), IGST Act, 2017 was unconstitutional and rested his conclusion on three observations. First, he examined the aforesaid provision on the touchstone of Art 286 of the Constitution and noted that the supply of service by an intermediary was outside Maharashtra and India. As per him, Section 13 (8)(b), IGST Act, 2017 had created a deeming fiction treating the export of service by an intermediary as an intra-State supply and it was definitely ‘an artificial device created to overcome a constitutional embargo.’ (para 49) Second, he observed that creating a deeming provision such as Section 13(8)(b) where the location of the recipient of service provided by an intermediary though outside India has been treated in India ‘runs contrary to the scheme of the CGST Act as well as the IGST Act besides being beyond the charging sections of both the Acts.’ (para 54) His third reason referred to the transaction’s lack of nexus with India and he concluded that: 

            … section 13(8)(b) of the IGST Act not only falls foul of the overall scheme of the CGST Act and the IGST Act but also offends Articles 245, 246A, 269A and 286(1)(b) of the Constitution. The extra-territorial effect given by way of section 13(8)(b) of the IGST Act has no real connection or nexus with the taxing regime in India introduced by the GST system. (para 56)   

While Justice Bhuyan’s opinion was correct in identifying the lack of nexus and that the provision undermined GST’s fundamental principle of destination-based consumption tax, he failed to clearly articulate as to ‘how’ Section13(8)(b), IGST Act, 2017 contravened Art 286 of Constitution. Art 286(1) prevents the State from levying GST on a supply that takes place outside the State or a supply that takes place in the course of import of goods or services into India’s territory or their export out of India’s territory. While Art 286(2) empowers the Parliament to determine principles for determining when a supply of goods or services takes place in any of the two ways mentioned in Art 286(1). It is unclear in Justice Bhuyan’s opinion as to which aspect of Art 286 does Section 13 (8)(b), IGST Act, 2017 specifically contravene and what is the constitutional embargo that the legislature is trying to circumvent. 

At the same time, Justice Bhuyan’s opinion was notable for understanding that while the source of legislative power regarding the inter-State supply of goods or services could be traced to Art 246A and Art 269A of the Constitution, there were constitutional restraints on such power, such as Art 286 of Constitution, and the impugned provision needed to be examined on those touchstones. More importantly, unlike the Gujarat High Court, he did not accept the argument that the existence of a similar provision under the service tax regime precluded a challenge to Section 13 (8)(b), IGST Act, 2017. He instead stated that the validity of Section 13 (8)(b) read with Section 8 of the IGST Act, 2017 had to be examined on the touchstone of relevant constitutional provisions and not by relying on previous legal provisions. Though he fell short of clearly specifying the nature and extent of constitutional transgression.  

Justice Abhay Ahuja in his separate opinion upheld the constitutionality of Section 13 (8)(b), IGST Act, 2017. He gave a ringing endorsement to the Gujarat High Court’s decision in Material Recycling Association of Indiacase, though he added his reasons, which were equally if not less convincing. I will only briefly mention his reasons since his engagement with the petitioner’s argument is almost cavalier. 

Justice Abhay Ahuja pithily observed that Section 13 (8)(b), IGST Act, 2017 was not contrary to the destination-based principle of GST. He observed that since under GST taxation is on supply by intermediaries and the same was characterized as an inter-State supply, there was no conflict thereby completely missing the thrust of the petitioner’s argument. He also incorrectly stated that the definition of export of services being a general provision would be inapplicable since there was a specific provision defining intermediary. Again, not realizing that the two provisions operated independently and performed different functions. 

Justice Ahuja’s examination of the constitutional dimension is worth discussing in more detail. He began by interpreting the scope of Parliament’s power under Art 269A and Art 286 of the Constitution too widely. He noted that while imports had been deemed to be inter-State trade or commerce under IGST Act, 2017, Art 269A of the Constitution did not take away the power of the Parliament to stipulate ‘any other supply’ to be a supply in the course of inter-State trade or commerce. (para 103) Art 269A(5) specifically provides that:

            Parliament may, by law, formulate the principles for determining the place of supply, and when a supply of goods or of services, or both takes place in the course of inter-State trade or commerce.   

Clearly, Art 269A (5) of the Constitution empowers the Parliament to determine the situs/place of supply for inter-State trade or commerce. Thus, when Justice Ahuja says that Art 269A does not take away power to include any supply as inter-State trade or commerce, it should have been preceded by an examination if the Parliament by exercising its power under Art 269A(5) – to enact Section13(8)(b), IGST Act, 2017 – has acted within the scope of its power and has adhered to the limitations imposed by Art 286 of Constitution. Instead, he held that the ‘whole purpose’ of Art 286(2) of the Constitution was to empower Parliament to determine the situs of supply and since Section13(8)(b), IGST Act, 2017 specifically does that it could not be said to contravene Art 286 of Constitution. His understanding of the nature and purpose of Art 286(2) is partly wrong. And his conclusion about the constitutionality of Section 13 (8)(b), IGST Act, 2017 lacks any examination of the Parliament’s powers under Art 269A read with Art 286 of the Constitution. 

The reasoning adopted by both the Gujarat and the Bombay High Court only contributes to greater uncertainty on GST’s applicability to intermediaries. Further, we have no clarity on the role of Art 286 in the GST regime, no clear articulation on the interplay of Art 246A and Art 269A and a lack of appreciation as to whether and to what extent GST’s identity as a destination-based tax is supposed to constrain Parliament’s legislative power. Are no deviations allowed from the destination-based principle? If they are, on what grounds and to what extent?

Finally, both the Gujarat High Court and Justice Abhay Ahuja of the Bombay High Court endorsed the deeming fiction contained in Section13(8)(b), IGST Act, 2017 by stating that it was essential to bring such intermediary services within the scope of GST to raise revenue. Adopting a revenue-maximising approach is the prerogative of the legislature; but, from the standpoint of Courts, it is crucial that the provision in question is constitutional. The fact that the legislature is better placed to frame a tax policy cannot be cited as a reason to enact provisions that are unconstitutional. We need a more robust examination of the tax dimensions of the Constitution and not a judicial approach that uncritically endorses the view that the legislature deserves a wide leeway in enacting tax laws. Such an approach has a little analytical basis, presumes that the legislature is adequately examining each law minutely and certainly does not warrant giving short shrift to arguments based on constitutional law. 

[1] Material Recycling Association of India v Union of India & Others 2020-VIL-341-GUJ. 

[2] Dharmendra M. Jani v Union of India 2021 SCC OnLine Bom 839. 

Budgetary Support Scheme: High Court Interprets Eligibility Criteria Strictly

by

Budgetary Support Scheme (‘BSS’) was introduced by the Union of India (‘Union’) for taxpayers to smoothen their transition to GST. Taxpayers who received concessions or exemptions under the pre-GST indirect tax regime would cease to receive the said concessions or exemptions due to subsumption of various indirect levies by GST. To ameliorate cessation of tax benefits due to introduction of GST, the State introduced BSS under which taxpayers who received exemptions under pre-GST indirect levies were eligible to receive partial refund of GST if they fulfilled the eligibility conditions. The High Court of Jammu & Kashmir and Ladakh pronounced a judgment[1] on 23 May 2023, interpreting the eligibility condition for BSS strictly and rejecting taxpayer’s claim to receive refund of GST. 

Taxpayers Claim 

The petitioner/taxpayer in the impugned case received exemption from payment of excise duty under a Notification issued by the Union under Central Excise Act, 1944. The benefit of excise duty exemption extended to goods described in the Table falling within different Chapters of the Notification. In the impugned case the Chapter 38 was the relevant Chapter. The petitioner claimed it was eligible to claim excise duty exemption under the broad HSN Code 3808 under Chapter 38. The petitioner was originally entitled to claim the exemption until October 2026, but due to the introduction of GST – and subsumption of excise duty – in July 2017, the petitioner had to apply for budgetary support under BSS. 

The petitioner claimed budgetary support by arguing that the exemption Notification covered all goods under the broad HSN Code 3808 and did not distinguish between various sub-headings under Chapter 38. While the Union resisted the claim by arguing that the exemption Notification covered specific goods and not all goodsunder the HSN Code 3808. The Union argued that the goods manufactured by the petitioner when it availed benefit under the exemption Notification were different than those manufactured after commencement of GST. As per the Union, the petitioner was only eligible for budgetary support if the goods manufactured after introduction of GST co-related to the same sub-headings as goods manufactured prior to GST.  While as per the petitioner, if the goods manufactured were covered under the umbrella code of 3808, they were eligible for budgetary support and the exact sub-heading was immaterial.

Since the goods manufactured by the petitioner before GST were different from those manufactured after introduction of GST, it adopted a broader interpretation of the exemption Notification and BSS eligibility conditions. The Union, on the other hand, adopted a comparatively more restrictive interpretation.  

High Court Rejects Taxpayers Claim 

The High Court stated that the appropriate manner to determine if the taxpayer was eligible to claim budgetary support was to examine the conditions specified for eligibility. One of the conditions, relevant for the purposes of the case, was that the taxpayer must be manufacturing specified goods. And specified goods were defined in BSS as goods which were being manufactured and cleared by the eligible unit by availing the benefit of excise duty exemption upto 1.07.2017. 

The High Court read the eligibility conditions of BSS with the definition of specified goods to mean that a taxpayer to claim the budgetary support must: be manufacturing goods covered under the HSN Code 3808, must have availed excise duty exemption under the Notification and the goods must have been cleared by the manufacturing unit by availing the exemption upto 1.07.2017, i.e., the date of implementation of GST. This was a fair and reasonable interpretation of the conditions specified in the BSS. 

The High Court’s interpretation of the conditions led to at least one straightforward conclusion: if the taxpayer was manufacturing the goods and availing exemption before 1 July 2017, it was eligible for BSS. While if it was not manufacturing the goods and not availing the exemption, it was not eligible for budgetary support. In view of the above, the petitioner’s argument seems attractive, i.e., if the goods under the HSN Code 3808 were manufactured by it before introduction of GST, the budgetary support should be available. However, the High Court noted that the second condition also needs to be satisfied, i.e., the goods must have been cleared by availing the exemption. And crucially the exemption could only be availed if the relevant sub-heading under HSN Code 3808 was mentioned alongside the 6-digit or 8-digit code. Thus, under the exemption Notification excise could only be availed for specific goods and not any goods manufactured under the HSN Code 3808. Accordingly, the High Court held that:

… even if any unit manufactures an item now which is covered under the Tariff Head of 3808, if the same had not been manufactured earlier during the subsistence of the Exemption Notification and had not availed excise duty exemption, such good would not qualify for claim of budgetary support under the Scheme. (para 43)

The High Court rejected the petitioners arguments on various grounds. It observed that accepting the petitioner’s argument would make the definition of specified goods redundant. It also observed that the Union was not adding words to the conditions of the BSS, instead it was interpreting the conditions correctly and strictly. And the High Court correctly endorsed the Union’s interpretation of the conditions provided in the BSS. The High Court also adopted a reasonable approach to the dispute and observed that there was no discernible ambiguity in the conditions specified in the BSS. The High Court rejected the petitioner’s claim by holding that the petitioner was adopting a generalised approach while the conditions mentioned in the BSS were specific and clear that did not allow for an interpretive approach adopted by the petitioners to support their claim of tax exemption.    

Conclusion

The High Court’s decision is a successful attempt to adhere to strict interpretation of tax statutes. At the same time, the High Court was clear in its understanding of the scope and aim of BSS. It clarified that the budgetary support is conditional and not a blanket support; to be eligible for BSS, a taxpayer needs to meet the conditions so specified. (para 27) Discounting the need for liberal interpretation of the relevant conditions, the High Court stated that the eligibility was clearly mentioned and rightly concluded that the decision to not extend BSS benefits to the petitioner did not suffer from the vice of illegality or arbitrariness. (paras 49 and 52)           

[1] M/S Best Crop Science Industrial Area, Kathua v Union of India and others 2023 LiveLaw (152).

LinkedIn