Rav Singh

Section 16, CGST Act is Constitutional: Kerala HC

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The Kerala High Court recently[1] dismissed a taxpayer’s challenge that Section 16(2)(c) and Rule 36(4) of CGST Rules, 2017 were violative of Article 14 and unconstitutional. The High Court ruled that the taxpayer’s challenge was vague, and the impugned provisions did not suffer from the vice of manifest arbitrariness and were not unconstitutional.   

Facts 

The brief facts of the case are: taxpayer was denied ITC under the CGST and SGST Acts on the ground of difference in GSTR 2A and GSTR 3B returns. The Assessing authority levied interest, penalty, and initiated recovery proceedings against the taxpayer. The taxpayer challenged the assessment order and the constitutional validity of Section 16(2)(c) and Rule 36(4).

Section 16(2)(c) states that no registered person shall be entitled to ITC in respect of any supply of goods or services unless the tax charged in respect of such supply has been actually paid to the Government either in cash or through utilization of ITC admissible in respect of such supply. Rule 36(4) states that ITC to be availed by a registered person in respect of invoices or debit notes the details of which have not been furnished by suppliers in GSTR-1 shall not exceed 5% of eligible ITC available in respect of invoices or debit notes the details of which have been furnished by the suppliers. 

Since the judgment didn’t mention in detail the arguments of the parties, it is difficult to decipher the exact ground on which the constitutional challenge was made by the taxpayer. One can only glean the arguments from the Kerala High Court’s reasoning and its conclusion.  

Decision 

The Kerala High Court articulated four reasons to dismiss the taxpayer’s challenge. 

First, the High Court noted that ‘it is settled’ that ITC is a benefit/concession and not a right extended to a dealer. And that ITC can only be claimed by a taxpayer as per the conditions prescribed in the statute. (para 5) And that the State in exercise of its rule making powers can provide additional conditions for availing the concession. This view aligns with recent decisions wherein ITC has been labelled as a concession thereby providing the State ample, if not infinite space, to impose conditions on taxpayers before they can successfully claim ITC.  

Second, the High Court relied on the doctrine of deference to tax statutes, encoded in Indian tax jurisprudence and is dutifully invoked by Courts without scrutinizing the merits of the doctrine. In the impugned case, the High Court noted there was need for judicial restraint before interfering with tax statutes unless the statute was manifestly unjust or glaringly unconstitutional. (para 10)

Third, the High Court rejected the taxpayer’s claims that Section 16(2)(c) and Rule 36(4) of CGST Rules, 2017 were violative of Article 14 on the ground that the argument was vague. The High Court further noted that neither did the provisions discriminate between the purchaser and seller nor were they manifestly arbitrary and were not contrary to Article 14. 

Fourth, the High Court relied on the facts to observe that the taxpayer did not produce tax invoice as required by Section 16 despite various opportunities, nor did it appear for personal hearing and equally did not discharge the burden on a dealer as per Section 155, CGST Act, 2017. Section 155 states that where any person claims that he is eligible for ITC, the burden of proving such claim shall lie on such person. Since the taxpayer did not meet the prescribed conditions under Section 16 and did not provide the documents, the High Court was correct in holding that the taxpayer did not discharge the burden under Section 155. 

Conclusion 

The Kerala High Court’s decision is defensible and cogent when it invokes Section 155 and non-fulfilment of the conditions of Section 16. However, the High Court is on tricky ground when it claims that ‘it is settled’ ITC is a concession. Undoubtedly, some of recent decisions have taken a similar view, but it is ordinarily incumbent on a Court to acknowledge the divergent interpretations and that ITC has not always been interpreted to be a concession. Similarly, the invocation of doctrine of deference to tax statutes, while well-established, needs to be scrutinized as to its relevance if not its merits in constitutional challenges to tax statutes. Surely, there is room to suggest that the doctrine is not holy grail in all constitutional challenges to tax statutes. The High Court was remiss in not paying adequate attention to the aforementioned facets of the reasoning.               

[1] Nahasshukoor v Asst Commr, Second Circle, SGST, Colletorate 2023:KER:69725. 

Jharkhand HC Allows State Authorities to Continue Proceedings, Rejects DGGI’S Arguments on Nationwide Fake ITC Fraud

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The Jharkhand High Court recently adjudicated a writ petition where the petitioner had argued that only the authority which had initiated the entire process of investigation can complete the modalities and any subsequent actions by other authorities need to be quashed. The High Court interpreted Section 6, CGST Act, 2017 and the relevant notifications to adjudicate in favor of the petitioner. 

Facts 

The petitioner was the proprietor of M/s Manish Trading, Ranchi carrying on the business of iron, steel and cement. An inspection was carried out by the Intelligence Branch of the Jharkkhand State GST Dept and subsequently the petitioner was made to make certain deposits. Therafter, the Preventive Branch of CGST, Ranchi issued a notice to the petitioner directing reversal of ITC due to purchases made from certain non-existent entities. It was followed by a search carried out by DGGI, Central Tax which seized certain items from the petitioner and prepared a Panchnama to that effect. The petitioner was sent various summons. 

The petitioner approached the Jharkhand High Court with the prayer that it had been issued summons by 3 different authorities and that only the authority which had initiated the proceeding prior in point in time shall be authorized to carry out the proceedings. The petitioner relied on the Notification and subsequent clarificationissued by CBIC, wherein the latter stated that: 

            It is accordingly clarified that the officers of both Central tax and State tax authorized to initiate intelligence based enforcement action on the entire taxpayer’s base irrespective of the administrative assignment of the taxpayer to any authority. The authority which initiates such action is empowered to complete the entire process of investigation, issuance of SCN, adjudication, recovery, filing of appeal etc. arising out of such action. (para 3)

The petitioner elaborated that the said Notification had been issued under Section 6(2)(b), CGST Act, 2017 and that it was amply clear that the investigation had been initiated by inspecting team of State GST and only it should be authorized to carry forward the proceedings. 

The respondents including DGGI argued that the investigation were initiated by them as part of the investigations against the fake invoice gangs based in Noida. The respondents argued that the investigations had revealed various fake entities that were involved in claiming fraudulent ITC and the petitioner was part of a large scale fraud spread across various States. And that DGGI was better suited to conduct the investigation since it had an all India jurisdiction and normally State GST transfers such cases to DGGI. 

DGGI’s argument was thus two-fold: not only did it initiate the investigation but also it was more competent to handle the investigation since the case had inter-State ramifications. 

Decision 

The Jharkhand High Court noted that Section 6(2)(b) and the clarification issued under it made it amply clear that the chain of a particular event and the investigation carried out at behest of the Department are interrelated. The High Court observed that even if it accepted that the DGGI initiated an independent investigation based on information received in Noida:

… in that event also, we are at loss to say that the DGGI is raising a question about credibility and competence of the State GST Authorities, in carrying out the investigation concerning wrong/inadmissible availment of Input Tax Credit, inasmuch as, the officers of the DGGI does not enjoy any special power or privilege in comparison with the officers of the State GST Authorities. (para 14) 

Based on the above, the Jharkhand High Court concluded that since the investigation by State authorities were prior in time, including the search and seizure operation and since all proceedings are inter-related, the State authorities shall continue with the proceedings. 

Conclusion 

The impugned decision reveals the administrative complexity of a nationwide dual levy. Empowering officials both the Central and State level to administer a single tax in India is unprecedented and some administrative tensions are bound to arise. And this isn’t the first nor the last instance of jurisdictional tussles. The Jharkhand High Court did well to rely only on the relevant statutory provisions and notifications/clarifications to arrive at its decision. Whether it is the best decision from an administrative standpoint is not easy to tell. At least not yet.  

Section 194N of IT Act, 1961 is Constitutional: Madras HC

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The Madras High Court recently[1] upheld constitutionality of Section 194N of the IT Act, 1961. Section 194N inserted via Finance Act, 2019 was argued by the petitioners to be unconstitutional on the grounds of it being illegal, arbitrary, and violative of their fundamental rights under Article 14 and 19(1)(g) of the Constitution. Section 194N imposes an obligation on the banks including co-operative societies carrying on banking – when paying any sum exceeding one crore rupees, increased to three crores in 2023 – to withhold a tax of 2% of the amount. The petitioner’s main argument that the amount withdrawn by co-operative societies was not income was rejected by the Madras High Court. 

Facts and Arguments 

The petitioner, a licensed bank, maintained accounts of co-operative societies. All the account holders were registered under the Tamil Nadu Co-operative Societies Act, 1963. When loans were sought by members of the societies, petitioner used to grant a loan via banking channels to the members. If a member did not have a bank account, the petitioner used to transfer the money to current account of the society for onward disbursement to the farmers. The societies would withdraw the cash and disburse it to the farmers. The petitioner stated that it was used a conduit between the State on one hand and societies on the other to transfer various kinds of cash support to farmers including crop loans and other gifts. 

The main argument of the petitioner was that the withdrawal of money by the co-operative society was intended to be forwarded to the farmers. And that the money did not constitute income of the society. And neither was the money income in the hands of recipients since they were gifts or monetary assistance provided by the State. When the petitioner was issued a showcause notice for non-compliance with Section 194N, it replied that the provision is arbitrary and withdrawal of cash cannot be regulated in a manner proposed under Section 194N. The petitioner argued that the tax withholding provisions under Chapter XVIIB were intended to be applicable only to receipts which constituted income in the hands of the recipient. The petitioner assailed the provision as being unreasonable and that its stated aim of promoting digital payments was immaterial in determining the reasonableness of the provision. 

Curiously, the petitioner also argued that a new charge was created via Section 194N and equated Section 194N to a charging provision, questioned its placement under the Chapter XVIIB of the IT Act, 1961 and termed it ‘eccentric’. (para 19)

The State, on the other hand, emphasised the objective of the provision, i.e., to promote digital payments. The State underlined its aim of creating an economy that was robust and cashless, as far as possible. And that the cash withdrawals in the co-operative banks were fraught with irregularities that led to a large portion of income escaping the tax net. (paras 31-36)      

Decision  

The Madras High Court did not engage with the petitioner’s main argument in a straightforward manner. It instead cited precedents to observe that the use of the word ‘sum’ instead of ‘income’ in Section 194N does not advance the petitioner’s case that the rigours of the provision would only apply if receipt constitutes taxable income in the hands of the recipient. The High Court referred to various provisions relating to withholding tax in Chapter XVII and the varied terminology used in them such as sum, amount, income and noted that the used of the terminology is not conclusive to establish if tax needs to be deducted at source. In fact, the High Court placed greater emphasis on the intent and objective and noted that the intent of the provision is equally crucial to interpret the terms used in the provision. (paras 39-51)     

Next, the Madras High Court relied on some relevant precedents to negate petitioner’s argument that Section 194N was a charging provision. The High Court held that the impugned provision was clearly a machinery provision. The High Court further observed that the objective of preventing cash withdrawals from escaping tax net and promoting a digital economy were intended to be achieved through Section 194N and the legality of the provision cannot be argued to be fatal based on its placement under the IT Act, 1961. 

Further, the Madras High Court relied on facts to reject the petitioner’s other argument, i.e., cash withdrawal was not income for the society. The High Court observed that there is nothing on record to show the entirety of the amount is further disbursed to the recipients of State’s cash assistance and other income support schemes. The High Court noted that one of petitioner’s argument was that the gifts were not taxable in the hands of the intended beneficiaries, and thus there was no need to deduct tax at source. But the High Court observed, the bank was not aware of the purpose at the time of withdrawal and that in many instances the withdrawal amount was more than the intended gift amounts for the beneficiaries.  

Another provision, that the High Court referred to was Section 197, IT Act, 1961 which allows a payee to obtain a nil certificate on the ground that the receipt is not amenable to tax. Section 197 did not include situations incorporated in Section 194N, meaning that the petitioner could not the option provided to other payees under Section 197. (paras 73-75) While the petitioner did not have the remedy under Section 197, it could invoke Section 194N itself wherein the Central Government in consultation with RBI is empowered to issue a Notification enlisting the recipients to whom rigour of Section 194N would not apply. The High Court noted that since such a Notification has already been issued in favor of certain recipients, the proper remedy for the petitioner is to approach the Central Govt seeking an exemption rather than make a claim that the receipts in the form of cash withdrawals from banks are not taxable. The High Court was indirectly hinting that the petitioner did not make a wise decision to not comply with its statutory obligations provided in Section 194N. (paras 77-78)   

Decision 

The impugned decision stands on defensible if not impeccable reasoning. The High Court sufficiently emphasised the intent for introduction of Section 194N and noted that machinery provisions can be introduced to meet social objectives such as expansion of tax base and introduce transparency in the fiscal economy. The High Court referred to legislative intent to highlight that machinery provisions while not charging provisions can mandate deduction of tax on withdrawal of money even if the money is not income in the hands of the recipient. But, the High Court was unable to provide a clear and articulate reasoning as to why legislative intent should override every other consideration while interpreting a statutory provision. 

[1] The Income Tax Officer, Tiruchirappalli v M/s. The Thanjavur District Central Co-operative Bank Ltd TS-821-HC-2023MAD.  

An Ambiguous Circular: Is Electricity Indirectly under GST?

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On 31.10.2023, CBIC issued a Circular clarifying the applicability of GST on certain services. The Circular, inter alia, clarified one issue which is the focus of this article. The issue, as framed by the Circular, was: Whether GST is applicable on reimbursement of electricity charges received by real estate companies, malls, airport operators etc. from their lessees/occupants? The Circular instead of clarifying the issue has raised further questions about the immediate GST implications on the transactions and is an example of the larger issue afflicting Indian tax policy: making rather than clarifying law through Circulars.  

Separate Invoices Are Immaterial 

The first transaction that the Circular mentions is supply of electricity by real estate companies, airports, malls, etc. to their occupants. The Circular mentions that if electricity is supplied as part of a composite supply then it shall be taxed accordingly. Section 2(30), CGST Act, 2017 defines composite supply to mean a supply made to a taxable person consisting of two or more taxable supplies of goods or services, which are naturally bundled together and supplied in conjunction with each other, in the ordinary course of business, one of which is a principal supply. And that the applicable GST rate is that of the principal supply. The first issue is that electrical energy is exempt from GST under Notification No. 2/2017 – Central Tax (Rate) (See Serial No. 104). Since electrical energy is exempt, it cannot, in my view, be included in a composite supply since the essential condition for a composite supply is that it should include two taxable supplies. An exempt supply cannot indirectly be transformed into a taxable supply by a Circular by treating it as an ancillary of a composite supply.         

The Circular curiously adds that even if electricity is billed separately, the supply will constitute a composite supply and shall be billed at the rate of principal supply, i.e., renting of immovable property. This position is again questionable, especially if one accounts for a previous Circular issued in June 2018. Serial No. 2 of the Circular answered the question: how servicing of cars involving both supply of goods and supply of services are to be treated under GST? The Circular clarified that where supply involves both supply of goods and supply of services and their value is shown separately, the goods and services will be liable to tax at the rates as applicable to such goods and services separately. Why is the position different if invoice for supply of electricity is issued separately? Why shouldn’t supply of electricity and renting of immovable property, be liable to GST at their applicable rates if they are billed separately? A cynical view would suggest that it is because if electricity is billed separately, it would be treated as an exempt supply, but if it is included in a composite supply it allows levy of GST on supply of electricity. One thing is evident that the Circular of 2018 and Circular of 2023 do not show a consistent view on taxability under GST if separate invoices for goods and services are issued.         

Pure Agent Acquires a New Meaning

Paragraph 3.3 of the Circular of 2023 invokes the concept of pure agent and is worth citing in full: 

However, where the electricity is supplied by the Real Estate Owners, Resident Welfare Associations (RWAs), Real Estate Developers etc., as a pure agent, it will not form part of value of their supply. Further, where they charge for electricity on actual basis that is, they charge the same amount for electricity from their lessees or occupants as charged by the State Electricity Boards or DISCOMs from them, they will be deemed to be acting as pure agent for this supply. 

The first and second sentences seem to refer to the pure agent in varied terms. The first sentences aligns with Rule 33, CGST Rules, 2017 which states that expenditure or costs incurred by a  supplier as a pure agent of recipient of supply shall be excluded from the value of supply. The latter sentence introduces a deeming fiction wherein the real estate owners, real estate developers, etc. are ‘deemed to be acting as pure agent’ if they charge for electricity on an actual basis. Does this mean that in this particular instance, the conditions specified in Rule 33, CGST Rules, 2017 for a person to be considered as a pure agent need not be satisfied? While a deeming fiction can be introduced, it is suspect if a Circular can introduce a deeming fiction bypassing the conditions specified in the Rules. A more prudent approach would have been to amend the Rule 33 if the intent was that certain entities were to be treated as pure agents irrespective of whether they fulfil the conditions specified in the said Rule. For now, we do not know if the Circular should prevail over the Rules or vice-versa, introducing an avoidable layer of indeterminacy on the issue.    

Conclusion 

The impugned Circular, in so far as it sought to introduce clarity on the applicability of GST on electricity charges has, in my view, not achieved its objective. In fact, it has introduced more uncertainty. And apart from the ambiguity that the Circular has introduced, this is an apt example of law making through Circulars. The statutory provisions and the relevant Rules do not, in any manner, support some of the clarifications issued by CBIC through its Circular. In fact, it is an exercise of law making with the Circular stating certain legal positions and articulating interpretations that cannot be directly linked to the parent statute. This leaves GST policy at the mercy of convenient interpretations that may find favor with CBIC at a particular point.     

Employment Includes Self-Employment: ITAT Interprets Section 6, IT Act, 1961

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ITAT, Mumbai recently[1] interpreted the term ‘employment’ used in Explanation 1(a), Section 6, IT Act, 1961 and held that the term includes within its remit self-employment such as business or profession. ITAT relied on CBDT’s Circular and the Kerala High Court’s decision on a similar issue which also held that the term employment includes self-employment.  

Facts 

In the impugned case, assessee filed his return on 28.01.2020 and claimed his status as ‘non-resident’ for the assessment year and did not offer his global income for taxation. The Assessing Officer (‘AO’) observed that the assessee had left for Mauritius as an investor on a business visa and not for the purpose of employment and could not avail the benefit of Explanation 1(a). 

Section 6(1) inter alia states that an individual is resident in India if he is in India for 365 days in the four years preceding the relevant previous year and is in India for a period or periods amounting to 60 days in the previous year. Explanation 1(a) to Section 6(1) states that an individual being a citizen of India, who leaves India in any previous year ‘for the purpose of employment outside India’, 60 days shall be read as 182 days. In simple terms, the Explanation alters the residence condition of 365+60 days to 365+182 days for an Indian citizen who leaves India for purpose of employment. A person who leaves abroad for purpose of employment has can spend more time in India before being considered a resident.  

In the impugned case, the AO was arguing that the assessee’s case was covered within the general rule of 365+60 days since he did not leave for employment outside India but as an investor on a business visa. While the asssessee argued that his case was covered by the 365+182 days condition since he left for Mauritius as a consultant to a company. Since the assessee had spent 176 days in India, determining the applicable condition was crucial to answering the residential status of the assessee. The ITAT had to determine if an assessee leaves India not for employment, but self-employment, can it be granted the benefit of the relaxed condition of 365+182 days. 

Decision 

ITAT primarily relied on the CBDT Circular and the Kerala High Court’s decision to conclude that the term employment cannot be given technical meaning and employment would include going aboard for any avocation including self-employment such as business or profession. The qualifier is that the term employment did not include visits abroad for tourism purposes or medical treatment or the like. ITAT and the Kerala High Court’s decision align closely with CBDT’s explanation as to why the relaxation in the residency test was introduced. As per CBDT’s Circular the residency test was modified to avoid hardship to Indian citizens who were employed or ‘engaged in other avocations outside India’. (para 7.3) It is apparent that relaxation in the residency test introduced via Explanation 1(a) was not limited to only employed persons but also any Indian citizen carrying out any avocation outside India. 

Conclusion 

ITAT Mumbai’s decision in the impugned case is the correct interpretation of the law and arrives at a fair conclusion ensuring parity between people who leave India for the purposes of employment and people who leave India for business purposes. Hopefully, the AO in the impugned case and other similar cases will adhere to this interpretation of the law and scrutinize assessments accordingly.     

[1] Asst Commissioner of Income Tax v Shri Nishant Kanodia TS-11-ITAT-2024 Mum.

ITC Can be Denied if Delay in Filing Returns: Cal HC

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The Calcutta High Court recently decided the question whether an assessee filing its tax returns after the stipulated time – prescribed under Section 16(4), CGST Act, 2017 – is entitled to claim ITC. The High Court answered in the negative and upheld the GST Department’s order denying ITC to the assessee on the ground of belated filing of returns.  

Facts and Arguments 

Assessee in the impugned case submitted the returns in GSTR-3B for the period from November 2018 to March 2019 on 20.10.2019 which was beyond the due date of submission, i.e., September 2019. The assessee was asked to show cause as to why its claim for ITC should not be denied since the returns were filed after the due date. On assessee’s failure to respond, the GST Department initiated recovery proceedings and debited the requisite amount from the cash ledger balances of the assessee. The assessee challenged the recovery actions before the Calcutta High Court. 

To begin with, it is important to briefly note that Section 16, CGST Act, 2017 prescribes the eligibility and conditions for an assessee to claim ITC. Section 16(2) requires fulfilment of certain conditions such as possession of tax invoices, receipt of goods or services or both while Section 16(4) prescribes the time within which an assessee is required to file returns to be eligible to claim ITC. And, another aspect that would become relevat in the subsequent discussion, Section 16(2) begins with  non-obstante clause, ‘Notwithstanding anything contained in this section’ while a similar clause is absent in Section 16(4). 

The assessee’s argument was that once the conditions stipulated in Section 16(2), CGST Act, 2017 have been fulfilled by the assessee, it is entitled to the right to claim ITC. And that availing or utilizing the ITC through procedural formalities of filing returns is a matter of choice for the assessee. The assessee further argued that ITC is not claimed through returns but through books of account under Section 16(2). And that the non-obstante clause used in Section 16(2) cannot be negated by stipulating an outer time for filing returns as an additional condition for claiming ITC under Section 16(4). If an assessee is denied the right to claim ITC for failure to file returns within the time stated under Section 16(4), it would negate the non-obstante clause of Section 16(2). 

The Revenue Department, on the other hand, argued that the non-obstante clause used in Section 16(2) cannot be interpreted in isolation. And that Section 16(2) and Section 16(4) were complementary provisions and not contradictory provisions. Section 16(2) prescribed the conditions necessary to avail ITC and Section 16(4) added the condition of time. Only by relying on the non-obstante clause, Section 16(2) cannot be interpreted in a manner to render Section 16(4) otiose. 

Calcutta High Court Decides 

The Calcutta High Court referred to various precedents decisions pronounced under GST and under VAT laws to emphasise three things: 

First, in matters of taxation the legislature deserves greater latitude and courts should be circumspect before intervening in tax disputes. While the doctrine of deference to taxation statutes has a long standing and questionable traction in Indian jurisprudence, it served no immediate purpose in deciding the issue at hand.  

Second, the High Court noted that a provision in a statute cannot be interpreted in isolation and there is a need to read it along with other provisions in the statute especially if the subject matter in the different provisions or different parts of the statute is similar. 

Third, the High Court cited a slew of precedents to express its agreement with the view that ITC is a concession and can only be claimed as a matter of right by an assessee on fulfilling the conditions prescribed in the statute. Relying on the same, the High Court observed that:

Section 16(2) does not appear to be a provision which allows Input Tax Credit, rather Section 16(1) is the enabling provision and Section 16(2) restricts the credit which is otherwise allowed to the dealers who satisfied the condition prescribed the interpretation given by the court that the stipulation in Section 16(2) is the restrictive provision is the correct interpretation given to the said provision. (para 12)

The Calcutta High Court also relied on the Patna High Court’s recent judgment to observe that Section 16(4) did not suffer from ambiguity and an assessee’s right to claim ITC can only materialise on fulfilling the conditions prescribed under Section 16(2) as well the condition prescribed under Section 16(4), i.e., filing of returns within a stipulated time. 

Conclusion 

There are, in my view, two important takeaways from the impugned judgment: first, the Calcutta High Court’s view that ITC is a concession/benefit granted by the State to an assessee and it can be claimed only if the conditions prescribed in the statute are strictly followed, though the nature of ITC is not as straightforward and may require a deeper look; second, all the conditions prescribed in Section 16 need to be fulfilled to claim ITC successfully and the condition to file returns within a prescribed time cannot be understood to be as optional. Failure to adhere to the time of filing returns will rightly result in denial of ITC.  

Allahabad HC Clarifies Govt’s Scope of Power under Section 3 and 5, CGST Act, 2017

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In a recent decision[1], the Allahabad High Court interpreted Sections 3 and 5 of the CGST Act, 2017 and clarified the scope of power of the Central Govt and the CBIC under these provisions. Section 3 confers the Central Govt with the power to appoint classes of officers for the purposes of CGST Act, 2017. Section 5 provides that officer of central tax may exercise powers and discharge duties subject to such conditions as the CBIC may impose. The High Court rejected petitioner’s argument that the Central Govt does not have the authority to confer powers on the officers under Section 5 and observed that the petitioner’s contention lacked substance. 

Facts 

The petitioner invoked extraordinary writ jurisdiction of the Allahabad High Court challenging Notification No. 14/2017 – Central Tax dated 01.07.2017 on the ground that it was ultra vires to the power of the Central Govt. The petitioner also made additional arguments about the jurisdiction of the concerned officers to carry out inspection/search proceedings under Section 67 and power to issue summons. I will though confine this post to the petitioner’s first argument involving power of the Central Govt and CBIC under Sections 3 and 5 of CGST Act, 2017. 

According to the petitioner, the Central Govt in exercise of its powers under Section 3 has issued the Notification No. 14/2017 – Central Tax wherein it has appointed officers of Director General of Goods and Services Tax Intelligence (‘DGSI’) as Central Tax Officers and invested them with all the powers under CGST Act and IGST Act. The petitioner contended that appointing officers does not confer them with powers and the latter was outside the remit of the Central Govt’s powers under Section 3. The petitioner’s case was that only the Commissioner in Board can confer powers to Central Tax Officers under Section 5 read with Section 167 and Section 168. 

The relevant statutory provisions are worth citing before examining the Allahabad High Court’s reasoning and its decision. Section 3, CGST Act, 2017 states that the Central Government shall, by notification, appoint the following classes of officers for the purposes of this Act. The classes of officers include the Principal Chief Commissioners or Directors General of Central Tax, Principal Commissioners of Central Tax or Directors General of Central Tax among others. Section 5 states that subject to such conditions and limitations as the Board/CBIC may impose, an officer of central tax may exercise the power and discharge the duties conferred or imposed on him under this Act. 

Simply put, the petitioner was arguing that the Central Government could only appoint certain officers as central tax officers while conferring them with powers could be done by the Board/CBIC under Section 5. Since the Notification No. 14.2017 – issued by the Central Govt – also performed the latter function, it was ultra vires Sections 3 and 5 of the CGST Act, 2017. Ironically, the said Notification was previously issued by CBIC and later via a corrigendum it was substituted by the word Central Govt.  

Decision 

The Allahabad High Court stated that the petitioner’s argument lacked substance. It traced the timeline relating to Notification No. 14/2107 – Central Tax and wording of Sections 3,4, and 5 of CGST Act, 2017. The High Court agreed with the petitioner’s contention that it was essentially the CBIC which had been empowered to entrust the power to the officers under Section 5, CGST Act, 2017. The High Court though treated the CBIC as an extension of the Central Govt. Referring to the constitution of CBIC, the High Court observed that it was constituted under Central Boards of Revenue Act, 1963 and that: 

Further, section 3 of the Central Boards of Revenue Act, 1963 relating to Constitution of Central Boards for Indirect Taxes and Customs says that it is the Central Government, which shall constitute the Central Board of Indirect Taxes and Customs and the said Board shall be subject to the control of the Central Government and shall exercise such powers and perform such duties, as may be entrusted to that Board by the Central Government or by or under any law. (para 18)

 The High Court concluded that it appears that the CBIC is subservient to the Govt and it can be argued that when the power has been invested with CBIC to do certain things, how can the Govt not exercise such a power. (para 18) The CBIC is to be understood as an alter ego of the Central Govt?  

Conclusion 

The necessary corollary of the High Court’s decision is that any power conferred on CBIC can be exercised by the Central Govt and more crucially, this could also mean that CBIC lacks autonomy. Undoubtedly, CBIC is a creation of the Central Govt under a statutory provision, but that cannot necessarily lead to the conclusion that the powers of CBIC are exercisable by the Govt in all cases and for all purposes. An analogy would be that a sectoral regulator such as RBI or SEBI is a creation of the statute, but that does not mean that any power of these statutory bodies can be exercised by the Central Govt. The Govt does has the power to supplant a statutory body only in exceptional or specified circumstances. And if CBIC and the Central Govt are to read interchangeably, what is the point of mentioning one and not the other in certain provisions? 

[1] R.C. Infra Digital Solutions Inc v Union of India TS-02-HCALL-2024-GST. 

Appellate Authority Ignored CBIC’s Circular: Bombay HC

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In a recent decision[1] the Bombay High Court expressed surprise that the appellate authority ignored CBIC’s Circular while ordering the assessee to pay back the Input Tax Credit (‘ITC’) refund granted to it along with interest. The High Court set aside the order by appellate authority.  

Facts 

The assessee had filed an application on 29.08.2018 seeking refund of ITC under Section 54(3), CGST Act, 2017 on export of goods made under a Letter of Undertaking. The assessee was granted a 90% refund of ITC via the first order and via a subsequent order, after scrutiny, the entire amount claimed as refund was granted. The Department, however, challenged the order granting refund to the assessee before the Commissioner/appellate authority claiming that the assessee must pay back the entire refund amount along with the interest. The Commissioner passed an order in favor of the Department which was assailed by the asssessee before the Bombay High Court. The primary ground of the assessee’s challenge was the legality of the Commissioner’s order.    

Two Circulars 

The legality or sustainability of the Commissioner’s order rested on CBIC’s Circular issued on 18.11.2019 (‘Circular of 2019’). The Department argued that the assessee was not allowed to make a simultaneous claim for refund that related to different financial years. And that in the impugned case, the assessee had claimed credit for the period from 1.04.2018 to July 2019 and financial year 2017-18. 

The assesee, on the other hand, argued that the refund was in conformity with Rule 89(4), CGST Rules, 2017 which provide a detailed formula for computing the refund for the assessee. Further, the assessee argued that the Commissioner’s view was not in accordance with the CBIC’s Circular dated 31.03.2020 (‘Circular of 2020’) which clarified and negated some of the refund related conditions mentioned in the Circular of 2019. 

The Commissioner was correct in interpreting the Circular of 2019. Paragraph 8 of Circular of 2019 stated that while an applicant file a refund for a tax period or by clubbing different tax periods, the refund claim cannot spread across different financial years.  The Commissioner was remiss in not noting that the Circular of 2020 had categorically modified the Circular of 2019 and removed the condition that a refund cannot be spread across more than one financial year. (para 2.5) Paragraph 2.4 of Circular of 2020 stated that: 

On perusal of the provisions under sub-section (3) of section 16 of the Integrated Goods and Services Tax Act, 2017 and sub-section (3) of section 54 of the CGST Act, there appears no bar in claiming refund by clubbing different months across successive Financial Years. (emphasis added) 

The rationale for modification was motivated by the underlying legal principle that a Circular cannot introduce a more stringent condition than imposed by the statutory provision. Circular of 2020 was also prompted by the Delhi High Court’s decision wherein it termed the condition imposed Paragraph 8 of the Circular of 2019 as arbitrary and stayed the condition which prevented an assessee from claiming refunds that spread across more than one financial year. The High Court had ordered opening of portal to allow the exporters to claim refunds that were tied to more than one financial year.   

Decision 

A persual of Rule 89(4) along with the Circular of 2020 clarifies the legal position amply, and the Bombay High Court correctly noted that the assessee was entitled to claim the ITC credit available for the prior financial years too. The High Court stated that it was a matter of wonder as to how the Commissioner could arrive at a decision contrary to both the Rule and the Circular of 2020 to deny the refund to the assessee. And that either the Commissioner had overlooked or not addressed the matter because it did not record a finding on the issue, which was impermissible. (para 11) Accordingly, the High Court concluded that the order of the Commissioner could not be sustained and was liable to be set aside. 

Conclusion 

The impugned decision is an instance of the Department challenging a legally sound order of one of its own officers, and the appellate authority, in this case the Commissioner, adopting a view that was contrary to the CBIC’s Circular. Either the Circular of 2019 was cherrypicked because it favored the Department or there was a genuine oversight by the Commissioner in not referring to the Circular of 2020, which had diluted the Circular of 2019. Either way, through the impugned case, the GST Department does not give the impression of a sound tax administration that is taking decisions as per the applicable law.  

[1] M/s Sine Automation and Integration Pvt Ltd v Union of India TS-697-HCBOM-2023-GST. 

The Din Surrounding ‘DIN’

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The Supreme Court recently granted an interim stay on the Delhi High Court’s judgment wherein it was held that a communication issued by an income tax authority without citing the computer-generated Document Identification Number (‘DIN’) does not have any standing in law. While the one line stay order of the Supreme Court does not mention the reasons, it is worth examining how the Income Tax Department is trying to circumvent the mandate of a Circular issued by its own apex administrative body, i.e., the Central Board of Direct Taxes. 

Contents of the CBDT Circular

Before I elaborate the legal issue involved, it is apposite to summarise the CBDT’s Circular, its aim and content. The CBDT issued a Circular on 14.08.2019 stating that as part of the broader e-governance initiatives as well as Income Tax Department’s move towards computerisation of work, almost all notices and orders are being generated on the Income Tax Business Application Platform (ITBA). However, the Circular noted that some notices were being issued manually without providing an audit trail of communication. To prevent manual communication, the CBDT in exercise of its powers under Section 119, IT Act, 1961 issued the impugned Circular. Paragraph 2 of the Circular mandated that no communication by any income tax authority relating to assessment, appeals, order, exemptions, investigation, etc. shall be issued unless a computer-generated DIN has been allotted and is duly quoted in the body of such communication.    

Paragraph 3 of the Circular enlisted limited exceptions when a manual communication can be issued by an income tax authority. Paragraph 3 envisaged 5 situations: 

  • When there are technical difficulties in generating/allotting/quoting the DIN
  • When communication is required to be issued by an income tax authority who is outside the office 
  • When due to delay in PAN migration, PAN is with non-jurisdictional Assessing Officer
  • When PAN of assessee is not available and proceeding under the IT Act, 1961 is sought to be initiated 
  • When functionality to issue communication is not available in the system 

However, to issue the manual communication in any of the above 5 situations, reasons need to be recorded in writing and prior written permission of Chief Commissioner/Director General of Income Tax is required. Further, the manual communication needs to state the fact that communication is being issued manually without generating a DIN and the date of written approval. For manual communication in situations (i), (ii), and (iii), Paragraph 5 of the Circular states that the communication needs to be ‘regularised’ by uploading it on the System, generating a DIN and communicating the DIN to the assessee. Presumably, the generation of DIN and its communication to assessee would happen on an ex-post basis, but the requirement of generating the DIN needs to be fulfilled nonetheless in these situations.   

Paragraph 4, crucially, and in unambiguous terms states the consequence for not adhering to the mandate of the Circular: any ‘communication which is not in conformity with Para-2 and Para-3 above, shall be treated as invalid and shall be deemed to have never been issued.’   

The above summary of the Circular leaves no doubt that the intent of CBDT is to make manual communication by income tax authorities an exception and electronic communication containing DIN a norm. This is evident in the fact that even when manual communication is allowed under certain exigencies, it needs to be regularised on ITBA to ensure an audit trail. And the seriousness of the intent is reflected in Paragraph 4 which states that a ‘DIN-less’ communication is non-existent in law. 

The above Circular was to have effect from 01.10.2019.   

Legal Issues 

Since the issuance of the Circular, Income Tax Appellate Tribunals and High Courts have, on various instances, opined on the effect of the Circular. The general fact pattern has been that an income tax authority issued a communication after 01.10.2019 without generating the DIN, or without mentioning it in the body of the communication or communicating with the assessee manually without the Income Tax Department being able to justify that any of the 5 exceptional situations existed. The assessees have challenged the ‘DIN-less’ communications as invalid and judicial authorities have pre-dominantly favored the assessee. The three legal prongs on which the decisions stand are: 

First, Circulars issued by CBDT under Section 119 of IT Act, 1961 are binding on the Revenue, i.e., all officers and persons employed in execution of the IT Act, 1961 need to compulsorily adhere to CBDT’s Circular. 

Second, strict interpretation of Paragraphs 2 and 4 of the CBDT Circular. Former requires generation of DIN and quoting it in the body of communication. Accordingly, ex post generation of DIN and communicating it to the assessee or not mentioning the DIN in the body of communication has been held to be non-compliance of the Circular’s mandate. 

Third, the Income Tax Department cannot take recourse to Section 292B of IT Act, 1961. Section 292B, IT Act, 1961 states that any return of income, assessment, notice, etc. shall not be deemed to be invalid merely by reason of any mistake, defect or omission if the communication or proceeding are in substance and effect in conformity with the intent and purpose of IT Act, 1961. Delhi High Court observed that the defence of Section 292B is not available to the Income Tax Department since the ‘phraseology’ used in Paragraph 4 of the Circular is clear: a communication not issued in accordance with the conditions prescribed in Paragraphs 2 and 3 shall have no standing in law. The Delhi High Court’s judgment has now been stayed by the Supreme Court. 

The Income Tax Department in filing a Special Leave Petition before the Supreme Court challenging the Delhi High Court’s decision is signaling that it is not bound by CBDT’s Circular or that it would only adhere to the Circular if it is aligned with the Department’s interpretation, i.e., generating DIN and quoting it in the body of the communication is only a procedural formality and not following the said procedure should not affect the validity of the communication. The Income Department’s interpretation though is not on sound legal footing as the Circular is clear that not following the prescribed procedure would render the communication non-existent in the eyes of law. What is the middle path that the Supreme Court can invent? Even if the Supreme Court states that the Income Tax Department can claim the defence of Section 292B, it would be akin to reading down Paragraph 4 of the Circular. Perhaps the Income Tax Department can press upon the Supreme Court that if ‘DIN-less’ communications are held to be invalid, it would result in a vacuum in certain assessment proceedings, risk loss of revenue, and create legal uncertainty. This consequential approach has succeeded before Courts in various instances and can possibly have traction in the impugned case as well. But, to my mind, it will not be prudent and would directly contradict CBDT’s stance.  

Madras HC Holds Prescribed Time Period for Filing Returns as ‘Directory’: Interprets Section 62, CGST Act

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In a recent decision[1], the Madras High Court had to decide if an assessee loses the right to file tax returns after expiry of 30 days under Section 62(2), CGST Act, 2017. Section 62(2) provides an assessee 30 days to file returns after the proper officer passes a ‘best judgment’ assessment order. The High Court held that the assessee does not lose its right to file returns, but its interpretation of the provision is not founded on cogent reasoning. 

Facts 

In the impugned case, the asssessee failed to file its tax returns for the months of December 2022, January 2023 and February 2023. Thus, in exercise of the powers under Section 62(1), the proper officer passed best judgment assessment orders on 28.03.2023 for the month of December 2022 and on 30.04.2023 for the months of January 2023 and February 2023. Under Section 62(2), the assessee can file a valid return within 30 days of the service of best judgment assessment order passed by a proper officer under Section 62(1). And if the return is filed, the best judgment assessment order is deemed to have been withdrawn but the assessee’s liability for payment of fine and penalty continues. 

In the impugned case, the assessee did not file its return within 30 days of the passing of the best judgment assessment order and pleaded that the delay be condoned on account of financial difficulties. The Madras High Court framed the issue as: whether the assessee loses the right to file returns after expiry of 30 days or is right retained by providing sufficient reasons for non-filing of returns. (para 13) 

Decision 

The Madras High Court examined the relevant provision, i.e., Section 62, CGST Act, 2017 and stated that under Section 62(1) the proper officer has been granted a period of 5 years for completing the best judgment assessment. The 5 years are calculated from the due date of filing of annual return of the relevant financial year. Thus, the High Court deduced that in the impugned case, the proper officer could finalise the best judgment assessment order until 31.12.2029. And thereafter elaborated:

In such case, if the best judgement assessment order is passed by the respondent on 31.12.2029, which is permissible under Section 74 of the GST Act, the petitioner can file his returns within a period of 30 days therefrom i.e., on or before 30.01.2030. Hence, the time limit is available up to 30.01.2030 for the petitioner to file their returns. (para 14) 

The above paragraph is a peculiar reading of Section 62. Under Section 62(1), the proper officer has an outer time limit of 5 years to finalise the best judgment assessment order. This does not automatically extend the right of an assessee to file their tax returns to 5 years and 30 days. The assessee, under Section 62(2), must file a valid tax return within 30 days of passing of the best judgment assessment. Only because in the impugned case the proper officer finalized the best judgment assessment much before expiry of 5 years does not mean that the right of assessee extends to 5 years and 30 days. If the right of an assessee is interpreted to survive for 5 years and 30 days in all cases, then prompt passing of best judgment assessment orders would negate the 30 day outer limit as assessee can file valid returns anytime within 5 years and 30 days. The intent of the provision seems to be to allot the proper officer a window of 5 years to pass an order and the assessee 30 days once the order has been passed.    

The other issue, about condonation of delay was where the Madras High Court’s observations were on sounder footing. The High Court observed that if there is a sufficient reason for not filing returns within 30 days then the delay can be condoned. But, this does not lead to the High Court’s conclusion that ‘the limitation of 30 days period prescribed under Section 62(2) of the Act appears to be directory in nature’. (para 16) Here again, interpreting the 30-day time period allotted to the assessee as directory in nature is an opinion manufactured by the High Court without any cogent reasoning or a detailed analysis of the intent of the provision. 

Conclusion 

The Madras High Court’s conclusion that if there is delay on assessee’s part, i.e., beyond 30 days, then the delay can be condoned if sufficient reasons are presented is appreciable. However, the interpretation that the period of 30 days is only directory in nature and right of the assesse to file valid returns extends beyond 5 years lacks teeth. The High Court was remiss in not noticing that the period of 5 years was for the proper officer and not the assessee. The latter only has 30 days which commence from the service of the assessment order.    

[1] Comfort Shoes Components v Assistant Commissioner, Ambur, Vellore TS-694-HCMAD-2023-GST. 

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