Rav Singh

Limits of Deeming Fiction: Intermediaries under GST – II

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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

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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 

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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

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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

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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

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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

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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

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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).

Possession, Ownership and Valuable Articles: Supreme Court Opines on Section 69A, IT Act, 1961

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On 16 May 2023, a Division Bench of the Supreme Court in M/s DN Singh case[1] delivered a well-reasoned judgment clarifying the scope of Section 69A, IT Act, 1961. The case required the Supreme Court to determine if a person in unlawful possession of bitumen can be equated to an owner and obligated to pay tax for its monetary value under Section 69A. The judgment is elegantly structured and helps us understand the intent and meaning of Section 69A.  

Introduction

The brief facts are as follows: assessee was a carriage contractor for bitumen which was loaded from oil companies to be delivered to various divisions of the Road Construction Department of the Government of Bihar. A scam was reported in the media that transporters were not delivering the requisite quantity of bitumen to the Road Construction Department and were misappropriating it after loading from oil companies. Taking note of the scam, Assessing Officer of the assessee took note of the difference in quantity between the bitumen lifted by the assessee and delivered by it and added the value of missing bitumen to the assessee’s income under Section 69A, IT Act, 1961.   

There were two assessment years in question: in the assessment year 1995-96, an addition was made in a sum of Rs.2,01,14,659 towards short delivery of bitumen while in the assessment year 1996-97 there was an addition in a sum of Rs.1,04,71,720. 

The assessee resisted addition of the amounts on two counts, i.e., bitumen was not a valuable article which was a pre-condition for invoking Section 69A and that the assessee was only a carrier but not owner of the bitumen in question and that Section 69A can only be invoked against owners of the valuable articles. Section 69A, IT Act, 1961 states as follows: 

Where in any financial year the assessee is found to be the owner of any money, bullion, jewellery or other valuable article and such money, bullion, jewellery or valuable article is not recorded in the books of account, if any, maintained by him for any source of income, and the assessee offers no explanation about the nature and source of acquisition of the money, bullion, jewellery or other valuable article, or the explanation offered by him is not, in the opinion of the 4 Assessing] Officer, satisfactory, the money and the value of the bullion, jewellery or other valuable article may be deemed to be the income of the assessee for such financial year. (emphasis added)

In this post, I will focus on the Supreme Court’s approach towards interpretation of the two terms – owner and other valuable article – used in Section 69A to examine how it understood the scope and intent of the above-cited provision.  

Supreme Court Clarifies the Scope and Intent of Section 69A

The first question was whether the transporter would qualify as an owner of goods which the Supreme Court answered in the negative. The Supreme Court referred to the law relating to bailment and noted that entrustment of goods to the transporter would amount to bailment. The bailee/transporter is necessarily entrusted with the possession of goods for the purpose of delivery as per the directions and wishes of the consignee. Consequently, the Supreme Court held that: 

During the subsistence of the contract of carriage of goods, the bailee would not become the owner of the goods. In the case of an entrustment to the carrier otherwise than under a contract of sale of goods also, the possession of the carrier would not convert it into the owner of the goods. (para 39)

The Supreme Court cited a series of cases which examined the definition of owner in the context of income from house property to emphasise two elements: first, that the definition of ownership needs to be interpreted as per the context e.g., in the case of taxation of an owner from income from house property courts have held that the emphasis was on receipt of income. And an owner must be someone who exercises the right of an owner not on behalf of the owner but in his own right. Second, the Supreme Court emphasised the owner possesses a bundle of rights with respect to a property, e.g., power of possession, right to alienate, right of bequeath and right of enjoyment. (paras 57-58) Applying the above understanding and elements of ownership to the case, the Supreme Court observed that the transporter cannot be considered as owner of bitumen. The Supreme Court reasoned that a transporter by short delivering the bitumen breached the terms of contract and committed an act that was punishable under penal laws. Accordingly: 

Recognising any right with the carrier in law would involve negation of the right of the actual owner which if the property in the goods under the contract has passed on to the consignee is the consignee and if not the consignor. This Court has already found that the appellant is bereft of any of the rights or powers associated with ownership of property. The only aspect was the alleged possession of the goods which is clearly wrongful when it continued with the appellant contrary to the terms of the contract and the law. (para 61)

The Supreme Court found that the assessee was not in possession of bitumen in his own right, did not possess the power of alienation, could not claim any right over bitumen as an owner and the title of assessee was only a shade better than that of the thief. And thereby the Supreme Court refused to accept that the assessee was the owner of bitumen. 

Second question that the Supreme Court had to address was if bitumen constituted a valuable article under Section 69A. It referred to the principle of ejusdem generis and Noscitur a Sociis, and observed that to apply the aforestated principle to interpret a provision there must exist a genus which must not be exhausted by the categories enumerated in the catalogue. The Supreme Court underscored the scope of ‘other valuable article’ by using certain examples. It referred to the fact that watches, coconuts, cameras can or cannot constitute a valuable article depending on the facts of the case, but placed primary emphasis on the price of the goods in question. According to the Supreme Court, the intent was to ascertain if the goods were worth a great deal of money or a great price. Thereby, citing the price of bitumen as Rs 5/kg, it concluded that:

But if to treat it as ‘valuable article’, it requires ownership in large quantity, in the sense that by multiplying the value in large quantity, a ‘good price’ or ‘great deal of money’ is arrived at then it would not be valuable article. Thus, this Court would conclude that ‘bitumen’ as such cannot be treated as a ‘valuable article’. (para 79) 

The Supreme Court adopted the right approach in analysing the scope and intent of Section 69A. It examined in detail the position of a transporter as a bailee, the rights of a bailee vis-à-vis owner and how the former cannot be equated to an owner in the impugned case. More importantly, the Supreme Court never lost sight of the intent of Section 69A when interpreting the terms owner and other valuable article, ensuring that its interpretation of both terms was in the proper context and furthered the objective that the provision seeks to achieve. 

Notes on Concurring Opinion 

In his concurring opinion, Justice Hrishikesh Roy examined the term other valuable article in detail and made three important observations: 

First, that he observed that if one focuses on the words money, bullion and jewellery that precede other valuable article, it is justified to include only high value goods. And that if sundry articles of nominal value are included or if one emphasises on total high value of goods without looking at their low per unit price, it would defy the logic of legislature. (para 10) 

Second, he stated that the provision was unambiguous and needs to be interpreted strictly – a well-established dictum in tax law interpretation. Thus, other valuable article cannot be interpreted to mean ‘any article of value’ but means an item ‘worth great deal of money’. He reasoned that other valuable article has to be a high-priced article that was purchased to avoid income tax liability and not every article of any value. (para 15)  

Third, he correctly observed that high value and less bulky items that aided assesses in evading their income tax liabilities were intended to be brought within the scope of Section 69A and were the reason for 1964 Amendment to introduction of the impugned provision. (para 17) 

Justice Roy, in his concurring opinion, was able to successfully highlight the intent, scope and meaning of Section 69A. The concurring opinion is worth reading for its precision and its adds considerable value to the case and helps us understand the history, scope and meaning of Section 69A clearly.  

Conclusion 

The Supreme Court through its judgment has articulated the scope of Section 69A sufficiently clearly. Equally, the judgment also adequately refers to the intent of the provision, i.e., to bring within the income tax net assets that an assessee may purchase or otherwise own and hides from the income tax authorities. Any article can be of value, the question was whether the article in question was worth enough money to enable a person to escape income tax liability. And more appropriately, the Supreme Court observed that it is not important to ascertain the total value of the goods, but need is to look at per unit value of goods else the objective of Section 69A would not be served.   

[1] M/s D.N. Singh v Commissioner of Income Tax, Central, Patna & Anr 2023 LiveLaw (SC) 451. 

Patna High Court Prevents Levy of Entertainment Tax Citing 101st Constitutional Amendment

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A Division Bench of the Patna High Court on 18 May 2023 pronounced a judgment that inter alia required it to examine the interaction of Bihar Entertainment Tax Act, 1948 (Act of 1948) with the 101st Constitutional Amendment Act, 2016 (‘101st Amendment’). While the case involved both, statutory and constitutional issues relating to the scope and nature of entertainment tax, in this post I will focus on the Constitutional aspect of the case. More specifically, nature and scope of power of States to levy entertainment tax after the 101stAmendment.  

Introduction 

The petitioner was a Multi System Operator (‘MCO’) who challenged its tax liability under the Act of 1948. State of Bihar argued that the MCO was liable to pay entertainment tax for transmitting programs it received through satellite. The MCO argued that the tax liability was that of local cable operators who broadcasted those signals to the subscribers and were responsible were providing connection to the subscribers, latter being the taxable event under the Act of 1948. One of the petitioner’s grounds of challenge was the State of Bihar’s lack of competence to levy entertainment tax after the 101st Amendment. There were two prongs to the petitioner’s argument: first, Entry 62 in List II has been amended by the 101st Amendment denuding State the power to levy entertainment tax. Pre and post amendment versions of Entry 62 in List II are respectively as follows: 

Taxes on luxuries, including taxes on entertainments, amusements, betting and gambling. 

Taxes on entertainments and amusements to the extent levied and collected by a Panchayat or a Municipality or a Regional Council or a District Council. 

As per the petitioner the field of legislation, i.e., entertainment tax, was no longer available to a State in the form it was available before the 101st Amendment. Entry 62 in List II has been substituted and only permits levy and collection by local bodies. Consequently, after the 101st Amendment, State of Bihar cannot levy and collect entertainment tax through Commercial Tax Officers as provided in the Act of 1948 and the relevant Rules. 

The second prong of the petitioner’s argument rested on Section 19 of the 101st Amendment which states as follows:

Notwithstanding anything in this Act, any provision of any law relating to tax on goods or services or on both in force in any State immediately before the commencement of this Act, which is inconsistent with the provisions of the Constitution as amended by this Act shall continue to be in force until amended or repealed by a competent Legislature or other competent authority or until expiration of one year from such commencement, whichever is earlier. (emphasis added) 

The petitioner urged that the Act of 1948 cannot justify levy of entertainment tax after the 101st Amendment and one can agree that is a reasonable conclusion since Section 19 only saves ‘law relating to tax on goods or services or on both’. But the petitioner went a step ahead and argued that there is no justification for levy and collection of entertainment tax for the period prior to the 101st Amendment since the power for levy and collection stands extinguished by the substitution of Entry 62 in List II. Now courts have recognized that the effect of substitution is that it repeals and introduces a new law, but the doctrine of ‘substitution effect’ has not yet been fully tested and applied regarding legislative entries in the Constitution. Neither is there complete jurisprudential clarity if the effect of substitution is retrospective in nature. (paras 7-9) In my opinion, the petitioner in making the latter argument was making a novel claim in the constitutional context.  

The State of Bihar, on the other hand, tried to justify its power to levy and collect entertainment tax despite the 101st Amendment amending Entry 62. To begin with, it stated that the 101st Amendment introduced a new clause, i.e., Article 366(26A) which defined ‘services’ as anything other than goods. The State adopted an unusually wide and non-contextual interpretation of ‘services’ to argue that every tax other than on goods would be covered by Section 19 of the 101st Amendment including entertainment tax. The State further referred to Sections 173 and 174 of the Bihar Goods and Services Tax Act, 2017 and claimed that while these provisions repealed the Act of 1948, recovery of arrears of tax was allowed as if the Act of 1948 was not repealed. The State made an alternative plea that the levy and collection of entertainment tax before the 101stAmendment certainly cannot be challenged. The State argued that the repeal and saving clause of Bihar Goods and Services Tax Act, 2017 not only preserved pre-existing tax liability, but also saved the levy and collection of tax prior to the 101st Amendment.       

101st Constitution Amendment Narrows State’s Power to Levy Entertainment Tax  

Patna High Court agreed with the petitioner’s arguments and made some interesting though not fully reasoned observations.  

To begin with, the High Court did not agree with the State’s argument that the definition of services encompassed entertainment tax. The High Court rightly reasoned that if the term ‘services’ was intended to subsume every tax there was no reason to retain Entry 62 and it could have been deleted like some other entries such as Entry 52 relating to entry taxes which was deleted via the 101st Amendment. Entertainment tax survived the 101st Amendment albeit in a modified form presumably with an intent to keep it as a separate levy instead of subsuming it under GST. In stating so, the High Court offered a more credible interpretation as compared to the State’s expansive understanding of the term ‘services’ under Article 366. (paras 32 and 33)

As regards the impact and effect of Section 19, the High Court stated that inconsistent provisions in State legislations could be continued for one year or till their repeal/amendment by respective State legislatures, whichever was earlier. However, the Act of 1948 while validly legislated under Entry 62, as it existed then, could not be sustained after the 101st Amendment because of the changes made to Entry 62. This conclusion also is a right understanding and naturally flows from the High Court’s understanding of the scope of Section 19, i.e., it did not extend to entertainment tax.    

However, as regards the petitioner’s argument that entertainment tax cannot be collected even for the period before the 101st Amendment, the High Court concluded that: 

The tax for the period prior to the amendment, though levied on the taxable event occurring, cannot also be collected since there is no transition provision available under the 101st Amendment making such collection of entertainment tax permissible for one year or by way of a repeal; by an enactment, consistent with the amendment, with a saving clause for continuance of the levy and collection under the old Act as it was never repealed. (para 40) (emphasis added)  

The above observation does not fully add up. Why would a transition provision be necessary to collect tax for a taxable event that occurred before the 101st Amendment? If at the time of occurrence of the taxable event, State of Bihar had the authority to levy and collect entertainment tax, it should be allowed to recover the same even after the 101st Amendment. Why should the power to recover pre-amendment tax liabilities cease abruptly if the transition provision does not encompass entertainment tax? Transition provisions, such as Section 19, aim to smoothen transition and allow States time to impose taxes under pre-existing laws such as VAT and/or amend the stated laws in consonance with the new regime, in this case GST. The High Court was right in observing that Section 19 excluded entertainment tax and thereby did not allow States to levy and collect entertainment tax for taxable event under the Act of 1948 occurring after the 1.07.2017, the date of 101st Amendment. However, there is little to justify that Section 19 also implies that taxable events occurred and tax liabilities incurred by taxpayers before that date should not be satisfied by taxpayers.

The High Court to fortify its reasoning needed to engage more deeply with the argument that Entry 62 in List II has been substituted and its resultant effect. A prima facie conclusion is that Entry 62 has been amended/modified, retaining power regarding entertainment tax with the State subject to it being levied and collected at the local level. However, given the transformative changes introduced in indirect tax regime – labelled under the umbrella heading of GST regime – by the 101st Amendment it would not be out of context to suggest that Entry 62 is substituted. There are arguments that can be made from both sides, but the judgment provides little insight about the scope of arguments and neither does it engage with this crucial issue in a meaningful manner. In my view, States are allowed to recover arrears of tax relating to the period before the 101st Amendment and a typical savings clause such as in Sections 173 and 174 of the Bihar Goods and Services Act, 2017 is usually beyond reproach. The onus is on the petitioners to prove that the tax arrears cannot be collected. In this case, the High Court thought that the petitioners have discharged the burden, but its reasoning didn’t seem sufficiently persuasive.     

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