Rav Singh

Supreme Court Opines on Nature of Section 19 of 101st Constitutional Amendment

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In a recent judgment[1], a Division Bench of the Supreme Court engaged in depth with the scope, meaning, and implication of Section 19 of The Constitution (101st Amendment) Act, 2016 (‘101st Amendment’) which catalysed the introduction of GST. Section 19 was a transitory provision which stated that existing indirect tax laws would be valid for one year or until States amend them to bring them in conformity with the 101stAmendment, whichever was earlier. The Supreme Court opined that Section 19 was transitory in nature and for that one year it was the repository of competence of State legislatures powers to amend the existing/pre-GST indirect tax laws. It held that the said legislative power could not be exercised after the period of one year contemplated under Section 19.  

Facts 

The case involved three batch of appeals that arose from special leave petitions filed in the case. 

First, related to the State of Telangana where the local VAT law was amended after coming into force of the 101st Amendment, i.e., 16.09.2016. State of Telangana amended the VAT law via an ordinance dated 17.06.2017 and thereafter the State legislature enacted a law replacing the ordinance which came into force on 02.12.2017. The amendment to VAT law was challenged and the Telangana High Court struck it down on the ground that State legislature could have exercised the power of amendment under Section 19 of the 101stAmendment only to bring the VAT law in conformity with GST laws. Also, the Ordinance could not have been confirmed since the State was denuded of legislative competence under Section 19 after 01.07.2017. Since GST laws came into force on 01.07.2017, the one year time period under Section 19 expired on the said date.     

Second, in the Gujarat batch of cases Section 84A was introduced in the Gujarat VAT Act, 2003 via an amendment gazette on 06.04.2018 with retrospective effect from 01.04.2006. The aim of introducing the said provision was to enable to the Revenue Department to open assessments which had attained finality. The Gujarat High Court struck down the amendment on the ground of lack of legislative competence on part of State legislature after 01.07.2017 and also on the ground that the amendment was manifestly arbitrary. 

Third, involved amendment to the Maharashtra VAT Act. On 15.04.2017 the amendment to the said act was gazetted and thereafter an explanation was added via an Ordinance w.e.f. 06.03.2019. Thereafter, on 09.07.2019 the Ordinance was replaced by the Amendment Act which inserted various provisions including the said explanation. The amendment was upheld by the Bombay High Court and appeals were filed in the Supreme Court against the judgment. 

Legal Issue and Arguments 

I think, it is best to upfront cite the provision that was the centrepiece of the judgment, i.e., 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)

At first glance, Section 19 reveals three things: first, it is a transitory provision; second, it allowed the States to amend pre-existing sales tax provisions make them consistent with the 101st Amendment; third, pre-existing laws such as VAT would cease to have force after one year of commencement of the provision or when they were amended or repealed, whichever was earlier. The one year was until 01.07.2017 when the GST laws came into force. The Supreme Court had to adjudicate on the nature and extent of legislative power conferred to the State legislatures under Section 19. 

To justify amendments to its local VAT law, the primary argument that the State of Telangana’s counsel made was that the effect of an Ordinance and a law was the same, only their manner of creation differed. And that the difference was only about procedure adopted and not subject matter of both legislative instruments. Thus, when the State legislature approved the Ordinance to amend the VAT law was enacted on 02.12.2017, its terms ‘related back’ to the date when the Ordinance was promulgated, i.e., 16.09.2016. Thus, the State legislature’s power to enact the law was preserved even after 01.07.2017. (para 27)

Counsel for State of Maharashtra, in a similar vein, argued that the material fact was the existence of the legislative power with States and not the manner of its exercise. It was argued that Section 19 preserved the power of States to amend the laws and it was erroneous to state that the power to amend the laws was only confined to bring the existing laws in conformity with the GST laws.    

The respondents led with their primary argument by drawing an analogy with Section 19 of the 101stAmendment with Article 243ZF of the Constitution.[2] They argued that the latter was incorporated in the Constitution – via 74th Constitutional Amendment – solely with the purpose of allowing amendments to existing laws and bring them in conformity with the new provisions of the Constitution. Similarly, they argued that Section 19 was limited in conferring legislative power to States, i.e., to bring existing laws in conformity with the 101st Amendment. The respondents relied on Section 19 not being made part of the Constitution text per se, but that it was only included in the Amendment Act and argued that it should be interpreted restrictively. The respondents further argued that interpreting the term ‘amend’ used in Section 19 to confer a power on States to make a law wider than curative legislation which runs contrary to the revised Constitutional architecture introduced by the 101st Amendment would not be in aid of the said Amendment.  

Supreme Court’s Observations on Section 19 

The Supreme Court, in a well-reasoned and detailed judgment has described the changes introduced by the 101st Amendment, its rationale, and the nature of transitory provisions among other things. In this post, I will elaborate on its three main observations on Section 19 that I think are relevant from the perspective of examining the interface of the Constitution and tax. 

First, one of the issues that the Supreme Court had to engage with was the effect of Section 19 not being included in the Constitution itself unlike, for example, Article 243ZF. And whether Section 19 was only ancillary to the 101st Amendment and thereby required to be interpreted in a narrow fashion. Supreme Court observed that the purpose of Section 19 was to preserve the existing laws and allow the Parliament and States to repeal and amend them. Since the 101st Amendment deleted various legislative entries relating to indirect taxes, the absence of such a provision would have been ‘catastrophic’ and denuded the States and Union of such crucial legislative power. (para 74) Comparing Section 19 with Article 243ZF, the Supreme Court noted that: 

However, the fact remains that those provisions as well as Section 19 were enacted in exercise of the constituent power. Section 19 is not, in this court’s opinion comparable to a mere Parliamentary enactment. There cannot be any gain in saying that Section 19 is not a mere legislative device. It was adopted as part of the 101st Constitutional Amendment Act. Undoubtedly, it was not inserted into the Constitution. Whatever reasons impelled Parliament to keep it outside the body of the Constitution, the fact remains that it was introduced as part of the same Amendment Act which entirely revamped the Constitution. (para 80)

The Supreme Court concluded that Section 19 was a transitory provision with limited life and whether it was part of the Constitution or not was academic, what was crucial was the effect of the provision. Thus, as per the Supreme Court the entire argument that Section 19 should be interpreted in a particular manner because of it being part of the Amendment Act but being included in the Constitution per se was irrelevant. Section 19 was enacted via the same process as other provisions of the Amendment Act and was a result of exercise of constituent power and not legislative power. 

Second, the Supreme Court then opined on the effect of the first observation, i.e., Section 19 was enacted as a result of exercise of constituent power. The Supreme Court noted that the 101st Amendment had brought significant changes to the Constitution in terms legislative powers relating to indirect taxes via deletion of legislative entries and thus the legislative powers of States and the Union ‘had to be directly sourced from the Amendment’ in the interim period. (para 92) As per the Supreme Court, in the hiatus period between coming into force of Section 19 and operationalising Article 246A (under which the States and Parliament exercise legislative powers on GST) legislative power should be traced to Section 19. 

In other words, the Supreme Court said that Section 19 was part of the Constitution since it was enacted through the same process as other provisions of the Constitution Amendment. And that since the 101stAmendment deleted previous sources of powers to levy indirect taxes and introduced new a locus of power under Article 246A, the source of legislative power for the transition period should be traced to Section 19. The ‘hiatus’ as per the Supreme Court was because the GST Council had not immediately recommended principles on the basis of which GST laws could be enacted in exercise of powers under Article 246A. And thus concluded that:

It is, therefore, held that there were no limitations under Section 19 (read together with Article 246A), of the Amendment. That provision constituted the expression of the sovereign legislative power, available to both Parliament and state legislatures, to make necessary changes through amendment to the existing laws. (para 97) 

The legislative power under Section 19, as per the Supreme Court, was only constricted by time, i.e., till 01.07.2017 and not in any other manner as suggested by parties to the case. 

The above is a liberal and expansive interpretation of Section 19 and goes far beyond what the text of the provision says. However, the Supreme Court justified by contextualising it and commenting on the drastic changes brought via the 101st Amendment. In my view, Section 19 only allowed States to amend existing provisions to bring them in conformity with the Constitution or enact new provisions to the same end. Section 19 did not allow States or the Parliament to enact any other provision for any other purpose. The restriction was not ‘only’ of time, but also of the nature and purpose of provisions that could be enacted and amended under Section 19. 

Third, and this is an indirect but proximate point, i.e., the Supreme Court clarified that Section 19 could not be used to clothe a retrospective amendment with validity. In other words, while the VAT Act may have been validly enacted, but once the power of States to enact or amend such laws ceased on 01.07.2017, then the States cannot amend the laws after the said date on the ground that laws can be amended retrospectively to cure a defect. The Supreme Court clarified that what was material was the presence of competence on the date on which amendment to the law was made and not the date when the law was enacted. (para 115)

Conclusion 

Supreme Court’s judgment in the impugned case is a well reasoned judgment that examines in depth the impact and nature of transitory provisions. While the Court may have, in my opinion, interpreted the scope of powers provided to the States more expansively than I think Section 19 provides, the end result nonetheless was that all the amendments to VAT Acts of the three States were held to be void on the ground that the States exercised their legislative powers once Section 19 had ceased to have effect. Telangana’s argument of ‘relating back’ was rejected on the ground that the State legislature did not possess competence on the date it enacted the amendment to approve the Ordinance. Similarly, the Supreme Court rejected the State of Gujarat’s argument that the amendment though effected after 01.07.2017 was retrospective in nature. Amendments by State of Maharashtra met the same fate. 

[1] The State of Telangana V M/S Tirumala Constructions 2023 INSC 942. 

[2] Article 243ZF of the Constitution states that: Notwithstanding anything in this Part, any provision of any law relating to Municipalities in force in a State immediately before the commencement of the Constitution (Seventy-fourth Amendment) Act, 1992, which is inconsistent with the provisions of this Part, shall continue to be in force until amended or repealed by a competent Legislature or other competent authority or until the expiration of one year from such commencement, whichever is earlier:   

Delhi High Court Allows IGST Refund to Vodafone

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In a recent judgment[1], the Delhi High Court ordered the Revenue Department to refund Integrated Goods and Services Tax (‘IGST’) claimed by the petitioners in respect of telecommunication services rendered by them to Foreign Telecom Operators (‘FTO’). Petitioners had entered into agreements with FTOs whereby they provided connectivity services to inbound subscribers of the latter. However, the Revenue Department rejected their refund claim on the ground that the services provided by petitioners did not amount to export of services. The High Court held otherwise.    

Facts 

Petitioners had entered into agreements with FTOs wherein the former agreed to provide connectivity services to subscribers of the latter who were in India/inbound subscribers. There was no privity of contract between the petitioners and subscribers of FTOs, the payments for connectivity services were made by subscribers to FTOs who, in turn, made payments to petitioners as per the terms of the agreement. 

The Revenue Department rejected petitioner’s claims for refund on two grounds: first, that the petitioners filed their claim for refund under Section 54 beyond the limitation period; second, the services provided by petitioners did not amount to export of services since the services were provided to inbound subscribers who were present in India and services were consumed in India. The petitioners, on the other hand, contended that they entered into agreements with FTOs and provided services to the FTOs. The FTOs, in turn, provided services to inbound subscribers. Thus, the services provided by petitioners to FTOs amounted to export of services since the FTOs were located outside India and the place of supply of services was outside India.  

Delhi High Court did not delve deeply into the issue of whether the petitioner’s claim was filed after the period of limitation. This is because the period of limitation was extended by the Central Board of Indirect Taxes and Customs via a Notification dated 05.07.2022. Thus, the only issue that the High Court had to engage with was whether services in question constituted export of services within the meaning of Section 2(6), IGST Act, 2017. 

Delhi High Court Decides, Relies on Precedent  

Section 2(6), IGST Act, 2017 defines ‘export of services’ and states as follows: 

            “export of services” means the supply of any service when, – 

  • The supplier of service is located in India; 
  • The recipient of service is located outside India; 
  • The place of supply of service is outside India; 
  • The payment for such service has been received by the supplier of service in convertible foreign exchange; [or in Indian rupees wherever permitted by the Reserve Bank of India]; and 
  • The supplier of service and recipient of service are not merely establishments of a distinct person in accordance with Explanation 1 in section 8; 

(emphasis added)

In the impugned case, the petitioner’s argument was that the recipient of service were FTOs, located outside India while the Revenue’s case that the recipient of service was the inbound subscriber who received the connectivity service due to an agreement between the petitioner and FTO. Since the Revenue was arguing that the inbound subscriber was the recipient, it by extension contended that place of service was in India. Thus, the services provided by the petitioner was not export of services and not entitled to a refund. 

The Delhi High Court instead of adjudicating on facts as to whether the inbound subscriber could be legitimately treated as a recipient of the petitioner’s service, cited the definition of export of services under Rule 6A, Service Tax Rules, 1994 which is similar to Section 2(6), IGST Act, 2017. It then relied on Verizon Communication case[2], to state that the said case covers the issue in the impugned case based on which the Revenue Department has granted refunds to predecessor of the petitioner and thus it allowed the petitioner to claim refunds in the impugned case as well. 

Precedent of Verizon Communication Case  

The Delhi High Court had considered the issue in detail in Verizon Communication case, where similar facts involved domestic telecom service providers, Verizon India and Verizon US. Verizon India had entered into a Master Supply Agreement with Verizon US for rendering connectivity services for the purpose of data transfer. Verizon India had filed for refund of taxes paid on its input on the ground that its output service to Verizon US, i.e., business support service, constituted as an export of service. The Delhi High Court agreed with Verizon India and in allowing its claim for refund, observed that: 

The position does not change merely because the subscribers to the telephone services of Verizon US or its US based customers ‘use’ the services provided by Verizon India. Indeed in the telecom sector, operators have network sharing and roaming arrangements with other telecom service providers whose services they engage to provide service to the former’s subscribers. Yet, the ‘recipient’ of the service is determined by the contract between the parties and by reference to (a) who has the contractual right to receive the services; and (b) who is responsible for the payment for the services provided (i.e., the service recipient). This essential difference has been lost sight of by the Department. In the present case there is no privity of contract between Verizon India and the customers of Verizon US. Such customers may be the ‘users’ of the services provided by Verizon India but are not its recipients. (para 46)

The distinction between the ‘user’ of services and ‘recipient’ of services proved to be crucial in the Verizon Communication case, and the Delhi High Court in the impugned case relied on the same. 

Conclusion 

The distinction between the user of services and recipient of services has been articulated in various cases, only for the said controversy to rear its head again before the Courts. In the impugned case, there was little reason, on substantive grounds, for the Revenue Department to deny refund to the petitioners. Courts, for example, have clearly that the customer’s customer is not your customer and that if a service is provided to a third party at the behest of your customer, the recipient is the customer and not the third party.[3] In the impugned case, this was squarely applicable as the inbound subscribers were not the recipients of services by petitioners, but it was the FTOs. Thus, the service provided by the petitioners to FTOs constituted as export of services entitling them to refund of IGST. 

[1] Vodafone Idea Limited v Union of India & Others 2023: DHC: 7468-DB. 

[2] Verizon Communication India Pvt Ltd v Assistant Commissioner of Service Tax, Delhi-III 2018 (8) GSTL 32. 

[3] See Vodafone Essar South Limited v CCE, Bangalore (Adn). Available at: https://indiankanoon.org/doc/193357462/ (Accessed on 30 October 2023).  

Allahabad HC Quashes Letter Issued by YEIDA Demanding Payment of GST

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Allahabad High Court recently allowed a writ petition[1] and quashed a letter issued by the Advisor to Yamuna Expressway Industrial Development Authority (YEIDA) requiring the petitioner to pay GST of 18% on the premium of Rs 3.80 crores charged by the YEIDA against an institutional plot allotted to the petitioner. The High Court inter alia observed that the YEIDA did not have the authority to demand payment of GST. 

Introduction 

The petitioner’s case was that it be allowed to claim tax exemption under Notification No. 12/2017 dated 28 June 2017 read with Notification No. 32/2017 dated 13 October 2017. The petitioner argued that YEIDA had doubt as to the applicability of the Notification to the case and had applied to Authority for Advance Rulings (‘AAR’) which had decided in petitioner’s favor. YEIDA, on the other hand, defended its demand of tax from the petitioner on the ground that the petitioner did not fulfil the requirement of exemption and further that its demand for tax was only provisional in nature and the petitioner could seek refund from the Revenue Department. 

Allahabad HC Decides 

Allahabad High Court examined the relevant entries of the Notifications wherein the exemption was claimed by the petitioner. The entries allowed exemption to upfront amounts such as premium, salami, development charges, etc. leviable in respect of the service of long term lease provided by the Development Corporations/Undertakings. The High Court observed that the plain letter of the law did not allow any doubt to arise with regard to applicability of the exemption to the impugned case. The only doubt that YEIDA had was whether the exemption was applicable to allotment of plots made for public health purposes. To this end, the High Court noted that YEIDA had approached AAR with a specific query, i.e., whether GST was chargeable on premium and lease rent on plots allotted to hospitals against lease granted for 30 years. And AAR had clarified that the GST was not applicable. 

Despite the advance ruling issued by AAR which was not challenged, YEIDA issued a letter to the petitioner demanding deposit of GST @18%. It was this letter which was the subject matter of challenge. 

The Allahabad High Court observed that the stand taken by YEIDA was wholly unfounded in law. And that any doubt that arose from the language of the exemption notification was resolved by AAR. Further, the High Court noted that the AAR had confirmed GST exemption subject to the conditions mentioned in the Notification. But a look at the Notification revealed that the legislature had chosen to give unconditional exemption with respect to upfront amounts paid for such plots. Thus, it concluded that: 

Consequently, the letter dated 24.08.2018 issued on behalf of YEIDA is wholly unfounded in law and also in facts. Besides absence of conditions imposed by the legislature while granting exemption, no fact allegation has been made in the said communication of any specific condition having been violated by the petitioner. (para 22) 

The Allahabad High Court thereby quashed the letter issued by YEIDA and ordered that any amount paid by the petitioner in pursuant of such communication be refunded.  

Conclusion 

The impugned case is one of those cases where one wonders why the dispute arose in the first place. YEIDA’s doubt – superfluous to begin with – as regards applicability of the exemption was clarified by AAR, but it still demanded payment of GST from the petitioner despite no claim by the Revenue Department that the transaction was exigible to GST. YEIDA’s argument that the demand for tax was ‘provisional’ and the petitioner could seek a refund missed the point completely. Why should the tax be paid if there is no liability to pay tax in the first place? Whether it will be refunded or not is immaterial.    

[1] M/S Ram Kamal Healthcare Pvt Ltd v Union of India & Ors 2023:AHC: 191485-DB. 

Sanctity of IBC Prevails Over Tax Claims: NCLT Mumbai

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In a recent order[1], NLCT Mumbai has ruled that the time bound process of Insolvency and Bankruptcy Code, 2016 (‘IBC’) will prevail over payment of belated Government dues, i.e., taxes. NCLT in the impugned case only reiterated an opinion expressed earlier, but the Revenue Department tends to need frequent reminders about certain elemental aspects of law. 

Facts 

In the impugned case, the Department of State (Tax) (‘Revenue Department’) filed an application under Section 60(5), IBC against the Resolution Professional of M/s Calchem Industries Pvt Ltd seeking directions that the Resolution Professional should deal with their claims and process them as per IBC. The Revenue Department had filed their claim with the Resolution Professional via letter/email on 08.10.2021 and the same was rejected by the latter on the ground that the Committee of Creditors had already approved the Resolution Plan on 13.10.2020. 

The Revenue Department assailed the rejection of their application as illegal and relied on Regulation 14 of IBBI (Insolvency Resolution Process for Corporate Person) Regulations, 2016. As per Regulation 14 the Resolution Professional shall make best estimate of the amount of claim based on information available to him. The Revenue Department argued that since their claims are statutory dues, the Resolution Professional should have incorporated the same in his estimate. The Revenue Department cited certain precedents to support its claim and also argued, rather strangely, that the delay in their application was caused since they were following the due procedure of law. (para 14)

The Resolution Professional, on the other hand, largely defended its rejection of the Revenue Department’s application on the ground of delay. The Resolution Professional informed NCLT that the public announcement dated 1.10.2019 had clearly stated that the last date for filing of claims was 14.10.2019 while the Revenue Department filed its initial claim on 8.10.2021.  

NCLT Decides 

NCLT cited the RPS Infrastructure case[2] to reiterate that undecided claims cannot make the CRP process endless. And it concluded that: 

Therefore, any interruption in the CIR process at this belated stage by allowing the application might open the floodgate for the similar claims, causing unnecessary delays in the CIRP process. (para 22)

NCLT, engaged with the various precedents cited by the Revenue Department in some detail and observed that one of the arguments made in previous cases was that since government dues would always be reflected in the books of account of the corporate debtor, the Resolution Professional should take them into account in its estimate. NCLT distinguished facts of the impugned case from the precedents and observed that out of the total amount claimed by the Revenue Department only some amount was reflected in the books of account on the date of initiation of CIRP. And that the assessment orders for other amounts were passed after initiation of CIRP. Thus, the latter could not have been reflected in the books of account of the corporate debtor at the time of initiation of CIRP. 

NCLT emphasised on the objective of IBC which aimed for insolvency resolution of the corporate debtor in a time bound manner and that priority accorded to Government dues was different as compared to the Companies Act. In other words, government dues were not in top hierarchy under the waterfall mechanism of IBC. While the latter was not germane to the issue at hand, NCLT did well to remind the Revenue Department that is claims did not supersede ever other claim against the corporate debtor. NCLT, thus, disallowed the application of the Revenue Department except to the extent tax dues were reflected in the books of account of the corporate debtor on the date of preparation of the Memorandum of Information by the Resolution Professional. (para 27)

Conclusion 

NCLT’s judgment in the impugned case, is another in a series of decisions where the Revenue Department has been informed that its dues are not sacrosanct and need to be secured only as per the timelines, processes and waterfall mechanism provided in the IBC. While in the impugned case, the Revenue Department secured a partial victory, and rightly so, it is another in a disconcerting trend where the Revenue Department tends to think, almost incorrigibly, that its tax dues should be paid irrespective of what the letter of law says.  

[1] Department of State Tax v Resolution Professional of M/s. Calchem Industries (India Limited), IA/282/2022 & IA426/2022, available at https://nclt.gov.in/gen_pdf.php?filepath=/Efile_Document/ncltdoc/casedoc/2709138000222022/04/Order-Challenge/04_order-Challange_004_1696595733706984618651fff15f3463.pdf (Accessed on 13.10.2023). 

[2] RPS Infrastructure Ltd v Mukul Kumar & Anr (2023) ibclaws.in 102 SC. 

No Advertisement Tax on Name Boards or Sign Boards

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In a recent judgment[1], the Supreme Court set aside demand notices for advertisement tax issued by the Indore Municipal Corporation against the appellant. The demand notices for advertisement tax were issued to the appellant because they had displayed their name/sign boards outside their business premises which the Municipal Corporation deemed to be advertisement and thus liable to pay advertisement tax. The Supreme Court opined on the meaning of advertisement, cited relevant precedents, and concluded that sign boards do not constitute advertisements and are not exigible to advertisement tax. 

Facts 

The appellant in the impugned case was occupier of premises on AB Road, Indore and was carrying on the business of Hyundai passenger cars at the said premises. The appellant had displayed its trade name as well as the product and services offered by it in the premises where the business was being run. The Indore Municipal Corporation issued a notice to the appellant for recovery of advertisement tax for displaying the sign board at its premises. The notice was issued under the relevant Municipal Corporation statute read with the relevant Municipal Corporation advertisement by-laws. 

The appellant objected to the notice demanding advertisement tax on the ground that it was not displaying any advertisement but its own trade and business name. The appellant also argued that it was carrying on business outside the municipal limits of Indore and thus no tax was leviable on its activities. Appellant’s writ petition against the notices was rejected by the Madhya Pradesh High Court and it appealed before the Supreme Court. 

Arguments 

The appellant assailed the Madhya Pradesh’s judgment on various grounds: first, that the High Court relied on Bharti Airtel judgment[2] which was irrelevant to the facts at hand; second, mere display of name and business cannot amount to advertisement as the said information is only for identification purposes and providing information to the general public; third, the appellant contended that levy of advertisement tax on trade name would amount to violation of Article 19(1)(a) and Article 19(1)(g) of the Constitution 

The State, on the other hand, contended that appellant’s displaying their trade name along with the products and services offered by them amounted to advertisement as the said information was communicated to the public not only for information purposes but also for commercial exploitation. 

Supreme Court Opines on Meaning of ‘Advertisement’

The Supreme Court framed the primary issue as: whether display boards, sign boards or name boards as displayed by the appellants would constitute as advertisements? The incidental question, as per the Supreme Court, was whether all modes of display would amount to advertisement? To answer this question, the Supreme Court relied heavily on the ICICI Bank case[3] where the meaning of advertisement in a comparable context had been examined. The Supreme Court in ICICI Bank case had noted that an advertisement should have a commercial purpose or exposition and should indicate business of the displayer with a view to attract people to its goods or services. The Supreme Court in ICICI Bank case opined on the issue of whether signs that illuminated ATM centres would constitute as advertisements. It did not give a clear answer and observed that signs of ATMs provide information to public as to a facility available at the said place but could also be used indirectly for commercial exploitation for commercial purposes. And the answer to this issue would depend on facts of each case. 

The Supreme Court said the guidelines in in ICICI Bank case, would prima facie indicate that in the impugned case:  

… as dealers of Tata Motors and Hyundai Vehicles appellants have displayed their name board of respective business establishment which is also depicting the nature of the respective vehicles which are being sold and it would be inseparable part of the appellants’ business establishment. By mere mentioning the name of the product in which the business establishment is being run would not partake the character of the advertisement until and unless by such display customers are solicited. (para 18)

 The Supreme Court added that in the absence of any name board or sign board it would be impossible to identify establishments and the sign boards displayed by appellants on their business premises only provide general information of the products offered by them and not to solicit customers or induce general public to purchase their products.  

Finally, the Supreme Court made a curious statement. It noted that under the relevant statutory provisions the Municipal Corporation was not authorized to demand tax for display of information through name boards. And that legislative was not to levy tax on sign boards but only on advertisements. It then noted that:

            Even in such circumstances, it is held that it amounts to advertisement, such levy would be without authority of law and would find foul of Article 19(1)(a), 19(1)(g) and Article 265 of the Constitution of India. (para 18) 

Does the above cited sentence mean that a sign board even if amounts to advertisement would not have been taxable under the relevant provisions? It is a curious sentence since it renders futile the entire argument made by the State. If the State, under the relevant provisions, could not tax a sign board even if it amounted to an advertisement what was the need to distinguish a sign board from an advertisement?  

Conclusion 

Presuming that distinguishing a sign board from an advertisement was crucial in the impugned case, it cannot be denied that distinguishing a sign board from an advertisement is a fraught exercise and the Supreme Court in ICICI Bank case was correct in laying down the broad parameters and stating that whether a particular information amounts to advertisement or not should be determined on the facts of each case. An attractive display of only the products and services offered by a business could amount to an advertisement in certain cases while it could be understood to be a mere sign board in other cases. In the impugned case, the Supreme Court favored the appellant relying on its assertion that its sign board was only aimed to identify its business and not solicit customers; though the distinction may not be as apparent in all cases. In ICICI Bank case, the Supreme Court noted that the non-commercial element of the illuminated ATM centre was that it was a public facility while in the impugned case the non-commercial element was that the sign board helps the general public identify a business place. It is reasonable to deduce from the above cases that if the non-commercial element dominates and is not intended to solicit customers it can be said to not amount to advertisement though the said issue can only be answered by looking at the signs in each case and after ascertaining the relevant facts. 

[1] M/S Harsh Automobiles Private Limited v Indore Municipal Corporation 2023 INSC 893. Available at https://main.sci.gov.in/supremecourt/2018/3032/3032_2018_8_1502_47486_Judgement_09-Oct-2023.pdf (Last accessed on 12 October 2023).  

[2] Bharti Airtel v State of Madhya Pradesh WP No. 2296 of 2012, decided on 12.01.2015. (This judgment addressed the issue of whether advertisement tax could be collected by appointing agents and was not relevant to the facts of impugned case. It was incorrectly relied on by the High Court and the Supreme Court correctly said that the Bharti Airtel case was irrelevant to the impugned case.). 

[3] ICICI Bank and Another v Municipal Corporation of Greater Bombay (2005) 6 SC 404. 

Allahabad HC Opines on Section 129, CGST Act, 2017

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In a recent case[1], the Allahabad High Court has reiterated an essential condition to invoke Section 129, CGST Act, 2017, i.e., an intention to evade tax. While a similar observation has been made by Supreme Court in M/s Satyam Shivam Papers case[2], the High Court’s reinforcement is perhaps necessary due to repeated transgressions by the Revenue Department.

Facts 

In the impugned case, the petitioner was engaged in the business of manufacture and sale of industrial grade steel components such as channels, beams, etc. The petitioner was transporting the said goods to M/s Maa Ambey Steels with the relevant tax invoices, e-way bills, etc. During transport, the said goods were intercepted, and the relevant officers found that the e-way bill accompanying the goods had been cancelled by the purchaser, M/s Maa Ambey Steels. In the absence of a valid e-way bills, the goods were seized. The petitioner subsequently explained to the Revenue Department that all the relevant e-way bills had been completed but the it was unaware of the fact that e-way bills had been cancelled by the purchaser. The petitioner tried to convince the Revenue Department that the transaction in question was genuine and goods were being sold by a registered dealer to another registered dealer. Dissatisfied with the petitioner’s response, the Revenue Department passed an order under Section 129(3), CGST Act, 2017 and a penalty was imposed on the petitioner. The petitioner assailed the said order via writ petition before the Allahabad High Court. 

No Intention to Evade Tax 

The Allahabad High Court engaged with the arguments of the petitioner and the Revenue Department. The petitioner’s primary argument was that while an order was passed against it under Section 129 whereby a penalty imposed, but in the said order there was no reference to the petitioner’s intention to evade tax. The petitioner argued that in the absence of an intent to evade tax, the penalty should have been imposed on it under Section 122(ix), CGST Act, 2017 and not Section 129(3), CGST Act, 2017. (para 5) The Revenue Department, on the other hand, argued that Section 129 starts with a non-obstante clause and thus it overrides every other provision of CGST Act, 2017. (para 7) And that transporting goods without a valid e-way bill attracted Section 129, CGST Act, 2017. 

The Allahabad High Court observed that once the dealer had informed the Revenue Department of the attending and mediating circumstances that led to cancellation of the e-way bill, it was a minor breach on the petitioner’s end. The purchaser had cancelled the e-way bill due to valuation issues of the goods. And the petitioner had sold the goods in question to another purchaser subsequently. And thus the High Court observed that: 

The authority could have initiated proceedings under section 122 of the CGST Act instead of proceedings under section 129 of the CGST Act. Section 129 of the CGST Act must be read with section 130 of the said Act, which mandate the intention to evade payment of tax. Once the authorities have not observed that there was intent to evade payment of tax, proceedings under section 129 of the CGST Act ought not to have been initiated, but it could be done under section 122 of the CGST Act in the facts & circumstances of the present case. (para 10) 

The Allahabad High Court further added that while Section 129 deals with detention and seizure of goods and Section 130 with confiscation of goods; a purposive reading of both the provisions deals indicates that the legislature intended that an intent to evade tax is sine qua non to initiate proceedings under the aforesaid provisions. (para 11) 

Conclusion

The Allahabad High Court’s observations in the impugned case are not unprecedented. The Supreme Court in M/s Satyam Shivam Papers case had observed that the goods in question could not be transported in time due to factors beyond the taxpayer’s control and thus an intent to evade tax could not be attributed to the taxpayer. It is not unsurprising that an elemental issue needs reiteration by different Courts repeatedly to underline the legislative intent and scope of the provision. Hopefully, this judgment will prove constructive in enhancing the Revenue Department’s understanding of the scope of Section 129 and by extension, of the scope of Section 130 of CGST Act, 2017.    

[1] M/s Shyam Sel and Power Ltd v State of UP and Others 2023 LiveLaw (AB) 374. 

[2] Assistant Commissioner (ST) & Others v M/s Satyam Shivam Papers Pvt Ltd (2022) 134 taxmann.com 241.  

Gujarat AAAR Disallows ITC on Mandatory CSR: Provides Superfluous Reasoning

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Gujarat Appellate Authority for Advance Ruling (‘Gujarat AAAR’) in a recent ruling[1] has concluded that the applicant was not allowed to claim ITC on inputs and input services for mandatory expenditure made in pursuance of Section 135, Companies Act, 2013. The answer to this question should have been obvious after the amendment to CGST Act, 2017 via the Finance Act, 2023. However, the Gujarat AAAR referred to GST Council meetings, IT Act, 1961 in an unnecessary exercise of providing superfluous reasons for its conclusion. 

Introduction 

The applicant, in the first instance, approached Gujarat Authority for Advance Ruling (‘Gujarat AAR’) to seek answer to the following question: whether the inputs and input services procured by the applicant to undertake mandatory CSR activities as required under Section 135 of the Companies Act, 2013 qualify as being in the course and furtherance of business and are eligible for ITC under Section 16, CGST Act, 2017. The Gujarat AAR answered in the negative and primarily relied on the definition of CSR under Company (CSR Policy) Rules, 2014 to hold that as CSR activities are excluded from the normal course of business activities of the applicant, ITC cannot be claimed for such activities. 

The applicant appealed to Gujarat AAAR and assailed the Gujarat AAR’s interpretation on various grounds. The applicant, for example, correctly challenged the Gujarat AAR’s decision on the ground that there was no nexus between the definition of CSR under Company (CSR Policy) Rules, 2014 and eligibility to claim ITC under Section 16, CGST Act, 2017. The applicant also alternatively argued that Section 16, CGST Act, 2017 uses the phrase ‘in course and furtherance of business’ while Company (CSR Policy) Rules, 2014 use the phrase ‘normal course of business’ and that Gujarat AAR erred in interpreting both the phrases to mean the same thing. 

Gujarat AAAR’s Reasoning and Conclusion

As stated above, the answer to the applicant’s question should have been straightforward with the Gujarat AAAR relying on Section 139, Finance Act, 2023 which introduced the following clause to Section 17(5), CGST Act, 2017:

“fa) goods or services or both received by a taxable person, which are used or intended to be used for activities relating to his obligations under corporate social responsibility referred to in section 135 of the Companies Act, 2013;

Section 17(5), CGST Act, 2017 enumerates the situations in which ITC is blocked, and the insertion of above clause in Section 17(5), CGST Act, 2017 means that goods or services or both used to fulfil mandatory CSR obligations will not be eligible for ITC. And as a result of this deeming fiction, mandatory CSR activities will not be considered as activities ‘in the course of business’.

Instead, the Gujarat AAAR chose to arrive at this conclusion via a circuitous route: it referred to the decision of the 48th GST Council to disallow ITC on mandatory CSR activities, cited a paragraph of the relevance of GST Council recommendations under the GST regime. (para 17) It then unnecessarily referred to the fact that IT Act, 1961 disallowed expenditure to an assessee for mandatory CSR activities. (para 16) Reference to all the above sources was and is perhaps necessary to resolve an ambiguity or an uncertainty in a statutory provision. In such cases, it is incumbent on adjudicating body to refer to additional sources in order to decide the case and/or answer specific queries. 

In the impugned case, the question was straightforward and the legal position amply clear after the amendment made to Section 17, CGST Act, 2017 via the Finance Act, 2023. Gujarat AAAR could have simply referred to the amended provision and answered the applicant’s query instead of stating multiple reasons and making unnecessary references to IT Act, 1961. Gujarat AAAR’s ruling in the impugned case is an example of arriving at the right conclusion by using superfluous reasoning. 

Conclusion 

It is hoped that the relevant authorities – AAR/AAAR – will adopt more precise reasoning and arrive at proper conclusions instead of referring to sources that have no relevance in interpreting a statutory provision that contains no ambiguity. It would prevent unnecessary confusion that may arise in the mind of taxpayers who are similarly situated or otherwise.   

[1] Re: M/s. Adama India Private Limited, GUJ/GAAR/APPEAL/2023/04, dated 26.09.2023. Available at https://taxguru.in/wp-content/uploads/2023/10/In-re-Adama-India-Private-Limited-GST-AAR-Gujrat.pdf (Last accessed on 10.10.2023).  

Calcutta High Court Sets Aside Order Denying ITC

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In a recent judgment[1], the Calcutta High Court set aside the order of the Revenue Department wherein the ITC of assessee was disallowed on the ground of mismatch in GSTR-2A and GSTR-3B. While Courts have, of late, been consistent in their stance that the mismatch in details between GSTR-2A and GSTR-3B cannot be a ground to deny ITC. In the impugned case, the High Court made similar observations suited to the facts of the case. 

Facts

In the impugned case, the assessee was registered under the Central Goods and Services Act, 2017 and the West Bengal Goods and Services Act, 2017. The assessee purchased several bidi leaves from various suppliers. In January 2021, physical inspection of the business premises was assessee was carried on and thereafter proceedings against the assessee were initiated under Section 73, CGST Act, 2017. Eventually, an order was passed against the assessee which was confirmed on appeal. The order rejected ITC claim of the assessee on the ground that the there was mismatch of ITC claimed in GSTR-3B and the same was not reflected in GSTR-2A.

Arguments and Decision 

The assessee claimed that ITC was denied and order passed against it without considering the documents, without providing the assessee an opportunity of being and also alleged violation of principles of natural justice. The assessee claimed that the transactions relating to purchase of bidi leaves were genuine and ITC cannot be denied on the ground that one of the suppliers errenously mentioned the wrong GSTIN number of the petitioner in the invoice. The assessee further argued that one of its suppliers had erroneously mentioned a B2B supply as a B2C supply and these errors could have been easily rectified by the State. 

The State countered the assessee’s assertion of violation of principles of natural justice enthusiastically. It argued that the assessee was served multiple notices to appear before it and present its case, but it either failed to appear or adopted delaying tactics and did not produce the relevant invoices. The Calcutta High Court with the State on this count and noted that fairness cannot be ‘a one way street’ and that the assessee cannot adopt an implacable approach and refuse to appear before adjudicatory authorities only to later complain of violation of principles of natural justice. 

Nonetheless, the Calcutta High Court observed that even in an ex-parte order, an adjudicating authority should proceed on the basis of records available and deal with the appeal on merits in accordance with the law. It observed that: 

Any mismatch ought to have been attempted to be ascertained from the records of the respondent authorities and their online portal. (page 6)      

The Calcutta High Court then referred to a Circular issued by CBIC on 27 December which inter alia provided for the approach to be followed by the Revenue Department where the supplier reports a supply as B2C instead of B2B in their GSTR-1. Since the steps prescribed in the said Circular were not followed, the High Court set aside the order denying the assessee’s claim of ITC. 

Conclusion 

While the Calcutta High Court’s order in the impugned case cryptic and is unlikely to be considered as ‘landmark’, there are three important issues that need to be underlined here: first, that the High Court’s observation that authorities should not deny ITC to assessee on cavalier grounds such as basic errors in GSTR-2A and should verify the claims of assessee by relying on their records and verifying from the online portal; second, the High Court’s emphasis on considering the relevant law and procedure even when passing an ex-parte order; third, the need for the Department of Revenue to follow the procedure and steps prescribed in its own Circulars and not act in violation or at least in defiance of those steps. It is important that other Courts note the aforesaid aspects in the impugned judgment and build on them to create a body of jurisprudence that holds that State account for denying ITC on flimsy grounds.      

[1] M/S Makhan Lal Sarkar and Anr v The Assistant Commissioner of Revenue, State Tax B.I. and Ors WPA/2146/2023, decided on 18.09.2023.  

Kerala HC Holds ITC Cannot be Denied Due to Difference in GSTR-2A and GSTR-3B

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In a recent judgment[1], the Kerala High Court has aligned with an emerging jurisprudence wherein the High Courts have held that under the GST regime a taxpayer’s ITC cannot be denied merely on ground of difference between GSTR-2A and GSTR-3B. 

In the impugned case, the Kerala High Court expressly noted the ratio of Supreme Court in M/s ECom Gill Coffee Trading Private Limited case[2] and the Calcutta High Court’s judgment in Suncraft Energy Private Limited case[3] to conclude that ITC of an assessee under the GST regime cannot be denied merely on the ground of discrepancy in GSTR-2A and GSTR-3B. It then cited a recent judgment of the Kerala High Court itself in Diya Agencies case[4] where the Kerala High Court had held that: 

In view thereof, I find that the impugned Exhibit P-1 assessment order so far denial of the input tax credit to the petitioner is not sustainable, and the matter is remanded back to the Assessing Officer to give opportunity to the petitioner for his claim for input tax credit. If on examination of the evidence submitted by the petitioner, the assessing officer is satisfied that the claim is bonafide and genuine, the petitioner should be given input tax credit. Merely on the ground that in Form GSTR-2A the said tax is not reflected should not be a sufficient ground to deny the assessee the claim of the input tax credit. The assessing authority is therefore, directed to give an opportunity to the petitioner to give evidence in respect of his claim for input tax credit. The petitioner is directed to appear before the assessing authority within fifteen days with all evidence in his possession to prove his claim for higher claim of input tax credit. After examination of the evidence placed by the petitioner/assessee, the assessing authority will pass a fresh order in accordance with law. (para 8) (emphasis added)

While the Kerala High Court’s 4-page order in the impugned case does not offer much scope for analysis, the primary aim of this blog post is two-fold: first, to record that Courts are increasingly taking the view that a taxpayer’s claim for ITC under GST regime cannot and should not be denied on grounds of discrepancy between GSTR-2A and GSTR-3B. This line of reasoning, if continued, will likely further underline the procedural nature of the former return and that it is only for information purposes and not the only basis of substantive claims. Courts are, until now, taking a reasonable view that ITC cannot be denied or affirmed merely based on information recorded and contained in GSTR-2A. Second, I wish to highlight that while in the impugned case the Kerala High Court relied heavily on the ratio in Diya Agencies case, it is important to highlight that in the latter case the Kerala High Court was expressly dealing with a situation where the taxpayer claimed that it was in possession of genuine invoices and bills that proved that transactions in question were genuine. Accordingly, in Diya Agencies case, the taxpayer was directed to appear before the concerned officer to prove the claim of ITC. While in the impugned case, no such fact was recorded by the Kerala High Court though it is not possible to know for sure if such claim was made by the taxpayer. Going forward, these factual distinctions may prove vital in reinforcing or diluting what is an emerging body of case law as regards the relevance of GSTR-2A in claiming ITC.     

[1] M/S Henna Medicals v State Tax Officer, Second Circle, SGST Department 2023: KER: 55979. 

[2] State of Karnataka v M/S Ecom Gill Coffee Trading Private Limited 2023 SCC OnLine SC 248. 

[3] Suncraft Energy Private Limited v The Assistant Commissioner, State Tax, Ballygunge (2023) 8 TMI 174. 

[4] Diya Agencies v State Tax Officer 2023 (9) TMI 955. 

Andhra HC Sets Aside SCN: Holds that it is Vague and Dubious

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The Andhra Pradesh High Court in a recent judgment[1] set aside the showcause notice (‘SCN’) issued by the Revenue Department on the ground that the SCN was vague and dubious. The High court held that the SCN did not contain sufficient details and particulars to enable the taxpayer to reply or file appropriate objections. 

Facts 

The petitioner in the impugned case, M/s Sakhti Steel Industries Pvt Ltd, was in the business of trading TMT bars, billets and ferrous scrap and importing iron scrap from foreign countries. The parent company of the petitioner, M/s Sakhti Ferroy Alloys Pvt Ltd, manufactured TMT bars and billets. The petitioner used to purchase the TMT bars and billets from its parent company and sell them to various States. The petitioner stated that to maintain better operational efficiency it took on lease vacant land with small builtup area that belonged to its parent company and in a portion of the said premises the parent company also operated. The petitioner had obtained registration in Andhra Pradesh where the said premises were located. 

The concerned Deputy Assistant Commissioner visited the business premises of the petitioner and issued a SCN with allegations that the petitioner had obtained registration by ‘fraud, wilful misstatement or misrepresentation of facts’ and the petitioner was asked to file a reply within 7 days. The SCN was issued because the Deputy Assistant Commissioner based on commonality of premises of the petitioner and its parent company concluded that the former had obtained registration by fraud. The petitioner filed a reply denying all allegations of fraud and refuting the fact that its business was not genuine, but the report of Deputy Assistant Commissioner was accepted by the appellate authorities and petitioner’s registration was cancelled. Against the said orders, the petitioner approached the Andhra Pradesh High Court. 

High Court Sets Aside SCN 

The Andhra Pradesh High Court was precise and unforgiving in its observations about the conduct of the Revenue Department. The High Court cited Section 29, Andhra Pradesh Goods and Services Tax, 2017 and noted that the grounds on which the registration of a taxpayer can be cancelled are specifically enumerated in the provision. Some of the grounds in the provision are: registered taxpayer has contravened any of the provisions of the Act or rules made thereunder, not filing of returns and obtaining registration by fraud, misstatement or misrepresentation of facts. The High Court noted that the SCN issued to the petitioner only mentioned the latter and observed that grounds mentioned in SCN were vague, dubious and did not furnish enough details for the taxpayer to respond to them meaningfully. The High Court added that the purpose of SCN is to state the formal grounds of accusation to enable the accused to reply in satisfaction of principles of natural justice and equity. (para 7) The nature of SCN was enough for the High Court to conclude that principles of natural justice had bene flagrantly violated and that the ‘very foundation for invocation of cancellation is feeble as it has no legal sanctity.’ (para 7)

While the vagueness in the SCN was enough for the Andhra Pradesh High Court to quash it, the High Court nonetheless added that the petitioner in its reply to SCN had stated that it was not involved in any fake business and vouched for the authenticity of its bills and details of all its invoices involving purchases and sales. The petitioner was willing for its records to be scrutinized to disprove allegations of it running a fake business. However, the High Court observed, instead of resorting to such a ‘logical and legal exercise’ the authorities relied on the conjecture of the inspecting authority who suspected the petitioner to be involved in bill trading without movement of goods, for which there was no proper basis. (para 10)

The Andhra Pradesh High Court was thus unsparing in its comments on the Revenue Department’s conduct at the time of issuance of SCN and thereafter. And its observations about the lackadaisical approach of the Revenue Department were certainly not inaccurate. 

Conclusion 

The Andhra Pradesh High Court adopted a pro-taxpayer approach in the impugned case without detracting from the basic principles of law. It interpreted the relevant provision – Section 29, Andhra Pradesh Goods and Services Tax, 2017 – reasonably to cast a burden on the State to articulate specific grounds of accusation in a detailed manner to enable the taxpayer to respond meaningfully. Merely reproducing the language of the statutory provision in the SCN was not sufficient to prove that the ground for cancellation of taxpayers’ registration were satisfied. And the High Court went further to castigate the authorities to follow a logical path once the taxpayer replies to the SCN instead of merely providing their stamp of approval to the suspicions of the inspecting officer.    

[1] M/s Sakhti Steel Industries Pvt Ltd v Appellate Additional Commissioner Sales Tax (Tirupati) TS-496-HCAP-2023-GST. 

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