Rav Singh

Understanding Orissa High Court’s Judgment in Safari Retreats Case

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This post is an attempt to understand the Orissa High Court’s judgment in Safari Retreats case.[1] While the judgment was pronounced by the High Court in April 2019, its current relevance stems from the appeal against the judgment being currently heard by the Supreme Court. This post is an attempt to understand the petitioner’s case as presented before the Orissa High Court and the nature of issues that the Supreme Court may have to engage with to decide the issue satisfactorily.  

Introduction 

The facts of the case were straightforward: petitioners were in the business of construction of shopping malls for the purpose of letting out the same to numerous tenants and lessees. Petitioners purchased huge quantities of materials and inputs for the purpose of construction, i.e., cement, plywood, wires, lifts, electrical equipment, etc. and paid GST on the said purchases. The petitioner completed construction of one of the shopping malls in Bhubaneshwar and decided to let out different units to various persons on a rental basis. The activity of letting out units amounts to a supply of service and is taxable under the relevant GST legislations, i.e., Central Goods and Services Act, 2017 and the Odisha Goods and Services Act, 2017 (‘GST laws’). 

The petitioner claimed that it had accumulated Input Tax Credit (‘ITC’) of Rs 34,40,18,028/- on purchase of inputs for construction of the shopping mall. However, the Revenue Department advised it to deposit the entire sum instead of claiming ITC on the same in view of the restriction placed under Section 17(5)(d) of GST laws. Section 17(1), CGST Act, 2017 states that where the goods or services or both are used by a registered person partly for the purpose of business and partly for other purpose, the amount of credit shall be restricted to so much of the input tax as is attributable to the purposes of his business. Section 17(5) provides that notwithstanding anything contained in sub-section (1), ITC shall not be available for certain supplies. Section 17(5)(d) provides that ITC shall not be available in respect of the following: 

            Goods or services or both received by a taxable person for construction of an immovable property (other than plant or machinery) on his own account including when such goods or services or both are used in the course or furtherance of business. 

Explanation.- For the purposes of clauses (c) and (d), the expression “construction” includes re-construction, renovation, additions or alterations or repairs, to the extent of capitalization, to the said immovable property. 

The Revenue Department cited the aforesaid provision and stated that the petitioner cannot claim ITC of of Rs 34,40,18,028/- against the supply of service, i.e., renting of units in the shopping mall. The petitioner challenged the vires of Section 17(5)(d), CGST Act, 2017 arguing that in its case there was no break in the tax chain. The petitioner argued that it had paid GST on purchase of its inputs and collected tax from the tenants while letting out units in the shopping mall. And while blocking ITC if an immovable property is sold made sense, because sale of immovable property after issuance of completion certificate did not attract GST. However, blocking ITC in the petitioner’s case was devoid of reason since there was no break in the tax chain, i.e., its input and output were both subject to GST. 

Orissa High Court’s Decision 

The Orissa High Court’s judgment in the impugned case is a unique case of devoting a substantial part of the judgment to arguments of the parties and earmarking only a miniscule portion to the conclusion without articulating detailed reasons for its conclusion. The High Court stated that the very purpose of GST laws is to ensure uniform collection of tax on supply of goods and services and prevent multi taxation. And by stating the aforesaid objective of GST laws, it concluded that: 

            While considering the provisions of Section 17(5)(d), the narrow construction of interpretation put forward by the Department is frustrating the very objective of the Act, in as much as the petitioner in that case has to pay huge amount without any basis. Further, the petitioner would have paid GST if it disposed of the property after the completion certificate is granted and in case the property is sold prior to completion certificate, he would not be required to pay GST. But here he is retaining the property and is not using for his own purpose but he is letting out the property on which he is covered under GST, but still he has to pay huge amount of GST, to which he is not liable. (para 19) (emphasis added)      

Thus, the Orissa High Court concluded that Section 17(5)(d) should be read down and the narrow reading adopted by the Revenue Department should not be accepted since ‘the very purpose of the credit is to give benefit to the assessee.’ (para 20) In stating the latter, the High Court relied on the observation made by the Supreme Court in Eicher Motors case[2] where in the context of excise duty, it had held that the right to claim ITC vests when the tax on inputs is paid and right to ITC becomes absolute when input is used in the manufacture of the final product. 

There are two pillars on which the High Court’s conclusion is standing: GST’s avowed purpose of preventing multi taxation, which in the context can be reasonably interpreted to mean prevention of tax on tax; second, is the High Court’s understanding of ITC as a benefit that the State provides to an assessee. 

The first reason has credence and relevance in every case involving blocking of ITC. Since it is a vital objective of GST to prevent cascading effect of taxes, the burden should be on the State to justify why in certain circumstances there is deviation from it and articulate the underlying rationale or policy objective. So High Court’s reliance on GST’s purpose of ensuring uniformity and preventing tax on tax was justifiable. Prevention of tax on tax and uniformity of GST, both are relevant and valid purposes of GST, on the touchstone of which cases can be adjudicated, but the High Court seems to have relied on them excessively in the impugned case. Equally, the High Court did not bother to seek an explanation from the State as to the reason for incorporating Section 17(5)(d). Second, Supreme Court’s observation in Eicher Motors case about ITC being a benefit provided to the taxpayer was in a different context: rules to claim ITC were changed after several taxpayers had utilized the input in the final product. It was in that context that the Supreme Court observed that ITC had vested in the taxpayer. In the impugned case, there was no change in the relevant provisions after the petitioner had initiated the transaction. Section 17(5)(d), CGST Act, 2017 clearly stated that ITC in petitioner’s case was blocked and there was no change while the transaction was ongoing. While the differing fact situations not detract from the larger debate on whether ITC is a State’s concession or taxpayers’ right; the issue did receive a rather cursory treatment from the High Court in the impugned case.  

Petitioner’s Arguments before the Orissa High Court 

I’m discussing the arguments adopted before the High Court at the end because they are likely to be repeated before the Supreme Court in a similar manner or edited suitably. I’m mentioning some of the arguments below to better illustrate how the petitioners’ in the impugned case viewed their position wherein they were unable to claim ITC and their view of the provision in question, i.e., Section 17(5), CGST Act, 2017. 

First argument of note that the petitioner adopted was that by allowing ITC to taxpayers who construct a building with the intent of sale under Schedule II, para 5(b) of CGST Act, 2017, but denying it to petitioners who let out such property on rent is violative of Article 14 of the Constitution. The petitioners alleged discriminatory treatment and argued that Section 17(5)(d) was arbitrary in nature. The petitioners laboured on the fact that under Schedule II, para 5(b) of CGST Act, 2017 ITC is only blocked if the entire consideration for the building in question is received after issuance of completion certificate. As per petitioners in such instances blocking of ITC made sense since no GST is charged in such scenarios, leading to disruption of tax chain. But in the petitioner’s case they were paying GST on their inputs and collecting GST on their output, i.e., renting property to their tenants leading to an unbroken tax chain and thereby not creating any rationale for blocking ITC in their situation. 

Second, the petitioner touched upon the fact that blocking their ITC is an unreasonable restriction under Article 19(1)(g) of the Constitution but did not elaborate on the unreasonableness.

Third, they repeatedly mentioned how the blocking of their ITC constitutes a detraction or at the very least a dilution of GST’s objective of preventing multiple taxation. And that by ensuring that the petitioner bear the additional burden of tax by denying them ITC the objective of GST was being frustrated. 

Fourth, the petitioner pointed out that one of the ingredients in Section 17(5)(d) was that the construction should have been done by the taxpayer ‘on their own account.’ The petitioners distinguished their case from the scenarios contemplated under Schedule II, para 5(b) of CGST Act, 2017 as well as under Section 17(5)(d). They argued that the former contemplated situations where construction was ‘intended for sale’ while the latter contemplated construction by a taxpayer ‘on his account’. And that the petitioner constructed the shopping mall with an intention ‘for letting out’ to tenants and thus their cannot be covered by Section 17(5)(d). 

Except for the third argument, which the Orissa High Court reproduced in its conclusion, it did not engage with any of the petitioner’s argument in any significant manner. Thus, one is unsure of what is the exact meaning of the phrase ‘on their own account’ used in Section 17(5)(d) and its resultant scope. Neither is applicability of Article 14 to the impugned set of facts clear even though the petitioner made elaborate arguments on both counts.  

Finally, it is worth noting that the Orissa High Court hardly provides any space to the State’s arguments and only cites relevant judgments relied on by the State. As a result, one can only gather that the State was arguing that ITC can only be claimed if the statutory conditions are met and the relevant conditions cannot be assailed as unconstitutional only because the tax set off is denied to the taxpayers. 

Way Forward 

The Revenue has filed an appeal against the Orissa High Court’s judgment and the approach that the Supreme Court will adopt is of course difficult to predict. But it is safe to say that a conservative approach wherein the legislature is provided a wide leeway in enacting tax laws is unlikely to lead to a conclusion that aligns with the Orissa High Court. Though such an interpretive approach would not be novel, but in line with well-entrenched jurisprudence. On the other hand, if the Supreme Court’s bench adjudicating the case is persuaded by the advocates in question that the provision in question infringes on a Fundamental Right, e.g., Article 19(1)(g) of the Constitution or falls foul of Article 14 then there is a possibility of the Supreme Court reading down the provision akin to the Orissa High Court’s opinion. Irrespective, I will update the latest developments on this case via another blog post.  

[1] Safari Retreats Pvt Ltd v Chief Commissioner of GST [2019] 105 taxmann.com 324. 

[2] Eicher Motors Ltd v Union of India (1999) 2 SCC 361. 

Bombay High Court Orders Refund of TDS: Opines on Illegal Tax

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In a recent judgment[1], the Bombay High Court ordered the Revenue Department to return the tax deposited by the assessee and opined that retaining tax that was not owed by the assessee in the first place would be in contravention of Article 265 of the Constitution.  

Facts 

The petitioner, an Indian company entered a Foreign Technical Collaboration with a US company. Petitioner agreed to pay US company US $ 16,231,000 net of any Indian income tax meaning that if any withholding tax was required to be deducted it would be paid by the petitioner while the US company would be paid the gross amount. The petitioner sought a no objection certificate from the Revenue Department without withholding any tax. The petitioner’s argument was that the services are rendered by the US company outside India, the income embedded in the amount accrues and arises to the US company outside India and is not taxable in India. However, the Revenue Department only issued a no objection certificate provided a 30% withholding tax was deducted. The petitioner paid the said witholding tax under protest and it was the refund of the withholding tax amount that was the subject of the impugned judgment. The petitioner’s case, succinctly put, was that the since the amount paid to US company was held to be non-taxable in India the Revenue Department was obliged to refund the withholding tax. 

The Revenue Department rejected the petitioner’s claim for refund on the ground that the tax was paid on behalf of the US company. 

Petitioner’s Argument 

Petitioner’s argument was that the Revenue Department was incorrect in taking the view that the witholding tax was deposited by it on behalf of the US company. The petitioner argued that the tax was paid by it on from its own pocket over and above the consideration agreed between it and the US company. And the US company has agreed to the same and has issued a no objection certificate that the refund be issued to the petitioner. 

The edifice of petitioner’s argument though was that once the Court had held that the income earned by the US company was not taxable in India, the tax deducted at source by it was not in accordance with the law and the amount so deducted must be paid back to it. 

The Revenue, on the other hand, made several arguments of varying persuasion but was not able to substantiate them convincingly. The Revenue, for example, suggested that the Court’s order that the income earned by US company was not taxable in India could not be used by the petitioner and the refund could be claimed only by the US company. The Revenue also suggested that the US company had claimed credit of witholding tax against tax liabilities. However, the Bombay High Court did not agree to any of the Revenue’s arguments. 

Bombay High Court Decides 

The Bombay High Court cited the order wherein it was held that the US company did not owe any tax in India on the income and concluded that: 

Technically, even though the amount deposited by Petitioner would be called as ‘tax deductible at source’, what Petitioner paid was ‘an ad hoc amount not technically a TDS amount’. Moreover, since it is also confirmed by this Court that the amount paid to DAVY was not chargeable to tax in India, Respondents’ insistence on Petitioner paying that amount was not in accordance with law and the amount so paid over must be refunded to Petitioner. (para 17) 

 The Bombay High Court relied on a few additional aspects: CBDT Circular No. 7 0f 2007 dated 23.10.2007 which stated that where no income has accrued to the non-resident or where income has accrued but no tax is due, then in such cases the amount deposited with the government cannot be said to be ‘tax’. The High Court also cited a line of relevant precedents which have established that the Revenue authorities can only collect tax per law and any tax collected illegally or not due from the taxpayer needs to be refunded else would in contravention of Article 265 of the Constitution. 

Conclusion 

The refund of tax paid out of caution and which is held to be not due from the assessee should not, ideally speaking, be a painful and long drawn process. In the impugned case, the petitioner as part of business transaction paid the tax on behalf of the US company but had to engage a lengthy process to claim refund of a tax which should have been paid much earlier. Single judgment such as in the impugned case lacks the ability to ensure course correction by the Revenue Department, but we live in hope.       

[1] Grasim Industries Ltd., v Assistant Commissioner of Income Tax, Mumbai 2023: BHC-OS:9537-DB. 

Delhi High Court Orders Refund of Illegally Collected GST

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The Delhi High Court in a recent order[1] followed the Gujarat High Court’s judgment in M/s Cosmol Energy Private Limited case[2] wherein it held that Section 54, CGST Act, 2017 is not applicable for illegally collected GST or GST paid under a mistake. Section 54 prescribes an outer time limit of two years for filing an application for refund and the High Court held that the said time limit would not apply in the impugned case since the assessee was under the mistaken belief that its services were chargeable to GST.  

Facts 

The petitioner in the impugned case, Delhi Metro Rail Corporation (‘DMRC’) provided services to Surat Municipal Corporation wherein it prepared a detailed project report for the purpose of development of a rail project in the City of Surat. The invoice raised by DMRC was of Rs 19,04,520/- and it included GST of Rs 2,90,520/-. However, the City of Surat paid DMRC only Rs 16,14,000/- and did not pay the GST amount included in the invoice by DMRC. 

However, DMRC to ensure compliance with its statutory obligations paid a sum of Rs 2,90,520/- as GST to the Revenue Department. DMRC was latter informed by the Surat Municipal Corporation that the services billed by it were not exigible to GST under the relevant Notification, i.e., Notification 12/2017 – Central Tax (Rate) dated 28.06.2017. DMRC there after filed an application for refund which was rejected by the Revenue Department on the ground that the application was filed after two years had elapsed.

DMRC’s argument against the rejection of its refund application was that it would amount to violation of Article 265 of the Constitution since it would amount to collection of tax without the authority of law. 

Delhi High Court Relies on M/s Cosmol Energy Case

The Gujarat High Court in M/s Cosmol Energy case upheld the petitioner’s claim for refund of ocean freight paid on reverse charge basis after Supreme Court in Mohit Minerals case declared the said levy to be unconstitutional. The petitioner’s application for refund of Integrated GST was refused on the ground that it was filed after the relevant date prescribed under Section 54, CGST Act, 2017 similar to the facts of the impugned case. In M/s Cosmol Energy case, the Gujarat High Court held that: 

Section 54 of the CGST Act is applicable only for claiming refund of any tax paid under the provisions of the CGST Act and/or the GGST Act. The amount collected by the Revenue without the authority of law is not considered as tax collected by them and, therefore, Section 54 is not applicable. (para 7) 

The Gujarat High Court also quoted Article 265 of the Constitution to state that no tax shall be collected and levied except by authority of law and the State was bound to refund the tax collected illegally. 

In the impugned case, the Delhi High Court relied on the Gujarat High Court’s observations in M/s Cosmol Energy case, noted the fact that the said decision had not been appealed against by the State, indicating the State’s acceptance of it, and observed that DMRC was not liable to pay GST on the services rendered by it and the GST deposited by the DMRC ‘on an erroneous belief that payment for services rendered by it were chargeable to tax, cannot be retained by the respondents.’ (para 12) The High Court was categorical in its conclusion that Section 54 does not apply where GST is not chargeable and it is established by the assessee that an amount has been deposited under a mistake of law. 

Conclusion 

It is one of the fundamental tenets of the Constitution that no tax can be levied and collected except by the authority of law as succinctly stated in Article 265 of the Constitution. The Delhi High Court has reiterated a long line of jurisprudence, but the law on the point remains at a stage of infancy under GST. Hopefully, the combined effect of the Gujarat High Court and the impugned judgment of the Delhi High Court would provide greater clarity to the taxpayers going forward. 

[1] Delhi Metro Rail Corporation Ltd v Additional Commissioner, CGST Appeals-II and Ors 2023: DHC: 6874:DB. 

[2] Cosmol Energy Private Limited v State of Gujarat 2020 (12) TR 4336.

Gujarat HC Quashes SCN for Lack of Reasons and Violation of Principles of Natural Justice

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Gujarat High Court has in a recent judgment[1] quashed a showcause notice (‘SCN’) and the subsequent order on the ground that the reasons for cancellation of the assessee’s registration are not decipherable. The High Court also added that the SCN is quashed because of violation of principles of natural justice. 

Facts 

The petitioner in the impugned case was registered under CGST Act, 2017 and had been regularly filing GST returns. The petitioner claimed that it received a SCN on 20.01.2023 via GSTN portal but did not receive the SCN or any other document or material at its registered place of business. The petitioner claimed that it was given seven working days to file a reply and was instructed to appear personally on 27.01.2023 to file the reply. The petitioner filed a reply by the said date and on 22.06.2023 received a non-speaking order informing it that its registration was cancelled w.e.f. 13.03.2021. 

The SCN was impugned on the ground that it was vague and on the ground that no reason had been assigned for cancellation of the assessee’s registration. The State, on the other hand, argued that the petitioner had obtained registration through fraud and misrepresentation but did not elaborate further as to the nature of fraud or misrepresentation.   

High Court Decides 

The Gujarat High Court reproduced in detail the procedure of registration, cancellation of revocation of registration enunciated in Aggarwal Dyeing and Printing Works case.[2] To put it pithily, the Gujarat High Court in Aggarwal Dyeing and Printing Works case had stated that the settled legal position is that assignment of reasons by adjudicating authority is imperative in nature. And that the said reasons are the heart and soul of decision making. The High Court stated that all evidence, documents must be considered by the decision making authority and reasons assigned in support of the decision must be cogent, clear and concise.

The Gujarat High Court in the impugned case stated that in Aggarwal Dyeing and Printing Works case the Court’s was clear: if a cryptic SCN is issued and reasons for cancellation of registration are not decipherable, then it amounts to violation of principles of natural justice. 

Relying on the aforestated ratio in Aggarwal Dyeing and Printing Works case, the Gujarat High Court in the impugned case held that:

… the show cause notice and the impugned order are quashed and set aside. The petition is allowed solely on the ground of violation of principles of natural justice. The show cause notice as well as the order cancelling the registration are quashed and set aside with a liberty reserved to the respondent to issue a fresh notice with particulars of reasons incorporated with details, and thereafter, to provide reasonable opportunity of hearing to the writ petitioner and to pass appropriate speaking order on merits. (para 8) 

The impugned decision of the Gujarat High Court is another attempt to introduce transparency, adherence to principles of natural justice and reasonableness before cancelling registration of taxpayers. It is instructive how the State raises the argument that the taxpayer obtained registration by fraud without backing the argument without any cogent or other evidence leaving the impression that the argument was used as a fig leaf for an ill thought and arbitrary action. Whether the High Court’s impugned decision will have any impact in the State’s behaviour will be known in the future, though the hope for it is bleak.   

[1] Hardik KaushikBhai Joshi v Union of India TS-485-HCGUJ-2023-GUJ. 

[2] Aggarwal Dyeing and Printing Works v State of Gujarat [2022] 137 taxmann.com 332 (Gujarat). 

Bombay High Court Notes Grant of Licence to Developer is not Grant of Possession under IT Act, 1961

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The Bombay High Court in a recent judgment[1] quashed a notice issued to the assessee under Section 148, IT Act, 1961 on the ground that the assessee failed to disclose its income. The High Court also noted, in an allied issue, that the transfer of licence to a developer under a development agreement did not amount to transfer of a capital asset and was not subject to tax as capital gains.  

Facts 

The assessee’s return of income for the Assessment Year 2013-14 was selected for scrutiny under Section 143(2), IT Act, 1961. During the corresponding Financial Year 2012-13, the assessee, along with other co-owners, had entered into a development agreement with Ashray Developers for developing the land. In response to the query by the Assessing Officer as to why the development agreement should not be treated as ‘transfer of the said land’ and why assessee should not be assessed for capital gains, the assessee stated that the land had not been transferred. The assessee relied on Section 2(47)(v) read with Section 53A of the Transfer of Property Act, 1882 under which transfer of possession of a capital asset in part performance of the contract is treated as transfer of a capital asset exigible to capital gains. The assessee stated that the requirements of the aforestated provisions were not fulfilled in its case.  

The Assessing Officer after receiving the assessee’s reply passed an assessment order under section 143(3) of the IT Act, 1961 without making any addition to the assessee’s income on account of capital gains. However, approximately 5 years later, assessee was issued a notice under Section 148 stating that its income for the Assessment Year 2013-14 had escaped assessment. The assessee’s objection to the notice were disposed by an order which was impugned before the Bombay High Court. 

High Court Decides 

The Bombay High Court noted that the entire reason for issuance of notice for reopening of assessment seems the development agreement which the assesee signed with Ashray developers. And that the Revenue’s objection is regarding assessee’s treatment of the land in question as stock in trade as opposed to capital asset along with the underreporting of the amount paid to the assessee for transferring right of development of land to Ashray Developers. (para 8) The High Court cited a similar decision pronounced by it a few months ago and relying on the same, held that grant of licence to a developer for the purpose of development did not amount to ‘allowing the possession of the land’ as contemplated under Section 53A of the Transfer of Property Act, 1882. Thus, granting of licence for the purpose of development of flats and selling the same could not said to be granting of possession and it would not amount to transfer of a capital asset as envisaged under Section 2(47)(v) of the IT Act, 1961. (para 10)

The Bombay High Court also quashed the reassessment notice issued under Section 148 by relying on the facts of the case. The High Court noted that the assessee had replied to the Assessing Officer’s query as to why consideration received under development agreement should not be taxed under capital gains. And the assessment order was passed after receiving the reply. The High Court relied on the well-established doctrine that if an assessee has replied to a query during assessment proceedings, it follows that the query was subject of consideration by the Assessing Officer while computing the assessment.[2] And no express reference to the query is needed in the assessment order. Thus, since the reply to the specific query on capital gains was considered by the Assessing Officer, the pretext of non-disclosure of income cannot be used to issue a reassessment notice under Section 148. On this ground alone, the High Court said that the notice under Section 148 needs to be quashed and set aside. (para 10) 

Conclusion On both the issues, the Bombay High Court made pertinent observations and correctly rejected the Revenue’s stance. Neither was the issuance of reassessment notice justified nor was the argument that the transfer of development rights amounted to transfer of capital asset. This is especially when identical issues have been decided by Courts with similar results.  

[1] Darshana Anand Damle v Deputy Commissioner of Income Tax, Central Circle 3(4), Mumbai, available at https://taxguru.in/wp-content/uploads/2023/09/Darshana-Anand-Damle-Vs-DCIT-Bombay-High-Court.pdf (Accessed on 28 September 2023).  

[2] Aroni Commercials Ltd v Deputy Commissioner of Income Tax 2(1), Mumbai & Anr 2014 (44) taxmann.com 304 (Bombay). 

Supreme Court Underlines Power of Settlement Commission under IT Act, 1961

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Supreme Court in a recent judgment[1] has interpreted two provisions of IT Act, 1961 – Section 245C and section 245H – to reiterate the scope of jurisdiction and power of Settlement Commission and the necessary conditions that a taxpayer needs to satisfy to invoke its jurisdiction. The Supreme Court also underlined that the power of Settlement Commission to grant immunity to taxpayers should not be ordinarily interfered with by the High Courts. 

Facts and Relevant Issues  

The relevant facts of the case are that the appellant approached Settlement Commission under Section 245C, IT Act, 1961 for determination of its taxable income for assessment years 1994-95 to 1999-2000. The Revenue’s preliminary objection before the Settlement Commission was that the applicant did not fulfil the qualifying criteria under Section 245C since it did not make a full and true disclosure of income before the assessing officer. The Settlement Commission nonetheless assumed jurisdiction and passed an order which the Revenue challenged before the Karnataka High Court. A Single Judge of the High Court allowed the Settlement Commission to decide on all matters relating to maintainability of the application and its merits. 

The Settlement Commission thereafter found the appellant’s application maintainable and granted immunity to the appellant in exercise of its powers under Section 245H, IT Act, 1961. Aggrieved by the Settlement Commission’s order the Revenue approached the Karnataka High Court again and a Single Judge Bench upheld the jurisdiction but found fault with the Settlement Commission’s order granting immunity and remanded the matter back. Against the said order, the appellant approached the Division Bench of the High Court which approved the order of the Single Judge. The two provisions in question: Section 245C and Section 245H were interpreted by the Division Bench of the High Court in the Revenue’s favor. 

As per the Division Bench of the Karnataka High Court, Section 245C, IT Act, 1961 which governs filing of application before the Settlement Commission, the applicant’s application must contain full and true disclosure of his income. While the Settlement Commission under Section 245H, IT Act, 1961 can grant immunity from penalty if two conditions are satisfied: the applicant has co-operated with the Settlement Commission in the proceedings before it and the applicant had made a full and true disclosure of income and the way such income had been derived. The High Court reasoned that the two provisions need to be read harmoniously and not independent of each other and that Section 245C was ‘embedded’ in Section 245H. 

The Revenue supported the Division Bench’s reasoning and judgment before the Supreme Court while the appellant assailed the said judgment inter alia on the ground that the assessing officer’s opinion is not final, Section 245C does not contemplate true and full disclosure before the assessing officer but before the Settlement Commission and that non-disclosure of income before the assessing officer cannot be a ground to prevent the Settlement Commission from exercising its jurisdiction and exercising its immunity granting powers under Section 245C and Section 245H of the IT Act, 1961 respectively.              

Supreme Court Decides  

The Supreme Court engaged with another argument made by the Revenue, i.e., the disclosure made by the appellant before the Settlement Commission must be ‘something apart’ from that discovered by the assessing officer. (para 7.1) As per the Revenue, the assessing officer ‘discovered’ additional income of the appellant through documents and other materials and not on the basis of income tax returns. And that the appellant’s disclosure of income while filing an application under Section 245C must be beyond the discovery of income already made by the assessing officer. The Supreme Court correctly rejected this laboured distinction between disclosure and discovery made by the Revenue and concluded that:

To say that in every case, the material “disclosed” by the assessee before the Commission must be something apart from what was “discovered” by the Assessing Officer, in our view, seems to be an artificial requirement. In every case, there may not even be additional income to offer, apart from what has been discovered by the Assessing Officer. (para 7.2)  

In stating so, the Supreme Court also noted that the appellant’s intent for approaching the Settlement Commission is to settle the dispute and not prolong litigation. And by making a full and complete disclosure of income not disclosed in the return of income, the appellant was trying to settle the case. In other words, the Revenue’s attempt to treat the application ineligible on the basis that income beyond discovery should be disclosed was not in serving the intent to resolve the dispute.  

Conclusion 

The Supreme Court’s conclusion was also influenced by the complexity of facts wherein the appellant in question – Kotak Mahindra Bank – had to make different disclosures to the Reserve Bank of India as per its guidelines, and it cited the Settlement Commission’s order to state that the latter had applied its mind to the facts of the case and thereafter decided to grant immunity under Section 245H, IT Act, 1961. It underlined the power of the Commission under Section 245H and stated that:

The High Court ought not to have sat in appeal as to the sufficiency of the material and particulars placed before the Commission, based on which the Commission proceeded to grant immunity from prosecution and penalty as contemplated under Section 245H of the Act. (para 9)

In stating the above, the Supreme Court reiterated that the power of Settlement Commission to grant immunity under Section 245H is determined as per facts and circumstances of each case and there is no universal formula for exercise of such power. 

[1] Kotak Mahindra Bank Ltd v Commissioner of Income Tax, Bangalore and Anr TS-556-SC-223. 

Namma Yatri App Qualifies as e-commerce operator, but not Supplier of Services

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In a recent ruling[1], Karnataka Authority for Advance Ruling (‘AAR’) made an interesting pronouncement where it held that the applicant in question only satisfied the definition of e-commerce operator under Section 9(5), CGST Act, 2017, but not the nature of supply as understood under the said provision. Thus, the applicant was not liable to discharge tax liability under the aforesaid provision.  

Facts 

Applicant in the impugned ruling was registered under the GST Act and in the business of providing technology services for merchants to connect to their preferred payment aggregators and payment gateways. The technology services in question involved the ‘Namma Yatri’ App, through which the applicant was connecting drivers to their customers. Any person desirous of using the applicant’s app were to apply online via a pre-subscribed form and upload soft copy of their documents and were thereafter granted the license to use ‘Namma Yatri’ App subject to the ‘terms and conditions between applicant and driver’. 

The applicant argued that the subscribers enter business transactions independently and mutually agree on the terms and conditions and the applicant has no role in such transactions, directly or indirectly. Providing further details of their business model, the applicant stated that their role under relevant GST legislations is only concerned with collecting membership and subscription fee and remitting the tax collected on such fee to the State. And that relationship between subscribers registered on ‘Namma Yatri’ App is of supplier and recipient and any consideration involved is purely privy to their contract. The applicant neither arranges the services or related facilities or otherwise nor does it collect any consideration or any other form of payment. 

e-commerce operators and GST 

Section 9(5), CGST Act, 2017 states that: 

The Government may, on the recommendations of the Council, by notification, specify categories of services the tax on intra-State supplies of which shall be paid by the electronic commerce operator if such services are supplied through it, and all the provisions of this Act shall apply to such electronic commerce operator as if he is the supplier liable for paying the tax in relation to the supply of such services: (emphasis added)       

Section 2(45), CGST Act, 2017 defines an electronic commerce operator as any person who owns, operates or manages digital or electronic facility or platform for electronic commerce.

The above two provisions cumulatively empower the Union to notify certain e-commerce operators as deemed suppliers if the twin conditions of intra-state supplies and supplies being supplied through the e-commerce operator are satisfied. One of the questions AAR was required to answer was if the applicant could be subjected to the conditions of Section 9(5), CGST Act, 2017.  

Applicant is e-commerce operator 

Analysing the above provisions, the AAR correctly concluded that the applicant met the criteria specified in the definition of e-commerce operator. The services in question were also supplied by motor cab, satisfying the criteria prescribed in the notification issued by the Union under Section 9(5) wherein it was stated that tax on intra-State supplies for services by way of transportation of passengers by a radio-taxi, motorcab, maxicab and motorcycle shall be paid by the electronic commerce operator. However, the AAR concluded that the services in question were not provided ‘through’ the applicant, a necessary condition under Section 9(5) and concluded that: 

…         the word through in the phrase services supplied through electronic commerce operator, in Section 9(5) ibid, gives the meaning that the services are to be supplied by means of/by the agency of/ from beginning to the end/during entire period by the e-commerce operator. In the instant case, it is observed that the applicant, because of their unique business model, merely connects the auto driver and passenger and their role ends on such connection; they do not collect the consideration; they have no control over actual provision of service by the service provider; they do not have the details of the ride; they do not have control room/call centre, etc. The supply happens independent of the applicant and the applicant is involved only in the identification of the supplier of services and doesn’t take responsibility for the operational and completion of the ride. (para 19)

Thus, AAR concluded that the supply of services are not through the applicant, e-commerce operator, but independent of it and the notification issued under Section 9(5), CGST Act, 2017 would not apply to the applicant.  

Conclusion

AAR was correct in its conclusion that even though the applicant satisfies the definition of e-commerce operator, the conditions specified under Section 9(5), CGST Act, 2017 are not satisfied for the applicant to discharge tax liability by an e-commerce operator. The applicant in the impugned ruling was only providing a minimal technology platform and nothing beyond thereby distinguishing it from cab aggregators. It is the latter that are subject to the conditions under Section 9(5), CGST Act, 2017 and the AAR was correct in accepting the applicant’s distinction between its business model and that of cab aggregators who actively facilitate the transactions on their platforms and applications. AAR’s conclusion is certainly well-reasoned and ensures that merely satisfying the definition of e-commerce operator should not place the entity under the onerous burden of Section 9(5), CGST Act, 2017.[2]    

[1] In Re: M/s. Juspay Technologies Pvt Ltd, Advance Ruling No. KAR ADRG 31/2023, pronounced on 15.09.2023. Available at https://taxguru.in/wp-content/uploads/2023/09/In-re-Juspay-Technologies-Pvt.-Ltd.-GST-AAR-Karnataka.pdf (Last accessed on 26.09.2023). 

[2] The impugned advance ruling aligns with another ruling in Re: M/s. Multi-Verse Technologies Private Limited, Advance Ruling No. KAR ADRG 36/2022, pronounced on 27.10.2022, available at https://taxguru.in/wp-content/uploads/2022/11/In-re-Multi-Verse-Technologies-Pvt.-Ltd-GST-AAR-Karnataka.pdf (Last accessed on 26.09.2023).

Bombay HC Allows Taxpayer to Claim Benefit of DTVVA, 2020

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In a recent judgment[1], the Bombay High Court allowed the taxpayer to claim benefit of Direct Tax Vivad Se Vishwas Act, 2020 (‘DTVVA, 2020’) and held that the interpretation adopted by the Revenue in deciding the ineligibility of the taxpayer was not in accordance with the objective and rationale of the DTVVA, 2020. The High Court relied heavily on Macrotech Developers case[2] to provide weight to its reasoning and conclusion.  

Facts 

The assessment of the taxpayer for Assessment Years 2010-11 and 2011-12 were reopened under Section 147, IT Act, 1961 and after conclusion of the reassessment proceedings the assessing officer passed an order. The assessing officer thereafter raised a demand based on the additional income determined in the reassessment proceedings. While the assessment order and consequent notice for additional demand were pending in appeal, taxpayer was served a notice as to why prosecution should not be initiated against him for intentionally evading tax. And the Revenue subsequently commenced prosecution by filing a complaint before the relevant Chief Metropolitan Magistrate. 

In the interim, DTVVA, 2020 was notified and taxpayer took advantage of it to file returns for the Assessment Years 2010-11 and 2011-12 under it. The Revenue noted that the taxpayer was not entitled to take advantage of the DTVAA, 2020 and settle the appeal since the prosecution in respect of the same had already been instituted. The taxpayer, on the other hand, claimed that under Section 9(a)(ii), DTVVA, 2020 a taxpayer was disentitled to claim the benefit only if the prosecution had been initiated ‘in respect of tax arrear’. And the amount payable by the taxpayer in the impugned case did not amount to a tax arrear.    

High Court Adjudicates

The High Court cited the ratio of Macrotech Developers case where the Bombay High Court had made a categorical observation that a bar on filing declaration is only when the prosecution initiated by the Revenue relates to tax arrears and not for any prosecution in relation to an assessment year per se. The High Court rejected the States’ weak argument that the taxpayer’s wilful evasion of tax would be covered by tax arrear. The High Court relying on the Macrotech Developers case, held that the taxpayer will be able file returns under the DTVVA, 2020. 

The Bombay High Court also examined the definition of tax arrear under Section 2(1)(o) which stated that tax arrear would mean the aggregate amount of disputed tax, interest chargeable or charged on such disputed tax and penalty levied or leviable on such disputed tax or disputed interest or disputed penalty or disputed fee as determined under the provisions of the Act. Based on the definition and ratio of Macrotech Developers case, the High Court concluded that delayed payment cannot amount to tax arrear. As per the High Court: 

the intention of the legislature was that the provisions of DTVSV Act shall not, in view of Section 9(a)(ii), apply in the case of a declarant in whose case a prosecution has been instituted in respect of tax arrear relating to an assessment year on or before the date of filing of declaration. The prosecution has to be in respect of tax arrear which naturally is relatable to an assessment year. (para 18) 

Conclusion

The Bombay High Court’s judgment in the impugned case reiterates the substance and ratio adopted in the Macrotech Developers case, and for good reason. There is little to suggest that the definition of tax arrear under DTVVA, 2020 should include delayed payment by the assessee. And the State’s contention suggesting that tax arrears should be interpreted broadly was not based on any concrete foundation and was correctly rejected by the High Court.  

[1] Pragati Pre Fab India Pvt Ltd v Principal Commissioner of Income Tax, Mumbai TS-552-HC-2023-BOM. 

[2] Macrotech Developers Ltd v Principal Commissioner of Income Tax (2021) 126 taxmann.com 1 (Bombay). 

Bombay HC Allows Petitioner to Claim Benefit of Section 54(F), IT Act, 1961

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In a lucid judgment[1], the Bombay High Court allowed petitioner to claim benefit of Section 54(F), IT Act, 1961 and held that the amendment made to the impugned provision by virtue of Finance Act, 2014 was prospective in nature. 

Facts 

The petitioner in the impugned case claimed benefit of Section 54(F), IT Act, 1961 on the ground that the capital gains from sale of residential property in India had been invested in another residential property in the United States of America. The petitioner’s claim was rejected by the Revenue Department on the ground that addition of the words ‘in India’ by way of amendment vide Finance Act, 2014 was retrospective in nature. And thus, the petitioner cannot claim benefit of Section 54(F) if the capital gains were invested in a residential property outside India. 

The petitioner argued that the only condition that was required to be fulfilled at the time of relevant assessment year was that a new residential house should be purchased de hors any condition about the location of the new house. The petitioner further stated that when a particular provision was capable of more than one meaning, the interpretation that is in favor of the assessee must be adopted. 

The State, on the other hand, argued that the amendment to Section 54(F) was clarificatory in nature and thus has retrospective effect. The State also adopted an innovative argument and stated that the requirement of ‘in India’ was in-built in the scheme of IT Act, 1961 by virtue of Section 5(2), IT Act, 1961, implying that the amendment to Section 54(F) only made express what was implied in the provision. 

Bombay High Court Favors the Petitioner 

The Bombay High Court identified the issue precisely and relied on precedents to clearly state that an amendment should be considered clarificatory only if the pre-amended provision was vague and ambiguous and it was impossible to read the provision unless the amendment was factored into it. Further as per the High Court, the clarification should not expand the scope of the provision. 

Applying the above parameters to the amendment made to Section 54(F), the High Court concluded that the pre-amended Section 54 was not ambiguous, it expressly and specifically excluded the words ‘in India’. Thus, the amendment cannot be stated to be clarificatory in nature. The High Court further noted that interplay of Section 5(2) and Section 54(F) was such that the former was ‘subject to the provisions of this Act …’ and thus the former provision would always operate subject to other provisions of the IT Act, 1961 including Section 54(F). The High Court further reasoned that amended provision did not refer to Section 5(2) or even remotely suggest that it was a clarification and concluded that the amendment to Section 54(F) wherein the words ‘in India’ were added was prospective in nature.

Conclusion 

The Bombay High Court in the impugned judgment was lucid and precise in its identification of the issue and applied the law in a straightforward and reasoned manner. The State’s argument of trying to link Section 5(2) with Section 54(F) was also suitably rebuffed, and rightly so.           

[1] Hemant Dinkar Kandlur v Commissioner of Income Tax TS-545-HC-2023 BOM. 

Kerala HC Accepts Taxpayer’s Plea Against Denial of ITC

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In a crisp judgment[1], the Kerala High Court has held that Input Tax Credit (‘ITC’) cannot be denied to a taxpayer merely because the tax paid is not reflected in GSTR-2A. The Kerala High Court’s conclusion aligns with a recent judgment pronounced by the Calcutta High Court where the taxpayer was provided a similar relief. 

Facts and Arguments 

The issue in this case was that the taxpayer was denied ITC by the Revenue Department on the ground that the amount of ITC claimed did not match the amount mentioned in GSTR-2A. The taxpayer relied on Section 16, CGST Act, 2017 and stated that the provision contained a non obstante clause implying that if the conditions prescribed under the provision were fulfilled by the taxpayer, ITC cannot be denied. 

The taxpayer, as in Suncraft Energy Pvt Ltd case, stated that GSTR-2A is for the purpose of taxpayer facilitation and does not/should not impact the ability of a taxpayer to claim ITC. Taxpayer in this case too stated that CBIC’s press release dated 18.10.2018 clarified that GSTR-2A does not impact a taxpayer’s ability to claim ITC on self-assessment basis under Section 16, CGST Act, 2017. Reliance was placed on Bharti Airtel case[2] for similar purposes.

High Court Provides Relief to Taxpayer 

The Kerala High Court essentially accepted all the arguments of the taxpayer, and interestingly, placed reliance on M/S Ecom Gill Trading Pvt Co Ltd case[3] to state that if the taxpayer has paid the tax amount to the dealer and said tax has not been remitted by the dealer, then the burden of proof as regards remittance of tax is on the taxpayer. However, while in M/S Ecom Gill Trading Pvt Co Ltd case the Supreme Court had held that the taxpayer needs ‘to prove beyond doubt’ the genuineness of the transaction, but, in the impugned judgment the Kerala High Court did not use a similar phrase and instead remanded back the matter to Assessing Officer to examine the taxpayer’s claim of ITC and concluded that: 

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. (para 8)

The Kerala High Court’s judgment is a welcome development on the heels of the Calcutta High Court’s judgment in the Suncraft Energy Pvt Ltd case and ensures that the ITC claims of the taxpayers are not denied on whimsical grounds. Instead, the nature of GST returns are respected to facilitate taxpayer claims. Hopefully, this will provide momentum to a more coherent jurisprudence on this issue in the near future. 

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

[2] Union of India v Bharti Airtel Ltd and Ors 2021 SCC OnLine 1006. 

[3] State of Karnataka v M/s Ecom Gill Trading Pvt Co Ltd 2023 SCC OnLine SC 248. 

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