Rav Singh

Supreme Court Reiterates Non-Obstante Clause of Section 529A, Companies Act, 1956

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In a recent judgment[1], the Supreme Court opined on the priority to be accorded to custom authorities vis-à-vis secured creditors under the Companies Act, 1956. It accorded due deference to the overriding nature of Section 529A under which tax due by a company under winding up is not to be the foremost payment. While the judgment is under the erstwhile Companies Act, 1956 it is important to highlight how a seemingly straightforward issue – ranking of tax dues from a company under the winding up or insolvency process – has a unduly long legacy that continues to simmer under the IBC as well. 

Introduction 

The appeal before the Supreme Court was against an order of the Andhra Pradesh High Court where it held that notwithstanding the winding up order against the impugned company – M/s Sri Vishnupriya Industries Limited – and Sections 529A and 530 of the Companies Act, 1956, the custom authorities have the first right to sell the imported goods and adjust the sale proceeds towards payment of customs duty. The appeal was filed by Industrial Development Bank of India from which the company had sought financial assistance and to which the company had hypothecated movable properties, namely machinery and its components.

The company had imported the machinery and components and on failure to pay the customs duty, an order was passed to detain and sell the said property for satisfaction of the outstanding customs duty. In the meanwhile, an order for winding up of company was passed and the Official Liquidator so appointed requested the custom authorities to hand over the properties of the company which the latter planned to auction for payment of customs duty. The Andhra Pradesh High Court faced with the question as to whether the rights of a secured creditor should have precedence over custom authorities, decided in favor of the latter.    

Interplay of Provisions of Companies Act, 1956

Supreme Court was categorical, and rightly so, in its examination of Section 529A of Companies Act, 1956. It noted that Section 529A enlisted that workmen’s dues and debts of secured creditors shall be paid in preference to all other payments, and the non-obstante clause in the provision made it clear that these payments were to be made in preference to all other payments in the winding up of a company. And all other payments enlisted in Section 530 were to be made subject to the prescription of Section 529A. Supreme Court concluded that it is ‘beyond debate’ that provisions of Section 529A shall prevail of Section 530 of the Companies Act, 1956. (para 11)

The result of this clear and unambiguous position and effect of both provisions, was, in Supreme Court’s own words: 

… IDBI is an overriding preferential creditor under Section 529A of the Companies Act and at best, if the requirements of clause (a) to Section 530(1) of the Companies Act are satisfied, the customs dues would fall under Section 530 of the Companies Act and will be categorized as preferential payment. (para 19) 

The Supreme Court, out of abundant caution, went into the meaning and interpretation of certain phrases used in Section 529A and Section 530, Companies Act, 1956. It went into detail and cited precedents as to what the terms ‘due’ and ‘due and payable’ mean under the provisions. 

The Supreme Court then clarified that as per the law laid down in relevant precedents, such as the Dena Bankcase[2], government dues do not have priority over secured creditors. The principle so enunciated in the Dena Bank case aligned with the Supreme Court’s interpretation and interplay of Section 529A and Section 530 in the impugned case. However, the Supreme Court clarified that the principle laid down in the Dena Bank case must give way to a statutory charge that may be created by an enactment. In the context of impugned case, it meant that the Supreme Court had to examine if Customs Act, 1962 created a first charge for payment of customs duty and if there was a conflict between the Companies Act, 1956 and Customs Act, 1962. Supreme Court’s conclusion on this point was: 

The provisions in the Customs Act do not, in any manner, negate or override the statutory preference in terms of Section 529A of the Companies Act, which treats the secured creditors and the workmen’s dues as overriding preferential creditors; and the government dues limited to debts ‘due and payable’ in the twelve months next before the relevant date, which are to be treated as preferential payments under Section 530 of the Companies Act, but are ranked below overriding preferential payments and have to be paid after the payment has been made in terms of Section 529 and 529A of the Companies Act. Therefore, the prior secured creditors are entitled to enforce their charge, notwithstanding the government dues payable under the Customs Act. (para 24)

The Supreme Court further clarified that the charge created under Section 142A, Customs Act, 1962 protects the rights of third parties under Section 529A, Companies Act, 1956 inter alia of those under Insolvency and Bankruptcy Code, 2016. And that Section 142A, Customs Act, 1962 does not create a first charge on the dues payable under the said legislation.         

Conclusion

While the Supreme Court’s judgment focuses on the interplay of provisions of Companies Act, 1956, its observations in the latter half of the judgment clarify, to some extent, the position of law after the implementation of IBC. The fact that Customs Act, 1962 does not create a statutory charge is an important and correct position of law as it clarifies that tax authorities – at least, customs authorities – are not placed above the preferential creditors. This may prove useful in unfortunate but frequent disputes between tax authorities seeking priority payment of outstanding dues over secured creditors of the company under insolvency, despite that the waterfall mechanism under IBC does not place the tax authorities above the secured creditors.  

[1] Industrial Development Bank of India v Superintendent of Central Excise and Customs and Others, available at https://main.sci.gov.in/supremecourt/2009/114/114_2009_3_1501_46202_Judgement_18-Aug-2023.pdf (Last accessed on 21 August 2023). 

[2] Dena Bank v Bhikhabhai Prabhudas Parekh & Co and Others (2000) 5 SCC 694. 

Reversal of ITC: Calcutta High Court Opines on Liability of Buyer-Seller & GST Returns

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In a recent judgment[1], the Calcutta High Court gave a detailed opinion on the nature and role of some of the tax returns, specifically, GSTR-2A, that taxpayers are required to file under GST. And in the process provided some clarity on who bears the burden – buyer or supplier – for paying taxes to the State in case of errors in the relevant tax returns.  

Introduction 

The appellant purchased certain goods and services from its supplier and paid GST on the supplies. However, some of the invoices of the supplier were not reflected in GSTR-2A of the appellant for the Financial Year 2017-18. It is important to state here that GSTR-2A is an auto-drafted statement that is generated for each taxpayer based on their supplier’s data and provides the taxpayer ITC-related information. When a taxpayer files their monthly summary under GSTR-3B, it is important for them to reconcile ITC and other data with their GSTR-2A. Thus, any error/mistake in the GSTR-2A generated by a taxpayer’s supplier could affect the ITC claims of a taxpayer.   

In the impugned case, the appellant was served notice for recovery of input tax credit (‘ITC’) availed and was eventually the ITC of the appellant was reversed. The ground for reversal of ITC was mismatch in the taxpayer’s GSTR-2A and GSTR-3B. The appellant defended the mismatch under GSTR-2A with GSTR-3B by arguing that its transactions with the supplier were genuine and were not reflected in GSTR-2A due to the supplier’s error. However, the notice was adjudicated and penalty along with interest were determined under Section 73(10), CGST Act, 2017. The appellant approached the Calcutta High Court against the order with its main grievance being that proceedings cannot be initiated against it without conducting any enquiry or effecting any recovery from the supplier.

In other words, if the supplier had not paid GST to the State – erroneously or otherwise – then the Revenue should proceed against the supplier and not reverse the appellant’s ITC. The issue was of attributing responsibility for the GST on the transactions in question. The Calcutta High Court adjudicated on the issue by inter alia stating the importance and role of the relevant tax returns under GST.    

High Court Adjudicates in Favor of Taxpayer 

The appellant’s arguments were reliant on Section 16, CGST Act, 2017 and CBIC Press Releases dated 4.05.2018 and 18.10.2018. The appellant argued that they had fulfilled all the statutory conditions to avail ITC as prescribed under Section 16(2) and they cited CBIC’s Press Releases to emphasise that GSTR-2A was for the purpose of taxpayer facilitation/information and did not impact the ability of a taxpayer to claim ITC on a self-assessment basis. In other words, as long as the taxpayer was fulfilling the statutory conditions prescribed under Sec 16, CGST Act, 2017 discrepancies in GSTR-2A should not affect its ability to claim ITC.  

The appellant further placed emphasis on Bharti Airtel judgment[2] of the Supreme Court to underline the nature of GSTR-2A and that it was de-linked with GSTR-3B. The Supreme Court in the Bharti Airtel judgment has held that GSTR-2A and the common electronic portal acts as enablers and facilitators for claiming ITC on self-assessment basis and the conditions to claim ITC under Section 16, CGST Act, 2017 were termed as crucial and substantive. Equally crucially, the appellant relied on Arise Limited case[3] where the issue for consideration was whether the purchasing dealer should be made liable for the default committed by selling dealer and the Delhi High Court had held that bona fide purchaser under a transaction with a registered seller should not be made responsible for seller’s default unless collusion between purchaser and seller is established by the Revenue. 

The Calcutta High Court accepted all the arguments of the appellant including the fact that the appellant possessed the invoice and the bank statement to prove that they had bought the goods from the supplier and the transactions in question were genuine transactions. 

Conclusion 

The Calcutta High Court’s judgment wherein it directed the Revenue to first proceed against the supplier and only in exceptional circumstance proceed against the appellant is a welcome development. It only reiterates what should be the default position under GST laws as far tax defaults are concerned. Unless collusion or fraud is established or a prima facie case for the same is made, the Revenue should not deny ITC or reverse ITC of the purchaser in case of tax default by the supplier. This is the desirable position of law and should be the law as followed in practice.     

[1] Suncraft Energy Pvt Ltd v The Assistant Commissioner, State Tax, Ballygunge (2023) 8 TMI 174. 

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

[3] Arise India Ltd v Commissioner of Trade and Taxes, Delhi and Ors MANU/DE/3361/2017. 

Bombay High Court Strikes Down FAQ under Vivad se Vishwas Act, 2020

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In a recent judgment[1], the Bombay High Court rejected an interpretation adopted by the Revenue Department which was prejudicial to the assessee. The case concerned answer to a Frequently Asked Question (‘FAQ’) which the High Court struck down as not in accordance with the object of Direct Tax Vivad se Vishwas Act, 2020, a beneficial legislation for assessees.  

Facts 

Assessee had filed an appeal before ITAT under Section 253, IT Act, 1961 on 30 September 2014 which was dismissed on 20 May 2016. The assessee filed a Miscellaneous Application (‘MA 1’) on 17 September 2016 seeking adjudication on grounds 3 and 4 which remained undecided by the ITAT. The ITAT passed an order on 14 May 2019 modifying its earlier order which was given effect to by the Deputy Commissioner of Income Tax. The petitioner then preferred another Miscellaneous Application (‘MA 2’) seeking adjudication of ground 4 which still remained undecided. MA 2 remained pending at the time of filing of petition by the assessee before the Bombay High Court.  

On 17 March 2020, Direct Tax Vivad se Vishwas Act, 2020 (DTVVA, 2020) was passed and petitioner on 30 January 2021 made an application to seek its benefit. However, the petitioner’s application was rejected on the ground that it was not eligible to avail the benefit under DTVVA, 2020.  

Arguments 

The assessee argued that its application under DTVVA, 2020 could not be rejected since MA 2 was pending adjudication at the time of application, and a pending appeal was one of the eligibility conditions under DTVVA, 2020. And the State could not argue that MA 2 was not maintainable; the assessee was in litigation at the time of introduction of DTVVA, 2020 and eligible to receive its benefits. The assessee pressed home the point that MA 2 was filed since one of the grounds  (ground 4 )remained undecided by ITAT, and MA 1 was held to be admissible for want of adjudication on ground 3 and ground 4. Thus, there was no reason to dismiss MA 2 was being infructuous or barred due to res judicata. 

State’s order rejecting the assessee’s application stated that the assessee had applied under DTVVA, 2020 against MA 2 which was filed against the dismissed appeal. The State reasoned that an examination of ITAT’s order reveals that the assessee’s appeal was not dismissed in limine as ITAT had discussed the issue involved. Thus, as per the State, assessee was not eligible to apply for DTVVA, 2020.

Bombay High Court Find in Favor of Assessee

The Bombay High Court noted that MA 2 is pending as a matter of record. And that the High Court cannot proceed on the basis that MA 2 might be rejected. Instead, the High Court observed that it cannot be ignored that MA 1 was decided in favor of the assessee. Thus, MA 2 should be treated as an application that is pending for adjudication on ground 4 which remained undecided in appeal. Having decided this crucial fact, the High Court examined the ‘FAQ’ which formed the basis of the State’s rejection stated above. 

FAQ 61 issued under the DTVVA, 2020 clarifying eligibility criteria stated that: 

61. Whether Miscellaneous Application (MA) pending as on 31st January 2020 will also be covered by the Scheme? 

Ans. If the MA pending on 31st January 2020 is in respect of an appeal which was dismissed in limine (before 31st January 2020) such MA is eligible. Disputed tax will be computed with reference to the appeal which was dismissed. (emphasis added)

The Bombay High Court referred to the objective of DTVVA, 2020, i.e., to reduce pending income tax disputes, generate timely revenue for the Government, and provide certainty to taxpayers. In light of this objective, the High Court noted that the qualifying words ‘in limine’ introduced in FAQ 61 were contrary to the object and reasons of DTVVA, 2020. The High Court cited a slew of precedents to highlight that a beneficial statute must be interpreted to provide the complete remedy which the statute seeks to provide. In view of the same, it struck down FAQ 61 reasoning that DTVVA, 2020 was a beneficial statute and addition of the words ‘in limine’ was adverse to the interests of the assessee and contrary to the objects of DTVVA, 2020. 

Conclusion 

The Bombay High Court’s approach in the impugned judgment is an example of a court carefully examining the issue at hand, and using the relevant jurisprudence to adjudicate in favor of the assessee by providing adequate reasoning. The State’s denial to the assessee’s application under DTVVA, 2020 was based on thin grounds and the High Court was correct in scrutinising the order and striking down the edifice of the State’s order.    

[1] Oerlikon Balzers Coating India (P) Ltd v Union of India 2023 SCC OnLine Bom 1295. 

Compounding Fee is Not Tax

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In a recent judgment[1], the Delhi High Court clarified that merely because appellants paid a compounding fee after initiation of legal proceedings against them, does not permit the State to retain the said amount if there was no legal provision under which the appellants were obligated to make the payment. The High Court clarified that in order to successfully claim the refund of compounding fee, it was not necessary for the appellants to have stated that it was paid under protest.   

Introduction 

The appellants imported fuel dispensing equipment for use at retail outlets in the country but without obtaining registration under the Legal Metrology Act, 2009. The respondents – Director of Legal Metrology and Others – took the view that appellants did not comply with the statutory requirements under Legal Metrology Act, 2009 and initiated proceedings against the appellants. During proceedings, the appellants paid compounding fee to the respondents. 

On examining the issue as to whether appellants need to obtain registration before importing the equipment, a Single Judge of the Delhi High Court held that the appellant was not liable to register under the Legal Metrology Act, 2009. However, the Judge refused to accept the appellant’s plea for refund of the compounding fee reasoning that the payment was not made under coercion, but voluntarily. The judge observed, that at the time of making payment, the appellants did not communicate that they were making the payment under coercion or under protest. 

Decision 

The Division Bench of the Delhi High Court held that it was unable to sustain the conclusions reached by the Single Judge. As per the Division Bench, once it was clear that the appellants were not liable under the Legal Metrology Act, 2009 it was difficult to accept the proposition that they should be held liable to pay the compounding fee.  

The Division Bench concluded: 

We also deem it pertinent to observe that the respondents being “State” cannot be countenanced to retain monies which are otherwise not payable by the appellants under the provisions of the 2009 Act. When viewed in that light, it is evident that the issue of deposit without demur or protest could not have justified the retention of compounding fee. (para 8)

It is evident that the retention of money by the Metrology Department – termed as State – by the Division Bench by viewed as illegal. The Division Bench was clear in stating that a compounding fee was not in the nature of a tax or duty but a payment made to avoid the rigours of a legal proceeding. Payment of compounding fee should not be understood mean acceptance of violation of the statutory provisions or an acceptance of guilt. 

The Division Bench adopted a comparatively more coherent approach in ordering the refund of the compounding fee. If the action of respondents was held to be not violative of the impugned statute, there was little to no reason for disallowing their request to refund the compounding fee paid to thwart legal proceedings initiated under the said statute. Merely not stating that the compounding fee was paid under protest was not a valid ground to deny the refund of compounding fee, and the Single Judge Bench erred in denying the refund.   

[1] Indian Oil Corporation Ltd v Director of Legal Metrology & Ors 2023 LiveLaw (Del) 654. 

Interplay of Section 153 and Section 144C: Bombay High Court Provides Clarity

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In a recent judgment[1], the Bombay High Court clarified that the period of limitation for passing an assessment order will be governed by Section 153, IT Act, 1961 and not by the time period envisaged under Section 144C, even if the latter was a self-contained code.  

Introduction 

The assessee was a company incorporated in Cayman Islands and headquartered in Dubai. It was engaged in the business of shallow water drilling for clients in the oil and gas industry. The assessee filed regularly filed its income returns under the IT Act, 1961 and the impugned judgment related to the Assessment Year 2004-05.  

Arguments 

The assessee argued that Section 153, IT Act, 1961 was the outermost limit for passing a final assessment order under the IT Act, 1961. The assessee stated that under Section 153(3), IT Act, 1961 read with Notification No. 10/2021, the time to pass the final assessment order in the impugned case 30 September 2021. While the draft assessment order was issued on 28 September 2021 and the final order was passed in October 2021. In view of the Revenue’s inability to pass the final assessment order before the deadline, the proceedings against the assessee should be held to be barred by limitation.   

Revenue, on the other hand, argued that time limit prescribed under Section 153(3) would be in addition to the time prescribed under Section 144C and that the time period prescribed under Section 144C does not get subsumed under Section 153(3). The Revenue made a few additional arguments to support its stance that Section 144C operated independently of Section 153(3). First, the Revenue stated that there was no time limit under Section 144C, the Dispute Resolution Panel (‘DRP’) was required to issue an order within 9 months and the Assessing Officer had one month to pass final assessment based on directions of the DRP. Second, the Revenue argued that Section 144C was a self-contained code and thus acquired primacy over Section 153(3). Third, an extension of the second, the Revenue stated that Section 144C being a special provision should override the general provision, i.e., Section 153(3). 

The Revenue also challenged correctness of the Madras High Court’s decision in Roca Bathroom case[2]where Section 153 was held to be the controlling provision for time limit of passing assessment orders. In the said case, the Madras High Court had held that the time limits prescribed under Section 144C and Section 153 are mutually and that the time limits refer not just to draft orders but also to final assessment orders. The Revenue argued that such an interpretation makes a key machinery provision unworkable and would make several orders passed after disposal of objections of DRP untenable.       

Decision 

The Bombay High Court examined the scheme of Section 144C and noted that Section 144C (13) excluded the application of Section 153. However, the exclusion was specific, i.e., the assessee need not be heard at time of passing of final assessment order and kicked only when the AO had to pass the final assessment order as per the directions of DRP. Otherwise, the High Court observed that the entire proceedings must be completed within the prescribed time provided in Section 153.

The Bombay High Court agreed with the State’s categorization of Section 144C as a self-contained code and that it constituted DRP as an expert body to investigate intricate matters concerning valuation expeditiously. The High Court agreed that while specific timelines have been drawn within the framework of Section 144C to fast-track a special kind of assessment, it ‘cannot be considered to mean that overall time limits prescribed have been given a go by in the process.’ (para 23)

The Bombay High Court further reasoned that where the legislature intended to provide exceptions, they were specifically included and provided in Section 153. It referred to various sub-sections and the Explanation to Section 153 to underline that in certain instances, the limitation period had been extended but that was not the case for Section 144C. In fact, the High Court noted, that if the argument is accepted that the AO is unfettered under Section 144C, it would run counter to the objective of Section 144C wherein time limits have been setup at every step. The High Court observed that ‘it does not stand to reason that proceedings on remand to the AO may be done at leisure sans the imposition of any time limit at all.’ (para 26)

Conclusion

The Bombay High Court rightly concluded that the time limit prescribed under Section 153 will prevail over and above the assessment time limit prescribed under Section 144C. The AO needs to follow the procedure under Section 144C, but the procedure must commence and be concluded within period of 12 months prescribed under Section 153(3). It is an important judgment by the High Court, even though it reiterates the observations made by the Calcutta High Court in the Roca Bathroom case. Especially, it is important to highlight that while the High Court agreed with the categorization of Section 144C as a self-contained code, it did not use that general categorisation to hold that it overrides Section 153 per se, and, in fact, adopted a more nuanced and cogent reading of Section 153.  

[1] Shelf Drilling Ron Tappmeyer Limited v Assistant Commissioner of Income Tax, available at https://taxguru.in/wp-content/uploads/2023/08/Shelf-Drilling-Ron-Tappmeyer-Limited-Vs-ACIT-Bombay-High-Court.pdf

[2] Commissioner of Income Tax v Roca Bathroom Products (P) Ltd (2022) 140 taxmann.com 304 (Madras). 

Calcutta High Court Decides a Case ‘Not of the Ordinary Kind’

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In a recent case[1], the Calcutta High Court pronounced a decision which it described as ‘not of the ordinary kind’. The High Court declared, in the opening sentence of the judgment, that most interesting points were involved in the case. In non-dramatic terms, the case involved determination of whether GST could be levied on a loan obtained by a credit card holder from a bank. The High Court decided in the negative. 

Facts 

The appellant possessed a credit card provided by Citi Bank. The bank provided a loan to the appellant of Rs 6,50,000/- with interest @13% per annum payable in 12 equal monthly instalments. It was in the monthly statements of the appellant’s credit card where the loan and EMI payable were indicated. The appellant challenged the levy of IGST on the transaction in question, i.e., the appellant obtaining loan from the bank. Via a writ petition before the Calcutta High Court, the appellant sought a declaration that IGST on the impugned transaction should not have been charged, and if charged should be refunded. 

Arguments 

The Calcutta High Court referred to Notification No. 9/2017 – Integrated Tax (Rate) wherein a list of services were exempted from IGST except tax levied on interest in credit card services. The appellant argued that possession of credit card entitled him to a loan, but the advancement of loan had nothing to do with the credit card or service which bank was offering in relation to it. The loan agreement was a separate and standalone agreement between the appellant and the bank unrelated to the credit card. He further argued that only for purpose of payment was EMI reflected in the credit card statement, otherwise the bank was not charging the same interest it charged for a credit card loan. Appellant’s case was that only the services provided in relation to use of a credit card with a merchant or online constitute credit card services and not a loan advanced through cheque without use of the card.

The bank, on the other hand, simply argued that since the loan was granted to the appellant because he possessed a credit card, the loan should be regarded as a credit card service. 

Analysis by the Calcutta High Court 

The Calcutta High Court noted that terms and conditions on which loan was granted to the appellant stated that it was only available to holders of Citi bank credit cards. And the appellant was granted a loan as per those terms and conditions.

The High Court observed that to be a credit card service, the service should be between the issuer of card and holder of card, and there should be some relationship or nexus with holding, operation, or use of such card of transactions relating to it. The Calcutta High Court concluded that the advancement of loan did not constitute a credit card service by reasoning as follows: 

If the loan was advanced to the appellant through use of the card, then one could have understood that the service was related to the card. In this case, the bank declared the appellant card holder to be eligible to receive loan. His loan amount was advanced by a cheque or draft issued by the bank. That is to say, the loan amount was not generated by charging the appellant’s card. (page 8) 

The High Court acknowledged that the loan amount appeared in the statement relating to use of the credit card, but it noted that it was more of a statement of account. And that the loan transaction should be taken as an altogether separate transaction which had no relation to the issue, holding or operation of the card. Thus, sending the loan statement with credit card statement did not create a sufficient nexus with the credit card, especially since the loan was not secured through use of the credit card per se.  

Conclusion 

The decision hinged on the fact whether the condition of prior possession of the credit card to avail the loan could be interpreted to mean the loan was an extension of credit card services. The fact that the loan was advanced through a separate cheque and not through use of the credit card was, in my opinion, decisive in Calcutta High Court’s conclusion and rightfully so. 

While the facts are certainly ‘interesting’ it is important to note that exemption from GST was due to the specific facts in the impugned case. It would be unwise to deduce that any service relating to a credit card but not involving the actual use of the credit card would be exempt from GST. The term ‘credit card services’ has been infused with some meaning by the Calcutta High Court in the impugned case, but it is a fact specific determination and is likely to be tested in similar cases in the future.    

[1] Ramesh Kumar Patodia v City Bank N.A. and Ors, available at https://taxguru.in/wp-content/uploads/2023/07/Ramesh-Kumar-Patodia-Vs-City-Bank-N.A.-and-Ors.-Calcutta-High-Court.pdf

DTAAs are Relevant for TDS Provisions under IT Act, 1961 

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In a recent judgment[1], the Karnataka High Court reiterated the ratio of Engineering Analysis case, more specifically the applicability of Double Taxation Avoidance Agreements (‘DTAA’) vis-à-vis withholding tax obligations under the IT Act, 1961. 

Introduction 

The assessee was an International Long Distance (‘ILD’) licence holder and was responsible for providing connectivity to calls originating/terminating in India. The assessee entered into agreements with non-resident telecom operators for the aforesaid purposes and was required to pay them inter-connectivity charges. In the impugned case, the centrepiece was an agreement assessee entered into with a Belgium entity which had no permanent establishment in India. Equally, all the equipment and necessary submarine cables were situated outside India. 

Arguments 

The Revenue made several arguments, the core, for the purpose of this post was that the assessee failed to discharge its statutory obligation to withhold tax/deduct TDS before making the payments to the Belgium entity. The Revenue argued that the agreement between the assessee and the Belgium entity did not specify that the income was not taxable in India and if in the opinion of the assessee no tax was deductible it should have approached the Assessing Officer and secured a nil certificate. The Revenue further argued that the income belonged to the payee. 

The assessee, on the other hand, argued that the payments made by the assesee could neither be considered as royalty, fee for technical services or business profits since no part of the business activity was conducted in India. The assessee also resisted Revenue’s attempt to apply the expanded definition of royalty amended via insertion of Explanations to Section 9(1)(vi) and instead argued that the definition of royalty under DTAA needs to be relied on.  

Observations of the High Court 

The High Court engaged with the questions relating to the interplay of DTAAs and withholding tax provisions. It cited the GE Technology case[2] and Engineering Analysis case[3] which had held in the context of Section 195, IT Act, 1961 that DTAAs are relevant while implementing tax deduction provisions. Relying on the said observations, the Karnataka High Court in the impugned case held that the assesee can take the benefit of DTAAs. And that the ITAT – whose order was under appeal – was wrong in stating that DTAA cannot be considered in proceedings under Section 201, IT Act, 1961. 

Another crucial question that the Karnataka High Court answered by relying on Engineering Analysis case was that the amendment to Section 9(1)(vi) by insertion of Explanations did not amend the DTAAs. The amended definition of royalty was thus only applicable if IT Act, 1961 was the relevant legal instrument. The High Court further clarified that in Engineering Analysis case it was observed that Explanation 4 added to Section 9(1)(vi) vide the Finance Act, 2012 was not clarificatory. Explanation 4 expanded the definition of royalty. And Supreme Court had observed that the person under Section 195, IT Act, 1961 cannot be expected to do the impossible, i.e., apply the expanded definition of royalty for assessment years when such definition was not factually in the statute. In view of the same, the High Court answered that the assesee was not obliged to withhold tax since the Assessment Years in question were 2008-09 and 2012-13 while the Explanation 4 expanding the definition of royalty was added to the IT Act, 1961 via Finance Act, 2012. Though this point was moot since the High Court had held that the assessee was entitled the benefits under DTAA (and consequently rely on more favorable/narrow definition of royalty.). 

While the High Court’s above observations were sufficient to clarify that the assessee did not have any obligation to deduct TDS on payments made to its Belgian contractual partners. The High Court also added, in response to an argument made by the assessee, that the Revenue Department did not have the power to bring to tax income arising from an extra-territorial source. The High Court held that: 

It is also not in dispute that the facilities are situated outside India and the agreement is with a Belgium entity which does not have any presence in India. Therefore, the Tax authorities in India shall have no jurisdiction to bring to tax the income arising from extra-territorial source. (para 22)

Conclusion

The Karnataka High Court’s observations are an unqualified endorsement of the ratio in Engineering Analysiscase especially regarding the interplay of TDS provisions and the applicability of DTAAs. The High Court’s observations bring specific clarity to the benefit of DTAAs available during proceedings under Section 201, IT Act, 1961. Whether the impugned case will be the subject of appeal is unknown, but the Revenue does not have a persuasive case against the assessee based on the facts and ratio of the High Courts’ judgment.  

[1] M/s Vodafone Idea Limited v Deputy Director of Income Tax, available at https://www.livelaw.in/high-court/karnataka-high-court/vodafone-idea-deduct-tds-inter-connectivity-usage-bandwidth-charges-karnataka-high-court-233692  

[2] GE India Technology Centre Private Limited v CIT (2010) 327 ITR 456 (SC). 

[3] Engineering Analysis Centre of Excellence Private Limited v CIT (2021) 125 taxmann.com 42 (SC). 

Interface of IBC and Tax: Supreme Court Clarifies

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In a notable judgment[1], the Supreme Court has clarified the waterfall mechanism under Insolvency and Bankruptcy Code, 2016 (‘IBC’) vis-à-vis the claims of secured interests and the place of the Revenue Department in the pecking order. 

Introduction 

The appellant, PVVNL was aggrieved by an order of the NCLAT directing release of the corporate debtor’s property. The property was attached by the District Magistrate in favor of the appellant, but NCLAT ordered its release for sale in favor of the liquidator to distribute the proceeds in accordance with the IBC.  

The appellant raised bills for supply of electricity to corporate debtor but since the bills remained unpaid, the appellant attached the properties of the corporate debtor and restrained transfer of property by sale, donation, or any other mode. The corporate debtor underwent a resolution under IBC failing which it became subject to liquidation. The liquidator took the plea that unless the attachment orders were set aside no one would purchase the property of the corporate debtor. Further, the appellant would be classified in the order of priority prescribed under waterfall mechanism of IBC. Both, NCLT and NCLAT endorsed the view that appellant was an operational creditor and would realize its due in the liquidation process as per the law.   

Arguments and Supreme Court’s Observations 

One of the appellant’s arguments was that the charge on property was created under the Electricity Act, 2003 and it being a special legislation should have priority over general legislation such as IBC. Supreme Court did not accept the appellant’s argument claiming priority of Electricity Act, 2003 over IBC. However, Supreme Court acknowledged that a reading of the relevant provisions of the agreement between the appellant and corporate debtor revealed that the appellant could create a charge on the property of the latter in event of unpaid bills. And that a valid charge was created in favor of the appellant. The crucial question was the priority that the appellant would acquire under the IBC. 

The counsel for liquidator argued that the amount due to the appellant was ‘government dues’ and low in priority as per the waterfall mechanism of Section 53, IBC. Supreme Court disagreed and noted that dues payable to statutory corporations were on a different footing compared to the amounts payable to the central and state governments. Supreme Court observed that: 

PVVNL undoubtedly has government participation. However, that does not render it a government or a part of the ‘State Government’. Its functions can be replicated by other entities, both private and public. The supply of electricity, the generation, transmission, and distribution of electricity has been liberalized in terms of the 2003 Act barring certain segments. Private entities are entitled to hold licenses. In this context, it has to be emphasized that private participation as distribution licensees is fairly widespread. For these reasons, it is held that in the present case, dues or amounts payable to PVVNL do not fall within the description of Section 53(1)(f) of the IBC. (para 47)

The appellant – PVVNL – on the other hand, relied on Rainbow Papers case which had held that the debts owed to a secured creditor included tax due to the Government under the Gujarat VAT Act, 2003. The Rainbow Papers case was an anomaly as the waterfall mechanism clearly prescribes priority to secured creditors while placing the government dues lower in the pecking order. The Supreme Court refused to adhere to the Rainbow Papers case and observed that the Court in that case ‘did not notice’ Section 53, IBC. Commenting on the Rainbow Papers case, Supreme Court observed:

Furthermore, Rainbow Papers (supra) was in the context of a resolution process and not during liquidation. Section 53, as held earlier, enacts the waterfall mechanism providing for the hierarchy or priority of claims of various classes of creditors. The careful design of Section 53 locates amounts payable to secured creditors and workmen at the second place, after the costs and expenses of the liquidator payable during the liquidation proceedings. However, the dues payable to the government are placed much below those of secured creditors and even unsecured and operational creditors. This design was either not brought to the notice of the court in Rainbow Papers (supra) or was missed altogether. In any event, the judgment has not taken note of the provisions of the IBC which treat the dues payable to secured creditors at a higher footing than dues payable to Central or State Government. (para 49)

The above observations are a categorical rejection of the inadequate reasoning adopted in Rainbow Paperscase whereby government was equated as a secured creditor and helped the government claim tax dues on priority by ‘jumping’ the queue. The Supreme Court in the impugned case was accurate in its observation that if there was no specific and separate enumeration of government dues under Section 53(1)(e) of IBC, it would be possible to hold that the government is a secured creditor. However, the enumeration of separate categories of a secured creditor and government dues under Section 53 indicates the Parliament’s intent to treat the latter differently and at a lower priority. 

Conclusion

The Supreme Court’s observations in the impugned case are welcome. The Revenue has in various attempts tried to bypass the waterfall mechanism of IBC by making various arguments such as tax dues should be treated as part of the insolvency costs as the latter are first in priority under the waterfall mechanism. It is important to recognize the importance of the observations in in the impugned case and yet be mindful that the Supreme Court has not expressly overruled the Rainbow case. For example, the Supreme Court did add that the observations made in the Rainbow case were in the context of resolution process while the impugned case involved liquidation. (para 49) We are likely to witness more disputes on the interface of IBC and tax in the future. Though, a more reasonable interpretation of the waterfall mechanism under Section 53, IBC suggests that the Supreme Court’s observations in the impugned case are more reasonable and accurate.     

[1] Paschimanchal Vidyut Vitran Nigam Limited v Raman Ispat Private Limited 2023 LiveLaw (SC) 534. 

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

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Short Note

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

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

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

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

Further, the High Court observed that: 

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

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

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

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

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

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Introduction 

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

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

Issue I: Expiry after One Year 

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

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

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

Issue II: Attaching Bank Account of Any Other Person  

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

Where, after the initiation of any proceeding under Chapter XII, Chapter XIV or Chapter XV, the Commissioner is of the opinion that for the purpose of protecting the interest of the Government revenue it is necessary so to do, he may, by order in writing, attach provisionally, any property, including bank account, belonging to the taxable person or any person specified in sub-section (1-A) of section 122, in such manner as may be prescribed. (emphasis added)

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

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

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

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

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

Conclusion

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

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

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

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