Rav Singh

SEZ Unit Not Entitled to Exemption from GST Compensation Cess: Andhra High Court

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In a recent decision[1], the Andhra Pradesh High Court decided two similar writ petitions and held that the SEZ unit was not eligible for exemption from GST Compensation Cess. The High Court noted that there were three specific provisions under the SEZ Act, 2005 which provided a tax exemption and interpreted the said provisions strictly to conclude that the petitioner’s claim for exemption from GST Compensation Cess did not have merit and dismissed both the writ petitions. 

Facts 

The petitioner was a company engaged in the business of ferro alloys manufacturing and was established as a SEZ unit under the SEZ Act, 2005. As per Section 26 of the SEZ Act, the petitioner was exempt from paying any duty, tax or cess under the Customs Act, 1962 and Customs Tariff Act, 1975. The petitioner sought clarification from Director (SEZ) if it was eligible for exemption from GST Compensation Cess on import of coal. The Director replied in the negative and stated that CBEC had issued a Notification No. 64/2017 under which payment of IGST was exempt on import of coal by a SEZ unit, which was otherwise leviable under Section 3 of the Customs Tariff Act, 1975. And under Section 26(1)(a), a SEZ unit is exempt only from duty of custom under the Customs Act, 1962 and Customs Tariff Act, 1975. Thus, there was no exemption from GST Compensation Cess under Section 26(1)(a) of SEZ Act, 2005. The petitioner challenged the aforesaid opinion of the Director (SEZ) as erroneous via writ petition before the Andhra Pradesh High Court.  

The Revenue Department’s arguments before the Andhra Pradesh High Court were like that of Director (SEZ). 

Decision

The Andhra Pradesh High Court spent considerable space in elaborating the nature and rationale of GST Compensation Cess, which wasn’t entirely germane to the issue in the impugned case. The High Court noted the scheme of SEZ Act and observed that tax exemption can be granted under three provisions of the SEZ Act, i.e. Sections 7, 26, and 50. 

Under Section 7 the exemption from taxes and cesses is available subject to certain conditions, but only if the relevant enactments are specified in the First Schedule of the SEZ Act, 2005. The petitioners desisted the claim that they were exempt from GST Compensation Cess under Section 7, since the relevant enactment – GST (Compensation to States) Act, 2017 – was not specified in the First Schedule of the SEZ Act. 

Second, petitioners did not press their claim under Section 50 since the said provision empowered the State Governments to grant tax exemptions, and there is presumably no State level legislation to implement SEZ Act, 2005.

The petitioners claim for exemption from GST Compensation Cess rested entirely on their interpretation of Section 26 of the SEZ Act. The petitioner’s argument for exemption was as follows: petitioner is exempted from custom duties under Section 26(1)(a) of SEZ Act including all the duties enumerated in the Customs Tariff Act, 1975. And since GST Compensation Cess is leviable on imports under Section 3(9) of the Customs Tariff Act, 1975, the petitioner is also exempt from paying it under Section 26(1)(a) of SEZ Act. The Revenue Department counter argued that what was exempt under Section 26(1)(a) was ‘duty of customs’ under Customs Act, 1962 or Customs Tariff Act, 1975. The Department elaborated and correctly so, that GST Compensation Cess owed its origin to the GST (Compensation to States) Act, 2017 and Section 3(9) of the Customs Tariff Act, 1975 only prescribes the rate applicable. Succinctly put, the petitioner cannot be allowed to interpret Section 26(1)(a) to include GST Compensation Cess when the provision only mentioned customs duty.  

The Andhra Pradesh High Court agreed with the Revenue Department, and concluded that: 

when Section 26 of SEZ Act is perused, it is discernible that the word “duty” alone is used in the said section but not the word “cess”. More prominently U/s 26(1)(a), on which much reliance is placed by the petitioners, what is exempted is only duty of customs but not any cess much-less the GST Compensation Cess. Therefore, it is difficult to accept the contention that the exemption of duty of customs under the Customs Act, 1962 or the Customs Tariff Act, 1975 or any other law on import of goods encompasses the Compensation Cess also merely because its rate of tariff is mentioned in Section 3(9) of Customs Tariff Act, 1975. In our considered view, such an argument is of no avail to the petitioners. (para 27)

In adopting a strict interpretation of Section 26(1)(a), the Andhra Pradesh High Court was clear in its conclusion that the term duty could not include within its scope GST Compensation cess. To emphasise that the scope of Section 26(1)(a) was deliberately narrow, the High Court noted that Section 7 of SEZ Act used the term ‘tax, duty or cess’, but Section 26(1)(a) did not include cess within its scope and only mentioned the term duty. And since Section 26(1)(a) only uses the term duty thereby negativing the petitioner’s argument that cess should be read into the provision. 

Conclusion  

The impugned decision is an appropriate example of the Court interpreting the provisions of a tax statute in a strict manner and rightly so. There is a well-established doctrine of interpreting the tax statutes in a strict manner and not read into the provision words and phrases that are not used in the relevant provision. The Andhra Pradesh High Court correctly adopted the said interpretive doctrine to deny petitioner’s claim of exemption from GST Compensation Cess.  

[1] Maithan Alloys Ltd v Union of India TS-677-HCAP-GST. 

Issuance of Share Capital Not Taxable: Delhi High Court cites Precedents

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The Delhi High Court recently pronounced a decision[1] wherein it adhered to the ratio of Vodafone and Nestlecases that investment by a foreign company via shares in its Indian subsidiary company is not income of the latter and not taxable under IT Act, 1961. The High Court relied on the Press Release by the Union of India indicating its approval of the former case and set aside the notices and subsequent orders issued in the impugned case under Section 148, IT Act, 1961. 

Facts 

The Delhi High Court was deciding a bunch of appeals together, and briefly elaborated on facts of one of the cases. The High Court elaborated that the petitioner was foreign company, resident in Italy, and subscribed to shares of its Indian subsidiary company. The petitioner subscribed to 15,00,000 shares at a face value of Rs 10 each and made a foreign remittance of Rs 1,50,00,000. The petitioner stated that since it did not earn any income from any source in India, it did not file any income tax returns in India. The Income Tax Department issued notices under Section 148(b) and passed orders under Section 148(d) of the IT Act, 1961 alleging that income had escaped the assessment. The petitioners challenged the said notice and orders and all the consequent actions taken therein. The petitioners assailed the allegations of money laundering and round tripping arguing that the notices did not mention the name of the company whose shares were bought and the Income Tax Department was merely trying to verify the transaction in question and was unable to substantiate any of its allegations.  

The Income Tax Department justified its actions by referring to risk management strategy. Explanation 1 of Section 148 states that the information with the Assessing Officer which suggests that income chargeable to tax has escaped assessment means any information flagged in accordance with the risk management strategy formulated by CBDT. The petitioners challenged the constitutional validity of the Explanation as well.  

Decision 

The Delhi High Court primarily relied on Vodafone and Nestle decisions to agree with the petitioners that the transactions in questions were capital account transactions that were incapable of generating any income. And in the absence of income, IT Act, 1961 cannot be invoked. To recall briefly, the Vodafone case involved issuance of shares by an Indian subsidiary company to its foreign holding company. The Assessing Officer disagreed on the valuation and opined that the shares should have been valued on the higher side. The difference between the share price arrived at by the companies and the higher price arrived by the AO was treated as ‘income foregone’ by the Indian subsidiary company. Accordingly, transfer pricing adjustment was made to tax the income foregone as a loan granted by the subsidiary company to its holding company. The Bombay High Court decided that the transaction could not be taxed under IT Act, 1961 reasoning that Chapter X of IT Act, 1961 – encompassing transfer pricing provisions – was incorporated to prevent underreporting of profits and overreporting of losses – and not to levy tax on capital receipts when there was no express provision to levy tax on such capital receipts. 

The Delhi High Court in the impugned case expressed complete concurrence with the Bombay High Court and cited the subsequent acceptance of the Bombay High Court’s decision by the Union of India. In the impugned case, the High Court accordingly set aside the notice and orders issued under Section 148, IT Act, 1961. 

Conclusion 

The Delhi High Court’s decision is, apart from the Nestle case, another instance where the Bombay High Court’s approach in the Vodafone case has received approval and rightly so. The High Court correctly cited the relevant precedents to arrive at its conclusion. Finally, though the petitioners challenged the constitutional validity of Explanation 1 to Section 148, the High Court left the question open. The issue may rear its head in another instance where the concerned Court may find it appropriate to pronounce a decision on the same.     

[1] Ms/ Angeltantoni Test Technologies SRL v Assistant Commissioner of Income Tax, Circle Intl Tax TS-804-HC-2023-DEL

Empty Liquor Bottles Are Not Scrap: Madras High Court

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The Madras High Court in a recent decision[1] held that empty liquor bottles do not constitute scrap under Section 206C, IT Act, 1961. Accordingly, it held that the petitioner, M/s Tamil Nadu State Marketing Corporation Ltd (‘TASMAC’), was not obliged to deduct tax at source when collecting licence fee from bar licencees who were authorized to sell empty bottles left behind by customers. 

Facts 

The petitioner, TASMAC, challenged the orders of the Income Tax Department wherein it was treated as an ‘assessee in default’ for failure to deduct tax at source under Section 206C, IT Act, 1961. The Income Tax Department contended that the petitioner should have deducted TCS on the amounts tendered by the successful bar licensee towards tax from sale of empty bottles by treating the sale of bottles as scrap. The petitioner has been given a statutory monopoly to sell – wholesale and retail – Indian Made Foreign Liquor (IMFL), in the State of Tamil Nadu. The petitioner invites tenders for running bars adjacent to its retail vending  liquor shops. It floats tenders to select third-party bar contractors to sell eatables and collect empty bottles from bars adjacent to its retail shops. As per the terms of bar licence, the licencee was allowed monetise empty bottles. The petitioner selected the winning tenders, used to retain 1% of the tender amount as agency commission and remit the remaining 99% to the State Government.  

The Income Tax Department contended that the petitioner fulfilled the conditions of being a seller under Explanation to Section 206C of the IT Act, 1961. The Department elaborated that the petitioner alone had the right over empty bottles as only it could award tenders for their sale and thus the awarding of tenders amounted to it selling scrap to winning bidders through the tendering process. 

The petitioners, on the other hand, contended that they only sold alcohol from distilleries and breweries to their ultimate customers via their retail outlets and they did not sell empty bottles to the customers. The petitioner clarified that the empty liquor bottles were sold by the licencees and they retained the entire consideration. Thus, the contention that the petitioner was seller of empty bottles and licencees the buyer was erroneous.  

High Court’s Interpretation of ‘Manufacture’ and ‘Scrap’ Proves Crucial    

The Madras High Court waxed eloquent and in a verbose manner about the role of petitioner in the State of Tamil Nadu. However, the issue that proved crucial to the fate of the case was the meaning of scrap. The Income Tax Department argued that empty bottles constituted scrap as per Explanation to Section 206C while the petitioner argued otherwise. Explanation (b) to Section 206C states that for the purpose of this Section – 

            Scrap means waste and scrap from the manufacture or mechanical working of materials which is definitely not usable as such because of breakage, cutting up, wear and other reasons; (emphasis added)

The Income Tax Department argued that the empty bottles were scrap since they were constituted via a mechanical process. The argument was that empty bottles were only generated when the liquor bottles are opened and consumed by the consumers and that the process of opening bottled liquor bottles involved them being subjected to external force beyond their yield strength to access contents of the bottle which was nothing but a mechanical process. (para 49) The petitioner described the above interpretation of the term mechanical process as absurd and unsustainable in law. (para 34)

The Madras High Court observed that while the term ‘manufacture’ had been defined under Section 2(29BA) of IT Act, 1961 the term ‘mechanical working of materials’ in the definition of scrap has not been defined separately. In the absence of a separate definition, the High Court noted that the doctrine of nocitur a sociis should be applied. The said doctrine, in its simplest version, means that when two or more words susceptible of analogous meaning are used together they must be understood in cognate sense as if they take their colour from each other. (paras 90-91) Relying on the above doctrine, the High Court opined that that an activity that does not amount to manufacture but resembles manufacture is the only activity that can be included in the expression ‘mechanical working of material.’ And accordingly, the High Court concluded that:

Mere opening, breaking or uncorking of a liquor bottle by mere twisting the seal in a liquor bottle will not amount to generation of “scrap” from “mechanical working of material” for the purpose of explanation to Section 206C of the Act. 

That apart, the activity of opening or uncorking of the bottle is also not by the petitioner. These are independent and autonomous acts of individual consumers who decides to consume liquor purchased from the Tasmac Shops of the petitioner which have a licensed premises (Bar) adjacent to them under the provisions of the Tamil Nadu Liquor Retail Vending (in Shops and Bars) Rules, 2003. (paras 99 and 100)

The Madras High Court further underlined its observations by stating that the empty water bottles were neither the property of the petitioners or of the licencees, and that the petitioner was merely regulating the sales of empty bottles and the same cannot be equated to sale of bottles by the petitioner. 

Conclusion 

The Madras High Court adopted a prudent approach in the impugned case by relying on and correctly applying the doctrine of nocitur a sociis. The said approach was a reasonable way of rebutting the Income Tax Department’s argument that opening of the liquor bottle amounted to a mechanical process, an interpretation that certainly stretched the limits of acceptable interpretation of expressions used in a tax statute.    

[1] M/s Tamil Nadu State Marketing Corporation Ltd v The Deputy Commissioner of Income Tax TS-798-HC-2023MAD. 

Citing DIN in Communication is Necessary: ITAT, Chandigarh

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Income Tax Appellate Tribunal, Chandigarh (ITAT) in its recent decision[1] followed the decisions pronounced by the Delhi High Court and the Bombay High Court which had held that quoting DIN in the body of communication issued by the Income Tax Department is mandatory by strictly interpreting CBIC’s Circular. ITAT held that the Income Tax Department cannot take recourse to Section 293B, IT Act, 1961 and argue that the error of not quoting the DIN does not affect the validity of the communication. 

Facts 

The brief facts of case are: the assessee filed its return of income and the relevant assessment proceedings were completed. But subsequently after search proceedings in the assessee’s premises were completed, the Assessing Officer (‘AO’) stated that some of assessee’s income had escaped assessment due to assessee’s failure to fully and truly disclose certain materials. AO added additional income and passed a reassessment which was challenged by the assessee. One of the grounds of challenge before ITAT was that the AO did not follow the prescribed procedure, the assessment order was not uploaded on the e-filing portal of the assessee and was communicated via courier without mentioning the DIN. The ITAT noted that the ground relating to not mentioning the DIN was the heart of the matter and adjudicated on it on priority. And ITAT’s ruling on the said issue proved crucial to assessee’s success in the case. 

Arguments 

The arguments on the issue of DIN were simple: the assessee argued that not quoting DIN in the communication issued by the Income Tax Department was contrary to CBIC’s Circular and thus liable to be struck down. The assessee elaborated that DIN was mentioned in the demand notice, but not in the reassessment order. And both the notice and order are required to be issued under different provisions of the statute, are separate communications and thus require their own DIN. In essence, the assessee’s case was that omission to cite DIN in the body of the reassessement order was fatal and in direct contravention of the CBDT’s Circular and thus should be struck down. 

The Income Tax Department tried to justify the non-citation of DIN in the body of assessment on various grounds, two of which included: first, that the demand notice and assessment order were not two separate communications and thus the latter did not require a separate DIN; second, that the omission of DIN can be saved by Section 292B, IT Act, 1961. Section 292B states that any return of income, assessment, notice, summons or other proceedings issued or purported to have been issued under the provisions of IT Act, 1961 shall not be invalid merely by reason of any mistake, defect, or omission if such communication is in substance and effect in conformity with or according to the intent and purpose of IT Act, 1961. 

ITAT’s Decision 

ITAT cited the CBDT Circular and arrived at the prudent conclusion that the CBDT Circular was clear in its mandate that the Income Tax Department shall not issue any communication without generating a DIN and quoting it in the body of the communication. No relaxation is provided in the Circular except when manual communication may be issued with prior approval of the Principal Commissioner. The ITAT also noted that the CBDT Circular clearly provided that in the absence of adherence to the conditions prescribed, it shall be presumed that the communication is invalid and deemed to have never been issued. 

The reassessment order, the ITAT held, was issued contrary to the conditions prescribed in the CBDT Circular, i.e., it did not cite the DIN in its body nor did it adhere to the conditions prescribed for issuing manual communication. Thus, it held the impugned communication to be invalid. 

ITAT did not accept any of the Income Tax Department’s arguments. It held that while the demand notice and the subsequent assessment order were part of the same assessment proceedings and their close connection cannot be denied. However, the demand notice is passed under Section 156, IT Act, 1961 while an assessment order is passed under Section 143 read with Section 147 of the IT Act, 1961. And more importantly it noted that no exception was provided in the CBDT Circular regarding issuance of successive communications to the same assessee, on the same date and regarding the same assessment year. ITAT concluded that: 

Therefore, in the instant case, we find that assessment order and notice of demand are two separate communications qua the assessee and carry separate physical existence and identity, even though issued on the same date by the same Assessing officer pertaining to same assessment year and therefore, necessarily have to carry separate DIN on the body of the said communications. In view of the admitted position that there is no DIN on body of the assessment order (even though there is DIN on body of the notice of demand), the same will continue to be non- compliant with paragraph 2 of the CBDT Circular no. 19/2019 and carry the same consequences in terms of paragraph 4 of the CBDT Circular and will be held as invalid and never been issued. (para 21) 

The Income Department was not allowed to take recourse to Section 292B as the ITAT relied on the relevant precedents to state that the language used in the CBDT Circular did not leave room for any alternate view or leeway and the said Circular is binding on the revenue as per Section 119, IT Act, 1961. The ‘phraseology’ used in paragraph 4 of the CBDT Circular which states that a communication shall be treated as never issued was relied on to conclude that Section 292B was inapplicable to the impugned case. 

Conclusion 

The ITAT’s decisions follow what is now a growing body of jurisprudence on the issue with several High Courts and ITATs deciding that not quoting DIN in the body of communication is fatal to the communication and contrary to CBDT’s Circular. The ITAT in this decision reiterates the earlier decisions with the additional input that demand notices and assessment orders cannot be treated as a single communication and are separate orders requiring their own DIN. As I stated in my recent post on ITAT Chennai’s decision on the same issue, decisions that strictly interpret CBDT’s Circular are welcome and hold them the Income Tax Department to standards that itself has prescribed for its officers.  

[1] M/s SPS Structures Ltd v The DCIT Central Circle-1, Chandigarh TS-791-ITAT-2023. 

CSR Expenses Can be Claimed under Section 80G: ITAT Mumbai

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The ITAT Mumbai in a recent decision[1] clearly enunciated the tax treatment to CSR expenses under the IT Act, 1961. The ITAT held that while Explanation 2 to Section 37 disallows CSR expenses by way of business expenditure, but the import of the provision cannot be imported to CSR contributions which are otherwise eligible for deduction. Section 37 disallows mandatory CSR expenses referred to in Section 135, Companies Act, 2013 and not voluntary CSR expenses. The impugned case dealt with the former.  

Facts 

Principal Commissioner of Income Tax passed an order under Section 263 stating that the Assessing Officer’s assessment order was prejudicial to the interest of the revenue on the ground that assessee’s claim for deduction under Section 80G in respect of CSR expenses was allowed. The Principal Commissioner was of the view that any CSR expenditure incurred by an assessee shall not be deemed to be expenditure incurred for the purpose of business or profession and thus cannot be claimed as an expense even if part of the expense was spent on a trust/society which was otherwise eligible for deduction under Section 80G. The Principal Commissioner restored the matter to the Assessing Officer stating that the assessee’s claim under Section 80G be disallowed on CSR expenses. 

Against the said order, the assessee filed an appeal before the ITAT. 

ITAT’s Decision 

The ITAT’s decision in the impugned case is a good example of harmonious and strict interpretation of the tax statute. The Revenue’s argument was that if the sum satisfies the requirement of a CSR expense under Section 135, Companies Act, 2013 the sum gets exhausted and is no longer available for claiming the benefit under Section 80G of the IT Act, 1961. The ITAT noted that there is no provision in the IT Act, 1961 which satisfies the Revenue’s contention. The ITAT noted Section 80G barred claiming of CSR expenses if they were allocated to two funds i.e., Swach Bharat Fund and Clean Ganga Fund. While a similar restriction was not prescribed towards any other fund listed under Section 80G. This implied that if CSR expenses were allocated to any other fund listed under Section 80G, other than the two aforementioned funds there was no express prohibition of claiming deductions for donations made to other funds. ITAT noted: 

Out of so many entries under section 80G(2) of the Act, only donations in respect of two entries are restricted if such payments were towards the discharge of the CSR. The Legislature could have put a similar embargo in respect of the other entries also, but such a restriction is conspicuously absent for other entries. The irresistible conclusion that would flow from it is that it is not the legislative intention to bar the payments covered by section 80G(2) of the Act which were made pursuant to the CSR, and other than covered by section 80G(2)(iiihk) and (iiihl) of the Act. (para 6)

More pertinently, the ITAT noted that Explanation 2 to Section 37 disallowed deductions of CSR expenses only for the purpose of computing business under Chapter IV-D of IT Act, 1961 and it could not be extended or imported to CSR contributions which were otherwise eligible for deduction under Chapter VI-A of the IT Act, 1961. ITAT elaborated that the legislature intended to deny assessee the benefit under Chapter IVD pertaining to ‘Income under the head Business and Profession’. However, if the assessee is denied the benefit under Chapter VIA while computing ‘Total Taxable Income’, it would result in double disallowance to the assessee contrary to legislative intention. 

Conclusion The ITAT’s observations were founded on two pillars: first, that CSR expenses under Section 80G are only barred for two specific funds and thus donations to other funds can be claimed as expenses; second, the restriction under Explanation 2 to Section 37 was only for computing income under the head of income from business or profession and could not be used as a tool while computing total income under a separate Chapter of the IT Act, 1961. The latter observation relies on treating the two Chapters of IT Act, 1961, i.e., Chapter IVD and Chapter VI-A as independent and self-contained codes. This view is not unimpeachable, though in the impugned case the ITAT adopted a strict interpretation of the provisions and apart from the express disallowance for CSR expenses under Section 80G, it correctly held that assessee was allowed to claim expenses for other donations.    

[1] Societe Generale Securities India Pvt Ltd v PCIT TS-770-ITAT-2023. 

Adjudicating Officer Bound to Consider Assessee’s Defence: Calcutta High Court

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In a recent decision[1], a Division Bench of the Calcutta High Court has held that the adjudicating officer should consider the assessee’s explanation or defence before passing the adjudicating order that imposes penalty under Section 129, CGST Act, 2019. If an adjudicating order is passed in complete ignorance of such explanation, then it would amount to violation of principles of natural justice and the order is liable to be set aside.   

Facts 

The assessee was transporting electrical switches manufactured as per the requirements of the Government of Arunachal Pradesh. The assessee generated e-way bill for the vehicle on which the electrical switches were originally transported. However, the vehicle in question developed a mechanical failure and the goods were shifted to another vehicle. The latter vehicle was detained, and the proper officer levied a penalty on the assessee for violation of Section 129 since the e-way bill in question specified the former vehicle while the goods were found in the latter vehicle bearing a different registration number. The assessee contended before the Calcutta High Court that the breakdown of the vehicle was unanticipated and there was sufficient cause for non-compliance with the statutory provisions. The assessee further argued that the e-way bill issued with the registration number of the first vehicle was valid when the second vehicle was intercepted. And that there was no intention to evade tax.  

The Revenue Department, on the other hand, contended that under Section 129, it is not required to determine the existence of mens rea. And correctly so. The Revenue Department further argued that any of the three parties: consignor, consignee or the transporter should have re-validated the e-way bill after the first vehicle broke down. And in the absence of revalidation of e-way bill after change in vehicle, the imposition of penalty under Section 129 was justifiable.  

Calcutta High Court Decides 

The Calcutta High Court focused on one factual aspect: it noted that the assessee was issued a notice under Section 129, CGST Act, 2017 and the assessee had responded to the said notice. However, the adjudicating authority did not allude to the response of the assessee, did not apply its mind, and proceeded to mechanically levy a penalty on the assessee. The High Court observed that Section 129(3) prescribed the requirement of issuance of notice while Section 129(4) mandated that an adjudication order cannot be passed without providing the assessee an opportunity of being heard. However, the High Court stressed that complying with principles of natural justice cannot be an empty formality and that the adjudicating officer needs to evaluate the defence and its merits offered by the assessee. 

The Calcutta High Court observed that: 

However, absence of requirement to establish mens rea by the department cannot be equated with an automatic imposition of penalty under the scheme of Section 129 of the Act of 2017 in view of the provisions of Section 129 (3) and (4) thereof. A delinquent alleged to have violated a tax regime inviting imposition of penalty, nonetheless may have potential defences which would require consideration by the Adjudicating Authority. (para 37)

Accordingly, the Calcutta High Court set aside the impugned order imposing a penalty under Section 129, CGST Act, 2017 on the ground that it violated the principles of natural justice since it did not speak on the defence offered by the assessee.

Conclusion 

The Calcutta High Court’s decision in the impugned case is a welcome development since it clarifies, in no uncertain terms, the obligation on the officers is to comply with principles of natural justice in a substantive manner and not merely as a formality. The defence or explanation offered by the assessee in response to issuance of notice needs to be engaged with in a more substantive manner and the adjudicating order under Section 129 needs to reflect that the explanation was considered. The imposition of penalties under Section 129 should not be automatic. Further, it is important to bear in mind that the order can still result in imposition of penalty, the High Court has only mandated that the explanation be considered and the penalty not be levied in a mechanical or a pre-determined manner.    

[1] Asian Switchgear Private Limited v State Tax Officer, Bureau of Investigation, North Bengal TS-668-HCCAL-2023-GST. 

Quoting DIN in Body of Communication is Mandatory: ITAT Chennai 

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The Income Tax Appellate Tribunal, Chennai (‘ITAT’) recently pronounced a decision[1] that strictly interpreted the CBDT’s Circular that all communication issued by the Income Tax Department relating to assessment, appeals, orders, statutory or otherwise issued on or after 1.10.2019 should carry a computer-generated Document Identification Number (DIN) duly quoted in the body of such communication. In this post, I will focus only on the DIN-related arguments and observations of ITAT, though there were a few ancillary issues that were discussed in this case.  

Impugned Circular

The impugned CBDT Circular states that while almost all notices and orders of the Income Tax Department are being generated electronically to maintain an audit trail of communication. However, some orders were being issued manually. To prevent instances of manual communication and improve the audit trail, the Circular mandated no communication shall be issued unless a computer-generated DIN is issued and ‘duly quoted in the body of communication.’ The Circular allowed manual communication only in exceptional circumstances with prior approval of the Chief Commissioner/Director General of Income Tax. Paragraph 4 of the Circular was clear about the implication of not following the Circular’s mandate – any communication issued in violation of the mandate would be deemed to have never been issued and shall be treated as invalid. 

Brief Facts 

The ITAT in the impugned case decided a batch of 54 appeals and only briefly narrated the facts one case. I will do the same. The communication that was the center of controversy was an instruction issued by the Dispute Resolution Panel (‘DRP’), an alternate body of dispute resolution created under the IT Act, 1961. DRP issued instructions to the Assessing Officer (‘AO’) under Section 144C(5) to complete the assessment of the assessee. The said instruction did not cite/contain a DIN in its body. The assessees contended that the instruction was invalid in law for being in contravention of the CDBT’s Circular and thus the subsequent assessment by the AO was also invalid since it was completed beyond the prescribed limitation period. The reason was that under Section 144C(13) the standard time limit for completing assessments by AO are extended to allow the AO to complete the assessment as per the DRP’s instructions. However, the assessees argued that if the DRP’s instructions to AO are invalid – because they did not cite the DIN – then the subsequent assessment completed by AO on such instructions are invalid since they were barred by limitation. 

The Income Tax Department adopted various arguments to persuade ITAT that the instructions issued by DRP were valid. The primary arguments were that the DIN of the relevant communication was generated on the same day or the next day and communicated to the relevant parties. The Income Tax Department also tried to defend the lack of DIN by arguing that instruction was an internal communication and thus it was not bound by the Circular’s mandate and further that DRP was not an income tax authority under IT Act, 1961 and only income tax authorities were obligated to follow the instructions contained in the CBDT Circular.   

ITAT Decides in Favor of Assessee

The ITAT was not persuaded by any of the Income Tax Department’s arguments. ITAT cited the CBDT Circular and noted that it is undoubtedly clear that any communication issued on or after 01.10.2019 without a valid DIN and quoted in the body of the order is invalid. ITAT noted the Income Tax Department’s argument that in each case before it, the DIN was communicated to the assessee by generating it on the same day or next day. ITAT, however, interpreted the conditions in the CBDT Circular strictly and noted that it contained two conditions: (i) generation of DIN; (ii) quoting the DIN in the body of communication. Thus, making it clear that the Income Tax Department had not complied with the two conditions of the CBDT Circular. 

The exception envisaged under the CBDT Circular wherein a manual communication could be issued without generating a DIN needs to state that the communication is being issued without generating a DIN and the approval of Chief Commissioner/Director General of Income Tax and the date of approval also needs to be mentioned. ITAT held that impugned communications did not satisfy the conditions provided in the exception either.

ITAT’s conclusion was unequivocal: 

In the present case, there is no dispute with regard to fact that mandatory requirement of generating a computer-based DIN has not been allotted and is duly quoted in the body of the order issued by the AO/DRP. Subsequent generation of DIN either on the same day or next day and intimated to the assessee or other person by way of separate communication does not satisfy the conditions of para 3 & 4 of said circular. Therefore, we are of the considered view that any communication issued by the income-tax authority, in the present case, the AO/DRP without a valid computer-generated DIN and is duly quoted in the body of the order is invalid, non-est and shall be deemed to have never been issued. (para 26)

ITAT also rejected the other arguments of the Income Tax Department that DRP’s instructions are internal communication and that DRP is not an income tax authority. As regards the former, ITAT held that the DRP’s instructions were to help AO complete the assessment and that was objective of the instructions, but the instructions were also communicated to the asssessee negating the argument that they constitute an internal communication. (para 27) For the latter, the ITAT held that DRP constituted a collegium of three Principal Commissioners or Commissioners of Income Tax and all three of them are income tax authorities under IT Act, 1961. Since DRP is an association/group of such income tax authorities, the argument that DRP is not an income tax authority does not hold water. (para 27)   

Conclusion 

ITAT concluded that once the DRP instructions are held to be bad in law and deemed to have never been issued, the AO could not have passed assessment orders under Section 144C(13) and thus the assessment orders were liable to be quashed. The ITAT adopted a cogent approach in adjudicating the matter and interpreted the conditions contained in CBDT Circular in a straightforward manner. The import of the Circular was clear, i.e., a DIN should be generated before issuing the communication and the same should be quoted in the body of the communication to maintain and enable a proper audit trail. Ex-post generation of DIN and communication of the same to the assessee amounted to ticking the box of communicating the DIN to the assessee, but not in accordance with the CBDT’s Circular.   

[1] M/s Sutherland Global Services, Inc. v The ACIT/DCIT, International Taxation Circle 2(2), Chennai TS-287-ITAT-2023CHNY

‘Prima facie’ Section 69A of IT Act, 1961 Inapplicable to Non-Residents: Delhi HC 

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In a recent decision[1], the Delhi High Court heard an appeal from an order of the Income Tax Appellate Tribunal (‘Tribunal’) where the Tribunal had held that Section 69A, IT Act, 1961 was not applicable to the facts of the case. Accordingly, one of the questions of law that the High Court had to adjudicate was if the Tribunal was correct in holding that Section 69A was inapplicable to the facts of the case. The Revenue Department requested that the High Court may leave open the question for it to be deliberated upon in some other case. The High Court acceded to the request, but still made ‘prima facie’ observations on Section 69A and it is unclear if they will have precedential value. 

Facts 

The assessee, a non-resident living in the United Arab Emirates filed the income tax returns for the Assessment Year 2017-18 declaring income which included savings bank interest and interest on income tax refund. During scrutiny proceedings, the Assessing Officer added additional sum under Section 69A, IT Act, 1961 on account of unexplained entries in the bank account and underreporting of income through interest. The assessee filed an appeal against the addition made by Assessing Officer which was partly allowed by the Commissioner of Income Tax. On second appeal, the Tribunal completely deleted the addition made under Section 69A. The Revenue filed an appeal against the Tribunal’s decision before the High Court. 

High Court’s Observations 

Before I mention that High Court’s observations, it is pertinent to mention Section 69A: 

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

The Tribunal noted that the ingredients of Section 69A were not fulfilled in the impugned case as the non-resident was not obliged to and had not maintained books of account, thereby a crucial ingredient of Section 69A was missing. Even on merits, the assessee’s explanation that the entries in the bank account were from his other account in Dubai and the money received on cancellation of a hotel booking and some money was deposited during demonetization was accepted by the Tribunal. The High Court noted that the Tribunal had meticulously examined the facts, the assessee’s explanation was held to be satisfactory and thus the additional money cannot be treated as unexplained money under Section 69A. The High Court refused to interfere in Tribunal’s findings on this matter. 

As regards applicability of Section 69A, the Revenue’s argument was that if the Tribunal’s observation is accepted, i.e., the provision is not applicable to non-residents, if would sanctify the non-maintenance of books by such assessees. (para 5) On this issue, the High Court opined as follows: 

Admittedly, in the present case, the respondent/assessee is a Non- Resident Indian and his source of income in India being from interest on bank accounts and interest on income tax refund, he is not obliged to maintain any books of account in India. It appears to us prima facie that the expression “if any” specifically used in Section 69A of the Act amplifies that where books of account are not maintained, it would not be possible to invoke this provision. But as mentioned above, learned counsel for appellant/revenue requested to keep this question open to be agitated in some better case. We accede to this request. (emphasis added) (para 7)

The Delhi High Court seems to have tentatively agreed to the Tribunal’s view, i.e., in the absence of books of account, Section 69A cannot be invoked. And a non-resident assessee is not obliged to maintain the books of account. This leads to the conclusion that Section 69A cannot be invoked against a non-resident assessee. This is the correct position of law. However, given that the Revenue expressly requested the High Court leave the question of applicability of Section 69A to the impugned case open and the High Court agreed to it, the above observations of the High Court should be treated as obiter dicta. Also, the preface of ‘prima facie’ to the High Court’s observations and the general tenor of the High Court’s observations supports the conclusion that the High Court’s opinion on applicability of Section 69A is not a fully reasoned opinion and should not be treated as a binding precedent.  

Conclusion 

Ideally, the Delhi High Court should have refrained from giving its ‘prima facie’ opinion on the scope and applicability of Section 69A in the impugned case since it agreed to the Revenue’s request to leave the question for deliberation in a subsequent case. However, even though the High Court has expressed it’s tentative opinion on the matter, it is important to treat the above observation as obiter dicta and not the final opinion on applicability and scope of Section 69A.  

[1] The Commissioner of Income Tax v Hersh Washesher Chadha 2023:DHC:8854-DB. 

Section 129 Need Not be Invoked in Every Case of Search and Seizure: Uttarakhand HC

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In a crucial decision[1], the Uttarakhand High Court observed that every case of search and seizure of vehicles need not necessarily lead to imposition of penalties under Section 129, CGST Act, 2017. The High Court referred to the legislative history of Section 129 and noted that the provision may be invoked only when contravention of provisions may require payment of tax, else penalties should be imposed under Section 122, CGST Act, 2017. 

Facts  

The petitioner in the impugned case was in the business of manufacturing PC wires and purchased raw materials from Steel Authority of India Limited, Kolkata. The goods were transported from West Bengal to Kanpur through a railway wagon, which was taken into custody by the petitioner for further transport to Bazpur. For the transport to Bazpur two vehicles were used. The entire transport happened against invoices. When the vehicles were intercepted, it was found that the vehicles did not carry the delivery challans as required under Rule 55, CGST Rules, 2017. Orders were passed wherein separate penalties were imposed on both the vehicles under Section 129, CGST Act, 2017. Against the said orders, the petitioners approached the Uttarakhand High Court. 

Arguments 

The petitioner’s case was that not carrying the delivery challan was only a procedural irregularity or impropriety and there was no element of evasion of tax. The petitioners contended that imposition of penalty under Section 129, CGST Act, 2017 was disproportionate. The petitioners emphasised that the tax had been paid for the goods transported from Bengal to Bazpur, e-way bills were generated, and the Revenue Department had all the relevant information about the transport of goods. In the absence of any intent to evade taxes, the imposition of penalty under Section 129 was challenged as disproportionate. 

The Revenue Department, on the other hand, argued that Rule 55 mandated that the vehicles need to be accompanied by a delivery challan and the intent is to prevent leakage of taxes. It was further highlighted that Section 129 begins with a non obstante clause and thus has an overriding effect over all other provisions of CGST Act, 2017 including Section 122 which prescribes penalties for certain offences.       

The Uttarakhand High Court framed the dispute as one involving determination of the relevance of Section 122 vis-à-vis Section 129. Both the provisions prescribe that penalties could be leived on the assessee under certain circumstances, the question was which provision is more relevant under certain circumstances including in the impugned case. 

Decision 

The Uttarakhand High Court referred to the relevant provisions and observed that Rule 55(5) requires that the vehicles should be accompanied by a delivery challan. At the same time, Rule 138-A(1)(a) also mentions that the person in charge of a conveyance can carry an invoice or a bill of supply or a delivery challan, ‘as the case may be’. The High Court noted that an invoice and a delivery challan were clearly interchangeable under the Rule, and further noted that the State counsel had admitted that no additional information would be found in any of the other two documents. While the petitioner clearly violated the requirement of Rule 55(5), the High Court adopted a purposive and harmonious interpretation by noting that Rule 138-A(1)(a) mentions that delivery challan was act a substitute for invoice under certain circumstances.  

The Uttarakhand High Court accepted almost all the petitioner’s contentions and observed that it was not the case that delivery challan was not carried along to evade tax since the tax had already been paid. And further observed that the principle of harmonious construction suggests that a statute should be interpreted to give life to each provision. Adopting this principle, the High Court noted that if every non-compliance with respect to documents of a vehicle would lead to imposition of penalty under Section 129, it may render Section 122 redundant. 

Accordingly, the Uttarakhand High Court referred to the legislative history of Section 129  – and its amendment in 2022 – to make the following observations: 

First, that Section 129 envisages situations where there is an element of tax and thus vehicles may be released by the proper officer on payment of tax. 

Second, Section 122 makes a person liable to tax if taxable goods are transported without documents. Mere non-production of documents is punishable under the provision. 

Third, Section 130 would come into play if both intention and tax are involved. 

Accordingly, the High Court held that in the impugned case, there was only a violation of Rule 55(5), the petitioner had supplied all other information to the Revenue Department. Thus, the authorities should have proceeded to levy a penalty under Section 122 of CGST Act, 2017 instead of Section 129. The High Court also made it clear that not every interception of vehicle in anticipation of contravention of the statutory provisions should lead to imposition of penalty under Section 129. The officers should invoke the relevant provisions as per the facts and circumstances of the case. 

ConclusionThe Uttarakhand High Court’s observations are a welcome exposition of the law and the interplay of Sections 122, 129, and 130 of CGST Act, 2017. The High Court’s interpretation of the provisions with an apt use of the principle of harmonious construction introduces much needed clarity as to which provision is relevant under which circumstances. Of course, many fact situations may not be straightforward and the officers will be tempted to invoke Section 129 frequently, but the impugned decision nonetheless provides clarity on the scope of the relevant provisions.      

[1] M/s Prestress Steel LLP v Commissioner, Uttarakhand State GST and Others TS-662-HCUTT-2023-GST.  

Delhi High Court Orders Refund of Tax Paid Under Protest

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In a recent decision[1] the Delhi High Court ordered that the tax paid by assessee under duress should be refunded. The High Court cited CBIC’s Instructions to reason that no recovery of tax dues can be made before passing an adjudication order and that no taxes can be paid while the search and seizure of assessee’s premises is ongoing, unless the tax is paid voluntarily by the assessee. 

Facts 

The petitioner was a company engaged in supply of services in New Delhi and registered under the CGST Act, 2017. Search operations were conducted on the premises of the petitioner on 20.10.2021 by the anti-evasion Dept of GST under Section 67(2). During the search, the petitioner, paid an amount of Rs 2,30,00,000/- and acknowledgement of the payment was issued by the Revenue Department via FORM GST DRC-03. On 21.10.2021 the petitioner wrote an email to the concerned Joint Commissioner that the said payment had been made under protest and the petitioner reserved the right to seek its refund. 

On 23.06.2022, the Revenue Department issued a Show Cause Notice (‘SCN’) to the petitioner under Section 74 read with Section 20 of CGST Act, 2017 demanding payment of GST amounting to Rs 36,53,359/- and sought to appropriate the amount of Rs 2,30,00,000/-. The petitioner under Section 54 had filed for refund of Rs 2,30,00,000/- paid under protest but the same was denied as the Revenue Department issued deficiency memos, i.e., memos indicating that the documents supplied by the petitioner in support of its refund claims were insufficient. Citing the insufficiency of documents, the application for refund was rejected twice. Against the order of refusal of refund, the petitioner approached the Delhi High Court. 

Issues and Decision 

The main issue before the Delhi High Court was whether the petitioner paid Rs 2,30,00,000/- voluntarily or under protest. While the petitioner’s raised other issues regarding the legality of deficiency memos, the High Court’s decision hinged on determining if the payment was made voluntarily or under protest. The High Court concluded that the payment was made under protest and ordered a refund of the amount.

The Delhi High Court noted the relevant facts: that the petitioner made a deposit of cash through cash ledger on 20.10.2021 at 8:41pm. The search operations had started at 3:45pm on 20.10.2021 and continued well beyond business hours until 3am on 21.10.2021. Thus, the cash of Rs 2,30,00,000/- was paid by the petitioner while the search and seizure operation was undergoing. The High Court further noted that it was an admitted fact that the petitioner never admitted its liability to pay the tax and merely deposited the said amount under duress and compelling circumstances. The High Court then referred to Section 73(5) and 73(6) of the CGST Act, 2017. Section 73(1) states that a proper officer may serve a SCN on a person where it appears to the proper officer that the person has not paid the tax or short paid the tax or wrongly availed ITC. Section 73(5) states that: 

The person chargeable with tax may, before service or notice under sub-section (1) or, as the case may be, the statement under sub-section (3), pay the amount of tax along with interest payable thereon under section 50 on the basis of his own ascertainment of such tax or the tax as ascertained by the proper officer and inform the proper officer in writing of such payment.   

Section 73(6) that on receipt of the information, the proper officer shall not serve any notice on the said person. 

The Delhi High Court observed that the above provisions are clearly for the benefit of the taxpayer and voluntary payments can be made before issuance of SCN. However, once the taxpayer pays tax under Section 73(5) but subsequently refutes that  the payment was not voluntary, it must be accepted that the payments were not made voluntarily. The High Court also pointed that the Revenue Department did not follow the requisite procedure in the impugned case as the petitioner was not issued FORM GST DRC-04, which follows the issuance of acknowledgement FORM GST DRC-03. 

Finally, the Delhi High Court cited CBIC’s Instructions wherein it is clearly stated that unpaid tax or short paid tax can only be collected after following the due process, i.e., issuance of SCN and passing of an adjudication order. And no recovery of tax dues can take place during the search or seizure proceedings unless the taxpayer makes the payment voluntarily. 

Conclusion

The Revenue Department in the impugned case inter alia also tried to resist the issuance of refund on the ground that the SCN had been issued to the petitioner after the search proceedings and refund shall only be granted after the proceedings were complete. The High Court endorsed the petitioner’s argument that adjudication of SCN is not a pre-requisite for issuance of refund and that issuance of refund cannot be withheld merely because SCN was issued after the deposit. It is interesting that the Revenue Department tends to make certain claims that have no basis in law, e.g., no refund can be issued until SCN is adjudicated. And it is appreciable that the Courts, at times, if not always, tend to see the ridiculousness of such claims and reject them. 

[1] Sapphire Intrex Ltd v Union of India & Ors 2023: DHC: 8978-DB. 

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