Indirect Tax

Sikkim High Court Strictly Interprets Eligibility Criteria for Budgetary Support Scheme

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In an interesting judgment[1], the Sikkim High Court interpreted eligibility criteria for the budgetary support scheme (‘BSS’) and denied petitioners BSS benefit because of change in ownership and constitution of the relevant business units. The petitioners claim that BSS was aimed at eligible units and not persons was rejected by the High Court. The High Court reasoned that the BSS was a concession to the persons who had made the initial investment in the State and change in ownership and constitution would amount to new persons coming into existence who were not provided the original tax benefits and thus the new entities were not eligible for BSS.

Facts 

The case involved two petitioners: first petitioner concerned a partnership firm which was converted into a company and sought BSS for the remaining period that the partnership firm was entitled; second petitioner concerned a company was transferred by way of slump sale and the new company sought BSS for the remaining period that the transferee company was entitled. The petitioners admitted that the change in constitution and ownership resulted in new Unique Identity (‘UID’) and registration number for the resulting units. The main arguments of the petitioner were that the change in constitution of the business or change in ownership does not make them ineligible as BSS is provided to the eligible units and not to the owners thereof. 

The State, on the other hand, argued that the new businesses with a new GST Registration Number and UID constituted a new person, and the new persons cannot claim BSS without making investment in the State and thereby cannot be considered as ‘eligible units’ under the BSS.

High Court Denies BSS to the Petitioners 

The Sikkim High Court elaborated on the need and rationale for BSS and why tax benefits provided to manufacturing units under the excise duty regime had to be stopped after the introduction of GST. And that BSS was a concession to the taxpayers aimed to provide them tax benefits even under the GST regime for the residual period of original tax benefit. The High Court examined the terms ‘eligible unit’ and ‘residual period’, ‘manufacturer’ and ‘person’ as defined under the BSS and relevant provisions of the CGST Act, 2017 to state that: 

Paragraph 7.1 of the Budgetary Support Scheme mandates the manufacturer to file the application for budgetary support. The definition of “eligible unit” in Paragraph 4.1 also provides that the application must have reference to either the Central Excise registration number of the eligible manufacturing unit as it existed prior to migration to GST or GST registration for the premises as a place of business where manufacturing activities under the exemption notification no.49/2003-CE dated 10.06.2003 and 50/2003-CE dated 10.06.2003 were being cleared. This was definitely related to the manufacturer or the “person” registered. (para 37)

The Sikkim High Court, as is evident from the paragraph cited above was placing emphasis on the person who files for the BSS and not on the unit per se. But in its subsequent observations, the High Court tends to use the terms ‘eligible unit’ and ‘person’ almost interchangeably. For example, it stated that the tax exemption was provided to manufacturers who made investments in the State and thereby BSS was extended to those eligible units from whom tax exemption was withdrawn prematurely. (para 38) It is an indication that even the High Court despite its effort to draw a distinction between the owners and eligible units was not able to maintain the distinction consistently. And this is the major flaw of this judgment. 

Conclusion The Sikkim High Court concluded that the two petitioners, i.e., the new company and the new owner respectively were separate and distinct persons from the previous entities and could not have filed applications under the BSS. However, its observation that the benefits was for the manufacturers and was extended to their units does not have analytical heft. It is true that applications for tax exemptions under BSS are required to be filed by persons, and the new entities became different ‘persons’, but despite change in their constitution/ownership the units were the ones in which the original manufacturers had invested. While the State, in public interest, or otherwise, has discretion to cease providing tax benefits if there is change in ownership; but, in this case the High Court’s observations did not align with the relevant provisions of the BSS. This is especially since its emphasis on persons and not eligible units was not based on a sound reasoning and interpretation.  

[1] Zydus Wellness Products Ltd v Union of India W.P.(C) No. 20 of 2022, available at https://www.livelaw.in/pdf_upload/zydus-wellness-products-limited-492279.pdf (Accessed on 16 September 2023). 

Delhi High Court Opines Allows Investigation Against Petitioner under GST: Refuses Reliance on Section 6(2)(b), CGST Act, 2017

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In a recent judgment[1], the Delhi High Court interpreted the term ‘intelligence-based enforcement action’ and denied the petitioner’s prayer to stop investigation by multiple investigating agencies. The High Court held that merely because certain authorities took action against the petitioner did not mean that the investigation was carried out against the petitioner. It rejected the petitioner’s reliance on Section 6(2)(b) of CGST Act, 2017. 

Facts 

The petitioner filed a writ petition in the Delhi High Court praying for a writ of certiorari and that investigations started by various investigating agencies be quashed and set aside. The petitioner specifically objected to investigation initiated against it by the Directorate General of Goods and Service Tax, Jaipur (‘DGGI Jaipur’). The petitioner argued that it had already been investigated by the Delhi Commissionerate (‘Delhi State Authority’). The petitioner elaborated that its bank account had been blocked and GST registration cancelled by the Delhi State Authority after investigation had been carried out for its transactions with one M/s Girdhari Exports. The Delhi State Authority however argued that no investigation was carried out by it, and that its actions were after taken after receiving communication from DGGI, Jaipur and DGGI, Chennai. The latter also made similar statement and stated that no investigation was carried out against the petitioner. 

Scope of Section 6(2)(b), CGST Act, 2017

The petitioner’s entire case was based on their understanding of Section 6(2)(b), CGST Act, 2017 and CBIC’s Circular dated 05.10.2018. Section 6(2)(b), CGST Act, 2017 states that: 

            Where a proper officer under the State Goods and Services Tax Act or the Union Territory Goods and Services Tax Act has initiated any proceedings on a subject matter, no proceedings shall be initiated by the proper officer under this Act on the same subject matter. 

The afore-mentioned provision is aimed at preventing a taxpayer from being subjected to multiple proceedings at the Union and State level on the same subject matter. It was in furtherance of the said provision that CBIC issued a circular on 05.10.2018 clarifying that if an officer of the Central tax authority had initiated intelligence-based enforcement action against a taxpayer administratively assigned to the State tax authority, then it would not transfer the case to the State tax counterpart but instead take the case to its logical conclusion themselves. This was presumably to ensure continuity of proceedings against a taxpayer.  

Relying on the above provision and the Circular, the petitioner argued that since investigation against it had been initiated by other State authorities, DGGI Jaipur could not initiate another investigation against it. 

High Court Decides Against the Petitioner 

The Delhi High Court rejected the petitioner’s arguments and held that: 

… it is apparent that although certain measures were taken, which affected the petitioner – inasmuch as its ITC was blocked and the bank accounts were provisionally attached – no investigation was conducted by any authority regarding the affairs of the petitioner company. (para 13) 

In view of the aforesaid, the High Court held that Section 6(2)(b), CGST Act, 2017 was not attracted. The High Court held that the Delhi State Authority – administratively concerned with the petitioner – had clarified that it had not conducted any investigation against the petitioner. The High Court further clarified that merely because the petitioner had the same principal place of business as other entities which were investigated, the petitioner cannot take advantage of the same. The petitioner had a separate tax registration and could be investigated by the DGGI, Jaipur. 

Conclusion 

The Delhi High Court’s opinion in the impugned judgment adopts a measured interpretation and understanding of Section 6(2)(b), CGST Act, 2017. The clarification by the High Court adopts a coherent view of investigation and did not accept the petitioner’s interpretation that any action against it could be termed as an intelligence-based enforcement action or an investigation-based action.       

[1] M/S Hanuman Enterprises (OPC) Pvt Ltd v The Additional Director General Directorate General of GST, WP(C) 2900/2023 & CM Appl 11322/2022, available at https://www.livelaw.in/pdf_upload/ms-hanuman-enterprises-488982.pdf (Accessed on 13 September 2023).  

Fake Invoices are ‘Economic Offences’: Delhi High Court Denies Bail

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Introduction

In a recent judgment[1], a Single Judge Bench of the Delhi High Court denied bail to the Chartered Accountant (‘CA’) of the complainant. The latter had filed FIR and alleged that he had appointed the CA for books of account of his business. The CA had persuaded the complainant to purchase goods and materials from various firms which the CA claimed were owned by persons known to him. The complainant started making purchases from the said firms and the CA generated various bills/e-way bills to that effect; but later the complainant got to know that firms recommended by the CA were bogus and non-existent. 

The complainant alleged in the FIR that he was duped of money by the CA and that by creating false/fake firms, GST was deposited in accounts of said firms for purchases made by him, but the GST was not deposited to the State. The complainant supported his allegations by relying on bank transfers, pen drives and telephonic conversations among other evidence. 

Bail Refused 

The Delhi High Court noted that the CA had withdrawn the previous application for anticipatory bail to file fresh application before the trial court and had instead filed a surrender cum bail application before the Sessions Court. Thereafter, the present application was filed before the High Court where the CA on payment of Rs 75 lakhs sought interim protection on the pretext that mediation proceedings were ongoing. The first adverse finding of the High Court against the CA was that he had abused the process of court. The intent of the CA, as per the High Court was to secure interim protection on payment of Rs 75 lakhs to the complainant. But the High Court observed that the protection was not granted to the CA on merits but on possibility of settlement and once the mediation proceedings ended as ‘not settled’, the application for bail had to be considered on merits.     

The Delhi High Court refused to grant bail to the CA inter alia on the ground that prima facie case was made against the CA – indicating a serious offence with severe punishment – of having duped the complainant of Rs 3.5 crores. The High Court further observed that: 

            … the present case is not just relating to the applicant having duped the complainant of a huge sum of money, it also involves allegations of issuing fake invoices and e-way bills for the purposes of GST evasion, which is an economic offence involving loss to the public exchequer. Such offences need to be viewed seriously as the same pose a threat to the economy of the country. Further, the present case involves offence under Section 467 of the IPC read with Section 471 of the IPC, for which the maximum punishment is imprisonment for life. (para 21) (emphasis added)

CGST Act, 2017 and the relevant State GST legislations contain provisions that envisage legal consequences – civil and criminal – for issuance of fake invoices, false claims of ITC, etc. And given the nature of a tax statute, it is not unreasonable to suggest that the said contraventions already constituted an ‘economic offence’ by virtue of the relevant GST provisions. So what value should we attach to the Delhi High Court terming issuance of fake invoices as ‘economic offences’? Perhaps, not much. The High Court’s observations are an endorsement of strict approach towards tax-related offences – categorized under the broader umbrella of economic offences – especially if the nature of allegations establish a prima offence of serious nature. In the impugned case, the High Court’s observations materialized in the form of denial of bail to the CA. 

Conclusion 

The impugned case is unlikely to influence the trajectory of an already uncertain bail jurisprudence under GST in any significant manner. Courts have granted bail under GST primarily based on facts and other factors such as: prima facie case against the accused, co-operation by the accused and history of tax evasion by the accused, among other factors. The impugned case concerned specific situation of CA of the concerned taxpayer generating false invoices, and may be valid only to these facts instead of cases dealing with bail of the accused taxpayer per se.     

[1] Aman Gupta v State, Bail Application 3408/2022, available at https://blog.saginfotech.com/delhi-hc-false-gst-invoices-used-evasion-should-considered-economic-crime  

Patna High Court Castigates Tax Officer for Recovering Tax Illegally

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In a recent judgment[1], the Patna High Court has castigated a tax officer for effecting a tax recovery and ignoring the legislative mandate. Section 78, CGST Act, 2017 allows for recovery of tax from taxpayers within 3 months of passing of an order. The Proviso to Section 78, CGST Act, 2017 allows a proper officer to initiate recovery before 3 months if he ‘considers it expedient in the interest of revenue’. In the impugned case, the proper officer had no cogent reason except for the fact that financial year would have ended if recovery was delayed, nor was any reasonable explanation offered as to why the taxpayer was not informed through a prior notice. 

Facts 

One day after the appellant’s/taxpayer’s appeal was dismissed, the tax was recovered from the bank accounts of the taxpayer. However, the taxpayer’s appellate remedy was not exhausted; yet, at the same time the appellate tribunal had not been constituted. In view of the non-constitution of appellate tribunals, Courts have typically directed that the taxpayer should deposit 20 per cent of the amount – required as a deposit for filing an appeal before the appellate tribunal – and stayed recovery till the appellate tribunal is constituted. The 20 per cent is as per the statutory provisions, which in the impugned case was Section 112(8), Bihar Goods and Services Tax Act, 2017.  

In the impugned case, the taxpayer’s appeal was rejected on 27.03.2023, and immediately on the next the tax officer in question sent a notice to bank managers of the banks where the taxpayer had bank accounts. The entire amount was recovered by the tax officer without sending a notice to the taxpayer which led to a petition before the Patna High Court. The Revenue’s reason for effecting such a quick recovery without informing the taxpayer beforehand was that there was that bank holidays were approaching and thereafter the financial year would have ended. The Patna High Court expressed ‘deep anguish and dissatisfaction’ in the reasons recorded by the tax officer. (para 10) 

The Patna High Court stressed on the need for adhering to principles of natural justice especially when quasi-judicial powers of officers led to prejudicial result for the taxpayer. While Proviso to Section 78, CGST Act, 2017 does not expressly lay down the requirement for a notice to the taxpayer, the High Court read into the provision the said requirement and hled that: 

In fact, on a reading of the proviso we are of the definite opinion that there is a requirement of notice, if not prior to the recording of reasons; at least intimation of the reasons which motivates the proper officer to recover the amounts due, considering such recovery to be expedient in the interest of revenue with clear specification of the period; less than a period of three months, within which the amounts are to be paid. (para 12)

Thus, the tax officer has to inform the taxpayer as to why the payment should be made before 3 months and specify exactly the period of payment. And while the Patna High Court did not approve of the actions of the tax officer per se, it did note that if recovery had to be initiated it should have been limited to 20 per cent of the amount due and any admitted tax, etc. The High Court observed that the action taken by the tax officer constituted an egregious error, high handed and contrary to legislative mandate. 

Guidelines for Recovery 

The Patna High Court thereafter, laid down certain guidelines for effectuating recovery under Section 78 which I will reproduce in full: 

  • There shall be no recovery of tax within the time limit for filing an appeal and when a stay application is filed in a properly instituted appeal, before the stay application is disposed of by the Appellate Authority; 
  • Even when the stay application in the appeal is disposed of, the recovery shall be initiated only after a reasonable period so as to enable the assessee to move a higher forum; 
  • However, in cases where the Assessing Officer has reason to believe that the assessee may defeat the demand or that it is expedient in the interest of Revenue, as is provided under the proviso to Section 78, there can be a recovery but with notice to the assessee, which notice shows the reasons for initiating it and specifies the lesser time within which the assessee is directed to satisfy the dues;
  • Though a bank account could be attached; before withdrawing the amount, reasonable prior notice should be furnished to the assessee to enable the assessee to make a representation or seek recourse to a remedy in law; 
  • We also remind the Tax Authorities, as was done in the UTI Mutual Fund case[2] that the ‘authorities under the tax enactment shall not act as a mere tax gatherer but act as a quasi-judicial authority vested with the public duty of protecting the interest of the Revenue while at the same time balancing the need to mitigate the hardship to the assessee.’ (para 16) 

Courts have issued various guidelines in different contexts – tax and otherwise, only for them to be ignored or be adhered in form rather than substance. It remains to be seen if mere enunciation of certain guidelines would prevent tax officers from contravening the statutory mandate especially if they are chasing targets set by superior officials. (para 15)

Conclusion

The Patna High Court elaborated one the final guideline to state that even though tax is a compulsory extraction, it is meant for the larger good. And that tax authorities should act as facilitators of business and economy instead of looking to extract their pound of flesh for personal reasons or to please the higher authorities. (para 18) And fined the tax officer concerned Rs 5,000/- for the high-handed action. (para 21) Again, the views of the High Court about the role of a tax officer and tax authorities in general are hard to find fault with; but, if and to what extent they are adhered to will be the bigger test. For now, there is solace in the fact that Courts endorse the need for balance between revenue extraction and protection of rights of businesspersons whose business can be paralyzed if such huge amounts are recovered without giving them prior notice. (para 17)  

[1] Sita Pandey v The State of Bihar (2023), available at https://www.livelaw.in/pdf_upload/sita-pandey-490868.pdf  

[2] UTI Mutual Fund v Income Tax Officer and Others [2012] 345 ITR 71 (Bom). 

Madras High Court Holds that Credit Note Not Required When No Delivery of Goods

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In a recent judgment[1], the Madras High Court held that there is no requirement to issue a credit note when the goods were returned to the seller without delivery to the buyer. The High Court held that the credit note was necessary for adjustment of tax liabilities, and the said requirement did not arise when the goods were not delivered to the buyer in the first place. 

Facts and Arguments 

The petitioner, based in Chennai, had transported a consignment of solar power generating systems/solar panels of different descriptions to the buyer in Tiruppur. The goods were transported accompanied by different invoices and accompanying e-way bills. When the goods were being transported there was a heavy downpour, the solar panels got wet and the buyer refused to take delivery of the goods. The petitioner generated new e-way bills and transported goods back to the factory in Chennai, but on the way the goods were intercepted. 

The intercepting officers claimed that it was necessary for the goods to be accompanied with credit notes, and in the absence of the same presumed an intent to evade tax. accordingly, proceedings were initiated against the petitioner under Section 129, CGST Act, 2017. The petitioner paid the penalty under protest, but later challenged the initiation of proceedings under Section 129 and officer’s view that a credit note was necessary even though the buyer had not taken delivery of the goods. As per the petitioner, issuance of credit note is only necessary if the goods were delivered to the buyer in the first place.  

Madras High Court Decides 

The Madras High Court examined Section 34 and observed that: 

Thus, the goods which are being returned need not necessarily accompany a Credit Note. The Credit Note or Debit Note as the case may be are intended only for adjustment of tax liabilities on account of return of the goods and where tax charged in that tax invoice is found to exceed the taxable value or tax payable in respect of such supply. (para 23) 

The High Court stressed on the need for and rationale of credit note, and to that extent, it was correct. However, it is also important to point out that the supplier’s obligation to issue a credit note is only triggered if there is a supply of goods or services in question. 

Since the issuance of credit note was viewed as not compulsory, the Madras High Court also concluded that ‘the detention of the goods was per se illegal and unwarranted’ particularly in light of the facts that were accompanied with valid e-way bills. 

As regards the payment of penalty and interest under Section 129, CGST Act, 2017, the Madras High Court made an important observation. The High Court observed that under the system and on the GST portal, the taxpayer only had the option to make payments on a voluntary basis and there was no option to take the goods back by claiming that the payment was made under protest. The High Court concluded that: 

Therefore, the system and procedure cannot be used against the petitioner particularly in the light of the fact that the detention itself was illegal. Credit note under Section 34 is not required to be issued at the stage, when the goods were being returned without even they having been received by the recipient. Issuance of Credit Note and/or Debit Note under Section 34(1) of the CGST Act, is only for adjustment of tax liability. (para 31)

Conclusion 

The Madras High Court has made some obvious but important observations in the impugned case. The fact that credit note is to be issued only if a supply of goods or services is made to the buyer is an obvious legal position, but the intercepting officers needed a reminder of the scope of their powers and grounds for detention of goods under Section 129, CGST Act, 2017. Equally, the High Court’s observations that the system cannot be used against a taxpayer to claim that the payment was not made under protest, especially if there is no option to make such a payment in the system.  

[1] Luminous Power Technologies Ltd v State Tax Officer [2023] 153 taxmann.com 623 (Madras). 

Delhi High Court Delineates the Scope of Section 67, CGST Act, 2017

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In a recent judgment[1], the Delhi High Court clarified scope and power of the Revenue officials under Section 67, CGST Act, 2017. The High Court adopted a purposive interpretation of the provision to state that the Revenue’s power to seize things cannot be interpreted liberally. Instead, the word ‘things’ used in Section 67 needs to be interpreted by applying the principle of ejusdem generis. And also in interpreting Section 67 it was important to note that it was not a machinery provision for recovery of tax. 

Introduction

The petitioner approached the Delhi High Court praying that the Revenue Department release silver bars, mobile phones and currency seized from its premises. The primary arguments of the petitioner for release of the aforesaid things were: first, that the notice issued under Section 74, CGST Act, 2017 and the demand raised therein did not refer to any of the aforementioned things; second, that since no notice was issued within six months of the seizure of goods, the seized goods were liable to be restored. 

Before delving into the observations of the Delhi High Court, it is important to cite the two relevant sub-sections of Section 67. Section 67(2), CGST Act, 2017 states as follows: 

Where the proper officer, not below the rank of Joint Commissioner, either pursuant to an inspection carried out under sub-section (1) or otherwise, has reasons to believe that any goods liable to confiscation or any documents or books or things, which in his opinion shall be used for or relevant to any proceedings under this Act, are secreted in any place, he may authorise in writing any other officer of central tax to search and seize or may himself search and seize such goods, documents or books or things: 

Provided that where it is not practicable to seize any such goods, the proper officer, or any officer authorised by him, may serve on the owner or the custodian of the goods an order that he shall not remove, part with, or otherwise deal with the goods except with the previous permission of such officer: 

Provided further that the documents or books or things so seized shall be retained by such officer only for so long as may be necessary for their examination and for any inquiry or proceedings under this Act. (emphasis added)

And Section 67(7), CGST Act, 2017 states as follows: 

Where any goods are seized under sub-section (2) and no notice in respect thereof is given within six months of the seizure of the goods, the goods shall be returned to the person from whose possession they were seized: Provided that the period of six months may, on sufficient cause being shown, be extended by the proper officer for a further period not exceeding six months. 

Decoding Section 67, CGST Act, 2017 

The Delhi High Court observed that Section 67(2) makes it amply clear that only those goods can be seized which are liable for confiscation. Thus, confiscation of documents or books or things is permissible if in the opinion of proper officer they shall be useful or relevant to any proceedings under the Act. The High Court then opined that it would not be apposite to construe the term ‘things’ mutually exclusive from the term ‘goods’ used in Section 67(2) and the term goods relates to goods which are subject matter of supplies that are taxable under the Act. As per the High Court: 

The word ‘goods’ as defined under Sub-section (52) of Section 2 of the Act is in wide terms, but the said term as used in Section 67 of the Act, is qualified with the condition of being liable for confiscation. Thus, only those goods, which are subject matter of or are suspected to be subject matter of evasion of tax. (Para 34) 

The second category – ‘documents or books or things’ – are liable for confiscation only if the proper officer believes that they are useful or relevant to any proceedings under this Act. The latter requirement is clear and express under Section 67, but the question that required adjudication was the scope of the term ‘things’ and by extension the width of the Revenue’s power of seizure. The Delhi High Court adopted a prudent interpretive approach and observed that: 

It is clear from the Scheme of Section 67 of the Act that the word ‘things’ is required to be read, ejusdem generis, with the preceding words ‘documents’ and ‘books’. It is apparent that the legislative intent of using a wide term such as ‘things’ is to include all material that may be informative or contain information, which may be useful for or relevant to any proceedings under the Act. (para 46) 

The Delhi High Court observed that ‘things’ would include devices, computers, etc. that may be used for storing information that may be useful or relevant to the proceedings. The High Court refused the Revenue’s contention that the term ‘things’ should be interpreted to include anything that may or may not be relevant to the proceedings under the Act. There are three distinct reasons for the High Court’s restrictive interpretation of the term ‘things’: first, the rule of ejusdem generis; second, the context of Section 67(2) that requires the proper officer to only confiscate things that are relevant or useful for proceedings under the Act; third, in the High Court’s own words: 

It is necessary to bear in mind that power of search and seizure is a drastic power; it is invasive of the rights of a taxpayer and his private space. Conferring of unguided or unbridled power of this nature would fall foul of the constitutional guarantees. It necessarily follows that such power must be read as circumscribed by the guidelines that qualify the exercise of such power, and the intended purpose for which it has been granted. (para 47)

The purposive interpretation of Section 67 led the Delhi High Court to conclude that even if the petitioner could not provide any evidence of purchase of silver bars or account for the cash in his possession, the same is not liable to be seized under Section 67(2), CGST Act, 2017. The High Court observed that seizure of unaccounted wealth is covered by the Income Tax Act, 1961. While Section 67 is merely a compliance provision aimed to aid the proceedings under the CGST Act, 2017 and the legislative intent behind Section 67 is clear: it does not permit seizure of currency or valuable assets merely on the ground that they represent unaccounted wealth.          

Conclusion         

The Delhi High Court’s impugned judgment is a good example of careful, strict, and purposive interpretation of the provisions of a tax statute. The provision in question – Section 67, CGST Act, 2017 – provides expansive and intrusive powers to the revenue officers to seize goods and other relevant documents, and it was crucial to underline the said powers are not without limits. The High Court carefully underscored the intent of the provision, its context and the limitations in-built in the provision to clearly decide that the confiscatory and seizure powers need to be exercised with proper caution and not in an unbridled manner. The judgment, if adhered to in true spirit, will be effective in reigning the Revenue’s certain adversarial and intrusive actions that tend to cross the statutory limits.  

[1] Deepak Khandelwal v Commissioner of CGST, Delhi West & Anr (2023) 8 TMI 1263. 

Patna High Court Opines on ITC Claims: Interprets Section 16 of CGST Act, 2017 Strictly

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In a recent judgment[1], the Patna High Court engaged with the issue of whether a claim for Input Tax Credit (‘ITC’) is sustainable when the purchasing dealer has made the tax payment to the seller, but the latter does not pay tax to the State. The issue of non-payment of tax by the seller and its impact on purchaser’s ITC claims has arisen frequently under pre-GST and GST regime, with no clear resolution. Recently, the Calcutta High Court – where issue of GST returns was central – opined that the Revenue should first proceed against the seller instead of reversing the ITC of purchaser. In the impugned case, the Patna High Court adopted a different approach where the ingredients of Section 16, CGST Act, 2017[2] were central in deciding the impugned case. 

Introduction 

The purchasing dealer claimed that the seller has not paid tax to the State despite the former making the payment to the latter. As per the purchaser, the liability of purchaser stood satisfied on payment of tax to the seller and the State seeking to recover the said tax from the purchaser would amount to double taxation and diluting the rationale of ITC, i.e., prevention of cascading effect of taxes. The State, on the other hand, argued that the conditions prescribed in Section 16, CGST Act, 2017 need to be satisfied for a taxpayer to claim ITC successfully.

The purchasing dealer tried to argue that the Supreme Court’s observations in ECom Gill Coffee case[3] that the purchaser had to prove ‘prove beyond doubt’ the genuineness of transaction in question to claim ITC was inapplicable in the impugned case since the said case was decided under the KVAT Act. The Patna High Court agreed with the argument but noted that the inapplicability of the ECom Gill Coffee case would still not absolve the dealer of the requirement under Section 16(2)(c) which requires payment of tax as a pre-condition for successfully claiming ITC.

Patna High Court Mandates Compliance with Section 16 

The Patna High Court while emphasizing that unless the purchaser satisfies the conditions prescribed under Section 16, cannot successfully claim ITC made two observations that are important to highlight as to how Courts struggle to categorise ITC. For example, the High Court first observed that the condition under Section 16(2)(c) requiring payment of tax via cash or ITC is a burden:

This in effect is a burden of proof cast on the purchasing dealer who claims Input Tax Credit, which is a right created under statute; sustained only under the specific terms of the statute. (para 10) (emphasis added)   

In the following paragraph, the Patna High Court observed that ITC was a benefit conferred by the statute: 

Necessarily, the conditions for such availment of credit has to be scrupulously followed failing which there can be no benefit conferred on the assessee. The benefit is one conferred by the statute and if the conditions prescribed in the statute are not complied; no benefit flows to the claimant. (para 11) (emphasis added) 

 The prima facie effect of observations in the above paragraphs is that ITC is both a right created under the statute and a benefit conferred by the statute. In my opinion, it is important to categorise it one and unambiguously so; it would determine the extent and nature of conditions can be imposed on taxpayers before they can successfully claim ITC. Courts through casual remarks on the nature of ITC, such as in the impugned case, only add confusion instead of conceptual clarity. 

Conclusion 

Nonetheless, the Patna High Court was categorical in conclusion that ITC postulates that there should be credit in ledger of the purchasing dealer and the said credit can only arise once the seller has paid the tax to the State. Mere production of invoices by the purchaser is not sufficient to claim ITC. Strangely, though the High Court noted that purchaser and seller have an ‘independent contract’ without junction of the Government. But it nonetheless noted that the purchaser’s claim of ITC is dependent on seller paying the tax, a statutory condition under Section 16(2)(c). In other words, the purchaser must either ensure that the seller fulfils its statutory obligation of paying tax to the State or be at the mercy of seller. Because the purchaser cannot successfully claim ITC until the seller pays the tax. Thus, it can also be said that Section 16 is an in-built condition in the purchaser-seller ‘independent contract’ for the purchaser to claim ITC. 

While the State claiming that conditions of Section 16 need to be strictly fulfilled for a purchaser to claim ITC is valid, what is unsettling and legally indeterminate are two things: first, if the State can impose such a statutory condition? The answer to this question would be partially supplied once we have judicial clarity on whether ITC is a right or a concession, for in the latter case such onerous conditions could be justified; second, it is unclear if the seller acts an agent of the State or purchaser once it collects the tax? In my opinion, only in the latter case is it defensible to make the purchaser’s claim of ITC dependent on seller paying the tax. Otherwise, it is not far-fetched to say that conditions under Section 16 are aligned to the State’s interest rather than a coherent conceptual approach towards transactions and the parties that generate GST.      

[1] M/s Aastha Enterprises v The State of Bihar 2023 LiveLaw (Pat) 96. 

[2] This provision is pari materia with Section 16, Bihar Goods and Services Tax Act, 2017, the impugned provision in this case.

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

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. 

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

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