Indirect Tax

CERC Is Exempt from GST: Delhi HC 

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The Delhi High Court in a recent judgment held that the Central Electricity Regulatory Commission and Delhi Electricity Regulatory Commission (‘Commission’) were not liable to pay GST. The Revenue sought to levy on the fees and tariff that Commission received from the power utilities. The Revenue contended that functions performed by the Commission were ‘support services to electricity transmission and distribution services’ under a 2017 Notification issued by CBIC. The Revenue clarified that while no GST was payable on services provided via electricity transmission and distribution services, but support services rendered in the contest of electricity transmission and distribution were subject to GST. 

The Delhi High Court ruled in favor of the Commission. 

Facts and Arguments 

Commission receives various amounts under different heads such as filing fee, tariff fee, license fee, annual registration fee and miscellaneous fee. Commission took the stance that GST is not payable on such amounts since it is performing statutory functions under the Electricity Act, 2003 and is essentially not engaged in any trade or commerce. 

Revenue’s argument – derived from its Show Cause Notices (SCNs) – before the High Court was that the Commission awards licences for distribution and transmission of electricity and charges licence fees. Thus, the definition of business read with consideration under CGST Act, 2017 makes it amply clear that the Commission is supplying services. And any such amount received is taxable under GST.  

The Revenue relied on two major elements to strengthen its argument about liability of the Commission to pay GST: 

First, it relied on FAQs where the CBIC had clarified that Commission is not a Government for the purpose of GST but is appropriately classified as a regulatory agency. And any financial consideration received by the Commission for any service provided by it was liable to GST. Since the regulatory activities performed by the Commission for which it received money amounted to ‘business’, the Commission was classified as a business entity under the said FAQs.  

Second, and the Revenue reasoned this in its SCN as well: the Commission performs both regulatory and adjudicatory functions. That regulatory functions of the Commission fall outside the purview of quasi-judicial functions and while performing such functions it does not have the trappings of a full-fledged court. Further, the licence fee is received by the Commission for its regulatory functions. The Revenue argued that it is immaterial if the regulatory functions of the Commission are mandated by the statute or not, as long as consideration is received by it is for supply of, services it amounts to a supply for which GST is liable to be paid.   

The Commission questioned the Revenue’s bifurcation between its regulatory and adjudicatory functions and contended that discharge of statutory duties by it in public interest cannot be subjected to GST. 

Relevant Provisions of GST 

The High Court reproduced the relevant provisions of CGST Act, 2017 relating to supply, business, and consideration. 

Section 7, CGST Act, 2017 defines supply to include all forms of supply of goods or services or both made for a consideration by a person in the course or furtherance of business. 

Clause 2, Schedule III, CGST Act, 2017 states that services provided by a Court or Tribunal established under any law for the time being in force will not be considered either as supply of goods or supply of services.  

Definitions of business and consideration under CGST Act, 2017 are as follows: 

―2. Definitions. —In this Act, unless the context otherwise requires- 

      xxxx                    xxxx                    xxxx

(17) ―business‖ includes— 

(a) any trade, commerce, manufacture, profession, vocation, adventure, wager or any other similar activity, whether or not it is for a pecuniary benefit; 

(b) any activity or transaction in connection with or incidental or ancillary to sub-clause (a); 

(c) any activity or transaction in the nature of sub-clause (a), whether or not there is volume, frequency, continuity or regularity of such transaction; 

(d) supply or acquisition of goods including capital goods and services in connection with commencement or closure of business; 

(e) provision by a club, association, society, or any such body (for a subscription or any other consideration) of the facilities or benefits to its members; 

(f) admission, for a consideration, of persons to any premises; 

(g) services supplied by a person as the holder of an office which has been accepted by him in the course or furtherance of his trade, profession or vocation; 

(h) activities of a race club including by way of totalisator or a license to book maker or activities of a licensed book maker in such club; and; 

(i) any activity or transaction undertaken by the Central Government, a State Government or any local authority in which they are engaged as public authorities;‖ 

―2. Definitions.—In this Act, unless the context otherwise requires,— 

      xxxx                    xxxx                    xxxx

(31) ―consideration‖ in relation to the supply of goods or services or both includes—

(a) any payment made or to be made, whether in money or otherwise, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government; 

(b) the monetary value of any act or forbearance, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government: 

Provided that a deposit given in respect of the supply of goods or services or both shall not be considered as payment made for such supply unless the supplier applies such deposit as consideration for the said supply;

The Delhi High Court examined the above two definitions in detail to reject Revenue’s contention. 

Decision 

The Delhi High Court noted that the Commission certainly acts as a tribunal, but the Revenue seeks to distinguish between the adjudicatory and regulatory functions of the Commission. The bifurcation warranted an examination of the definition of business and consideration in tandem with supply as defined under Section 7, CGST Act, 2017. 

As regards the definition of business, the Delhi High Court observed that clause (a) was the applicable clause. But the High Court observed that it cannot fathom how the power of regulation statutorily vested in the Commission can be included in any of the activities enlisted in the definition of business. Further, while clause (i) included activities undertaken by the Central or State Governments, the High Court noted that the Commission being a statutory body could not be equated with either of the two entities. 

As regards the definition of consideration, the Delhi High Court noted that it draws colour from the definition of business and it needs to be in relation or response to inducement of supply of goods or services. And here two elements need to be satisfied: first, the payment received must be outcome of an inducement of supply of goods or services; second, the supply must be in the course of or furtherance of business. 

As regards the first element, the High Court noted that: 

Suffice it to note that it was not even remotely sought to be contended by the respondents that the payments in the form of fee as received by Commissions were an outcome of an inducement to supply goods or services. (para 29) 

The above observation is not entirely accurate, since the SCN did mention that the Commission was providing support services for electricity transmission and distribution services. 

Nonetheless, even if one accepts that the money received by the Commission was in response to inducement of supply of goods or services, the said money must be in course or furtherance of business. To this end, the Delhi High Court observed that the functions performed by the Commission cannot be included in the term ‘business’ as defined under Section 2(17), CGST Act, 2017 and concluded: 

We find ourselves unable to accept, affirm or even fathom the conclusion that regulation of tariff, inter-State transmission of electricity or the issuance of license would be liable to be construed as activities undertaken or functions discharged in the furtherance of business. (para 33)

Finally, what about the bifurcation between regulatory and adjudicatory functions of the Commission? As per the Delhi High Court that the Electricity Act made no distinction between regulatory and adjudicatory functions of the Commission and that the statute had enjoined the Commission to regulate and administer electricity distribution. 

Conclusion 

The Delhi High Court’s decision stands on firm footing. And despite the CBIC and the GST Council having recommended otherwise, the High Court arrived at a clear and well-reasoned decision that the Commission was a tribunal. Even if it was accepted that the Commission received consideration in exercise of regulatory functions, it was not in course or furtherance of business. 

Finally, the Delhi High Court clarified that merely because was a heading: “Support services to electricity, gas and water distribution” which is placed under Group Heading 99863 of the CBIC Notification does not mean that the statutory exemption under Schedule III where services provided by a tribunal are excluded can be bypassed. The High Court helpfully clarified: 

What we seek to emphasise is that a notification would neither expand the scope of the parent entry nor can it be construed as taking away an exemption which stands granted under the CGST Act. There cannot possibly be even a cavil of doubt that a Schedule constitutes an integral part and component of the principal legislation. (para 36) 

Whether the Revenue will appeal against this decision will be revealed in due course, but for now, a well-reasoned decision of the Delhi High Court has clarified the GST implications of the Commission’s functions. 

Assignment of Leasehold Rights is Immovable Property under GST: Guj HC 

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Introduction 

In a recent and much discussed judgment, the Gujarat High Court has held that assignment by sale and transfer of leasehold rights of a plot of land amounts to transfer of benefits arising out of immovable property. The High Court concluded that the transfer would not amount to a supply under Section 7, CGST Act, 2017 read with Schedule II of the Act.  

My usual lament is about length of judgments. This judgment is 280 pages and could very well have been less than half. But the Judges felt the need to reproduce the entirety of arguments and copiously cite precedents relied on by the parties to the case, even if several of them had no proximate bearing on the High Court’s conclusion. While this lament may sound repetitive, I believe it is important to constantly strive for more brevity and more clarity in our judgments.   

Regardless, a quick summary of the case is below. 

Issue before the Gujarat High Court 

The brief facts of case are: Gujarat Industrial Development Corporation (‘GIDC’). GIDC acquires land and develops the same for industrial estate by creating infrastructure such as road, drainage, etc. and allots a plot of land on long term lease for 99 years to a person/entity. A registered deed is executed between GIDC and the lessee. The lease deed allows the lessee to further assign the leasehold rights and any interest in the land to a third person with approval of GIDC. In the impugned case, Gujarat Chamber of Commerce and Industries was the lessee and its case was that the transfer of leasehold rights to a third party did not attract GST. 

In the impugned case, the land was leased to the lessee, and the latter constructed a building on it. And the leasehold rights that were assigned related to both the land and the building so constructed.  The High Court thus framed the issue specifically as: whether assignment of leasehold rights alongwith the building thereon would be covered by the scope of supply to levy GST as per the CGST Act, 2017 or not?  

Arguments and Relevant Provisions 

The crux of lessee/petitioner’s argument was that leasehold rights are benefits arising out of land. A succinct logical flow of the argument can be stated as follows: 

  1. The definitions of immovable property under the General Clauses Act, 1897 and Registration Act, 1908 both include ‘benefits that arise out of land’.   
  2. Leasehold rights are benefits arising out of an immovable property. 
  3. Thus, transfer/assignment of leasehold rights amounts to transfer of an immovable property. 
  4. Since transfer of immovable property is not within the scope of ‘supply’ as defined under CGST Act, 2017 it cannot be subjected to GST. 

The Revenue’s case was that while sale immovable property is outside the scope of supply of GST laws, interest in immovable property like leasehold rights which is transferred by way of sale is a ‘supply of services’ is liable for GST. The Revenue further argued that transfer of right to occupy a land by GIDC to lessee constitutes a supply of service. And that the nature of interest in land would not change merely because the lessee makes an absolute transfer of leasehold rights to a third party. 

To buttress its argument that leasehold rights were benefits arising out of a land, the petitioner’s relied on a galaxy of judgments in the context of TPA, 1882 where courts have elaborated on what constitutes a movable or immovable property.

Supply has been defined under Section 7, CGST Act, 2017 to include sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration in the course or furtherance of business. Further, Clause 5(a), Schedule II, CGST Act, 2017 states that renting of immovable property shall be treated as supply of services. Thus, while renting/leasing is within the scope of supply the assignment of leasehold rights is not specifically included in the definition of supply.  

Reasoning and Conclusion 

The Gujarat High Court did not accept the Revenue’s argument. The High Court noted that the first transaction between GIDC and lessee merely transferred the right of possession to the latter as the right of ownership of the plot remained with GIDC. The second transaction wherein the lessee assigned all the leasehold rights in the property to a third party involved transfer of absolute rights. The High Court added: 

when the lessee-assignor transfers absolute right by way of sale of leasehold rights in favour of the assignee, the same shall be transfer of “immovable property” as leasehold rights is nothing but benefits arising out of immovable property which according to the definition contained in other statutes would be “immovable property”. Therefore, the question of supply of services or place of supply of services does not arise … (para 52)

Thus, transfer of land for lease of 99 years by GIDC to lessee is taxable under GST as per clause 5(a), Schedule II, CGST Act, 2017. But transfer of such leasehold rights would be nothing but transfer of immovable property since the consideration paid is as much an alienation as sale or mortgage. (para 64) The High Court also invoked the meaning of term ‘assignment’ to mean that it includes transfer of all rights of a property, the whole interest with rights and liability to sue and be sued. (para 67-68) And the implication of the above understanding of assignment was that the lessee was removed from the picture on transfer of leasehold rights.   

But can the lessee transfer a title superior to the one they received? If the lessee only received leasehold rights from GIDC can it transfer/assign absolute rights to a third party? To this end, the High Court emphasised that GIDC only leased the plot of land and the lessee constructed a building and developed a land for the purpose of business. The entire land and building was therefore transferred along with leasehold rights and interests in land which is a capital asset in the form of immovable property. The lessee, therefore, earned profits by operating a building which constitutes ‘profit a pendre’ which in turn constitutes as immovable property as per the Anand Behra case. 

Legislative Intent or Strict Interpretation? 

The Gujarat High Court has relied on both: strict interpretation of tax statutes and legislative intent to hold that assignment of land the building does not amount to a supply under GST. Using both interpretive techniques in a single judgment is a bit strange. The default approach in interpreting tax statutes is – strict interpretation. Courts usually resort to discovering legislative intent if there is ambiguity or uncertainty in the relevant provisions. In the impugned case, the Gujarat High Court declared that it must follow strict interpretation of law since regard must be given to clear meaning of the terms since entire issue is governed by language of the provisions. (para 58) And yet in the succeeding paragraphs the High Court goes into legislative intent and history in detail before arriving at its conclusion. (paras 60-62)

The Gujarat High Court specifically invoked legislative intent when it noted that when legislative intent is not to levy GST on sale of immovable property, the Revenue’s argument of treating assignment of leasehold rights as equal to renting of immovable property would be contrary to legislative intent. (Para 82) This issue could have been easily adjudicated upon by relying on the strict interpretation of statutes by holding that Clause 5(a), Schedule II, CGST Act, 2017 only mentions ‘renting of immovable property’ and cannot by interpretive gymnastics be held to include ‘assignment of leasehold rights’.   

 This interpretive approach where the High Court was trying to rely on two different interpretive methodologies without reconciling them is indicative of a ‘let cover all bases’ approach instead of a narrow inquiry into the issue at hand.        

Conclusion 

It is important that the ratio of this case is understood in the specific context of this case. The specific context is that the lessee received leasehold rights of a plot of land from GIDC. The lessee in turn developed the land, constructed a building, and assigned the leasehold rights over the land and building to a third party. The High Court stressed on the development of land made by the lessee after receiving the leasehold rights and that the assignment by sale by the lessee was of both the land and building. The conclusion may have been different if the land received on land was further leased to a third party on ‘as is where is’ basis.      

Telecommunication Towers are Movable Property under GST: Delhi HC

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The Delhi High Court in a recent decision held that telecommunication towers are best characterized as movable property under Section 17(5), CGST Act, 2017 and are eligible for input tax credit (‘ITC’). 

Facts 

Indus Towers filed a writ petition impugning the showcause notice issued under Section 74, CGST Act, 2017. The notice issued a demand for tax along with interest and penalty. Indus Towers was engaged in the business of providing passive infrastructure services to telecommunication service providers. And the notices denied it ITC on inputs and input services used for setting up passive infrastructure on the ground. The Revenue’s argument was that the inputs were used in construction of telecommunication towers and fell in the ambit of Section 17(5)(d), CGST Act, 2017. The relevant portions of the provision are below to help us understand the issue better: 

17. Apportionment of credit and blocked credits. 

xxxxx

(5) Notwithstanding anything contained in sub-section (1) of Section 16 and sub-section (1) of Section 18, input tax credit shall not be available in respect of the following, namely:-  

xxx

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

Xxx

Explanation.- For the purposes of this Chapter and Chapter VI, the expression “plant and machinery” means apparatus, equipment, and machinery fixed to earth by foundation or structural support that are used for making outward supply of goods or services or both and includes such foundation and structural supports but excludes – 

  • land, building or any other civil structures; 
  • telecommunication towers; and 
  • pipelines laid outside the factory premises. 

Revenue’s reading of the above extracted provisions was: plant and machinery is not immovable property and is eligible for ITC, but clause (ii) of the Explanation expressly excludes telecommunication towers from the scope of plant and machinery. Thus, telecommunication towers should be considered as immovable property on which ITC is blocked. 

Petitioner’s Arguments 

Petitioner’s assertion was that telecommunication towers more appropriately classified as movable and not immovable property. Petitioner argued that telecommunication towers are movable items of essential equipment used in telecommunications. The towers can be dismantled at site and are capable of being moved. The concrete structure on which the towers are placed could be treated as the immovable element of the equipment, but all other parts can be easily moved and shifted to other locations. And since the underlying concrete structure is essentially for the purpose of providing stability to the towers, it would not detract from the basic characteristic of towers as being a movable property. 

Precedents and Generic Principles of Immovable Property 

The Delhi High Court cited two major precedents: Bharti Airtel and Vodafone Mobile Services cases. The Supreme Court in the former and the Delhi High Court in the latter had opined that telecom towers are intrinsically movable items and liable to be treated as inputs under the CENVAT Credit Rules, 2004. The Revenue’s contention was that both decisions should be distinguished. Under GST, the Explanation appended to Section 17, CGST Act, 2017 specifically excludes telecommunication towers from the ambit of plant and machinery, and thereby they should be treated as immovable property. The Delhi High Court relied on the above two precedents to disagree with the Revenue’s contentions.   

Additionally, the Delhi High Court cited a host of other principles enunciated in the context of TPA, 1882 where courts have tried to distinguish movable property from immovable property. Some of the principles to determine the nature of a property include: nature of annexation, object of annexation, intention of parties, functionality, permanency, and marketability test. 

The Delhi High Court cited Supreme Court’s observations in the Airtel case and how after applying the said tests, the Court had concluded that towers were not permanently annexed to the earth, but could be removed or relocated without causing any damage to them. And that the annexation of telecommunication towers to the earth was only to make them stable and wobble free. 

Expressing its complete agreement with Supreme Court’s observations, the Delhi High Court noted that the telecommunication towers were never erected with an intent of conferring permanency and their placement on concrete bases was only to help them overcome the vagaries of nature. The Revenue’s argument that telecommunication towers were immovable property, was as per the Delhi High Court, completely untenable.      

High Court Interprets Section 17(5) & the Explanation in a Curious Manner  

The Delhi High Court noted that telecommunication towers are not an immovable property in the first place and do not fall within the ambit of Section 17(5)(d). While the Explanation specifically excludes telecommunication towers from the ambit of the expression ‘plant and machinery’, the High Court observed that: 

… the specific exclusion of telecommunication towers from the scope of the phrase “plant and machinery” would not lead one to conclude that the statute contemplates or envisages telecommunication towers to be immovable property. Telecommunication towers would in any event have to quality as immovable property as a pre-condition to fall within the ambit of clause (d) of Section 17(5). Their exclusion from the expression “plant and machinery” would not result in it being concomitantly held that they constitute articles which are immoveable. (para 18) 

The High Court interpretation is a curious one. The legislative scheme under CGST Act, 2017 is: plant and machinery are not to be treated as immovable property, but telecommunication towers are specifically excluded from ambit of plant and machinery. Does mean that telecommunication towers move back into the category of immovable property since they are excluded from the exception? Prima facie, yes. But the Delhi High Court answered in negative. The High Court’s reasoning is that telecommunication towers are not an immovable property in the first place. The High Court’s opinion is not entirely convincing. Explanation to Section 17(5) excludes three specific things from the ambit of plant and machinery, i.e., 

  • land, building or any other civil structures; 
  • telecommunication towers; and 
  • pipelines laid outside the factory premises. 

Category (i) and (ii), are prima facie immovable property. Applying the principle of ejusdem generis, one can argue that telecommunication towers also fall in the same category. Even if the generic principles of the concept of immovable property suggest that telecommunication towers are a movable property that is an answer in abstract. In the context of Explanation to Section 17(5), a case can be made that telecommunication towers are treated as immovable property by a deeming fiction. Section 17(5) read with the Explanation clearly suggests that telecommunication towers are to be treated as immovable property. The Delhi High Court’s opinion that telecommunication towers are not an immovable property in the first place does not adequately examine the interplay of the Explanation with the text of Section 17(5) and that the predecents cited were in the context of CENVAT Credit Rules and not GST law. This issue of telecommunication towers and their appropriate classification under GST may need a revisit in the future.   

JDAs Not Exempt from GST: Telangana HC

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The Telangana High Court in a recent judgment clarified that Joint Development Agreements (‘JDA’) between developer and landowner do not transfer ownership rights but only grant development rights to developer. The petitioner’s case, in summary, was that JDA results in transfer of ownership in land and the GST exemption for ‘sale of land’ under Entry 5, Schedule III, CGST Act, 2017 will be applicable to JDAs. The State’s case for bringing JDA within the fold of GST relied on Entry 5(b), Schedule II, CGST Act, 2017 which inter alia makes construction services amenable to GST.  The High Court clarified that transfer of ownership only takes place via a conveyance deed after the developer has completed the obligations under JDA, and JDA itself does not transfer title in the land.  

Facts and Arguments 

The petitioner claimed that the transfer of development rights in its favor by the landowner via JDA should be treated as sale of land by the landowners and the execution of JDA should not be subjected to GST. 

The petitioner’s arguments were that the execution of JDA was ‘almost like a sale of land’ and that JDA needs to be considered holistically without focus on individual clauses as it enabled the landowner to transfer the land to the petitioner. The petitioner’s case was that by execution of JDA itself there is substantive transfer of development rights in favor of the petitioner which results in sale of land proportionate to the amount of investment made by the developer. And since JDA gives rise to an element of sale of land the statutory embargo on levy of GST on sale of land would be applicable. 

The petitioner’s ancillary argument was that Notification via which GST was imposed on transfer of development rights should be declared as ultra vires the Constitution. The petitioner’s argued that the Notification traversed beyond the four corners of the law. The absence, in CGST Act, 2017, of any specific provision, mechanism or machinery to determine the quantum of tax payable on JDA was emphasised to argue that the Notification being a delegated legislation traversed beyond the parent legislation.  

The State contended that the petitioner’s entire case lacked any foundation. The State referred to the clauses of JDA to argue that ownership, title rights on the land were retained by the owner and the petitioner was only granted the development rights on the land which belonged to the landowner. The State added that none of the clauses of JDA indicate that the JDA which gives petitioner right to develop the property also effectuates an outright sale of land from the landowner to the petitioner. 

Telangana High Court Decides 

The Telangana High Court correctly rejected the petitioner’s arguments and concluded that execution of JDA does not result in an outright sale of land. The High Court’s conclusion was primarily dependent on its examination of the terms/clauses of JDA and their implication.  

The Telangana High Court opined that an owner of immovable property has a bundle of rights one of which is to get the property developed by an agent of its choice on the terms and conditions that they deem fit. The High Court noted that under the JDA, the petitioner would get the licence/permission to enter the landowners’ property for execution of its development activities. And after the petitioner develops the entire property, the landowner would grant to the petitioner a share in the land proportionate to the built-up area for which petitioner is entitled. (paras 24 and 25) 

The Telangana High Court also noted that the JDA clearly stipulated that in event of default on the petitioner’s part, all the rights on the property remained with the landowner. This stipulation in favor of the landowner, as per the High Court, was an indication that the title over the property on the date of execution of JDA remained with the landowner and not with the petitioner. (para 26) 

The Telangana High Court referred to another clause of JDA which stipulated that on completion of development, the petitioner was to transfer possession of the completed units to the landowner. Thereafter, the landowner would sign conveyance deed with the petitioner to transfer the undivided share of land towards investment, efforts, cost of construction incurred by the petitioner in developing the land. The High Court correctly interpreted the terms of JDA to note that under a JDA, the petitioner offered construction services to the landowner. And for the said services the landowner transferred development rights to the petitioner and the same cannot be equated with outright sale of land. Based on the above reading of the various clauses of JDA, the High Court concluded that:    

From plain reading of the JDA that was entered into between the two parties, what is apparently visible is that, there was no outright sale of land being effectuated and the JDA per se cannot be considered merely as a medium adopted by the landowner selling his land and the JDA does not lead to sale of land by itself. After the entire development activities are carried out for the investment made by the petitioner for realizing what he has invested, he would be permitted to sell/dispose of certain developed properties constructed in execution of the JDA. (para 29)

The High Court further reinforced its conclusion by observing that the transfer of undivided land in favor of the petitioner only happens after issuance of the completion certificate indicating that the services rendered by the petitioner in execution of JDA were supplied prior to issuance of competition certificate and were amenable to GST. The High Court was here impliedly referring to Entry 5(b), Schedule II, CGST Act, 2017 which makes construction services amenable to GST when they are provided before issuance of completion certificate. 

As regards the petitioner’s challenge to the validity of Notification, the High Court noted that Notification does not create a charge but only states the time at which the GST is payable is when the developed area is transferred by the petitioner to the landowner and not at the time of execution of JDA. And the Notification did not suffer from the vice of excessive delegation.  

Conclusion 

The Telangana High Court’s interpretation and understanding of JDA is correct. The petitioner’s contention that execution of JDA itself transfers ownership rights was incorrect as the various stipulations in JDA made it evident that the transfer in title only happens once the developer has fulfilled the obligations of developing the land in question. The petitioner erroneously equated the right to receive a part of the land on completing the development of land with the actual transfer of land. 

Penalties for e-way bills cannot be imposed in absence of Mens Rea: Allahabad HC

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The Allahabad High Court in a recent judgment took the view that the GST Department cannot impose a penalty on taxpayers – under Section 129(3), CGST Act, 2017  – for not possessing e-way bills in the absence of an intention to evade tax. The High Court held that the essence of any penal imposition is linked to the presence of mens rea which was clearly absent as revealed from the facts and records of the impugned case. In stating so, the High Court aligned with an emerging jurisprudence on Section 129 that requires intent to evade tax as an essential requirement for passing orders under Section 129(3). 

Facts  

The petitioner, an authorized dealer of Steel Authority of India Ltd (‘SAIL’) purchased a bar of TMT on 19.02.2021. Tax invoices were issued by SAIL to the petitioner, and they contained the registration number of the transportation vehicle. The petitioner claimed that the e-way bills could not be generated at the onset of transportation since there were glitches in the e-way bill system of the Department. The e-way bills were generated on 20.02.2019 and 21.02.2019. The petitioner’s claim was that the e-way bills were presented at the time of interception of goods before the issuance of showcause notice and before passing the detention order. Aggrieved by the orders of detention passed on 21.02.2019 and 20.10.2019 by the Assistant and Additional Commissioner respectively, the petitioner approached the Allahabad High Court. 

Allahabad High Court Quashes Orders of Detention 

The Allahabad High Court noted that the relevant question was: despite the petitioner failing to generate the e-way bills on time, did it have an actual intent to evade payment of tax? The High Court cited relevant precedents to note that for proceedings under Section 129(3) intent to evade tax is mandatory and that even in the absence of an e-way bill if there is no discrepancy in the accompanying documents and no intent to evade tax, then penalty cannot be levied. Courts have also held that not generating Part B of the e-way bill is a mere technical error, and if the accompanying invoice has the vehicle details, then it can be reasonably concluded that the taxpayer has no intent to evade tax. Based on an examination of the relevant precedents, the High Court’s summation of the current legal position was: 

What emerges from a perusal of the aforesaid judgments is that, if penalty is imposed, in the presence of all the valid documents, even if e-Way Bill has not been generated, and in the absence of any determination to evade tax, it cannot be sustained. (para 15) 

As per the facts of the impugned case, the petitioner had generated both the e-way bills, one before detention and one after detention, but both before the order under Section 129(3) was passed. The Allahabad High Court noted, neither of the two orders contained a reasoning as to how and why an intention to evade tax was established. The High Court noted that the petitioner was made to suffer due to a technical error without there being an intent to evade tax on petitioner’s behalf. Elaborating on the importance of establishing intent to evade tax before imposing penalties under Section 129(3), CGST Act, 2017, the High Court observed: 

A penal action devoid of mens rea not only lacks a solid legal foundation but also raises concerns about the proportionality and reasonableness of the penalties imposed. The imposition of penalties without a clear indication of intent may result in an arbitrary exercise of authority, undermining the principles of justice. Tax evasion is a serious allegation that necessitates a robust evidentiary basis to withstand legal scrutiny. The mere rejection of post-detention e-Way Bills, without a cogent nexus to intention to evade tax, is fallacious. (para 18) 

The Allahabad High Court further added that it was incumbent on the tax authorities to distinguish technical errors from deliberate attempts to avoid tax. And that mere technical errors that do not have financial implications should not lead to imposition of penalties. 

Conclusion 

The Allahabad High Court through its judgment in the impugned case follows a line of judicial precedents – and the High Court duly cited some of them – that underline the need to establish or indicate the presence of intent to evade tax before tax authorities pass an order under Section 129(3) of CGST Act, 2017. Either the officers are not understanding the scope and objective of the provision or are deliberately ignoring the requisite conditions of the provision before passing orders under Section 129(3). Irrespective, the burgeoning no. of cases by taxpayers claiming violation of Section 129(3) indicates a lack of adherence to the law laid down by Courts in an increasing no. of cases.  

Post-Supply Discounts Cannot be Included in Transaction Value: Madras HC

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The Madras High Court recently observed that post-supply discounts offered by a supplier to the recipient cannot be included in the transaction value/value of supply for levying GST. The High Court distinguished between subsidy offered by a third party and a discount and noted that a discount by itself cannot qualify as subsidy.  

Introduction to Taxability of Discounts under GST  

Before discussing the case, I think it is important to provide contest of the type of discounts envisaged under CGST Act, 2017 and their manner of inclusion and exclusion from the value of supply. 

Section 15, CGST Act, 2017 contains stipulations as to which amounts can or cannot be included in the value of a taxable supply, where both the recipient and supplier are not related, and price paid or payable is the sole consideration for supply. Section 15(3)(a) states that discounts offered at the time of or before a supply shall not be included in the value of supply in such discount has been duly recorded in the invoice in respect of such supply. Section 15(3)(b), which was in focus in the impugned case, states that a discount after a supply has been effected shall not be part of value of supply if: (i) such discount is established in terms of agreement entered into at or before the time of such supply and specifically linked to relevant invoices; (ii) ITC as is attributable to the discount on the basis of the document issued by the supplier has been reversed by the recipient of the supply. 

Typically, discounts offered before or at the time of supply are excluded from the value at the time of generation of invoice itself. While discounts offered after the supply cannot, due to their nature be reflected in the invoice per se, but the value can be reduced by filing credit notes thereafter and linking it to the supply in question. It is the latter kind of discount that was the Madras High Court’s focus in the impugned case.  

Facts and Arguments  

The facts of the impugned case were not clearly stated by the Madras High Court in its judgment, but from what one can gather it seems: the petitioner challenged the inclusion of volume discount in the value of supply and the Revenue Department’s stance that the discount was a ‘private’ subsidy. Under Section 15(2)(e) subsidies directly linked to the price are included in the value of supply except subsidies provided by the Central and State Governments. The petitioner’s case was that it paid GST on the transaction value in the invoice which includes the volume discount, and the Revenue Department cannot add the volume discount over and above the invoice amount as it would to double taxation on the same amount. The petitioner contended a manufacturer would incentivize the distributors to sell mobile phones on a discount and such discount cannot be construed as a subsidy under Section 15(2)(e). 

The Revenue Department seems to have added the discount value to the invoice by claiming that the discount is a subsidy by a third party and amounts to consideration under Section 2(31)(b), CGST Act, 2017. The Revenue Department’s order under challenge before the High Court also mentioned that the after-supply discount must be as per the terms agreed and based on certain parameters and workable criteria. And a discount cannot be offered at the complete discretion of the supplier. The Madras High Court held that the order was unsustainable in law and liable to be quashed. 

Madras High Court Decides 

The Madras High Court made three observations that were vital to the dispute and are our understanding of when post-supply discounts can or cannot be included in the value of supply: 

First, the High Court observed that Section 15(2)(e) of CGST Act, 2017 will only come into play when a part of the consideration payable for the supply is subsidized by third party other than the Central Government or the State Government. While this is a straightforward interpretation of the impugned provision, it is a necessary clarification for frequently some basic and obvious things need to be made clear to the Revenue Department. (para 45)

Second, the High Court observed that a subsidy will be embedded in the transaction value only if it disguised as a discount. However, a discount by itself will not qualify as a subsidy. (para 48) A discount will only be part of the transaction value if it is on account of a subsidy offered by a third party. The High Court was trying to distinguish the discount offered by a supplier on their own account and a discount offered due to contribution by a third party; the latter being a ‘private’ subsidy that was liable to be included in the value of supply and the former being a discount that as per Section 15(3)(a) and/or Section 15(3)(b), whichever is applicable, not being part of the value of supply. While this an important distinction, it still leaves open the question of how a discount is to identified and distinguished from a ‘private’ subsidy. We do know that a discount does not by itself become a subsidy, but we don’t know when they transform into a subsidy. 

Third, the High Court stated the discount can only impact the transaction value of the supplier and its recipient. And there is no scope for confusing the further supply made by the recipient and the sale it effected to its customers and the discount it offered. (paras 51-52) 

As I stated above, the High Court did not narrate the facts clearly, so it is difficult to understand some of its observations especially the third observation listed above. But, after reading the judgment, it does seem that in this case this is what transpired: 

A supplied goods to B, which included the price of volume discounts and GST was calculated by including the value of volume discounts. When B further supplied those goods to C on a discounted value, the Revenue Department included the discount value offered by B in the transaction value of supply made from A to B contending that the discount offered by B to C was a subsidy provided by A to B. This not only caused the possibility of double taxation of the discount, but also inter-relating two different supplies and not treating them independent of each other. The value of supply from A to B was calculated in reference to the value of supply from B to C and the High Court frowned on the same. 

Conclusion 

The Madras High Court’s judgment is succinct on its findings on law and almost equally precise on the facts, though the latter lack clarity which is an impediment to completely understanding its approach to the underlying dispute. Despite the hiccups in comprehension, the High Court’s findings on law are welcome and clarify an important aspect on the GST implications of discounts and their impact on the value of supply.             

NAA is Constitutional, Individual Orders Can be Challenged on Merits: Delhi HC

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Introduction 

This post focuses on the Delhi High Court’s recent judgment upholding the constitutionality of NAA, a statutory body established under Section 171, CGST Act, 2017. I’ve examined the working of NAA in detail here and here, where I’ve highlighted the problematic aspects of NAA’s various orders. In this post, I will summarize the petitioner’s arguments and the State’s response. At the outset, it is important to highlight that NAA’s functions and powers have been transferred to Competition Commission of India w.e.f. 01.12.2022. While the petitions challenging the constitutionality of NAA have been pending before the Delhi High Court for a while now, a decision on the constitutionality of NAA after it has passed hundreds of orders and has practically ceased to function is also an instance of how tax justice for taxpayers is elusive and littered with delays, even under a ‘transformative’ and ‘game changing’ legislation such as GST.  

The Delhi High Court, in upholding the constitutionality of NAA, has not broken any new ground. In fact, it has blunted various persuasive arguments of the petitioner’s by choosing to adopt a pedantic and literal interpretive approach that saves the face of NAA and paves path for almost unfettered delegated legislation in tax legislations. The High Court has used similar vocabulary as NAA deployed in its orders to defend its constitutionality. The High Court has floundered in engaging with the true import and scope of petitioner’s arguments and instead has provided them the concession of challenging the NAA’s individual orders on merits which is at best a half-baked solution to a constitutional challenge. 

The centrepiece of the petitioner’s case was that Section 171, CGST Act, 2017 and Rules 122, 124, 126, 127, 129, 133, 134 of CGST Rules, 2017. The notices and orders of NAA imposing penalties on taxpayers were also challenged, but the constitutional validity of the aforesaid provisions was the main subject of the impugned decision. And the constitutionality of the provisions and the related arguments also are the focus of this post.  

Section 171(1), CGST Act, 2017 states that any reduction in rate of tax on any supply of goods or services or the benefit of input tax credit shall be passed on to the recipient by way of commensurate reduction in prices. Section 171(2) empowers the Central Government, on recommendations of the GST Council, to constitute an authority or empower an existing authority to examine if the mandate of sub-section (1) is being followed by the registered taxpayers. It was in exercise of its powers under Section 171(2) that the Central Government constituted NAA.        

The relevant Rules under challenge inter alia provided that NAA shall consist of one Chairperson and four technical members, it shall have the power to determine the procedure and methodology to determine if the mandate of Section 171(1) is being adhered to, amongst other relevant details about initiation and conduct of proceedings by NAA. 

Arguments 

The petitioner’s arguments traversed a wide array of issues. The challenge to Section 171 involved arguments that Section 171 prescribed a financial extraction akin to a tax which cannot be levied via subordinate legislation; Section 171 suffered from the vice of excessive delegation as it delegates essential legislative functions to the Government and contains no legislative or policy guidance as to how NAA is to exercise its powers; and further while Section 171 delegates to the Government the power to determine the powers of NAA, the Government via Rule 126 has further delegated to the NAA the power to determine the methodology and procedure to adjudicate on violation of Section 171. The petitioners also contended that the term ‘commensurate’ has not been defined under Section 171 and meaning of profiteering hinges on the phrase ‘commensurate reduction in prices’ resulting in a circular reasoning in the provision. Section 171 was accordingly challenged as being violative of Article 14 and 19(1)(g). 

The other leg of challenges involved the opaque and uncertain methodology adopted by NAA in determining the violation of Section 171. And that in the absence of any legislative guidance, NAA acted arbitrarily demanding taxpayers reduce prices without disclosing specifics of its methodology. The petitioner highlighted the methodology adopted by NAA in profiteering complaints involving real estate companies to underline the arbitrariness in NAA’s approach. The petitioner also compared India’s anti-profiteering mechanism with that of Malaysia and Australia to underline their argument that the anti-profiteering mechanism in India was a price control mechanism interfering with their right to determine prices of goods and services.  

Petitioners further highlighted that there was no time prescribed for taxpayers to reduce prices, there was no judicial member in NAA even though it performed a quasi-judicial function, taxpayers did not have a statutory right to appeal against NAA’s orders. And that NAA did not allow any other method to pass on benefits of reduced taxes except via reduction in prices. For example, altering the sizes of products to pass on benefits of reduced taxes to customers had been rejected by NAA except in one case. 

The State justified the legal framework of NAA as constitutional. The arguments were, to a large extent, comparable to the rhetoric that NAA deployed in its orders in justifying its constitutionality. Some of the arguments that the State adopted were: Section 171 was enacted in pursuance of the Directive Principles of State Policy under Articles 38, 38(b), and 38(c) which inter alia mention economic justice and prevention of concentration of resources in a few hands. Section 171 was within the legislative competence of the Union under Article 246A of the Constitution. The State interpreted Section 171(1) differently from that of the petitioners and argued that it provided amply policy direction. It was argued that Section 171(1) clearly states that ‘any reduction’ in tax rates must be passed to recipients by ‘commensurate reduction in prices.’ And that only minutiae had been left for delegated legislation. The State defended NAA’s powers to determine the procedure and methodology stating that it clearly flows from Section 171 and this not a case of excessive delegation.

The State also challenged petitioner’s argument that only reduction of prices cannot be the sole method via which the taxpayers can adhere to the mandate of Section 171. The State argued that taxpayers should be allowed to ‘only’ reduce price in compliance of Section 171 and NAA is justified in interpreting the provision which is least prone to tax avoidance as allowing other methods may involve manipulation by taxpayers. 

The State argued that Section 171 did not provide for a price control mechanism as argued by petitioners and it only influenced the indirect price component and did not restrict the freedom of suppliers to determine the price. And that NAA was only indulging in fact finding exercise and absence of a judicial member was not fatal to its orders. Neither can absence of a time for which taxpayers are to maintain reduced prices can be the basis of challenging the constitutionality of NAA. 

I’ve tried to summarise the important arguments raised by both sides; but, in my view, the core challenge was of excessive delegation. Section 171 does not provide legislative and policy guidance to NAA and Rule 126 questionably allows NAA to determine its own procedure and methodology, a methodology which the State argued it ‘may’ determine but was not obligated to determine. The issues of excessive delegation and opaqueness/arbitrariness in the NAA’s functioning were the overarching themes in the arguments. And State defended the constitutionality of Section 171 by interpreting it in a manner as if it was the most precise and comprehensive statutory provision. 

Delhi High Court Upholds NAA’s Constitutionality 

The Delhi High Court gave multiple reasons for upholding the constitutionality of NAA. The High Court dutifully cited the principles that presumption of constitutionality guides adjudication of constitutionality of a provision and that in matters of economic laws the legislature has a wide latitude, both principles duly entrenched in Indian jurisprudence via a long line of judicial precedents. Further, the High Court observed that GST heralded a new indirect tax regime in India to reduce the cascading effect of multiple indirect taxes. On these broad and abstract principles there is little to find fault with the High Court’s approach. It is the specifics that make this judgment deficient in reasoning. I highlight some of the deficiencies below.  

To begin with, one of petitioner’s argument was that the key phrases used in Section 171 ‘commensurate’ and ‘profiteering’ are defined in reference to each other, a case of circular reasoning. The High Court invoked the State’s reference to Directive Principles of State Policy, the objective of GST to reduce cascading effect of taxes, and the dictionary meaning of ‘commensurate’ to conclude: 

Section 171 of the Act, 2017 mandates that whatever is saved in tax must be reduced in price. Section 171 of the Act, 2017 incorporates the principle of unjust enrichment. Accordingly, it has a flavor of consumer welfare regulatory measure, as it seeks to achieve the primary objective behind the Goods and Services Tax regime i.e. to overcome the cascading effect of indirect taxes and to reduce the tax burden on the final consumer. (para 100)

Again, what the Delhi High Court says here is correct, but it does not address the petitioner’s simple argument that in absence of precise phrases or clear definitions the provision suffers from arbitrariness as it allows NAA complete discretion to interpret and implement the provision. Also, the constitutionality of a provision cannot be defended by reference to its intended objectives. The fact that Section 171 was enacted in reference to Directive Principles of State Policy or for consumer protection is irrelevant to the argument that it suffers from arbitrariness. The High Court places undue emphasis on the intent of the provision to adjudicate its constitutionality and sidestepped the core issue of the provision lacking sufficient policy guidance.  

The second questionable aspect of the judgment was in the Delhi High Court’s conclusion that Section 171 contains a clear legislative policy and does not delegate essential legislative functions. And the High Court added that not only does Section 171 prescribe a clear legislative policy it also contains all the navigational tools, checks and balances to guide the authority tasked with its workability. Section 171 creates a substantive obligation on taxpayers to not profiteer, but the authority to implement the mandate, NAA, has under the relevant rules been given the power to determine its own procedure, determine the scope of complaints and investigation, determine the methodology to determine profiteering – without being under an obligation to determine it or disclose it – which cannot be reasonably traced to the statutory provision. And a statutory right to appeal against NAA’s order is absent. In such a scenario, the High Court’s interpretation that Section 171 contains sufficient policy guidance, imbibes Section 171 with more substance than it contains. 

Further, Section 171(3) states that the authority, i.e., NAA shall exercise such  powers and discharge such functions as may be prescribed. And under Rule 126, the Central Government empowers NAA to determine the methodology and procedure for determining if the taxpayers are passing on benefits of reduced taxes to consumers. It is indeed difficult to not see that the delegated legislation function assigned to the Central Government was further passed to NAA leading to a situation where NAA framed Rules to determine its own powers and determine the methodology to determine profiteering. In my view, this is a clear case of impermissible delegated legislation where an authority has been entrusted to self-determine scope of its own powers circumscribed by a thinly worded statutory provision. Also, it is worth pointing out that the Methodology that NAA prescribed in exercise of its powers was not a methodology that reliably informed the taxpayers of how the reduced prices are to be calculated and unreasonably suggested that increased costs of compliance for taxpayers are immaterial to determine compliance with Section 171. The Delhi High Court’s observations on this issue are: 

Moreover, as per Rule 126 NAA ‘may determine’ the methodology and not ‘prescribe’ it. The substantive provision i.e. Section 171 of the Act, 2017 itself provides sufficient guidance to NAA to determine the methodology on a case by case basis depending upon peculiar facts of each case and the nature of the industry and its peculiarities. Consequently, so long as the methodology determined by NAA is fair and reasonable, the petitioners cannot raise the objection that the specifics of the methodology adopted are not prescribed. (para 126) 

What is the difference between ‘determining’ and ‘prescribing’? NAA, in its orders has observed that it is not obligated to prescribe a methodology since different fact situations require different approaches. And it is only supposed to determine the methodology as per the facts, an approach which the Delhi High Court endorses in the above paragraph. But, is it justifiable to rely on the said interpretation to conclude that the methodology need not be revealed to the taxpayers?

The above observations of the Delhi High Court where it almost completely agreed with the State’s arguments and in fact NAA’s own defence of its own constitutionality, pretty much sealed the case for the petitioners. The High Court though concluded that all other arguments of the petitioners’ also did not have a persuasive value. For example, the High Court observed NAA’s investigations could be validly extended beyond the scope of original complaint (para 159), time limit to complete investigations were only directory and not mandatory despite use of the word ‘shall’, (para 158 )and that NAA was a fact-finding body and absence of judicial members was not fatal to its constitutionality. (para 146) The last finding collapses on an examination of NAA’s function and High Court’s own interpretation of Section 171 as a provision that creates a substantive obligation on taxpayers. (para 100) Clearly, in implementing Section 171, NAA is adjudicating on rights and obligations of consumers and taxpayers and yet NAA’s functions were interpreted to be confined to mere fact-finding exercise. While the actual fact-finding was undertaken by the investigative arm of the NAA, i.e., DGAP. And if a body like NAA has powers to impose penalties and cancel registrations, do they not impact taxpayer obligations? How is it defensible to accord it a status of mere fact-finding body performing functions of expert determination? 

Finally, while the State and the Delhi High Court were correct in stating that absence of a right of appeal is not fatal to the constitutionality of a body, it needs to be stated that the absence of such a right should have made the High Court more cautious that there are enough checks and balances to protect taxpayer rights at the NAA level. Instead, by upholding the arguments that investigation by DGAP can traverse beyond the subject matter of complaint, the time limit to complete investigation is directory in nature and otherwise misreading the mandate and nature of NAA, the Delhi High Court has granted a wide leeway to the State in matters of anti-profiteering in particular and generally in drafting tax legislations with unfettered delegated legislative powers to the executive.

Conclusion 

I’ve argued previously that NAA adopted self-serving interpretation of Section 171, relied on opaque and arbitrary methodology to adjudicate complaints of profiteering and that its manner of creation was tinged with unconstitutionality. The Delhi High Court has concluded otherwise, though as I’ve highlighted above, its reasoning and interpretive approaches are not beyond reproach. The concession that the petitioners have received from the Delhi High Court is that NAA adopted a flawed methodology in adjudicating complaints of profiteering in real estate projects. The High Court observed that NAA relied on the difference between ratio of ITC and turnover in pre and post-GST periods, but there is no direct co-relation between ITC and turnover. And that varying expenses and nature of construction activity should have been considered by NAA. But, the impact of these observations will only be revealed when specific orders of NAA are challenged on merits. (para 129) Since a bulk of NAA’s orders related to the real estate sector, this is not insignificant, but still does not detract from the High Court’s flawed approach in engaging with the arguments on constitutionality of NAA.            

NCLT Cannot Declare an Assessment Order as Void: Kerala HC

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The Kerala High Court in a recent judgment used strong words against an order of NCLT, Kochi Bench for declaring an assessment order passed under KVAT Act as void ab initio. The High Court observed that NCLT did not have the power to declare an assessment as void ab initio and quashed its order. I describe the case below and state whether there was a need for Kerala High Court to use harsh words against NCLT. 

Before I describe the case, it is important to reiterate, for context, that Section 14, IBC, 2016 imposes a moratorium on initiation of any coercive legal action against the corporate debtor. Section 14(1)(a) empowers the adjudicating authority to declare a moratorium for prohibiting the institution of suits or continuation of suits against the corporate debtor including any judgment, decree, or order in any court of law. While Section 33(5), IBC, 2016 states that where a liquidation order has been passed, no suit or other legal proceeding shall be initiated by or against the corporate debtor except with prior approval of the adjudicating authority.   

Facts 

The petitioner, Deputy Commissioner (Works Contract) approached the Kerala High Court impugning an order of NCLT, Kochi passed on 26.10.2022 under Section 33(5), IBC, 2016. 

The company, the corporate debtor, against whom an assessment order was passed was under the liquidation process under IBC, 2016 and was admitted into the Corporate Insolvency Resolution Process (‘CIRP’) on 25.10.2019. The CIRP effected public announcement on 03.11.2019 and a moratorium was declared under Section 14, IBC, 2016 which was to be effective on 02.12.2021, the day on which liquidation order was passed.

For the year 2015-16, the GST Department found certain discrepancies relating to VAT payments by the corporate debtor. For the year 2015-16, the corporate debtor was issued a notice under Section 25, KVAT. The assessment against the corporate debtor was completed via order dated 25.02.2021 and total VAT liability was determined as 11,76,35,626.70/- On a Form-C dated 04.01.2022 the Department claimed the said tax amount before the resolution professional appointed for the corporate debtor under IBC, 2016. 

Against the Form-C application, the corporate debtor filed an application before NCLT, Kochi under Section 33(5), IBC, 2016 seeking permission to prefer an appeal against the order of assessment dated 25.02.2021. 

While the petitioner had filed an application seeking permission to file an appeal against the order of assessment, NCLT, Kochi declared the assessment order as void ab initio. NCLT stated that the assessment order had been passed in violation of the prohibition contained in Section 14(1)(a), IBC, 2016 and directed that the tax claim be considered independently without considering the assessment order passed on 25.02.2021. Against the NCLT’s order, the State approached the Kerala High Court.  

Kerala High Court Expounds on the Law 

The issue before the Kerala High Court was: whether the NCLT is empowered to declare an assessment order as void ab initio under Section 33(5) of IBC? The straightforward answer is no, and the High Court arrived at the same conclusion, but not before it had a few harsh words to say about NCLT, Kochi. 

The law on the interface of tax claims and IBC has been expounded by various judgments, with the Courts on various occasions clarifying the overriding effect of IBC over all other legislations including tax laws. The Kerala High Court relied on two judgments, VM Deshpande case and the Sundaresh Bhatt case. The latter case was decided in the context of interplay of IBC, 2016 and Customs Act where the Supreme Court had clarified that the custom authorities can only determine the tax, interest, fine or any penalties that are due but cannot enforce their claims during the period of moratorium. This was the ratio of VM Deshpande case too, though decided in the pre-IBC period. 

The Kerala High Court relied on the above two precedents to enunciate that the law was that the tax authorities have the limited power to determine the quantum of tax and make assessments, but not enforce its demands. Accordingly, it rightly held that: 

Thus, after declaring the moratorium, there is an embargo on enforcing the demand, but there is no embargo under Section 14, read with Section 33(5) of the IBC, for determining the quantum of tax and other levies, if any, against the Corporate Debtor. (para 5.3) 

Applying the said dictums to the impugned case meant that during the moratorium the VAT assessments could have been finalized against the corporate debtor, but the said tax assessments could not be enforced. And in enforcing the said tax demands, there was a violation of Section 14, IBC, 2016. In seeking permission of NCLT to appeal against the enforcement of the tax demands, the corporate debtor was trying to enforce the law as laid down by Supreme Court in previous decisions. The NCLT went a few steps ahead and declared the tax assessment as void ab initio and non-est in law. A power that it certainly does not possess under any of the relevant provisions of IBC, 2016. NCLT should have merely provided the corporate debtor a permission to appeal, while not commenting on the assessment order per se. The Kerala High Court correctly quashed NCLT’s order and in doing so termed it as preposterous, untenable, and showing a lack of basic understanding of law. (para 6)

Conclusion 

The Kerala High Court correctly interpreted and applied the relevant precedents to the facts of the case. Equally, it was right in terming the NCLT’s order as untenable in law. The High Court in striking down the NCLT’s order also commented on the quality of persons in NCLT and their competence. I’m sure there are more suitable and appropriate channels to address the quality of personnel in NCLT instead of commenting on their legal aptitude in a judgment. I do not agree with NCLT striking down the assessment order and NCLT should have approached the issue in a more considered manner, but the Kerala High Court’s comments on NCLT personnel in the judgment could have been avoided as well.         

Whose Money is it? Madras HC Says Deposit of Cash Amounts to Payment of GST

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The Madras High Court, in a recent decision, observed that the money in Electronic Cash Ledger (‘ECL’) of the taxpayer belongs to the exchequer since the money was deposited in the name of the exchequer in the form of GST. The High Court held that it cannot be said that the Government can only utilize the money in the ECL only when the taxpayer files the monthly return, i.e., GSTR-3B. The High Court reasoned that the taxpayer cannot keep the money in ECL forever and deprive the exchequer the right to utilize the amount deposited in the Government’s account on the pretext of non-filing of GSTR-3B. The High Court’s decision is at variance with the Jharkhand High Court’s decision where it was held that mere deposit of amount in the ECL does not amount to payment of tax to the exchequer and a taxpayer discharges tax liability only on filing of GSTR-3B. 

Facts 

On the date of introduction of GST, i.e., 01.07.2017, the petitioner had Rs 33 crores (rounded off) in balance as CENVAT credit which could not be transitioned to GST regime due to technical difficulties faced by the petitioner in filing TRAN-1. Since the credit was not transitioned and reflected as ITC, the petitioner could not file GSTR-3B for July 2017 within the due date. The inability to file GSTR-3B for July 2017 disentitled the petitioner from filing GSTR-3B for August to December 2017 due to the bar under Section 39(10). Accordingly, the petitioner discharged the GST liability for the period of July 2017 to December 2017 by depositing amounts in the Electronic Cash Ledger and Electronic Credit Ledger under appropriate heads of CGST, SGST, IGST into the government account. Once the petitioner was able to file TRAN-1, the GST portal allowed it to file GSTR-3B for July 2017 to December 2017 which it did on 24.01.2018. 

The petitioner was served with a recovery notice on 16.05.2023 demanding payment of interest of Rs 24 crores (rounded off) for belated filing of returns for the period of July 2017 to December 2017. The petitioner’s representation against the recovery was rejected by the Department and the validity of recovery proceedings formed the subject of the writ petition before the Madras High Court. 

The issue, simply put, was whether the petitioner was liable to pay interest on the amount it regularly – and before due date – deposited in the ECL, but in respect of which GSTR-3B was filed belatedly. 

Arguments 

The petitioner’s argument was that the deposit of cash in ECL is tantamount to deposit of money with the Government since that deposit is made into the Government’s treasury account maintained with the RBI. The petitioner relied on Section 49(1) and Explanation (a) to Section 49 of the CGST Act, 2017. Section 49(1) states that: 

Every deposit made towards tax, interest, penalty, fee or any other amount by a person by internet banking or by using credit or debit cards or National Electronic Fund Transfer or Real Time Gross Settlement or by such other mode and subject to such conditions and restrictions as may be prescribed, shall be credited to the electronic cash ledger of such person to be maintained in such manner as may be prescribed. 

And Explanation (a) to Section 49 states that ‘the date of credit to the account of the Government in the authorized bank shall be deemed to be the date of deposit in the electronic cash ledger.’ 

Based on the above two provisions, the petitioner argued that once money is deposited in ECL, it cannot be withdrawn by the taxpayer at their sweet will since it is money deposited in the Government account maintained with RBI. And a refund from ECL can only happen under Section 54 and, at the same time, if the Department wishes to recover any amount from a taxpayer they can do it via a journal entry for appropriation of amount against the pending tax demand. The petitioner added that merely because debit of ECL is a mere journal entry does not take away from the fact that tax is paid to the Government at the time of remittance under Section 49(1). And since they had deposited amount in ECL on time which amounts to payment of tax, there was no case to levy an interest on them under Section 50, CGST Act, 2017. 

The Department, on the other hand, argued that ‘cash’ which is paid vide a challan is a deposit into the petitioner’s own ECL and is not tax paid to the Government unless the said amount is debited by filing GSTR-3B returns. The Department relied on Section 49(3) which states that the amount available in ECL can be used towards making any payment towards tax, fee or interest and that tax under different heads, i.e., CGST, SGST, IGST is paid only on filing GSTR-3B and debiting the amount from ECL. It is only when GSTR-3B is filed that the tax liability is discharged. 

As is evident, the fulcrum of arguments was whether deposit of cash in the Govt’s account and subsequent credit in ECL amounts to payment of tax or whether debit from ECL at the time of filing of GSTR-3B amounts to payment of tax.  

Madras High Court Favored the Petitioner 

The Madras High Court favored the petitioner by interpreting Section 39, Section 49, and Explanation (a) to Section 49 and to support its interpretation the High Court also relied on the challan used to deposit cash and the format of GSTR-3B. 

Section 39(1) states that:

Every registered person, other than an Input Service Distributor or a non-resident taxable person or a person paying tax under the provisions of section 10 or section 51 or section 52 shall, for every calendar month or part thereof, furnish, in such form and manner as may be prescribed, a return, electronically, of inward and outward supplies of goods or services or both, input tax credit availed, tax payable, tax paid and such other particulars, in such form and manner, and within such time, as may be prescribed, on or before the twentieth day of the month succeeding such calendar month or part thereof. 

The Madras High Court emphasised on the phrase ‘tax paid’ and noted that Section 39 makes it clear that in GSTR-3B the detail of tax paid has to be furnished which is paid via GST PMT-06 challan. And since the challan mentions RBI as the beneficiary bank, any amount deposited vide the challan goes to RBI under the name of GST where the Government maintains an account. The High Court then examined the columns and details provided in GSTR-3B which contain a column of tax paid in cash. And thereby concluded that it was necessary that tax should have been paid via GST PMT-06 ‘prior’ to filing of GSTR-3B since there is a column in GSTR-3B which requires furnishing the details of tax paid in cash. 

The Madras High Court then cited Section 39(7) which states as follows:

Every registered person, who is required to furnish a return under sub-section (1) or sub-section (2) or sub-section (3) or sub-section (5), shall pay to the Government the tax due as per such return not later than the last date on which he is required to furnish such return.” 

The Madras High Court’s interpretation was novel and vital to the case. As per the High Court, Section 39(7) requires that the tax be paid before the due date of filing monthly return – GSTR-3B – and that filing of the monthly return is not important, but that tax should be paid before the due date of filing of monthly return. (paras 24-26) The High Court thus decoupled the payment of tax with filing of GSTR-3B and derived this conclusion from the manner in which Section 39(7) is phrased. 

The Madras High Court subsequently interpreted Section 49(1) and Explanation (a) to mean that the date on which account of the Government is credited is deemed to be the date of deposit in the ECL. The High Court noted that this implies that at the first step the Government’s account is credited and then the taxpayers’ ECL. And that latter was merely a journal entry or an accounting entry.   

The Madras High Court’s combined reading of Section 39(1), 39(7), 49(1) and Explanation (a) led it to the conclusion that the payment of tax must be made before the filing of GSTR-3B and the payment is made in the Government’s authorized account maintained with RBI. This inevitably led the High Court to the conclusion that GST is paid when money is deposited in the Government’s account and not when GSTR-3B is filed. The High Court further reinforced its interpretation by reasoning that if one were to hold that the Government cannot utilize GST collection until the taxpayer files GSTR-3B then the taxpayer can retain the amount in ECL forever by delaying filing of returns. Thus, the High Court reasoned that the moment money is deposited by generating the challan GST PMT-06, it is the money of the exchequer. The amount deposited is GST collected by a taxpayer on behalf of the Government and the Government’s right to utilize it cannot be postponed until the taxpayer files GSTR-3B. (paras 35-41)     

Jharkhand High Court Favored the Department 

On a similar issue, the Jharkhand High Court in M/s RSB Transmissions case, referred to the same provisions, but interpreted them differently to conclude that tax is paid at the time of filing of GSTR-3B and not when cash is deposited in ECL. The Jharkhand High Court referred to the deposit of money vide a challan, Explanation (a) to Section 49 and noted that the deposit of cash was a deposit in the ECL of the taxpayer and did not amount to discharge of tax liability. While, as per the Madras High Court, the money deposited vide a challan is deposited into the Government’s account maintained in RBI and thereafter shown in ECL via a journal entry. 

The Jharkhand High Court also differed in its interpretation of Section 39(7) by observing that no tax can be paid before filing of GSTR-3B. The Jharkhand High Court noted that it is only on filing of GSTR-3B that the ECL is debited towards payment of tax, interest or penalty. The High Court emphasised on the term ‘deposit’ used in Section 49(1) and 49(3) which states that the amount available in ECL ‘may be’ used for payment towards any tax, interest, interest, penalty or fees. The Jharkhand High Court viewed the ECL as an ‘e-wallet’ where the taxpayer can deposit cash anytime by generating the requisite challans. And refund of the said cash can be obtained under the procedure prescribed under the Act. (para 15)   

Importance of Proviso to Section 50 

Section 50(1) and the Proviso also received differing interpretations from the Madras High Court and the Jharkhand High Court primarily because the way the former interpreted Section 39(7). 

Section 50(1) states that: 

Every person who is liable to pay tax in accordance with the provisions of this Act or the rules made thereunder, but fails to pay the tax or any part thereof to the Government within the period prescribed, shall for the period for which the tax or any part thereof remains unpaid, pay, on his own, interest at such rate, not exceeding eighteen per cent., as may be notified by the Government on the recommendations of the Council. (emphasis added)  

The Madras High Court interpreted the term prescribed period in reference to Section 39(7) cited above and held that Section 39(7) provides that tax should be paid before due date of filing monthly return, i.e., GSTR-3B. And, the said tax, as the Madras High Court had noted is deposited vide a challan. This fact becomes crucial in interpreting the Proviso to Section 50(1) which states: 

Provided that the interest on tax payable in respect of supplies made during a tax period and declared in the return for the said period furnished after the due date in accordance with the provisions of section 39, except where such return is furnished after commencement of any proceedings under section 73 or section 74 in respect of the said period, shall be levied on that portion of the tax that is paid by debiting the electronic cash ledger.  (emphasis added)

The Jharkhand High Court had relied on the latter part of Proviso to conclude that tax is actually paid when the ECL is debited. The Jharkhand High Court had observed: 

This again goes to show that only on filing of GSTR-3B return, the debit of the tax dues is made from Electronic Cash Ledger and any amount lying in deposit in the Electronic Cash Ledger prior to that date does not amount to discharge of tax liability. A combined reading of Section 39 (7), 49 (1) and Section 50(1) read with its proviso and Rule 61(2) also confirms this position. (para 15)

The Madras High Court expressed its disagreement with the above interpretation and noted that Section 50(1) read with Section 39(7) provides for payment of tax via cash and its Proviso cannot be interpreted to mean that tax is paid only on debit of ECL. The Madras High Court noted that the Jharkhand High Court’s interpretation of the Proviso is contrary to Section 50(1) which is not permissible since a Proviso does not travel beyond the main provision, only carves out an exception to it. (paras 55 and 58)

The Jharkhand High Court’s interpretation of Proviso to Section 50 flowed from its interpretation of Section 39(7) and since the Madras High Court interpreted Section 39(7) differently, its interpretation of Proviso to Section 50 differed accordingly. Though, the latter seems more aligned with the bare text of the provisions. 

Conclusion

The Madras High Court’s conclusion was premised on its understanding that deposit of cash vide challan is a deposit in the Government’s account which it can utilize immediately. The Madras High Court viewed GSTR-3B as the ‘ultimate proof’ for discharge of tax liability of the taxpayer, a return that quantifies and formalizes the tax payment made earlier. (para 38) The Jharkhand High Court viewed the deposit vide challan as a deposit in the e-wallet of the taxpayer. (para 15) The Jharkhand High Court did not pay attention to the first few words of Explanation (a) to Section 49(1) which state ‘the date of credit to the account of the Government …’. The import of these words, in my view, is that the cash is deposited in the account of the Government and by the deeming fiction the date of deposit is treated to be the date of deposit in ECL of the taxpayer. The cash deposit happens in the Government’s account which is merely reflected in the ECL later. And via a journal entry caused by GSTR-3B, the remainder amount, if any, is shown in ECL which can be refunded to the taxpayer. The Jharkhand High Court was also remiss in not paying adequate attention to the phrase ‘tax paid’ used in Section 39(1) and which the Madras High Court corrected, to some extent.   What then is the purpose of GSTR-3B? In my view, the Madras High Court is correct in observing that tax liability is quantified on filing of GSTR-3B even though the tax is deposited before the filing of GSTR-3B. This is because, as the petitioners argued before the Madras High Court, a taxpayer cannot simply withdraw money from ECL unless the prescribed procedure is followed. And a proper officer would not ordinarily allow withdrawal from ECL if there is outstanding tax liability. The cash so deposited, is de facto in the Government’s control. To conclude, it suffices to say that the Jharkhand High Court erred in stating that tax cannot be paid before filing of GSTR-3B while the Madras High Court has accorded less than deserved importance to GSTR-3B, though it does not detract from the fact that the latter’s view reflects a more accurate reading of the law. 

Section 16, CGST Act is Constitutional: Kerala HC

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The Kerala High Court recently[1] dismissed a taxpayer’s challenge that Section 16(2)(c) and Rule 36(4) of CGST Rules, 2017 were violative of Article 14 and unconstitutional. The High Court ruled that the taxpayer’s challenge was vague, and the impugned provisions did not suffer from the vice of manifest arbitrariness and were not unconstitutional.   

Facts 

The brief facts of the case are: taxpayer was denied ITC under the CGST and SGST Acts on the ground of difference in GSTR 2A and GSTR 3B returns. The Assessing authority levied interest, penalty, and initiated recovery proceedings against the taxpayer. The taxpayer challenged the assessment order and the constitutional validity of Section 16(2)(c) and Rule 36(4).

Section 16(2)(c) states that no registered person shall be entitled to ITC in respect of any supply of goods or services unless the tax charged in respect of such supply has been actually paid to the Government either in cash or through utilization of ITC admissible in respect of such supply. Rule 36(4) states that ITC to be availed by a registered person in respect of invoices or debit notes the details of which have not been furnished by suppliers in GSTR-1 shall not exceed 5% of eligible ITC available in respect of invoices or debit notes the details of which have been furnished by the suppliers. 

Since the judgment didn’t mention in detail the arguments of the parties, it is difficult to decipher the exact ground on which the constitutional challenge was made by the taxpayer. One can only glean the arguments from the Kerala High Court’s reasoning and its conclusion.  

Decision 

The Kerala High Court articulated four reasons to dismiss the taxpayer’s challenge. 

First, the High Court noted that ‘it is settled’ that ITC is a benefit/concession and not a right extended to a dealer. And that ITC can only be claimed by a taxpayer as per the conditions prescribed in the statute. (para 5) And that the State in exercise of its rule making powers can provide additional conditions for availing the concession. This view aligns with recent decisions wherein ITC has been labelled as a concession thereby providing the State ample, if not infinite space, to impose conditions on taxpayers before they can successfully claim ITC.  

Second, the High Court relied on the doctrine of deference to tax statutes, encoded in Indian tax jurisprudence and is dutifully invoked by Courts without scrutinizing the merits of the doctrine. In the impugned case, the High Court noted there was need for judicial restraint before interfering with tax statutes unless the statute was manifestly unjust or glaringly unconstitutional. (para 10)

Third, the High Court rejected the taxpayer’s claims that Section 16(2)(c) and Rule 36(4) of CGST Rules, 2017 were violative of Article 14 on the ground that the argument was vague. The High Court further noted that neither did the provisions discriminate between the purchaser and seller nor were they manifestly arbitrary and were not contrary to Article 14. 

Fourth, the High Court relied on the facts to observe that the taxpayer did not produce tax invoice as required by Section 16 despite various opportunities, nor did it appear for personal hearing and equally did not discharge the burden on a dealer as per Section 155, CGST Act, 2017. Section 155 states that where any person claims that he is eligible for ITC, the burden of proving such claim shall lie on such person. Since the taxpayer did not meet the prescribed conditions under Section 16 and did not provide the documents, the High Court was correct in holding that the taxpayer did not discharge the burden under Section 155. 

Conclusion 

The Kerala High Court’s decision is defensible and cogent when it invokes Section 155 and non-fulfilment of the conditions of Section 16. However, the High Court is on tricky ground when it claims that ‘it is settled’ ITC is a concession. Undoubtedly, some of recent decisions have taken a similar view, but it is ordinarily incumbent on a Court to acknowledge the divergent interpretations and that ITC has not always been interpreted to be a concession. Similarly, the invocation of doctrine of deference to tax statutes, while well-established, needs to be scrutinized as to its relevance if not its merits in constitutional challenges to tax statutes. Surely, there is room to suggest that the doctrine is not holy grail in all constitutional challenges to tax statutes. The High Court was remiss in not paying adequate attention to the aforementioned facets of the reasoning.               

[1] Nahasshukoor v Asst Commr, Second Circle, SGST, Colletorate 2023:KER:69725. 

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