Introduction
Recently, the Supreme Court in M/S Armour Security (India) Ltd v Commissioner, CGST, Delhi East Commissionerate & Anr (Armour Security case) clarified scope of the terms ‘proceedings’ and ‘same subject matter’ used in Section 6(2)(b) of the Central Goods and Services Act, 2017 (CGST Act of 2017). The need to clarify the import of both phrases was necessary to ensure that taxpayers are not subjected to parallel proceedings by the Union and State GST officers on the same subject matter.
The judgment largely succeeds in earmarking the scope of both phrases but feels like a missed opportunity.
In this article, I suggest that Armour Security case offered the Supreme Court a chance to elucidate on the inter-relatedness of various proceedings under CGST Act of 2017. Instead, the Supreme Court focused narrowly only on Section 6(2)(b) and eschewed a broader examination of inter-dependency of various provisions of the CGST Act of 2017. I also argue that the Supreme Court’s guidelines are not a substantive contribution to the challenge of preventing parallel proceedings. GST is the first time that both the Union and States have jurisdiction over the same taxpayer base. Overlaps, frictions, and disputes in administrative actions of both entities are expected and addressing them will require time, deft adjudication, and interpretive balance. Broad guidelines for tax administration wherein courts urge respective tax authorities to ‘communicate with each other’ is a simplistic approach to a novel and complex issue.
Scope and Aim of Section 6(2)(b), CGST Act of 2017
Section 6 of the CGST Act of 2017 performs two crucial roles in GST administration:
first, Section 6(1) ensures ‘cross empowerment’ wherein officers appointed under the State Goods and Services Tax Act or the Union Territory Goods and Services Tax Act are authorized to be the proper officers for the purposes of the CGST Act of 2017 as well. This ensures that appointment and orders of proper officers have effect under both the Union and State GST laws simultaneously.
second, Section 6(2)(b) ensures a ‘single interface’ for the taxpayer by providing:
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. (emphasis added)
Section 6(2)(b) serves a salutary purpose of ensuring that a taxpayer is not subjected to overlapping investigations by two different authorities and is accountable to only one authority, i.e., there is a ‘single interface’ for the taxpayer. But ensuring a single interface is not as straightforward. The Supreme Court in Armour Security case had to interpret the phrases ‘proceedings’ and ‘same subject matter’ to clarify the powers of officers and various actions that they are allowed or restrained from initiating against a taxpayer.
Issuance of Summons is not Initiation of Proceedings
In the impugned case, Armour Security had received a show cause notice (‘SCN’) under Section 73 of the CGST Act of 2017. The SCN raised a demand for tax, interest, and penalty for excess claim of ITC. Approximately three months later the premises of Armour Security were searched by another authority. Armour Security subsequently received summons under Section 70 of the CGST Act of 2017 requiring one of its directors to produce relevant documents. Armour Security challenged the latter on the grounds of lack of jurisdiction in view of Section 6(2)(b).
The Supreme Court in Armour Security case clarified that issuance of summons to a taxpayer under Section 70 of the CGST Act of 2017 does not amount to initiation of proceedings. The Supreme Court endorsed the view of the Allahabad High Court in GK Trading v Union of India & Ors where it was held that Section 70 of the CGST Act of 2017 empowers a proper officer to issue a summon to obtain evidence or document in any inquiry. The High Court added that the use of the word ‘inquiry’ in Section 70 had a specific connotation and was not synonymous with use of the word “proceedings” used in Section 6(2)(b) of Uttar Pradesh GST Act (pari materia with Section 6(2)(b) of the CGST Act of 2017).
The Supreme Court reasoned that summons do not culminate an investigation but are merely an information gathering device during an ‘inquiry’ to determine if proceedings should be initiated against the taxpayer. If and any information received consequent to summons can influence initiation of proceedings. Thus, the Supreme Court correctly held that issuance of summons does not amount to proceedings. In stating the above, the Supreme Court largely reiterated the reasoning and conclusion of the Allahabad High Court. But let’s suppose proceedings against a taxpayer are pending before the Union GST officers. During the pendency, State GST officers issue summons to the taxpayer. And the latter discover new information as part of their inquiry; information that justifies initiation of proceedings. Wouldn’t pending proceedings before the former constrain the latter from initiating proceedings against the latter? It would defeat the entire purpose of obtaining the information via summons. In such a situation, it seems the State GST officers can only transfer the information that they obtained to the Union GST officers who initiated the proceedings.
‘Proceedings’ Galore under CGST Act of 2017
In interpreting the scope of ‘proceedings’, the Supreme Court chose to focus only on Section 6(2)(b) of the CGST Act of 2017. The Supreme Court’s narrow lens on Section 6(2)(b) is a defensible judicial choice but has left a few issues unaddressed. I will take two examples from the CGST Act of 2017 to highlight the crucial nature of inter-relatedness of various proceedings.
First, let me cite Section 83 of the CGST Act of 2017 which states:
Where, after the initiation of any proceeding under Chapter XII, Chapter XIV or Chapter XV, the Commissioner is of the opinion that for the purpose of protecting the interest of the Government revenue it is necessary so to do, he may, by order in writing, attach provisionally, any property. Including bank account, belonging to the taxable person … (emphasis added)
Chapter XIV of the CGST Act of 2017 contains Section 70 which empowers a proper officer to summon any person. Chapter XII also contains Section 67 empowering a proper officer to conduct inspection, search and seizure. So, it is not unreasonable to deduce that as per Section 83(1) cited above, issuance of summons and conduct of inspection, search and seizure amounts to proceedings. Initiation of either of the two will satisfy the pre-condition of exercising the power of provisional attachment under Section 83(1).
So, after Armour Security case, this is the position: issuance of summon under Section 70 of the CGST Act of 2017 does not amount to initiation of ‘proceedings’ under Section 6(2)(b); but as per Section 83(1), issuance of summons continues to be a ‘proceeding’. Not only is the taxpayer liable to respond to the summons, but the taxpayer becomes susceptible to provisional attachment immediately after issuance of summons. The current position of law is unlikely to be a respite for the taxpayer.
Second, Section 66 of the CGST Act of 2017 empowers an officer not below an Assistant Commissioner to direct a special audit ‘at any stage of scrutiny, inquiry, investigation or any other proceedings before him’. Does issuance of a summon satisfy the pre-condition for a special audit under Section 66 too? Section 66 is under Chapter XIII of the CGST Act of 2017, so we can argue that proceedings under this provision does not have the same meaning as ascribed to it under Section 6(2)(b) or Section 83(1). And that the Armor Security case needs to be read narrowly. But there is no clear or definitive answer yet.
The term ‘proceedings’ has been used in several places in different contexts throughout the CGST Act of 2017. One can argue that the context of the provision may alter the meaning of the term ‘proceeding’ and the Supreme Court’s observations in Armour Security case must be understood solely in the context of Section 6. It is a fair argument but does not set aside the possible interpretive disagreements that may arise. Not the least because of the inter-related nature of various proceedings under the CGST Act of 2017 – an issue that the Supreme Court chose to not address.
Scope of ‘Same Subject Matter’
The bar against parallel proceedings under Section 6(2)(b) of the CGST Act of 2017 is only regarding ‘the same subject matter.’ The meaning of same subject matter thus acquiring a crucial role in preventing parallel proceedings. The Supreme Court in the impugned case was clear that proceedings are initiated only on issuance of SCN. And it is only in a SCN that various grounds and challenges alleged against an assessee are penned down for the first time. Based on its above observations about SCN, the Supreme Court concluded that:
The expression “subject matter” contemplates proceedings directed towards determining the taxpayer’s liability or contravention, encompassing the alleged offence or non-compliance together with the relief or demand sought by the Revenue, as articulated in the show cause notice through its charges, grounds, and quantification of demand. Accordingly, the bar on the “same subject matter” is attracted only where both proceedings seek to assess or recover an identical liability, or even where there is the slightest overlap in the tax liability or obligation. (para 86)
Thus, same subject matter is determined on the basis that an authority has already proceeded on an identical tax or offence and the demand or relief sought subsequently is identical.
The Supreme Court’s delineation of what constitutes the same subject matter flows logically from its identification of issuance of SCN as the initiation of proceedings against an assessee. And it is the demand mentioned in a SCN that will be the reference point to determine if the latter set of proceedings are on the same subject matter.
There is little to dispute about the Supreme Court’s interpretation of scope and meaning of the ‘same subject matter’. But whether the above understanding will be applied appropriately – by GST officers and courts – to various fact situations will only be known in future.
Supreme Court’s Guidelines
The Supreme Court did not stop at interpreting the term proceedings and same subject matter. Though the interpretation would have sufficed given the issue involved in the impugned case. The Supreme Court went ahead and issued guidelines in its over eagerness to ensure that parallel proceedings against a taxpayer are avoided. The Supreme Court’s guidelines are perhaps the weakest part of Armour Security case. Mostly, because they were not needed. Additionally, the guidelines are a simplistic take on an issue that requires frequent administrative decisions and co-ordination. A task that the judiciary is not best suited to accomplish. The Supreme Court as part of its guidelines urges the tax authorities to decide inter se who should have jurisdiction over the proceedings against the taxpayer if it comes to their notice that a taxpayer is subjected to parallel proceedings. And enjoins an assessee to bring parallel proceedings to the notice of tax authorities by writing a complaint to have that effect. Equally, the Supreme Court clarified that both authorities have a right to pursue a matter until it is established that it concerns the same liability and demand. In other words, both authorities are allowed to pursue their actions until they can ascertain if they relate to the same subject matter.
Maybe – by way of abundant caution – the Supreme Court felt the need to communicate certain obvious issues to the Revenue Department. But, on balance, it seems that the guidelines are superfluous and could have been easily avoided. The Revenue Department – if it feels necessary – is better positioned to issue suitable guidelines on how to address the issue of parallel proceedings, prevent duplication of efforts, and ensure that the taxpayer is not subject to repeated and unnecessary queries on the same subject matter. There are likely to be finer nuances of dual tax administration that the Revenue Department can appreciate as opposed to a judicial forum. And some of the issues may need time and experience to be ironed out adequately.
Conclusion
The Armor Security case is a welcome addition to the jurisprudence on parallel proceedings. It clarifies some crucial elements regarding proceedings and subject matter. And, at the same time, provides additional guidance to the taxpayers and tax authorities on how to ensure better communication when caught in the crosshairs of multiple proceedings. While the guidelines seem superfluous, the Supreme Court’s narrow focus on Section 6(2)(b) may create a bigger uncertainty. The meaning of ‘proceedings’ used in other provisions of the CGST Act of 2017 can either be aligned with or be at variance with the Armor Security case. Either way, there is no clear answer for now.
