Allahabad HC Quashes Letter Issued by YEIDA Demanding Payment of GST

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Allahabad High Court recently allowed a writ petition[1] and quashed a letter issued by the Advisor to Yamuna Expressway Industrial Development Authority (YEIDA) requiring the petitioner to pay GST of 18% on the premium of Rs 3.80 crores charged by the YEIDA against an institutional plot allotted to the petitioner. The High Court inter alia observed that the YEIDA did not have the authority to demand payment of GST. 

Introduction 

The petitioner’s case was that it be allowed to claim tax exemption under Notification No. 12/2017 dated 28 June 2017 read with Notification No. 32/2017 dated 13 October 2017. The petitioner argued that YEIDA had doubt as to the applicability of the Notification to the case and had applied to Authority for Advance Rulings (‘AAR’) which had decided in petitioner’s favor. YEIDA, on the other hand, defended its demand of tax from the petitioner on the ground that the petitioner did not fulfil the requirement of exemption and further that its demand for tax was only provisional in nature and the petitioner could seek refund from the Revenue Department. 

Allahabad HC Decides 

Allahabad High Court examined the relevant entries of the Notifications wherein the exemption was claimed by the petitioner. The entries allowed exemption to upfront amounts such as premium, salami, development charges, etc. leviable in respect of the service of long term lease provided by the Development Corporations/Undertakings. The High Court observed that the plain letter of the law did not allow any doubt to arise with regard to applicability of the exemption to the impugned case. The only doubt that YEIDA had was whether the exemption was applicable to allotment of plots made for public health purposes. To this end, the High Court noted that YEIDA had approached AAR with a specific query, i.e., whether GST was chargeable on premium and lease rent on plots allotted to hospitals against lease granted for 30 years. And AAR had clarified that the GST was not applicable. 

Despite the advance ruling issued by AAR which was not challenged, YEIDA issued a letter to the petitioner demanding deposit of GST @18%. It was this letter which was the subject matter of challenge. 

The Allahabad High Court observed that the stand taken by YEIDA was wholly unfounded in law. And that any doubt that arose from the language of the exemption notification was resolved by AAR. Further, the High Court noted that the AAR had confirmed GST exemption subject to the conditions mentioned in the Notification. But a look at the Notification revealed that the legislature had chosen to give unconditional exemption with respect to upfront amounts paid for such plots. Thus, it concluded that: 

Consequently, the letter dated 24.08.2018 issued on behalf of YEIDA is wholly unfounded in law and also in facts. Besides absence of conditions imposed by the legislature while granting exemption, no fact allegation has been made in the said communication of any specific condition having been violated by the petitioner. (para 22) 

The Allahabad High Court thereby quashed the letter issued by YEIDA and ordered that any amount paid by the petitioner in pursuant of such communication be refunded.  

Conclusion 

The impugned case is one of those cases where one wonders why the dispute arose in the first place. YEIDA’s doubt – superfluous to begin with – as regards applicability of the exemption was clarified by AAR, but it still demanded payment of GST from the petitioner despite no claim by the Revenue Department that the transaction was exigible to GST. YEIDA’s argument that the demand for tax was ‘provisional’ and the petitioner could seek a refund missed the point completely. Why should the tax be paid if there is no liability to pay tax in the first place? Whether it will be refunded or not is immaterial.    

[1] M/S Ram Kamal Healthcare Pvt Ltd v Union of India & Ors 2023:AHC: 191485-DB. 

Sanctity of IBC Prevails Over Tax Claims: NCLT Mumbai

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In a recent order[1], NLCT Mumbai has ruled that the time bound process of Insolvency and Bankruptcy Code, 2016 (‘IBC’) will prevail over payment of belated Government dues, i.e., taxes. NCLT in the impugned case only reiterated an opinion expressed earlier, but the Revenue Department tends to need frequent reminders about certain elemental aspects of law. 

Facts 

In the impugned case, the Department of State (Tax) (‘Revenue Department’) filed an application under Section 60(5), IBC against the Resolution Professional of M/s Calchem Industries Pvt Ltd seeking directions that the Resolution Professional should deal with their claims and process them as per IBC. The Revenue Department had filed their claim with the Resolution Professional via letter/email on 08.10.2021 and the same was rejected by the latter on the ground that the Committee of Creditors had already approved the Resolution Plan on 13.10.2020. 

The Revenue Department assailed the rejection of their application as illegal and relied on Regulation 14 of IBBI (Insolvency Resolution Process for Corporate Person) Regulations, 2016. As per Regulation 14 the Resolution Professional shall make best estimate of the amount of claim based on information available to him. The Revenue Department argued that since their claims are statutory dues, the Resolution Professional should have incorporated the same in his estimate. The Revenue Department cited certain precedents to support its claim and also argued, rather strangely, that the delay in their application was caused since they were following the due procedure of law. (para 14)

The Resolution Professional, on the other hand, largely defended its rejection of the Revenue Department’s application on the ground of delay. The Resolution Professional informed NCLT that the public announcement dated 1.10.2019 had clearly stated that the last date for filing of claims was 14.10.2019 while the Revenue Department filed its initial claim on 8.10.2021.  

NCLT Decides 

NCLT cited the RPS Infrastructure case[2] to reiterate that undecided claims cannot make the CRP process endless. And it concluded that: 

Therefore, any interruption in the CIR process at this belated stage by allowing the application might open the floodgate for the similar claims, causing unnecessary delays in the CIRP process. (para 22)

NCLT, engaged with the various precedents cited by the Revenue Department in some detail and observed that one of the arguments made in previous cases was that since government dues would always be reflected in the books of account of the corporate debtor, the Resolution Professional should take them into account in its estimate. NCLT distinguished facts of the impugned case from the precedents and observed that out of the total amount claimed by the Revenue Department only some amount was reflected in the books of account on the date of initiation of CIRP. And that the assessment orders for other amounts were passed after initiation of CIRP. Thus, the latter could not have been reflected in the books of account of the corporate debtor at the time of initiation of CIRP. 

NCLT emphasised on the objective of IBC which aimed for insolvency resolution of the corporate debtor in a time bound manner and that priority accorded to Government dues was different as compared to the Companies Act. In other words, government dues were not in top hierarchy under the waterfall mechanism of IBC. While the latter was not germane to the issue at hand, NCLT did well to remind the Revenue Department that is claims did not supersede ever other claim against the corporate debtor. NCLT, thus, disallowed the application of the Revenue Department except to the extent tax dues were reflected in the books of account of the corporate debtor on the date of preparation of the Memorandum of Information by the Resolution Professional. (para 27)

Conclusion 

NCLT’s judgment in the impugned case, is another in a series of decisions where the Revenue Department has been informed that its dues are not sacrosanct and need to be secured only as per the timelines, processes and waterfall mechanism provided in the IBC. While in the impugned case, the Revenue Department secured a partial victory, and rightly so, it is another in a disconcerting trend where the Revenue Department tends to think, almost incorrigibly, that its tax dues should be paid irrespective of what the letter of law says.  

[1] Department of State Tax v Resolution Professional of M/s. Calchem Industries (India Limited), IA/282/2022 & IA426/2022, available at https://nclt.gov.in/gen_pdf.php?filepath=/Efile_Document/ncltdoc/casedoc/2709138000222022/04/Order-Challenge/04_order-Challange_004_1696595733706984618651fff15f3463.pdf (Accessed on 13.10.2023). 

[2] RPS Infrastructure Ltd v Mukul Kumar & Anr (2023) ibclaws.in 102 SC. 

No Advertisement Tax on Name Boards or Sign Boards

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In a recent judgment[1], the Supreme Court set aside demand notices for advertisement tax issued by the Indore Municipal Corporation against the appellant. The demand notices for advertisement tax were issued to the appellant because they had displayed their name/sign boards outside their business premises which the Municipal Corporation deemed to be advertisement and thus liable to pay advertisement tax. The Supreme Court opined on the meaning of advertisement, cited relevant precedents, and concluded that sign boards do not constitute advertisements and are not exigible to advertisement tax. 

Facts 

The appellant in the impugned case was occupier of premises on AB Road, Indore and was carrying on the business of Hyundai passenger cars at the said premises. The appellant had displayed its trade name as well as the product and services offered by it in the premises where the business was being run. The Indore Municipal Corporation issued a notice to the appellant for recovery of advertisement tax for displaying the sign board at its premises. The notice was issued under the relevant Municipal Corporation statute read with the relevant Municipal Corporation advertisement by-laws. 

The appellant objected to the notice demanding advertisement tax on the ground that it was not displaying any advertisement but its own trade and business name. The appellant also argued that it was carrying on business outside the municipal limits of Indore and thus no tax was leviable on its activities. Appellant’s writ petition against the notices was rejected by the Madhya Pradesh High Court and it appealed before the Supreme Court. 

Arguments 

The appellant assailed the Madhya Pradesh’s judgment on various grounds: first, that the High Court relied on Bharti Airtel judgment[2] which was irrelevant to the facts at hand; second, mere display of name and business cannot amount to advertisement as the said information is only for identification purposes and providing information to the general public; third, the appellant contended that levy of advertisement tax on trade name would amount to violation of Article 19(1)(a) and Article 19(1)(g) of the Constitution 

The State, on the other hand, contended that appellant’s displaying their trade name along with the products and services offered by them amounted to advertisement as the said information was communicated to the public not only for information purposes but also for commercial exploitation. 

Supreme Court Opines on Meaning of ‘Advertisement’

The Supreme Court framed the primary issue as: whether display boards, sign boards or name boards as displayed by the appellants would constitute as advertisements? The incidental question, as per the Supreme Court, was whether all modes of display would amount to advertisement? To answer this question, the Supreme Court relied heavily on the ICICI Bank case[3] where the meaning of advertisement in a comparable context had been examined. The Supreme Court in ICICI Bank case had noted that an advertisement should have a commercial purpose or exposition and should indicate business of the displayer with a view to attract people to its goods or services. The Supreme Court in ICICI Bank case opined on the issue of whether signs that illuminated ATM centres would constitute as advertisements. It did not give a clear answer and observed that signs of ATMs provide information to public as to a facility available at the said place but could also be used indirectly for commercial exploitation for commercial purposes. And the answer to this issue would depend on facts of each case. 

The Supreme Court said the guidelines in in ICICI Bank case, would prima facie indicate that in the impugned case:  

… as dealers of Tata Motors and Hyundai Vehicles appellants have displayed their name board of respective business establishment which is also depicting the nature of the respective vehicles which are being sold and it would be inseparable part of the appellants’ business establishment. By mere mentioning the name of the product in which the business establishment is being run would not partake the character of the advertisement until and unless by such display customers are solicited. (para 18)

 The Supreme Court added that in the absence of any name board or sign board it would be impossible to identify establishments and the sign boards displayed by appellants on their business premises only provide general information of the products offered by them and not to solicit customers or induce general public to purchase their products.  

Finally, the Supreme Court made a curious statement. It noted that under the relevant statutory provisions the Municipal Corporation was not authorized to demand tax for display of information through name boards. And that legislative was not to levy tax on sign boards but only on advertisements. It then noted that:

            Even in such circumstances, it is held that it amounts to advertisement, such levy would be without authority of law and would find foul of Article 19(1)(a), 19(1)(g) and Article 265 of the Constitution of India. (para 18) 

Does the above cited sentence mean that a sign board even if amounts to advertisement would not have been taxable under the relevant provisions? It is a curious sentence since it renders futile the entire argument made by the State. If the State, under the relevant provisions, could not tax a sign board even if it amounted to an advertisement what was the need to distinguish a sign board from an advertisement?  

Conclusion 

Presuming that distinguishing a sign board from an advertisement was crucial in the impugned case, it cannot be denied that distinguishing a sign board from an advertisement is a fraught exercise and the Supreme Court in ICICI Bank case was correct in laying down the broad parameters and stating that whether a particular information amounts to advertisement or not should be determined on the facts of each case. An attractive display of only the products and services offered by a business could amount to an advertisement in certain cases while it could be understood to be a mere sign board in other cases. In the impugned case, the Supreme Court favored the appellant relying on its assertion that its sign board was only aimed to identify its business and not solicit customers; though the distinction may not be as apparent in all cases. In ICICI Bank case, the Supreme Court noted that the non-commercial element of the illuminated ATM centre was that it was a public facility while in the impugned case the non-commercial element was that the sign board helps the general public identify a business place. It is reasonable to deduce from the above cases that if the non-commercial element dominates and is not intended to solicit customers it can be said to not amount to advertisement though the said issue can only be answered by looking at the signs in each case and after ascertaining the relevant facts. 

[1] M/S Harsh Automobiles Private Limited v Indore Municipal Corporation 2023 INSC 893. Available at https://main.sci.gov.in/supremecourt/2018/3032/3032_2018_8_1502_47486_Judgement_09-Oct-2023.pdf (Last accessed on 12 October 2023).  

[2] Bharti Airtel v State of Madhya Pradesh WP No. 2296 of 2012, decided on 12.01.2015. (This judgment addressed the issue of whether advertisement tax could be collected by appointing agents and was not relevant to the facts of impugned case. It was incorrectly relied on by the High Court and the Supreme Court correctly said that the Bharti Airtel case was irrelevant to the impugned case.). 

[3] ICICI Bank and Another v Municipal Corporation of Greater Bombay (2005) 6 SC 404. 

Allahabad HC Opines on Section 129, CGST Act, 2017

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In a recent case[1], the Allahabad High Court has reiterated an essential condition to invoke Section 129, CGST Act, 2017, i.e., an intention to evade tax. While a similar observation has been made by Supreme Court in M/s Satyam Shivam Papers case[2], the High Court’s reinforcement is perhaps necessary due to repeated transgressions by the Revenue Department.

Facts 

In the impugned case, the petitioner was engaged in the business of manufacture and sale of industrial grade steel components such as channels, beams, etc. The petitioner was transporting the said goods to M/s Maa Ambey Steels with the relevant tax invoices, e-way bills, etc. During transport, the said goods were intercepted, and the relevant officers found that the e-way bill accompanying the goods had been cancelled by the purchaser, M/s Maa Ambey Steels. In the absence of a valid e-way bills, the goods were seized. The petitioner subsequently explained to the Revenue Department that all the relevant e-way bills had been completed but the it was unaware of the fact that e-way bills had been cancelled by the purchaser. The petitioner tried to convince the Revenue Department that the transaction in question was genuine and goods were being sold by a registered dealer to another registered dealer. Dissatisfied with the petitioner’s response, the Revenue Department passed an order under Section 129(3), CGST Act, 2017 and a penalty was imposed on the petitioner. The petitioner assailed the said order via writ petition before the Allahabad High Court. 

No Intention to Evade Tax 

The Allahabad High Court engaged with the arguments of the petitioner and the Revenue Department. The petitioner’s primary argument was that while an order was passed against it under Section 129 whereby a penalty imposed, but in the said order there was no reference to the petitioner’s intention to evade tax. The petitioner argued that in the absence of an intent to evade tax, the penalty should have been imposed on it under Section 122(ix), CGST Act, 2017 and not Section 129(3), CGST Act, 2017. (para 5) The Revenue Department, on the other hand, argued that Section 129 starts with a non-obstante clause and thus it overrides every other provision of CGST Act, 2017. (para 7) And that transporting goods without a valid e-way bill attracted Section 129, CGST Act, 2017. 

The Allahabad High Court observed that once the dealer had informed the Revenue Department of the attending and mediating circumstances that led to cancellation of the e-way bill, it was a minor breach on the petitioner’s end. The purchaser had cancelled the e-way bill due to valuation issues of the goods. And the petitioner had sold the goods in question to another purchaser subsequently. And thus the High Court observed that: 

The authority could have initiated proceedings under section 122 of the CGST Act instead of proceedings under section 129 of the CGST Act. Section 129 of the CGST Act must be read with section 130 of the said Act, which mandate the intention to evade payment of tax. Once the authorities have not observed that there was intent to evade payment of tax, proceedings under section 129 of the CGST Act ought not to have been initiated, but it could be done under section 122 of the CGST Act in the facts & circumstances of the present case. (para 10) 

The Allahabad High Court further added that while Section 129 deals with detention and seizure of goods and Section 130 with confiscation of goods; a purposive reading of both the provisions deals indicates that the legislature intended that an intent to evade tax is sine qua non to initiate proceedings under the aforesaid provisions. (para 11) 

Conclusion

The Allahabad High Court’s observations in the impugned case are not unprecedented. The Supreme Court in M/s Satyam Shivam Papers case had observed that the goods in question could not be transported in time due to factors beyond the taxpayer’s control and thus an intent to evade tax could not be attributed to the taxpayer. It is not unsurprising that an elemental issue needs reiteration by different Courts repeatedly to underline the legislative intent and scope of the provision. Hopefully, this judgment will prove constructive in enhancing the Revenue Department’s understanding of the scope of Section 129 and by extension, of the scope of Section 130 of CGST Act, 2017.    

[1] M/s Shyam Sel and Power Ltd v State of UP and Others 2023 LiveLaw (AB) 374. 

[2] Assistant Commissioner (ST) & Others v M/s Satyam Shivam Papers Pvt Ltd (2022) 134 taxmann.com 241.  

Gujarat AAAR Disallows ITC on Mandatory CSR: Provides Superfluous Reasoning

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Gujarat Appellate Authority for Advance Ruling (‘Gujarat AAAR’) in a recent ruling[1] has concluded that the applicant was not allowed to claim ITC on inputs and input services for mandatory expenditure made in pursuance of Section 135, Companies Act, 2013. The answer to this question should have been obvious after the amendment to CGST Act, 2017 via the Finance Act, 2023. However, the Gujarat AAAR referred to GST Council meetings, IT Act, 1961 in an unnecessary exercise of providing superfluous reasons for its conclusion. 

Introduction 

The applicant, in the first instance, approached Gujarat Authority for Advance Ruling (‘Gujarat AAR’) to seek answer to the following question: whether the inputs and input services procured by the applicant to undertake mandatory CSR activities as required under Section 135 of the Companies Act, 2013 qualify as being in the course and furtherance of business and are eligible for ITC under Section 16, CGST Act, 2017. The Gujarat AAR answered in the negative and primarily relied on the definition of CSR under Company (CSR Policy) Rules, 2014 to hold that as CSR activities are excluded from the normal course of business activities of the applicant, ITC cannot be claimed for such activities. 

The applicant appealed to Gujarat AAAR and assailed the Gujarat AAR’s interpretation on various grounds. The applicant, for example, correctly challenged the Gujarat AAR’s decision on the ground that there was no nexus between the definition of CSR under Company (CSR Policy) Rules, 2014 and eligibility to claim ITC under Section 16, CGST Act, 2017. The applicant also alternatively argued that Section 16, CGST Act, 2017 uses the phrase ‘in course and furtherance of business’ while Company (CSR Policy) Rules, 2014 use the phrase ‘normal course of business’ and that Gujarat AAR erred in interpreting both the phrases to mean the same thing. 

Gujarat AAAR’s Reasoning and Conclusion

As stated above, the answer to the applicant’s question should have been straightforward with the Gujarat AAAR relying on Section 139, Finance Act, 2023 which introduced the following clause to Section 17(5), CGST Act, 2017:

“fa) goods or services or both received by a taxable person, which are used or intended to be used for activities relating to his obligations under corporate social responsibility referred to in section 135 of the Companies Act, 2013;

Section 17(5), CGST Act, 2017 enumerates the situations in which ITC is blocked, and the insertion of above clause in Section 17(5), CGST Act, 2017 means that goods or services or both used to fulfil mandatory CSR obligations will not be eligible for ITC. And as a result of this deeming fiction, mandatory CSR activities will not be considered as activities ‘in the course of business’.

Instead, the Gujarat AAAR chose to arrive at this conclusion via a circuitous route: it referred to the decision of the 48th GST Council to disallow ITC on mandatory CSR activities, cited a paragraph of the relevance of GST Council recommendations under the GST regime. (para 17) It then unnecessarily referred to the fact that IT Act, 1961 disallowed expenditure to an assessee for mandatory CSR activities. (para 16) Reference to all the above sources was and is perhaps necessary to resolve an ambiguity or an uncertainty in a statutory provision. In such cases, it is incumbent on adjudicating body to refer to additional sources in order to decide the case and/or answer specific queries. 

In the impugned case, the question was straightforward and the legal position amply clear after the amendment made to Section 17, CGST Act, 2017 via the Finance Act, 2023. Gujarat AAAR could have simply referred to the amended provision and answered the applicant’s query instead of stating multiple reasons and making unnecessary references to IT Act, 1961. Gujarat AAAR’s ruling in the impugned case is an example of arriving at the right conclusion by using superfluous reasoning. 

Conclusion 

It is hoped that the relevant authorities – AAR/AAAR – will adopt more precise reasoning and arrive at proper conclusions instead of referring to sources that have no relevance in interpreting a statutory provision that contains no ambiguity. It would prevent unnecessary confusion that may arise in the mind of taxpayers who are similarly situated or otherwise.   

[1] Re: M/s. Adama India Private Limited, GUJ/GAAR/APPEAL/2023/04, dated 26.09.2023. Available at https://taxguru.in/wp-content/uploads/2023/10/In-re-Adama-India-Private-Limited-GST-AAR-Gujrat.pdf (Last accessed on 10.10.2023).  

Calcutta High Court Sets Aside Order Denying ITC

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In a recent judgment[1], the Calcutta High Court set aside the order of the Revenue Department wherein the ITC of assessee was disallowed on the ground of mismatch in GSTR-2A and GSTR-3B. While Courts have, of late, been consistent in their stance that the mismatch in details between GSTR-2A and GSTR-3B cannot be a ground to deny ITC. In the impugned case, the High Court made similar observations suited to the facts of the case. 

Facts

In the impugned case, the assessee was registered under the Central Goods and Services Act, 2017 and the West Bengal Goods and Services Act, 2017. The assessee purchased several bidi leaves from various suppliers. In January 2021, physical inspection of the business premises was assessee was carried on and thereafter proceedings against the assessee were initiated under Section 73, CGST Act, 2017. Eventually, an order was passed against the assessee which was confirmed on appeal. The order rejected ITC claim of the assessee on the ground that the there was mismatch of ITC claimed in GSTR-3B and the same was not reflected in GSTR-2A.

Arguments and Decision 

The assessee claimed that ITC was denied and order passed against it without considering the documents, without providing the assessee an opportunity of being and also alleged violation of principles of natural justice. The assessee claimed that the transactions relating to purchase of bidi leaves were genuine and ITC cannot be denied on the ground that one of the suppliers errenously mentioned the wrong GSTIN number of the petitioner in the invoice. The assessee further argued that one of its suppliers had erroneously mentioned a B2B supply as a B2C supply and these errors could have been easily rectified by the State. 

The State countered the assessee’s assertion of violation of principles of natural justice enthusiastically. It argued that the assessee was served multiple notices to appear before it and present its case, but it either failed to appear or adopted delaying tactics and did not produce the relevant invoices. The Calcutta High Court with the State on this count and noted that fairness cannot be ‘a one way street’ and that the assessee cannot adopt an implacable approach and refuse to appear before adjudicatory authorities only to later complain of violation of principles of natural justice. 

Nonetheless, the Calcutta High Court observed that even in an ex-parte order, an adjudicating authority should proceed on the basis of records available and deal with the appeal on merits in accordance with the law. It observed that: 

Any mismatch ought to have been attempted to be ascertained from the records of the respondent authorities and their online portal. (page 6)      

The Calcutta High Court then referred to a Circular issued by CBIC on 27 December which inter alia provided for the approach to be followed by the Revenue Department where the supplier reports a supply as B2C instead of B2B in their GSTR-1. Since the steps prescribed in the said Circular were not followed, the High Court set aside the order denying the assessee’s claim of ITC. 

Conclusion 

While the Calcutta High Court’s order in the impugned case cryptic and is unlikely to be considered as ‘landmark’, there are three important issues that need to be underlined here: first, that the High Court’s observation that authorities should not deny ITC to assessee on cavalier grounds such as basic errors in GSTR-2A and should verify the claims of assessee by relying on their records and verifying from the online portal; second, the High Court’s emphasis on considering the relevant law and procedure even when passing an ex-parte order; third, the need for the Department of Revenue to follow the procedure and steps prescribed in its own Circulars and not act in violation or at least in defiance of those steps. It is important that other Courts note the aforesaid aspects in the impugned judgment and build on them to create a body of jurisprudence that holds that State account for denying ITC on flimsy grounds.      

[1] M/S Makhan Lal Sarkar and Anr v The Assistant Commissioner of Revenue, State Tax B.I. and Ors WPA/2146/2023, decided on 18.09.2023.  

Kerala HC Holds ITC Cannot be Denied Due to Difference in GSTR-2A and GSTR-3B

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In a recent judgment[1], the Kerala High Court has aligned with an emerging jurisprudence wherein the High Courts have held that under the GST regime a taxpayer’s ITC cannot be denied merely on ground of difference between GSTR-2A and GSTR-3B. 

In the impugned case, the Kerala High Court expressly noted the ratio of Supreme Court in M/s ECom Gill Coffee Trading Private Limited case[2] and the Calcutta High Court’s judgment in Suncraft Energy Private Limited case[3] to conclude that ITC of an assessee under the GST regime cannot be denied merely on the ground of discrepancy in GSTR-2A and GSTR-3B. It then cited a recent judgment of the Kerala High Court itself in Diya Agencies case[4] where the Kerala High Court had held that: 

In view thereof, I find that the impugned Exhibit P-1 assessment order so far denial of the input tax credit to the petitioner is not sustainable, and the matter is remanded back to the Assessing Officer to give opportunity to the petitioner for his claim for input tax credit. If on examination of the evidence submitted by the petitioner, the assessing officer is satisfied that the claim is bonafide and genuine, the petitioner should be given input tax credit. Merely on the ground that in Form GSTR-2A the said tax is not reflected should not be a sufficient ground to deny the assessee the claim of the input tax credit. The assessing authority is therefore, directed to give an opportunity to the petitioner to give evidence in respect of his claim for input tax credit. The petitioner is directed to appear before the assessing authority within fifteen days with all evidence in his possession to prove his claim for higher claim of input tax credit. After examination of the evidence placed by the petitioner/assessee, the assessing authority will pass a fresh order in accordance with law. (para 8) (emphasis added)

While the Kerala High Court’s 4-page order in the impugned case does not offer much scope for analysis, the primary aim of this blog post is two-fold: first, to record that Courts are increasingly taking the view that a taxpayer’s claim for ITC under GST regime cannot and should not be denied on grounds of discrepancy between GSTR-2A and GSTR-3B. This line of reasoning, if continued, will likely further underline the procedural nature of the former return and that it is only for information purposes and not the only basis of substantive claims. Courts are, until now, taking a reasonable view that ITC cannot be denied or affirmed merely based on information recorded and contained in GSTR-2A. Second, I wish to highlight that while in the impugned case the Kerala High Court relied heavily on the ratio in Diya Agencies case, it is important to highlight that in the latter case the Kerala High Court was expressly dealing with a situation where the taxpayer claimed that it was in possession of genuine invoices and bills that proved that transactions in question were genuine. Accordingly, in Diya Agencies case, the taxpayer was directed to appear before the concerned officer to prove the claim of ITC. While in the impugned case, no such fact was recorded by the Kerala High Court though it is not possible to know for sure if such claim was made by the taxpayer. Going forward, these factual distinctions may prove vital in reinforcing or diluting what is an emerging body of case law as regards the relevance of GSTR-2A in claiming ITC.     

[1] M/S Henna Medicals v State Tax Officer, Second Circle, SGST Department 2023: KER: 55979. 

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

[3] Suncraft Energy Private Limited v The Assistant Commissioner, State Tax, Ballygunge (2023) 8 TMI 174. 

[4] Diya Agencies v State Tax Officer 2023 (9) TMI 955. 

Andhra HC Sets Aside SCN: Holds that it is Vague and Dubious

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The Andhra Pradesh High Court in a recent judgment[1] set aside the showcause notice (‘SCN’) issued by the Revenue Department on the ground that the SCN was vague and dubious. The High court held that the SCN did not contain sufficient details and particulars to enable the taxpayer to reply or file appropriate objections. 

Facts 

The petitioner in the impugned case, M/s Sakhti Steel Industries Pvt Ltd, was in the business of trading TMT bars, billets and ferrous scrap and importing iron scrap from foreign countries. The parent company of the petitioner, M/s Sakhti Ferroy Alloys Pvt Ltd, manufactured TMT bars and billets. The petitioner used to purchase the TMT bars and billets from its parent company and sell them to various States. The petitioner stated that to maintain better operational efficiency it took on lease vacant land with small builtup area that belonged to its parent company and in a portion of the said premises the parent company also operated. The petitioner had obtained registration in Andhra Pradesh where the said premises were located. 

The concerned Deputy Assistant Commissioner visited the business premises of the petitioner and issued a SCN with allegations that the petitioner had obtained registration by ‘fraud, wilful misstatement or misrepresentation of facts’ and the petitioner was asked to file a reply within 7 days. The SCN was issued because the Deputy Assistant Commissioner based on commonality of premises of the petitioner and its parent company concluded that the former had obtained registration by fraud. The petitioner filed a reply denying all allegations of fraud and refuting the fact that its business was not genuine, but the report of Deputy Assistant Commissioner was accepted by the appellate authorities and petitioner’s registration was cancelled. Against the said orders, the petitioner approached the Andhra Pradesh High Court. 

High Court Sets Aside SCN 

The Andhra Pradesh High Court was precise and unforgiving in its observations about the conduct of the Revenue Department. The High Court cited Section 29, Andhra Pradesh Goods and Services Tax, 2017 and noted that the grounds on which the registration of a taxpayer can be cancelled are specifically enumerated in the provision. Some of the grounds in the provision are: registered taxpayer has contravened any of the provisions of the Act or rules made thereunder, not filing of returns and obtaining registration by fraud, misstatement or misrepresentation of facts. The High Court noted that the SCN issued to the petitioner only mentioned the latter and observed that grounds mentioned in SCN were vague, dubious and did not furnish enough details for the taxpayer to respond to them meaningfully. The High Court added that the purpose of SCN is to state the formal grounds of accusation to enable the accused to reply in satisfaction of principles of natural justice and equity. (para 7) The nature of SCN was enough for the High Court to conclude that principles of natural justice had bene flagrantly violated and that the ‘very foundation for invocation of cancellation is feeble as it has no legal sanctity.’ (para 7)

While the vagueness in the SCN was enough for the Andhra Pradesh High Court to quash it, the High Court nonetheless added that the petitioner in its reply to SCN had stated that it was not involved in any fake business and vouched for the authenticity of its bills and details of all its invoices involving purchases and sales. The petitioner was willing for its records to be scrutinized to disprove allegations of it running a fake business. However, the High Court observed, instead of resorting to such a ‘logical and legal exercise’ the authorities relied on the conjecture of the inspecting authority who suspected the petitioner to be involved in bill trading without movement of goods, for which there was no proper basis. (para 10)

The Andhra Pradesh High Court was thus unsparing in its comments on the Revenue Department’s conduct at the time of issuance of SCN and thereafter. And its observations about the lackadaisical approach of the Revenue Department were certainly not inaccurate. 

Conclusion 

The Andhra Pradesh High Court adopted a pro-taxpayer approach in the impugned case without detracting from the basic principles of law. It interpreted the relevant provision – Section 29, Andhra Pradesh Goods and Services Tax, 2017 – reasonably to cast a burden on the State to articulate specific grounds of accusation in a detailed manner to enable the taxpayer to respond meaningfully. Merely reproducing the language of the statutory provision in the SCN was not sufficient to prove that the ground for cancellation of taxpayers’ registration were satisfied. And the High Court went further to castigate the authorities to follow a logical path once the taxpayer replies to the SCN instead of merely providing their stamp of approval to the suspicions of the inspecting officer.    

[1] M/s Sakhti Steel Industries Pvt Ltd v Appellate Additional Commissioner Sales Tax (Tirupati) TS-496-HCAP-2023-GST. 

Understanding Orissa High Court’s Judgment in Safari Retreats Case

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This post is an attempt to understand the Orissa High Court’s judgment in Safari Retreats case.[1] While the judgment was pronounced by the High Court in April 2019, its current relevance stems from the appeal against the judgment being currently heard by the Supreme Court. This post is an attempt to understand the petitioner’s case as presented before the Orissa High Court and the nature of issues that the Supreme Court may have to engage with to decide the issue satisfactorily.  

Introduction 

The facts of the case were straightforward: petitioners were in the business of construction of shopping malls for the purpose of letting out the same to numerous tenants and lessees. Petitioners purchased huge quantities of materials and inputs for the purpose of construction, i.e., cement, plywood, wires, lifts, electrical equipment, etc. and paid GST on the said purchases. The petitioner completed construction of one of the shopping malls in Bhubaneshwar and decided to let out different units to various persons on a rental basis. The activity of letting out units amounts to a supply of service and is taxable under the relevant GST legislations, i.e., Central Goods and Services Act, 2017 and the Odisha Goods and Services Act, 2017 (‘GST laws’). 

The petitioner claimed that it had accumulated Input Tax Credit (‘ITC’) of Rs 34,40,18,028/- on purchase of inputs for construction of the shopping mall. However, the Revenue Department advised it to deposit the entire sum instead of claiming ITC on the same in view of the restriction placed under Section 17(5)(d) of GST laws. Section 17(1), CGST Act, 2017 states that where the goods or services or both are used by a registered person partly for the purpose of business and partly for other purpose, the amount of credit shall be restricted to so much of the input tax as is attributable to the purposes of his business. Section 17(5) provides that notwithstanding anything contained in sub-section (1), ITC shall not be available for certain supplies. Section 17(5)(d) provides that ITC shall not be available in respect of the following: 

            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. 

Explanation.- For the purposes of clauses (c) and (d), the expression “construction” includes re-construction, renovation, additions or alterations or repairs, to the extent of capitalization, to the said immovable property. 

The Revenue Department cited the aforesaid provision and stated that the petitioner cannot claim ITC of of Rs 34,40,18,028/- against the supply of service, i.e., renting of units in the shopping mall. The petitioner challenged the vires of Section 17(5)(d), CGST Act, 2017 arguing that in its case there was no break in the tax chain. The petitioner argued that it had paid GST on purchase of its inputs and collected tax from the tenants while letting out units in the shopping mall. And while blocking ITC if an immovable property is sold made sense, because sale of immovable property after issuance of completion certificate did not attract GST. However, blocking ITC in the petitioner’s case was devoid of reason since there was no break in the tax chain, i.e., its input and output were both subject to GST. 

Orissa High Court’s Decision 

The Orissa High Court’s judgment in the impugned case is a unique case of devoting a substantial part of the judgment to arguments of the parties and earmarking only a miniscule portion to the conclusion without articulating detailed reasons for its conclusion. The High Court stated that the very purpose of GST laws is to ensure uniform collection of tax on supply of goods and services and prevent multi taxation. And by stating the aforesaid objective of GST laws, it concluded that: 

            While considering the provisions of Section 17(5)(d), the narrow construction of interpretation put forward by the Department is frustrating the very objective of the Act, in as much as the petitioner in that case has to pay huge amount without any basis. Further, the petitioner would have paid GST if it disposed of the property after the completion certificate is granted and in case the property is sold prior to completion certificate, he would not be required to pay GST. But here he is retaining the property and is not using for his own purpose but he is letting out the property on which he is covered under GST, but still he has to pay huge amount of GST, to which he is not liable. (para 19) (emphasis added)      

Thus, the Orissa High Court concluded that Section 17(5)(d) should be read down and the narrow reading adopted by the Revenue Department should not be accepted since ‘the very purpose of the credit is to give benefit to the assessee.’ (para 20) In stating the latter, the High Court relied on the observation made by the Supreme Court in Eicher Motors case[2] where in the context of excise duty, it had held that the right to claim ITC vests when the tax on inputs is paid and right to ITC becomes absolute when input is used in the manufacture of the final product. 

There are two pillars on which the High Court’s conclusion is standing: GST’s avowed purpose of preventing multi taxation, which in the context can be reasonably interpreted to mean prevention of tax on tax; second, is the High Court’s understanding of ITC as a benefit that the State provides to an assessee. 

The first reason has credence and relevance in every case involving blocking of ITC. Since it is a vital objective of GST to prevent cascading effect of taxes, the burden should be on the State to justify why in certain circumstances there is deviation from it and articulate the underlying rationale or policy objective. So High Court’s reliance on GST’s purpose of ensuring uniformity and preventing tax on tax was justifiable. Prevention of tax on tax and uniformity of GST, both are relevant and valid purposes of GST, on the touchstone of which cases can be adjudicated, but the High Court seems to have relied on them excessively in the impugned case. Equally, the High Court did not bother to seek an explanation from the State as to the reason for incorporating Section 17(5)(d). Second, Supreme Court’s observation in Eicher Motors case about ITC being a benefit provided to the taxpayer was in a different context: rules to claim ITC were changed after several taxpayers had utilized the input in the final product. It was in that context that the Supreme Court observed that ITC had vested in the taxpayer. In the impugned case, there was no change in the relevant provisions after the petitioner had initiated the transaction. Section 17(5)(d), CGST Act, 2017 clearly stated that ITC in petitioner’s case was blocked and there was no change while the transaction was ongoing. While the differing fact situations not detract from the larger debate on whether ITC is a State’s concession or taxpayers’ right; the issue did receive a rather cursory treatment from the High Court in the impugned case.  

Petitioner’s Arguments before the Orissa High Court 

I’m discussing the arguments adopted before the High Court at the end because they are likely to be repeated before the Supreme Court in a similar manner or edited suitably. I’m mentioning some of the arguments below to better illustrate how the petitioners’ in the impugned case viewed their position wherein they were unable to claim ITC and their view of the provision in question, i.e., Section 17(5), CGST Act, 2017. 

First argument of note that the petitioner adopted was that by allowing ITC to taxpayers who construct a building with the intent of sale under Schedule II, para 5(b) of CGST Act, 2017, but denying it to petitioners who let out such property on rent is violative of Article 14 of the Constitution. The petitioners alleged discriminatory treatment and argued that Section 17(5)(d) was arbitrary in nature. The petitioners laboured on the fact that under Schedule II, para 5(b) of CGST Act, 2017 ITC is only blocked if the entire consideration for the building in question is received after issuance of completion certificate. As per petitioners in such instances blocking of ITC made sense since no GST is charged in such scenarios, leading to disruption of tax chain. But in the petitioner’s case they were paying GST on their inputs and collecting GST on their output, i.e., renting property to their tenants leading to an unbroken tax chain and thereby not creating any rationale for blocking ITC in their situation. 

Second, the petitioner touched upon the fact that blocking their ITC is an unreasonable restriction under Article 19(1)(g) of the Constitution but did not elaborate on the unreasonableness.

Third, they repeatedly mentioned how the blocking of their ITC constitutes a detraction or at the very least a dilution of GST’s objective of preventing multiple taxation. And that by ensuring that the petitioner bear the additional burden of tax by denying them ITC the objective of GST was being frustrated. 

Fourth, the petitioner pointed out that one of the ingredients in Section 17(5)(d) was that the construction should have been done by the taxpayer ‘on their own account.’ The petitioners distinguished their case from the scenarios contemplated under Schedule II, para 5(b) of CGST Act, 2017 as well as under Section 17(5)(d). They argued that the former contemplated situations where construction was ‘intended for sale’ while the latter contemplated construction by a taxpayer ‘on his account’. And that the petitioner constructed the shopping mall with an intention ‘for letting out’ to tenants and thus their cannot be covered by Section 17(5)(d). 

Except for the third argument, which the Orissa High Court reproduced in its conclusion, it did not engage with any of the petitioner’s argument in any significant manner. Thus, one is unsure of what is the exact meaning of the phrase ‘on their own account’ used in Section 17(5)(d) and its resultant scope. Neither is applicability of Article 14 to the impugned set of facts clear even though the petitioner made elaborate arguments on both counts.  

Finally, it is worth noting that the Orissa High Court hardly provides any space to the State’s arguments and only cites relevant judgments relied on by the State. As a result, one can only gather that the State was arguing that ITC can only be claimed if the statutory conditions are met and the relevant conditions cannot be assailed as unconstitutional only because the tax set off is denied to the taxpayers. 

Way Forward 

The Revenue has filed an appeal against the Orissa High Court’s judgment and the approach that the Supreme Court will adopt is of course difficult to predict. But it is safe to say that a conservative approach wherein the legislature is provided a wide leeway in enacting tax laws is unlikely to lead to a conclusion that aligns with the Orissa High Court. Though such an interpretive approach would not be novel, but in line with well-entrenched jurisprudence. On the other hand, if the Supreme Court’s bench adjudicating the case is persuaded by the advocates in question that the provision in question infringes on a Fundamental Right, e.g., Article 19(1)(g) of the Constitution or falls foul of Article 14 then there is a possibility of the Supreme Court reading down the provision akin to the Orissa High Court’s opinion. Irrespective, I will update the latest developments on this case via another blog post.  

[1] Safari Retreats Pvt Ltd v Chief Commissioner of GST [2019] 105 taxmann.com 324. 

[2] Eicher Motors Ltd v Union of India (1999) 2 SCC 361. 

Bombay High Court Orders Refund of TDS: Opines on Illegal Tax

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In a recent judgment[1], the Bombay High Court ordered the Revenue Department to return the tax deposited by the assessee and opined that retaining tax that was not owed by the assessee in the first place would be in contravention of Article 265 of the Constitution.  

Facts 

The petitioner, an Indian company entered a Foreign Technical Collaboration with a US company. Petitioner agreed to pay US company US $ 16,231,000 net of any Indian income tax meaning that if any withholding tax was required to be deducted it would be paid by the petitioner while the US company would be paid the gross amount. The petitioner sought a no objection certificate from the Revenue Department without withholding any tax. The petitioner’s argument was that the services are rendered by the US company outside India, the income embedded in the amount accrues and arises to the US company outside India and is not taxable in India. However, the Revenue Department only issued a no objection certificate provided a 30% withholding tax was deducted. The petitioner paid the said witholding tax under protest and it was the refund of the withholding tax amount that was the subject of the impugned judgment. The petitioner’s case, succinctly put, was that the since the amount paid to US company was held to be non-taxable in India the Revenue Department was obliged to refund the withholding tax. 

The Revenue Department rejected the petitioner’s claim for refund on the ground that the tax was paid on behalf of the US company. 

Petitioner’s Argument 

Petitioner’s argument was that the Revenue Department was incorrect in taking the view that the witholding tax was deposited by it on behalf of the US company. The petitioner argued that the tax was paid by it on from its own pocket over and above the consideration agreed between it and the US company. And the US company has agreed to the same and has issued a no objection certificate that the refund be issued to the petitioner. 

The edifice of petitioner’s argument though was that once the Court had held that the income earned by the US company was not taxable in India, the tax deducted at source by it was not in accordance with the law and the amount so deducted must be paid back to it. 

The Revenue, on the other hand, made several arguments of varying persuasion but was not able to substantiate them convincingly. The Revenue, for example, suggested that the Court’s order that the income earned by US company was not taxable in India could not be used by the petitioner and the refund could be claimed only by the US company. The Revenue also suggested that the US company had claimed credit of witholding tax against tax liabilities. However, the Bombay High Court did not agree to any of the Revenue’s arguments. 

Bombay High Court Decides 

The Bombay High Court cited the order wherein it was held that the US company did not owe any tax in India on the income and concluded that: 

Technically, even though the amount deposited by Petitioner would be called as ‘tax deductible at source’, what Petitioner paid was ‘an ad hoc amount not technically a TDS amount’. Moreover, since it is also confirmed by this Court that the amount paid to DAVY was not chargeable to tax in India, Respondents’ insistence on Petitioner paying that amount was not in accordance with law and the amount so paid over must be refunded to Petitioner. (para 17) 

 The Bombay High Court relied on a few additional aspects: CBDT Circular No. 7 0f 2007 dated 23.10.2007 which stated that where no income has accrued to the non-resident or where income has accrued but no tax is due, then in such cases the amount deposited with the government cannot be said to be ‘tax’. The High Court also cited a line of relevant precedents which have established that the Revenue authorities can only collect tax per law and any tax collected illegally or not due from the taxpayer needs to be refunded else would in contravention of Article 265 of the Constitution. 

Conclusion 

The refund of tax paid out of caution and which is held to be not due from the assessee should not, ideally speaking, be a painful and long drawn process. In the impugned case, the petitioner as part of business transaction paid the tax on behalf of the US company but had to engage a lengthy process to claim refund of a tax which should have been paid much earlier. Single judgment such as in the impugned case lacks the ability to ensure course correction by the Revenue Department, but we live in hope.       

[1] Grasim Industries Ltd., v Assistant Commissioner of Income Tax, Mumbai 2023: BHC-OS:9537-DB. 

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