Bombay High Court Upholds Amendment to Definition of Income under IT Act, 1961 

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In a significant decision[1], the Bombay High Court upheld the amendment made to definition of income in Income Tax Act, 1961 (IT Act, 1961) via which all forms of subsidy granted by the Central or State Government, in cash or kind, are now considered income and taxable under the IT Act, 1961. The petitioner’s core challenge to the amendment was that it removed the distinction between revenue and capital subsidy while latter had been held by Courts to be non-taxable. The Bombay High Court did not engage with several arguments of the petitioners that traversed issues of legislative competence and fundamentals of income tax jurisprudence, but instead reasoned that the challenge was because of petitioner’s reduced profits and therefore was unwarranted. 

Facts 

Petitioner was a biotechnology company and had a manufacturing plant in Hadapsar, Pune. It was eligible for concessions on electricity duty and VAT/GST/ subsidy under the State of Maharashtra’s ‘Package Scheme of Incentives, 2013’ which came into effect from 1 April 2013. Petitioner was entitled to the subsidies from 1 January 2015 to 31 March 2045, having fulfilled the eligibility conditions prescribed under the Scheme. 

The Finance Act, 2015 amended the definition of income under Section 2(24), IT Act, 1961 wherein clause (xviii) was added. The clause stated: 

            assistance in the form of a subsidy or grant or cash incentive or duty drawback or waiver or concession or reimbursement (by whatever name called) by the Central Government or a State Government or any authority or body or agency in cash or kind to the assessee; 

other than, –

  • The subsidy or grant or reimbursement  which is taken into account for determination of the actual cost of the asset in accordance with the provisions of Explanation 10 to clause (1) of section 43; or 
  • The subsidy or grant by the Central Government for the purpose of the corpus of a trust or institution established by the Central Government or a State Government, as the case may be;  

Clearly, any incentives in the form of subsidies or otherwise provided to companies or assessees in general were included in the definition of income and made exigible to tax. The significance of this amendment can be appreciated through a brief understanding of the history of income tax under which revenue receipts are by default taxable, but capital receipts are taxable only if there is an express provision to that effect. Income tax laws have evolved in the past few decades in such a manner that a large variety of capital receipts have been expressly made taxable and the distinction between revenue and capital receipts though still in existence, has been blurred to a large extent. The above cited clause is another step towards rendering the distinction between revenue and capital receipts otiose. 

The petitioner’s case was built on this distinction which has been upheld by Indian Courts in numerous decisions.[2] The petitioner’s arguments also raised important issues of legislative competence and arguments that alluded to fiscal federalism, which unfortunately went unaddressed by the Bombay High Court. Some of the petitioner’s arguments were: the amendment does not create any distinction between capital and revenue subsidy though only the latter is taxable under Sections 4 and 5 of IT Act, 1961; that IT Act, 1961 levies tax only on ‘real’ income and the definition of income cannot be extended to include every kind of subsidy especially when it is received on capital account; the subsidy given by a State Government is by forsaking its own revenues and taxing the same in the hands of the petitioner amounts indirect tax on revenue of the State in violation of Article 289; the amendment was also challenged as violative of Article 14 for being arbitrary and discriminatory as well as Article 19(1)(g) of the Constitution for causing unreasonable hardship on the petitioner as it had made a huge investment in a backward region on the promise of subsidy and now the Union may take away 30-40% of the subsidy via income tax. 

The petitioner’s cited a bevy of cases to underline the fact that the distinction between subsidy received on revenue and capital account has been acknowledged by Courts and only the former has been held to be taxable and not the latter. The Revenue, on the other hand, invoked the argument that Courts should be deferential in matters of economic law as it involves complex decision-making impinging on economic and fiscal policy of the country. Accordingly, it argued that the legislature has wide leeway in drafting provisions on taxation of income and can choose to levy tax on certain persons and Article 14 cannot be invoked against tax laws casually. Similarly, reduction of profits of the petitioner, the Revenue argued, cannot be a ground to invoke violation of Article 19(1)(g).  

Bombay High Court Focuses on Reduced Profits 

The spectrum of issues highlighted by the petitioner were ultimately futile, as the Bombay High Court upheld the amendment by relying on and focusing on one strand, i.e., Article 19(1)(g) and reduction of profits of the petitioner. The High Court did cite the relevant judicial precedents that distinguished capital and revenue receipts and the ‘purpose test’ enunciated by the Supreme Court in various cases, but only for ornamental reasons. (para 17-21) The High Court used the well-entrenched doctrine in Indian jurisprudence that in matters of economic laws – by extension tax laws – the legislature has a wide latitude. It cited the relevant precedents on this point as well to underline its agreement with the approach that courts cannot intervene unless there is manifest arbitrariness and violation of Article 14 or if the restrictions were unreasonable thereby contravening Article 19(1)(g) of the Constitution. (paras 24-25) 

The latter particularly was conclusive in influencing the Bombay High Court’s conclusion that the amendment to definition of income was constitutional. The High Court noted that the petitioner’s argument about withdrawal of fiscal incentives tends to conflate the issue with fiscal immunity. And that the profits as well as incentives are subject to fluctuation and the amendment reflects a recalibration of fiscal advantages in tune with the broader economic policy considerations. And that diminution or even drastic reduction in profits cannot amount to violation of Article 19(1)(g) of the Constitution. (para 31) The High Court concluded that: 

The policy of tax in its effectuation, might, of course, bring in some hardship in some individual cases. That is, inevitable. Every cause, it is said, has its martyrs. Mere excessiveness of a tax or even the circumstances that its imposition might tend towards the diminution of the earnings or profits of petitioner, per se and cannot constitute violation of constitutional rights. If in the process a few individuals suffer severe hardship that cannot be helped, for individual interests must yield to the larger interests of the community or the country as indeed every noble cause claims its martyr. (para 38) 

The doctrine of deference in matters of economic law proved decisive in the Bombay High Court finally upholding the amendment to the definition of income. While the merits of this doctrine are beyond the scope of this post, it is crucial to mention that the sacrosanct status accorded to this doctrine is preventing Courts from engaging in a fundamental analysis of the violation of Fundamental Rights and other well established doctrines in taxation law in this case the well founded distinction between revenue and capital receipts and the promise of IT Act, 1961 to only tax ‘real’ income. The High Court was especially remiss in interlinking the two aspects, i.e., if subsidy on capital account did not constitute ‘real’ income, then is it still within legislative competence to levy tax on such subsidy?    

Conclusion 

The Bombay High Court’s decision falls short primarily on not engaging with the various arguments put forth by the petitioners. In my view, there is considerable merit in determining the scope of income and whether IT Act, 1961 can be amended by the Union to include any form and kind of receipt as income. Historically, capital receipts have not been taxed under IT Act, 1961 but there is no express bar in including such receipts within the fold of income. However, the related concern in this case was that a portion of subsidy benefits extended by the State Government, would end up being paid as taxes to the Union. Apart from a constitutional question, this issue also raises the point of efficacy of such subsidies and grants provided by the State Government. It is unlikely that any Court will read a limitation on the Union’s legislative power on that ground, but it is worth examining from the perspective of efficacy of policies providing tax exemptions. Finally, it is worth noting that though the distinction between revenue and capital receipts has been significantly blurred via numerous provisions expressly taxing the latter, the question of whether it amounts to ‘real’ income as opposed to hypothetical income has not been answered conclusively in this context. Courts have opined that mere accounting entries cannot be relied on to state that the assessee has received income, ‘real’ income that can be taxed. A similar analysis in the context of revenue and capital receipts is amiss, as it is possible to suggest that not every capital receipt amounts to a ‘real’ income taxable under the IT Act, 1961.   

[1] Serum Institute of India Pvt Ltd v Union of India TS-723-HC-2023-BOM. 

[2] See, for example, CIT v Chapalkar Brothers 400 ITR 279 (SC); CIT v Shree Balaji Alloys 7 ITR-OL 50 (SC). 

Tea is an Agricultural Produce: Bombay High Court Rules

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In a recent decision[1], the Bombay High Court ruled that tea qualifies as an agricultural produce warehousing services in relation to it are exempt from GST as specified in Notification No. 12 of 2017. The writ was filed by the petitioner against rulings of advance and appellate advance ruling authorities which held that tea which underwent process of blending/mixing ceased to be an agricultural produce. The High Court also made a pertinent observation about the scope of a CBIC Circular and whether it can dilute a statutory Notification. 

Facts 

The petitioner was licensed for carrying the warehouse business under the Bombay Warehouses Act, 1959. The petitioner had let one if its warehouse to M/s Unilever India Export Ltd (‘Unilever’). Unilever would procure tea at public auctions and directly from manufacturers and would undertake blending and packing of the tea at the petitioner’s warehouse. The petitioner was of the view that tea was an agricultural produce under Clause 2(d) of the Notification No. 12 of 2017 and thus warehousing services provided to such a product were exempt form GST as specified under Serial No. 54(e) of the said Notification. 

The relevant portions of the Notification No. 12 of 2017 state that: 

Clause 2(d):

“agricultural produce” means any produce out of cultivation of plants and rearing of all life forms of animals, except the rearing of horses, for food, fibre, fuel, raw material or other similar products, on which either no further processing is done or such processing is done as is usually done by a cultivator or producer which does not alter its essential characteristics but makes it marketable for primary market;” 

And, Serial No. 54(e) of the Notification No. 12 of 2017 exempts from GST the loading, unloading, packing, storage or warehousing of agricultural produce. 

Reading both the provisions together suggests that warehousing services related to agricultural produce were exempt from GST. The petitioner’s primary contention was that manufacturing and packaging of tea undertaken by Unilever did not alter the essential characteristics of tea and were undertaken to make it fit for human consumption and marketable. It was further argued that every agricultural product undergoes some treatment to make it fit for human consumption, save it from perishing and to make it fit for transportation. The ‘minimal’ processes undertaken by Unilever, as per the petitioner, did not change the nature of tea and it retained the character of an agricultural produce. The Revenue, on the other hand, argued that the kind of processes undertaken by Unilever required plant and machinery and cannot be categorized as minimal processes undertaken to make tea fit for primary market. And that tea ceased to an agricultural produce after undergoing the processes undertaken by Unilever.  

High Court Relies on Supreme Court Decision

The Bombay High Court, in determining the nature of processes undertaken by Unilever and their effect on tea relied cited D.S. Bist and Sons case [2] (which was relied on heavily by the petitioners) where it was held that tea leaf that underwent the process of withering, roasting, crushing and fermentation continued to be an agricultural produce since the process was to ensure that the flavor and color of tea leaves was brought out, but tea still retained its essential characteristics. The High Court held that the facts and observations in D.S. Bist and Sons case should have persuaded the advance ruling authorities and appellate advance ruling authorities to have come to a similar conclusion. (para 26) As per the High Court tea, an agricultural produce, retained its essential characteristics even after the processes undertaken on it by Unilever. The High Court observed: 

In so far as the impugned orders are concerned, on a perusal of the orders passed by the AAR the emphasis appears to be more on the issue that the process by which the tea leaves are dried which results in emergence of a manufactured product, and therefore, tea ceases to be an agricultural produce. In our opinion, such reasoning would in fact go contrary to the decisions of the Supreme Court as noted above for the reason that the essential characteristic of the tea being an ‘agricultural produce’ would not stand extinguish by mere processing and packing in whatever form. (para 31)

Circular Cannot Go Beyond Statutory Notification 

Another issue that the Bombay High Court addressed in its judgment was the interplay and effect of a Circular on the contents of a statutory Notification. The Revenue contended that their stance that tea that underwent the processes of fermentation, etc. was not an agricultural produce was in accordance with a CBIC Circular issued on 15 November 2017. The High Court, however held that a Circular cannot whittle down or scuttle an Exemption Notification. (para 29) What was the basis of High Court’s opinion? As per the High Court the Exemption Notification No. 12 of 2017 was issued in exercise of power under Section 11, CGST, Act, 2017 wherein the Government can grant exemption from tax on satisfaction in public interest and on recommendations of the GST Council. Thus, the clarification issued in Circular dated 15 November 2017 cannot amend a statutory Notification so as to take tea as an agricultural produce from the ambit of exemption. There is a precedent[3] to this effect, but the underlying premise of the High Court’s opinion is interesting in the context of GST. The Circulars issued by CBIC, admittedly in exercise of its administrative powers, often issue clarifications or state its interpretations of various clauses contained in a statutory Notification, i.e., a Notification issued in exercise of powers under a statutory provision. The High Court’s opinion on the scope of such Circulars will be tested in future as well to determine if a Circular is merely ‘interpreting’ a Notification and issuing a ‘clarification’ or does the Circular go beyond what the Notification states. In the impugned case, the Bombay High Court correctly held it to be the latter. However, it will be a tricky exercise and results are likely to be determined by facts of each case, but the High Court has opened doors for an examination of the scope of what a Circular can state in the context of GST. 

Conclusion The High Court’s observations in the impugned case are welcome and provide clarity on two crucial issues: the scope of the term agricultural produce and the scope of a Circular in terms of what kind of clarifications and interpretive clarities it can provide. Both these facets are likely to occupy judicial attention in the future as well and the dust is far from settled. However, we have a welcome decision that can become a reference point for future disputes. 

[1] Nutan Warehousing Company Pvt Ltd v The Commissioner, Central Tax, Pune – II, 2023: BHC-AS: 37052: DB. 

[2] Commissioner of Sales Tax, Lucknow v D.S. Bist and Sons, Nainital (1979) 4 SCC 741. 

[3] Sandur Micro. Circuits, Ltd v Commissioner of Central Excise, Belgaum (2008) 14 SCC 336. 

High Court Quashes Tax Notice Citing ‘Clean Slate’ Principle under IBC, 2016

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In a recent judgment, the Delhi High Court[1] emphasised and reiterated the ‘clean slate’ principle under the Insolvency and Bankruptcy Code, 2016 (‘IBC, 2016’). The High Court held that the notices issued by the Revenue Department after the Resolution Plan had been approved by the National Company Law Tribunal (‘NCLT’) were bad in law. The clean slate principle, as per the High Court, does not admit of any exceptions for the Revenue Department and the tax dues have to be paid as per the Resolution Plan, else they the tax claims will be considered as extinguished.  

Facts 

The Revenue Department’s impugned notice dated 28.08.2018 called upon Tata Steel Ltd, petitioner, to deposit tax for the assessment years 2001-02, 2009-10, 2010-11, and 2013-14. Via the same notice the petitioner was also asked to justify as to why a penalty under Section 221(1), IT Act, 1961 should not be levied. The petitioner challenged the notice broadly on the ground that the notices were issued after the approval of the Resolution Plan by the NCLT and fell within the ambit of ‘clean slate’ principle. In other words, once the Resolution Plan had been approved by the NCLT, all creditors were bound by the terms of the Resolution Plan and the Revenue Department could not claim an exception from the said principle. 

The arguments advanced on behalf of the petitioner also mentioned that the Revenue Department was an operational creditor and tax due to it was operational debt within the meaning of Sections 5(20) and 5(21), IBC, 2016. And the claims that were made by the Revenue Department were the subject matter of the Resolution Plan while those claims that were not part of the Resolution Plan were extinguished and could not be recovered. And since the claim relating to penalty was not lodged by the Revenue Department before the Resolution Professional, it was not provided in the Resolution Plan and thus could not be recovered from the petitioner. 

Delhi High Court Decides 

The Delhi High Court enlisted the timeline of the Revenue Department’s claims and the insolvency process via which the petitioner became the successor entity to Bhushan Steel. The Delhi High Court noted the dates on which various assessment orders and other orders were passed by the CIT(Appeals) and held that it was clear that the demands for the Assessment Years in question were certainly outstanding on the date the Resolution Plan was approved. The High Court noted that for the Assessment Years 2009-10, 2010-11, and 2013-14 the claims were certainly filed by the Revenue Department before the Resolution Professional. While for the Assessment Year 2001-02 and claims for penalty there was a failure to lodge the relevant claim. In view of these facts, the High Court observed that the failure to lodge the claim within the prescribed time framework cannot result in such claims being placed on a better footing compared to other claims that were considered while finalizing the Resolution Plan. 

The Delhi High Court correctly concluded that the demand qua Assessment Year 2001-02 which was communicated via an additional notice after approval of the Resolution Plan ordinarily would stand extinguished under IBC, 2016. However, since an appeal for the Assessment Year 2001-02 was pending before the Supreme Court, the High Court concluded that recoveries for the said Assessment Year would have to be made as per the decision in that appeal. (paras 26 and 32.1) 

The Delhi High Court reiterated that qua claims of the Revenue Department filed before the Resolution Professional, i.e., before finalizing the Resolution Plan, they could only be satisfied as per the terms of the Resolution Plan. The Delhi High Court observed: 

Notwithstanding the aforesaid argument advanced on behalf of the revenue, we are of the opinion that dues payable to creditors, including statutory creditors, for the periods which precede the date when the RP is approved, can only be paid as per the terms contained in the RP. (para 27) 

Thus, if claims were filed by the Revenue Department after the approval of the Resolution Plan, they could not be satisfied since they were presumed to have been extinguished as per the clean slate principle. Though it is important to note here that the said claims should be pending when the proceedings under IBC, 2016 are initiated. Thus, to the extent the pending claims were lodged before the Insolvency Professional and are incorporated in the Resolution Plan approved by NCLT they will be satisfied in the terms incorporated in the said plan; for pending claims that were not incorporated they stand extinguished.    

IBC, 2016 Overrides IT Act, 1961 

The Delhi High Court also noted, in no ambiguous terms, that IBC, 2016 overrides IT Act, 1961. The fact that IBC, 2016 overrides IT Act, 1961 is a straightforward conclusion when one reads Section 238, IBC, 2016 as it states that the provisions of this law shall have effect notwithstanding anything contained in any other law for the time being in force, which by a reasonable interpretation also includes IT Act, 1961. Clarifying the same, the Delhi High Court observed that: 

Thus, where matters covered by the 2016 Code are concerned [including insolvency resolution of corporate persons] if provisions contained therein are inconsistent with other statutes, including the 1961 Act, it shall override such laws. If such an approach is not adopted, it will undermine the entire object and purpose with which the Legislature enacted the 2016 Code. (para 29) 

Conclusion 

The Delhi High Court’s two observations that: first, pending tax claims against a company which underwent the insolvency process under IBC, 2016 can only be recovered as per the Resolution Plan; second, that IBC, 2016 overrides all other laws including IT Act, 1961 seem obvious and straightforward in hindsight. However, the aggressiveness of the Revenue Department to seek its claims despite the law saying otherwise requires that the law be laid in clear terms and perhaps repeatedly to thwart such tax claims that can cast a shadow on an insolvency process that seeks to revive a debt-laden company.   

[1] Tata Steel v Deputy Commissioner of Income Tax 2023: DHC: 7855 – DB. 

Kerala HC Clarifies Scope of Authorisation under Section 67, CGST Act, 2017

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In a recent judgment[1], the Kerala High Court clarified that the authorization provided by a Joint Commissioner for inspection, search and seizure could not be in specific terms, but is only granted in general terms. If the criteria of Section 67, Central Goods and Services Act, 2017 and/or relevant State GST legislation were fulfilled, the authorization cannot be assailed to be illegal. 

Facts

Petitioner filed a writ petition assailing the order of seizure as well as the order of confiscation passed by the Joint Commissioner. The search took place in the business premises of M/s Sobhana Jewellery after authorization given by the Joint Commissioner under section 67(2) of the Kerala Goods and Services Tax Act/Central Goods and Services Tax Act (KGST/CGST). During the search of premises, certain gold ornaments were found in a bag belonging to the petitioner which were accompanied by a delivery challan. The delivery challan was for transportation of the gold ornaments from the petitioner to M/s Sobhana Jewellery. The gold ornaments were verified by the officers and some discrepancies were found in the documents because of which the gold ornaments in the bag were seized.    

The petitioner’s objection to seizure of the gold ornaments was that it was the owner of the gold ornaments in question and that the persons who were present in the business premises of M/s Sobhana Jewellery were one of the partners of its firm and one of its employees. And that the authorization granted by the Joint Commissioner under Section 67(2) for search, seizure and inspection was not for seizing its gold ornaments and thus the seizure was null and void. The petitioner’s case, in effect, was that the authorization for search and seizure was regard to business premises of M/s Sobhana Jewellery and not the articles that belonged to them. 

Kerala HC Interprets Section 67

Relevant portion of Section 67(2), CGST Act, 2017 that was the subject of interpretation is as follows: 

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

There are two important ingredients that a Joint Commissioner needs to satisfy before granting authorization for search and seizure under Section 67(2): first, the Joint Commissioner must have a reason to believe; second, the authorization must be regard to goods or documents or books or things which will be useful or relevant to any proceedings under the Act. It is latter that is the subject of concern in the impugned judgment. It is evident that the Joint Commissioner cannot anticipate in granular detail the nature and kinds of goods, documents, etc. that the officers will encounter during their search and inspection. Thus, the authorization granted by a Joint Commissioner cannot specify which ones can be seized and which ones cannot. Recognizing the above elements, the Kerala High Court rejected the petitioner’s argument and observed that: 

Authorisation has to be in general terms and cannot be with respect to any specific books, items, things or documents. What is relevant is that while granting authorisation for search and seizure operations, the authority granting such permission, i.e., Joint Commissioner or Officer above the rank of Joint Commissioner, should have reasons to believe that the goods, documents or things hold relevance and are useful in any legal proceedings under the SGST/CGST Act 2017 and the same are secreted at a particular place. (para 5) 

The Kerala High Court added that the authorization cannot be in respect of each and every article, good, etc. The authorization is in respect of the business premises of the assessee. (para 5.2) In stating so, the High Court clarified that if goods, articles, etc. belonging to a person other than an assessee are found in the premises of the assessee and the officers find them to relevant or useful to any proceedings under the KGST/CGST, they can be confiscated. It is not necessary that the title to such seized items should belong to the assessee, the confiscated goods can belong to a third party if they are found in the business premises of the assessee. 

Conclusion The Kerala High Court’s decision is a correct interpretation of the scope of permission granted to officers under Section 67. If the officers were empowered to only seize articles belonging to the assessee whose premises were being inspected, it would reduce the efficacy of the entire exercise. The barrier of them finding the articles ‘relevant and useful’ though remains; but, the scope of this barrier is the subject of another discussion. 

[1] Velayudhan Gold LLP v Intelligence Officer, Intelligence Unit, Kottarakkara TS-561-HCKER-2023-GST. 

Supreme Court Opines on Nature of Section 19 of 101st Constitutional Amendment

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In a recent judgment[1], a Division Bench of the Supreme Court engaged in depth with the scope, meaning, and implication of Section 19 of The Constitution (101st Amendment) Act, 2016 (‘101st Amendment’) which catalysed the introduction of GST. Section 19 was a transitory provision which stated that existing indirect tax laws would be valid for one year or until States amend them to bring them in conformity with the 101stAmendment, whichever was earlier. The Supreme Court opined that Section 19 was transitory in nature and for that one year it was the repository of competence of State legislatures powers to amend the existing/pre-GST indirect tax laws. It held that the said legislative power could not be exercised after the period of one year contemplated under Section 19.  

Facts 

The case involved three batch of appeals that arose from special leave petitions filed in the case. 

First, related to the State of Telangana where the local VAT law was amended after coming into force of the 101st Amendment, i.e., 16.09.2016. State of Telangana amended the VAT law via an ordinance dated 17.06.2017 and thereafter the State legislature enacted a law replacing the ordinance which came into force on 02.12.2017. The amendment to VAT law was challenged and the Telangana High Court struck it down on the ground that State legislature could have exercised the power of amendment under Section 19 of the 101stAmendment only to bring the VAT law in conformity with GST laws. Also, the Ordinance could not have been confirmed since the State was denuded of legislative competence under Section 19 after 01.07.2017. Since GST laws came into force on 01.07.2017, the one year time period under Section 19 expired on the said date.     

Second, in the Gujarat batch of cases Section 84A was introduced in the Gujarat VAT Act, 2003 via an amendment gazette on 06.04.2018 with retrospective effect from 01.04.2006. The aim of introducing the said provision was to enable to the Revenue Department to open assessments which had attained finality. The Gujarat High Court struck down the amendment on the ground of lack of legislative competence on part of State legislature after 01.07.2017 and also on the ground that the amendment was manifestly arbitrary. 

Third, involved amendment to the Maharashtra VAT Act. On 15.04.2017 the amendment to the said act was gazetted and thereafter an explanation was added via an Ordinance w.e.f. 06.03.2019. Thereafter, on 09.07.2019 the Ordinance was replaced by the Amendment Act which inserted various provisions including the said explanation. The amendment was upheld by the Bombay High Court and appeals were filed in the Supreme Court against the judgment. 

Legal Issue and Arguments 

I think, it is best to upfront cite the provision that was the centrepiece of the judgment, i.e., Section 19 of the 101st Amendment which states as follows: 

Notwithstanding anything in this Act, any provision of any law relating to tax on goods or services or on both in force in any State immediately before the commencement of this Act, which is inconsistent with the provisions of the Constitution as amended by this Act shall continue to be in force until amended or repealed by a competent Legislature or other competent authority or until expiration of one year from such commencement, whichever is earlier. (emphasis added)

At first glance, Section 19 reveals three things: first, it is a transitory provision; second, it allowed the States to amend pre-existing sales tax provisions make them consistent with the 101st Amendment; third, pre-existing laws such as VAT would cease to have force after one year of commencement of the provision or when they were amended or repealed, whichever was earlier. The one year was until 01.07.2017 when the GST laws came into force. The Supreme Court had to adjudicate on the nature and extent of legislative power conferred to the State legislatures under Section 19. 

To justify amendments to its local VAT law, the primary argument that the State of Telangana’s counsel made was that the effect of an Ordinance and a law was the same, only their manner of creation differed. And that the difference was only about procedure adopted and not subject matter of both legislative instruments. Thus, when the State legislature approved the Ordinance to amend the VAT law was enacted on 02.12.2017, its terms ‘related back’ to the date when the Ordinance was promulgated, i.e., 16.09.2016. Thus, the State legislature’s power to enact the law was preserved even after 01.07.2017. (para 27)

Counsel for State of Maharashtra, in a similar vein, argued that the material fact was the existence of the legislative power with States and not the manner of its exercise. It was argued that Section 19 preserved the power of States to amend the laws and it was erroneous to state that the power to amend the laws was only confined to bring the existing laws in conformity with the GST laws.    

The respondents led with their primary argument by drawing an analogy with Section 19 of the 101stAmendment with Article 243ZF of the Constitution.[2] They argued that the latter was incorporated in the Constitution – via 74th Constitutional Amendment – solely with the purpose of allowing amendments to existing laws and bring them in conformity with the new provisions of the Constitution. Similarly, they argued that Section 19 was limited in conferring legislative power to States, i.e., to bring existing laws in conformity with the 101st Amendment. The respondents relied on Section 19 not being made part of the Constitution text per se, but that it was only included in the Amendment Act and argued that it should be interpreted restrictively. The respondents further argued that interpreting the term ‘amend’ used in Section 19 to confer a power on States to make a law wider than curative legislation which runs contrary to the revised Constitutional architecture introduced by the 101st Amendment would not be in aid of the said Amendment.  

Supreme Court’s Observations on Section 19 

The Supreme Court, in a well-reasoned and detailed judgment has described the changes introduced by the 101st Amendment, its rationale, and the nature of transitory provisions among other things. In this post, I will elaborate on its three main observations on Section 19 that I think are relevant from the perspective of examining the interface of the Constitution and tax. 

First, one of the issues that the Supreme Court had to engage with was the effect of Section 19 not being included in the Constitution itself unlike, for example, Article 243ZF. And whether Section 19 was only ancillary to the 101st Amendment and thereby required to be interpreted in a narrow fashion. Supreme Court observed that the purpose of Section 19 was to preserve the existing laws and allow the Parliament and States to repeal and amend them. Since the 101st Amendment deleted various legislative entries relating to indirect taxes, the absence of such a provision would have been ‘catastrophic’ and denuded the States and Union of such crucial legislative power. (para 74) Comparing Section 19 with Article 243ZF, the Supreme Court noted that: 

However, the fact remains that those provisions as well as Section 19 were enacted in exercise of the constituent power. Section 19 is not, in this court’s opinion comparable to a mere Parliamentary enactment. There cannot be any gain in saying that Section 19 is not a mere legislative device. It was adopted as part of the 101st Constitutional Amendment Act. Undoubtedly, it was not inserted into the Constitution. Whatever reasons impelled Parliament to keep it outside the body of the Constitution, the fact remains that it was introduced as part of the same Amendment Act which entirely revamped the Constitution. (para 80)

The Supreme Court concluded that Section 19 was a transitory provision with limited life and whether it was part of the Constitution or not was academic, what was crucial was the effect of the provision. Thus, as per the Supreme Court the entire argument that Section 19 should be interpreted in a particular manner because of it being part of the Amendment Act but being included in the Constitution per se was irrelevant. Section 19 was enacted via the same process as other provisions of the Amendment Act and was a result of exercise of constituent power and not legislative power. 

Second, the Supreme Court then opined on the effect of the first observation, i.e., Section 19 was enacted as a result of exercise of constituent power. The Supreme Court noted that the 101st Amendment had brought significant changes to the Constitution in terms legislative powers relating to indirect taxes via deletion of legislative entries and thus the legislative powers of States and the Union ‘had to be directly sourced from the Amendment’ in the interim period. (para 92) As per the Supreme Court, in the hiatus period between coming into force of Section 19 and operationalising Article 246A (under which the States and Parliament exercise legislative powers on GST) legislative power should be traced to Section 19. 

In other words, the Supreme Court said that Section 19 was part of the Constitution since it was enacted through the same process as other provisions of the Constitution Amendment. And that since the 101stAmendment deleted previous sources of powers to levy indirect taxes and introduced new a locus of power under Article 246A, the source of legislative power for the transition period should be traced to Section 19. The ‘hiatus’ as per the Supreme Court was because the GST Council had not immediately recommended principles on the basis of which GST laws could be enacted in exercise of powers under Article 246A. And thus concluded that:

It is, therefore, held that there were no limitations under Section 19 (read together with Article 246A), of the Amendment. That provision constituted the expression of the sovereign legislative power, available to both Parliament and state legislatures, to make necessary changes through amendment to the existing laws. (para 97) 

The legislative power under Section 19, as per the Supreme Court, was only constricted by time, i.e., till 01.07.2017 and not in any other manner as suggested by parties to the case. 

The above is a liberal and expansive interpretation of Section 19 and goes far beyond what the text of the provision says. However, the Supreme Court justified by contextualising it and commenting on the drastic changes brought via the 101st Amendment. In my view, Section 19 only allowed States to amend existing provisions to bring them in conformity with the Constitution or enact new provisions to the same end. Section 19 did not allow States or the Parliament to enact any other provision for any other purpose. The restriction was not ‘only’ of time, but also of the nature and purpose of provisions that could be enacted and amended under Section 19. 

Third, and this is an indirect but proximate point, i.e., the Supreme Court clarified that Section 19 could not be used to clothe a retrospective amendment with validity. In other words, while the VAT Act may have been validly enacted, but once the power of States to enact or amend such laws ceased on 01.07.2017, then the States cannot amend the laws after the said date on the ground that laws can be amended retrospectively to cure a defect. The Supreme Court clarified that what was material was the presence of competence on the date on which amendment to the law was made and not the date when the law was enacted. (para 115)

Conclusion 

Supreme Court’s judgment in the impugned case is a well reasoned judgment that examines in depth the impact and nature of transitory provisions. While the Court may have, in my opinion, interpreted the scope of powers provided to the States more expansively than I think Section 19 provides, the end result nonetheless was that all the amendments to VAT Acts of the three States were held to be void on the ground that the States exercised their legislative powers once Section 19 had ceased to have effect. Telangana’s argument of ‘relating back’ was rejected on the ground that the State legislature did not possess competence on the date it enacted the amendment to approve the Ordinance. Similarly, the Supreme Court rejected the State of Gujarat’s argument that the amendment though effected after 01.07.2017 was retrospective in nature. Amendments by State of Maharashtra met the same fate. 

[1] The State of Telangana V M/S Tirumala Constructions 2023 INSC 942. 

[2] Article 243ZF of the Constitution states that: Notwithstanding anything in this Part, any provision of any law relating to Municipalities in force in a State immediately before the commencement of the Constitution (Seventy-fourth Amendment) Act, 1992, which is inconsistent with the provisions of this Part, shall continue to be in force until amended or repealed by a competent Legislature or other competent authority or until the expiration of one year from such commencement, whichever is earlier:   

Delhi High Court Allows IGST Refund to Vodafone

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In a recent judgment[1], the Delhi High Court ordered the Revenue Department to refund Integrated Goods and Services Tax (‘IGST’) claimed by the petitioners in respect of telecommunication services rendered by them to Foreign Telecom Operators (‘FTO’). Petitioners had entered into agreements with FTOs whereby they provided connectivity services to inbound subscribers of the latter. However, the Revenue Department rejected their refund claim on the ground that the services provided by petitioners did not amount to export of services. The High Court held otherwise.    

Facts 

Petitioners had entered into agreements with FTOs wherein the former agreed to provide connectivity services to subscribers of the latter who were in India/inbound subscribers. There was no privity of contract between the petitioners and subscribers of FTOs, the payments for connectivity services were made by subscribers to FTOs who, in turn, made payments to petitioners as per the terms of the agreement. 

The Revenue Department rejected petitioner’s claims for refund on two grounds: first, that the petitioners filed their claim for refund under Section 54 beyond the limitation period; second, the services provided by petitioners did not amount to export of services since the services were provided to inbound subscribers who were present in India and services were consumed in India. The petitioners, on the other hand, contended that they entered into agreements with FTOs and provided services to the FTOs. The FTOs, in turn, provided services to inbound subscribers. Thus, the services provided by petitioners to FTOs amounted to export of services since the FTOs were located outside India and the place of supply of services was outside India.  

Delhi High Court did not delve deeply into the issue of whether the petitioner’s claim was filed after the period of limitation. This is because the period of limitation was extended by the Central Board of Indirect Taxes and Customs via a Notification dated 05.07.2022. Thus, the only issue that the High Court had to engage with was whether services in question constituted export of services within the meaning of Section 2(6), IGST Act, 2017. 

Delhi High Court Decides, Relies on Precedent  

Section 2(6), IGST Act, 2017 defines ‘export of services’ and states as follows: 

            “export of services” means the supply of any service when, – 

  • The supplier of service is located in India; 
  • The recipient of service is located outside India; 
  • The place of supply of service is outside India; 
  • The payment for such service has been received by the supplier of service in convertible foreign exchange; [or in Indian rupees wherever permitted by the Reserve Bank of India]; and 
  • The supplier of service and recipient of service are not merely establishments of a distinct person in accordance with Explanation 1 in section 8; 

(emphasis added)

In the impugned case, the petitioner’s argument was that the recipient of service were FTOs, located outside India while the Revenue’s case that the recipient of service was the inbound subscriber who received the connectivity service due to an agreement between the petitioner and FTO. Since the Revenue was arguing that the inbound subscriber was the recipient, it by extension contended that place of service was in India. Thus, the services provided by the petitioner was not export of services and not entitled to a refund. 

The Delhi High Court instead of adjudicating on facts as to whether the inbound subscriber could be legitimately treated as a recipient of the petitioner’s service, cited the definition of export of services under Rule 6A, Service Tax Rules, 1994 which is similar to Section 2(6), IGST Act, 2017. It then relied on Verizon Communication case[2], to state that the said case covers the issue in the impugned case based on which the Revenue Department has granted refunds to predecessor of the petitioner and thus it allowed the petitioner to claim refunds in the impugned case as well. 

Precedent of Verizon Communication Case  

The Delhi High Court had considered the issue in detail in Verizon Communication case, where similar facts involved domestic telecom service providers, Verizon India and Verizon US. Verizon India had entered into a Master Supply Agreement with Verizon US for rendering connectivity services for the purpose of data transfer. Verizon India had filed for refund of taxes paid on its input on the ground that its output service to Verizon US, i.e., business support service, constituted as an export of service. The Delhi High Court agreed with Verizon India and in allowing its claim for refund, observed that: 

The position does not change merely because the subscribers to the telephone services of Verizon US or its US based customers ‘use’ the services provided by Verizon India. Indeed in the telecom sector, operators have network sharing and roaming arrangements with other telecom service providers whose services they engage to provide service to the former’s subscribers. Yet, the ‘recipient’ of the service is determined by the contract between the parties and by reference to (a) who has the contractual right to receive the services; and (b) who is responsible for the payment for the services provided (i.e., the service recipient). This essential difference has been lost sight of by the Department. In the present case there is no privity of contract between Verizon India and the customers of Verizon US. Such customers may be the ‘users’ of the services provided by Verizon India but are not its recipients. (para 46)

The distinction between the ‘user’ of services and ‘recipient’ of services proved to be crucial in the Verizon Communication case, and the Delhi High Court in the impugned case relied on the same. 

Conclusion 

The distinction between the user of services and recipient of services has been articulated in various cases, only for the said controversy to rear its head again before the Courts. In the impugned case, there was little reason, on substantive grounds, for the Revenue Department to deny refund to the petitioners. Courts, for example, have clearly that the customer’s customer is not your customer and that if a service is provided to a third party at the behest of your customer, the recipient is the customer and not the third party.[3] In the impugned case, this was squarely applicable as the inbound subscribers were not the recipients of services by petitioners, but it was the FTOs. Thus, the service provided by the petitioners to FTOs constituted as export of services entitling them to refund of IGST. 

[1] Vodafone Idea Limited v Union of India & Others 2023: DHC: 7468-DB. 

[2] Verizon Communication India Pvt Ltd v Assistant Commissioner of Service Tax, Delhi-III 2018 (8) GSTL 32. 

[3] See Vodafone Essar South Limited v CCE, Bangalore (Adn). Available at: https://indiankanoon.org/doc/193357462/ (Accessed on 30 October 2023).  

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.  

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