GST

Supply of Vouchers and GST: Three Decisions and a Defensible Conclusion

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This article focuses on the issue raised by M/s Kalyan Jewellers Limited (‘Kalyan Jewellers’) as regards the pre-paid instruments (‘PPI’)/vouchers issued by them to their customers. The claim of Kalyan Jewellers before the Advance Authority (‘AAR’), Appellate body for Advance Rulings (‘AAAR’), and thereafter before the Madras High Court was that the PPIs/vouchers issued by them were actionable claims. And due to the exemption of actionable claims under Schedule III of the CGST Act, 2017, the supply of PPIs was not subject to GST. Section 2(1) of CGST Act, 2017 defines actionable claims to have the same meaning as assigned to them under Section 3 of Transfer of Property Act, 1882 which inter alia defines it as a claim to any debt other than a debt secured by mortgage of immovable property or by hypothecation or pledge of movable property. And Schedule III of CGST Act, 2017 – as it existed then – stated that actionable claims, other than lottery, betting and gambling shall neither be treated as supply of goods nor supply of services. AAR, AAAR, and the Madras High Court all three adopted varied perspectives on the issue, and I examine all three below.     

AAR and AAAR Adopt Different Perspectives 

PPIs issued by Kalyan Jewellers directly or through third party vendors could be redeemed at any store of Kalyan Jewellers across India. PPIs were purchased by customers by paying a value of money specified on the PPI, and on payment the value was loaded on the PPI. And the customers could redeem the PPI against purchase of any jewellery in any of the outlets of Kalyan Jewellers. Kalyan Jewellers’ claim was that GST was only attracted when customers redeemed their PPIs, since the goods were sold at the time of redemption of PPIs and not at the time of supply of PPIs.

AAR observed that if the customer loses the PPI or is unable to produce it before expiry it cannot be used to purchase any goods. Based on the limited use of PPI, AAR concluded that PPI was not an actionable claim but only an instrument accepted as consideration/part consideration while purchasing goods from a specific supplier whose identity was established in the PPI. AAR held that PPIs constitute vouchers as defined under Section 2(118) of CGST Act, 2017 which states as follows: 

“voucher” means an instrument where there is an obligation to accept it as consideration or part consideration for a supply of goods or services or both and where the goods or services or both to be supplied or the identities of their potential suppliers are either indicated on the instrument itself or in related documentation, including the terms and conditions of use of such instrument; 

Relying on the above definition, the fact that PPI belongs to the customer who purchases it and is allowed to redeem it, AAR concluded that PPIs issued by Kalyan Jewellers are neither money nor actionable claims. And since other ingredients of a supply were fulfilled, the issuance of PPIs constituted as a supply.

The remaining question was that of time of supply, i.e., should GST be payable at the time of issuance of vouchers or at the time of their redemption by the customers? Time of supply where vouchers are involved is mentioned in Section 12(4), CGST Act, 2017 where it is stated that the time of supply shall be the date of issue of voucher, if the supply is identifiable at that point; or the date of redemption of voucher in all other cases. And since PPIs were redeemable against any jewellery, the time of supply in this case was held to be at the time of redemption of PPIs.     

Kalyan Jewellers filed an appeal before AAAR on the ground that PPIs only had a redeemable value but no inherent value capable of being marketable for the purpose of levy of GST. Kalyan Jewellers repeated its argument that PPIs are not actionable claims or goods and if their supply is subject to GST it would amount to double taxation since GST would also be paid at the time of supply of jewellery. AAAR adopted an interesting to determine the issue. AAAR held that PPI in question was neither a good nor a service, but it was not necessary to arrive at a determination if it was an actionable claim. 

AAAR categorized the PPI as a voucher, like AAR’s approach, but added its own observations. AAAR held that voucher is just means of an advance payment of consideration and per se it is neither a good nor a service. (para 7.9) It clarified that there was no issue of double taxation for if GST was levied at the time of issuance of PPI no GST would be payable at the time of its redemption. And whether supply of PPIs is taxable at the time of their supply or their redemption would be determined by the fact if the underlying supply is identifiable at that point. AAAR concluded that since the PPIs mentioned that they can be redeemed against gold jewellery at a known rate of tax, they were taxable at the time of their supply. (para 7.11) And since the PPI was neither a good or a service, it was classifiable as per the goods or services supplied on its redemption.      

It is interesting to note that Kalyan Jewellers was insistent that their PPIs be classified as actionable claims and not be subject to GST at the time of their supply but only at the time of their redemption. AAR and AAAR pretty much sidestepped the issue of actionable claim. Both the AAR and AAAR made one common observation, and in my view correctly so, that PPIs satisfied the definition of voucher and were means of consideration, treating the issue of whether PPIs were actionable claims as incidental and almost unnecessary. 

Madras High Court Goes a Step Ahead 

One would assume that AAAR’s succinct and accurate identification of PPI as vouchers would end the matter of taxability of PPIs issued by Kalyan Jewellers; but, that was not to be. Kalyan Jewellers appealed AAAR’s appealed before the Madras High Court and made similar arguments and claims it made before AAR and AAAR, i.e., PPIs issued by it were actionable claims and were subject to GST only at the time of their redemption and not at the time of their issuance. (paras 12-13) 

Madras High Court went a step further than both AAR and AAAR to interpret the definition of voucher, actionable claims and debt in significant detail and referred to the relevant provisions of Transfer of Property Act, 1882, General Clauses Act, 1897 and the Educational Guide issued under Finance Act, 1994. The High Court concluded that the PPIs issued by Kalyan Jewellers were a debt instrument as they acknowledged debt and could be redeemed on a future date towards sale consideration on purchase of any merchandise from the Kalyan Jewellers outlet. And if Kalyan Jewellers refused to redeem the value of PPI, the customer would have a right to enforce. 

Another factor that influenced the Madras High Court’s conclusion that PPI was an actionable claim was its attention to the fact that while the PPIs issued by Kalyan Jewellers mentioned that the customers would not be entitled to refund if PPIs expire before redemption, the said condition was not in accordance with RBI’s Master Directions on PPIs. The High Court clarified that even if the PPI expires before the customer claims refund, the customer would be entitled to claim refund. Accordingly, the High Court clarified that:

The “Gift Voucher/Card” is a debit card. It is like a frozen cash received in advance and thaws on its presentation at the retail outlet for being set off against the amount payable by a customer for purchase of merchandise sold by the petitioner or the amount specified therein is to be returned to the customer as per RBI’s Master Direction where a customer fails to utilize it within the period of its validity. (para 72)  

While the Madras High Court held that the PPI was an actionable claim, it also partially endorsed the AAAR’s approach that there was no need to determine if the voucher was an actionable claim to conclude that it was neither a good nor a service. As per the High Court it was sufficient to state that since PPIs were actionable claims, they were ‘as such’ not liable to taxation themselves, but only the underlying transactions were taxable. Here again, the implication of PPIs being not liable to GST as such is not clear, since PPIs are anyways liable to tax only in reference to the supply of goods or services that they facilitate. So while the High Court did finally endorse PPIs as actionable claims, it did not, and as per me, will not materially affect their taxability.    

Finally, the High Court’s conclusion was correct as it clarified that the PPI/voucher being the means of consideration could not be subject to GST, but only the goods or services purchased via it were taxable. Of course, presuming the other prescribed ingredients of supply were satisfied. (paras 79-80) As regards the time of supply, the High Court’s opinion was similar to that AAR and AAAR and there was no substantial change i.e., if goods were identifiable at the time of supply of vouchers that would constitute as time of supply else time of supply would be the date of redemption of vouchers. 

Is the Dust Settled on GST Implications of Vouchers? 

Has the Madras High Court’s opinion finally settled the dust on PPIs and their status as actionable claims under GST? I doubt it. The High Court in its decision cited the Karnataka High Court’s decision in M/s Premier Sales Promotion Pvt Ltd, where the latter made two observations that are slightly at odds with the impugned decision. The Karnataka High Court observed that PPIs do not have any inherent value of their own but are instruments of consideration and would fall under the definition of money under CGST Act, 2017. And money has been specifically excluded from the definition of both goods and services. (para 16) Second, the Karnataka High Court held that the issuance of PPIs was akin to a pre-deposit and their issuance did not amount to supply. (para 22) The Madras High Court cited the latter observations of the Karnataka High Court. (para 96) But, the Madras High Court never indicated if it agreed or disagreed with the Karnataka High Court’s approach. And, the difference in opinion of both the High Courts raises the question if PPIs are better classified as money or actionable claims?  

One way to understand this issue is by viewing vouchers as a sub-category of money. Vouchers serve the purpose of consideration or part consideration for goods or services while money, in its traditional form, also performs the same function. PPIs are also typically instruments or forms of consideration. And since PPIs also typically contain identities of suppliers, they tend to satisfy all ingredients of a voucher as in the impudnged case and are better understood as such. While the current divergence between the two High Courts on the actual character of PPIs, did not create any immediate implications in both cases, since both money and actionable claims are outside the purview of GST per se. The divergent interpretations of both the High Courts may present hurdles going forward and will require some reconciliation. 

Conclusion 

On balance, the Madras High Court’s decision is well-reasoned and, in my view, correctly identifies the status of PPIs. The High Court could have, like the AAAR chosen to not adjudicate on the issue of whether PPIs constitute an actionable claim, since the point of their taxability could have been decided only by a reference to the definition of vouchers. However, it scrutinized the key phrases and referred to various legislations and arrived at a justifiable conclusion creating a solid anchor for jurisprudence on the issue of GST implications of PPIs. 

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

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Introduction 

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

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

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

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

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

Arguments 

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

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

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

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

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

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

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

Delhi High Court Upholds NAA’s Constitutionality 

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

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

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

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

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

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

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

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

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

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

Conclusion 

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

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

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

Facts 

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

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

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

Arguments 

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

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

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

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

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

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

Madras High Court Favored the Petitioner 

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

Section 39(1) states that:

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

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

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

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

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

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

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

Jharkhand High Court Favored the Department 

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

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

Importance of Proviso to Section 50 

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

Section 50(1) states that: 

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

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

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

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

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

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

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

Conclusion

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

Section 16, CGST Act is Constitutional: Kerala HC

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

Facts 

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

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

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

Decision 

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

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

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

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

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

Conclusion 

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

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

Jharkhand HC Allows State Authorities to Continue Proceedings, Rejects DGGI’S Arguments on Nationwide Fake ITC Fraud

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The Jharkhand High Court recently adjudicated a writ petition where the petitioner had argued that only the authority which had initiated the entire process of investigation can complete the modalities and any subsequent actions by other authorities need to be quashed. The High Court interpreted Section 6, CGST Act, 2017 and the relevant notifications to adjudicate in favor of the petitioner. 

Facts 

The petitioner was the proprietor of M/s Manish Trading, Ranchi carrying on the business of iron, steel and cement. An inspection was carried out by the Intelligence Branch of the Jharkkhand State GST Dept and subsequently the petitioner was made to make certain deposits. Therafter, the Preventive Branch of CGST, Ranchi issued a notice to the petitioner directing reversal of ITC due to purchases made from certain non-existent entities. It was followed by a search carried out by DGGI, Central Tax which seized certain items from the petitioner and prepared a Panchnama to that effect. The petitioner was sent various summons. 

The petitioner approached the Jharkhand High Court with the prayer that it had been issued summons by 3 different authorities and that only the authority which had initiated the proceeding prior in point in time shall be authorized to carry out the proceedings. The petitioner relied on the Notification and subsequent clarificationissued by CBIC, wherein the latter stated that: 

            It is accordingly clarified that the officers of both Central tax and State tax authorized to initiate intelligence based enforcement action on the entire taxpayer’s base irrespective of the administrative assignment of the taxpayer to any authority. The authority which initiates such action is empowered to complete the entire process of investigation, issuance of SCN, adjudication, recovery, filing of appeal etc. arising out of such action. (para 3)

The petitioner elaborated that the said Notification had been issued under Section 6(2)(b), CGST Act, 2017 and that it was amply clear that the investigation had been initiated by inspecting team of State GST and only it should be authorized to carry forward the proceedings. 

The respondents including DGGI argued that the investigation were initiated by them as part of the investigations against the fake invoice gangs based in Noida. The respondents argued that the investigations had revealed various fake entities that were involved in claiming fraudulent ITC and the petitioner was part of a large scale fraud spread across various States. And that DGGI was better suited to conduct the investigation since it had an all India jurisdiction and normally State GST transfers such cases to DGGI. 

DGGI’s argument was thus two-fold: not only did it initiate the investigation but also it was more competent to handle the investigation since the case had inter-State ramifications. 

Decision 

The Jharkhand High Court noted that Section 6(2)(b) and the clarification issued under it made it amply clear that the chain of a particular event and the investigation carried out at behest of the Department are interrelated. The High Court observed that even if it accepted that the DGGI initiated an independent investigation based on information received in Noida:

… in that event also, we are at loss to say that the DGGI is raising a question about credibility and competence of the State GST Authorities, in carrying out the investigation concerning wrong/inadmissible availment of Input Tax Credit, inasmuch as, the officers of the DGGI does not enjoy any special power or privilege in comparison with the officers of the State GST Authorities. (para 14) 

Based on the above, the Jharkhand High Court concluded that since the investigation by State authorities were prior in time, including the search and seizure operation and since all proceedings are inter-related, the State authorities shall continue with the proceedings. 

Conclusion 

The impugned decision reveals the administrative complexity of a nationwide dual levy. Empowering officials both the Central and State level to administer a single tax in India is unprecedented and some administrative tensions are bound to arise. And this isn’t the first nor the last instance of jurisdictional tussles. The Jharkhand High Court did well to rely only on the relevant statutory provisions and notifications/clarifications to arrive at its decision. Whether it is the best decision from an administrative standpoint is not easy to tell. At least not yet.  

An Ambiguous Circular: Is Electricity Indirectly under GST?

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On 31.10.2023, CBIC issued a Circular clarifying the applicability of GST on certain services. The Circular, inter alia, clarified one issue which is the focus of this article. The issue, as framed by the Circular, was: Whether GST is applicable on reimbursement of electricity charges received by real estate companies, malls, airport operators etc. from their lessees/occupants? The Circular instead of clarifying the issue has raised further questions about the immediate GST implications on the transactions and is an example of the larger issue afflicting Indian tax policy: making rather than clarifying law through Circulars.  

Separate Invoices Are Immaterial 

The first transaction that the Circular mentions is supply of electricity by real estate companies, airports, malls, etc. to their occupants. The Circular mentions that if electricity is supplied as part of a composite supply then it shall be taxed accordingly. Section 2(30), CGST Act, 2017 defines composite supply to mean a supply made to a taxable person consisting of two or more taxable supplies of goods or services, which are naturally bundled together and supplied in conjunction with each other, in the ordinary course of business, one of which is a principal supply. And that the applicable GST rate is that of the principal supply. The first issue is that electrical energy is exempt from GST under Notification No. 2/2017 – Central Tax (Rate) (See Serial No. 104). Since electrical energy is exempt, it cannot, in my view, be included in a composite supply since the essential condition for a composite supply is that it should include two taxable supplies. An exempt supply cannot indirectly be transformed into a taxable supply by a Circular by treating it as an ancillary of a composite supply.         

The Circular curiously adds that even if electricity is billed separately, the supply will constitute a composite supply and shall be billed at the rate of principal supply, i.e., renting of immovable property. This position is again questionable, especially if one accounts for a previous Circular issued in June 2018. Serial No. 2 of the Circular answered the question: how servicing of cars involving both supply of goods and supply of services are to be treated under GST? The Circular clarified that where supply involves both supply of goods and supply of services and their value is shown separately, the goods and services will be liable to tax at the rates as applicable to such goods and services separately. Why is the position different if invoice for supply of electricity is issued separately? Why shouldn’t supply of electricity and renting of immovable property, be liable to GST at their applicable rates if they are billed separately? A cynical view would suggest that it is because if electricity is billed separately, it would be treated as an exempt supply, but if it is included in a composite supply it allows levy of GST on supply of electricity. One thing is evident that the Circular of 2018 and Circular of 2023 do not show a consistent view on taxability under GST if separate invoices for goods and services are issued.         

Pure Agent Acquires a New Meaning

Paragraph 3.3 of the Circular of 2023 invokes the concept of pure agent and is worth citing in full: 

However, where the electricity is supplied by the Real Estate Owners, Resident Welfare Associations (RWAs), Real Estate Developers etc., as a pure agent, it will not form part of value of their supply. Further, where they charge for electricity on actual basis that is, they charge the same amount for electricity from their lessees or occupants as charged by the State Electricity Boards or DISCOMs from them, they will be deemed to be acting as pure agent for this supply. 

The first and second sentences seem to refer to the pure agent in varied terms. The first sentences aligns with Rule 33, CGST Rules, 2017 which states that expenditure or costs incurred by a  supplier as a pure agent of recipient of supply shall be excluded from the value of supply. The latter sentence introduces a deeming fiction wherein the real estate owners, real estate developers, etc. are ‘deemed to be acting as pure agent’ if they charge for electricity on an actual basis. Does this mean that in this particular instance, the conditions specified in Rule 33, CGST Rules, 2017 for a person to be considered as a pure agent need not be satisfied? While a deeming fiction can be introduced, it is suspect if a Circular can introduce a deeming fiction bypassing the conditions specified in the Rules. A more prudent approach would have been to amend the Rule 33 if the intent was that certain entities were to be treated as pure agents irrespective of whether they fulfil the conditions specified in the said Rule. For now, we do not know if the Circular should prevail over the Rules or vice-versa, introducing an avoidable layer of indeterminacy on the issue.    

Conclusion 

The impugned Circular, in so far as it sought to introduce clarity on the applicability of GST on electricity charges has, in my view, not achieved its objective. In fact, it has introduced more uncertainty. And apart from the ambiguity that the Circular has introduced, this is an apt example of law making through Circulars. The statutory provisions and the relevant Rules do not, in any manner, support some of the clarifications issued by CBIC through its Circular. In fact, it is an exercise of law making with the Circular stating certain legal positions and articulating interpretations that cannot be directly linked to the parent statute. This leaves GST policy at the mercy of convenient interpretations that may find favor with CBIC at a particular point.     

ITC Can be Denied if Delay in Filing Returns: Cal HC

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The Calcutta High Court recently decided the question whether an assessee filing its tax returns after the stipulated time – prescribed under Section 16(4), CGST Act, 2017 – is entitled to claim ITC. The High Court answered in the negative and upheld the GST Department’s order denying ITC to the assessee on the ground of belated filing of returns.  

Facts and Arguments 

Assessee in the impugned case submitted the returns in GSTR-3B for the period from November 2018 to March 2019 on 20.10.2019 which was beyond the due date of submission, i.e., September 2019. The assessee was asked to show cause as to why its claim for ITC should not be denied since the returns were filed after the due date. On assessee’s failure to respond, the GST Department initiated recovery proceedings and debited the requisite amount from the cash ledger balances of the assessee. The assessee challenged the recovery actions before the Calcutta High Court. 

To begin with, it is important to briefly note that Section 16, CGST Act, 2017 prescribes the eligibility and conditions for an assessee to claim ITC. Section 16(2) requires fulfilment of certain conditions such as possession of tax invoices, receipt of goods or services or both while Section 16(4) prescribes the time within which an assessee is required to file returns to be eligible to claim ITC. And, another aspect that would become relevat in the subsequent discussion, Section 16(2) begins with  non-obstante clause, ‘Notwithstanding anything contained in this section’ while a similar clause is absent in Section 16(4). 

The assessee’s argument was that once the conditions stipulated in Section 16(2), CGST Act, 2017 have been fulfilled by the assessee, it is entitled to the right to claim ITC. And that availing or utilizing the ITC through procedural formalities of filing returns is a matter of choice for the assessee. The assessee further argued that ITC is not claimed through returns but through books of account under Section 16(2). And that the non-obstante clause used in Section 16(2) cannot be negated by stipulating an outer time for filing returns as an additional condition for claiming ITC under Section 16(4). If an assessee is denied the right to claim ITC for failure to file returns within the time stated under Section 16(4), it would negate the non-obstante clause of Section 16(2). 

The Revenue Department, on the other hand, argued that the non-obstante clause used in Section 16(2) cannot be interpreted in isolation. And that Section 16(2) and Section 16(4) were complementary provisions and not contradictory provisions. Section 16(2) prescribed the conditions necessary to avail ITC and Section 16(4) added the condition of time. Only by relying on the non-obstante clause, Section 16(2) cannot be interpreted in a manner to render Section 16(4) otiose. 

Calcutta High Court Decides 

The Calcutta High Court referred to various precedents decisions pronounced under GST and under VAT laws to emphasise three things: 

First, in matters of taxation the legislature deserves greater latitude and courts should be circumspect before intervening in tax disputes. While the doctrine of deference to taxation statutes has a long standing and questionable traction in Indian jurisprudence, it served no immediate purpose in deciding the issue at hand.  

Second, the High Court noted that a provision in a statute cannot be interpreted in isolation and there is a need to read it along with other provisions in the statute especially if the subject matter in the different provisions or different parts of the statute is similar. 

Third, the High Court cited a slew of precedents to express its agreement with the view that ITC is a concession and can only be claimed as a matter of right by an assessee on fulfilling the conditions prescribed in the statute. Relying on the same, the High Court observed that:

Section 16(2) does not appear to be a provision which allows Input Tax Credit, rather Section 16(1) is the enabling provision and Section 16(2) restricts the credit which is otherwise allowed to the dealers who satisfied the condition prescribed the interpretation given by the court that the stipulation in Section 16(2) is the restrictive provision is the correct interpretation given to the said provision. (para 12)

The Calcutta High Court also relied on the Patna High Court’s recent judgment to observe that Section 16(4) did not suffer from ambiguity and an assessee’s right to claim ITC can only materialise on fulfilling the conditions prescribed under Section 16(2) as well the condition prescribed under Section 16(4), i.e., filing of returns within a stipulated time. 

Conclusion 

There are, in my view, two important takeaways from the impugned judgment: first, the Calcutta High Court’s view that ITC is a concession/benefit granted by the State to an assessee and it can be claimed only if the conditions prescribed in the statute are strictly followed, though the nature of ITC is not as straightforward and may require a deeper look; second, all the conditions prescribed in Section 16 need to be fulfilled to claim ITC successfully and the condition to file returns within a prescribed time cannot be understood to be as optional. Failure to adhere to the time of filing returns will rightly result in denial of ITC.  

Allahabad HC Clarifies Govt’s Scope of Power under Section 3 and 5, CGST Act, 2017

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In a recent decision[1], the Allahabad High Court interpreted Sections 3 and 5 of the CGST Act, 2017 and clarified the scope of power of the Central Govt and the CBIC under these provisions. Section 3 confers the Central Govt with the power to appoint classes of officers for the purposes of CGST Act, 2017. Section 5 provides that officer of central tax may exercise powers and discharge duties subject to such conditions as the CBIC may impose. The High Court rejected petitioner’s argument that the Central Govt does not have the authority to confer powers on the officers under Section 5 and observed that the petitioner’s contention lacked substance. 

Facts 

The petitioner invoked extraordinary writ jurisdiction of the Allahabad High Court challenging Notification No. 14/2017 – Central Tax dated 01.07.2017 on the ground that it was ultra vires to the power of the Central Govt. The petitioner also made additional arguments about the jurisdiction of the concerned officers to carry out inspection/search proceedings under Section 67 and power to issue summons. I will though confine this post to the petitioner’s first argument involving power of the Central Govt and CBIC under Sections 3 and 5 of CGST Act, 2017. 

According to the petitioner, the Central Govt in exercise of its powers under Section 3 has issued the Notification No. 14/2017 – Central Tax wherein it has appointed officers of Director General of Goods and Services Tax Intelligence (‘DGSI’) as Central Tax Officers and invested them with all the powers under CGST Act and IGST Act. The petitioner contended that appointing officers does not confer them with powers and the latter was outside the remit of the Central Govt’s powers under Section 3. The petitioner’s case was that only the Commissioner in Board can confer powers to Central Tax Officers under Section 5 read with Section 167 and Section 168. 

The relevant statutory provisions are worth citing before examining the Allahabad High Court’s reasoning and its decision. Section 3, CGST Act, 2017 states that the Central Government shall, by notification, appoint the following classes of officers for the purposes of this Act. The classes of officers include the Principal Chief Commissioners or Directors General of Central Tax, Principal Commissioners of Central Tax or Directors General of Central Tax among others. Section 5 states that subject to such conditions and limitations as the Board/CBIC may impose, an officer of central tax may exercise the power and discharge the duties conferred or imposed on him under this Act. 

Simply put, the petitioner was arguing that the Central Government could only appoint certain officers as central tax officers while conferring them with powers could be done by the Board/CBIC under Section 5. Since the Notification No. 14.2017 – issued by the Central Govt – also performed the latter function, it was ultra vires Sections 3 and 5 of the CGST Act, 2017. Ironically, the said Notification was previously issued by CBIC and later via a corrigendum it was substituted by the word Central Govt.  

Decision 

The Allahabad High Court stated that the petitioner’s argument lacked substance. It traced the timeline relating to Notification No. 14/2107 – Central Tax and wording of Sections 3,4, and 5 of CGST Act, 2017. The High Court agreed with the petitioner’s contention that it was essentially the CBIC which had been empowered to entrust the power to the officers under Section 5, CGST Act, 2017. The High Court though treated the CBIC as an extension of the Central Govt. Referring to the constitution of CBIC, the High Court observed that it was constituted under Central Boards of Revenue Act, 1963 and that: 

Further, section 3 of the Central Boards of Revenue Act, 1963 relating to Constitution of Central Boards for Indirect Taxes and Customs says that it is the Central Government, which shall constitute the Central Board of Indirect Taxes and Customs and the said Board shall be subject to the control of the Central Government and shall exercise such powers and perform such duties, as may be entrusted to that Board by the Central Government or by or under any law. (para 18)

 The High Court concluded that it appears that the CBIC is subservient to the Govt and it can be argued that when the power has been invested with CBIC to do certain things, how can the Govt not exercise such a power. (para 18) The CBIC is to be understood as an alter ego of the Central Govt?  

Conclusion 

The necessary corollary of the High Court’s decision is that any power conferred on CBIC can be exercised by the Central Govt and more crucially, this could also mean that CBIC lacks autonomy. Undoubtedly, CBIC is a creation of the Central Govt under a statutory provision, but that cannot necessarily lead to the conclusion that the powers of CBIC are exercisable by the Govt in all cases and for all purposes. An analogy would be that a sectoral regulator such as RBI or SEBI is a creation of the statute, but that does not mean that any power of these statutory bodies can be exercised by the Central Govt. The Govt does has the power to supplant a statutory body only in exceptional or specified circumstances. And if CBIC and the Central Govt are to read interchangeably, what is the point of mentioning one and not the other in certain provisions? 

[1] R.C. Infra Digital Solutions Inc v Union of India TS-02-HCALL-2024-GST. 

Appellate Authority Ignored CBIC’s Circular: Bombay HC

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In a recent decision[1] the Bombay High Court expressed surprise that the appellate authority ignored CBIC’s Circular while ordering the assessee to pay back the Input Tax Credit (‘ITC’) refund granted to it along with interest. The High Court set aside the order by appellate authority.  

Facts 

The assessee had filed an application on 29.08.2018 seeking refund of ITC under Section 54(3), CGST Act, 2017 on export of goods made under a Letter of Undertaking. The assessee was granted a 90% refund of ITC via the first order and via a subsequent order, after scrutiny, the entire amount claimed as refund was granted. The Department, however, challenged the order granting refund to the assessee before the Commissioner/appellate authority claiming that the assessee must pay back the entire refund amount along with the interest. The Commissioner passed an order in favor of the Department which was assailed by the asssessee before the Bombay High Court. The primary ground of the assessee’s challenge was the legality of the Commissioner’s order.    

Two Circulars 

The legality or sustainability of the Commissioner’s order rested on CBIC’s Circular issued on 18.11.2019 (‘Circular of 2019’). The Department argued that the assessee was not allowed to make a simultaneous claim for refund that related to different financial years. And that in the impugned case, the assessee had claimed credit for the period from 1.04.2018 to July 2019 and financial year 2017-18. 

The assesee, on the other hand, argued that the refund was in conformity with Rule 89(4), CGST Rules, 2017 which provide a detailed formula for computing the refund for the assessee. Further, the assessee argued that the Commissioner’s view was not in accordance with the CBIC’s Circular dated 31.03.2020 (‘Circular of 2020’) which clarified and negated some of the refund related conditions mentioned in the Circular of 2019. 

The Commissioner was correct in interpreting the Circular of 2019. Paragraph 8 of Circular of 2019 stated that while an applicant file a refund for a tax period or by clubbing different tax periods, the refund claim cannot spread across different financial years.  The Commissioner was remiss in not noting that the Circular of 2020 had categorically modified the Circular of 2019 and removed the condition that a refund cannot be spread across more than one financial year. (para 2.5) Paragraph 2.4 of Circular of 2020 stated that: 

On perusal of the provisions under sub-section (3) of section 16 of the Integrated Goods and Services Tax Act, 2017 and sub-section (3) of section 54 of the CGST Act, there appears no bar in claiming refund by clubbing different months across successive Financial Years. (emphasis added) 

The rationale for modification was motivated by the underlying legal principle that a Circular cannot introduce a more stringent condition than imposed by the statutory provision. Circular of 2020 was also prompted by the Delhi High Court’s decision wherein it termed the condition imposed Paragraph 8 of the Circular of 2019 as arbitrary and stayed the condition which prevented an assessee from claiming refunds that spread across more than one financial year. The High Court had ordered opening of portal to allow the exporters to claim refunds that were tied to more than one financial year.   

Decision 

A persual of Rule 89(4) along with the Circular of 2020 clarifies the legal position amply, and the Bombay High Court correctly noted that the assessee was entitled to claim the ITC credit available for the prior financial years too. The High Court stated that it was a matter of wonder as to how the Commissioner could arrive at a decision contrary to both the Rule and the Circular of 2020 to deny the refund to the assessee. And that either the Commissioner had overlooked or not addressed the matter because it did not record a finding on the issue, which was impermissible. (para 11) Accordingly, the High Court concluded that the order of the Commissioner could not be sustained and was liable to be set aside. 

Conclusion 

The impugned decision is an instance of the Department challenging a legally sound order of one of its own officers, and the appellate authority, in this case the Commissioner, adopting a view that was contrary to the CBIC’s Circular. Either the Circular of 2019 was cherrypicked because it favored the Department or there was a genuine oversight by the Commissioner in not referring to the Circular of 2020, which had diluted the Circular of 2019. Either way, through the impugned case, the GST Department does not give the impression of a sound tax administration that is taking decisions as per the applicable law.  

[1] M/s Sine Automation and Integration Pvt Ltd v Union of India TS-697-HCBOM-2023-GST. 

Madras HC Holds Prescribed Time Period for Filing Returns as ‘Directory’: Interprets Section 62, CGST Act

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In a recent decision[1], the Madras High Court had to decide if an assessee loses the right to file tax returns after expiry of 30 days under Section 62(2), CGST Act, 2017. Section 62(2) provides an assessee 30 days to file returns after the proper officer passes a ‘best judgment’ assessment order. The High Court held that the assessee does not lose its right to file returns, but its interpretation of the provision is not founded on cogent reasoning. 

Facts 

In the impugned case, the asssessee failed to file its tax returns for the months of December 2022, January 2023 and February 2023. Thus, in exercise of the powers under Section 62(1), the proper officer passed best judgment assessment orders on 28.03.2023 for the month of December 2022 and on 30.04.2023 for the months of January 2023 and February 2023. Under Section 62(2), the assessee can file a valid return within 30 days of the service of best judgment assessment order passed by a proper officer under Section 62(1). And if the return is filed, the best judgment assessment order is deemed to have been withdrawn but the assessee’s liability for payment of fine and penalty continues. 

In the impugned case, the assessee did not file its return within 30 days of the passing of the best judgment assessment order and pleaded that the delay be condoned on account of financial difficulties. The Madras High Court framed the issue as: whether the assessee loses the right to file returns after expiry of 30 days or is right retained by providing sufficient reasons for non-filing of returns. (para 13) 

Decision 

The Madras High Court examined the relevant provision, i.e., Section 62, CGST Act, 2017 and stated that under Section 62(1) the proper officer has been granted a period of 5 years for completing the best judgment assessment. The 5 years are calculated from the due date of filing of annual return of the relevant financial year. Thus, the High Court deduced that in the impugned case, the proper officer could finalise the best judgment assessment order until 31.12.2029. And thereafter elaborated:

In such case, if the best judgement assessment order is passed by the respondent on 31.12.2029, which is permissible under Section 74 of the GST Act, the petitioner can file his returns within a period of 30 days therefrom i.e., on or before 30.01.2030. Hence, the time limit is available up to 30.01.2030 for the petitioner to file their returns. (para 14) 

The above paragraph is a peculiar reading of Section 62. Under Section 62(1), the proper officer has an outer time limit of 5 years to finalise the best judgment assessment order. This does not automatically extend the right of an assessee to file their tax returns to 5 years and 30 days. The assessee, under Section 62(2), must file a valid tax return within 30 days of passing of the best judgment assessment. Only because in the impugned case the proper officer finalized the best judgment assessment much before expiry of 5 years does not mean that the right of assessee extends to 5 years and 30 days. If the right of an assessee is interpreted to survive for 5 years and 30 days in all cases, then prompt passing of best judgment assessment orders would negate the 30 day outer limit as assessee can file valid returns anytime within 5 years and 30 days. The intent of the provision seems to be to allot the proper officer a window of 5 years to pass an order and the assessee 30 days once the order has been passed.    

The other issue, about condonation of delay was where the Madras High Court’s observations were on sounder footing. The High Court observed that if there is a sufficient reason for not filing returns within 30 days then the delay can be condoned. But, this does not lead to the High Court’s conclusion that ‘the limitation of 30 days period prescribed under Section 62(2) of the Act appears to be directory in nature’. (para 16) Here again, interpreting the 30-day time period allotted to the assessee as directory in nature is an opinion manufactured by the High Court without any cogent reasoning or a detailed analysis of the intent of the provision. 

Conclusion 

The Madras High Court’s conclusion that if there is delay on assessee’s part, i.e., beyond 30 days, then the delay can be condoned if sufficient reasons are presented is appreciable. However, the interpretation that the period of 30 days is only directory in nature and right of the assesse to file valid returns extends beyond 5 years lacks teeth. The High Court was remiss in not noticing that the period of 5 years was for the proper officer and not the assessee. The latter only has 30 days which commence from the service of the assessment order.    

[1] Comfort Shoes Components v Assistant Commissioner, Ambur, Vellore TS-694-HCMAD-2023-GST. 

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