GST

Supreme Court Reduces Penalty under Section 129, CGST Act: Clarifies that Decision is Not a Precedent

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Supreme Court in a recent case[1], directed that the penalty imposed on the assessee for transporting goods without a valid e-way bill should be reduced by 50%. While the Calcutta High Court had upheld the levy of penalty, the Supreme Court to serve ‘ the ends of justice’ reduced the penalty amount by half, without articulating any convincing reason for its conclusion and stated that its order in the impugned case should not be treated as a precedent.   

Facts 

The brief facts of the case are: the assessee was in the business of horizontal drilling in underground utilities and availed the services of M/s Hariom Freight Carriers for transportation of one its machines weighing 68 tons from its previous work site in Uttar Pradesh to West Bengal. The e-way bill for transportation was generated on 30 May 2019, and it was valid until 9 June 2019. The transportation was not done within the validity period and the vehicle was intercepted on 17 June 2019 and was found carrying goods without a valid e-way bill. Accordingly, the assessee was issued a notice as to why it should not pay a tax of Rs 54,00,000 and a penalty of equivalent amount. The said amount was confirmed against which the assessee filed an appeal. The assessee deposited 10% of the tax demand and furnished a bank guarantee of the amount of demand to secure release of its machine. However, the appeal was not decided and the Calcutta High Court directed that the appeal be decided. Eventually, the High Court ordered that the tax be paid in cash, 50% of the penalty amount be paid in cash and the remaining 50% of the penalty amount be paid by furnishing a bank guarantee which should be valid for 1 year. Against the said order, the assessee approached the Supreme Court.     

Arguments and Decision 

The assessee’s arguments before the Supreme Court centred around reduction of the penalty amount. The assessee argued that the imposition of such a heavy penalty would lead to financial hardship for it. The assessee had no justifiable reason for not generating another e-way bill after expiry of the first one. The assessee could only suggest that M/s Hariom Freight Carriers did not have another vehicle available for transportation and it did not inform the assessee about it, which led to transportation of the machine accompanied by an expired e-way bill. The assessee also added that the transaction in question was not a sale/purchase but merely the transport of its capital goods from one place to another and the entire set of circumstances should be taken cognizance of to reduce its penalty.

The Revenue Department, on the other hand, defended the imposition of penalty by clearly and cogently arguing that the assessee had no valid reason for not carrying a valid e-way bill and in the absence of a valid e-way bill, it was completely justified to levy a tax and penalty on the assessee. The Revenue Department added that there was a gap of 10 days between expiry of e-way bill and interception of the transport, and the assessee should have been more vigilant. And if another vehicle was not available, then the assessee should not have agreed to transport the machine without a valid e-way bill. 

The Supreme Court referred to three distinct facts: first, an e-way bill was generated by the assessee, even if goods were transported after it had expired; second, the fact that the machine was being transported for use of the assessee itself, but in another place and there was no sale/purchase involved; third, that the penalty of a huge amount of Rs 54,00,000 was imposed on the assessee. The Court said that while it would not have ordinarily interfered, ‘the ends of justice’ would be served if the penalty amount is reduced by 50%. And concluded its order by clarifying that the order was passed under Article 142 of the Constitution and should not be treated as a precedent. 

Conclusion 

Ordinarily, one would not quibble if a Court intervenes to reduce the penalty imposed on an assessee if it in the opinion of the Court the penalty is unjust or harsh. However, in such scenarios the onerous nature of the penalty should be obvious. In the impugned case, while the penalty amount was certainly on the higher side, it is difficult to see how the assessee was not at fault. It was negligent behaviour on assessee’s part for allowing goods to be transported on an e-way bill that had expired 10 days before the vehicle was intercepted. While the fact that a penalty may impose financial hardship is an acceptable reason for reducing the quantum of penalty, the assessee’s conduct, in my opinion, did not merit the leniency shown by the Supreme Court.     

[1] Vardan Associates Pvt Ltd v Assistant Commissioner of State Tax, Central Section & Ors TS-692-SC-2023-GST. 

Pre-Deposit Under CGST Act Does not Include Penalty and Fee: Kar HC

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The Karnataka High Court in a recent decision[1] interpreted Section 107, CGST Act, 2017 and adopted a literal interpretation of Section 107(6)(b) to hold that it only mentions that the remaining amount of tax in dispute needs to be deposited before filing an appeal excluding fee, penalty and fee. Since the provision does not mention interest, fine or fee, the same cannot be read into the provision to create an onerous burden on the assessee before admitting its appeal. 

Facts and Arguments 

The facts of the case are brief: the petitioner’s appeal before the appellate authority was rejected on the ground that the condition prescribed under Section 107, CGST Act, 2017 had not been fulfilled. Section 107(1) states that any decision or order passed under CGST Act, CGST Act or UTGST Act by an adjudicating authority may be appealed by a person to such Adjudicating Authority as may be prescribed. Section 107(6) states that no appeal shall be filed under sub-section (1), unless the appellant has paid – 

  • in full, such part of the amount of tax, interest, fine, fee and penalty arising from the impugned order, as is admitted by him; and 
  • a sum equal to ten per cent of the remaining amount of tax in dispute arising from the said order, subject to a maximum of twenty-five crore rupees, in relation to which the appeal has been filed: (emphasis added)

The petitioner argued that it was disputing the entire amount confirmed in the confiscation order and under Section 107(6)(b), the tax in dispute would only include the tax component and not the interest, fee and fine. The appellant authority erred in not admitting its appeal by stating that 10% of the entire amount needs to be deposited and not 10% of the tax in dispute. The petitioner approached the Karnataka High Court via a writ seeking appropriate directions. 

The Revenue Department had a meek reply and argued that the petitioner was virtually trying to defeat the provision of appeal under Section 107. The Revenue Department argued that since the petitioner was disputing the entire amount, it was obliged to deposit 10% of the entire amount and not 10% of the tax. 

High Court Adopts Strict Interpretation 

The Karnataka High Court gave three broad reasons for agreeing to the petitioner’s arguments: 

First, the High Court cited Section 107(6) and observed that there was a statutory basis for asserting that the petitioner should only deposit 10% of the disputed tax before filing an appeal. The High Court noted that the interpretation also aligned with the legal principle that penalties are consequent to determination of tax liability. 

Second, it observed that if the statute provides that a thing has to be done in a particular manner, it should be done only in that manner. (para 8) Adopting the principle of strict interpretation of tax statutes, the High Court observed that the terms fine, fee, penalties were not used in Section 107(6)(b), but only the term ‘disputed tax’ was used, and the provision should be interpreted as per the words mentioned in it. The High Court added that the isolation of the term ‘a sum equal to ten per cent of the remaining amount of tax’ reflected legislative design and an intention to limit the pre-deposit requirement to only 10% of the disputed tax amount.  

Third, the High Court noted that the presumption is that the legislature has not made any mistake and the language employed is the determinative factor in ascertaining legislative intent. If there is any omission or defect in the provision, the Courts cannot correct it.

Conclusion The Karnataka High Court in the impugned case adopted a reasonable approach and appreciably adhered to the principle of strict interpretation of tax statutes to rule in favor of the petitioner. The High Court’s decision is clearly and unequivocally supported by the language of the provision. In fact I would argue further and recommend and in similar cases where the appellate authority takes such stance which is obviously and clearly against the written text, Courts should consider levying a penalty or costs for forcing the assessee’s hand to approach the High Court merely to get its appeal admitted.   

[1] M/S Tejas Arecanut Traders v Joint Commissioner of Commercial Taxes TS-686-HCKAR-2023-GST. 

SEZ Unit Not Entitled to Exemption from GST Compensation Cess: Andhra High Court

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In a recent decision[1], the Andhra Pradesh High Court decided two similar writ petitions and held that the SEZ unit was not eligible for exemption from GST Compensation Cess. The High Court noted that there were three specific provisions under the SEZ Act, 2005 which provided a tax exemption and interpreted the said provisions strictly to conclude that the petitioner’s claim for exemption from GST Compensation Cess did not have merit and dismissed both the writ petitions. 

Facts 

The petitioner was a company engaged in the business of ferro alloys manufacturing and was established as a SEZ unit under the SEZ Act, 2005. As per Section 26 of the SEZ Act, the petitioner was exempt from paying any duty, tax or cess under the Customs Act, 1962 and Customs Tariff Act, 1975. The petitioner sought clarification from Director (SEZ) if it was eligible for exemption from GST Compensation Cess on import of coal. The Director replied in the negative and stated that CBEC had issued a Notification No. 64/2017 under which payment of IGST was exempt on import of coal by a SEZ unit, which was otherwise leviable under Section 3 of the Customs Tariff Act, 1975. And under Section 26(1)(a), a SEZ unit is exempt only from duty of custom under the Customs Act, 1962 and Customs Tariff Act, 1975. Thus, there was no exemption from GST Compensation Cess under Section 26(1)(a) of SEZ Act, 2005. The petitioner challenged the aforesaid opinion of the Director (SEZ) as erroneous via writ petition before the Andhra Pradesh High Court.  

The Revenue Department’s arguments before the Andhra Pradesh High Court were like that of Director (SEZ). 

Decision

The Andhra Pradesh High Court spent considerable space in elaborating the nature and rationale of GST Compensation Cess, which wasn’t entirely germane to the issue in the impugned case. The High Court noted the scheme of SEZ Act and observed that tax exemption can be granted under three provisions of the SEZ Act, i.e. Sections 7, 26, and 50. 

Under Section 7 the exemption from taxes and cesses is available subject to certain conditions, but only if the relevant enactments are specified in the First Schedule of the SEZ Act, 2005. The petitioners desisted the claim that they were exempt from GST Compensation Cess under Section 7, since the relevant enactment – GST (Compensation to States) Act, 2017 – was not specified in the First Schedule of the SEZ Act. 

Second, petitioners did not press their claim under Section 50 since the said provision empowered the State Governments to grant tax exemptions, and there is presumably no State level legislation to implement SEZ Act, 2005.

The petitioners claim for exemption from GST Compensation Cess rested entirely on their interpretation of Section 26 of the SEZ Act. The petitioner’s argument for exemption was as follows: petitioner is exempted from custom duties under Section 26(1)(a) of SEZ Act including all the duties enumerated in the Customs Tariff Act, 1975. And since GST Compensation Cess is leviable on imports under Section 3(9) of the Customs Tariff Act, 1975, the petitioner is also exempt from paying it under Section 26(1)(a) of SEZ Act. The Revenue Department counter argued that what was exempt under Section 26(1)(a) was ‘duty of customs’ under Customs Act, 1962 or Customs Tariff Act, 1975. The Department elaborated and correctly so, that GST Compensation Cess owed its origin to the GST (Compensation to States) Act, 2017 and Section 3(9) of the Customs Tariff Act, 1975 only prescribes the rate applicable. Succinctly put, the petitioner cannot be allowed to interpret Section 26(1)(a) to include GST Compensation Cess when the provision only mentioned customs duty.  

The Andhra Pradesh High Court agreed with the Revenue Department, and concluded that: 

when Section 26 of SEZ Act is perused, it is discernible that the word “duty” alone is used in the said section but not the word “cess”. More prominently U/s 26(1)(a), on which much reliance is placed by the petitioners, what is exempted is only duty of customs but not any cess much-less the GST Compensation Cess. Therefore, it is difficult to accept the contention that the exemption of duty of customs under the Customs Act, 1962 or the Customs Tariff Act, 1975 or any other law on import of goods encompasses the Compensation Cess also merely because its rate of tariff is mentioned in Section 3(9) of Customs Tariff Act, 1975. In our considered view, such an argument is of no avail to the petitioners. (para 27)

In adopting a strict interpretation of Section 26(1)(a), the Andhra Pradesh High Court was clear in its conclusion that the term duty could not include within its scope GST Compensation cess. To emphasise that the scope of Section 26(1)(a) was deliberately narrow, the High Court noted that Section 7 of SEZ Act used the term ‘tax, duty or cess’, but Section 26(1)(a) did not include cess within its scope and only mentioned the term duty. And since Section 26(1)(a) only uses the term duty thereby negativing the petitioner’s argument that cess should be read into the provision. 

Conclusion  

The impugned decision is an appropriate example of the Court interpreting the provisions of a tax statute in a strict manner and rightly so. There is a well-established doctrine of interpreting the tax statutes in a strict manner and not read into the provision words and phrases that are not used in the relevant provision. The Andhra Pradesh High Court correctly adopted the said interpretive doctrine to deny petitioner’s claim of exemption from GST Compensation Cess.  

[1] Maithan Alloys Ltd v Union of India TS-677-HCAP-GST. 

Adjudicating Officer Bound to Consider Assessee’s Defence: Calcutta High Court

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In a recent decision[1], a Division Bench of the Calcutta High Court has held that the adjudicating officer should consider the assessee’s explanation or defence before passing the adjudicating order that imposes penalty under Section 129, CGST Act, 2019. If an adjudicating order is passed in complete ignorance of such explanation, then it would amount to violation of principles of natural justice and the order is liable to be set aside.   

Facts 

The assessee was transporting electrical switches manufactured as per the requirements of the Government of Arunachal Pradesh. The assessee generated e-way bill for the vehicle on which the electrical switches were originally transported. However, the vehicle in question developed a mechanical failure and the goods were shifted to another vehicle. The latter vehicle was detained, and the proper officer levied a penalty on the assessee for violation of Section 129 since the e-way bill in question specified the former vehicle while the goods were found in the latter vehicle bearing a different registration number. The assessee contended before the Calcutta High Court that the breakdown of the vehicle was unanticipated and there was sufficient cause for non-compliance with the statutory provisions. The assessee further argued that the e-way bill issued with the registration number of the first vehicle was valid when the second vehicle was intercepted. And that there was no intention to evade tax.  

The Revenue Department, on the other hand, contended that under Section 129, it is not required to determine the existence of mens rea. And correctly so. The Revenue Department further argued that any of the three parties: consignor, consignee or the transporter should have re-validated the e-way bill after the first vehicle broke down. And in the absence of revalidation of e-way bill after change in vehicle, the imposition of penalty under Section 129 was justifiable.  

Calcutta High Court Decides 

The Calcutta High Court focused on one factual aspect: it noted that the assessee was issued a notice under Section 129, CGST Act, 2017 and the assessee had responded to the said notice. However, the adjudicating authority did not allude to the response of the assessee, did not apply its mind, and proceeded to mechanically levy a penalty on the assessee. The High Court observed that Section 129(3) prescribed the requirement of issuance of notice while Section 129(4) mandated that an adjudication order cannot be passed without providing the assessee an opportunity of being heard. However, the High Court stressed that complying with principles of natural justice cannot be an empty formality and that the adjudicating officer needs to evaluate the defence and its merits offered by the assessee. 

The Calcutta High Court observed that: 

However, absence of requirement to establish mens rea by the department cannot be equated with an automatic imposition of penalty under the scheme of Section 129 of the Act of 2017 in view of the provisions of Section 129 (3) and (4) thereof. A delinquent alleged to have violated a tax regime inviting imposition of penalty, nonetheless may have potential defences which would require consideration by the Adjudicating Authority. (para 37)

Accordingly, the Calcutta High Court set aside the impugned order imposing a penalty under Section 129, CGST Act, 2017 on the ground that it violated the principles of natural justice since it did not speak on the defence offered by the assessee.

Conclusion 

The Calcutta High Court’s decision in the impugned case is a welcome development since it clarifies, in no uncertain terms, the obligation on the officers is to comply with principles of natural justice in a substantive manner and not merely as a formality. The defence or explanation offered by the assessee in response to issuance of notice needs to be engaged with in a more substantive manner and the adjudicating order under Section 129 needs to reflect that the explanation was considered. The imposition of penalties under Section 129 should not be automatic. Further, it is important to bear in mind that the order can still result in imposition of penalty, the High Court has only mandated that the explanation be considered and the penalty not be levied in a mechanical or a pre-determined manner.    

[1] Asian Switchgear Private Limited v State Tax Officer, Bureau of Investigation, North Bengal TS-668-HCCAL-2023-GST. 

Section 129 Need Not be Invoked in Every Case of Search and Seizure: Uttarakhand HC

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In a crucial decision[1], the Uttarakhand High Court observed that every case of search and seizure of vehicles need not necessarily lead to imposition of penalties under Section 129, CGST Act, 2017. The High Court referred to the legislative history of Section 129 and noted that the provision may be invoked only when contravention of provisions may require payment of tax, else penalties should be imposed under Section 122, CGST Act, 2017. 

Facts  

The petitioner in the impugned case was in the business of manufacturing PC wires and purchased raw materials from Steel Authority of India Limited, Kolkata. The goods were transported from West Bengal to Kanpur through a railway wagon, which was taken into custody by the petitioner for further transport to Bazpur. For the transport to Bazpur two vehicles were used. The entire transport happened against invoices. When the vehicles were intercepted, it was found that the vehicles did not carry the delivery challans as required under Rule 55, CGST Rules, 2017. Orders were passed wherein separate penalties were imposed on both the vehicles under Section 129, CGST Act, 2017. Against the said orders, the petitioners approached the Uttarakhand High Court. 

Arguments 

The petitioner’s case was that not carrying the delivery challan was only a procedural irregularity or impropriety and there was no element of evasion of tax. The petitioners contended that imposition of penalty under Section 129, CGST Act, 2017 was disproportionate. The petitioners emphasised that the tax had been paid for the goods transported from Bengal to Bazpur, e-way bills were generated, and the Revenue Department had all the relevant information about the transport of goods. In the absence of any intent to evade taxes, the imposition of penalty under Section 129 was challenged as disproportionate. 

The Revenue Department, on the other hand, argued that Rule 55 mandated that the vehicles need to be accompanied by a delivery challan and the intent is to prevent leakage of taxes. It was further highlighted that Section 129 begins with a non obstante clause and thus has an overriding effect over all other provisions of CGST Act, 2017 including Section 122 which prescribes penalties for certain offences.       

The Uttarakhand High Court framed the dispute as one involving determination of the relevance of Section 122 vis-à-vis Section 129. Both the provisions prescribe that penalties could be leived on the assessee under certain circumstances, the question was which provision is more relevant under certain circumstances including in the impugned case. 

Decision 

The Uttarakhand High Court referred to the relevant provisions and observed that Rule 55(5) requires that the vehicles should be accompanied by a delivery challan. At the same time, Rule 138-A(1)(a) also mentions that the person in charge of a conveyance can carry an invoice or a bill of supply or a delivery challan, ‘as the case may be’. The High Court noted that an invoice and a delivery challan were clearly interchangeable under the Rule, and further noted that the State counsel had admitted that no additional information would be found in any of the other two documents. While the petitioner clearly violated the requirement of Rule 55(5), the High Court adopted a purposive and harmonious interpretation by noting that Rule 138-A(1)(a) mentions that delivery challan was act a substitute for invoice under certain circumstances.  

The Uttarakhand High Court accepted almost all the petitioner’s contentions and observed that it was not the case that delivery challan was not carried along to evade tax since the tax had already been paid. And further observed that the principle of harmonious construction suggests that a statute should be interpreted to give life to each provision. Adopting this principle, the High Court noted that if every non-compliance with respect to documents of a vehicle would lead to imposition of penalty under Section 129, it may render Section 122 redundant. 

Accordingly, the Uttarakhand High Court referred to the legislative history of Section 129  – and its amendment in 2022 – to make the following observations: 

First, that Section 129 envisages situations where there is an element of tax and thus vehicles may be released by the proper officer on payment of tax. 

Second, Section 122 makes a person liable to tax if taxable goods are transported without documents. Mere non-production of documents is punishable under the provision. 

Third, Section 130 would come into play if both intention and tax are involved. 

Accordingly, the High Court held that in the impugned case, there was only a violation of Rule 55(5), the petitioner had supplied all other information to the Revenue Department. Thus, the authorities should have proceeded to levy a penalty under Section 122 of CGST Act, 2017 instead of Section 129. The High Court also made it clear that not every interception of vehicle in anticipation of contravention of the statutory provisions should lead to imposition of penalty under Section 129. The officers should invoke the relevant provisions as per the facts and circumstances of the case. 

ConclusionThe Uttarakhand High Court’s observations are a welcome exposition of the law and the interplay of Sections 122, 129, and 130 of CGST Act, 2017. The High Court’s interpretation of the provisions with an apt use of the principle of harmonious construction introduces much needed clarity as to which provision is relevant under which circumstances. Of course, many fact situations may not be straightforward and the officers will be tempted to invoke Section 129 frequently, but the impugned decision nonetheless provides clarity on the scope of the relevant provisions.      

[1] M/s Prestress Steel LLP v Commissioner, Uttarakhand State GST and Others TS-662-HCUTT-2023-GST.  

Delhi High Court Orders Refund of Tax Paid Under Protest

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In a recent decision[1] the Delhi High Court ordered that the tax paid by assessee under duress should be refunded. The High Court cited CBIC’s Instructions to reason that no recovery of tax dues can be made before passing an adjudication order and that no taxes can be paid while the search and seizure of assessee’s premises is ongoing, unless the tax is paid voluntarily by the assessee. 

Facts 

The petitioner was a company engaged in supply of services in New Delhi and registered under the CGST Act, 2017. Search operations were conducted on the premises of the petitioner on 20.10.2021 by the anti-evasion Dept of GST under Section 67(2). During the search, the petitioner, paid an amount of Rs 2,30,00,000/- and acknowledgement of the payment was issued by the Revenue Department via FORM GST DRC-03. On 21.10.2021 the petitioner wrote an email to the concerned Joint Commissioner that the said payment had been made under protest and the petitioner reserved the right to seek its refund. 

On 23.06.2022, the Revenue Department issued a Show Cause Notice (‘SCN’) to the petitioner under Section 74 read with Section 20 of CGST Act, 2017 demanding payment of GST amounting to Rs 36,53,359/- and sought to appropriate the amount of Rs 2,30,00,000/-. The petitioner under Section 54 had filed for refund of Rs 2,30,00,000/- paid under protest but the same was denied as the Revenue Department issued deficiency memos, i.e., memos indicating that the documents supplied by the petitioner in support of its refund claims were insufficient. Citing the insufficiency of documents, the application for refund was rejected twice. Against the order of refusal of refund, the petitioner approached the Delhi High Court. 

Issues and Decision 

The main issue before the Delhi High Court was whether the petitioner paid Rs 2,30,00,000/- voluntarily or under protest. While the petitioner’s raised other issues regarding the legality of deficiency memos, the High Court’s decision hinged on determining if the payment was made voluntarily or under protest. The High Court concluded that the payment was made under protest and ordered a refund of the amount.

The Delhi High Court noted the relevant facts: that the petitioner made a deposit of cash through cash ledger on 20.10.2021 at 8:41pm. The search operations had started at 3:45pm on 20.10.2021 and continued well beyond business hours until 3am on 21.10.2021. Thus, the cash of Rs 2,30,00,000/- was paid by the petitioner while the search and seizure operation was undergoing. The High Court further noted that it was an admitted fact that the petitioner never admitted its liability to pay the tax and merely deposited the said amount under duress and compelling circumstances. The High Court then referred to Section 73(5) and 73(6) of the CGST Act, 2017. Section 73(1) states that a proper officer may serve a SCN on a person where it appears to the proper officer that the person has not paid the tax or short paid the tax or wrongly availed ITC. Section 73(5) states that: 

The person chargeable with tax may, before service or notice under sub-section (1) or, as the case may be, the statement under sub-section (3), pay the amount of tax along with interest payable thereon under section 50 on the basis of his own ascertainment of such tax or the tax as ascertained by the proper officer and inform the proper officer in writing of such payment.   

Section 73(6) that on receipt of the information, the proper officer shall not serve any notice on the said person. 

The Delhi High Court observed that the above provisions are clearly for the benefit of the taxpayer and voluntary payments can be made before issuance of SCN. However, once the taxpayer pays tax under Section 73(5) but subsequently refutes that  the payment was not voluntary, it must be accepted that the payments were not made voluntarily. The High Court also pointed that the Revenue Department did not follow the requisite procedure in the impugned case as the petitioner was not issued FORM GST DRC-04, which follows the issuance of acknowledgement FORM GST DRC-03. 

Finally, the Delhi High Court cited CBIC’s Instructions wherein it is clearly stated that unpaid tax or short paid tax can only be collected after following the due process, i.e., issuance of SCN and passing of an adjudication order. And no recovery of tax dues can take place during the search or seizure proceedings unless the taxpayer makes the payment voluntarily. 

Conclusion

The Revenue Department in the impugned case inter alia also tried to resist the issuance of refund on the ground that the SCN had been issued to the petitioner after the search proceedings and refund shall only be granted after the proceedings were complete. The High Court endorsed the petitioner’s argument that adjudication of SCN is not a pre-requisite for issuance of refund and that issuance of refund cannot be withheld merely because SCN was issued after the deposit. It is interesting that the Revenue Department tends to make certain claims that have no basis in law, e.g., no refund can be issued until SCN is adjudicated. And it is appreciable that the Courts, at times, if not always, tend to see the ridiculousness of such claims and reject them. 

[1] Sapphire Intrex Ltd v Union of India & Ors 2023: DHC: 8978-DB. 

Cancellation of GST Registration Needs to be Accompanied by Reasons

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Short Note

In a recent decision[1], the Delhi High Court held that the cancellation of an assessee’s registration under GST cannot be done in an arbitrary fashion and needs to be accompanied by objective reasons. 

Facts 

The assessee in the impugned case was carrying on the business as a sole proprietorship under the name ‘M/s P.S. Metal’ but closed business on 11.11.2019 on account of her ill health. The assessee filed an application on the same date for cancellation of her registration and her application was acknowledged, but not processed. Thereafter, on 12.021.2021, the proper officer issued a showcause notice to the petitioner proposing to cancel the assessee’s registration on the ground of non-filing of returns for a period of six months. The assessee was requested to appear before the proper officer failing which the case would be decided ex parte. The proper officer thereafter passed an ex parte order cancelling the petitioner’s registration, with the order stating that no reply was received to the showcause notice. However, the order did not mention any reasons for cancelling the registration even though the petitioner’s registration was cancelled with retrospective effect from 01.07.2017.  

The assessee challenged the order on various grounds: while the showcause notice asked the assessee to appear for a personal hearing, it did not mention the date, time or venue for personal hearing, the order for cancellation of registration was passed in violation of principles of natural justice, and that the order does not contain any reasons for cancellation of the assessee’s registration. 

Decision

The Delhi High Court accepted the assessee’s contention. The High Court referred to Section 29(2), CGST Act, 2017 which states that the proper may cancel the registration of a person from such date, including any retrospective date, as he may deem fit. The provision specifies various grounds under which the registration may be cancelled with retrospective effect including the registered person having contravened any of the provisions of the Act or not having filed returns for a financial year beyond three months from the due date, etc. The High Court observed that the discretion provided to the proper officer under Section 29(2) cannot be exercised arbitrarily and the decision to cancel registration from retrospective effect must be accompanied with some objective criteria. (para 6)

The Delhi High Court specifically noted the Revenue’s contention that cancellation of registration would have the effect of denying ITC to customers of assessee. The High Court observed that assuming that such a contention is true, it is incumbent on the proper officer to be ‘fully satisfied’ that the registration needs to be cancelled, and that too with retrospective effect. Though in the instant case no reason for cancellation of registration was provided, let alone a reason for cancellation of registration with retrospective effect. 

Accordingly, the Delhi High Court granted the assessee’s request that her registration be cancelled w.e.f. 11.11.2019 since she ceased her business from the said date. 

Conclusion

The Delhi High Court’s succinct decision in the impugned case throws light on certain practices that the Revenue Department sometimes tends to adopt: issuance of a showcause notice without providing adequate details to the person such as the date and venue for hearing on the notice and the exercise of discretion without providing adequate reasons. The officers have been granted wide and extensive powers under the GST laws to assist in implementation of GST laws and it is necessary that the same are exercised prudently.      

[1] Pratima Tyagi v Commissioner of GST & Anr 2023: DHC: 9025-DB. 

Bombay High Court Adopts ‘Purposive Interpretation’: Permits Rectification of GSTR-1

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In a recent decision[1], the Bombay High Court permitted the petitioner to rectify their GSTR-1 despite even though statutory deadline for rectification of such return had expired. The High Court cited the relevant provisions – Sections 37, 38, and 39 of CGST Act, 2017 – and stated that they need to be interpreted purposively and the law cannot be interpreted to mean that there is no room for correcting inadvertent errors in returns. 

Facts 

The petitioner, Star Engineers (I) Pvt Ltd, designed, manufactured, and supplied wide range of electronic components for industrial purposes. The petitioner was a regular supplier of the components to Bajaj Auto Limited and during the Financial Year 2021-22 supplied various components to third party vendors on ‘Bill-to-Ship-to-Model’ on instructions of Bajaj Auto Limited. The aforesaid Model allows a supplier to ship the goods to one entity, while issue the bill in favor of another entity. In this case, the petitioner was supplying goods to third party vendors and invoices were issued in the name of Bajaj Auto Limited. However, while filing GSTR-1 for the period July 2021, November 2021, and January 2022, the petitioner inadvertently mentioned GSTIN of the third-party vendors instead of Bajaj Auto Limited.

The above error in filing GSTR-1 meant that the supplies made by the petitioner for the said period were not reflected in GSTR-2B of Bajaj Auto Limited but in the GSTR-2B of the third-party vendors. Accordingly, Bajaj Auto Limited was unable to claim ITC for the said supplies. To compensate itself for the same, Bajaj Auto Limited reduced the payment amount to the petitioner equivalent to the GST stating its inability to claim ITC to that extent. 

In September 2023, the petitioner approached the Deputy Commissioner of Sales Tax requesting that it be allowed to rectify the error in GSTR-1 for the supplies made during the Financial Year 2021-22 as it was causing prejudice to the petitioner. However, the Deputy Commissioner rejected the request on the ground that while rectification of the error would not cause any loss the Government exchequer, it was past the due date prescribed under the statute. Against, the said decision the petitioner approached the Bombay High Court. 

Purposive Interpretation of Sections 37, 38, and 39 of CGST Act, 2017 

The Bombay High Court noted the relevant provisions of the CGST Act, 2017 which mandate the filing of returns and prescribe the outer time limit for rectification of errors that may creep into such returns at the time of filing. 

Section 37(1) requires all registered persons to furnish electronically all details of their outward supplies and the said information will be communicated to the recipient of such supplies. This provision has translated into the registered person filing GSTR-1 stating their outward supplies and the recipient receiving an auto-drafted ITC statement based on the information disclosed in GSTR-1. Section 37(3) allows for rectification or omission in the returns, but the Proviso states that no rectification shall be allowed after 30 November following the end of financial year to which the returns pertain.  Section 38 states that the details of outward supplies provided under Section 37 shall be communicated to the recipient. Section 39(1) also contains a similar obligation regarding both the input and output supplies and ITC paid or payable. While Section 39(9) allows rectification of errors and omissions. Proviso to Section 39(9) prescribes a similar outer time limit as Proviso to Section 37(3). 

The Bombay High Court perusing the above provisions observed that they ‘need to be purposively interpreted.’ (para 12) What did purposive interpretation mean in this context? The High Court elaborated that Section 37(3) cannot be interpreted to mean that the assessee cannot be allowed to rectify errors in returns and reflect an accurate record. Not allowing rectification of errors would lead to preservation of inaccurate records consisting of errors, which the High Court observed would not be in consonance with the purpose of GST. The High Court stated that the proviso cannot be allowed defeat the intent of provision especially if rectification of the error would not lead to loss of revenue. 

The Bombay High Court also reasoned that GST regime had inaugurated a regime where returns are completely online. It stated that there are a wide variety of traders in India and many may have limited resources and expertise as a result of which inadvertent errors may creep into the returns and the keeping the same in mind, assessees should be allowed to rectify errors in their returns and the provisions of law ‘should be alive’ to such considerations. (para 20)

Similar Judicial Precedents 

The Bombay High Court in allowing the petitioner to their rectify GSTR-1 beyond the due date followed a slew of precedents – M/s Sun Dye Chem v Assistant Commissioner (ST) & Ors[2], Pentacle Plant Machineries Pvt Ltd v Office of GST Council & Ors[3], Shiva Jyoti Constructions v Chairperson, CBEC & Ors[4], Mahalaxmi Infra Contract Ltd v GST Council & Ors[5] – where various High Courts have awarded a similar relief to the assessees. The High Court did cite the precedents in support of its reasoning and conclusion. In these precedents none of the High Courts expressly invoked purposive interpretation, but instead the relief was provided based on facts and Court’s satisfaction that errors of assesses in their returns were bona fide. Further, the common thread in all the cases is that the High Courts were convinced that the rectification of the returns would not lead to loss to the Government exchequer. The latter issue weighed with the High Court in the impugned case as well.    

Conclusion 

The Bombay High Court’s decision in the impugned case invoked the bona error of the petitioner, the fact that no illegality involved, and that the rectification of GSTR-1 would cause no loss to the exchequer. It was not a simple case of purposive interpretation wherein the High Court went beyond the statutory provisions to allow the petitioner to rectify returns even after expiry of the statutory deadline. In the absence of even one of the three factors mentioned above, the High Court’s decision could have been different. Finally, it is important to underline here that reliefs such as in the impugned case are ordinarily and perhaps can only be granted by Courts. Officers allowing rectification of returns after expiry of statutory deadlines is a possibility that is hard to foresee. 

[1] Star Engineers (I) Pvt Ltd v Union of India 2023:BHC – AS: 37549-DB. 

[2] 2020 TIOL 1858 HC MAD GST. 

[3] 2021-TIOL-604-HC-MAD-GST. 

[4] MANU/OR/0522/2023. 

[5] MANU/JH/1003/2022. 

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. 

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. 

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