GST

Fraudulent Sale is Supply Under GST: Three Errors of the Advance Ruling

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A recent advance ruling by Gujarat AAR is a frustrating read. AAR held that sale by a seller constitutes as supply under GST laws even if the seller was defrauded and did not receive any consideration for such goods. In this article, I argue that there are three obvious errors in the advance ruling, which encompass flaw in applicant’s arguments and AAR’s approach. The three errors are: 

First, the applicant’s framing of question. 

Second, AAR’s reasoning and identification of relevant provision. 

Third, applicant’s argument on why a fraudulent sale should not constitute a supply. 

The facts involved a peculiar and may I daresay a novel question that should have led to an interesting analysis of the relevant legal provisions and hopefully a defensible answer. Instead, what we receive via the advance ruling is a superficial analysis and a facile answer. 

The basic facts in application were: the applicant supplied submersible pumps for two months and generated several invoices for the said sales only to discover that it had been defrauded. The applicant did not receive any consideration for the supply of goods as the order documents were forged by a fraudulent purchaser by using the name of a reputable purchaser. Applicant approached AAR seeking an answer whether GST can be levied on the above transaction.  

First Error 

The question before AAR should have been whether such a fraudulent sale of goods constitutes a supply under GST laws, even in the absence of a consideration? Instead, applicant framed the question as:      

Whether the goods supplied by us [becoming victim of fraud without receiving consideration] could be considered as supply of goods under the provisions of section 21 under the IGST Act? 

Grammatical errors in the question aside, the legal question would be why did the applicant invoke Section 21, IGST Act, 2017? The impugned provision states that import of services made on or after the appointed day shall be liable to tax regardless, whether the transactions for import of such services had been initiated before the appointed day. However, the applicant’s transaction in question was an inter-State supply and nothing to do with import of services. Clearly, the applicant approached AAR with a question that referred to the wrong provision. And AAR also noted the applicant’s reference to the above provision and observed: 

How this will be applicable to supply of goods made by the applicant to the recipient in the State of Assam is not understood. We find that the question, at best is vaguely framed. (para 9)

The applicant’s query could not have been answered by referring to the wrong provision and thus another approach was necessary. 

Second Error 

In adopting the alternate approach, the AAR made an error by referring to Section 12, CGST Act, 2017 which states the time of supply of goods. Time of supply goods is a concept under GST which helps us determine at what point in time did the supply in question took place. To delineate and cohere various situations, the provision lays down certain rules including deeming fictions. AAR referred to Section 12 and noted that time of supply of goods is either the date of issue of invoice by the supplier or date on which the supplier receives payment with respect to the supply, whichever is earlier. Applying the above rules to the facts, AAR noted that the supplier had issued invoices in June 2023 and July 2023, thus the point of taxation in respect of supply of goods will be the date of issue of invoice. AAR thereby concluded that the applicant had supplied goods under relevant provisions of GST laws. 

The error in the above analysis by AAR is that it did not consider if supply had been made. Time of supply as the phrase indicates is only relevant for a supply. The more relevant question for AAR was if a supply had been made and not the time of supply. Latter was contingent on the former. AAR, instead, assumed that the supply had been made and relied on time of supply and invoices to state that a supply had been made. 

Third Error 

This leads us to the third error: applicant’s argument that no supply had taken place. The applicant relied on Sales of Goods Act, 1930 to argue that a valid sale had not taken place since all the essential ingredients of a sale were not satisfied in absence of a consideration. AAR declined to accept applicant’s above argument and referred to Section 7, CGST Act, 2017 which defines supply. However, instead of analysing if the ingredients of supply were satisfied in the impugned case, AAR took a short route and simply noted that ‘it is not disputed that a supply has been done by the applicant’. (para 14) AAR concluded that while a fraud may vitiate the contract of sale, the applicant has not explained how a fraudulent sale moves outside the ambit of supply. 

The error here is actually two-fold: first, the applicant invoking Sales of Goods Act, 1930 instead of categorically stating that the ingredients of supply are not satisfied in the impugned case; second, AAR only reproducing the definition of supply in its ruling rather than examining if a supply can take place under Section 7, CGST Act, 2017 even if the purchaser pays no consideration. To be fair though, AAR would not undertake the latter exercise if the applicant doesn’t argue for it. And it seems the four people representing the applicant before AAR didn’t make the argument and instead surprisingly relied on Sales of Goods Act, 1930 to argue that a sale had not taken place.      

Conclusion 

The first instinct is to club Gujarat AAR’s impugned ruling with the wide swathe of sub-par advance rulings under GST. While AAR is not completely faultless in this ruling and did commit its own error, the applicant approached AAR with a wrongly framed question and made some misjudged arguments. There is only so much that AAR can do when the applicant adopts such a flawed approach. AAR to some extent did salvage the situation. But just about. Irrespective, I doubt we have heard the last word on this issue. 

Legislative Intent or Error: Puzzle of Indian Tax Policy

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Introductory Questions 

Let me start with a question: how does one discover legislative intent in a provision of tax statute? Through a plain reading of the provision or through a subsequent statement by the State’s legal counsel stating its intent? Positivist thinking would point us to the former, and rightly so. A statement, even a sworn statement in a court shouldn’t override what is contained in the statute. Deference to the legislature cannot extend to a point where despite what the statute contains, court interprets the provision based on legislature’s statement explaining its intent. 

The question in your mind may be: why am I asking this question? Well, for those who follow tax developments, you may already know. For others, I’m asking the question in the context of Safari Retreats case and the latest amendment to CGST Act, 2017 via the Finance Act, 2025. 

One key question that the Supreme Court had to answer in Safari Retreats case was: Did the legislature intentionally use the conjunction ‘or’ instead of ‘and’? Or did the legislature commit a mistake? A simple question that acquires tremendous urgency if a taxpayer needs the answer to assess its tax liability which in this was a few crores. 

During the hearing, the State’s counsel argued that use of the conjunction ‘or’ was a legislative error and further pressed that ‘or’ should be read as ‘and’. What should have been the ideal response of the Supreme Court? One view – subscribed by the State – is that Supreme Court should have declared ‘or’ means ‘and’ and interpreted the provision accordingly even if it meant throwing all grammar and interpretive rules out of the court complex. Or was there more justification in the Supreme Court responding the way it did: legislative intent can only be revealed by the legislative text and not by the State counsel’s statement about the text. And in doing so, restrict the amount of deference that courts accord to the legislature in tax laws.   

And equally importantly, how should we respond? Resign to yet another retrospective amendment to a tax statute and raise our hands in exasperation while letting out a huge sigh. Or do we try to understand this entire episode like a puzzle and use it as an example of how Indian State approaches tax policy. I prefer to do the latter, and hence this article.  

‘Or’ Means ‘And’

I’ve commented on the case in detail here and here. In this article, I intend to provide a limited overview of the controversy with an aim to highlight Indian State’s tax policy choices. 

In 2019, the Orissa High Court allowed taxpayer to claim Input Tax Credit (‘ITC’) on construction of a shopping mall. In 2024-25, one of State’s arguments before the Supreme Court was that use of ‘or’ instead of ‘and’ was a legislative error. The reason for the argument, from a revenue perspective, was straightforward: it would ostensibly allow the State to block the taxpayer’s ITC claim. But the State was aware of the ‘legislative error’ since 2019, why not correct the error via a legislative amendment and bury the issue instead of making elaborate arguments before the Supreme Court? Commenting on the same the Supreme Court in its judgment observed the following: 

The writ petition in which the impugned decision was rendered is a six-year-old writ petition. If it was a drafting mistake, as suggested by learned ASG, the legislature could have stepped in to correct it. However, that was not done. In such circumstances, it must be inferred that the legislature has intentionally used the expression “plant or machinery” in clause (d) as distinguished from the expression “plant and machinery”, which has been used in several places. (emphasis added) (para 43)

As is evident, the Supreme Court rejected the State’s claim of an error. If use of ‘or’ was indeed an error, there was ample time for the State to step in and rectify it. And its failure to do so, in my books, counts as lack of bona fide. For the Supreme Court it was sufficient to dismiss the entire argument and proceed solely on the basis of what was written in the statute.  

What did the State achieve by not amending the law and correcting what it claimed was a ‘legislative error’? For one, if the Supreme Court had actually ruled that ‘or’ should be read as ‘and’, it would have armed the State with a decision that could have been conveniently used by it to block ITC in the future as well. 

Second, if the Supreme Court refused to interpret ‘or’ to mean ‘and’, the State could have claimed that the decision did not reflect ‘legislative intent’. Both things did happen. The latter is no longer a surprise. Each time the State loses a major tax case, its response is that the judicial decision does not reflect legislative intent. And subsequently, it leads to an amendment of the provision in question. And even more often, the amendment is given retrospective effect.   

Legislative Intent – Legislative Error 

The Supreme Court in its above cited paragraph makes it sufficiently apparent that legislative intent must be reflected through the statute itself. If the State claims that a legislative error crept into the statute, it should have rectified it in the intervening 6 years it had to act on it. 

Legislative intent thus cannot be superimposed on a statute by the State on discovering its error or mistake. That would upset the balance of power in State’s favor and would violate a cardinal rule of tax law interpretation, i.e., strict interpretation of tax statutes is necessary to determine the taxpayer’s liability. 

But does that mean that legislative error can never be acknowledged by courts? Apparently so.

One, there is no telling if an error is truly an error. In Safari Retreats case, the petitioners pointed out that:

In the model GST law, which the GST Council Secretariat circulated in November 2016 for inviting suggestions and comments, the expression “plant and machinery” was used both in clauses (c) and (d) of Section 17(5). However, while enacting the law, the legislature has advisedly used the expression “plant and machinery” in clause (c) and “plant or machinery” in clause (d) of Section 17(5). Therefore, the intention of the legislature cannot be brushed aside by contending that the use of the word “or” in Section 17(5)(d) is a mistake of the legislature. (para 9)

In such circumstances, who is to know if the legislature intentionally replaced ‘and’ with ‘or’ when finalising the text of the bill or an error crept in while editing the Model law. Presumably only the State can reveal the mystery through detailed document history and accompanying notes on the provisions. But do we want to go down that rabbit hole. Forget us, I doubt the State would like that like that level of transparency in law making. 

Second, it would defeat a core tenet of not just tax law but also law in general. Tax liability is as per the law that exists and not what the law was intended to be. A taxpayer has no way of knowing what the legislature ‘intended’ to enact except by interpreting the provisions as they exist. And if one argues that the legislative debates, and other pre-legislative reports would provide a clue, it is a heavy burden to impose on the taxpayer. Then not only must the taxpayer know the law but also whether the law contains an error or not. Hardly just or fair. And one would argue such a stance is also devoid of common sense.

Puzzle of Indian Tax Policy

Hidden in the steps of Safari Retreats case and its aftermath is the puzzle of Indian tax policy decisions. 

One, why wait for the Supreme Court’s decision and then amend the provision retrospectively? Because beyond the immediate urgency of losing or wining a case, was a question of policy. Do we allow taxpayers to claim ITC on construction of shopping malls when they further rent it for business? While a timely amendment of ‘or’ to ‘and’ may not have answered the question with certainty, it would have provided a clear signal of proactive policy making including correcting errors. Instead, the post-decision amendment reveals a policy of amending laws as per convenience.   

Two, where were the States? Since the entire dispute centred around CGST Act, 2017 we expect response from the Union, but GST is a federal levy. Why didn’t any State openly and persuasively argue for an amendment and perhaps end a long winding litigation? It was only after the Supreme Court’s judgment, that States were visible. But just about. States were on board for the GST Council’s recommendation for amendment. Or at least no State objected to the amendment. So, my impression is that either ALL States were either clueless about the litigation or all of them unanimously approve retrospective amendments to GST laws instead of proactive amendments to thwart resource consuming litigation. Maybe, this is the kind of uniformity that was aimed through GST. 

Third, why file a review after deciding to introduce the amendment? Again, it seems the Court’s stamp of approval or its views on the amendment will prevent sprouting of similar issues from the provision. In this case, though the litigation may not end because even the amendment may not prove enough as courts will still need to interpret the phrase ‘plant and machinery’. But a review seems like a circuitous way of making tax policy when there can be direct and straightforward ways. Only we prefer to be clever by half and like to prevent transparency on fundamental tax policy issues. Else, the State may be held to its word and that is not something it will enjoy. 

Way Forward 

The promise of no retrospective amendments to GST laws was buried long ago. And now it is dead. We can only hope for a more sane approach to tax disputes and a saner reaction to court decisions that are not in the State’s favor. Else, the familiar cycle of dispute, decision, amendment will continue till perpetuity until one fine day we feel the need to ‘simplify’ GST by removing all the Provisos and Explanations which were added via numerous reactive amendments.    

Powers of Arrest under CGST Act, 2017 and Customs Act, 1962: Constitutionality and their Scope

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The Supreme Court in a recent judgment upheld the constitutionality of arrest-related provisions contained in Customs Act, 1962 and CGST Act, 2017. The Court also elaborated on the scope of arrest powers under CGST Act, 2017 and safeguards applicable to an arrestee. The judgment reiterates some well-established principles and clarifies the law on a few uncertain issues. In this article, I examine the judgment in 3 parts: first, the import of Om Prakash judgment and Court’s opinion on arrest powers under Customs Act ,1962; second, the issue of constitutionality of arrest-related provisions contained in CGST Act, 2017, and third, the scope and contours of arrest-related powers under GST laws along with a comment on Justice Bela Trivedi’s concurring opinion and its possible implication. 

Part I: Om Prakash Judgment and Customs Act, 1962 

Om Prakash Judgment 

In Om Prakash judgment, the Supreme Court heard two matters relating to Customs Act, 1962 and Central Excise Act, 1944. The issue in both matters was that all offences under both the statutes are non-cognizable, but are they bailable? The Court held that while the offences were non-cognizable, they were bailable. The Court referred to relevant provisions of the CrPC, 1973 and statutes in question to support its conclusion. For example, the Court referred to Section 9A, Central Excise Act, 1944 and held that the legislative intent is recovery of dues and not punish individuals who contravene the statutory provisions. And the scheme of CrPC also suggests that even non-cognizable offences are bailable, unless specifically provided. 

The Supreme Court in Om Prakash judgment also clarified that even though customs and excise officers had been conferred with powers of arrest, their powers were not beyond that of a police officer. And for non-cognizable offences, the officers under both statutes had to seek warrant from the Magistrate under Sec 41, CrPC, 1973.  

Amendments to Customs Act, 1962 

Section 104, Customs Act, 1962 was amended in 2012, 2013, and 2019 to modify and to some extent circumvent the application of Om Prakash judgment. Supreme Court’s insistence on tax officers seeking Magistrate’s permission before making an arrest was sought both – acknowledged and modified via amendments to the Customs Act, 1962. To begin with, Customs Act, 1962 bifurcated offences into two clear categories: cognizable and non-cognizable and the amended provisions clearly specified which offences were bailable or non-bailable. These amendments which were the subject of challenge in the impugned case. 

The Supreme Court rejected the challenge and held that petitioner’s reliance on Om Prakash judgment was incorrect. But were the pre-conditions for arrest in Customs Act, 1962 sufficient to safeguard liberty? Were there sufficient safeguards against arbitrary arrest to protect the constitutional guaranteed liberties? 

The Supreme Court clarified that the safeguards contained in Sections 41-A, 41-D, 50A, and 55A of CrPC shall be applicable to arrests made by customs officers under the Customs Act, 1962. The arrestee would have to informed about grounds of arrest, the arresting officer should be clearly identifiable through a badge being some of the protections available to an arrestee. Court added that mandating that said safeguards of CrPC shall apply to arrests by customs officers ‘do not in any way fall foul of or repudiate the provisions of the Customs Act. They complement the provisions of the Customs Act and in a way ensure better regulation, ensuring due compliance with the statutory conditions of making an arrest.’ (para 29) 

The Supreme Court further added that safeguards provided in Customs Act, 1962 were in itself also adequate to protect life and liberty of the persons who could be arrested under the statute. The Supreme Court noted that the threshold of ‘reason to believe’ was higher than the ‘mere suspicion’ threshold provided under Section 41, CrPC. And that the categorisation of offences under the Customs Act, 1962 wherein clear monetary thresholds were prescribed for non-cognizable and non-bailable offences enjoined the arresting officers to specifically state that the statutory thresholds for arrest have been satisfied. 

Finally, the Supreme Court read into Section 104, Customs Act, 1962 the requirement of informing the accused of grounds of arrest as it was in consonance with the mandate of Article 22 of the Constitution. The Supreme Court exhorted the officers to follow the mandate and guidelines laid down in Arvind Kejriwal casewhere it had specified parameters of a legal arrest in the context of Sec 19, PMLA, 2002. 

While dismissing the challenge to constitutionality of arrest-related provisions of Customs Act, 1962 the Supreme Court cautioned and underlined the need to prevent frustration of statutory and constitutional rights of the arrestee. 

Overall, the Supreme Court was of the view that pre-conditions for arrest specified in Customs Act, 1962 were not constitutional and safeguarded the liberties of an arrestee while obligating the custom officers to clearly specify that the conditions for arrest were satisfied. The Court also clarified that various safeguards prescribed in CrPC, 1973 were available to an arrestee during arrests made under Customs Act, 1962.  

Part II: Constitutionality of Arrest-Related Provisions in CGST Act, 2017

Article 246A Has a Broad Scope 

The constitutionality of arrest-related provisions contained in CGST Act, 2017 was previously upheld by the Delhi High Court in Dhruv Krishan Maggu case, as I mentioned elsewhere. The Supreme Court in impugned case also upheld the constitutionality of provisions.  The arguments against constitutionality of arrest-related provisions in CGST Act, 2017 were similar in the impugned case as they were before the Delhi High Court. The petitioner’s challenge was two-fold: first, Parliament can enact arrest related provisions only for subject matters contained in List I; second, powers relating to arrest, summon, etc. are not incidental to power to levy GST and thus arrest-related provisions cannot be enacted under Article 246A of the Constitution.

The Supreme Court’s rejection of petitioner’s argument on constitutionality was in the following words: 

The Parliament, under Article 246-A of the Constitution, has the power to make laws regarding GST and, as a necessary corollary, enact provisions against tax evasion. Article 246-A of the Constitution is a comprehensive provision and the doctrine of pith and substance applies. The impugned provisions lay down the power to summon and arrest, powers necessary for the effective levy and collection of GST. (para 75) 

Supreme Court relied on the doctrine of liberal interpretation of legislative entries, wherein courts have noted that the entries need to be interpreted liberally to include legislative powers on matters that are incidental and ancillary to the subject contained in legislative entry. Relying on above, the Supreme Court concluded that: 

Thus, a penalty or prosecution mechanism for the levy and collection of GST, and for checking its evasion, is a permissible exercise of legislative power. The GST Acts, in pith and substance, pertain to Article 246-A of the Constitution and the powers to summon, arrest and prosecute are ancillary and incidental to the power to levy and collect goods and services tax. In view of the aforesaid, the vires challenge to Sections 69 and 70 of the GST Acts must fail and is accordingly rejected. (para 75) 

The Supreme Court has correctly interpreted Article 246A in the impugned case. The Court liberally interpreted the scope of Article 246A in a previous case as well. The Court’s observations in the impugned case align with its previous interpretation wherein the Court has been clear that Article 246A needs to be interpreted liberally – akin to legislative entries – and include in its sweep legislative powers not merely to levy GST but ancillary powers relating to administration and ensuring compliance with GST laws. 

The nature of Article 246A is such that it needs to be interpreted akin to a legislative entry since there is no specific GST-related legislative entry in the Constitution. The power to enact GST laws and bifurcation of powers in relation to GST are both contained in Article 246A itself investing the provision with the unique character of a legislative entry as well as source of legislative power in relation to GST. 

Part III: Scope and Contours of Arrest Powers under CGST Act, 2017

Reason to Believe and Judicial Review  

The Supreme Court referred to the relevant provisions of GST laws to note that there is clear distinction between cognizable and non-cognizable offences under the GST laws. And bailable and non-bailable offences have also been bifurcated indicating the legislature’s cognizance of Om Prakash’s judgment. Further, the nature of offence is linked to the quantum of tax evaded. While the threshold to trigger arrest under CGST Act, 2017 is the Commissioner’s ‘reason to believe’ that an offence has been committed. In this respect, the Court emphasized that the Commissioner should refer to the material forming the basis of his finding regarding commission of the offence. And that an arrest cannot be made to investigate if an offence has been committed. The Supreme Court also pronounced a general caution about the need to exercise arrest powers judiciously. 

Another riddle of arrest that the Supreme Court tried to resolve was: whether a taxpayer can be arrested prior to completion of assessment? An assessment order quantifies the tax evasion or input tax credit wrongly availed. And since under CGST Act, 2017 the classification of whether an offence is cognizable or otherwise is typically dependent on the quantum of tax evaded, this is a crucial question. And there is merit in stating that the assessment order should precede an arrest since only then can the nature of offence by truly established. In MakeMyTrip case – decided under Finance Act, 1994, the Delhi High Court had mentioned that an arrest without an assessment order is akin to putting the horse before a cart. And in my view, in the absence of an assessment order, the Revenue’s allegation about the quantum of tax evaded is merely that: an allegation. And there is a tendency to inflate the amount of tax evaded in the absence of an assessment order. And an inflated amount tends to discourage courts from granting bail immediately and can even change the nature of an offence.  

However, the Supreme Court in the impugned case noted that it cannot lay down a ‘general and broad proposition’ that arrest powers cannot be exercised before issuance of assessment orders. (para 59) There may be cases, the Supreme Court noted where the Commissioner can state with a certain degree of certainty that an offence has been committed and in such cases arrest can be effectuated without completion of an assessment order. 

Here again, the Supreme Court stated that the CBIC’s guidelines on arrest will act as a safeguard alongwith its previous observations on arrest by custom officers, which will also apply to arrest under GST laws.      

The issue is that CBIC issued the guidelines on arrest in 2022, and yet the Supreme Court noted that there have been instances of officers forcing tax payments and arresting taxpayers. And though the arrests led to recovery of revenue, the element of coercion in tax payments cannot be overlooked. If the coercive element during arrest was present even despite the guidelines, then perhaps an even stronger pushback is needed against arbitrary and excessive use of arrest powers. While the Supreme Court has done well in stating that various safeguards will apply to arrests such as those enlisted in various provisions of CrPC and requirements of warrants from Magistrates in non-cognizable offences, even the numerous safeguards, at times, don’t seem enough to protect taxpayers.   

Justice Bela M. Trivedi’s Concurring Opinion  

Justice Bela M. Trivedi’s concurring opinion prima facie dilutes safeguards provided to taxpayers. The Revenue is likely to use her words to argue against any judicial interference and deny bail to accused. Justice Trivedi clearly noted that when legality of arrests under legislations such as GST are challenged, the courts must be extremely loath in exercising their power of judicial review. The courts must confine themselves to examine if the constitutional and statutory safeguards were met and not examine the adequacy of material on which the Commissioner formed a ‘reason to believe’ nor examine accuracy of facts. 

Justice Trivedi was emphatic that adequacy of material will not be subject to judicial review since an arrest may ordinarily happen at initial stages of an investigation. The phrase ‘reason to believe’, she observed, implies that the Commissioner has formed a prima facie opinion that the offence has been committed. Sufficiency or adequacy of material leading to formation of such belief will not be subject to judicial review at nascent stage of inquiry. The reason, as per Justice Trivedi was that ‘casual and frequent’ interference by courts could embolden the accused and frustrate the objects of special legislations such as GST laws. Limited judicial review powers for powers exercised on ‘reason to believe’ is a recurring theme in the jurisprudence on this standard. Reason to believe is a standard prescribed under IT Act, 1961 as well and courts have clear about not scrutinizing the material which forms the basis of the officer’s belief. 

However, some of Justice Trivedi’s observations seem at odds with the lead opinion which requires written statements about Commissioner’s belief, reference to material on basis of which the Commissioner forms the ‘reason to believe’ that lead to arrest. The majority opinion is also clear about power of judicial review in case of payment of tax under threat of arrest, power of courts to provide bail even if no FIR is filed, among other safeguards. Though in the leading opinion there is no clear opinion about scope of judicial review at preliminary or later stages of investigation.  

One possible manner to reconcile Justice Trivedi’s concurring opinion with the lead opinion is that her observations about narrow judicial review are only for preliminary stages of investigation. And that courts can exercise wider powers of judicial review at later stages of investigation. And that her view is only limited to ensuring that once the statutory safeguards have been met, courts should not stand in the way of officers to complete their inquiries and investigations else aims of the special laws such as GST may not be met. But her views are likely to be interpreted in multiple manners and the Revenue will certainly prefer her stance in matters relating to bail, not just at the initial stage of investigation but during the entire investigative process.   

Conclusion 

In the impugned case, the Supreme Court has advanced the jurisprudence on arrests under tax laws to some extent. But the observations are not in the context of any facts but in a case involving constitutional challenge. Thus, numerous safeguards that the Court has noted will apply to arrests made by customs officers or under GST Acts will be tested in future. Courts will have to ascertain if the arrests were made after fulfilment of the various safeguards, whether taxes were paid under threats of arrests, and other likely abuse of powers. The crucial test will be how and if to grant bail including anticipatory bail in matters where FIR is not registered. 

Finally, ‘reason to believe’ is admittedly a subjective standard. It is the opinion of an officer based on the material that comes to their notice. And courts while may examine the material, cannot replace their own subjective view with that of the officer. The test in such cases is if a reasonable person will arrive at the same conclusion based on the material as arrived at by the Commissioner. Thus, ‘reason to believe’ as a standard per se, limits scope of judicial review and confers immense discretion to the Commissioner to exercise powers of arrest. The jurisprudence on this issue – both under the IT Act, 1961 and GST laws – is evidently uneven due to the subjective nature of standard. And courts have not been able to form a clear and unambiguous stance on the scope of judicial review with respect to the ‘reason to believe’ standard. And this unevenness and relatively weak protection afforded to taxpayers is likely to continue in the future as well despite the Supreme Court’s lofty observations in the impugned case.             

            

Long Wait for GSTATs: July 2017 … and Counting. 

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GSTATs have been envisaged as the first appellate forum under GST laws. And yet, 7.5 years since implementation of GST, not a single GSTAT is functioning. Reason? Many. Some are easy to identify, others are tough to understand. Nonetheless, here is a small story of the ill-fated GSTATs since the implementation of GST laws in July 2017. 

Provision is Declared Unconstitutional 

CGST Act, 2017, as originally enacted, provided that the no. of technical members in GSTATs would exceed the no. of judicial members. Both the Union and States wanted to ensure their representation on GSTATs via technical members which led to each GSTAT accommodating at least 2 technical members, i.e., technical member (Centre) and technical member (State). But CGST Act, 2017 provided for only one judicial member on the Bench of GSTAT. The Madras High Court ruled that the strength of technical members in tribunals cannot exceed that of judicial members, as per the law laid down by the Supreme Court. The relevant provision – Section 109(9) as originally enacted – was struck down as unconstitutional. There was a simultaneous challenge on the ground of Article 14 wherein the petitioners argued that under CGST Act, 2017 advocates were not eligible to become members of GSTATs and it violated their fundamental right to equality. The High Court refused to accept this plea and requested the Union to reconsider the ineligibility of advocates. Making advocates ineligible to become members of GSTAT is rather strange since a similar disqualification does not exist for ITATs under the IT Act, 1961.     

No Appeal Against the Decision  

The Union didn’t appeal against the Madras High Court’s decision. Surprising, since the Union likes to defend all its decisions including its interpretation of tax statutes until the last possible forum. Or perhaps in this instance the Union decided it was prudent to agree with the High Court’s decision. Or it wanted to use the High Court’s decision as a shield to defend the delay in operationalizing GSTATs. Irrespective, the Union’s decision to not file an appeal against the High Court’s decision meant it had to explore options to operationalize the GSTATs. During 2019-2021, the GST Council did discuss the options and feasibility of GSTATs in various States and the required no. of Benches, but the discussions didn’t prove to be immediately fruitful. One possible option of breaking the logjam was by amending the respective provision of CGST Act, 2017. 

Provisions are Amended 

The Finance Act, 2023 amended the provisions relating to composition of GSTATs. Below are the relevant provisions before amendment and post-amendment respectively: 

Pre-Amendment

Section 109(3):

The National Bench of the Appellate Tribunal shall be situated at New Delhi which shall be presided over by the President and shall consist of one Technical Member (Centre) and one Technical Member (State). 

Section 109(9): 

Each State Bench and Area Benches of the Appellate Tribunal shall consist of a Judicial Member, one Technical Member (Centre) and one Technical Member (State) and the State Government may designate the seniormost Judicial Member in a State as the State President. 

Post-Amendment 

Section 109(3): 

The Government shall, by notification, constitute a Principal Bench of the Appellate Tribunal at New Delhi which shall consist of the President, a Judicial Member, a Technical Member (Centre) and a Technical Member (State). 

Section 109(4): 

On request of the State, the Government may, by notification, constitute such number of State Benches at such places and with such jurisdiction, as may be recommended by the Council, which shall consist of two Judicial Members, a Technical Member (Centre) and a Technical Member (State). 

In summary, the amendments via the Finance Act, 2023 have ensured that the no. of judicial members are equal to technical members, if not more. This is because the President of GSTAT is usually the senior most judicial member. The balance of judicial and technical members needed to be met on two fronts: ensuring balance of representation between the Union and States inter-se needs and the balance between judicial and technical side to avoid executive domination. Now that the initial hurdle to constitute GSTATs was officially removed via Finance Act, 2023, one would have expected speedy and decisive steps towards constitution of GSTATs. But that wasn’t the case.  

Benches, Chairperson, Website … and Other Puny Steps 

Since the provisions relating to GSTATs have been amended, the Union has taken multiple – but tiny – steps towards operationalizing the GSTATs. With each step, the tax community has raised its hopes for quick operationalization of GSTATs. But each step seems a step too far. 

In May 2024, the Minister of Finance administered oath to the first President of GSTAT, New Delhi. Since GSTATs are not yet operational and do not hear cases, I’m not sure what the President of GSTAT does to earn his salary.  

In July 2024, in another step forward, the Ministry of Finance notified various Benches of GSTATs, with the Principal Bench in New Delhi. 

Recently, the tax community was rejoicing at GSTATs having a dedicated website. It is hard for me to understand the joy of having a functional website for an institution that itself isn’t functional. And the purpose of having a website is difficult to comprehend due to a recent report in January 2025, mentioning that GSTATs will take another 6 months to begin their functioning. When the formalities for appointing personnel have not completed, IT infrastructure is yet uncertain, and real estate for GSTATs has not been finalized, even 6 months seem like an ambitious target. Especially due to the track record of the Union and States on this aspect of GST.  

Constitutional Courts are Impatient  

Since GSTATs, ideally the first appellate forum for GST-related disputes, are not functioning, the burden has shifted to constitutional courts. High Courts and the Supreme Court end up hearing matters that typically should not have received attention beyond GSTATs. Supreme Court has recognized the effect of not having GSTATs and has recently raised the following query in one of its orders:

We would like to first know at the earliest why the Goods and Services Tax Appellate Tribunal has not been made functional till this date.  

The Union is supposed to reply to the above query in three weeks, but do not expect any fireworks and new revelations. 

Supreme Court’s question was prompted after it noted that the petitioner had the remedy to file an appeal under CGST Act, 2017 but had to approach the High Court via writ petition due to GSTATs not functioning. Many such cases that did not deserve or should not have been heard by High Courts and Supreme Court are currently in limbo because these constitutional courts do not have the advantage of GSTATs judgments and fact finding.   

Previously, the Allahabad High Court also tried to make the Union act quickly. But, despite the High Court’s eagerness to constitute GSTATs in the State of UP, there wasn’t much headway. 

Additionally, GSTATs are necessary to ensure harmony in interpretation and coherence in jurisprudence which has, for a long time, been at the mercy of AARs and AAARs. Both are intended to be interpretive bodies, not dispute resolution bodies but their several sub-par interpretations have caused tremendous confusion on various matters.

To conclude, I cannot say for sure when GSTATs will start functioning, but it is imperative that they do. And they function efficiently. A reform such as GST cannot be truly called a bold or a transformative reform until the accompanying rule of law infrastructure is operational. And GSTATs are a vital cog of that infrastructure. Until then, GST has certainly transformed the landscape of indirect tax in India. But, the promise of fair and speedy resolution of disputes remains a distant and unfulfilled promise.  

CERC Is Exempt from GST: Delhi HC 

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The Delhi High Court in a recent judgment held that the Central Electricity Regulatory Commission and Delhi Electricity Regulatory Commission (‘Commission’) were not liable to pay GST. The Revenue sought to levy on the fees and tariff that Commission received from the power utilities. The Revenue contended that functions performed by the Commission were ‘support services to electricity transmission and distribution services’ under a 2017 Notification issued by CBIC. The Revenue clarified that while no GST was payable on services provided via electricity transmission and distribution services, but support services rendered in the contest of electricity transmission and distribution were subject to GST. 

The Delhi High Court ruled in favor of the Commission. 

Facts and Arguments 

Commission receives various amounts under different heads such as filing fee, tariff fee, license fee, annual registration fee and miscellaneous fee. Commission took the stance that GST is not payable on such amounts since it is performing statutory functions under the Electricity Act, 2003 and is essentially not engaged in any trade or commerce. 

Revenue’s argument – derived from its Show Cause Notices (SCNs) – before the High Court was that the Commission awards licences for distribution and transmission of electricity and charges licence fees. Thus, the definition of business read with consideration under CGST Act, 2017 makes it amply clear that the Commission is supplying services. And any such amount received is taxable under GST.  

The Revenue relied on two major elements to strengthen its argument about liability of the Commission to pay GST: 

First, it relied on FAQs where the CBIC had clarified that Commission is not a Government for the purpose of GST but is appropriately classified as a regulatory agency. And any financial consideration received by the Commission for any service provided by it was liable to GST. Since the regulatory activities performed by the Commission for which it received money amounted to ‘business’, the Commission was classified as a business entity under the said FAQs.  

Second, and the Revenue reasoned this in its SCN as well: the Commission performs both regulatory and adjudicatory functions. That regulatory functions of the Commission fall outside the purview of quasi-judicial functions and while performing such functions it does not have the trappings of a full-fledged court. Further, the licence fee is received by the Commission for its regulatory functions. The Revenue argued that it is immaterial if the regulatory functions of the Commission are mandated by the statute or not, as long as consideration is received by it is for supply of, services it amounts to a supply for which GST is liable to be paid.   

The Commission questioned the Revenue’s bifurcation between its regulatory and adjudicatory functions and contended that discharge of statutory duties by it in public interest cannot be subjected to GST. 

Relevant Provisions of GST 

The High Court reproduced the relevant provisions of CGST Act, 2017 relating to supply, business, and consideration. 

Section 7, CGST Act, 2017 defines supply to include all forms of supply of goods or services or both made for a consideration by a person in the course or furtherance of business. 

Clause 2, Schedule III, CGST Act, 2017 states that services provided by a Court or Tribunal established under any law for the time being in force will not be considered either as supply of goods or supply of services.  

Definitions of business and consideration under CGST Act, 2017 are as follows: 

―2. Definitions. —In this Act, unless the context otherwise requires- 

      xxxx                    xxxx                    xxxx

(17) ―business‖ includes— 

(a) any trade, commerce, manufacture, profession, vocation, adventure, wager or any other similar activity, whether or not it is for a pecuniary benefit; 

(b) any activity or transaction in connection with or incidental or ancillary to sub-clause (a); 

(c) any activity or transaction in the nature of sub-clause (a), whether or not there is volume, frequency, continuity or regularity of such transaction; 

(d) supply or acquisition of goods including capital goods and services in connection with commencement or closure of business; 

(e) provision by a club, association, society, or any such body (for a subscription or any other consideration) of the facilities or benefits to its members; 

(f) admission, for a consideration, of persons to any premises; 

(g) services supplied by a person as the holder of an office which has been accepted by him in the course or furtherance of his trade, profession or vocation; 

(h) activities of a race club including by way of totalisator or a license to book maker or activities of a licensed book maker in such club; and; 

(i) any activity or transaction undertaken by the Central Government, a State Government or any local authority in which they are engaged as public authorities;‖ 

―2. Definitions.—In this Act, unless the context otherwise requires,— 

      xxxx                    xxxx                    xxxx

(31) ―consideration‖ in relation to the supply of goods or services or both includes—

(a) any payment made or to be made, whether in money or otherwise, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government; 

(b) the monetary value of any act or forbearance, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government: 

Provided that a deposit given in respect of the supply of goods or services or both shall not be considered as payment made for such supply unless the supplier applies such deposit as consideration for the said supply;

The Delhi High Court examined the above two definitions in detail to reject Revenue’s contention. 

Decision 

The Delhi High Court noted that the Commission certainly acts as a tribunal, but the Revenue seeks to distinguish between the adjudicatory and regulatory functions of the Commission. The bifurcation warranted an examination of the definition of business and consideration in tandem with supply as defined under Section 7, CGST Act, 2017. 

As regards the definition of business, the Delhi High Court observed that clause (a) was the applicable clause. But the High Court observed that it cannot fathom how the power of regulation statutorily vested in the Commission can be included in any of the activities enlisted in the definition of business. Further, while clause (i) included activities undertaken by the Central or State Governments, the High Court noted that the Commission being a statutory body could not be equated with either of the two entities. 

As regards the definition of consideration, the Delhi High Court noted that it draws colour from the definition of business and it needs to be in relation or response to inducement of supply of goods or services. And here two elements need to be satisfied: first, the payment received must be outcome of an inducement of supply of goods or services; second, the supply must be in the course of or furtherance of business. 

As regards the first element, the High Court noted that: 

Suffice it to note that it was not even remotely sought to be contended by the respondents that the payments in the form of fee as received by Commissions were an outcome of an inducement to supply goods or services. (para 29) 

The above observation is not entirely accurate, since the SCN did mention that the Commission was providing support services for electricity transmission and distribution services. 

Nonetheless, even if one accepts that the money received by the Commission was in response to inducement of supply of goods or services, the said money must be in course or furtherance of business. To this end, the Delhi High Court observed that the functions performed by the Commission cannot be included in the term ‘business’ as defined under Section 2(17), CGST Act, 2017 and concluded: 

We find ourselves unable to accept, affirm or even fathom the conclusion that regulation of tariff, inter-State transmission of electricity or the issuance of license would be liable to be construed as activities undertaken or functions discharged in the furtherance of business. (para 33)

Finally, what about the bifurcation between regulatory and adjudicatory functions of the Commission? As per the Delhi High Court that the Electricity Act made no distinction between regulatory and adjudicatory functions of the Commission and that the statute had enjoined the Commission to regulate and administer electricity distribution. 

Conclusion 

The Delhi High Court’s decision stands on firm footing. And despite the CBIC and the GST Council having recommended otherwise, the High Court arrived at a clear and well-reasoned decision that the Commission was a tribunal. Even if it was accepted that the Commission received consideration in exercise of regulatory functions, it was not in course or furtherance of business. 

Finally, the Delhi High Court clarified that merely because was a heading: “Support services to electricity, gas and water distribution” which is placed under Group Heading 99863 of the CBIC Notification does not mean that the statutory exemption under Schedule III where services provided by a tribunal are excluded can be bypassed. The High Court helpfully clarified: 

What we seek to emphasise is that a notification would neither expand the scope of the parent entry nor can it be construed as taking away an exemption which stands granted under the CGST Act. There cannot possibly be even a cavil of doubt that a Schedule constitutes an integral part and component of the principal legislation. (para 36) 

Whether the Revenue will appeal against this decision will be revealed in due course, but for now, a well-reasoned decision of the Delhi High Court has clarified the GST implications of the Commission’s functions. 

Assignment of Leasehold Rights is Immovable Property under GST: Guj HC 

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Introduction 

In a recent and much discussed judgment, the Gujarat High Court has held that assignment by sale and transfer of leasehold rights of a plot of land amounts to transfer of benefits arising out of immovable property. The High Court concluded that the transfer would not amount to a supply under Section 7, CGST Act, 2017 read with Schedule II of the Act.  

My usual lament is about length of judgments. This judgment is 280 pages and could very well have been less than half. But the Judges felt the need to reproduce the entirety of arguments and copiously cite precedents relied on by the parties to the case, even if several of them had no proximate bearing on the High Court’s conclusion. While this lament may sound repetitive, I believe it is important to constantly strive for more brevity and more clarity in our judgments.   

Regardless, a quick summary of the case is below. 

Issue before the Gujarat High Court 

The brief facts of case are: Gujarat Industrial Development Corporation (‘GIDC’). GIDC acquires land and develops the same for industrial estate by creating infrastructure such as road, drainage, etc. and allots a plot of land on long term lease for 99 years to a person/entity. A registered deed is executed between GIDC and the lessee. The lease deed allows the lessee to further assign the leasehold rights and any interest in the land to a third person with approval of GIDC. In the impugned case, Gujarat Chamber of Commerce and Industries was the lessee and its case was that the transfer of leasehold rights to a third party did not attract GST. 

In the impugned case, the land was leased to the lessee, and the latter constructed a building on it. And the leasehold rights that were assigned related to both the land and the building so constructed.  The High Court thus framed the issue specifically as: whether assignment of leasehold rights alongwith the building thereon would be covered by the scope of supply to levy GST as per the CGST Act, 2017 or not?  

Arguments and Relevant Provisions 

The crux of lessee/petitioner’s argument was that leasehold rights are benefits arising out of land. A succinct logical flow of the argument can be stated as follows: 

  1. The definitions of immovable property under the General Clauses Act, 1897 and Registration Act, 1908 both include ‘benefits that arise out of land’.   
  2. Leasehold rights are benefits arising out of an immovable property. 
  3. Thus, transfer/assignment of leasehold rights amounts to transfer of an immovable property. 
  4. Since transfer of immovable property is not within the scope of ‘supply’ as defined under CGST Act, 2017 it cannot be subjected to GST. 

The Revenue’s case was that while sale immovable property is outside the scope of supply of GST laws, interest in immovable property like leasehold rights which is transferred by way of sale is a ‘supply of services’ is liable for GST. The Revenue further argued that transfer of right to occupy a land by GIDC to lessee constitutes a supply of service. And that the nature of interest in land would not change merely because the lessee makes an absolute transfer of leasehold rights to a third party. 

To buttress its argument that leasehold rights were benefits arising out of a land, the petitioner’s relied on a galaxy of judgments in the context of TPA, 1882 where courts have elaborated on what constitutes a movable or immovable property.

Supply has been defined under Section 7, CGST Act, 2017 to include sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration in the course or furtherance of business. Further, Clause 5(a), Schedule II, CGST Act, 2017 states that renting of immovable property shall be treated as supply of services. Thus, while renting/leasing is within the scope of supply the assignment of leasehold rights is not specifically included in the definition of supply.  

Reasoning and Conclusion 

The Gujarat High Court did not accept the Revenue’s argument. The High Court noted that the first transaction between GIDC and lessee merely transferred the right of possession to the latter as the right of ownership of the plot remained with GIDC. The second transaction wherein the lessee assigned all the leasehold rights in the property to a third party involved transfer of absolute rights. The High Court added: 

when the lessee-assignor transfers absolute right by way of sale of leasehold rights in favour of the assignee, the same shall be transfer of “immovable property” as leasehold rights is nothing but benefits arising out of immovable property which according to the definition contained in other statutes would be “immovable property”. Therefore, the question of supply of services or place of supply of services does not arise … (para 52)

Thus, transfer of land for lease of 99 years by GIDC to lessee is taxable under GST as per clause 5(a), Schedule II, CGST Act, 2017. But transfer of such leasehold rights would be nothing but transfer of immovable property since the consideration paid is as much an alienation as sale or mortgage. (para 64) The High Court also invoked the meaning of term ‘assignment’ to mean that it includes transfer of all rights of a property, the whole interest with rights and liability to sue and be sued. (para 67-68) And the implication of the above understanding of assignment was that the lessee was removed from the picture on transfer of leasehold rights.   

But can the lessee transfer a title superior to the one they received? If the lessee only received leasehold rights from GIDC can it transfer/assign absolute rights to a third party? To this end, the High Court emphasised that GIDC only leased the plot of land and the lessee constructed a building and developed a land for the purpose of business. The entire land and building was therefore transferred along with leasehold rights and interests in land which is a capital asset in the form of immovable property. The lessee, therefore, earned profits by operating a building which constitutes ‘profit a pendre’ which in turn constitutes as immovable property as per the Anand Behra case. 

Legislative Intent or Strict Interpretation? 

The Gujarat High Court has relied on both: strict interpretation of tax statutes and legislative intent to hold that assignment of land the building does not amount to a supply under GST. Using both interpretive techniques in a single judgment is a bit strange. The default approach in interpreting tax statutes is – strict interpretation. Courts usually resort to discovering legislative intent if there is ambiguity or uncertainty in the relevant provisions. In the impugned case, the Gujarat High Court declared that it must follow strict interpretation of law since regard must be given to clear meaning of the terms since entire issue is governed by language of the provisions. (para 58) And yet in the succeeding paragraphs the High Court goes into legislative intent and history in detail before arriving at its conclusion. (paras 60-62)

The Gujarat High Court specifically invoked legislative intent when it noted that when legislative intent is not to levy GST on sale of immovable property, the Revenue’s argument of treating assignment of leasehold rights as equal to renting of immovable property would be contrary to legislative intent. (Para 82) This issue could have been easily adjudicated upon by relying on the strict interpretation of statutes by holding that Clause 5(a), Schedule II, CGST Act, 2017 only mentions ‘renting of immovable property’ and cannot by interpretive gymnastics be held to include ‘assignment of leasehold rights’.   

 This interpretive approach where the High Court was trying to rely on two different interpretive methodologies without reconciling them is indicative of a ‘let cover all bases’ approach instead of a narrow inquiry into the issue at hand.        

Conclusion 

It is important that the ratio of this case is understood in the specific context of this case. The specific context is that the lessee received leasehold rights of a plot of land from GIDC. The lessee in turn developed the land, constructed a building, and assigned the leasehold rights over the land and building to a third party. The High Court stressed on the development of land made by the lessee after receiving the leasehold rights and that the assignment by sale by the lessee was of both the land and building. The conclusion may have been different if the land received on land was further leased to a third party on ‘as is where is’ basis.      

Telecommunication Towers are Movable Property under GST: Delhi HC

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The Delhi High Court in a recent decision held that telecommunication towers are best characterized as movable property under Section 17(5), CGST Act, 2017 and are eligible for input tax credit (‘ITC’). 

Facts 

Indus Towers filed a writ petition impugning the showcause notice issued under Section 74, CGST Act, 2017. The notice issued a demand for tax along with interest and penalty. Indus Towers was engaged in the business of providing passive infrastructure services to telecommunication service providers. And the notices denied it ITC on inputs and input services used for setting up passive infrastructure on the ground. The Revenue’s argument was that the inputs were used in construction of telecommunication towers and fell in the ambit of Section 17(5)(d), CGST Act, 2017. The relevant portions of the provision are below to help us understand the issue better: 

17. Apportionment of credit and blocked credits. 

xxxxx

(5) Notwithstanding anything contained in sub-section (1) of Section 16 and sub-section (1) of Section 18, input tax credit shall not be available in respect of the following, namely:-  

xxx

(d) goods or services or both received by a taxable person for construction of an immovable property (other than plant or machinery) on his own account including when such goods or services or both are used in the course or furtherance of business. 

Xxx

Explanation.- For the purposes of this Chapter and Chapter VI, the expression “plant and machinery” means apparatus, equipment, and machinery fixed to earth by foundation or structural support that are used for making outward supply of goods or services or both and includes such foundation and structural supports but excludes – 

  • land, building or any other civil structures; 
  • telecommunication towers; and 
  • pipelines laid outside the factory premises. 

Revenue’s reading of the above extracted provisions was: plant and machinery is not immovable property and is eligible for ITC, but clause (ii) of the Explanation expressly excludes telecommunication towers from the scope of plant and machinery. Thus, telecommunication towers should be considered as immovable property on which ITC is blocked. 

Petitioner’s Arguments 

Petitioner’s assertion was that telecommunication towers more appropriately classified as movable and not immovable property. Petitioner argued that telecommunication towers are movable items of essential equipment used in telecommunications. The towers can be dismantled at site and are capable of being moved. The concrete structure on which the towers are placed could be treated as the immovable element of the equipment, but all other parts can be easily moved and shifted to other locations. And since the underlying concrete structure is essentially for the purpose of providing stability to the towers, it would not detract from the basic characteristic of towers as being a movable property. 

Precedents and Generic Principles of Immovable Property 

The Delhi High Court cited two major precedents: Bharti Airtel and Vodafone Mobile Services cases. The Supreme Court in the former and the Delhi High Court in the latter had opined that telecom towers are intrinsically movable items and liable to be treated as inputs under the CENVAT Credit Rules, 2004. The Revenue’s contention was that both decisions should be distinguished. Under GST, the Explanation appended to Section 17, CGST Act, 2017 specifically excludes telecommunication towers from the ambit of plant and machinery, and thereby they should be treated as immovable property. The Delhi High Court relied on the above two precedents to disagree with the Revenue’s contentions.   

Additionally, the Delhi High Court cited a host of other principles enunciated in the context of TPA, 1882 where courts have tried to distinguish movable property from immovable property. Some of the principles to determine the nature of a property include: nature of annexation, object of annexation, intention of parties, functionality, permanency, and marketability test. 

The Delhi High Court cited Supreme Court’s observations in the Airtel case and how after applying the said tests, the Court had concluded that towers were not permanently annexed to the earth, but could be removed or relocated without causing any damage to them. And that the annexation of telecommunication towers to the earth was only to make them stable and wobble free. 

Expressing its complete agreement with Supreme Court’s observations, the Delhi High Court noted that the telecommunication towers were never erected with an intent of conferring permanency and their placement on concrete bases was only to help them overcome the vagaries of nature. The Revenue’s argument that telecommunication towers were immovable property, was as per the Delhi High Court, completely untenable.      

High Court Interprets Section 17(5) & the Explanation in a Curious Manner  

The Delhi High Court noted that telecommunication towers are not an immovable property in the first place and do not fall within the ambit of Section 17(5)(d). While the Explanation specifically excludes telecommunication towers from the ambit of the expression ‘plant and machinery’, the High Court observed that: 

… the specific exclusion of telecommunication towers from the scope of the phrase “plant and machinery” would not lead one to conclude that the statute contemplates or envisages telecommunication towers to be immovable property. Telecommunication towers would in any event have to quality as immovable property as a pre-condition to fall within the ambit of clause (d) of Section 17(5). Their exclusion from the expression “plant and machinery” would not result in it being concomitantly held that they constitute articles which are immoveable. (para 18) 

The High Court interpretation is a curious one. The legislative scheme under CGST Act, 2017 is: plant and machinery are not to be treated as immovable property, but telecommunication towers are specifically excluded from ambit of plant and machinery. Does mean that telecommunication towers move back into the category of immovable property since they are excluded from the exception? Prima facie, yes. But the Delhi High Court answered in negative. The High Court’s reasoning is that telecommunication towers are not an immovable property in the first place. The High Court’s opinion is not entirely convincing. Explanation to Section 17(5) excludes three specific things from the ambit of plant and machinery, i.e., 

  • land, building or any other civil structures; 
  • telecommunication towers; and 
  • pipelines laid outside the factory premises. 

Category (i) and (ii), are prima facie immovable property. Applying the principle of ejusdem generis, one can argue that telecommunication towers also fall in the same category. Even if the generic principles of the concept of immovable property suggest that telecommunication towers are a movable property that is an answer in abstract. In the context of Explanation to Section 17(5), a case can be made that telecommunication towers are treated as immovable property by a deeming fiction. Section 17(5) read with the Explanation clearly suggests that telecommunication towers are to be treated as immovable property. The Delhi High Court’s opinion that telecommunication towers are not an immovable property in the first place does not adequately examine the interplay of the Explanation with the text of Section 17(5) and that the predecents cited were in the context of CENVAT Credit Rules and not GST law. This issue of telecommunication towers and their appropriate classification under GST may need a revisit in the future.   

Safari Retreats: Supreme Court Adopts a ‘Strict’ Stance

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The Supreme Court pronounced its judgment in the Safari Retreats case a few days ago. The judgment involved interpretation of Section 17(5), CGST Act, 2017, specifically clauses (c) and (d) read with two Explanations contained in the Section. The judgment has been greeted with a mixed response by tax community with some commending the Supreme Court for adhering to strict interpretation of tax statutes while others criticizing it for misreading the provision and by extension legislative intent. While a lot of ink has already been spilled in writing comments on the judgment, I think there is room for one more view. 

In this article, I describe the judgment, issues involved and argue that the Supreme Court in the impugned judgment identified the issue clearly, applied the doctrine of strict interpretation of tax statutes correctly, and any criticism that the Court misread legislative intent doesn’t have strong legs. At the same time, the judgment is not without flaws. Finally, it is vital to acknowledge that the judgment is an interpretive exercise in abstract as it didn’t decide the case on facts and remanded the matter to the High Court with instructions to decide the matter on merit ‘by applying the functionality test in terms of this judgment.’ (para 67) It is in application of the functionality test where implications of the impugned judgment will be most visible.   

Introduction 

The writ petition before the Supreme Court was a result of Orissa High Court’s decision wherein it read down Section 17(5)(d). I’ve discussed the High Court’s judgment here, but I will recall brief facts of the case for purpose of this article: the petitioner was in the business of construction of shopping malls. During construction, the petitioner bought raw materials as inputs and utilized various input services such as engineering and architect services. The petitioner paid GST on the inputs and input services. In the process, the petitioner accumulated Input Tax Credit (‘ITC’) of Rs 34 crores. After completion of construction of the shopping mall, the petitioner rented premises of the shopping mall and collected GST from the tenants. The petitioner was not allowed to claim ITC against the GST collected from the tenants. The Revenue Department invoked Section 17(5)(d), CGST Act, 2017 to block the petitioner’s ITC claim. It is worth reproducing the relevant Section 17(5)(d) and (e), as they form nucleus of the impugned judgment. 

17. Apportionment of credit and blocked credits.— 

(5) Notwithstanding anything contained in sub-section (1) of section 16 and sub- section (1) of section 18, input tax credit shall not be available in respect of the following, namely:— 

(c) works contract services when supplied for construction of an immovable property (other than plant and machinery) except where it is an input service for further supply of works contract service; 

(d) goods or services or both received by a taxable person for construction of an immovable property (other than plant or machinery) on his own account including when such goods or services or both are used in the course or furtherance of business. 

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

Another Explanation is appended to Section 17, after Section 17(6), which states as follows: 

Explanation.––For the purposes of this Chapter and Chapter VI, the expression ― “plant and machinery”means apparatus, equipment, and machinery fixed to earth by foundation or structural support that are used for making outward supply of goods or services or both and includes such foundation and structural supports but excludes— 

  1. (i)  land, building or any other civil structures; 
  2. (ii)  telecommunication towers; and 
  3. (iii)  pipelines laid outside the factory premises. 

The Revenue’s argument was that the petitioner constructed an immovable property, i.e., a shopping mall on his own account and ITC in such a situation is blocked under Section 17(5)(d). The Orissa High Court read down Section 17(5)(d) and allowed the petitioner to claim ITC by reasoning that denial of ITC would lead to cascading effect of taxes. The High Court crucially did not examine if the shopping mall could be categorized in the exemption of ‘plant or machinery’. While the High Court’s judgment is not an exemplar of legal reasoning, it triggered a debate on the permissibility of petitioner’s ITC claim and the Supreme Court has clarified some issues through its judgment.  

Arguments 

Petitioners 

The Supreme Court, in the initial pages of the judgment, laments that the arguments in the case were repetitive and cajoles lawyers to make brevity their friend. (para 6) I will try and summarise the arguments from both sides by paying heed to the above suggestion.  

Petitioners argued that denial of ITC under Section 17(5)(d) amounted to treating unequals equally. Petitioners argued that renting/leasing of immovable property cannot be treated the same as sale of immovable property. There is no intelligible differentia since the transactions are different. Latter does not attract GST while the former is subject to GST. There is no break in chain in case of petitioners since both input and output are taxable under GST and blocking of ITC will lead to cascading effect of taxes and defeat a core objective of GST. It was further argued that the provision suffered from vagueness since the phrase ‘on its own account’ was not defined, and use of two different phrases – ‘plant or machinery’/ ‘plant and machinery’ – and their meanings were not sufficiently clarified by the legislature. 

A ‘three-pronged’ argument of the petitioner stated that claim of ITC could be allowed without reading down Section 17(5)(d). The three prongs were:  

First, clause (d) exempts ‘plant or machinery’ from blocked credit while the Explanation after Section 17(6) is applicable to ‘plant and machinery’. Thus, the Explanation is inapplicable to the clause (d). This point is further underlined by use of the phrase ‘plant or machinery’ in clause (c) indicating that the two phrases – ‘plant and machinery’/‘plant or machinery’ are different. Explanation to Section 17(6) effectively states that land, building and other civil structure cannot form ‘plant and machinery’; if the Explanation cannot be applied to clause (d) a building such as a shopping mall can be categorized as a ‘plant’ on which ITC is not blocked.  

Second, it was argued that malls, hotels, warehouses, etc. are plants under Section 17(d). Stressing on strict interpretation of statutes and need to avoid cascading effect of taxes, the petitioners specifically added that the term ‘plant’ should include buildings that are an ‘essential tool of the trade’ with which the business is carried on. But, if it is merely a ‘setting within which the business’ is carried on, then the building would not qualify as a plant.

Third, it was argued that supply of service under Section 7 of CGST Act, 2017 read with Clause 2 of Schedule II includes leasing and renting of any building including a commercial or residential complex. And ITC accumulated on construction of such property should be available against such service. This argument seems to address the issue of blocking of ITC under Section 17(5) indirectly and advocated for a seamless availability of ITC. But this argument side steps the fact that a transaction can amount to supply under Section 7, and yet ITC on it can be blocked under Section 17. 

The first argument though was the most crucial argument, as the latter part of this article will examine.  

The State

The State’s arguments oscillated from sublime to the ridiculous. The State argued that  classification of the petitioners with assessees who constructed immovable property and sold it was based on intelligible differentia. And the intelligible differentia was that both kinds of asssessees ‘created immovable property’. The State also mentioned that there was a break in the chain of tax, but this is not true for petitioner since renting of premises in the shopping mall was taxable. The petitioners were paying GST on their inputs and collecting GST on the output, i.e., renting of premises of shopping mall. The break in tax chain, as the petitioners rightly argued was only when an immovable property is sold after receiving a completion certificate as in such transactions output is not subject to GST. Further, State stressed that ITC is not a fundamental or a constitutional right and thus State has the discretion to limit the availability/block ITC. While ITC not being a right is now a well-established legal position, the State’s justification for blocking ITC in this case lacked an express and cogent reason.  

The State further argued, unsuprisingly, that the phrase ‘plant or machinery’ should be interpreted to mean ‘plant and machinery’. As per the State, it was not uncommon to interpret ‘or’ to mean ‘and’. I’m terming this argument as unsurprising because this is not a novel argument in taxation matters and the State even had a few authorities to back this view. The State though did admit that the phrase ‘plant or machinery’ occurs only once in Chapters V and VI of the CGST Act, 2017 while the phrase ‘plant and machinery’ occurred ten times. The existence of both phrases in the CGST Act, 2017 proved crucial in the final view taken by the Supreme Court that both phrases have a different meaning. Finally, the State also cited ‘revenue loss’ as a reason for disallowing ITC. It was argued that the petitioner could claim ITC while renting/leasing the mall, but the mall would be sold after 5 or 6 years and on such sale no GST would be paid since GST is not payable on sale of immovable property sold after receiving a completion certificate. This would cause a loss to the exchequer. This again is a curious argument: if sale of immovable property does not attract GST as per the legal provisions, how can non-payment of GST in such cases cause a ‘loss’ to exchequer? Further, if blocking of ITC is done to prevent such a ‘loss’ then it defeats a central purpose of GST as a value-added tax.   

Despite the voluminous arguments, if one were to identify the core issue in the judgment, it would be whether ‘or’ can mean ‘and’ and further whether a shopping mall could be termed as a ‘plant’. Supreme Court said answered the former in negative and the latter is to be decided by the High Court based on facts of the case and by applying the ‘functionality test’ endorsed by the Supreme Court. 

Supreme Court’s conclusion is based on two pillars: first, reiteration and clear articulation of the elements of strict interpretation of statutes; second, reliance on a variety of judicial precedents to endorse the functionality test. 

First Pillar of the Judgment: Strict Interpretation of Tax Statutes  

To begin with, strict interpretation of tax statutes is a principle that is followed universally and adhered to in most jurisdictions including India. The principle can be summarized can be expressed in a thesis length and has various nuances. In the context of impugned judgment, the Supreme Court highlighted summarized the core principles as: a taxation statute must be interpreted with no additions or subtractions; a taxation statute cannot be interpreted on any assumption or presumption; in the fiscal arena it is not the function of the Court to compel the Parliament to go further and do more and there is nothing unjust if a taxpayer escapes the letter of law due to failure of the legislature to express itself clearly. (para 25) 

Second, while Courts in various judgments have stated that taxation statutes should be interpreted strictly, they have failed to apply the said principle in its true sense. But in the impugned judgment we see a correct application of the strict interpretation principle as evidenced in the following observations of the Supreme Court: 

The explanation to Section 17 defines “plant and machinery”. The explanation seeks to define the expression “plant and machinery” used in Chapter V and Chapter VI. In Chapter VI, the expression “plant and machinery” appears in several places, but the expression “plant or machinery” is found only in Section 17(5)(d). If the legislature intended to give the expression “plant or machinery” the same meaning as “plant and machinery” as defined in the explanation, the legislature would not have specifically used the expression “plant or machinery” in Section 17(5)(d). The legislature has made this distinction consciously. Therefore, the expression “plant and machinery” and “plant or machinery” cannot be given the same meaning. (para 44) 

The Supreme Court in making the above observations clarified that interpreting ‘plant or machinery’ to mean same as ‘plant and machinery’ would amount to doing violence to words in the statute and in interpreting tax statutes, the Courts cannot supply deficiencies in the statute. Dominant part of the reasoning for above conclusion was derived from adherence to strict interpretation, but also that the phrase ‘plant and machinery’ occurred ten times in Chapter V and VI of the CGST Act, 2017 while the phrase ‘plant or machinery’ occurred only once indicating that the legislature intended to use different phrases at different places. Also, the Supreme Court noted that even if use of ‘or’ was a mistake the legislature had ample time since the High Court’s judgment to intervene and correct the error, but it had not done so. Hence, the assumption should be that use of the phrase ‘plant or machinery’ was not a mistake. The bulk of the reasoning though did come from principles of strict interpretation. Both, Supreme Court’s summary of principles of strict interpretation of tax statutes and its application to Section 17(5)(d) read with Explanation to Section 17(6) are a perfect example of crisp articulation of a principle and its application.     

Second Pillar of the Judgment: Functionality Test 

Once the Supreme Court concluded that the phrase ‘plant or machinery’ is distinct from ‘plant and machinery’, it had to interpret meaning and scope of the former phrase since only the latter was defined under Explanation to Section 17(6). The Supreme Court clarified that the expression ‘immovable property other than plant or machinery’ used in Section 17 shows that a plant could be an immovable property. And in the absence of a definition of ‘plant’ in CGST Act, 2017 meaning of the word in commercial sense will have to be relied on. The Court cited a series of precedents where the word ‘plant’ had been interpreted and the ‘functionality test’ had been laid down. Clarifying the import of various precedents, the Supreme Court borrowed the language from previous judicial decisions and expressed the functionality test in following terms: 

 … if it is found on facts that a building has been so planned and constructed as to serve an assessee’s special technical requirements, it will qualify to be treated as a plant for the purposes of investment allowance. The word ‘plant’ used in a bracketed portion of Section 17(5)(d) cannot be given the restricted meaning provided in the definition of “plant and machinery”, which excludes land, buildings or any other civil structures … To give a plain interpretation to clause (d) of Section 17(5), the word “plant” will have to be interpreted by taking recourse to the functionality test. (para 52)

 While the functionality test expressed above provides broad guidelines, there is enough in the test to cause tremendous confusion and uncertainty once it is applied to varied fact situations. For example, the Supreme Court itself clarified that the Orissa High Court did not decide if the shopping mall of the petitioner was a ‘plant’ and the High Court needs to answer the question determine if ITC will be blocked. But even if the petitioner’s shopping mall is held to constitute a plant, it would not mean that all shopping malls will receive similar treatment. Because the Supreme Court clearly says: 

‘Each mall is different. Therefore, in each case, fact-finding enquiry is contemplated.’ (para 56)

The answer on applying the functionality test would depend on facts of each case and similar buildings can be labelled as a plant or not depending on factual variations. While the Supreme Court has clarified that the functionality test is the appropriate framework to determine the eligibility for ITC in the impugned case and other similar cases, the application of it has been left to the High Court for now. Only once several such cases are decided, will be know if coherence is emerging in the interpretation and application of the functionality test. But since the functionality test is highly fact sensitive, we should expect varied answers depending on the underlying fact situation.  

Finally, the Supreme Court helpfully did clarify the import and ratio of the precedents on this issue mostly notably Anand Theatres judgment. In Anand Theatres case, the issue was whether a building which is used for running a hotel or a cinema theatre can be considered as a tool for business and thus a plant for purpose of allowing depreciation under the IT Act, 1961. The Court answered in the negative, but a later decision in Karnataka Power Corporations judgment limited the decision in Anand Theatres case to only cinemas and hotels. The Supreme Court in the impugned judgment also made it amply clear that Anand Theatres case was only applicable for hotels and cinema theatres and could not be used to determine if shopping malls, warehouses, or any other building amounts to a plant.  In clarifying so, the legal position that emerges is that hotels and cinema theatres are not plants while other buildings are a plant or not needs to be determined by applying the functionality test. This was a welcome clarification since there was confusion as to which decision is relevant and applicable in the context of deciding if a building is a plant or not while applying the functionality test.         

Meaning of ‘On Own Account’ Lacks Proper Reasoning 

A notable flaw of the judgment, which in my opinion, should be scrutinized in future decisions is the Supreme Court’s explanation of the meaning of ‘own account’. It interpreted the phrase in following terms: 

Construction is said to be on a taxable person’s “own account” when (i) it is made for his personal use and not for service or (ii) it is to be used by the person constructing as a setting in which business is carried out. However, construction cannot said to be on a taxable person’s “own account” if it is intended to be sold or given on lease or license. (para 32)

The flaw in the above opinion is that it comes from ‘nowhere’. The latter element of ‘own account’ was the petitioner’s understanding of the phrase. But, in the Supreme Court in reaching this conclusion does not cite any authority or how or why does it agree with this interpretation of the phrase. The paragraphs that precede and succeed the above conclusion are focused on Supreme Court’s analysis that clause (c) and (d) of Section 17(5) are distinct and occupy different territories and its view about meaning of ‘own account’ seems to hang in air with no discernible reason to support it. One could argue that the Supreme Court’s interpretation is a commercial understanding of the phrase, but I doubt if adopting commercial meaning of the phrase can be done without stating reasons for subscribing to it. 

Also, the petitioner’s had argued that ‘on own account’ should be restricted to scenarios when a building is used as a setting for carrying out the business, not when it a tool for the business. Supreme Court seems to have endorsed the distinction based on the above cited paragraph. Again, this distinction works well in abstract but applying it to the facts of each case and distinguishing between what is ‘setting for a business’ and what is merely a ‘tool for business’ may not be obvious in each case. 

Implications and Way Forward 

The implications of the impugned judgment are various. To begin with, the phrase ‘plant or machinery’ does not mean the same as ‘plant and machinery’. A clear and unambiguous application of the doctrine of strict interpretation of tax statutes signals and reiterates the need to adopt this doctrine while interpreting provisions of tax law. At the same time, while the Supreme Court has not inaugurated a new test, it has unambiguously thrown its weight behind a well-established test, i.e., functionality test to determine if a plant or fixture in question is a plant. And judicial decisions that have applied the functionality test in the pre-GST and IT Act, 1961 indicate that uniform answers are unlikely as the query is fact specific and so are the answers. Thus, in the foreseeable future as courts adjudicate on this issue, we should expect varied answers and not a classical coherent and uniform jurisprudence on this issue.  

Much Ado About Demo Vehicles: Ambiguity on ITC Clarified

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The CBIC recently issued a Circular clarifying availability of ITC in respect of demo vehicles. The Circular, as I briefly mentioned elsewhere, seems like an exercise in law making rather than a mere interpretation of law. But I will keep that view aside for the purpose of this article. In this article, I focus on the ambiguity that emerged on ITC availability for demo vehicles, due to divergent views of AARs/AAARs, the relevant statutory provisions, and then describe how the recent CBIC Circular clarifies the law. I conclude that the confusion regarding availability of ITC on demo vehicles was avoidable if AARs/AAARs had adopted a more rigorous interpretive approach. However, going forward it may be prudent to align with the CBIC’s view expressed in its latest circular in the interest of taxpayers. 

ITC is Blocked, but there are Exceptions 

Section 17(5)(a), CGST Act, 2017 states that: ITC shall not be available in respect of motor vehicles for transportation of persons having approved seating capacity of not more than thirteen persons (including the driver), except when they are used for making the following taxable supplies, namely –  

(A)  further supply of such motor vehicles; or 

(B)  transportation of passengers; or 

(C)  imparting training on driving such motor vehicles; 

The policy rationale behind blocking ITC for motor vehicles of the above description is unclear and so is the reason for exceptions incorporated in the provision. And while the CBIC in its Circular and AAR/AAARs in some of their rulings have said that they are trying to decipher the ‘intent of law’, the phrase has been used erroneously. Neither the CBIC nor AAR/AAARs have referred to any legislative debates or other legislative instruments to decipher legislative intent behind the above provision. The phrase ‘intent of law’ has been used to merely describe the process of statutory interpretation. In fact, I would argue that the attempt to decipher legislative intent in the above instances is nothing except but second guessing legislative policy. It is best to understand the attempts by AAR/AAARs and CBIC as an attempt to clarify the meaning of the above provision through a process of interpretation. And nothing more.  

Advance Rulings are Decidedly Ambiguous   

The advance rulings – of AAR and AAAR – on the issue can be broadly grouped into two categories: one category has allowed ITC on demo vehicles, while the other category has disallowed it. An overview of both categories of advance rulings is below. 

In one ruling the Madhya Pradesh AAAR expressed its agreement with the AAR and held that the sale of demo vehicle in the subsequent year when depreciation has been charged shall be treated as sale of a second hand vehicle. It negatived the appellant’s contention that there was no time limit for ‘further supply’ of the demo vehicles under sub-clause (A) and that ITC should be available on sale of demo vehicle. AAAR’s emphasis was on the fact that demo vehicles are capitalised by the car dealer and serve a particular purpose for a limited period. Thereafter, the dealer sells the demo car as a second hand car. AAAR refused to engage with the appellant’s argument that the demo vehicles were used for further supply of such motor vehicles, and its focus on depreciation and capitalisation almost nudged the appellant to claim depreciation on the tax component under IT Act, 1961 instead of claiming ITC under GST laws. 

In another ruling, the Haryana AAAR expressed a similar opinion as the Madhya Pradesh AAAR and noted that sale of a demo vehicle is akin to sale of a ‘second hand good’ which is different from a new vehicle and it cannot be said that ‘demo vehicle is for further supply of such vehicles’. Haryana AAAR expressed the apprehension that: 

If the contentions of the applicant is allowed then in that case all the motor vehicles, irrespective of the nature of Supply will be eligible for ITC across the industries. It will no longer be a restricted clause for Car Dealers , but will be an open-clause for all the trade and industry to avail the ITC on all the Vehicles purchased by them. 

As per the Haryana AAAR, the legislative intent was to allow ITC on motor vehicles only in limited conditions such as when there is further supply of such vehicles. However, a demo vehicle is put to different uses and then sold as a second hand good making it ineligible to claim ITC. 

At the same time, other AARs have held that ITC is available on demo cars. Goa AAR, simply held that demo cars are an indispensable tool for providing a trial run to the customers and are used in the course or furtherance of business. Thus, ITC is available on demo cars whenever they are sold. The Bengal AAR, delved a bit deeper into the provision and clarified that claim for ITC under Section 17(5)(a)(A) is not time barred nor is it barred on the ground that the outer supply was made at a lower price than the purchase price. Interpreting the provision in a pointed fashion, the AAR opined that: 

In our considered opinion, the word ‘such’ as used in the expression ‘further supply of such vehicles’ relates to the vehicle only that was purchased. It is a fact that the condition of a demo vehicle at the time of its further supply might have undergone some deterioration from the spick and span condition in which it was at the time of its purchase. But that does not detract from the reality that the vehicle when supplied by a car dealer has ceased to be such vehicle that was purchased. (para 4.11)

The Bengal AAR clarified an important interpretive point which seems to have bypassed other AARs: whether the outward supply should be of the demo vehicle or other similar vehicles? Bengal AAR’s view was that used of the word ‘such’ qualifies and clarifies that outward supply has to be of the vehicle purchased, i.e., the demo vehicle. And the demo vehicle may have deteriorated due to its use by the car dealer, but it does not detract from the intent and scope of the provision. Kerala AAR also took a similar view and held that the demo vehicles are purchased for further supply and sale after their use for a certain period of time. Thus, the sale of such demo vehicles satisfies the requirement of ‘further supply of such vehicles’ as prescribed under Section 17(5)(A) and ITC is available on demo vehicles.  

The denial of ITC on sale of demo vehicles was premised their sale being comparable to second hand goods, the fact that they were capitalised in books of the car dealer while allowance of ITC was based on the fact that demo vehicles were used for furtherance of business and there was no express restriction on ITC even if the demo vehicles were used by the dealer before being sold. Except for the Bengal AAR, no advance ruling provided clarity or attempted to provide it by interpreting if the phrase ‘supply of such motor vehicles’ included only the demo vehicle or other motor vehicles that were sold by using the demo vehicle. To its credit, only CBIC engaged with this crucial interpretive issue in its Circular. 

CBIC Clarifies and Decodes ‘Intent of the Law’ 

CBIC has intervened to clarify the law on the point, since the rulings of various AARs and AAARs failed to provide any certainty and clarity. The Circular notes a few elemental points and clarifies a few crucial ones: 

First, the Circular notes a fairly obvious point: the intent of the law seems clear that based on the nature of outward supplies, ITC in respect of motor vehicles is blocked in several instances. 

Second, that sub-clauses (B) and (C) are inapplicable in situations involving sale of demo vehicles. And only clause (A) of the exception is relevant to determine if ITC can be claimed on sale of demo vehicles. Interpreting the expression ‘such motor vehicles’, the Circular states: 

… the usage of the words “such motor vehicles” instead of “said motor vehicle”, in sub-clause (A) of the clause (a) of section 17(5) of CGST Act, implies that the intention of the lawmakers was not only to exclude from the blockage of input tax credit, the motor vehicle which is itself further supplied, but also to exclude from the blockage of input tax credit, the motor vehicle which is being used for the purpose of further supply of similar type of motor vehicles. (Para 4.4) 

The Circular added that since demo vehicles are used by authorised dealers to provide trial runs to the customers, display features of the vehicle and help consumer purchase similar features, they can be considered by the dealer as being used for making ‘further supply of such vehicles’. Thus, ITC is available in respect of sale of demo vehicles. 

However, the Circular clarifies that when demo vehicles are used to transport employees/management, etc. ITC will be blocked. Equally, ITC will be blocked when the dealer merely uses the demo vehicle for advertising on behalf of the manufacturer and is not directly involved in the sale and purchase of the vehicles. Since in such cases, the invoice is issued by the manufacturer and sale of the vehicle is not made by the dealer on his own account. 

Finally, the Circular also clarified – what should have been obvious and a straightforward conclusion for AAR/AAARs – that capitalisation of demo vehicle in the books of the dealer does not affect the availability of ITC. Under Section 16 read with Section 17 of the CGST Act, 2017, ITC is available on both capital and non-capital goods as long as the goods are used in the course or furtherance of business. In clarifying the capitalisation aspect, CBIC through its Circular has effectively negated a line of inquiry adopted by certain AAR/AAARs that treated capitalisation of the demo vehicles as vital in determining if ITC is available on their sale. 

Conclusion 

The entire saga on availability of ITC on demo vehicles seems like much ado about nothing. The entire issue revolved around whether the demo vehicle can be included in the expression ‘further supply of such motor vehicles’, with the word ‘such’ being crucial. The Bengal AAR interpreted ‘such’ to only include the vehicle in question, while CBIC has adopted a comparatively wider approach and included vehicles purchased to make further supply of similar motor vehicles. Demo vehicles are now undoubtedly included in the expression. But, does this mean – an anxiety expressed by Haryana AAAR – that now ‘all vehicles’ purchased by a dealer could be included in the exception of sub-clause (A) and on all such vehicles ITC can be claimed? Unlikely. The proximate relationship of the purchased vehicle and further supply will need to be established to claim ITC, which can be easily done in case of demo vehicles. Establishing the same would be much tougher for ‘all other vehicles’ that a dealer may purchase. Thus, the anxiety of Haryana AAAR may turn out to be hollow. Or at least it should be unless AAR/AAARs decide to another unwanted twist to the issue.  

Finally, if the AAR/AAARs had kept the interpretive question narrow and focused on the words and expressions of Section 17(5)(a) that demanded an interpretation, we would have had better and perhaps coherent answers to the taxpayer’s queries. The tangents of sale of demo vehicles being akin to sale of second hand vehicles, and undue emphasis on capitalisation of the demo vehicles by AAR/AAARs prevented a more prudent answer from emerging through various advance rulings. Hopefully, we will witness better advance rulings going forward, at least on this issue which seems to have gained great clarity with the issuance of CBIC’s circular.  

Single Administrative Interface under GST: Identifying Two Rough Patches  

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GST is a dual nationwide tax implying that both the Union and States concurrently levy it on supply of goods or services. While a single indirect tax jointly administered by the Union and States is supposed to augur well for ease of doing business and improve other economic efficiencies, it also requires demarcating administrative responsibilities to prevent the taxpayer from being subjected to proceedings by two different authorities. One such issue is demarcating and assigning tax base to tax authorities of the Union on one hand and the States/Union Territories on the other. GST laws anticipated overlap of tax administration in a dual tax such as GST and incorporated a specific provision – Section 6, CGST Act and Section 6 in SGST Act/UTGST Acts to prevent taxpayer harassment.  

Section 6, CGST Act, 2017 is pari materia with SGST and UTGST and provides for the following: 

First, officers appointed under SGST and UTGST Acts are authorized to be proper officers for purposes of CGST Act as well; 

Second, where a proper officer issues an order under CGST Act he shall also issue an order under the SGST or UTGST Act under intimation to the jurisdictional officer of State tax or UT tax. 

Third, where a proper officer under the SGST Act or UTGST Act has initiated any proceedings on a subject matter, no proceedings shall be initiated by the proper officer under CGST Act on the same subject matter. 

Finally, any proceedings for rectification, appeal, and revision, wherever applicable, of any order passed by an officer under CGST Act shall not lie before an officer appointed under the SGST Act or UTGST Act.        

While the cross empowerment of officials is a sound policy encoded in Section 6, there are two dominant uncertainties that prevail in the interpretation and implementation of the impugned provision: first, is the meaning and scope of the term ‘intelligence-based’ enforcement action’; second, is the implication of the term ‘proceedings on the subject matter’. The former term is not used in Section 6 but is proving to be crucial in allocation of tax administrative responsibilities. I will discuss the uncertainties that revolve around both phrases.   

Intelligence-Based Enforcement Action 

The 9th GST Council meeting discussed the issue of cross empowerment of tax officials under GST. There was detailed discussion on the issue of allocation of tax base as per turnover of the taxpayer, powers relating to audits, and issues relating to administration of IGST. In so far as is relevant to the current discussion, the GST Council agreed that:

Of the total number of taxpayers below Rs. 1.5 crore turnover, all administrative control over 90% of the taxpayers shall vest with the State tax administration and 10% with the Central tax administration; 

In respect of the total number of taxpayers above Rs. 1.5 crore turnover, all administrative control shall be divided equally in the ratio of 5O% each for the Central and the State tax administration; (para 28)

In view of the same, the CBIC issue a Circular reiterating the same as well as prescribing broad guidelines for computing turnover of the taxpayers.  

Apart from the above division of tax base to smoothen administration of GST, there was another agreement reached in the GST Council, i.e., both the Union and State administrations shall have the power to take ‘intelligence-based enforcement action’ across the entire value chain. The import of the GST Council’s above decision was clarified via a letter issued on 05. 10. 2018. Two important things that were clarified through the letter were:

First, that irrespective of assignment of taxpayer base as per turnover, both the Union and State are empowered to initiate intelligence-based enforcement action on the entire tax base which includes entire process of investigation, issuance of SCN, recovery, appeal, etc. 

Second, it added that:

If an officer of the Central tax authority initiates intelligence based enforcement action against a taxpayer administratively assigned to State tax authority, the officers of Central tax authority would not transfer the said case to its Sate tax counterpart and would themselves take the case to its logical conclusions. (para 4)  

The initial allocation of taxpayer base is thus subject to intelligence-based enforcement action, and once the latter is initiated by any authority it will retain the jurisdiction over that particular taxpayer and take the case to its logical conclusion.   

Reading both the above legal instruments alongside minutes of the 9th GST Council meeting clarify the division of taxpayer base amongst the State and Union tax officers, but the term ‘intelligence-based enforcement action’ adds a layer of uncertainty. To what extent and what action exactly amounts to such an ‘intelligence-based action’ remains unclear. The phrase indicates that the action is based on some information obtained by tax officers and not a random scrutiny of taxpayer. But, the scope and limit of the phrase needs a more precise understanding which is currently lacking. And the same will, hopefully, be available as the jurisprudence on the issue develops.  

‘Proceedings’ on Same ‘Subject-Matter’  

The other prong of uncertainty is if a taxpayer can be subjected to proceedings on the same subject matter by two different authorities – at the Union and State level. Section 6(2)(b) states:  

            … where a proper officer under the State Goods and Services Tax Act or the Union Territory Goods and Services Tax Act has initiated any proceedings on a subject matter, no proceedings shall be initiated by the proper officer under this Act on the same subject matter.  (emphasis added) 

While Section 6(2)(b) uses the phrases ‘proceedings’ and ‘subject matter’, they are not defined under GST laws. Courts in certain cases have attempted to unravel the meaning of the two terms ‘proceedings’ and ‘subject-matter’. The most prominent attempt was by the Allahabad High Court in GK Trading case where the petitioner’s contention was that once the Deputy Commissioner, Ghaziabad has conducted survey of its business premises and is investigating the matter pursuant to the survey, the issuance of summons by another authority – DGGSTI, Meerut – under Section 70 of CGST Act, 2017 is barred by Section 6(2)(b).

The Allahabad High Court relied on previous judicial decisions – largely unrelated to GST – to conclude that the term ‘inquiry’ used in Section 70, under which summons were issued and the term ‘proceedings’ used in Section 6(2)(b) had different meanings. The High Court noted that the term ‘inquiry’ under Section 70 was limited to requiring the presence of a person to produce evidence or documents and cannot be intermixed with steps that may ensue on conclusion of the inquiry. Noting that words ‘proceeding’ and ‘inquiry’ are not synonymous, the High Court held that: 

The word “proceedings” used in Section 6(2)(b) is qualified by the words “subject-matter” which indicates an adjudication process/ proceedings on the same cause of action and for the same dispute which may be proceedings relating to assessment, audit, demands and recovery, and offences and penalties etc. These proceedings are subsequent to inquiry under Section 70 of the Act. (para 17) 

The above observation implies that the power of inquiry under Section 70 – and issuance of summons – can be invoked against a taxpayer even if proceedings have been initiated by another tax authority, but the steps subsequent to inquiry cannot be taken if proceedings are underway. What is the point of inquiry if Section 6(2)(b) bars the inquiry authority to take steps subsequent to an inquiry? The answer is unclear, and the High Court does not delve into the issue, and rightly so. Nonetheless, the High Court’s strict interpretation of the relevant statutory provisions ensure that the bar under Section 6(2)(b) has been interpreted in a strict fashion, but the implications of the High Court’s interpretation will only become clear in due time.   

Conclusion 

On both the above discussed issues, single-interface GST administration is likely to remain in a state of flux. Given that ‘intelligence-based enforcement action’ is a phrase of uncertain scope and the words ‘proceedings’ and ‘subject-matter’ are not defined under the GST Acts, the tax officers are likely to interpret in differing manner and as per the facts of each case. While the Allahabad High Court has tried to demarcate the scope of latter, and to some extent succeeded, the meaning of the phrase ‘intelligence-based enforcement action’ remains even more elusive. And we are likely to witness some disputes over the same.     

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