Gujarat AAAR Disallows ITC on Mandatory CSR: Provides Superfluous Reasoning

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

Introduction 

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

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

Gujarat AAAR’s Reasoning and Conclusion

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

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

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

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

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

Conclusion 

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

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

Calcutta High Court Sets Aside Order Denying ITC

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

Facts

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

Arguments and Decision 

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

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

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

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

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

Conclusion 

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

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

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

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

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

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

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

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

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

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

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

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

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

Facts 

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

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

High Court Sets Aside SCN 

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

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

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

Conclusion 

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

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

Understanding Orissa High Court’s Judgment in Safari Retreats Case

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

Introduction 

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

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

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

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

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

Orissa High Court’s Decision 

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

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

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

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

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

Petitioner’s Arguments before the Orissa High Court 

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

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

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

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

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

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

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

Way Forward 

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

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

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

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

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

Facts 

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

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

Petitioner’s Argument 

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

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

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

Bombay High Court Decides 

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

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

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

Conclusion 

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

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

Delhi High Court Orders Refund of Illegally Collected GST

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The Delhi High Court in a recent order[1] followed the Gujarat High Court’s judgment in M/s Cosmol Energy Private Limited case[2] wherein it held that Section 54, CGST Act, 2017 is not applicable for illegally collected GST or GST paid under a mistake. Section 54 prescribes an outer time limit of two years for filing an application for refund and the High Court held that the said time limit would not apply in the impugned case since the assessee was under the mistaken belief that its services were chargeable to GST.  

Facts 

The petitioner in the impugned case, Delhi Metro Rail Corporation (‘DMRC’) provided services to Surat Municipal Corporation wherein it prepared a detailed project report for the purpose of development of a rail project in the City of Surat. The invoice raised by DMRC was of Rs 19,04,520/- and it included GST of Rs 2,90,520/-. However, the City of Surat paid DMRC only Rs 16,14,000/- and did not pay the GST amount included in the invoice by DMRC. 

However, DMRC to ensure compliance with its statutory obligations paid a sum of Rs 2,90,520/- as GST to the Revenue Department. DMRC was latter informed by the Surat Municipal Corporation that the services billed by it were not exigible to GST under the relevant Notification, i.e., Notification 12/2017 – Central Tax (Rate) dated 28.06.2017. DMRC there after filed an application for refund which was rejected by the Revenue Department on the ground that the application was filed after two years had elapsed.

DMRC’s argument against the rejection of its refund application was that it would amount to violation of Article 265 of the Constitution since it would amount to collection of tax without the authority of law. 

Delhi High Court Relies on M/s Cosmol Energy Case

The Gujarat High Court in M/s Cosmol Energy case upheld the petitioner’s claim for refund of ocean freight paid on reverse charge basis after Supreme Court in Mohit Minerals case declared the said levy to be unconstitutional. The petitioner’s application for refund of Integrated GST was refused on the ground that it was filed after the relevant date prescribed under Section 54, CGST Act, 2017 similar to the facts of the impugned case. In M/s Cosmol Energy case, the Gujarat High Court held that: 

Section 54 of the CGST Act is applicable only for claiming refund of any tax paid under the provisions of the CGST Act and/or the GGST Act. The amount collected by the Revenue without the authority of law is not considered as tax collected by them and, therefore, Section 54 is not applicable. (para 7) 

The Gujarat High Court also quoted Article 265 of the Constitution to state that no tax shall be collected and levied except by authority of law and the State was bound to refund the tax collected illegally. 

In the impugned case, the Delhi High Court relied on the Gujarat High Court’s observations in M/s Cosmol Energy case, noted the fact that the said decision had not been appealed against by the State, indicating the State’s acceptance of it, and observed that DMRC was not liable to pay GST on the services rendered by it and the GST deposited by the DMRC ‘on an erroneous belief that payment for services rendered by it were chargeable to tax, cannot be retained by the respondents.’ (para 12) The High Court was categorical in its conclusion that Section 54 does not apply where GST is not chargeable and it is established by the assessee that an amount has been deposited under a mistake of law. 

Conclusion 

It is one of the fundamental tenets of the Constitution that no tax can be levied and collected except by the authority of law as succinctly stated in Article 265 of the Constitution. The Delhi High Court has reiterated a long line of jurisprudence, but the law on the point remains at a stage of infancy under GST. Hopefully, the combined effect of the Gujarat High Court and the impugned judgment of the Delhi High Court would provide greater clarity to the taxpayers going forward. 

[1] Delhi Metro Rail Corporation Ltd v Additional Commissioner, CGST Appeals-II and Ors 2023: DHC: 6874:DB. 

[2] Cosmol Energy Private Limited v State of Gujarat 2020 (12) TR 4336.

Gujarat HC Quashes SCN for Lack of Reasons and Violation of Principles of Natural Justice

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Gujarat High Court has in a recent judgment[1] quashed a showcause notice (‘SCN’) and the subsequent order on the ground that the reasons for cancellation of the assessee’s registration are not decipherable. The High Court also added that the SCN is quashed because of violation of principles of natural justice. 

Facts 

The petitioner in the impugned case was registered under CGST Act, 2017 and had been regularly filing GST returns. The petitioner claimed that it received a SCN on 20.01.2023 via GSTN portal but did not receive the SCN or any other document or material at its registered place of business. The petitioner claimed that it was given seven working days to file a reply and was instructed to appear personally on 27.01.2023 to file the reply. The petitioner filed a reply by the said date and on 22.06.2023 received a non-speaking order informing it that its registration was cancelled w.e.f. 13.03.2021. 

The SCN was impugned on the ground that it was vague and on the ground that no reason had been assigned for cancellation of the assessee’s registration. The State, on the other hand, argued that the petitioner had obtained registration through fraud and misrepresentation but did not elaborate further as to the nature of fraud or misrepresentation.   

High Court Decides 

The Gujarat High Court reproduced in detail the procedure of registration, cancellation of revocation of registration enunciated in Aggarwal Dyeing and Printing Works case.[2] To put it pithily, the Gujarat High Court in Aggarwal Dyeing and Printing Works case had stated that the settled legal position is that assignment of reasons by adjudicating authority is imperative in nature. And that the said reasons are the heart and soul of decision making. The High Court stated that all evidence, documents must be considered by the decision making authority and reasons assigned in support of the decision must be cogent, clear and concise.

The Gujarat High Court in the impugned case stated that in Aggarwal Dyeing and Printing Works case the Court’s was clear: if a cryptic SCN is issued and reasons for cancellation of registration are not decipherable, then it amounts to violation of principles of natural justice. 

Relying on the aforestated ratio in Aggarwal Dyeing and Printing Works case, the Gujarat High Court in the impugned case held that:

… the show cause notice and the impugned order are quashed and set aside. The petition is allowed solely on the ground of violation of principles of natural justice. The show cause notice as well as the order cancelling the registration are quashed and set aside with a liberty reserved to the respondent to issue a fresh notice with particulars of reasons incorporated with details, and thereafter, to provide reasonable opportunity of hearing to the writ petitioner and to pass appropriate speaking order on merits. (para 8) 

The impugned decision of the Gujarat High Court is another attempt to introduce transparency, adherence to principles of natural justice and reasonableness before cancelling registration of taxpayers. It is instructive how the State raises the argument that the taxpayer obtained registration by fraud without backing the argument without any cogent or other evidence leaving the impression that the argument was used as a fig leaf for an ill thought and arbitrary action. Whether the High Court’s impugned decision will have any impact in the State’s behaviour will be known in the future, though the hope for it is bleak.   

[1] Hardik KaushikBhai Joshi v Union of India TS-485-HCGUJ-2023-GUJ. 

[2] Aggarwal Dyeing and Printing Works v State of Gujarat [2022] 137 taxmann.com 332 (Gujarat). 

Bombay High Court Notes Grant of Licence to Developer is not Grant of Possession under IT Act, 1961

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The Bombay High Court in a recent judgment[1] quashed a notice issued to the assessee under Section 148, IT Act, 1961 on the ground that the assessee failed to disclose its income. The High Court also noted, in an allied issue, that the transfer of licence to a developer under a development agreement did not amount to transfer of a capital asset and was not subject to tax as capital gains.  

Facts 

The assessee’s return of income for the Assessment Year 2013-14 was selected for scrutiny under Section 143(2), IT Act, 1961. During the corresponding Financial Year 2012-13, the assessee, along with other co-owners, had entered into a development agreement with Ashray Developers for developing the land. In response to the query by the Assessing Officer as to why the development agreement should not be treated as ‘transfer of the said land’ and why assessee should not be assessed for capital gains, the assessee stated that the land had not been transferred. The assessee relied on Section 2(47)(v) read with Section 53A of the Transfer of Property Act, 1882 under which transfer of possession of a capital asset in part performance of the contract is treated as transfer of a capital asset exigible to capital gains. The assessee stated that the requirements of the aforestated provisions were not fulfilled in its case.  

The Assessing Officer after receiving the assessee’s reply passed an assessment order under section 143(3) of the IT Act, 1961 without making any addition to the assessee’s income on account of capital gains. However, approximately 5 years later, assessee was issued a notice under Section 148 stating that its income for the Assessment Year 2013-14 had escaped assessment. The assessee’s objection to the notice were disposed by an order which was impugned before the Bombay High Court. 

High Court Decides 

The Bombay High Court noted that the entire reason for issuance of notice for reopening of assessment seems the development agreement which the assesee signed with Ashray developers. And that the Revenue’s objection is regarding assessee’s treatment of the land in question as stock in trade as opposed to capital asset along with the underreporting of the amount paid to the assessee for transferring right of development of land to Ashray Developers. (para 8) The High Court cited a similar decision pronounced by it a few months ago and relying on the same, held that grant of licence to a developer for the purpose of development did not amount to ‘allowing the possession of the land’ as contemplated under Section 53A of the Transfer of Property Act, 1882. Thus, granting of licence for the purpose of development of flats and selling the same could not said to be granting of possession and it would not amount to transfer of a capital asset as envisaged under Section 2(47)(v) of the IT Act, 1961. (para 10)

The Bombay High Court also quashed the reassessment notice issued under Section 148 by relying on the facts of the case. The High Court noted that the assessee had replied to the Assessing Officer’s query as to why consideration received under development agreement should not be taxed under capital gains. And the assessment order was passed after receiving the reply. The High Court relied on the well-established doctrine that if an assessee has replied to a query during assessment proceedings, it follows that the query was subject of consideration by the Assessing Officer while computing the assessment.[2] And no express reference to the query is needed in the assessment order. Thus, since the reply to the specific query on capital gains was considered by the Assessing Officer, the pretext of non-disclosure of income cannot be used to issue a reassessment notice under Section 148. On this ground alone, the High Court said that the notice under Section 148 needs to be quashed and set aside. (para 10) 

Conclusion On both the issues, the Bombay High Court made pertinent observations and correctly rejected the Revenue’s stance. Neither was the issuance of reassessment notice justified nor was the argument that the transfer of development rights amounted to transfer of capital asset. This is especially when identical issues have been decided by Courts with similar results.  

[1] Darshana Anand Damle v Deputy Commissioner of Income Tax, Central Circle 3(4), Mumbai, available at https://taxguru.in/wp-content/uploads/2023/09/Darshana-Anand-Damle-Vs-DCIT-Bombay-High-Court.pdf (Accessed on 28 September 2023).  

[2] Aroni Commercials Ltd v Deputy Commissioner of Income Tax 2(1), Mumbai & Anr 2014 (44) taxmann.com 304 (Bombay). 

Supreme Court Underlines Power of Settlement Commission under IT Act, 1961

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Supreme Court in a recent judgment[1] has interpreted two provisions of IT Act, 1961 – Section 245C and section 245H – to reiterate the scope of jurisdiction and power of Settlement Commission and the necessary conditions that a taxpayer needs to satisfy to invoke its jurisdiction. The Supreme Court also underlined that the power of Settlement Commission to grant immunity to taxpayers should not be ordinarily interfered with by the High Courts. 

Facts and Relevant Issues  

The relevant facts of the case are that the appellant approached Settlement Commission under Section 245C, IT Act, 1961 for determination of its taxable income for assessment years 1994-95 to 1999-2000. The Revenue’s preliminary objection before the Settlement Commission was that the applicant did not fulfil the qualifying criteria under Section 245C since it did not make a full and true disclosure of income before the assessing officer. The Settlement Commission nonetheless assumed jurisdiction and passed an order which the Revenue challenged before the Karnataka High Court. A Single Judge of the High Court allowed the Settlement Commission to decide on all matters relating to maintainability of the application and its merits. 

The Settlement Commission thereafter found the appellant’s application maintainable and granted immunity to the appellant in exercise of its powers under Section 245H, IT Act, 1961. Aggrieved by the Settlement Commission’s order the Revenue approached the Karnataka High Court again and a Single Judge Bench upheld the jurisdiction but found fault with the Settlement Commission’s order granting immunity and remanded the matter back. Against the said order, the appellant approached the Division Bench of the High Court which approved the order of the Single Judge. The two provisions in question: Section 245C and Section 245H were interpreted by the Division Bench of the High Court in the Revenue’s favor. 

As per the Division Bench of the Karnataka High Court, Section 245C, IT Act, 1961 which governs filing of application before the Settlement Commission, the applicant’s application must contain full and true disclosure of his income. While the Settlement Commission under Section 245H, IT Act, 1961 can grant immunity from penalty if two conditions are satisfied: the applicant has co-operated with the Settlement Commission in the proceedings before it and the applicant had made a full and true disclosure of income and the way such income had been derived. The High Court reasoned that the two provisions need to be read harmoniously and not independent of each other and that Section 245C was ‘embedded’ in Section 245H. 

The Revenue supported the Division Bench’s reasoning and judgment before the Supreme Court while the appellant assailed the said judgment inter alia on the ground that the assessing officer’s opinion is not final, Section 245C does not contemplate true and full disclosure before the assessing officer but before the Settlement Commission and that non-disclosure of income before the assessing officer cannot be a ground to prevent the Settlement Commission from exercising its jurisdiction and exercising its immunity granting powers under Section 245C and Section 245H of the IT Act, 1961 respectively.              

Supreme Court Decides  

The Supreme Court engaged with another argument made by the Revenue, i.e., the disclosure made by the appellant before the Settlement Commission must be ‘something apart’ from that discovered by the assessing officer. (para 7.1) As per the Revenue, the assessing officer ‘discovered’ additional income of the appellant through documents and other materials and not on the basis of income tax returns. And that the appellant’s disclosure of income while filing an application under Section 245C must be beyond the discovery of income already made by the assessing officer. The Supreme Court correctly rejected this laboured distinction between disclosure and discovery made by the Revenue and concluded that:

To say that in every case, the material “disclosed” by the assessee before the Commission must be something apart from what was “discovered” by the Assessing Officer, in our view, seems to be an artificial requirement. In every case, there may not even be additional income to offer, apart from what has been discovered by the Assessing Officer. (para 7.2)  

In stating so, the Supreme Court also noted that the appellant’s intent for approaching the Settlement Commission is to settle the dispute and not prolong litigation. And by making a full and complete disclosure of income not disclosed in the return of income, the appellant was trying to settle the case. In other words, the Revenue’s attempt to treat the application ineligible on the basis that income beyond discovery should be disclosed was not in serving the intent to resolve the dispute.  

Conclusion 

The Supreme Court’s conclusion was also influenced by the complexity of facts wherein the appellant in question – Kotak Mahindra Bank – had to make different disclosures to the Reserve Bank of India as per its guidelines, and it cited the Settlement Commission’s order to state that the latter had applied its mind to the facts of the case and thereafter decided to grant immunity under Section 245H, IT Act, 1961. It underlined the power of the Commission under Section 245H and stated that:

The High Court ought not to have sat in appeal as to the sufficiency of the material and particulars placed before the Commission, based on which the Commission proceeded to grant immunity from prosecution and penalty as contemplated under Section 245H of the Act. (para 9)

In stating the above, the Supreme Court reiterated that the power of Settlement Commission to grant immunity under Section 245H is determined as per facts and circumstances of each case and there is no universal formula for exercise of such power. 

[1] Kotak Mahindra Bank Ltd v Commissioner of Income Tax, Bangalore and Anr TS-556-SC-223. 

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