Namma Yatri App Qualifies as e-commerce operator, but not Supplier of Services

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In a recent ruling[1], Karnataka Authority for Advance Ruling (‘AAR’) made an interesting pronouncement where it held that the applicant in question only satisfied the definition of e-commerce operator under Section 9(5), CGST Act, 2017, but not the nature of supply as understood under the said provision. Thus, the applicant was not liable to discharge tax liability under the aforesaid provision.  

Facts 

Applicant in the impugned ruling was registered under the GST Act and in the business of providing technology services for merchants to connect to their preferred payment aggregators and payment gateways. The technology services in question involved the ‘Namma Yatri’ App, through which the applicant was connecting drivers to their customers. Any person desirous of using the applicant’s app were to apply online via a pre-subscribed form and upload soft copy of their documents and were thereafter granted the license to use ‘Namma Yatri’ App subject to the ‘terms and conditions between applicant and driver’. 

The applicant argued that the subscribers enter business transactions independently and mutually agree on the terms and conditions and the applicant has no role in such transactions, directly or indirectly. Providing further details of their business model, the applicant stated that their role under relevant GST legislations is only concerned with collecting membership and subscription fee and remitting the tax collected on such fee to the State. And that relationship between subscribers registered on ‘Namma Yatri’ App is of supplier and recipient and any consideration involved is purely privy to their contract. The applicant neither arranges the services or related facilities or otherwise nor does it collect any consideration or any other form of payment. 

e-commerce operators and GST 

Section 9(5), CGST Act, 2017 states that: 

The Government may, on the recommendations of the Council, by notification, specify categories of services the tax on intra-State supplies of which shall be paid by the electronic commerce operator if such services are supplied through it, and all the provisions of this Act shall apply to such electronic commerce operator as if he is the supplier liable for paying the tax in relation to the supply of such services: (emphasis added)       

Section 2(45), CGST Act, 2017 defines an electronic commerce operator as any person who owns, operates or manages digital or electronic facility or platform for electronic commerce.

The above two provisions cumulatively empower the Union to notify certain e-commerce operators as deemed suppliers if the twin conditions of intra-state supplies and supplies being supplied through the e-commerce operator are satisfied. One of the questions AAR was required to answer was if the applicant could be subjected to the conditions of Section 9(5), CGST Act, 2017.  

Applicant is e-commerce operator 

Analysing the above provisions, the AAR correctly concluded that the applicant met the criteria specified in the definition of e-commerce operator. The services in question were also supplied by motor cab, satisfying the criteria prescribed in the notification issued by the Union under Section 9(5) wherein it was stated that tax on intra-State supplies for services by way of transportation of passengers by a radio-taxi, motorcab, maxicab and motorcycle shall be paid by the electronic commerce operator. However, the AAR concluded that the services in question were not provided ‘through’ the applicant, a necessary condition under Section 9(5) and concluded that: 

…         the word through in the phrase services supplied through electronic commerce operator, in Section 9(5) ibid, gives the meaning that the services are to be supplied by means of/by the agency of/ from beginning to the end/during entire period by the e-commerce operator. In the instant case, it is observed that the applicant, because of their unique business model, merely connects the auto driver and passenger and their role ends on such connection; they do not collect the consideration; they have no control over actual provision of service by the service provider; they do not have the details of the ride; they do not have control room/call centre, etc. The supply happens independent of the applicant and the applicant is involved only in the identification of the supplier of services and doesn’t take responsibility for the operational and completion of the ride. (para 19)

Thus, AAR concluded that the supply of services are not through the applicant, e-commerce operator, but independent of it and the notification issued under Section 9(5), CGST Act, 2017 would not apply to the applicant.  

Conclusion

AAR was correct in its conclusion that even though the applicant satisfies the definition of e-commerce operator, the conditions specified under Section 9(5), CGST Act, 2017 are not satisfied for the applicant to discharge tax liability by an e-commerce operator. The applicant in the impugned ruling was only providing a minimal technology platform and nothing beyond thereby distinguishing it from cab aggregators. It is the latter that are subject to the conditions under Section 9(5), CGST Act, 2017 and the AAR was correct in accepting the applicant’s distinction between its business model and that of cab aggregators who actively facilitate the transactions on their platforms and applications. AAR’s conclusion is certainly well-reasoned and ensures that merely satisfying the definition of e-commerce operator should not place the entity under the onerous burden of Section 9(5), CGST Act, 2017.[2]    

[1] In Re: M/s. Juspay Technologies Pvt Ltd, Advance Ruling No. KAR ADRG 31/2023, pronounced on 15.09.2023. Available at https://taxguru.in/wp-content/uploads/2023/09/In-re-Juspay-Technologies-Pvt.-Ltd.-GST-AAR-Karnataka.pdf (Last accessed on 26.09.2023). 

[2] The impugned advance ruling aligns with another ruling in Re: M/s. Multi-Verse Technologies Private Limited, Advance Ruling No. KAR ADRG 36/2022, pronounced on 27.10.2022, available at https://taxguru.in/wp-content/uploads/2022/11/In-re-Multi-Verse-Technologies-Pvt.-Ltd-GST-AAR-Karnataka.pdf (Last accessed on 26.09.2023).

Bombay HC Allows Taxpayer to Claim Benefit of DTVVA, 2020

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In a recent judgment[1], the Bombay High Court allowed the taxpayer to claim benefit of Direct Tax Vivad Se Vishwas Act, 2020 (‘DTVVA, 2020’) and held that the interpretation adopted by the Revenue in deciding the ineligibility of the taxpayer was not in accordance with the objective and rationale of the DTVVA, 2020. The High Court relied heavily on Macrotech Developers case[2] to provide weight to its reasoning and conclusion.  

Facts 

The assessment of the taxpayer for Assessment Years 2010-11 and 2011-12 were reopened under Section 147, IT Act, 1961 and after conclusion of the reassessment proceedings the assessing officer passed an order. The assessing officer thereafter raised a demand based on the additional income determined in the reassessment proceedings. While the assessment order and consequent notice for additional demand were pending in appeal, taxpayer was served a notice as to why prosecution should not be initiated against him for intentionally evading tax. And the Revenue subsequently commenced prosecution by filing a complaint before the relevant Chief Metropolitan Magistrate. 

In the interim, DTVVA, 2020 was notified and taxpayer took advantage of it to file returns for the Assessment Years 2010-11 and 2011-12 under it. The Revenue noted that the taxpayer was not entitled to take advantage of the DTVAA, 2020 and settle the appeal since the prosecution in respect of the same had already been instituted. The taxpayer, on the other hand, claimed that under Section 9(a)(ii), DTVVA, 2020 a taxpayer was disentitled to claim the benefit only if the prosecution had been initiated ‘in respect of tax arrear’. And the amount payable by the taxpayer in the impugned case did not amount to a tax arrear.    

High Court Adjudicates

The High Court cited the ratio of Macrotech Developers case where the Bombay High Court had made a categorical observation that a bar on filing declaration is only when the prosecution initiated by the Revenue relates to tax arrears and not for any prosecution in relation to an assessment year per se. The High Court rejected the States’ weak argument that the taxpayer’s wilful evasion of tax would be covered by tax arrear. The High Court relying on the Macrotech Developers case, held that the taxpayer will be able file returns under the DTVVA, 2020. 

The Bombay High Court also examined the definition of tax arrear under Section 2(1)(o) which stated that tax arrear would mean the aggregate amount of disputed tax, interest chargeable or charged on such disputed tax and penalty levied or leviable on such disputed tax or disputed interest or disputed penalty or disputed fee as determined under the provisions of the Act. Based on the definition and ratio of Macrotech Developers case, the High Court concluded that delayed payment cannot amount to tax arrear. As per the High Court: 

the intention of the legislature was that the provisions of DTVSV Act shall not, in view of Section 9(a)(ii), apply in the case of a declarant in whose case a prosecution has been instituted in respect of tax arrear relating to an assessment year on or before the date of filing of declaration. The prosecution has to be in respect of tax arrear which naturally is relatable to an assessment year. (para 18) 

Conclusion

The Bombay High Court’s judgment in the impugned case reiterates the substance and ratio adopted in the Macrotech Developers case, and for good reason. There is little to suggest that the definition of tax arrear under DTVVA, 2020 should include delayed payment by the assessee. And the State’s contention suggesting that tax arrears should be interpreted broadly was not based on any concrete foundation and was correctly rejected by the High Court.  

[1] Pragati Pre Fab India Pvt Ltd v Principal Commissioner of Income Tax, Mumbai TS-552-HC-2023-BOM. 

[2] Macrotech Developers Ltd v Principal Commissioner of Income Tax (2021) 126 taxmann.com 1 (Bombay). 

Bombay HC Allows Petitioner to Claim Benefit of Section 54(F), IT Act, 1961

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In a lucid judgment[1], the Bombay High Court allowed petitioner to claim benefit of Section 54(F), IT Act, 1961 and held that the amendment made to the impugned provision by virtue of Finance Act, 2014 was prospective in nature. 

Facts 

The petitioner in the impugned case claimed benefit of Section 54(F), IT Act, 1961 on the ground that the capital gains from sale of residential property in India had been invested in another residential property in the United States of America. The petitioner’s claim was rejected by the Revenue Department on the ground that addition of the words ‘in India’ by way of amendment vide Finance Act, 2014 was retrospective in nature. And thus, the petitioner cannot claim benefit of Section 54(F) if the capital gains were invested in a residential property outside India. 

The petitioner argued that the only condition that was required to be fulfilled at the time of relevant assessment year was that a new residential house should be purchased de hors any condition about the location of the new house. The petitioner further stated that when a particular provision was capable of more than one meaning, the interpretation that is in favor of the assessee must be adopted. 

The State, on the other hand, argued that the amendment to Section 54(F) was clarificatory in nature and thus has retrospective effect. The State also adopted an innovative argument and stated that the requirement of ‘in India’ was in-built in the scheme of IT Act, 1961 by virtue of Section 5(2), IT Act, 1961, implying that the amendment to Section 54(F) only made express what was implied in the provision. 

Bombay High Court Favors the Petitioner 

The Bombay High Court identified the issue precisely and relied on precedents to clearly state that an amendment should be considered clarificatory only if the pre-amended provision was vague and ambiguous and it was impossible to read the provision unless the amendment was factored into it. Further as per the High Court, the clarification should not expand the scope of the provision. 

Applying the above parameters to the amendment made to Section 54(F), the High Court concluded that the pre-amended Section 54 was not ambiguous, it expressly and specifically excluded the words ‘in India’. Thus, the amendment cannot be stated to be clarificatory in nature. The High Court further noted that interplay of Section 5(2) and Section 54(F) was such that the former was ‘subject to the provisions of this Act …’ and thus the former provision would always operate subject to other provisions of the IT Act, 1961 including Section 54(F). The High Court further reasoned that amended provision did not refer to Section 5(2) or even remotely suggest that it was a clarification and concluded that the amendment to Section 54(F) wherein the words ‘in India’ were added was prospective in nature.

Conclusion 

The Bombay High Court in the impugned judgment was lucid and precise in its identification of the issue and applied the law in a straightforward and reasoned manner. The State’s argument of trying to link Section 5(2) with Section 54(F) was also suitably rebuffed, and rightly so.           

[1] Hemant Dinkar Kandlur v Commissioner of Income Tax TS-545-HC-2023 BOM. 

Kerala HC Accepts Taxpayer’s Plea Against Denial of ITC

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In a crisp judgment[1], the Kerala High Court has held that Input Tax Credit (‘ITC’) cannot be denied to a taxpayer merely because the tax paid is not reflected in GSTR-2A. The Kerala High Court’s conclusion aligns with a recent judgment pronounced by the Calcutta High Court where the taxpayer was provided a similar relief. 

Facts and Arguments 

The issue in this case was that the taxpayer was denied ITC by the Revenue Department on the ground that the amount of ITC claimed did not match the amount mentioned in GSTR-2A. The taxpayer relied on Section 16, CGST Act, 2017 and stated that the provision contained a non obstante clause implying that if the conditions prescribed under the provision were fulfilled by the taxpayer, ITC cannot be denied. 

The taxpayer, as in Suncraft Energy Pvt Ltd case, stated that GSTR-2A is for the purpose of taxpayer facilitation and does not/should not impact the ability of a taxpayer to claim ITC. Taxpayer in this case too stated that CBIC’s press release dated 18.10.2018 clarified that GSTR-2A does not impact a taxpayer’s ability to claim ITC on self-assessment basis under Section 16, CGST Act, 2017. Reliance was placed on Bharti Airtel case[2] for similar purposes.

High Court Provides Relief to Taxpayer 

The Kerala High Court essentially accepted all the arguments of the taxpayer, and interestingly, placed reliance on M/S Ecom Gill Trading Pvt Co Ltd case[3] to state that if the taxpayer has paid the tax amount to the dealer and said tax has not been remitted by the dealer, then the burden of proof as regards remittance of tax is on the taxpayer. However, while in M/S Ecom Gill Trading Pvt Co Ltd case the Supreme Court had held that the taxpayer needs ‘to prove beyond doubt’ the genuineness of the transaction, but, in the impugned judgment the Kerala High Court did not use a similar phrase and instead remanded back the matter to Assessing Officer to examine the taxpayer’s claim of ITC and concluded that: 

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. (para 8)

The Kerala High Court’s judgment is a welcome development on the heels of the Calcutta High Court’s judgment in the Suncraft Energy Pvt Ltd case and ensures that the ITC claims of the taxpayers are not denied on whimsical grounds. Instead, the nature of GST returns are respected to facilitate taxpayer claims. Hopefully, this will provide momentum to a more coherent jurisprudence on this issue in the near future. 

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

[2] Union of India v Bharti Airtel Ltd and Ors 2021 SCC OnLine 1006. 

[3] State of Karnataka v M/s Ecom Gill Trading Pvt Co Ltd 2023 SCC OnLine SC 248. 

Patna High Court Upholds Constitutionality of Section 16(4), CGST Act, 2017

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In a recent judgment[1], the Patna High Court upheld the constitutionality of Section 16(4), Central Goods and Services Tax Act, 2017 (‘CGST Act’) and Bihar Goods and Services Tax Act, 2017. Section 16(4), as it stood then, did not allow Input Tax Credit (‘ITC’) in respect of any invoice or debit note for supply of goods or services after due date of furnishing returns under Section 39 of the said Acts. The petitioners alleged the said condition under Section 16(4) to be violative of Article 14 and 300A of the Constitution. The High Court made detailed observations about right to property and nature of ITC to reject the claim of petitioners. In this post, I examine the High Court’s reasoning and whether it withstands scrutiny.  

Introduction 

The petitioners apart from claiming that Section 16(4) violated Article 14 and 300A, also argued that conditions to claim ITC prescribed in Section 16(4) should be understood as procedural in nature as opposed to the ‘substantive’ conditions under Section 16(1) and Section 16(2). And that the former could not override the latter. The petitioners also alternatively argued that Section 16(4) should be read down to apply only to invoices or debit notes received after end of financial year beyond September of the financial year. 

The writ petition involved several cases clubbed together since their facts were similar. The facts of representative case were that the assessee was denied ITC for the tax period February and March 2019 because of late filing of GSTR-3B return. The officer in question relied on Section 16(4), CGST Act, 2017 to deny petitioner’s ITC claim. Section 16(4) which prescribes eligibility and conditions for claiming input tax credit, as it stood then, stated that: 

A registered person shall not be entitled to take input tax credit in respect of any invoice or debit note for supply of goods or services or both after the due date of furnishing of the return under section 39 for the month of September following the end of financial year to which such invoice or debit note pertains or furnishing of the relevant annual return, whichever is earlier. 

Petitioner’s Arguments 

The petitioner made several arguments, but in this post, I will concentrate on the interface of ITC as vested right and right to property under Article 300A. Petitioner argued that ITC constituted a vested right under Article 300A since it was tax paid at the time of purchase of goods and services and is adjusted against tax liability payable on sale of goods and services. And that Section 16(4) was confiscatory in nature as denial of ITC is implied in confiscation of property in the shape of financial benefit belonging to the registered person. (para 15) The petitioner also tried to make the claim that ITC was an indefeasible right. By characterizing ITC as a vested right of the taxpayer, the petitioner was trying to persuade the Court that its denial would amount to deprivation of property and thus violate the constitutional right to property under Article 300A.  

The State, on the other hand, argued that ITC is not a vested right, but a concession/benefit extended by the State and can only be availed as per the conditions laid down in the statute. It was argued that condition prescribed under Section 16(4) are uniformly applicable to all the taxpayers and there is no question it being discriminatory and violating Article 14 of the Constitution.

The characterization of ITC either as a vested right of the taxpayer or a concession extended by the State is not just a superficial exercise, it would determine the extent and nature of restrictions that the State can impose on taxpayers for claiming ITC and the grounds on which ITC can be denied.  

Patna High Court Decides 

The arguments of the petitioners and the State mentioned above, clearly reveal that the petitioner’s view ITC as a vested right while the State views it as a benefit/concession. The imprecise nature of ITC is an eternally indeterminate issue under VAT/GST laws. And the judicial oscillation on this issue tends to provide to a wider than necessary leeway to the State in prescribing onerous conditions to avail ITC and consequently also to deny ITC claims. In adjudicating the issue, the Patna High Court in the impugned case framed the issue in interesting terms, it stated that the question before it is: whether ITC per se is a vested right, the denial of which under Section 16(4) would amount to infringement of constitutional right under Article 300-A of the Constitution? (para 18) 

The Patna High Court laid emphasis on the phrase ‘deprive of his property’ used in Article 300-A of the Constitution to state that the property in question of the person must be deprived without the sanction of the law for it constitute a violation of the right to property under Article 300-A. Thus, it is important for a successful claim under Article 300-A for the petitioner to prove that they possessed the property in the first place. The High Court first examined the language deployed by Section 16 and concluded that there was no ambiguity in the provision and there was no need to read down the provision, as claimed by petitioners in their alternative arguments. And noting the conditions prescribed under Section 16, for a taxpayer to claim ITC, the High Court concluded that: 

we note here that ITC is not unconditional and a registered person becomes entitled to ITC only if the requisite conditions stipulated therein are fulfilled and the restrictions contemplated under sub-section (2) of Section 16 do not apply. One of the conditions to make a registered person entitled to take ITC is prescribed under sub-section (4) of Section 16. The right of a registered person to take ITC under sub-section (1) of Section 16 of the Act becomes a vested right only if the conditions to take it are fulfilled, free of restrictions prescribed under sub-section (2) thereof. (para 26) (emphasis added)

The highlighted part in the above paragraph indicates that the High Court agreed with the petitioner’s argument that ITC is a vested right, but with the added condition that ITC becomes a vested right only if the statutory conditions are fulfilled. Thus, it is possible to deduce from the above that ITC remains a concession/benefit provided by the State prior to the taxpayer fulfilling the statutory conditions, and transforms into a vested right of the taxpayer on fulfilment of the statutory conditions. 

Having stated the above, the High Court logically also arrived at the conclusion that Section 16(4) did not violate Article 300-A of the Constitution as ITC was not a taxpayer’s vested right before fulfilment of the conditions under Section 16(4). Thus, question of deprivation of property did not arise prior to fulfilment of those conditions. It also referred to select precedents in a cursory manner to reiterate that Section 16(4) does not violate Article 19(1)(g) and Article 14 of the Constitution. Though the High Court in a latter part of the judgment observed that ‘the concession of ITC’ is dependent on various conditions laid under Section 16 of CGST Act, 2017. (para 36) This, on the face of it, contradicts its opinion of ITC being a vested right; though one can argue that the latter observation was in the context of ITC before fulfilment of the statutory conditions. 

Conclusion

The nature of ITC has never been sufficiently scrutinised by Courts to arrive at a determinative finding if it constitutes a concession or a vested right of the taxpayer. Hence, when faced with onerous conditions, taxpayers challenge them on the ground that their vested right is being infringed while the State typically responds by claiming that ITC is a concession; impliedly asserting that it has wide powers to prescribe conditions to avail ITC. Courts have preferred to adjudicate such disputes by limiting their observations to the facts without clearly opining on the nature of ITC. And, to the extent, there are some observations, as in the impugned case, they are rarely built upon by other Courts to build a coherent jurisprudence on the issue. This is a trend that needs to be arrested, else similar disputes on ITC are likely to be decided on an ad hoc basis without creating a conceptually sound jurisprudence under GST.      

[1] Gobinda Construction v Union of India 2023 LiveLaw (Pat) 109. 

Sikkim High Court Strictly Interprets Eligibility Criteria for Budgetary Support Scheme

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In an interesting judgment[1], the Sikkim High Court interpreted eligibility criteria for the budgetary support scheme (‘BSS’) and denied petitioners BSS benefit because of change in ownership and constitution of the relevant business units. The petitioners claim that BSS was aimed at eligible units and not persons was rejected by the High Court. The High Court reasoned that the BSS was a concession to the persons who had made the initial investment in the State and change in ownership and constitution would amount to new persons coming into existence who were not provided the original tax benefits and thus the new entities were not eligible for BSS.

Facts 

The case involved two petitioners: first petitioner concerned a partnership firm which was converted into a company and sought BSS for the remaining period that the partnership firm was entitled; second petitioner concerned a company was transferred by way of slump sale and the new company sought BSS for the remaining period that the transferee company was entitled. The petitioners admitted that the change in constitution and ownership resulted in new Unique Identity (‘UID’) and registration number for the resulting units. The main arguments of the petitioner were that the change in constitution of the business or change in ownership does not make them ineligible as BSS is provided to the eligible units and not to the owners thereof. 

The State, on the other hand, argued that the new businesses with a new GST Registration Number and UID constituted a new person, and the new persons cannot claim BSS without making investment in the State and thereby cannot be considered as ‘eligible units’ under the BSS.

High Court Denies BSS to the Petitioners 

The Sikkim High Court elaborated on the need and rationale for BSS and why tax benefits provided to manufacturing units under the excise duty regime had to be stopped after the introduction of GST. And that BSS was a concession to the taxpayers aimed to provide them tax benefits even under the GST regime for the residual period of original tax benefit. The High Court examined the terms ‘eligible unit’ and ‘residual period’, ‘manufacturer’ and ‘person’ as defined under the BSS and relevant provisions of the CGST Act, 2017 to state that: 

Paragraph 7.1 of the Budgetary Support Scheme mandates the manufacturer to file the application for budgetary support. The definition of “eligible unit” in Paragraph 4.1 also provides that the application must have reference to either the Central Excise registration number of the eligible manufacturing unit as it existed prior to migration to GST or GST registration for the premises as a place of business where manufacturing activities under the exemption notification no.49/2003-CE dated 10.06.2003 and 50/2003-CE dated 10.06.2003 were being cleared. This was definitely related to the manufacturer or the “person” registered. (para 37)

The Sikkim High Court, as is evident from the paragraph cited above was placing emphasis on the person who files for the BSS and not on the unit per se. But in its subsequent observations, the High Court tends to use the terms ‘eligible unit’ and ‘person’ almost interchangeably. For example, it stated that the tax exemption was provided to manufacturers who made investments in the State and thereby BSS was extended to those eligible units from whom tax exemption was withdrawn prematurely. (para 38) It is an indication that even the High Court despite its effort to draw a distinction between the owners and eligible units was not able to maintain the distinction consistently. And this is the major flaw of this judgment. 

Conclusion The Sikkim High Court concluded that the two petitioners, i.e., the new company and the new owner respectively were separate and distinct persons from the previous entities and could not have filed applications under the BSS. However, its observation that the benefits was for the manufacturers and was extended to their units does not have analytical heft. It is true that applications for tax exemptions under BSS are required to be filed by persons, and the new entities became different ‘persons’, but despite change in their constitution/ownership the units were the ones in which the original manufacturers had invested. While the State, in public interest, or otherwise, has discretion to cease providing tax benefits if there is change in ownership; but, in this case the High Court’s observations did not align with the relevant provisions of the BSS. This is especially since its emphasis on persons and not eligible units was not based on a sound reasoning and interpretation.  

[1] Zydus Wellness Products Ltd v Union of India W.P.(C) No. 20 of 2022, available at https://www.livelaw.in/pdf_upload/zydus-wellness-products-limited-492279.pdf (Accessed on 16 September 2023). 

Delhi High Court Opines Allows Investigation Against Petitioner under GST: Refuses Reliance on Section 6(2)(b), CGST Act, 2017

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In a recent judgment[1], the Delhi High Court interpreted the term ‘intelligence-based enforcement action’ and denied the petitioner’s prayer to stop investigation by multiple investigating agencies. The High Court held that merely because certain authorities took action against the petitioner did not mean that the investigation was carried out against the petitioner. It rejected the petitioner’s reliance on Section 6(2)(b) of CGST Act, 2017. 

Facts 

The petitioner filed a writ petition in the Delhi High Court praying for a writ of certiorari and that investigations started by various investigating agencies be quashed and set aside. The petitioner specifically objected to investigation initiated against it by the Directorate General of Goods and Service Tax, Jaipur (‘DGGI Jaipur’). The petitioner argued that it had already been investigated by the Delhi Commissionerate (‘Delhi State Authority’). The petitioner elaborated that its bank account had been blocked and GST registration cancelled by the Delhi State Authority after investigation had been carried out for its transactions with one M/s Girdhari Exports. The Delhi State Authority however argued that no investigation was carried out by it, and that its actions were after taken after receiving communication from DGGI, Jaipur and DGGI, Chennai. The latter also made similar statement and stated that no investigation was carried out against the petitioner. 

Scope of Section 6(2)(b), CGST Act, 2017

The petitioner’s entire case was based on their understanding of Section 6(2)(b), CGST Act, 2017 and CBIC’s Circular dated 05.10.2018. Section 6(2)(b), CGST Act, 2017 states that: 

            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. 

The afore-mentioned provision is aimed at preventing a taxpayer from being subjected to multiple proceedings at the Union and State level on the same subject matter. It was in furtherance of the said provision that CBIC issued a circular on 05.10.2018 clarifying that if an officer of the Central tax authority had initiated intelligence-based enforcement action against a taxpayer administratively assigned to the State tax authority, then it would not transfer the case to the State tax counterpart but instead take the case to its logical conclusion themselves. This was presumably to ensure continuity of proceedings against a taxpayer.  

Relying on the above provision and the Circular, the petitioner argued that since investigation against it had been initiated by other State authorities, DGGI Jaipur could not initiate another investigation against it. 

High Court Decides Against the Petitioner 

The Delhi High Court rejected the petitioner’s arguments and held that: 

… it is apparent that although certain measures were taken, which affected the petitioner – inasmuch as its ITC was blocked and the bank accounts were provisionally attached – no investigation was conducted by any authority regarding the affairs of the petitioner company. (para 13) 

In view of the aforesaid, the High Court held that Section 6(2)(b), CGST Act, 2017 was not attracted. The High Court held that the Delhi State Authority – administratively concerned with the petitioner – had clarified that it had not conducted any investigation against the petitioner. The High Court further clarified that merely because the petitioner had the same principal place of business as other entities which were investigated, the petitioner cannot take advantage of the same. The petitioner had a separate tax registration and could be investigated by the DGGI, Jaipur. 

Conclusion 

The Delhi High Court’s opinion in the impugned judgment adopts a measured interpretation and understanding of Section 6(2)(b), CGST Act, 2017. The clarification by the High Court adopts a coherent view of investigation and did not accept the petitioner’s interpretation that any action against it could be termed as an intelligence-based enforcement action or an investigation-based action.       

[1] M/S Hanuman Enterprises (OPC) Pvt Ltd v The Additional Director General Directorate General of GST, WP(C) 2900/2023 & CM Appl 11322/2022, available at https://www.livelaw.in/pdf_upload/ms-hanuman-enterprises-488982.pdf (Accessed on 13 September 2023).  

CA Firm Cannot Invoke MSME Act Against the Income Tax Department

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In a unique case[1], the Delhi High Court adjudicated that a Chartered Accountancy firm (‘CA firm’) cannot invoke the Micro, Small and Medium Enterprises Development Act, 2006 (‘MSME Act’) for fees payable to it for Special Audits conducted by it under Section 142(2A), IT Act, 1961. While the High Court provided a detailed history of the rationale and objective of the MSME Act, its conclusion was based primarily on the fact that the Revenue Department was not a buyer nor was the CA firm a seller of services. As per the High Court, the Special Audit conducted by the CA firm was a statutory duty and not a commercial service thereby invocation of the MSME Act was misplaced. 

Introduction 

The impugned writ petitions resulted from four nominations made by the Income Tax Department of the concerned CA firm for conducting Special Audits of assessees under Section 142(2A), IT Act, 1961. The nomination letters so issued do not typically state the remuneration payable for the Special Audits; the amount payable is determined under the IT Act, 1961 and its relevant Rules. The dispute was not regarding the content of the reports prepared by the CA firm instead the grievance of the CA firm was about the quantum of amount payable for the work done by it in pursuance of the nomination. The Income Tax Department approved an amount that was below the amount claimed by the CA firm.  

To secure the remaining amount, the CA firm initiated two arbitration proceedings against the Income Tax Department, and both were stayed. The impugned writ petitions before the Delhi High Court were because of these arbitration proceedings. The issues before the Delhi High Court were mainly about the applicability of the MSME Act in the payment dispute between the CA firm and the Income Tax Department.  

Delhi High Court Elaborates on Rationale of MSME Act and Section 142(2A), IT Act, 1961

The Delhi High Court reproduced the Statement of Objects of the MSME Act and the provided a brief history of the legislation to emphasize that the various legal options envisaged under the MSME Act are available only to a supplier against a buyer. And a buyer under Section 2(d), MSME Act buyer is someone who buys any goods or receives any service from a supplier for consideration. Simultaneously, under Section 2(n), MSME Act defines a supplier to inter alia include micro or small enterprises and any trust or body supplying goods manufactured by a micro or small enterprise. For the impugned case, it is relevant that the CA firm was validly registered under the MSME Act, and its status under the MSME Act was not under scrutiny. The issue was if the CA firm could invoke the MSME Act against the Income Tax Department.

Under Section 142(2A), IT Act, 1961, the Income Tax Department, through the Commissioner or other high-ranking officer – if the Assessing Officer is of the opinion that the complexity of the case so requires – require an assessee to get their accounts audited from an accountant. The expenses of such audit are determined by the Principal Chief Commissioner or other such high ranking official, whose determination is final under Section 142(2D), IT Act, 1961. The approval of such remuneration may not be the exact amount stated in the invoice by the accountant, it may be lower.  

The crucial question that the High Court had to decide was if the CA firm could qualify as a supplier given the nature of its relationship and function envisaged under Section 142(2A), IT Act, 1961. And the High Court answered in the negative.    

High Court Decides Against the CA Firm 

After a detailed extract of the relevant provisions of the MSME Act and the IT Act, 1961, the Delhi High Court decided against the CA firm and held that the invocation of the MSME Act for the impugned dispute was misplaced.  As per the High Court the special audit conduct by an account under Section 142(2A) was to assist the Assessing Officer in a complex case to arrive at a proper determination of the tax liability. Also, the invoice generated by the accountant for the said work was not always accepted, as the decision of the Principal Chief Commissioner or other authorized official was final. And the said decision on appropriate remuneration was taken based on the nature and complexity of the work performed by the accountant. Based on the above, the High Court concluded that: 

The nature of the Audit and the manner in which remuneration is to be determined would require domain expertise and knowledge which the MSEFC cannot possess. Moreover, the function which is in effect delegated to the Audit firm is one which is exercised under the Income Tax Act and would be purely governed by the said statute. Payment of remuneration is also based on the factors prescribed in the Rules as discussed above. (para 96)

The High Court added that the ‘nature of assessment is not commercial but statutory’ and for assistance of the Assessing Officer and the Income Tax Department. Thus, the latter cannot be termed as a buyer nor the CA firm as a supplier and payment made to the CA firm cannot be termed as consideration since it is for performance a statutory function. (para 97) The limitation of this conclusion by the High Court is that while it is premised on the accountant performing/assisting in a statutory function, it does not clarify if the invocation of MSME Act is misplaced only due to that reason or whether the CA firm does not qualify as a supplier per se for this transaction. The High Court though add later that while the CA firm may be registered under the MSME Act and can invoke it for other purposes, it cannot invoke for assignment emanating from a statute, i.e., IT Act, 1961, and whose remuneration is determined solely by the concerned officials. Thus, for the High Court, the statutory nature of the work performed by the CA firm overpowered its status under the MSME Act.  

Conclusion 

The impugned judgment addresses a unique and novel issue and adopts a conservative approach towards the CA firm’s ability to invoke MSME Act against the Income Tax Department. The central point of the High Court’s conclusion is based on the CA firm performing a statutory function whose remuneration is determined by the statutory bodies, thereby carving the said relationship outside of the purview of a typical commercial transaction. And since as per the Delhi High Court, the MSME Act concerns itself only with commercial transactions, statutory functions cannot be subject of arbitration proceedings under the said Act. The conclusion, while seems correct in the context and facts of the case, may invite a different interpretation if another function or another statute is in question.    

[1] Principal Commissioner of Income Tax v Micro and Small Facilitation Council and Anr (2023) TAXSCAN HC 1067. 

Fake Invoices are ‘Economic Offences’: Delhi High Court Denies Bail

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Introduction

In a recent judgment[1], a Single Judge Bench of the Delhi High Court denied bail to the Chartered Accountant (‘CA’) of the complainant. The latter had filed FIR and alleged that he had appointed the CA for books of account of his business. The CA had persuaded the complainant to purchase goods and materials from various firms which the CA claimed were owned by persons known to him. The complainant started making purchases from the said firms and the CA generated various bills/e-way bills to that effect; but later the complainant got to know that firms recommended by the CA were bogus and non-existent. 

The complainant alleged in the FIR that he was duped of money by the CA and that by creating false/fake firms, GST was deposited in accounts of said firms for purchases made by him, but the GST was not deposited to the State. The complainant supported his allegations by relying on bank transfers, pen drives and telephonic conversations among other evidence. 

Bail Refused 

The Delhi High Court noted that the CA had withdrawn the previous application for anticipatory bail to file fresh application before the trial court and had instead filed a surrender cum bail application before the Sessions Court. Thereafter, the present application was filed before the High Court where the CA on payment of Rs 75 lakhs sought interim protection on the pretext that mediation proceedings were ongoing. The first adverse finding of the High Court against the CA was that he had abused the process of court. The intent of the CA, as per the High Court was to secure interim protection on payment of Rs 75 lakhs to the complainant. But the High Court observed that the protection was not granted to the CA on merits but on possibility of settlement and once the mediation proceedings ended as ‘not settled’, the application for bail had to be considered on merits.     

The Delhi High Court refused to grant bail to the CA inter alia on the ground that prima facie case was made against the CA – indicating a serious offence with severe punishment – of having duped the complainant of Rs 3.5 crores. The High Court further observed that: 

            … the present case is not just relating to the applicant having duped the complainant of a huge sum of money, it also involves allegations of issuing fake invoices and e-way bills for the purposes of GST evasion, which is an economic offence involving loss to the public exchequer. Such offences need to be viewed seriously as the same pose a threat to the economy of the country. Further, the present case involves offence under Section 467 of the IPC read with Section 471 of the IPC, for which the maximum punishment is imprisonment for life. (para 21) (emphasis added)

CGST Act, 2017 and the relevant State GST legislations contain provisions that envisage legal consequences – civil and criminal – for issuance of fake invoices, false claims of ITC, etc. And given the nature of a tax statute, it is not unreasonable to suggest that the said contraventions already constituted an ‘economic offence’ by virtue of the relevant GST provisions. So what value should we attach to the Delhi High Court terming issuance of fake invoices as ‘economic offences’? Perhaps, not much. The High Court’s observations are an endorsement of strict approach towards tax-related offences – categorized under the broader umbrella of economic offences – especially if the nature of allegations establish a prima offence of serious nature. In the impugned case, the High Court’s observations materialized in the form of denial of bail to the CA. 

Conclusion 

The impugned case is unlikely to influence the trajectory of an already uncertain bail jurisprudence under GST in any significant manner. Courts have granted bail under GST primarily based on facts and other factors such as: prima facie case against the accused, co-operation by the accused and history of tax evasion by the accused, among other factors. The impugned case concerned specific situation of CA of the concerned taxpayer generating false invoices, and may be valid only to these facts instead of cases dealing with bail of the accused taxpayer per se.     

[1] Aman Gupta v State, Bail Application 3408/2022, available at https://blog.saginfotech.com/delhi-hc-false-gst-invoices-used-evasion-should-considered-economic-crime  

Patna High Court Castigates Tax Officer for Recovering Tax Illegally

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In a recent judgment[1], the Patna High Court has castigated a tax officer for effecting a tax recovery and ignoring the legislative mandate. Section 78, CGST Act, 2017 allows for recovery of tax from taxpayers within 3 months of passing of an order. The Proviso to Section 78, CGST Act, 2017 allows a proper officer to initiate recovery before 3 months if he ‘considers it expedient in the interest of revenue’. In the impugned case, the proper officer had no cogent reason except for the fact that financial year would have ended if recovery was delayed, nor was any reasonable explanation offered as to why the taxpayer was not informed through a prior notice. 

Facts 

One day after the appellant’s/taxpayer’s appeal was dismissed, the tax was recovered from the bank accounts of the taxpayer. However, the taxpayer’s appellate remedy was not exhausted; yet, at the same time the appellate tribunal had not been constituted. In view of the non-constitution of appellate tribunals, Courts have typically directed that the taxpayer should deposit 20 per cent of the amount – required as a deposit for filing an appeal before the appellate tribunal – and stayed recovery till the appellate tribunal is constituted. The 20 per cent is as per the statutory provisions, which in the impugned case was Section 112(8), Bihar Goods and Services Tax Act, 2017.  

In the impugned case, the taxpayer’s appeal was rejected on 27.03.2023, and immediately on the next the tax officer in question sent a notice to bank managers of the banks where the taxpayer had bank accounts. The entire amount was recovered by the tax officer without sending a notice to the taxpayer which led to a petition before the Patna High Court. The Revenue’s reason for effecting such a quick recovery without informing the taxpayer beforehand was that there was that bank holidays were approaching and thereafter the financial year would have ended. The Patna High Court expressed ‘deep anguish and dissatisfaction’ in the reasons recorded by the tax officer. (para 10) 

The Patna High Court stressed on the need for adhering to principles of natural justice especially when quasi-judicial powers of officers led to prejudicial result for the taxpayer. While Proviso to Section 78, CGST Act, 2017 does not expressly lay down the requirement for a notice to the taxpayer, the High Court read into the provision the said requirement and hled that: 

In fact, on a reading of the proviso we are of the definite opinion that there is a requirement of notice, if not prior to the recording of reasons; at least intimation of the reasons which motivates the proper officer to recover the amounts due, considering such recovery to be expedient in the interest of revenue with clear specification of the period; less than a period of three months, within which the amounts are to be paid. (para 12)

Thus, the tax officer has to inform the taxpayer as to why the payment should be made before 3 months and specify exactly the period of payment. And while the Patna High Court did not approve of the actions of the tax officer per se, it did note that if recovery had to be initiated it should have been limited to 20 per cent of the amount due and any admitted tax, etc. The High Court observed that the action taken by the tax officer constituted an egregious error, high handed and contrary to legislative mandate. 

Guidelines for Recovery 

The Patna High Court thereafter, laid down certain guidelines for effectuating recovery under Section 78 which I will reproduce in full: 

  • There shall be no recovery of tax within the time limit for filing an appeal and when a stay application is filed in a properly instituted appeal, before the stay application is disposed of by the Appellate Authority; 
  • Even when the stay application in the appeal is disposed of, the recovery shall be initiated only after a reasonable period so as to enable the assessee to move a higher forum; 
  • However, in cases where the Assessing Officer has reason to believe that the assessee may defeat the demand or that it is expedient in the interest of Revenue, as is provided under the proviso to Section 78, there can be a recovery but with notice to the assessee, which notice shows the reasons for initiating it and specifies the lesser time within which the assessee is directed to satisfy the dues;
  • Though a bank account could be attached; before withdrawing the amount, reasonable prior notice should be furnished to the assessee to enable the assessee to make a representation or seek recourse to a remedy in law; 
  • We also remind the Tax Authorities, as was done in the UTI Mutual Fund case[2] that the ‘authorities under the tax enactment shall not act as a mere tax gatherer but act as a quasi-judicial authority vested with the public duty of protecting the interest of the Revenue while at the same time balancing the need to mitigate the hardship to the assessee.’ (para 16) 

Courts have issued various guidelines in different contexts – tax and otherwise, only for them to be ignored or be adhered in form rather than substance. It remains to be seen if mere enunciation of certain guidelines would prevent tax officers from contravening the statutory mandate especially if they are chasing targets set by superior officials. (para 15)

Conclusion

The Patna High Court elaborated one the final guideline to state that even though tax is a compulsory extraction, it is meant for the larger good. And that tax authorities should act as facilitators of business and economy instead of looking to extract their pound of flesh for personal reasons or to please the higher authorities. (para 18) And fined the tax officer concerned Rs 5,000/- for the high-handed action. (para 21) Again, the views of the High Court about the role of a tax officer and tax authorities in general are hard to find fault with; but, if and to what extent they are adhered to will be the bigger test. For now, there is solace in the fact that Courts endorse the need for balance between revenue extraction and protection of rights of businesspersons whose business can be paralyzed if such huge amounts are recovered without giving them prior notice. (para 17)  

[1] Sita Pandey v The State of Bihar (2023), available at https://www.livelaw.in/pdf_upload/sita-pandey-490868.pdf  

[2] UTI Mutual Fund v Income Tax Officer and Others [2012] 345 ITR 71 (Bom). 

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