DTAAs are Relevant for TDS Provisions under IT Act, 1961 

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In a recent judgment[1], the Karnataka High Court reiterated the ratio of Engineering Analysis case, more specifically the applicability of Double Taxation Avoidance Agreements (‘DTAA’) vis-à-vis withholding tax obligations under the IT Act, 1961. 

Introduction 

The assessee was an International Long Distance (‘ILD’) licence holder and was responsible for providing connectivity to calls originating/terminating in India. The assessee entered into agreements with non-resident telecom operators for the aforesaid purposes and was required to pay them inter-connectivity charges. In the impugned case, the centrepiece was an agreement assessee entered into with a Belgium entity which had no permanent establishment in India. Equally, all the equipment and necessary submarine cables were situated outside India. 

Arguments 

The Revenue made several arguments, the core, for the purpose of this post was that the assessee failed to discharge its statutory obligation to withhold tax/deduct TDS before making the payments to the Belgium entity. The Revenue argued that the agreement between the assessee and the Belgium entity did not specify that the income was not taxable in India and if in the opinion of the assessee no tax was deductible it should have approached the Assessing Officer and secured a nil certificate. The Revenue further argued that the income belonged to the payee. 

The assessee, on the other hand, argued that the payments made by the assesee could neither be considered as royalty, fee for technical services or business profits since no part of the business activity was conducted in India. The assessee also resisted Revenue’s attempt to apply the expanded definition of royalty amended via insertion of Explanations to Section 9(1)(vi) and instead argued that the definition of royalty under DTAA needs to be relied on.  

Observations of the High Court 

The High Court engaged with the questions relating to the interplay of DTAAs and withholding tax provisions. It cited the GE Technology case[2] and Engineering Analysis case[3] which had held in the context of Section 195, IT Act, 1961 that DTAAs are relevant while implementing tax deduction provisions. Relying on the said observations, the Karnataka High Court in the impugned case held that the assesee can take the benefit of DTAAs. And that the ITAT – whose order was under appeal – was wrong in stating that DTAA cannot be considered in proceedings under Section 201, IT Act, 1961. 

Another crucial question that the Karnataka High Court answered by relying on Engineering Analysis case was that the amendment to Section 9(1)(vi) by insertion of Explanations did not amend the DTAAs. The amended definition of royalty was thus only applicable if IT Act, 1961 was the relevant legal instrument. The High Court further clarified that in Engineering Analysis case it was observed that Explanation 4 added to Section 9(1)(vi) vide the Finance Act, 2012 was not clarificatory. Explanation 4 expanded the definition of royalty. And Supreme Court had observed that the person under Section 195, IT Act, 1961 cannot be expected to do the impossible, i.e., apply the expanded definition of royalty for assessment years when such definition was not factually in the statute. In view of the same, the High Court answered that the assesee was not obliged to withhold tax since the Assessment Years in question were 2008-09 and 2012-13 while the Explanation 4 expanding the definition of royalty was added to the IT Act, 1961 via Finance Act, 2012. Though this point was moot since the High Court had held that the assessee was entitled the benefits under DTAA (and consequently rely on more favorable/narrow definition of royalty.). 

While the High Court’s above observations were sufficient to clarify that the assessee did not have any obligation to deduct TDS on payments made to its Belgian contractual partners. The High Court also added, in response to an argument made by the assessee, that the Revenue Department did not have the power to bring to tax income arising from an extra-territorial source. The High Court held that: 

It is also not in dispute that the facilities are situated outside India and the agreement is with a Belgium entity which does not have any presence in India. Therefore, the Tax authorities in India shall have no jurisdiction to bring to tax the income arising from extra-territorial source. (para 22)

Conclusion

The Karnataka High Court’s observations are an unqualified endorsement of the ratio in Engineering Analysiscase especially regarding the interplay of TDS provisions and the applicability of DTAAs. The High Court’s observations bring specific clarity to the benefit of DTAAs available during proceedings under Section 201, IT Act, 1961. Whether the impugned case will be the subject of appeal is unknown, but the Revenue does not have a persuasive case against the assessee based on the facts and ratio of the High Courts’ judgment.  

[1] M/s Vodafone Idea Limited v Deputy Director of Income Tax, available at https://www.livelaw.in/high-court/karnataka-high-court/vodafone-idea-deduct-tds-inter-connectivity-usage-bandwidth-charges-karnataka-high-court-233692  

[2] GE India Technology Centre Private Limited v CIT (2010) 327 ITR 456 (SC). 

[3] Engineering Analysis Centre of Excellence Private Limited v CIT (2021) 125 taxmann.com 42 (SC). 

Interface of IBC and Tax: Supreme Court Clarifies

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In a notable judgment[1], the Supreme Court has clarified the waterfall mechanism under Insolvency and Bankruptcy Code, 2016 (‘IBC’) vis-à-vis the claims of secured interests and the place of the Revenue Department in the pecking order. 

Introduction 

The appellant, PVVNL was aggrieved by an order of the NCLAT directing release of the corporate debtor’s property. The property was attached by the District Magistrate in favor of the appellant, but NCLAT ordered its release for sale in favor of the liquidator to distribute the proceeds in accordance with the IBC.  

The appellant raised bills for supply of electricity to corporate debtor but since the bills remained unpaid, the appellant attached the properties of the corporate debtor and restrained transfer of property by sale, donation, or any other mode. The corporate debtor underwent a resolution under IBC failing which it became subject to liquidation. The liquidator took the plea that unless the attachment orders were set aside no one would purchase the property of the corporate debtor. Further, the appellant would be classified in the order of priority prescribed under waterfall mechanism of IBC. Both, NCLT and NCLAT endorsed the view that appellant was an operational creditor and would realize its due in the liquidation process as per the law.   

Arguments and Supreme Court’s Observations 

One of the appellant’s arguments was that the charge on property was created under the Electricity Act, 2003 and it being a special legislation should have priority over general legislation such as IBC. Supreme Court did not accept the appellant’s argument claiming priority of Electricity Act, 2003 over IBC. However, Supreme Court acknowledged that a reading of the relevant provisions of the agreement between the appellant and corporate debtor revealed that the appellant could create a charge on the property of the latter in event of unpaid bills. And that a valid charge was created in favor of the appellant. The crucial question was the priority that the appellant would acquire under the IBC. 

The counsel for liquidator argued that the amount due to the appellant was ‘government dues’ and low in priority as per the waterfall mechanism of Section 53, IBC. Supreme Court disagreed and noted that dues payable to statutory corporations were on a different footing compared to the amounts payable to the central and state governments. Supreme Court observed that: 

PVVNL undoubtedly has government participation. However, that does not render it a government or a part of the ‘State Government’. Its functions can be replicated by other entities, both private and public. The supply of electricity, the generation, transmission, and distribution of electricity has been liberalized in terms of the 2003 Act barring certain segments. Private entities are entitled to hold licenses. In this context, it has to be emphasized that private participation as distribution licensees is fairly widespread. For these reasons, it is held that in the present case, dues or amounts payable to PVVNL do not fall within the description of Section 53(1)(f) of the IBC. (para 47)

The appellant – PVVNL – on the other hand, relied on Rainbow Papers case which had held that the debts owed to a secured creditor included tax due to the Government under the Gujarat VAT Act, 2003. The Rainbow Papers case was an anomaly as the waterfall mechanism clearly prescribes priority to secured creditors while placing the government dues lower in the pecking order. The Supreme Court refused to adhere to the Rainbow Papers case and observed that the Court in that case ‘did not notice’ Section 53, IBC. Commenting on the Rainbow Papers case, Supreme Court observed:

Furthermore, Rainbow Papers (supra) was in the context of a resolution process and not during liquidation. Section 53, as held earlier, enacts the waterfall mechanism providing for the hierarchy or priority of claims of various classes of creditors. The careful design of Section 53 locates amounts payable to secured creditors and workmen at the second place, after the costs and expenses of the liquidator payable during the liquidation proceedings. However, the dues payable to the government are placed much below those of secured creditors and even unsecured and operational creditors. This design was either not brought to the notice of the court in Rainbow Papers (supra) or was missed altogether. In any event, the judgment has not taken note of the provisions of the IBC which treat the dues payable to secured creditors at a higher footing than dues payable to Central or State Government. (para 49)

The above observations are a categorical rejection of the inadequate reasoning adopted in Rainbow Paperscase whereby government was equated as a secured creditor and helped the government claim tax dues on priority by ‘jumping’ the queue. The Supreme Court in the impugned case was accurate in its observation that if there was no specific and separate enumeration of government dues under Section 53(1)(e) of IBC, it would be possible to hold that the government is a secured creditor. However, the enumeration of separate categories of a secured creditor and government dues under Section 53 indicates the Parliament’s intent to treat the latter differently and at a lower priority. 

Conclusion

The Supreme Court’s observations in the impugned case are welcome. The Revenue has in various attempts tried to bypass the waterfall mechanism of IBC by making various arguments such as tax dues should be treated as part of the insolvency costs as the latter are first in priority under the waterfall mechanism. It is important to recognize the importance of the observations in in the impugned case and yet be mindful that the Supreme Court has not expressly overruled the Rainbow case. For example, the Supreme Court did add that the observations made in the Rainbow case were in the context of resolution process while the impugned case involved liquidation. (para 49) We are likely to witness more disputes on the interface of IBC and tax in the future. Though, a more reasonable interpretation of the waterfall mechanism under Section 53, IBC suggests that the Supreme Court’s observations in the impugned case are more reasonable and accurate.     

[1] Paschimanchal Vidyut Vitran Nigam Limited v Raman Ispat Private Limited 2023 LiveLaw (SC) 534. 

Patna High Court Directs Substantive Compliance with Section 129, CGST Act, 2017 

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Short Note

In a concise judgment[1], a Division Bench of the Patna High Court provided relief to a taxpayer who was made liable under Section 129, CGST Act, 2017 for transporting goods on an expired e-way bill. The High Court held that the proper officer levied penalty without application of mind. 

The petitioner was transporting goods without a valid e-way bill. The petitioner argued that since the vehicle broke down it could not travel the State of Bihar before the expiry of the e-way bill. And that the petitioner’s bona fide reason was not considered by the authorities which levied a penalty mechanically. To emphasise the latter point, the petitioner highlighted that the notice and order of penalty were issued on the same date.  The proper officer issued a notice to the petitioner on 28.03.2022 and followed it by levying a penalty on the petitioner under Section 129(3) by an order dated 28.03.2022 itself.

The Revenue, on the other hand, argued that the e-way bill was valid only upto 16.03.2022 while the petitioner’s vehicle was intercepted on 23.03.2022 when the goods were still in movement. The State argued that under Section 129, CGST Act, 2017 the petitioner had a window of 8 hours to renew an expired e-way bill and thus was liable to face penalty for transporting goods accompanied by an expired e-way bill. 

The Patna High Court took cognizance of the fact that the proper officer had issued the notice and order imposing penalty simultaneously. It also noted that the order passed by the proper officer did not record the presence or hearing of the petitioner prior to passing of the order. 

Further, the High Court observed that: 

This Court would find that the notice issued under Section 129(1)(a) was nothing more than an empty formality as no time/opportunity has been allowed pursuant to the notice, and immediately, on the same date, penalty has been recorded under Section 129(3). The determination of penalty under Section 129(3) is, therefore, in contravention of the statutory requirement under Section 129 of the Act. The requisite compliance with principles of natural justice, inherent in Section 129(4) has thus been violated. (para 9)

The order imposing penalty was thus held to be unsustainable and was quashed. The High Court noted that the petitioner’s response to the notice should be considered and an opportunity of being heard should be provided as per the statutory mandate. 

It is important to highlight that Section 129 mandates the proper officer to not only issue a notice to the taxpayer before imposing a penalty, but also provide an opportunity of being heard to the taxpayer before passing an order imposing penalty. In the impugned case, the Patna High Court clearly endorsed that the issuance of notice should not be a mechanical exercise and providing an opportunity of being heard to the taxpayer cannot be dispensed with. Hopefully, the latter will not be adhered to in a mechanical fashion by the Revenue.   

[1] M/S Sangam Wires v The State of Bihar. Available at https://www.livelaw.in/pdf_upload/ca825b59-583c-4d04-995d-6b0436d311ea-481343.pdf

Provisional Attachment under GST: Bombay HC Clarifies Scope of Section 83 

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Introduction 

In a judgment[1] pronounced on 30.06.2023, a Division Bench of the Bombay High Court interpreted the law on provisional attachment under GST. While the law on provisional attachment has been sufficiently elaborated by the Supreme Court in Radha Krishan case[2], High Courts have had to consistently interpret the relevant provisions to remind the Revenue of the limits of its powers of provisional attachment. In the impugned case, the Bombay High Court clarified an obvious point, i.e., the order of provisional attachment expires after one year as stated in Section 83(2), CGST Act, 2017. And a new order needs to be issued after one year to legally continue the provisional attachment. The High Court also clarified scope of the Revenue’s power of provisional attachment, i.e., persons whose property can be attached under Section 83.   

To begin with, the Revenue argued that the petitioner cannot file a writ petition against an order dismissing its objections against provisional attachment. The petitioner, in the impugned case, filed objections against provisional attachment but the same were disposed by an order under Rule 159(5), CGST Rules, 2017. Relying on Radha Krishan case, the Bombay High Court agreed with the petitioner that the order dismissing the petitioner’s objections was not an appealable order and the only remedy available to the petitioner was to invoke writ jurisdiction of the High Court under Article 226 of the Constitution. It therefore admitted the petition dismissing the Revenue’s objections against its maintainability. As regards the merits, there were two issues that the High Court elaborated on, which I discuss below.    

Issue I: Expiry after One Year 

Section 83(2), CGST Act, 2017 provides that an order of provisional attachment passed under Section 83(1) expires after a period of one year. In the impugned case, the order for provisional attachment was passed on 21.04.2022 and ceased to have effect on 21.04.2023. The Revenue issued a letter to the bank on 19.04.2022, with a copy marked to the petitioner informing them about the continuance of the provisional attachment effectuated on 21.04.2022. The Revenue contended that a copy of the order sheet reflected that a fresh order was passed on 21.04.2023, making the provisional attachment valid. The Bombay High Court’s dismissed the Revenue’s contention.

The Bombay High Court observed that the order sheet recorded the date of noting as 21.04.2022 and formed the basis of the first provisional attachment order. There was no fresh order passed by the Revenue on 19.04.2023, which was merely a letter by way of communication to the bank to continue provisional attachment of the bank account. The High Court observed that mere notings in the file cannot constitute a formal order and the latter is a requirement under the law.    

Since no fresh order was passed to provisionally attach the petitioner’s bank account, the Bombay High Court rightly held that there was no provisional attachment of the petitioner’s bank account after 21.04.2023, from any angle. The extension of provisional attachment via communication letter dated 19.04.2023, was quashed.  

Issue II: Attaching Bank Account of Any Other Person  

In a similar writ petition, which was decided alongside the previous petition, the petitioner objected to provisional attachment of their bank account on jurisdictional grounds. The petitioner argued that they were a resident of Chennai and their bank account was also in Chennai and the Maharashtra GST authorities did not have jurisdiction to order provisional attachment of their bank account. The Bombay High Court disagreed with the petitioner and correctly interpreted Section 83. Section 83(1), CGST Act, 2017 states as follows:

Where, after the initiation of any proceeding under Chapter XII, Chapter XIV or Chapter XV, the Commissioner is of the opinion that for the purpose of protecting the interest of the Government revenue it is necessary so to do, he may, by order in writing, attach provisionally, any property, including bank account, belonging to the taxable person or any person specified in sub-section (1-A) of section 122, in such manner as may be prescribed. (emphasis added)

Elaborating on the scope of Section 83(1), the Bombay High Court observed that it contemplated two persons: taxable and any person specified in Section 122(1-A). The High Court observed that Section 122(1-A) provides that any person who is the beneficiary of certain specified transactions shall be liable to penalty of sum equivalent to tax evaded or ITC availed or passed on. The High Court held that Maharashtra GST authorities can exercise their powers under Section 83(1) in respect of person who may not be within their territorial jurisdiction and stated two reasons: 

First, it would lead to a situation where a person who is beneficiary of a transaction involving tax evasion is in a different State other than the one where the transaction occurred, will not be examined by the latter State since he is not a resident there and will not be examined by the State where he is resident since the transaction did not happen in that State. It emphasised on the term ‘any person’ used in Section 122-A and held that the provision does not contemplate that the person should be in the State where the transaction occurred. 

Second, the Bombay High Court held that the ‘context of the legislation’ is vital too. The High Court held that Section 1(2), CGST Act, 2017 states that it shall be operational throughout the country and the Commissioner as defined under Section 2(24) should be understood in light of the said provision. The High Court held that the power of Commissioner under Section 83(1) extends to ‘any person’ and concluded that: 

There cannot be any other reading of the legislative scheme flowing through a conjoint reading of Section 83(2) read with Section 122(1-A) and Section 2(24) of the Act, moreover, a contrary reading of the said provisions would defeat the legislative intention. (para 6) 

Thus, the petitioner’s objection to provisional attachment on grounds of jurisdiction was rejected since the Bombay High Court correctly interpreted the scope of Section 83 read with Section 122(1-A) of CGST Act, 2017.  

Conclusion

While the Bombay High Court’s findings on Issue II were rendered moot because it quashed the communication letter dated 19.04.2023 and 21.04.2023, its observations provide an important insight into the Revenue’s territorial jurisdiction qua provisional attachment. The High Court was not incorrect in referring to GST as a nationwide levy operational throughout the country but the said fact on its own did not offer enough legal force to support an expansive jurisdiction of the Commissioner qua provisional attachment. Similarly, the reliance on legislative mandate and intent was not incorrect and but at the same time was key to provide support to the High Court’s observations about the expansive scope of Section 83. It will be interesting to observe, if the High Court’s observations have any observable effect on the Revenue’s approach towards provisional attachment; a power that the Revenue tends to interpret liberally and invoke more frequently than required.   

[1] Bharat Parihar v State of Maharashtra 2023 (6) TR 7547. 

[2] Radha Krishan Industries v State of Himachal Pradesh (2021) 6 SCC 771.  

Limits of Deeming Fiction: Intermediaries under GST – II

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Constitutionality of Section 13(8)(b) and Section 8(2), IGST Act, 2017

Introduction

As elaborated in the first of this two-part post, the constitutionality of Section 13(8)(b), IGST Act, 2017 has attracted varied judicial opinions that deploy superficial and sub-par reasoning. Nonetheless, a Division Bench of the Bombay High Court delivered a split verdict on the constitutionality of Section 13(8)(b) and referred the issue to a third judge. Justice G.S. Kulkarni in his opinion[1] has adopted a unique perspective towards the issue and in the process arrived at a novel conclusion, whose implications are not entirely clear. The conclusion of Justice Kulkarni is that Section 13(8)(b) and Section 8(2) of IGST Act, 2017 are legal, valid, and constitutional if their operation is confined in their operation to IGST Act only and same cannot be made applicable for levy of tax on services under Central and Maharashtra GST legislations (‘CGST Act’ and ‘MGST Act’ respectively). I examine the reasoning and approach of Justice Kulkarni in the following paragraphs. Please refer to the first part for an introduction to the issue.    

Arguments

The Revenue justified Section 13(8)(b), IGST Act, 2017 by articulating several reasons. The Revenue argued that the place of service for intermediaries was the location of intermediary under the service tax regime as well and a similar legal position has been adopted under GST. Also, it referred to the fact that value addition in case of services by intermediaries happens at the location of intermediary. The Revenue also stated – in my view the real reason for Section 13(8)(b) – that if the location of intermediary was not made the place of service under the impugned provision, then the transaction would have escaped the tax net. (para 13)

The petitioners relied on Article 246A, 269A and 286 of the Constitution to argue that the impugned provision, i.e., Section 13(8)(b), IGST Act, 2017 was violative of the Constitutional limits. The petitioners, for example, argued that by deploying the deeming fiction under Section 13(8)(b), IGST Act, 2017 the Revenue was trying to convert the actual place of supply which was in foreign territory to the place of supplier and tax it as an intra-State supply. And the use of deeming fiction contravened Articles 246A, 269A and 286. The other arguments of the petitioners can be enlisted as follows: the levy of IGST on export of services is de hors the fundamental principle of GST as a destination-based tax, its violates the restrictions imposed by Article 286 which forbid States from levying a tax on transactions which take place in the course of import and the Parliament cannot authorize States to levy tax on export of services by deeming it to be a local supply, the levy is extra-territorial and violative of Article 245. Further, the petitioners also alleged that the levy via Section 13(8)(b) was arbitrary, discriminatory, and violative of Article 14.    

Decision

Justice Kulkarni noted that there is no dispute that the transaction undertaken by taxpayers constitutes an export of service. He agreed with the petitioners and stated that: 

In my opinion, the contention of the petitioners appears to be correct that the transactions in question of the petitioners are in fact a transactions of export of service, as the recipient of service is the foreign principal. The destination/consumption of the services as provided by the petitioners takes place in a foreign land. This completely satisfies the test of “export of service” as defined under Section 2(6) of the IGST Act, also as there is no contra indication that “factually” it can be regarded as either inter-State or intra-State sale of services.(para 60)

Justice Kulkarni relied on the definition of export of services under Section 2(6), IGST Act, 2017 and observed that all the ingredients of were satisfied in the impugned case. Section 2(6), IGST Act, 2017 defines export of services to mean when: (i) the supplier of service is located in India; (ii) the recipient of service is located outside India; (iii) the place of supply of service is outside India; (iv) the payment for such service has been received by the supplier of service in convertible foreign exchange; and (v) the supplier of service and the recipient of service are not merely establishments of a distinct person in accordance with Explanation 1 in section 8. Strictly speaking, the third ingredient, i.e., place of supply of service is not satisfied in the impugned case by virtue of Section 13(8)(b), IGST Act, 2017. However, since that was the centrepiece of the petitioner’s case, accepting it on face value would have prevented engagement with the petitioner’s argument.   

Justice Kulkarni stated that the contention of petitioners is that Section 13(8)(b), IGST Act, 2017 is being read into the Central and State GST legislations, i.e., CGST Act and MGST Act to tax export of services indirectly by treating them as a local supply. He framed the issued as: provisions of IGST Act were being imported into CGST Act and MGST Acts. The framing of the issuing as interplay of two distinct legislations rather than as an issue of legislative competence is crucial. By treating the issue of deeming fiction under Section 13(8)(b), IGST Act, 2017 he was able to address the petitioner’s grievance and yet managed to not situate it completely within the Constitutional context. Thus, Justice Kulkarni engaged with inter-connectedness of various GST legislations as the central issue making the petitioner’s argument of the Parliament’s competence to enact the impugned provision as an allied issue.   

Once Justice Kulkarni framed the issue as discussed above, he elaborated on the different spheres of CGST Act, 2017, IGST Act, 2017 and various State GST legislations. He agreed with the petitioner’s argument that the deeming fiction incorporated in Section 13(8)(b), IGST Act, 2017 would amount to double taxation and linking of two separate transactions. He observed that the commission is subsumed in the transaction that the foreign principal undertakes with Indian importer. And that the transaction between Indian intermediary and foreign principal cannot be understood be part of the transaction foreign principal and Indian importer. Interlinking of the two independent transactions would be contrary to the destination-based character of GST. He noted that if Section 13(8)(b), IGST Act, 2017 would be applied to CGST and MGST Acts, it would ‘in my opinion, it would lead not only to a consequence of double taxation but also to an implausible and illogical effect, in recognizing two independent transactions to be one transaction for the purpose of levy of CGST and MGST as intra-State trade and commerce.’ (para 79)

Developing on the issue of distinct but inter-relatedness of the two transactions and legislations, Justice Kulkarni highlighted that there was a tension in IGST Act, 2017 itself. He specifically cited Section 7(5), IGST Act, 2017 which provides that if supplier is located in India and place of supply is outside India then such supply shall be treated as in the course of inter-State trade or commerce. He observed that there is a dichotomy since on one hand the petitioner’s transaction of export of services is treated as inter-State under Section 7(5) while it is treated as intra-State under Section 13(8(b). The aforesaid comparison and ‘dichotomy’ is not a conclusive reason to not accept the deeming fiction incorporated under Section 13(8(b) since a legislation can incorporate a rule and its exception. Justice Kulkarni was however convinced that operation of both provisions would lead to absurdity and uncertainty in the operation of IGST Act, 2017. (para 82)

Based on the above reasoning Justice Kulkarni concluded that inter-State transactions should be confined to IGST Act and intra-State transactions only to CGST Act and MGST Act. He observed: 

Necessarily transactions which are intra-State transactions and those which are inter- State transactions (trade or commerce) are required to be compartmentalized, so as to be recognized under the separate regimes and without creation of any fictional incongruity in regard to the regimes, they need to be taxed, in the given facts and circumstances. It will be too harsh and not fair to the assessees to suffer any uncertainty in regard to the regimes the assessee’s would be taxed. Such uncertainty is neither conducive to trade or commerce nor of any real benefit to the interest of the revenue. (para 83) 

However, Justice Kulkarni did not hold Section 13(8)(b) and Section 8(2), IGST Act, 2017 to be unconstitutional. Relying on a spate of precedents he observed that if a provision could be read down and made workable to further the intent of legislation, Courts should adopt that path instead of striking down a provision as ultra-vires. And in his opinon the impugned provision could be made workable and reflect legislative intent if its operation was confined solely to IGST Act, 2017 and was not imported into CGST and MGST Act. (paras 84 and 89)   

Conclusion

A straightforward and pithy conclusion of Justice Kulkarni’s opinion is that Section 13(8)(b) and Section 8(2), IGST Act, 2017 is not unconstitutional but its operation has been confined to provisions of IGST Act only and cannot be made applicable to tax on services under CGST and MGST Acts. What does this mean? One immediate implication is that Section 13(8)(b) of IGST Act cannot be used to levy GST on intermediary services provided to a foreign principal by treating their export of services as a local/intra-State supply. This also means that such intermediary services cannot be subjected to IGST since exports are ordinarily speaking, not taxed under the destination-based principle of GST. And Justice Kulkarni has noted expressly that the petitioner’s intermediary services amount to export of services. Any further implications are likely to be revealed in due time as and when the CBIC issues some communication from its end. 

It is important to note that the exclusive domains and compartmentalization that Justice Kulkarni refers to is an appropriate approach to understand the multiple GST legislations, their operation and their respective spheres of operation. Justice Kulkarni through his judgment has brought home the fact that while the entire legislative matrix of GST operates on same fundamental principles, e.g., destination-based tax; they intend to levy tax on different transactions. IGST Act is applicable to inter-State transactions while CGST Act and State GST Acts are applicable on intra-State transactions. Going forward, it would be interesting to watch if the strict compartmentalization advocated by Justice Kulkarni would admit of some exceptions and the circumstances when the dilution of such compartmentalization may be allowed.   

Finally, it is worth noting that the opinion of Justice Kulkarni is a satisfactory resolution to the taxation of intermediary services and their treatment as intra-State supplies. However, given the way Justice Kulkarni chose to frame the issue some of the Constitutional questions raised by the petitioners remain unanswered or unsatisfactorily resolved. For example, we are unsure of the applicability of Articles 249A, 269A, and 286 to GST legislations and how the three vital Constitutional provisions interact with each other. Neither do we have a clear view as to the aforesaid Constitutional provisions constrain the Parliament or otherwise the scope of their influence on GST laws.     

[1] Dharmendra M. Jani v Union of India 2023 SCC OnLine Bom 852. 

Revenue Mistakes Buying for Selling: Bombay High Court Quashes Order

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Short Note

In a recent judgment[1], the Delhi High Court provided a remedy to the assessee that should have ordinarily not required judicial intervention. The High Court reminded the Revenue that the assessee had purchased and not sold the immovable property, eliminating the question of assessee declaring any capital gains for the transaction. 

The assessee was first issued a notice under Section 133(6), IT Act, 1961 on 25.03.2021 and thereafter under Section 148A(b) on 19.05.2022. In both notices, the assessee was required to explain why the capital gains on sale of immovable property was not disclosed. In reply to each of the notices, the assessee had furnished information that it had not sold the immovable property in question but had purchased it.    

AO passed an order on 28.07.2022 inter alia alleging that the assessee had not disclosed the acquisition of property and thorugh unexplained sources. The Bombay High Court agreed with the assessee that the order suffered from lack of application of mind by the assessee and relevant materials were not considered by the AO before passing the order. 

Adjudicating on the issue, the Bombay High Court concluded that:

Having regard to the aspects noted hereinabove, we are of the view, that if at all, the AO deems it fit to carry out a fresh exercise, it would be from the stage prior to the issuance of notice under Section 148A(b) of the Act. Clearly, the AO has missed the most crucial part of the transaction, that it was a purchase and not a sale transaction. (para 16)

The Bombay High Court set aside the order passed on 28.07.2022 in pursuance of the notice issued on 19.05.2022. Though the High Court did not set aside the notice issued on 19.05.2022, the paragraph cited above does mandate the AO to re-start the proceedings from the stage prior to issuance of such notice.    

The judgment, while not a landmark or major development under IT Act, 1961 indicates the approach of certain assessing officers (‘AO’). To begin with, the Bombay High Court remarked, it is indeed surprising that while the assessee on 22.04.2021 disclosed information to the Revenue  – in response to the first notice issued under Section 133(6) – about purchase of the immovable property, the AO issued a notice on 19.05.2022 under Section 148A(B), IT Act, 1961 alleging that the assessee had sold the property and not disclosed capital gains.  Further, once the AO realised it had mistook purchase for sale, an order was issued against the assessee alleging assessee’s failure to disclose the purchase of property, which also proved false. Instead of acknowledging the initial mistake, the order issued by the AO alleged assessee’s failure to meet various statutory obligations was an attempt to justify the initial issue of notice.  In this case, the Revenue and more specifically the AO in question did not acknowledge its initial mistake, which are unavoidable during the scrutiny process, instead it doubled down on its mistake. Consequently, we have a situation where refusal and disinclination to admit a mistake led to unnecessary litigation and required the Court to remind the Revenue to adopt a more prudent approach in such situations.     

[1] Krishna Diagnostic Private Limited v Income Tax Office Ward 143 Delhi TS-353-HC-2023 (DEL). 

Revenue Cannot Dispute Singapore Tax Certificate: Bombay High Court Interprets India-Singapore DTAA Correctly 

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Short Note

In a recent judgment[1], the Bombay High Court interpreted the exemption condition under the India-Singapore DTAA and held that the limitation of benefit provision would not apply to the assessee. The Assessing Officer (‘AO’) had taken an unduly restrictive view of the exemption provision to deny the assessee the rightful benefit. And the High Court rightfully refused to accept the AO’s view.   

Issue

The assessee was a Foreign Institutional Investor registered with the Securities and Exchange Board of India (‘SEBI’). The assessee was investing in debt instruments in India and its return for the Assessment Year 2010-2011 declared a capital gains from the sale of such debt instruments. The assessee claimed exemption under Article 13(4), India-Singapore DTAA for the capital gains. The impugned provision stated that the gains from the sale of a property (dent instrument in this case) would be taxable only in the State of which the assessee was a resident. The assessee in this case was a resident of Singapore and thus it argued that the capital gains were only taxable in Singapore and were exempt from taxation in India by virtue of Article 13(4).

The AO, however, relied on Article 24(1) of the India-Singapore DTAA and denied the assessee’s exemption claim. Article 24(1) stated that:

Where this Agreement provides (with or without other conditions) that income from sources in a Contracting India State shall be exempt from tax, or taxed at a reduced rate III that- Contracting State and under the laws in force in the other Contracting State, the said income is subject to tax by reference to the amount thereof which is remitted to or received in that other Contracting State and not by reference to the full amount thereof, then the exemption or reduction of tax to be allowed under this Agreement in the first-mentioned Contracting State shall apply to so much of the income as is remitted to or received in that other Contracting State. (emphasis added)

The AO did not pay attention to the phrase underlined above and stated that the assessee was entitled to claim exemption only to the extent the capital gains were remitted to Singapore. However, the assessee argued that the amount that was remitted to Singapore was irrelevant as the assessee was liable to tax for its worldwide income in Singapore since it was a tax resident of Singapore.   

Bombay High Court Upholds Assessee’s Claim of Exemption 

The Bombay High Court endorsed the assessee’s position and stated that the AO insisting on evidence of repatriation was an inaccurate statement. The High Court stated that the assessee had placed on record a certificate from the Singapore Tax Authorities stating that the income of assessee from debt instruments in India would be taxable in Singapore irrespective of the amount received or remitted in Singapore. And that the said income of assessee would be treated as accruing in or derived from Singapore. Accordingly, the High Court concluded that: 

Therefore, Singapore authorities have themselves certified that the capital gain income would be brought to tax in Singapore without reference to the amount remitted or received in Singapore. The AO could not have come to a conclusion otherwise. (para 13)

The High Court cited Circular No. 789 which was issued on 13 April 2000 which inter alia stated that certificates of residence issued by the treaty partner are to be accepted as valid. While the Circular was issued under the India-Mauritius DTAA, the High Court noted that its implication and import was sufficiently clear; and it held that the certificates issued by the Singapore Tax Authorities will constitute sufficient evidence for accepting the legal position. The High Court also supported its conclusion by citing the Madras High Court’s judgment in Lakshmi Textile Importers Ltd[2] where a similar principle was reiterated, i.e., the certificate issued by Singapore Tax Authorities should be treated as sufficient evidence of the position of law in Singapore and AO should not try to interpret the law of Singapore. 

The Bombay High Court adopted the correct view and reminded AO that once a treaty partner has issued a certificate stating the position of law in their jurisdiction, it is not open to the AO to dispute the correctness of that legal position. In the impugned case, the AO was interpreting the tax law of Singapore contrary to the legal position stated in the certificate issued by Singapore Tax Authorities. Such an attempt by AO belied acceptable interpretive approaches adopted towards tax treaties and domestic tax statutes.       

[1] Commissioner of Income Tax v M/s Citicorp Investment Bank. Income Tax Appeal No. 256 of 2018, decided on 21.06.2023. Available at https://www.livelaw.in/high-court/bombay-high-court/capital-gain-taxed-singapore-bombay-high-court-exemption-fii-231459?infinitescroll=1  

[2] Commissioner of Income Tax v Lakshmi Textile Importers Ltd 245 ITR 522.

No Whisper in Reasons to Believe: Bombay High Court Quashes Reassessment Notice

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The Bombay High Court in a judgment[1] delivered on 09.06.2023, quashed a reassessment notice issued to the assessee. The High Court inter alia observed that the notice had been issued without any justification and the assessing officer lacked any reason to believe that any income chargeable to tax had escaped assessment. Instead, the reassessment notice was based on the change of opinion of the assessing officer. 

Introduction 

In January 1993, the petitioner filed its return of income for the Assessment Year 1992-1993. During the assessment proceedings, the petitioner responded to queries by the assessing officer. The latter also obtained information from third parties and conducted a special audit of the petitioner to conclude the assessment in September 1995. The assessment order of the petitioner was further revised, which it appealed before the Commissioner of Income Tax in January 1998. While the appeal was pending, the Finance Act, 1998 introduced the Kar Vivad Samadhan Scheme (‘KVSS’) to declog the litigation and give assesses an opportunity to pay certain amounts and settle all their tax issues. 

The petitioner took advantage of the KVSS to settle all tax disputes and issues and paid amounts in full and final settlement of its arrears under the relevant provisions of the Finance Act, 1998. And the petitioner was accordingly issued a certificate. 

On 15.01.2000, the petitioner was issued another notice alleging that certain income for the Assessment Year 1992-93, has escaped assessment. The petitioner was accordingly asked to file a return for the said Assessment Year within a period of 30 days. The petitioner that the notice issued on 15.01.2000 should be quashed.    

Petitioner Challenges Reassessment Notice 

The petitioner assailed the validity of the reassessment notice on various grounds. The petitioner argued that the order under KVSS was passed after considering all the facts, was final for all heads of income, and also provided petitioner immunity from prosecution and imposition of penalty. The petitioner argued that the Revenue could not used the reassessment notice to ‘turn back the clock’. It is important to note that under Section 93(1), Finance Act, 1998 the designated authority was empowered to issue an order determining the tax arrears and sum payable by the taxpayer. And Section 93(3), Finance Act, 1998 stated that:

Every order passed under sub-section (1), determining the sum payable under this Scheme, shall be conclusive as to the matters stated therein and no matter covered by such order shall be reopened in any other proceeding under the direct tax enactment or indirect tax enactment or under any other law for the time being in force. 

The petitioner had a justifiable and legally sound reason to resist the issuance of reassessment order if the rationale of KVSS and its underlying statutory provisions were reasonably interpreted. To further reinforce their case, the petitioner made an alternate argument, i.e., during the assessment proceedings the assessing officer made certain queries from the petitioner which were answered by it. Therefore, it follows that the reply was subject of consideration while finalizing the assessment order and thus re-opening assessment on same subject matter cannot constitute a reason to believe that income has escaped assessment.

The Revenue defended the issuance of notice by arguing that there was misdeclaration by the petitioner. And that Section 93(1), Finance Act, 1998 permitted revival of proceedings in case the declaration by the petitioner under KVSS was found to be false. 

Bombay High Court Quashes Reassessment Notice 

The Bombay High Court rejected the Revenue’s argument and quashed the reassessment notice issued against the petitioner. The High Court cited various reasons for its conclusion. 

First, the High Court noted that it was never the State’s case that the petitioner had mis-declared income and the certificate/form issued to the petitioner under KVSS was never withdrawn. 

Second, the High Court relied on Killick Nixon case[2], where the Supreme Court adjudicated on a similar set of facts and engaged with similar arguments. The Supreme Court in Killick Nixon case had held that the determination by designated authority under Section 90, Finance Act, 1998 was conclusive in respect of tax arrears and sums payable after such determination which shall be considered as full and final settlement of tax arrears. In the said case, the Supreme Court held that the assessing officer had no jurisdiction to reopen the assessment and issue a notice under Section 148, IT Act, 1961 unless it was found that the information furnished by the assessee was false. The High Court held that only on the strength of the Supreme Court’s observations, the petitioner deserved to succeed.  

Third, the High Court also accepted the petitioner’s alternate argument and held that once the petitioner had furnished a detailed reply during the assessment proceedings and same had been considered during the assessment order; the reopening of assessment was based on a mere change of opinion by the assessing officer and not because there was any justification/reason to believe for issuance of the reassessment notice.  

Conclusion

While the impugned case was squarely covered by the Supreme Court’s decision in Killick Nixon case and was sufficient for the petitioner to succeed. The High Court, nonetheless, went a step ahead to engage with the petitioner’s alternative argument to clarify that mere change of opinion cannot constitute a reason to believe. Section 148, IT Act, 1961 empowers an assessing officer to issue a reassessment notice on if there is a reason to believe that income of the assessee has escaped assessment. Courts have in various decisions opined that mere change of opinion cannot amount to a reason to believe, but the Revenue needs frequent reminders of the threshold prescribed. Lastly, the High Court also observed that since the Revenue issued a notice under Section 148, IT Act, 1961 after expiry of four years from end of relevant assessment year:

… the onus is on the Assessing Officer to show that income chargeable to tax has escaped assessment by reason of the failure on the part of assessee to disclose fully and truly all material facts necessary for its assessment for that assessment year. There is not even a whisper in the reasons to believe that there was any such failure on the part of petitioner to disclose fully and truly all material facts necessary for its assessment.(para 17) (emphasis added) 

Accordingly, the Bombay High Court correctly quashed the reassessment notice.  

[1] Citibank N.A. v S.K. Ojha [2023] 151 taxmann.com 234. 

[2] Killick Nixon Ltd v Deputy Commissioner of Income Tax, Mumbai and Ors (2003) 1 SCC 145. 

Time Period for Filing Appeals under GST: Kerala HC Adopts Strict Interpretation

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Short Note

In a concise judgment[1], the Kerala High Court dismissed writ petition of a taxable person and held that an appeal under CGST Act, 2017 must be filed before the appellate authority in a time bound manner. The High Court held that the time prescribed for appeal under CGST Act, 2017 must be interpreted strictly. 

Introduction 

The petitioner/taxable person did not file its GST returns in a time bound manner due to COVID-19. The proper officer exercised the power under Section 29(2)(c), CGST Act, 2017 wherein the registration of a taxable person can be cancelled if returns are not filed for a continuous period of six months. The petitioner filed an appeal against the order of cancellation of registration, but after the time prescribed under CGST Act, 2017. Section 107(4), CGST Act, 2017 states as follows: 

“The Appellate Authority may, if he is satisfied that the appellant was prevented by sufficient cause from presenting the appeal within the aforesaid period of three months or six months, as the case may be, allow it to be presented within a further period of one month.” 

Thus, the appellate authority has, in certain cases, the power to extend the time of appeal only by one month after the expiry of initial 3/6 months, whichever is applicable. The taxpayer had filed an appeal even after the additional one month had expired. 

High Court Denies the Claim of Petitioner 

The Kerala High Court relied on a couple of precedents[2] where the Supreme Court while interpreting similar provisions under the Central Excise Act, 1944 had held that the provisions prescribing an outer time limit for filing appeals operated to the exclusion of Limitation Act, 1963. The High Court observed that Section 107(4), CGST Act, 2017 was analogous to the provisions of Central Excise Act, 1944 and concluded that: 

            The Central Goods and Services Tax Act is a special statute and a self-contained code by itself. Section 107 is an inbuilt mechanism and has impliedly excluded the application of the Limitation Act. It is trite, that the Limitation Act will apply only if it is extended to the special statute. It is also rudimentary that the provisions of a fiscal statute have to be strictly construed and interpreted. (para 10)

Accordingly, the High Court dismissed the petitioner’s argument that the Revenue dismissing its appeal against cancellation of registration was arbitrary. 

Conclusion 

The Kerala High Court’s judgment establishes with clarity that the taxpayer is bound to obey the time limit prescribed under CGST Act, 2017 and cannot rely on extraneous factors to extend the time period prescribed for filing appeals before the appellate authorities. In this case, the petitioner was indirectly invoking COVID-19 as an excuse, which was not accepted by the High Court. Further, the High Court, in accordance with the well-established precedents in pre-GST regime held that the Limitation Act cannot come to the rescue of petitioners in extending the time period for filing appeals. CGST Act, 2017, the High Court clarified, operates like a self-contained code for the purpose of time period for filing appeals. Though it would be interesting to observe if the Courts interpret any exceptions to the outer time period if the taxpayer has a genuine hardship and is able to establish it convincingly before Courts.    

[1] Penuel Nexus Pvt Ltd v The Additional Commissioner Headquarters (Appeals) 2023 LiveLaw (Ker) 280. 

[2] Singh Enterprises v Commissioner of Central Excise, Jamshedpur and Others (2008) 3 SCC 70; CCE & Customs v Hongo India (P) Ltd (2009) 5 SCC 791. 

Uncertain Purchaser Obligations under GST: ITC Claims Hit a Roadblock

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On 12.06.2023, the Calcutta High Court pronounced a judgment[1] urging the Revenue to thoroughly review the petitioner’s supporting documents before rejecting its ITC claim. In the impugned case, the Revenue disallowed the petitioner’s ITC claim because the supplier’s registration had been cancelled with retrospective effect. The case is an example of how, in certain situations, the Revenue unjustifiably burdens the purchaser for the supplier’s lack of bona fide, even though it is the Revenue that belatedly discovers the supplier’s deficient credentials. I examine the High Court’s judgment and suggest that the Courts need to take a sterner view of the Revenue’s approach when it disallows an ITC claim based on inadequate examination of relevant documents.   

Introduction

The petitioner filed ITC claim against supplies purchased from its various suppliers including a certain Global Bitumen (‘supplier’). Petitioner’s ITC claim for purchases from the supplier was rejected by the Revenue. The Revenue’s reasons for rejection were as follows: the supplier was fake, non-existent, and opened its bank account based on fake documents. The Revenue alleged that the petitioner did not verify the credentials of supplier, claimed ITC without the support of any relevant documents and further asked the petitioner to pay penalty and interest under the relevant provisions of GST laws.

There are two specific claims of the Revenue that are worth noting: first, that the petitioner did not ascertain and verify genuineness of the supplier; second, that the supplier’s registration has been cancelled with retrospective effect covering the period of petitioner’s ITC claim. 

The petitioner, on the other hand, argued that the Revenue did not consider the documents which proved that it had purchased goods from the supplier, evidenced the transport of goods and proved that it had made payment to the supplier. The petitioner argued that the failure of supplier to pay the GST to the State cannot be attributed to it since at the time of transaction, the supplier had a valid registration and its status as a GST-registered supplier was reflected on the Revenue’s portal.       

High Court Dismisses Revenue’s Claims 

The Calcutta High Court observed that foundation of the petitioner’s case was that its transaction with the supplier was a genuine transaction. The High Court observed that it was not possible to determine whether the petitioner had failed to meet any of its statutory obligation unless all the petitioner’s documents relating to the purchase were examined by the Revenue. The High Court noted that the Revenue only took into consideration the retrospective cancellation of the supplier’s registration to disallow ITC claim; but did not consider other documents presented by the petitioner. Accordingly, the Revenue’s orders were set aside, and the High Court directed the Revenue to take up petitioner’s case afresh by taking into consideration other documents relating to the transaction in question.

Purchaser Obligations under GST 

The Calcutta High Court, in its judgment, relied on a precedent, i.e., M/s Lgw Industries case[2], where the Calcutta High Court adjudicated a similar set of facts and ordered the Revenue to consider the petitioner’s ITC claim afresh by scrutinizing its documents to verify if the transactions in question were genuine or not. The Revenue was also directed to ascertain if the transactions in question took place before or after the cancellation of registration and whether the purchaser fulfilled its statutory obligation to verify the identity of the supplier.

It is important to note that the purchaser’s obligation extends to establishing the genuineness of the supplier’s identity which includes checking the supplier’s registration status at the time of entering the transaction. If subsequently, the Revenue finds that the supplier lacks bona fide and cancels the registration retrospectively, why should the purchaser’s ITC be blocked for transactions entered before the cancellation of registration? Blocking purchaser’s ITC is especially unfair if the Revenue is not alleging and proving collusion between the purchaser and supplier.

If the purchaser transacts with the supplier after cancellation of latter’s registration, the Revenue has a good reason to deny the purchaser’s ITC claim. However, if the Revenue cancels the supplier’s registration retrospectively, it should not invalidate the purchaser’s ITC claim if the purchaser is able to prove genuineness of the transaction. And if purchaser can establish that at the time of transaction it inquired into and verified that the supplier was validly registered. 

While the Calcutta High Court in both the above-mentioned cases has taken a favorable approach towards petitioners, I suggest that the Revenue needs to be made accountable in a more meaningful manner for treating ITC claims in a casual manner. In both the above cases, the Revenue dismissed ITC claims without taking into consideration the documents presented by the purchaser. Not considering relevant documents is a cavalier way of judging ITC eligibility and gives the impression of pre-judging purchaser’s claims. The High Court directing the Revenue to consider the case afresh is a necessary but not sufficient reprimand to prevent occurrence of similar instances in the future. Courts need to consider if, in certain cases, erring officials should pay damages for not performing their statutory duties.          

[1] M/s Gargo Traders v The Joint Commissioner, Commercial Taxes WPA 1009 of 2022, available at https://www.livelaw.in/pdf_upload/ms-gargo-traders-476282.pdf

[2] M/S Lgw Industries Ltd & Ors v Union of India & Ors, Available at https://indiankanoon.org/doc/109803748/

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