Machinery Provisions Brook No Vested Rights: Supreme Court Holds that Amendment to Section 153C, IT Act, 1961 is Retrospective

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On 6 April 2023, a Division Bench of the Supreme Court in Vikram Bhatia case[1], held that the amendment to Section 153C, IT Act, 1961 was retrospective in nature and would be applicable to searches conducted even before the date of amendment, i.e., 1.06.2015. The Supreme Court’s decision is another example of its deferential approach to the State in tax matters. The impugned case also highlights that the Revenue Department is not hesitant to argue that an amendment is retrospective on the pretext that the pre-amendment provision was interpreted contrary to legislative intent. An argument that the Supreme Court and other Courts have not scrutinized with necessary rigor.  

Background to Amendment of Section 153C, IT Act, 1961 

The relevant portion of Section 153C, as it stood before its amendment vide the Finance Act, 2015, provided that where the assessing officer is satisfied that any money, bullion, jewellery or other valuable article or thing or books of account or documents seized or requisitioned belongs or belong to a person other a person against whom search is conducted, then such books of account or assets shall be handed over to the assessing officer having jurisdiction over the other person. And the other person may be issued notice and their income reassessed under Section 153-A, IT Act, 1961.   

The Delhi High Court in Pepsico India case[2] held that the words ‘belongs or belong to’ should not be confused with ‘relates to or refers to’. In this case, the Delhi High Court noted that if  the purchaser’s premises are searched and a registered sale deed is seized, it cannot be said that it ‘belongs to’ to the vendor just because his name is mentioned in the document. (para 16) The Delhi High Court’s interpretation meant that the assessing officer could only initiate proceedings against a third party if the incriminating material found during search proceedings ‘belonged to’ the third party and not merely ‘related to’ the third party. The Revenue Department’s stance was that the Delhi High Court’s interpretation did not align with the intent of the provision. Though the Revenue Department’s disagreement with the Delhi High Court’s ruling could also stem from the fact that its interpretation set a high threshold for the assessing officer to invoke Section 153C against a third party. 

To overcome the effect of the Delhi High Court’s judgment, Finance Act, 2015 amended Section 153C, and Section 153C(1)(b) now states that where the assessing officer is satisfied that any books of account or documents, seized or requisitioned, pertains or pertain to, or any information contained therein, relates to, person other than against whom search is conducted, then such books of account or assets shall be handed over to the assessing officer having jurisdiction having jurisdiction over the other person. And the other person may be issued notice and their income reassessed under Section 153-A, IT Act, 1961.   

The scope of Section 153C was clearly widened, the threshold to proceed against a third party was lowered with the phrase ‘belongs to’ being replaced with ‘relates to’. The expression ‘belongs to’ though continued to qualify money, bullion, jewellery or other valuable article or thing mentioned in Section 153C(1)(a).  

Interpretation of Amended Section 153C, IT Act, 1961      

The Supreme Court heard appeals from common judgment[3] of the Gujarat High Court pronounced in April 2019. The Gujarat High Court observed that though Section 153C was a machinery provision, but by virtue of its amendment new class of assessees were brought within the scope of the provision and it affected their substantive rights and resultantly Section 153C could not be interpreted to be a mere procedural/machinery provision. Further, the Gujarat High Court reasoned that the amended provision was much wider in scope as compared to its predecessor. The Gujarat High Court concluded that amendment to Section 153C shall not be given a retrospective effect, and no notices could be issued post-amendment of Section 153C for searches conducted before its amendment, i.e., 1.06.2015. Against this decision of the Gujarat High Court, the Supreme Court heard appeals filed by the Revenue Department.    

The precise question before the Supreme Court was whether amendment to Section 153C, IT Act, 1961 was retrospective? And whether Section 153C, IT Act, 1961 would be applicable to searches conducted before 1.06.2015, i.e., the date before amendment. The Supreme Court answered in the affirmative. There are several limitations in the Supreme Court’s approach, let me highlight a few below. 

First, the Supreme Court accepted the State’s argument that the amendment to Section 153C, IT Act, 1961 was ‘a case of substitution of the words by way of amendment’. (para 10.1) The Supreme Court cited numerous precedents to the effect without really explaining the basis on which it was deciphering that the amendment in question was a ‘substitution’ amendment. In fact, the Supreme Court adopted a broad brush approach and neglected to observe that even post-amendment Section 153C(1)(a) retains the phrase ‘belongs to’. Section 153C(1), after amendment vide the Finance Act, 2015 states that: 

Nothwithstanding anything contained in section 139, section 147, section 148, section 149, section 151 and section 153, where the Assessing Office is satisfied that,-

  • any money, bullion, jewellery or other valuable article or thing, seized or requistioned, belongs to; or 
  • any books of account or documents, seized or requistioned, pertains or pertain to, or any information contained therein, relates to,   

a person other than the person referred to in section 153A, … (emphasis added) 

Clearly, both phrases ‘belong to’ and ‘relates to’ have been retained in Section 153C. And the afore cited portion of Section 153C provides reasonable basis to argue that the Finance Act, 2015 did not effectuate a ‘substitution amendment’ of Section 153C. The amendment only lowers the threshold to initiate the proceedings against the third person for certain kinds of documents and does not fully substitute the pre-amended provision.    

Second, the Supreme Court reasoned that Section 153C, IT Act, 1961 was a machinery provision and it must be construed to give effect to the purpose and object of the statute. (para 10.6) The Supreme Court then cited a host of decisions to support its stance that machinery provisions must be construed liberally. However, the decisions cited by the Supreme Court such as Calcutta Knitwears case[4], hold that machinery provisions should be interpreted liberally to give meaning to the charging provision. The judicial precedents on this issue do not state that machinery provisions should be interpreted liberally per se. Neither do any of the precedents cited by the Supreme Court state that legislative intent needs to be placed at the highest pedestal without weighing it against other factors such as taxpayer rights. 

Third, the Supreme Court rejected the assessee’s contention that Section 153C, IT Act, 1961 should not be interpreted to have retrospective effect since it affected the substantive rights of the third party. The Supreme Court rejected the argument on the ground that the pre-amended Section 153C was also applicable to the third party. While the Supreme Court is right, its statement does not sufficiently appreciate that the threshold to proceed against the third party after amendment to Section 153C was lowered directly affecting the rights of such party. Instead, it stressed that there was legislative intent to proceed against the third party before and after the amendment without delving into the details. Equally, the Supreme Court dismissed the argument that there is presumption against retrospectivity of a statute. The Supreme Court examined the jurisprudence on presumption against/for retrospectivity superficially. At no place in the judgment is there an examination as to why and how the amendment to Section 153C is ‘declaratory’ and why presumption against its retrospectivity is inapplicable.            

Fourth, which overlays with the second point, is that the Supreme Court laid considerable emphasis on legislative intent. Despite immense emphasis on legislative intent, the Supreme Court did not examine as to why one sub-clause of Section 153C continued to retain ‘belongs to’ after the amendment. And, neither did it refer to any source that helps us understand the original legislative intent or the intent behind amendment to Section 153C. In the absence of such references, legislative intent is a malleable phrase in the hands of any adjudicating authority, and it was used as such in the impugned case.  

Fifth, the Supreme Court stated that the Delhi High Court construed the term ‘belongs’ unduly narrowly and restrictively, but never clarified the precise objection to the High Court’s interpretive approach. Strict interpretation of tax statutes is the default approach of Courts, and deviations from it need to be justified not adherence to it. The Delhi High Court was clear in its judgment that a tax statute must be interpreted strictly and in case of doubt or dispute must be interpreted in favor of the assessee. (para 7) And the Delhi High Court adopted such an approach in construing Section 153C, IT Act, 1961. The Supreme Court never truly explained how adopting such an approach by the Delhi High was an unjust or restrictive interpretation. 

Sixth, the Supreme Court took made an interesting point when it referred to First Proviso to Section 153C. The said Proviso contains a deeming fiction where in case of a third person, the reference to the date of initiation of the search under Section 132 shall be construed as reference to the date of receiving of books of account or documents or assets seized or requisitioned by the assessing officer having jurisdiction over such person. The deeming fiction in the First Proviso moves the date of initiation of search to the date the assessing officer of the third person receives the documents. In the impugned case, while the search took place before 1.06.2015, the assessing officer of the third party received the documents on 25.04.2017 and issued notice to the third party on 04.05.2018. Thus, as per the deeming fiction, the search against the third party was initiated after 1.06.2015. Given these set of facts, it was not unreasonable to suggest that the applicable provision should have been the amended Section 153C. The Supreme Court’s used the First Proviso to support its conclusion (para 10.3) But the Supreme Court did not delve into the implication of the First Proviso adequately vis-à-vis its repeated emphasis on legislative intent. The Supreme Court observed that not allowing the Revenue Department to proceed against the third party ‘solely on the ground that the search was conducted prior to the amendment’ would frustrate the object and purpose of the amendment. In arriving at this conclusion, the Supreme Court did not satisfactorily examine how the deeming fiction in the First Proviso to Section 153C makes the actual date of initiation of search irrelevant for the third person.   

Conclusion 

The Supreme Court granting the State leeway in tax (and economic) laws is a well-entrenched doctrine in Indian tax jurisprudence. In this case, the Supreme Court used the doctrine impliedly to stamp its approval to an amendment to IT Act, 1961, stating that the amendment was retrospective in effect, without articulating its reasoning in a cogent and defensible manner. While the deeming fiction in the First Proviso to Section 153C lends some support to the Supreme Court’s conclusion, there was need for more robust reasoning to interpret the amendment to be retrospective in nature. The amendment of Section 153C has an appreciable impact on the substantive rights of the third parties. This factor alone was sufficient for the Supreme Court’s conclusion to be based on impeccable reasoning, but we only saw a glimpse of it in the judgment. 

[1] Income Tax Officer v Vikram Sujit Kumar Bhatia 2023 SCC OnLine SC 370. 

[2] Pepsico India Holdings Private Limited v ACIT 2014 SCC OnLine Del 4155. 

[3] Supreme Court, in its judgment, did not specifically state the name of parties and the exact decision. Though one of the Gujarat High Court’s decision decided in 2019 is Anikumar Gopikishan Aggarwal v CIT [2019] 106 taxmann.com 137 (Guj). In this case, the Gujarat High Court decided that amendment to Section 153C, IT Act, 1961 was prospective in nature.  

[4] Commissioner of Income Tax, III v Calcutta Knitwears, Ludhiana (2014) 6 SCC 444. 

Supreme Court Opines on Residence Rule under IT Act, 1961: Traverses Familiar Path

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In a judgment[1] delivered on 10 April 2023, a Division Bench of the Supreme Court opined on the residency principle of companies under Section 6(3)(ii) of IT Act, 1961. While there were a few other issues involved in the case, in this post I will focus on Supreme Court’s treatment of the residency principle of companies and how it missed an opportunity to advance the jurisprudence on this issue. Instead, it merely reproduced the ratio of previous judgments without adding any substantive value. 

Before proceeding, it is important to state that Section 6(3)(ii), IT Act, 1961 was amended in 2017. Pre-amendment, Section 6(3)(ii) stated that a company is said to be resident in India if the control and management of its affairs is situated wholly in India. Post-2017, Section 6(3)(ii) states that a company is said to be resident in India in any previous year if its place of effective management, in that year, is in India. The pre-amendment clause was applicable in the impugned case. The State though argued that to cull the meaning of pre-2017 clause it is important to consider the post-2017 clause, but this argument wasn’t expressly endorsed by the Supreme Court. (para 4.5) 

Facts and Issues 

Assessees in the impugned case were companies registered in Sikkim under the Registration of Companies (Sikkim) Act, 1961. Their business was to act as commercial agents for sale of cardamom and other agricultural products. The case of assessees was that they were residents of Sikkim and conducted their business in Sikkim and were thus governed by Sikkim State Income Tax Manual, 1948 and not IT Act, 1961. The reason the two income tax statutes were in question was because of historical reasons. Sikkim became part of India in April 1975, but all Indian laws were not immediately made applicable to Sikkim. Thus, residents of Sikkim continued to be governed by the Sikkim State Income Tax Manual, 1948. This was until Finance Act, 1989 proposed to make IT Act, 1961 applicable to Sikkim commencing from 1 April 1990. Thus, for the period prior to 1 April 1990, the assessees were foreign companies under IT Act, 1961 and could be considered as Indian residents only if control and management of their affairs was situated wholly in India. The State’s entire case was that the companies satisfied the latter criteria under Section 6(3)(ii), IT Act, 1961.   

The State contended that the assessees were not residents of Sikkim based on the documents obtained from their Delhi-based accountants in a search operation. The accountants were found in possession of book of accounts, signed blank cheques, cheque books, letter heads, rubber seals, and other income documents of the assessees. The State further alleged that the accountants were appointing Directors of the companies and thus the control and management of the assessees was completely from Delhi. 

The issue before the Supreme Court – and one that I focus on in this post – was: should the assessees be considered as residents of Sikkim due to reason of their incorporation in Sikkim or should they be considered as residents of India since they were (allegedly) completely managed and controlled from Delhi?   

Summary of Jurisprudence 

The Supreme Court dutifully cited the precedents that have elaborated on the test to determine the residence of a company not incorporated in India or to determine the control and management of HUF. The leading case on the issue is that of VVRNM Subbaya Chettiar[2], where in determining the residence of HUF under the Income Tax Act, 1922 the Supreme Court opined that ‘control and management’ signifies that the controlling and directive power or the ‘head and brain’ is functioning at a particular place with a certain degree of permanence. And since control and management of a company remains in the hand of a person or group of persons the question to be asked is wherefrom such person or group of persons control the company. Mere activity of a company at a particular place did not create its residence at that place. This test, in short referred to as the ‘substance over form’ test has been endorsed in subsequent decisions as well. For example, in Erin Estate[3] case the Supreme Court observed that the test was a mixed question of law and fact and clarified that what was necessary to show was from where the de facto control and management was exercised in the management of the firm and not the place from where the theoretical or de jure control was exercised. Similarly, in Narottam and Pereira Ltd[4]  the Bombay High Court observed that the authority which controls and manages the employees and servants is the central authority, and the place from where such central authority functions is the residence of the company.     

Expressing its agreement with the above line of jurisprudence, the Supreme Court stated that in the impugned case the Assessing Officer and Commissioner of Income Tax (Appeals) rightly concluded that the control and management of the assessees was with their accountants in Delhi and thus residence was in India. And that the conclusion is aligned with the findings of fact and material on record.  

No Substantial Addition to the Jurisprudence  

Given the set of facts detailed in the judgment, the Supreme Court’s decision seems justifiable. However, it also feels like a missed opportunity as the Supreme Court never really went beyond what was stated in the precedents. The facts offered an opportunity to examine – in some depth – how and if certain situations prove or lend support to the assertion that an assessee is controlled from a place other than its place of incorporation. Was the fact of an accountant possessing all relevant materials and documents of a company sufficient for an irrefutable conclusion that the accountant controlled the company? Or was the additional fact of an accountant appointing and controlling the Directors of a company an equal or more decisive factor? Further, inability to prove that assessees received all their payments in Sikkim and that their rates of commission were astronomical/unrealistic were relied on by the Supreme Court to arrive at its conclusion. But we are left unaware as to which fact was decisive or was it the combination of facts that tilted the case against the assessees. 

One crucial aspect that the Supreme Court did not address clearly was the burden of proof in such cases. It is important to note that the two cases that the Supreme Court cited approvingly, i.e., VVRANM Subbaya Chettiar and Erin Estate cases made their observations in the context of Section 4-A(b), IT Act, 1992 (the predecessor of Section 6(2), IT Act, 1961) where the burden of proof is on assessee to show that the HUF is not a resident of India. And in Erin Estate case it was clearly stated that the onus to rebut the initial presumption is on the assessee. (para 6) While under Section 6(3)(ii), IT Act, 1961, the applicable provision in the impugned case, the initial burden is on the State to show that a company incorporated outside India is wholly managed from India.    

In the impugned case, the petitioners argued that the State had not discharged its onus that the control and management of the company was wholly situated in India. (para 3.14) The Delhi High Court’s judgment which was under appeal had mentioned that once all the materials and documents of the company were discovered in possession of the accountants, the burden was on the assessee to prove that the residence of company was not in India. (para 6.3) Since the Supreme Court did not find any error in the Delhi High Court’s findings on this issue, it stands to reason that the High Court’s view was upheld. Is discovery of important documents of a company from a place other than the place of incorporation/registered office sufficient to shift the burden of proof to assessees? We do not have clear answers.    

The result is that the Supreme Court’s judgment apart from reiterating the substance over form test, added no significant jurisprudential value to the residence test under Section 6(3)(ii) of the IT Act, 1961.    

[1] Mansarovar Commercial Pvt Ltd v Commissioner of Income Tax, Delhi 2023 LiveLaw (SC) 291. 

[2] V.V.R.N.M. Subbayya v CIT, Madras AIR 1951 SC 101. 

[3] Erin Estate v CIT AIR 1958 SC 779. 

[4] Narottam and Pereira Ltd v CIT, Bombay City 1953 23 ITR 454 Bom. 

Onerous Burden: Supreme Court Restricts ITC Claims under KVAT Act, 2003

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A Division Bench of the Supreme Court on 13 March 2023, decided a group of appeals under the Karnataka Value Added Tax Act, 2003 (‘KVAT Act, 2003’) and denied Input Tax Credit (‘ITC’) to purchasers.[1] While the dispute was under KVAT Act, 2003, the interpretive approach adopted by the Supreme Court could have some repercussions for taxpayers under GST. The aim of this post is to understand the Supreme Court’s interpretive approach and examine its relevance to GST. 

Introduction

The Supreme Court decided a group of appeals involving purchasers who were claiming ITC under the KVAT Act, 2003. The State denied purchasers ITC on the ground the sellers fell in either one of the following categories: they had filed ‘Nil’ returns, or were de-registered, or did not file returns or denied their turnover and refused to file taxes. The Karnataka High Court allowed purchasers to claim ITC on the ground that they had made payments to the sellers through account payee cheques and had produced relevant invoices to prove genuineness of the sale transactions. (para 4.1) The State filed appeal against the High Court’s decision in the Supreme Court.  

Conditions to Claim ITC 

The central provision in the dispute was Section 70(1), KVAT Act, 2003 which provides that: 

For the purposes of payment or assessment of tax or any claim to input tax under this Act, the burden of proving that any transaction of a dealer is not liable to tax, or any claim to deduction of input tax is correct, shall lie on such dealer. 

The State argued that purchasers cannot claim to have successfully discharged the burden under Section 70, KVAT Act, 2003 by merely proving financial transfers/transactions through invoices and cheques. To discharge their burden, the State argued, the purchasers are also required to establish actual movement of goods. The State further argued that the High Court had not appreciated the fact that the State cannot recover taxes from a seller who files ‘Nil’ returns. The purchasers, on the other hand, argued that once they produce genuine invoices and evidence of payments through cheques, it should be considered sufficient discharge of their burden under Section 70, KVAT Act, 2003. And that the statute and the relevant Rules under KVAT Rules, 2005 – Rules 27 and 29 – did not require a purchaser to submit any additional documents to claim ITC. The purchasers further argued that if the seller had not paid the tax, then the State needs to recover the tax from the seller and not block their ITC. 

Interpreting Burden of Proof under Section 70 of KVAT Act, 2003  

The narrow issue that the Supreme Court was required to decide was if proving movement of goods was necessary for a purchaser to discharge the burden under Section 70, KVAT Act, 2003. The Supreme Court answered in the affirmative and held that proving genuineness of the transaction and physical movement of goods is sine qua non to claim ITC and the same can only be proved through name and address of the selling dealer, details of the vehicle, acknowledgement of the delivery of goods, etc. The Supreme Court held that:

If the purchasing dealer/s fails/fail to establish and prove the said important aspect of physical movement of the goods alleged to have been purchased by it/them from the concerned dealers and on which the ITC have been claimed, the Assessing Officer is absolutely justified in rejecting such ITC claim. (para 10)

Supreme Court repeated the same observation thrice in its judgment to emphasise that unless the purchaser proves movement of goods, the genuineness of the transaction could not be established and in its absence the burden of proof under Section 70, KVAT Act, 2003 was not discharged by the purchasers. In my view, the Supreme Court repeatedly states its conclusion in the judgment to disguise it as reasoning. There is no explanation by the Supreme Court as to why proving movement of goods should be read as an essential condition under Section 70, KVAT Act, 2003. If the relevant statutory provisions and Rules did not impose an express condition on the purchaser to prove movement of goods and the same was being read into the provisions, there was an additional need for the Supreme Court to provide its reasons. Merely repeating the same conclusions do not reinforce an interpretation or make it more defensible.  

In this case, the relevant provision(s) were silent if the purchaser needs to prove the movement of goods. The facts elaborated in the judgment do not clearly establish if interpreting the additional condition of movement of goods was necessary. The State argued that the additional condition was necessary to prove genuineness of the transaction and the Supreme Court certainly went beyond the text of the statutory provisions and relevant Rules to accept the State’s argument. Perhaps the Supreme Court in trying to prevent tax evasion and fraudulent ITC claims did not give sufficient thought about the need to protect taxpayer rights. Or maybe the Supreme Court was trying to compensate for an oversight in legislative drafting. Irrespective, the deficient reasoning is palpable in the judgment.        

Attributing Fault, Denying ITC, and Position under GST  

The Karnataka High Court by allowing ITC claims had agreed with the purchaser’s argument – also repeated before the Supreme Court – that they cannot be held liable for seller’s failure to deposit the tax. While the State argued that a purchaser can only claim ITC on the tax paid by the seller, and if the seller does not deposit tax, it is logical to block ITC of the purchaser. GST seeks to address the same issue, i.e., who should be liable for the seller’s failure to deposit tax with the State? Can the State block or reverse ITC of a purchaser because of the seller’s fault? If so, under what circumstances? We do not have clear answers for now.   

One of the conditions to claim ITC is provided under Section 16(2)(c), CGST Act, 2017 which states that no person shall be entitled to ITC in respect of supply of any goods or services or both unless the tax charged in respect of such supply ‘has actually been paid to the Government’ either through cash or utilization of ITC. Thus, seller must deposit the tax for a purchaser to successfully claim ITC. 

Further, after a series of amendments, it is not possible for a purchaser to claim ITC unless the seller has filed their GST returns indicating the supplies on which the purchaser can claim ITC.[2] Linking the ITC claims to seller’s returns certainly seems to make the co-operation of purchaser and seller necessary to claim ITC.  However, in my view, the statutory provisions do not decisively attribute liability in case of seller’s inability or failure to deposit the tax.  

In M/s D.Y. Beathel Enterprises[3], a case decided under Tamil Nadu Goods and Services Tax Act, 2017 (pari materia with CGST Act, 2017), the Madras High Court ‘did not appreciate’, the approach of the Revenue whereby they reversed ITC of the purchaser while not initiating any recovery action against the seller for not depositing the tax. The High Court observed that inquiry against the seller was necessary since the State made claim that there was no movement of goods. The High Court held that if the State does not receive the tax, liability has to be borne by one party – seller or buyer, but it did not specifically state which party must bear the burden. And it remanded the matter back to the Revenue Department directing initiation of fresh inquiry against both the purchaser and seller. 

The Madras High Court’s decision cannot be treated as precedent under GST for all kinds of fact situations and the final word on the issue is yet to be spoken. Also, the High Court did not conclusively attribute liability to one party but directed action against both – purchaser and seller. And if the Supreme Court’s interpretive approach under KVAT, 2003 is any indication, the purchasers are unlikely to find it easy to claim ITC under GST or are likely to get their ITC reversed if the seller defaults or delays filing of their returns or otherwise does not deposit tax with the State. If and when the liability will be attached to purchaser due to the conduct of the seller is currently an open question.        

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

[2] Section 16(2) and Section 38 of CGST Act, 2017 were amended via the Finance Act, 2022 with the result that the purchasing dealer is dependent on the supplier furnishing its GSTR-1. 

[3] M/s D.Y. Beathel Enterprises v State Tax Officer 2021-VIL-308-MAD. 

e-Commerce Operators Constitute a Distinct Category Under GST

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In a notable judgment[1] delivered on 12 April 2023, a Division Bench of the Delhi High Court opined that e-commerce operators (‘ECOs’) are a distinct category under CGST Act, 2017, opening interesting possibilities for future of e-commerce under the aegis of GST. The subject of challenge were two Notifications issued by the Union of India which withdrew GST exemption for passenger transportation services provided by auto-rickshaws mediated by ECOs. However, the same services provided by auto-rickshaws without mediation of ECOs continued to be exempt from GST.  

Arguments

The petitioners – which included Uber India and Pragatisheel Auto Rickshaw Driver Union – based their challenge on the following grounds:

first, the petitioners argued that the impugned Notifications were discriminatory as equally placed service providers were put in an unequal position in contravention of Article 14 of the Constitution. The petitioners argued that giving differential tax treatment to the same services based on the mode through which they were availed – offline versus online – lacked an intelligible differentia and was discriminatory against ECOs; second, the petitioners developed the Article 14 argument indirectly to state that the levy of GST must be based on the service and not on the medium used to avail the service; third, the petitioners argued that merely because ECOs had the (financial) ability to comply with GST obligations could not be a ground to levy tax on services offered via them; fourth, the petitioners argued that levy of GST would increase cost of transportation services provided through ECOs, which in turn would threaten the livelihood of auto rickshaw drivers which violated Article 19(1(g) and Article 21 of the Constitution.

The State argued that the distinction between services mediated by ECOs and without ECOs was valid since the ECOs were able to deploy their technology to provide value-added services to consumers which were not available if a person hailed auto-rickshaws on the roadside. Further, the State emphasised that both service providers were not equally placed: the tax exemption was given to auto-rickshaw drivers was because they possessed limited means to meet GST compliance requirements, while ECOs had the resources to meet such burdens. The State further defended the Notifications on the ground that it possessed wide leeway in enacting tax laws, and it could validly exercise its discretion to levy tax on certain transactions while providing tax exemption to others.   

Decision

The Delhi High Court agreed with the State and upheld the Notifications as valid and held that they were in consonance with Article 14 of the Constitution. The five core observations of the Delhi High Court are below:

First, based on a combined reading of Section 9(5), Section 24(ix) and Section 52, the Delhi High Court opined that the CGST Act, 2017 itself treats ECOs as a separate category. Section 9(5) provides 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:   

Section 24(ix) requires that it shall be compulsory for every person to register under GST if he supplies goods or services or both through an ECO who is required to collect tax at source under Section 52. And Section 52 in turn provides that every ECO shall collect an amount not exceeding one per cent, of net value of taxable supplies made through it by other suppliers.

The Delhi High Court noted that Section 9(5) gives effect to a deeming fiction that an ECO is considered a supplier even when it is not making the supply, and under Section 52 an ECO is required to collect tax at source ‘even when the individual supplier itself is otherwise exempt from taxation as is evident from Section 24(ix) of the Act of 2017.’ (para 15.2) Though it would have been apposite to make a reference to Section 24(x) too, which prescribes compulsory registration for every ECO required to collect tax at source under Section 52. Based on the above, the High Court concluded that ECOs are a class distinct from individual suppliers. The High Court also referred to other Notifications under which supplies – such as those relating to hotel accommodation – made through ECOs were made taxable while they continued to be exempt if provided without mediation of ECOs.  

Second, as a corollary to the above observation, the Delhi High Court held that ECOs seeking parity with individual auto-rickshaw drivers were seeking equality amongst unequals. The High Court noted that rides booked through ECOs provided value added services such as: auto-rickshaw picking the consumer from his/her doorstep, ability to track the ride, multiple payment options, etc. The High Court highlighted the ability of ECOs to deploy technological and logistical capabilities to conclude that they were not similarly placed as individual suppliers. The High Court observed that while the quality of the physical ride does not differ if an auto-rickshaw is booked through ECO, the latter offered additional services which was a distinguishing factor.   

Third, the Delhi High Court found that the differentiation had a rational nexus with the object of CGST Act, 2017. The High Court endorsed the State’s argument that the object of CGST Act, 2017 was to levy tax on ‘every’ transaction of supply of goods and services. The Delhi High Court interpreting the objective of GST in such wide terms is not based on sound analysis and in fact it unjustly endorses GST as solely a revenue generating legislative instrument, not leaving room for any other policy objective. While a tax law is primarily a revenue generating mechanism, a welfare state does not and should not use it only for the said purpose, as various other policy objectives are also sought to be accomplished via tax laws.     

Fourth, the Delhi High Court rejected the petitioner’s argument that the differentiation was only based on ‘mode’ of booking. The High Court observed, and correctly so, that the ECOs were not merely offering a ‘mode’ of booking. The High Court observed that the relationship of ECOs with both consumers and vendors/drivers was on a principal-to-principal basis. ECOs were charging commission from registered vendors and convenience charges from consumers. And in case of cancellation of rides, refunds, etc. ECOs were in fact stepping into shoes of a service provider and not just acting as an agent of service provider nor were they merely providing a ‘mode’ or a platform for booking the services.  

Fifth, the Delhi High Court negatived petitioner’s argument for continued GST exemption on the ground that the petitioner had no continued right to tax exemption. This was an endorsement of the States’ argument that it had wide leeway to enact tax laws. Also, as per the High Court, there was no constitutional guarantee or statutory entitlement to a continued exemption from payment of tax. While the High Court justified its conclusion by referring to the State’s right to levy tax, it was an inevitable conclusion once the High Court had endorsed the State’s argument that the purpose of CGST Act, 2017 was to levy tax on ‘every’ transaction of supply of goods and services. 

Conclusion

The Delhi High Court’s judgment is on defensible ground in so far as it reasons that ECOs constitute a separate category under CGST Act, 2017, though it could have been better articulated. Nonetheless, the Delhi High Court’s views could be used by the Revenue Department for various purposes: to prevent tax evasion, ensure greater transparency in e-commerce transactions, and otherwise collect revenue on transactions that may not be exigible to GST when undertaken solely via physical mode. See, for example, the following observation of the Delhi High Court:

The intent of Section 9(5) is to plug leaks in collection of GST and therefore, the Respondent is empowered under the said section to consolidate the liability to collect and pay tax for the services supplied through ECO. This is also evident from the provision of Section 52 of the Act of 2017. (para 17.6)

The Delhi High Court’s view that Section 9(5) of CGST Act, 2017 is an anti-tax evasion provision, will further empower the Revenue Department to impose additional obligations on ECOs. Not to mention, it is also helpful to the Revenue Department that the Delhi High Court has noted that ECOs are not comparable with individual suppliers, limiting the success of Article 14-based challenges to such measures.

Lastly, a vital sub-text of the Delhi High Court’s decision is that a taxable person possessing the financial ability to comply with GST obligations can be a valid ground of differentiation in certain circumstances. The State expressly argued that ECOs were subject to GST because they possessed the financial ability to adhere to additional obligations, which was impliedly endorsed by the Court. This opens the possibility for imposing additional GST compliance obligations on certain taxpayers and differentiating them from other taxpayers based on their ability to comply, though the validity and scope of this dictum will be tested in varied fact situations.      

[1] Uber India Systems Private Limited v Union of India 2023 SCC OnLine Del 2216.

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