Bombay High Court

Tea is an Agricultural Produce: Bombay High Court Rules

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In a recent decision[1], the Bombay High Court ruled that tea qualifies as an agricultural produce warehousing services in relation to it are exempt from GST as specified in Notification No. 12 of 2017. The writ was filed by the petitioner against rulings of advance and appellate advance ruling authorities which held that tea which underwent process of blending/mixing ceased to be an agricultural produce. The High Court also made a pertinent observation about the scope of a CBIC Circular and whether it can dilute a statutory Notification. 

Facts 

The petitioner was licensed for carrying the warehouse business under the Bombay Warehouses Act, 1959. The petitioner had let one if its warehouse to M/s Unilever India Export Ltd (‘Unilever’). Unilever would procure tea at public auctions and directly from manufacturers and would undertake blending and packing of the tea at the petitioner’s warehouse. The petitioner was of the view that tea was an agricultural produce under Clause 2(d) of the Notification No. 12 of 2017 and thus warehousing services provided to such a product were exempt form GST as specified under Serial No. 54(e) of the said Notification. 

The relevant portions of the Notification No. 12 of 2017 state that: 

Clause 2(d):

“agricultural produce” means any produce out of cultivation of plants and rearing of all life forms of animals, except the rearing of horses, for food, fibre, fuel, raw material or other similar products, on which either no further processing is done or such processing is done as is usually done by a cultivator or producer which does not alter its essential characteristics but makes it marketable for primary market;” 

And, Serial No. 54(e) of the Notification No. 12 of 2017 exempts from GST the loading, unloading, packing, storage or warehousing of agricultural produce. 

Reading both the provisions together suggests that warehousing services related to agricultural produce were exempt from GST. The petitioner’s primary contention was that manufacturing and packaging of tea undertaken by Unilever did not alter the essential characteristics of tea and were undertaken to make it fit for human consumption and marketable. It was further argued that every agricultural product undergoes some treatment to make it fit for human consumption, save it from perishing and to make it fit for transportation. The ‘minimal’ processes undertaken by Unilever, as per the petitioner, did not change the nature of tea and it retained the character of an agricultural produce. The Revenue, on the other hand, argued that the kind of processes undertaken by Unilever required plant and machinery and cannot be categorized as minimal processes undertaken to make tea fit for primary market. And that tea ceased to an agricultural produce after undergoing the processes undertaken by Unilever.  

High Court Relies on Supreme Court Decision

The Bombay High Court, in determining the nature of processes undertaken by Unilever and their effect on tea relied cited D.S. Bist and Sons case [2] (which was relied on heavily by the petitioners) where it was held that tea leaf that underwent the process of withering, roasting, crushing and fermentation continued to be an agricultural produce since the process was to ensure that the flavor and color of tea leaves was brought out, but tea still retained its essential characteristics. The High Court held that the facts and observations in D.S. Bist and Sons case should have persuaded the advance ruling authorities and appellate advance ruling authorities to have come to a similar conclusion. (para 26) As per the High Court tea, an agricultural produce, retained its essential characteristics even after the processes undertaken on it by Unilever. The High Court observed: 

In so far as the impugned orders are concerned, on a perusal of the orders passed by the AAR the emphasis appears to be more on the issue that the process by which the tea leaves are dried which results in emergence of a manufactured product, and therefore, tea ceases to be an agricultural produce. In our opinion, such reasoning would in fact go contrary to the decisions of the Supreme Court as noted above for the reason that the essential characteristic of the tea being an ‘agricultural produce’ would not stand extinguish by mere processing and packing in whatever form. (para 31)

Circular Cannot Go Beyond Statutory Notification 

Another issue that the Bombay High Court addressed in its judgment was the interplay and effect of a Circular on the contents of a statutory Notification. The Revenue contended that their stance that tea that underwent the processes of fermentation, etc. was not an agricultural produce was in accordance with a CBIC Circular issued on 15 November 2017. The High Court, however held that a Circular cannot whittle down or scuttle an Exemption Notification. (para 29) What was the basis of High Court’s opinion? As per the High Court the Exemption Notification No. 12 of 2017 was issued in exercise of power under Section 11, CGST, Act, 2017 wherein the Government can grant exemption from tax on satisfaction in public interest and on recommendations of the GST Council. Thus, the clarification issued in Circular dated 15 November 2017 cannot amend a statutory Notification so as to take tea as an agricultural produce from the ambit of exemption. There is a precedent[3] to this effect, but the underlying premise of the High Court’s opinion is interesting in the context of GST. The Circulars issued by CBIC, admittedly in exercise of its administrative powers, often issue clarifications or state its interpretations of various clauses contained in a statutory Notification, i.e., a Notification issued in exercise of powers under a statutory provision. The High Court’s opinion on the scope of such Circulars will be tested in future as well to determine if a Circular is merely ‘interpreting’ a Notification and issuing a ‘clarification’ or does the Circular go beyond what the Notification states. In the impugned case, the Bombay High Court correctly held it to be the latter. However, it will be a tricky exercise and results are likely to be determined by facts of each case, but the High Court has opened doors for an examination of the scope of what a Circular can state in the context of GST. 

Conclusion The High Court’s observations in the impugned case are welcome and provide clarity on two crucial issues: the scope of the term agricultural produce and the scope of a Circular in terms of what kind of clarifications and interpretive clarities it can provide. Both these facets are likely to occupy judicial attention in the future as well and the dust is far from settled. However, we have a welcome decision that can become a reference point for future disputes. 

[1] Nutan Warehousing Company Pvt Ltd v The Commissioner, Central Tax, Pune – II, 2023: BHC-AS: 37052: DB. 

[2] Commissioner of Sales Tax, Lucknow v D.S. Bist and Sons, Nainital (1979) 4 SCC 741. 

[3] Sandur Micro. Circuits, Ltd v Commissioner of Central Excise, Belgaum (2008) 14 SCC 336. 

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

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

Facts 

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

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

Petitioner’s Argument 

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

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

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

Bombay High Court Decides 

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

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

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

Conclusion 

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

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

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

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

Facts 

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

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

High Court Decides 

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

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

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

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

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

Bombay HC Allows Taxpayer to Claim Benefit of DTVVA, 2020

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

Facts 

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

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

High Court Adjudicates

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

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

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

Conclusion

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

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

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

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

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

Facts 

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

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

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

Bombay High Court Favors the Petitioner 

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

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

Conclusion 

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

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

Bombay High Court Strikes Down FAQ under Vivad se Vishwas Act, 2020

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In a recent judgment[1], the Bombay High Court rejected an interpretation adopted by the Revenue Department which was prejudicial to the assessee. The case concerned answer to a Frequently Asked Question (‘FAQ’) which the High Court struck down as not in accordance with the object of Direct Tax Vivad se Vishwas Act, 2020, a beneficial legislation for assessees.  

Facts 

Assessee had filed an appeal before ITAT under Section 253, IT Act, 1961 on 30 September 2014 which was dismissed on 20 May 2016. The assessee filed a Miscellaneous Application (‘MA 1’) on 17 September 2016 seeking adjudication on grounds 3 and 4 which remained undecided by the ITAT. The ITAT passed an order on 14 May 2019 modifying its earlier order which was given effect to by the Deputy Commissioner of Income Tax. The petitioner then preferred another Miscellaneous Application (‘MA 2’) seeking adjudication of ground 4 which still remained undecided. MA 2 remained pending at the time of filing of petition by the assessee before the Bombay High Court.  

On 17 March 2020, Direct Tax Vivad se Vishwas Act, 2020 (DTVVA, 2020) was passed and petitioner on 30 January 2021 made an application to seek its benefit. However, the petitioner’s application was rejected on the ground that it was not eligible to avail the benefit under DTVVA, 2020.  

Arguments 

The assessee argued that its application under DTVVA, 2020 could not be rejected since MA 2 was pending adjudication at the time of application, and a pending appeal was one of the eligibility conditions under DTVVA, 2020. And the State could not argue that MA 2 was not maintainable; the assessee was in litigation at the time of introduction of DTVVA, 2020 and eligible to receive its benefits. The assessee pressed home the point that MA 2 was filed since one of the grounds  (ground 4 )remained undecided by ITAT, and MA 1 was held to be admissible for want of adjudication on ground 3 and ground 4. Thus, there was no reason to dismiss MA 2 was being infructuous or barred due to res judicata. 

State’s order rejecting the assessee’s application stated that the assessee had applied under DTVVA, 2020 against MA 2 which was filed against the dismissed appeal. The State reasoned that an examination of ITAT’s order reveals that the assessee’s appeal was not dismissed in limine as ITAT had discussed the issue involved. Thus, as per the State, assessee was not eligible to apply for DTVVA, 2020.

Bombay High Court Find in Favor of Assessee

The Bombay High Court noted that MA 2 is pending as a matter of record. And that the High Court cannot proceed on the basis that MA 2 might be rejected. Instead, the High Court observed that it cannot be ignored that MA 1 was decided in favor of the assessee. Thus, MA 2 should be treated as an application that is pending for adjudication on ground 4 which remained undecided in appeal. Having decided this crucial fact, the High Court examined the ‘FAQ’ which formed the basis of the State’s rejection stated above. 

FAQ 61 issued under the DTVVA, 2020 clarifying eligibility criteria stated that: 

61. Whether Miscellaneous Application (MA) pending as on 31st January 2020 will also be covered by the Scheme? 

Ans. If the MA pending on 31st January 2020 is in respect of an appeal which was dismissed in limine (before 31st January 2020) such MA is eligible. Disputed tax will be computed with reference to the appeal which was dismissed. (emphasis added)

The Bombay High Court referred to the objective of DTVVA, 2020, i.e., to reduce pending income tax disputes, generate timely revenue for the Government, and provide certainty to taxpayers. In light of this objective, the High Court noted that the qualifying words ‘in limine’ introduced in FAQ 61 were contrary to the object and reasons of DTVVA, 2020. The High Court cited a slew of precedents to highlight that a beneficial statute must be interpreted to provide the complete remedy which the statute seeks to provide. In view of the same, it struck down FAQ 61 reasoning that DTVVA, 2020 was a beneficial statute and addition of the words ‘in limine’ was adverse to the interests of the assessee and contrary to the objects of DTVVA, 2020. 

Conclusion 

The Bombay High Court’s approach in the impugned judgment is an example of a court carefully examining the issue at hand, and using the relevant jurisprudence to adjudicate in favor of the assessee by providing adequate reasoning. The State’s denial to the assessee’s application under DTVVA, 2020 was based on thin grounds and the High Court was correct in scrutinising the order and striking down the edifice of the State’s order.    

[1] Oerlikon Balzers Coating India (P) Ltd v Union of India 2023 SCC OnLine Bom 1295. 

Interplay of Section 153 and Section 144C: Bombay High Court Provides Clarity

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In a recent judgment[1], the Bombay High Court clarified that the period of limitation for passing an assessment order will be governed by Section 153, IT Act, 1961 and not by the time period envisaged under Section 144C, even if the latter was a self-contained code.  

Introduction 

The assessee was a company incorporated in Cayman Islands and headquartered in Dubai. It was engaged in the business of shallow water drilling for clients in the oil and gas industry. The assessee filed regularly filed its income returns under the IT Act, 1961 and the impugned judgment related to the Assessment Year 2004-05.  

Arguments 

The assessee argued that Section 153, IT Act, 1961 was the outermost limit for passing a final assessment order under the IT Act, 1961. The assessee stated that under Section 153(3), IT Act, 1961 read with Notification No. 10/2021, the time to pass the final assessment order in the impugned case 30 September 2021. While the draft assessment order was issued on 28 September 2021 and the final order was passed in October 2021. In view of the Revenue’s inability to pass the final assessment order before the deadline, the proceedings against the assessee should be held to be barred by limitation.   

Revenue, on the other hand, argued that time limit prescribed under Section 153(3) would be in addition to the time prescribed under Section 144C and that the time period prescribed under Section 144C does not get subsumed under Section 153(3). The Revenue made a few additional arguments to support its stance that Section 144C operated independently of Section 153(3). First, the Revenue stated that there was no time limit under Section 144C, the Dispute Resolution Panel (‘DRP’) was required to issue an order within 9 months and the Assessing Officer had one month to pass final assessment based on directions of the DRP. Second, the Revenue argued that Section 144C was a self-contained code and thus acquired primacy over Section 153(3). Third, an extension of the second, the Revenue stated that Section 144C being a special provision should override the general provision, i.e., Section 153(3). 

The Revenue also challenged correctness of the Madras High Court’s decision in Roca Bathroom case[2]where Section 153 was held to be the controlling provision for time limit of passing assessment orders. In the said case, the Madras High Court had held that the time limits prescribed under Section 144C and Section 153 are mutually and that the time limits refer not just to draft orders but also to final assessment orders. The Revenue argued that such an interpretation makes a key machinery provision unworkable and would make several orders passed after disposal of objections of DRP untenable.       

Decision 

The Bombay High Court examined the scheme of Section 144C and noted that Section 144C (13) excluded the application of Section 153. However, the exclusion was specific, i.e., the assessee need not be heard at time of passing of final assessment order and kicked only when the AO had to pass the final assessment order as per the directions of DRP. Otherwise, the High Court observed that the entire proceedings must be completed within the prescribed time provided in Section 153.

The Bombay High Court agreed with the State’s categorization of Section 144C as a self-contained code and that it constituted DRP as an expert body to investigate intricate matters concerning valuation expeditiously. The High Court agreed that while specific timelines have been drawn within the framework of Section 144C to fast-track a special kind of assessment, it ‘cannot be considered to mean that overall time limits prescribed have been given a go by in the process.’ (para 23)

The Bombay High Court further reasoned that where the legislature intended to provide exceptions, they were specifically included and provided in Section 153. It referred to various sub-sections and the Explanation to Section 153 to underline that in certain instances, the limitation period had been extended but that was not the case for Section 144C. In fact, the High Court noted, that if the argument is accepted that the AO is unfettered under Section 144C, it would run counter to the objective of Section 144C wherein time limits have been setup at every step. The High Court observed that ‘it does not stand to reason that proceedings on remand to the AO may be done at leisure sans the imposition of any time limit at all.’ (para 26)

Conclusion

The Bombay High Court rightly concluded that the time limit prescribed under Section 153 will prevail over and above the assessment time limit prescribed under Section 144C. The AO needs to follow the procedure under Section 144C, but the procedure must commence and be concluded within period of 12 months prescribed under Section 153(3). It is an important judgment by the High Court, even though it reiterates the observations made by the Calcutta High Court in the Roca Bathroom case. Especially, it is important to highlight that while the High Court agreed with the categorization of Section 144C as a self-contained code, it did not use that general categorisation to hold that it overrides Section 153 per se, and, in fact, adopted a more nuanced and cogent reading of Section 153.  

[1] Shelf Drilling Ron Tappmeyer Limited v Assistant Commissioner of Income Tax, available at https://taxguru.in/wp-content/uploads/2023/08/Shelf-Drilling-Ron-Tappmeyer-Limited-Vs-ACIT-Bombay-High-Court.pdf

[2] Commissioner of Income Tax v Roca Bathroom Products (P) Ltd (2022) 140 taxmann.com 304 (Madras). 

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). 

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