Delhi High Court

Delhi HC Clarifies Powers of AO Under Section 142(2C), IT Act, 1961 

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In a recent decision[1], the Delhi High Court clarified that the power granted to the Assessing Officer (‘AO’) under Proviso to Section 142(2C), IT Act, 1961 cannot be abdicated to a superior officer. Thus, the decision of the superior officer, even if it was arrived at on the recommendation of AO was not valid. 

Facts 

The brief facts of the case are that the assessee was subjected to a search action under Section 132, IT Act, 1961 on 19.02.2008 and thereafter the AO issued a notice to the assessee under Section 153A. Eleven months later, the AO issued a notice to the assessee seeking a response for conduct of special audit of its affairs in exercise of its powers under Section 142(2A). The objections of the assessee to the notice were rejected and thereafter the Commissioner of Income Tax (‘CIT’) approved the conduct of audit and appointed an auditor and the same was communicated to the assessee. The time frame of 120 days was also fixed for completion of the audit. 

The auditor so appointed thereafter requested for an extension and the request was forwarded by the AO to the Assistant CIT who in turn forwarded it to the CIT. On considering the request, the CIT granted an approval and the AO communicated the extension of time period to the auditors. 

The question before the Delhi High Court was whether the extension of time period for audit was lawfully granted by the CIT under Proviso to Section 142(2C), IT Act, 1961.

Arguments 

Before I summarise the arguments, the two relevant provisions for consideration are: 

Briefly put, Section 142(2A) states that if at any stage of the proceedings the AO is of the opinion that it is necessary to get the accounts of the assessee audited he may with the prior approval of the Principal Chief Commissioner or Chief Commissioner or Commissioner direct the assessee to get the accounts audited by an accountant nominated by the Principal Chief Commissioner or Chief Commissioner or Commissioner. The AO is required to form such an opinion based nature and complexity of accounts, volume of accounts, doubts about correctness of accounts and interests of the revenue. And once the auditor is nominated, the AO shall direct the assessee to get the accounts audited and furnish a report if such audit in the prescribed form duly signed and verified by such accountant and setting forth such particulars as the AO may require. 

Proviso to Section 142(2C) states that:

… the Assessing Officer may, Suo motu, or on an application made in this behalf by the assessee and for any good and sufficient reason, extend the said period by such further period or period as he thinks fit; so, however, that the aggregate of the period originally fixed and the period or periods so extended shall not, in any case, exceed one hundred and eighty days from the date on which the direction under sub-section (2A) is received by the assessee.     

The recommendation for extension of time for the audit was made by CIT once the AO forwarded the auditor’s request letter to the CIT. The Revenue argued that the extension of time period was an administrative act and whatever functions a subordinate authority can perform a superior authority can also undertake on the administrative side. The Revenue further argued that the CIT had the power to appoint an auditor under Section 142(2A) and in doing so it exercises an administrative power. And in extension of the same power, the CIT can also amend the time within which the audit needs to be completed. The Revenue further added that if the prior approval of CIT is needed for appointment of an auditor under Section 142(2A), there is no infirmity in seeking the opinion of CIT for extension of the time for such audit under Proviso to Section 142(2C). The Revenue was trying to read the power to nominate an auditor under Section 142(2A) and the power to grant an extension for audit under Proviso to Section 142(2C) as the same or in a continuum.  

The assessee, on the other hand, disputed that the power was an administrative power and argued that the audit proceedings are part of assessment proceedings which are judicial in nature. The assessee argued that the AO abdicated its powers under Proviso to Section 142(2C) in favor of CIT since AO did not seek approval of CIT for extension of the time but abdicated the entire decision to CIT. Further, it was pointed that the approval of CIT is not needed for extension of time under Proviso to Section 142(2C). The approval is only needed to appoint an auditor under Section 142(2A). The assessee was thus treating both the provisions are independent of each other and the powers so provided as distinct.  

Decision 

The Delhi High Court decided in favor of the assessee by strictly interpreting Proviso to Section 142(2C).  The High Court observed that the Proviso to Section 142(2C) makes it abundantly clear that the AO has the discretion to extend the initial timeframe allotted for submission of the audit report. And it noted that: 

Thus, it is evident from a plain reading of the provisions mentioned above that both the discretion to trigger the process for issuance of a direction to the assessee for getting the accounts audited within a specified timeframe and the extensions, if any, that are granted is that of the AO. Both sub-sections (2A) and (2C) read with the proviso appended to the latter make that abundantly clear. (para 11) 

The Delhi High Court correctly noted per Section 142(2A) the CIT or other authority was only the nominating authority for auditors. The time frame for submission of audit, the details in the audit reports, etc. were all to be decided by the AO. The High Court was categorical in its assertion that Section 142(2A) was ‘AO-centric’, since the AO was performing the dual role of an adjudicator and the inquisitor. (par 13.1)

The Delhi High Court concluded that the facts clearly show that the AO did not exercise its power to extend the timeframe, instead merely transmitted the request for extension to the CIT and made a recommendation which was not in accordance with Proviso to Section 142(2C). The High Court noted that ‘since the legislature vested the discretion to extend the timeframe solely in the AO, he could not have abdicated that function and confined his role to only making a recommendation to the CIT.’ (para 20) 

Finally, the Delhi High Court also agreed with the assesee’s contention that since the appointment of auditor was part of the assessment proceedings, it had civil consequences and it was clearly not an administrative power. Though the High Court did add that the distinction between administrative and quasi-judicial powers has been obliterated since they have civil consequences. 

Conclusion 

The Delhi High Court correctly interpreted the Proviso to Section 142(2C) wherein only the AO has the power to extend the timeframe for the audit though two things are worth mentioning: first, the fact that the AO decides the original time allotted under Section 142(2A) is not expressly provided in the provision though the High Court interpreted it to be so; second, the High Court’s opinion on the distinction between administrative and quasi-judicial powers and the obliteration of their difference is not entirely clear. While on one hand it termed the power as quasi-judicial while on the other hand it seemed to suggest that distinction between both kinds of powers had obliterated, making at least one observation redundant. 

[1] Pr. Commissioner of Income Tax Central v Soul Space Projects Ltd 2023:DHC:8835-DB. 

Delhi High Court Reiterates the Law on Interface of IBC and Tax

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The Delhi High Court in a recent case[1] reiterated the legal position relating to outstanding tax of an entity which has or is undergoing the insolvency process under IBC, 2016. In the impugned case, the Revenue Department claimed that the petitioner owed it taxes despite such the Revenue Department’s claims not being part of the approved resolution plan. The High Court relying on relevant precedents stated that tax claims that were not part of the approved resolution plan stand extinguished and the Revenue Department is also bound by the resolution plan approved under IBC, 2016. 

Facts 

The petitioner, TUF Metallurgical Pvt Ltd, took over the management of the erstwhile corporate debtor in accordance with the terms of the resolution plan which was approved by the NCLT under Section 31(1), IBC, 2016 via order dated 05.11.2019. The public advertisement regarding commencement of the Corporate Insolvency Resolution Process (CIRP) was issued under Section 15, IBC, 2016 stating that the last date for filing of claims was 21.01.2019. But until the said date the Revenue Department did not submit any claim. It was on 12.12.2019 that the Revenue Department passed an order against the petitioner qua Assessment Year 2017-18. The petitioner’s claim was that the tax demand was barred after the approval of resolution plan was rejected by the Revenue Department which issued a Demand Notice and levied a penalty on the petitioner. Against the said order, the petitioner filed a writ petition before the Delhi High Court. 

Arguments 

The arguments of the petitioner and the Revenue Department were straightforward. The petitioners argued that the Revenue Department ignored the legal and factual ramifications which ensued on conclusion of any insolvency process. The petitioner stated that once the resolution plan was approved by the concerned authority, it was not open to the Revenue Department to open stale claims which were settled upon conclusion of the insolvency proceedings. The Revenue Department, on the other hand, argued that it stood on a ‘different footing’ from other creditors and that the tax claims of the Revenue Department would not be affected by the provisions of IBC, 2016. (para 4)

Decision 

Given that the argument of the Revenue Department did not have a legal leg to stand on, the decision of the Delhi High Court did not involve unravelling a complex legal web. The High Court’s conclusion rested on Supreme Court’s observations in Ghanshyam Mishra’s case[2], where the Supreme Court categorically observed that once the resolution plan has been approved by the adjudicating authority under Section 31(1), IBC, 2016, the claims as provided in the resolution plan shall stand frozen and shall be binding on the corporate debtor, its employees, members, Central Government, State Government, guarantors and other stakeholders. It was clarified by the Supreme Court that claims that are not part of the resolution plan shall stand extinguished and no person shall be entitled to initiate or continue proceedings in respect of claims which were not part of the resolution plan. It was further clarified that the said bar also applies to tax due to the Central or State Government. 

The conclusion, based on the findings in Ghanshyam Mishra case is that if the Revenue Department fails to respond to the public advertisement in time, its claims will not be part of the resolution plan. And subsequently, the Revenue Department cannot initiate proceedings in respect of taxes due prior to initiation of insolvency proceedings on the ground that it stands on a different footing than other creditors. Courts and IBC, 2016 do not acknowledge, and rightly so, that the Revenue Department is not bound by terms of the resolution plan. Accordingly, the Delhi High Court in the impugned case allowed the petitioner’s writ petition and set aside the demand and orders by the Revenue Department.     

Conclusion It is indeed a case of unending mystery that why does the Revenue Department does not respond to the public notices relating to commencement of insolvency process on time. And if it for some reason fails to respond to the notices on time, why does it initiate proceedings against the assessees, when the law clearly states that the provisions of IBC, 2016 shall override all other laws,[3] which of course also includes tax legislations. And more specifically, if the Revenue Department’s claim was not part of the approved resolution plan, the claim stands extinguished. The Revenue Department does not stand on a ‘different’ footing from other creditors. The IBC, 2016 certainly does not state so. It is a self-image that the Revenue Department has conjured with no legal basis.    

[1] TUF Metallurgical Pvt Ltd v Union of India & Anr 2023:DHC:8856-DB.

[2] Ghanshyam Mishra & Sons Pvt Ltd v Edelweiss Asset Reconstruction Co Ltd (2021) 9 SCC 657. 

[3] Section 238, IBC, 2016. 

Delhi High Court Holds Explanations 6 and 7 Added to Section 9 in 2015 are Retrospective in Nature

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In a recent decision[1], the Delhi High Court has held that the Explanations 6 and 7 added to Section 9, IT Act, 1961 via Finance Act, 2015 are retrospective in nature despite the amendment not expressly stating so. A brief recall to the Finance Act, 2012 which inter alia amended Section 9 along with adding Explanation 5 to it, to overcome the effect of Supreme Court’s decision in Vodafone International Holdings.[2] The amendment clearly stated that Explanation 5 would have effect w.e.f. 1.04.1962. However, such an express declaration was missing when Explanations 6 and 7 were added in 2015. Nonetheless, the Delhi High Court held that Explanations were retrospective in nature by referring to their legislative history. 

Facts 

The respondent, August Capital PTE Ltd, was a company incorporated in Singapore in 2011. Between January 2013 and March 2014 the respondent invested in equity and preference shares of Accelyst Pte Ltd (‘APL’), incorporated in Singapore. In March 2015 the respondent sold its investment to an Indian company. In the return of the income for the particular Assessment Year, i.e, 2015-16, the respondent showed its income as nil. The respondent was issued a showcause notice as to why its income from the sale of shares should not be taxed in India. The respondent’s explanation was that it had only acquired 0.05% of ordinary share capital and 2.93% of preference share capital and had no rights of management and control concerning the affairs of APL and thus the capital gains arising out of the transfer of shares was not taxable in India. 

The Assessing Officer, Dispute Resolution Panel decided in favor of the Revenue Department wherein the respondent’s taxable income was pegged at a little more than Rs 36 crores. The tribunal ruled in favor of the respondent and directed deletion of the income and against the tribunal’s decision, the Revenue filed an appeal before the Delhi High Court. 

The respondent was sought to be taxed under Explanation 5 that was added to Section 9, IT Act, 1961 via the Finance Act, 2012. Explanation 5 added via Finance Act, 2012 with retrospective effect stated that:

            … an asset or a capital asset being any share or interest in a company or entity registered or incorporated outside India shall be deemed to be and shall always be deemed to have been situated in India, if the share or interest derives, directly or indirectly, its value substantially from the assets located in India;     

The above Explanation was unambiguously added to tax Vodafone like transactions. However, immediately after its insertion there were specific concerns about the uncertain nature of the terms ‘share and interest’ and ‘substantially’. A Committee chaired by Mr. Parthsarthy Shome recommended that the term ‘substantially’ used in Explanation 5 be defined precisely to avoid interpretive difficulties. The narrow concern was that Explanation 5 may also include within its scope small investors wherein even if a single share of a company is transferred – and such company derived its value substantially from assets located in India – it would result in taxable gains under the Explanation 5. 

Explanations 6 and 7 were added to address the above concerns and effectively provided a benefit to small investors. For example, Explanation 6 states that for the purpose of this clause, it is hereby declared that the share of interest, referred to in Explanation 5 shall be deemed to derive its value substantially from the assets (whether tangible or intangible) located in India, if, on the specified date, the value of the assets exceeds the amount of ten crore rupees and represents at least fifty per cent of the value of all the assets owned by the company or entity, as the case may be. A minimum threshold was prescribed to indirectly define the term ‘substantially’ used in Explanation 5.  

Similarly, Explanation 7 inter alia states that for the purposes of this clause no income shall be deemed to accrue or arise to a non-resident from transfer, outside India, of any share of, or interest in, a company or an entity, registered or incorporated outside India referred to in Explanation 5 if the such company or entity directly owns the assets situated in India at any time in the twelve months preceding the date of transfer, neither holds the rights of management or control in relation to such company or entity, nor holds voting power or share capital or interest exceeding five per cent of the total voting power. 

Arguments and Decision

The respondent in the reply to showcause notice had clearly stated that it had no control and management rights in APL and further argued before the Delhi High Court in the same vein. The respondents argued that the Explanations 6 and 7 should have retrospective effect since Section 9(1)(i) read with Explanations 4,5,6, and 7 form a complete code. They referred to the context and reason for introductions of Explanations 6 and 7 and argued that the reason for introduction of these Explanations was to cure the unintended effect of Explanation 5 and given this context, Explanations 6 and 7 should also be given a retrospective effect even if Finance Act, 2015 did not expressly state that these Explanations would have retrospective effect. 

The Revenue, on the other hand, argued that Explanations 6 and 7 brought a substantial change in the law and were not merely clarificatory amendments. And added that even a clarificatory amendment need not necessarily have a retrospective effect. 

The Delhi High Court cited the Shome Committee recommendations and the text of Finance Minister’s speech while explaining the introduction of Explanations 6 and 7. Both these sources led to the straightforward conclusion that the Explanations 6 and 7 were added to cure the limitations of Explanation 5, and thus the Delhi High Court concluded that the insertion of Explanations 6 and 7 was a curative step to cure the vague expressions used in Explanation 5. The High Court noted that: 

The argument advanced on behalf of the appellant/revenue, shorn of gloss, boils down to the fact that the insertion of Explanations 6 and 7 via FA 2015 was to take effect from 01.04.2016 and could only be treated as a prospective amendment. The argument advanced in support of this plea was that Explanations 6 and 7 brought about a substantive amendment in Section 9(1)(i) of the Act. In our view, this submission is misconceived because Explanations 6 and 7 alone would have no meaning if they were not read along with Explanation 5. Therefore, if Explanations 6 and 7 have to be read along with Explanation 5, which concededly operates from 01.04.1962, they would have to be construed as clarificatory and curative. (para 20)

The Delhi High Court reasoned that the legislature took recourse to the mischief rule else Explanation 5 offered no legislative guidance to the assessing officer and was in danger of being struck down as arbitrary. The High Court concluded that though the Finance Act, 2016 stated that the Explanations 6 and 7 were to take effect from 01.04.2016, the legislative history provides authority to conclude that they could be treated as retrospective. 

Conclusion The Delhi High Court relied almost solely on legislative history and context of the introduction of Explanations 6 and 7 to Section 9 to hold that the Explanations had a retrospective effect. This is novel territory because the Finance Act, 2015 clearly does not state that the Explanations 6 and 7 will have retrospective effect. Alternately, one could also argue that the Delhi High Court adopted holistic approach in interpreting the effect of Explanations 6 and 7. It is undoubtedly true from the legislative history, as the High Court cited, that the Explanations 6 and 7 were intended to overcome the shortcomings of Explanation 5. And as standalone, Explanations 6 and 7 do not contain much substance. Thus, if Explanations 6 and 7 are to be read in tandem with Explanation 5, there is little reason to suggest that only Explanation 5 should have a retrospective effect while Explanations 6 and 7 operate prospectively.   

[1] The Commissioner of Income Tax, International Taxation-I v Augustus Capital Pte Ltd 2023:DHC:8521-DB. 

[2] Vodafone International Holdings B.V. v Union of India & Anr (2012) 1 SCR 573. 

High Court Quashes Tax Notice Citing ‘Clean Slate’ Principle under IBC, 2016

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In a recent judgment, the Delhi High Court[1] emphasised and reiterated the ‘clean slate’ principle under the Insolvency and Bankruptcy Code, 2016 (‘IBC, 2016’). The High Court held that the notices issued by the Revenue Department after the Resolution Plan had been approved by the National Company Law Tribunal (‘NCLT’) were bad in law. The clean slate principle, as per the High Court, does not admit of any exceptions for the Revenue Department and the tax dues have to be paid as per the Resolution Plan, else they the tax claims will be considered as extinguished.  

Facts 

The Revenue Department’s impugned notice dated 28.08.2018 called upon Tata Steel Ltd, petitioner, to deposit tax for the assessment years 2001-02, 2009-10, 2010-11, and 2013-14. Via the same notice the petitioner was also asked to justify as to why a penalty under Section 221(1), IT Act, 1961 should not be levied. The petitioner challenged the notice broadly on the ground that the notices were issued after the approval of the Resolution Plan by the NCLT and fell within the ambit of ‘clean slate’ principle. In other words, once the Resolution Plan had been approved by the NCLT, all creditors were bound by the terms of the Resolution Plan and the Revenue Department could not claim an exception from the said principle. 

The arguments advanced on behalf of the petitioner also mentioned that the Revenue Department was an operational creditor and tax due to it was operational debt within the meaning of Sections 5(20) and 5(21), IBC, 2016. And the claims that were made by the Revenue Department were the subject matter of the Resolution Plan while those claims that were not part of the Resolution Plan were extinguished and could not be recovered. And since the claim relating to penalty was not lodged by the Revenue Department before the Resolution Professional, it was not provided in the Resolution Plan and thus could not be recovered from the petitioner. 

Delhi High Court Decides 

The Delhi High Court enlisted the timeline of the Revenue Department’s claims and the insolvency process via which the petitioner became the successor entity to Bhushan Steel. The Delhi High Court noted the dates on which various assessment orders and other orders were passed by the CIT(Appeals) and held that it was clear that the demands for the Assessment Years in question were certainly outstanding on the date the Resolution Plan was approved. The High Court noted that for the Assessment Years 2009-10, 2010-11, and 2013-14 the claims were certainly filed by the Revenue Department before the Resolution Professional. While for the Assessment Year 2001-02 and claims for penalty there was a failure to lodge the relevant claim. In view of these facts, the High Court observed that the failure to lodge the claim within the prescribed time framework cannot result in such claims being placed on a better footing compared to other claims that were considered while finalizing the Resolution Plan. 

The Delhi High Court correctly concluded that the demand qua Assessment Year 2001-02 which was communicated via an additional notice after approval of the Resolution Plan ordinarily would stand extinguished under IBC, 2016. However, since an appeal for the Assessment Year 2001-02 was pending before the Supreme Court, the High Court concluded that recoveries for the said Assessment Year would have to be made as per the decision in that appeal. (paras 26 and 32.1) 

The Delhi High Court reiterated that qua claims of the Revenue Department filed before the Resolution Professional, i.e., before finalizing the Resolution Plan, they could only be satisfied as per the terms of the Resolution Plan. The Delhi High Court observed: 

Notwithstanding the aforesaid argument advanced on behalf of the revenue, we are of the opinion that dues payable to creditors, including statutory creditors, for the periods which precede the date when the RP is approved, can only be paid as per the terms contained in the RP. (para 27) 

Thus, if claims were filed by the Revenue Department after the approval of the Resolution Plan, they could not be satisfied since they were presumed to have been extinguished as per the clean slate principle. Though it is important to note here that the said claims should be pending when the proceedings under IBC, 2016 are initiated. Thus, to the extent the pending claims were lodged before the Insolvency Professional and are incorporated in the Resolution Plan approved by NCLT they will be satisfied in the terms incorporated in the said plan; for pending claims that were not incorporated they stand extinguished.    

IBC, 2016 Overrides IT Act, 1961 

The Delhi High Court also noted, in no ambiguous terms, that IBC, 2016 overrides IT Act, 1961. The fact that IBC, 2016 overrides IT Act, 1961 is a straightforward conclusion when one reads Section 238, IBC, 2016 as it states that the provisions of this law shall have effect notwithstanding anything contained in any other law for the time being in force, which by a reasonable interpretation also includes IT Act, 1961. Clarifying the same, the Delhi High Court observed that: 

Thus, where matters covered by the 2016 Code are concerned [including insolvency resolution of corporate persons] if provisions contained therein are inconsistent with other statutes, including the 1961 Act, it shall override such laws. If such an approach is not adopted, it will undermine the entire object and purpose with which the Legislature enacted the 2016 Code. (para 29) 

Conclusion 

The Delhi High Court’s two observations that: first, pending tax claims against a company which underwent the insolvency process under IBC, 2016 can only be recovered as per the Resolution Plan; second, that IBC, 2016 overrides all other laws including IT Act, 1961 seem obvious and straightforward in hindsight. However, the aggressiveness of the Revenue Department to seek its claims despite the law saying otherwise requires that the law be laid in clear terms and perhaps repeatedly to thwart such tax claims that can cast a shadow on an insolvency process that seeks to revive a debt-laden company.   

[1] Tata Steel v Deputy Commissioner of Income Tax 2023: DHC: 7855 – DB. 

Delhi High Court Allows IGST Refund to Vodafone

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In a recent judgment[1], the Delhi High Court ordered the Revenue Department to refund Integrated Goods and Services Tax (‘IGST’) claimed by the petitioners in respect of telecommunication services rendered by them to Foreign Telecom Operators (‘FTO’). Petitioners had entered into agreements with FTOs whereby they provided connectivity services to inbound subscribers of the latter. However, the Revenue Department rejected their refund claim on the ground that the services provided by petitioners did not amount to export of services. The High Court held otherwise.    

Facts 

Petitioners had entered into agreements with FTOs wherein the former agreed to provide connectivity services to subscribers of the latter who were in India/inbound subscribers. There was no privity of contract between the petitioners and subscribers of FTOs, the payments for connectivity services were made by subscribers to FTOs who, in turn, made payments to petitioners as per the terms of the agreement. 

The Revenue Department rejected petitioner’s claims for refund on two grounds: first, that the petitioners filed their claim for refund under Section 54 beyond the limitation period; second, the services provided by petitioners did not amount to export of services since the services were provided to inbound subscribers who were present in India and services were consumed in India. The petitioners, on the other hand, contended that they entered into agreements with FTOs and provided services to the FTOs. The FTOs, in turn, provided services to inbound subscribers. Thus, the services provided by petitioners to FTOs amounted to export of services since the FTOs were located outside India and the place of supply of services was outside India.  

Delhi High Court did not delve deeply into the issue of whether the petitioner’s claim was filed after the period of limitation. This is because the period of limitation was extended by the Central Board of Indirect Taxes and Customs via a Notification dated 05.07.2022. Thus, the only issue that the High Court had to engage with was whether services in question constituted export of services within the meaning of Section 2(6), IGST Act, 2017. 

Delhi High Court Decides, Relies on Precedent  

Section 2(6), IGST Act, 2017 defines ‘export of services’ and states as follows: 

            “export of services” means the supply of any service when, – 

  • The supplier of service is located in India; 
  • The recipient of service is located outside India; 
  • The place of supply of service is outside India; 
  • The payment for such service has been received by the supplier of service in convertible foreign exchange; [or in Indian rupees wherever permitted by the Reserve Bank of India]; and 
  • The supplier of service and recipient of service are not merely establishments of a distinct person in accordance with Explanation 1 in section 8; 

(emphasis added)

In the impugned case, the petitioner’s argument was that the recipient of service were FTOs, located outside India while the Revenue’s case that the recipient of service was the inbound subscriber who received the connectivity service due to an agreement between the petitioner and FTO. Since the Revenue was arguing that the inbound subscriber was the recipient, it by extension contended that place of service was in India. Thus, the services provided by the petitioner was not export of services and not entitled to a refund. 

The Delhi High Court instead of adjudicating on facts as to whether the inbound subscriber could be legitimately treated as a recipient of the petitioner’s service, cited the definition of export of services under Rule 6A, Service Tax Rules, 1994 which is similar to Section 2(6), IGST Act, 2017. It then relied on Verizon Communication case[2], to state that the said case covers the issue in the impugned case based on which the Revenue Department has granted refunds to predecessor of the petitioner and thus it allowed the petitioner to claim refunds in the impugned case as well. 

Precedent of Verizon Communication Case  

The Delhi High Court had considered the issue in detail in Verizon Communication case, where similar facts involved domestic telecom service providers, Verizon India and Verizon US. Verizon India had entered into a Master Supply Agreement with Verizon US for rendering connectivity services for the purpose of data transfer. Verizon India had filed for refund of taxes paid on its input on the ground that its output service to Verizon US, i.e., business support service, constituted as an export of service. The Delhi High Court agreed with Verizon India and in allowing its claim for refund, observed that: 

The position does not change merely because the subscribers to the telephone services of Verizon US or its US based customers ‘use’ the services provided by Verizon India. Indeed in the telecom sector, operators have network sharing and roaming arrangements with other telecom service providers whose services they engage to provide service to the former’s subscribers. Yet, the ‘recipient’ of the service is determined by the contract between the parties and by reference to (a) who has the contractual right to receive the services; and (b) who is responsible for the payment for the services provided (i.e., the service recipient). This essential difference has been lost sight of by the Department. In the present case there is no privity of contract between Verizon India and the customers of Verizon US. Such customers may be the ‘users’ of the services provided by Verizon India but are not its recipients. (para 46)

The distinction between the ‘user’ of services and ‘recipient’ of services proved to be crucial in the Verizon Communication case, and the Delhi High Court in the impugned case relied on the same. 

Conclusion 

The distinction between the user of services and recipient of services has been articulated in various cases, only for the said controversy to rear its head again before the Courts. In the impugned case, there was little reason, on substantive grounds, for the Revenue Department to deny refund to the petitioners. Courts, for example, have clearly that the customer’s customer is not your customer and that if a service is provided to a third party at the behest of your customer, the recipient is the customer and not the third party.[3] In the impugned case, this was squarely applicable as the inbound subscribers were not the recipients of services by petitioners, but it was the FTOs. Thus, the service provided by the petitioners to FTOs constituted as export of services entitling them to refund of IGST. 

[1] Vodafone Idea Limited v Union of India & Others 2023: DHC: 7468-DB. 

[2] Verizon Communication India Pvt Ltd v Assistant Commissioner of Service Tax, Delhi-III 2018 (8) GSTL 32. 

[3] See Vodafone Essar South Limited v CCE, Bangalore (Adn). Available at: https://indiankanoon.org/doc/193357462/ (Accessed on 30 October 2023).  

Delhi High Court Orders Refund of Illegally Collected GST

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

Facts 

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

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

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

Delhi High Court Relies on M/s Cosmol Energy Case

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

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

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

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

Conclusion 

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

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

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

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

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

Facts 

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

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

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

            Where a proper officer under the State Goods and Services Tax Act or the Union Territory Goods and Services Tax Act has initiated any proceedings on a subject matter, no proceedings shall be initiated by the proper officer under this Act on the same subject matter. 

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

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

High Court Decides Against the Petitioner 

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

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

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

Conclusion 

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

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

CA Firm Cannot Invoke MSME Act Against the Income Tax Department

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

Introduction 

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

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

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

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

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

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

High Court Decides Against the CA Firm 

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

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

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

Conclusion 

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

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

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

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Introduction

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

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

Bail Refused 

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

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

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

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

Conclusion 

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

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

Delhi High Court Delineates the Scope of Section 67, CGST Act, 2017

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In a recent judgment[1], the Delhi High Court clarified scope and power of the Revenue officials under Section 67, CGST Act, 2017. The High Court adopted a purposive interpretation of the provision to state that the Revenue’s power to seize things cannot be interpreted liberally. Instead, the word ‘things’ used in Section 67 needs to be interpreted by applying the principle of ejusdem generis. And also in interpreting Section 67 it was important to note that it was not a machinery provision for recovery of tax. 

Introduction

The petitioner approached the Delhi High Court praying that the Revenue Department release silver bars, mobile phones and currency seized from its premises. The primary arguments of the petitioner for release of the aforesaid things were: first, that the notice issued under Section 74, CGST Act, 2017 and the demand raised therein did not refer to any of the aforementioned things; second, that since no notice was issued within six months of the seizure of goods, the seized goods were liable to be restored. 

Before delving into the observations of the Delhi High Court, it is important to cite the two relevant sub-sections of Section 67. Section 67(2), CGST Act, 2017 states as follows: 

Where the proper officer, not below the rank of Joint Commissioner, either pursuant to an inspection carried out under sub-section (1) or otherwise, has reasons to believe that any goods liable to confiscation or any documents or books or things, which in his opinion shall be used for or relevant to any proceedings under this Act, are secreted in any place, he may authorise in writing any other officer of central tax to search and seize or may himself search and seize such goods, documents or books or things: 

Provided that where it is not practicable to seize any such goods, the proper officer, or any officer authorised by him, may serve on the owner or the custodian of the goods an order that he shall not remove, part with, or otherwise deal with the goods except with the previous permission of such officer: 

Provided further that the documents or books or things so seized shall be retained by such officer only for so long as may be necessary for their examination and for any inquiry or proceedings under this Act. (emphasis added)

And Section 67(7), CGST Act, 2017 states as follows: 

Where any goods are seized under sub-section (2) and no notice in respect thereof is given within six months of the seizure of the goods, the goods shall be returned to the person from whose possession they were seized: Provided that the period of six months may, on sufficient cause being shown, be extended by the proper officer for a further period not exceeding six months. 

Decoding Section 67, CGST Act, 2017 

The Delhi High Court observed that Section 67(2) makes it amply clear that only those goods can be seized which are liable for confiscation. Thus, confiscation of documents or books or things is permissible if in the opinion of proper officer they shall be useful or relevant to any proceedings under the Act. The High Court then opined that it would not be apposite to construe the term ‘things’ mutually exclusive from the term ‘goods’ used in Section 67(2) and the term goods relates to goods which are subject matter of supplies that are taxable under the Act. As per the High Court: 

The word ‘goods’ as defined under Sub-section (52) of Section 2 of the Act is in wide terms, but the said term as used in Section 67 of the Act, is qualified with the condition of being liable for confiscation. Thus, only those goods, which are subject matter of or are suspected to be subject matter of evasion of tax. (Para 34) 

The second category – ‘documents or books or things’ – are liable for confiscation only if the proper officer believes that they are useful or relevant to any proceedings under this Act. The latter requirement is clear and express under Section 67, but the question that required adjudication was the scope of the term ‘things’ and by extension the width of the Revenue’s power of seizure. The Delhi High Court adopted a prudent interpretive approach and observed that: 

It is clear from the Scheme of Section 67 of the Act that the word ‘things’ is required to be read, ejusdem generis, with the preceding words ‘documents’ and ‘books’. It is apparent that the legislative intent of using a wide term such as ‘things’ is to include all material that may be informative or contain information, which may be useful for or relevant to any proceedings under the Act. (para 46) 

The Delhi High Court observed that ‘things’ would include devices, computers, etc. that may be used for storing information that may be useful or relevant to the proceedings. The High Court refused the Revenue’s contention that the term ‘things’ should be interpreted to include anything that may or may not be relevant to the proceedings under the Act. There are three distinct reasons for the High Court’s restrictive interpretation of the term ‘things’: first, the rule of ejusdem generis; second, the context of Section 67(2) that requires the proper officer to only confiscate things that are relevant or useful for proceedings under the Act; third, in the High Court’s own words: 

It is necessary to bear in mind that power of search and seizure is a drastic power; it is invasive of the rights of a taxpayer and his private space. Conferring of unguided or unbridled power of this nature would fall foul of the constitutional guarantees. It necessarily follows that such power must be read as circumscribed by the guidelines that qualify the exercise of such power, and the intended purpose for which it has been granted. (para 47)

The purposive interpretation of Section 67 led the Delhi High Court to conclude that even if the petitioner could not provide any evidence of purchase of silver bars or account for the cash in his possession, the same is not liable to be seized under Section 67(2), CGST Act, 2017. The High Court observed that seizure of unaccounted wealth is covered by the Income Tax Act, 1961. While Section 67 is merely a compliance provision aimed to aid the proceedings under the CGST Act, 2017 and the legislative intent behind Section 67 is clear: it does not permit seizure of currency or valuable assets merely on the ground that they represent unaccounted wealth.          

Conclusion         

The Delhi High Court’s impugned judgment is a good example of careful, strict, and purposive interpretation of the provisions of a tax statute. The provision in question – Section 67, CGST Act, 2017 – provides expansive and intrusive powers to the revenue officers to seize goods and other relevant documents, and it was crucial to underline the said powers are not without limits. The High Court carefully underscored the intent of the provision, its context and the limitations in-built in the provision to clearly decide that the confiscatory and seizure powers need to be exercised with proper caution and not in an unbridled manner. The judgment, if adhered to in true spirit, will be effective in reigning the Revenue’s certain adversarial and intrusive actions that tend to cross the statutory limits.  

[1] Deepak Khandelwal v Commissioner of CGST, Delhi West & Anr (2023) 8 TMI 1263. 

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