Delhi High Court

Compounding Fee is Not Tax

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In a recent judgment[1], the Delhi High Court clarified that merely because appellants paid a compounding fee after initiation of legal proceedings against them, does not permit the State to retain the said amount if there was no legal provision under which the appellants were obligated to make the payment. The High Court clarified that in order to successfully claim the refund of compounding fee, it was not necessary for the appellants to have stated that it was paid under protest.   

Introduction 

The appellants imported fuel dispensing equipment for use at retail outlets in the country but without obtaining registration under the Legal Metrology Act, 2009. The respondents – Director of Legal Metrology and Others – took the view that appellants did not comply with the statutory requirements under Legal Metrology Act, 2009 and initiated proceedings against the appellants. During proceedings, the appellants paid compounding fee to the respondents. 

On examining the issue as to whether appellants need to obtain registration before importing the equipment, a Single Judge of the Delhi High Court held that the appellant was not liable to register under the Legal Metrology Act, 2009. However, the Judge refused to accept the appellant’s plea for refund of the compounding fee reasoning that the payment was not made under coercion, but voluntarily. The judge observed, that at the time of making payment, the appellants did not communicate that they were making the payment under coercion or under protest. 

Decision 

The Division Bench of the Delhi High Court held that it was unable to sustain the conclusions reached by the Single Judge. As per the Division Bench, once it was clear that the appellants were not liable under the Legal Metrology Act, 2009 it was difficult to accept the proposition that they should be held liable to pay the compounding fee.  

The Division Bench concluded: 

We also deem it pertinent to observe that the respondents being “State” cannot be countenanced to retain monies which are otherwise not payable by the appellants under the provisions of the 2009 Act. When viewed in that light, it is evident that the issue of deposit without demur or protest could not have justified the retention of compounding fee. (para 8)

It is evident that the retention of money by the Metrology Department – termed as State – by the Division Bench by viewed as illegal. The Division Bench was clear in stating that a compounding fee was not in the nature of a tax or duty but a payment made to avoid the rigours of a legal proceeding. Payment of compounding fee should not be understood mean acceptance of violation of the statutory provisions or an acceptance of guilt. 

The Division Bench adopted a comparatively more coherent approach in ordering the refund of the compounding fee. If the action of respondents was held to be not violative of the impugned statute, there was little to no reason for disallowing their request to refund the compounding fee paid to thwart legal proceedings initiated under the said statute. Merely not stating that the compounding fee was paid under protest was not a valid ground to deny the refund of compounding fee, and the Single Judge Bench erred in denying the refund.   

[1] Indian Oil Corporation Ltd v Director of Legal Metrology & Ors 2023 LiveLaw (Del) 654. 

Supreme Court Interprets Section 153A, IT Act, 1961 Correctly & Provides ‘Remedy’ to the Revenue  

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Introduction 

On 24 April 2023, a Division Bench of the Supreme Court in Abhisar Buildwell case[1] interpreted the scope of Section 153A, IT Act, 1961. The specific question before the Supreme Court was: whether the jurisdiction of Assessing Officer to make assessment in respect of completed/unabated assessment is confined only to incriminating material found during a search or requisition under Sections 132 and 132A? The Supreme Court – relying on the Delhi High Court’s judgment – narrowly interpreted the Assessing Officer’s jurisdiction and answered the above question in the affirmative. The Supreme Court held that the Assessing Officer could not make additions to the completed assessment based on other material on record if no incriminating material was found during the search or requisition.     

Arguments About the Scope of Section 153A

To begin with, it is important to understand the elements of Section 153A, IT Act, 1961 which required consideration by the Supreme Court.  

Section 153A(1) states that in case of a person where a search is initiated under Section 132 or books of account, other documents or any assets are requisitioned under Section 132A, the Assessing Officer shall issue a notice to the person requiring him to furnish a return for the six assessment years immediately preceding the preceding year in which the search is conducted or requisition is made. And the Assessing Officer shall assess or reassess the total income in respect of each assessment year falling within such six assessment years. 

The Second Proviso, is worth citing in full: 

Provided further that assessment or reassessment, if any, relating to any assessment year falling within the period of six assessment years and for the relevant assessment year or years referred to in this sub-section pending on the date of initiation of the search under section 132 or making of requisition under section 132A, as the case may be, shall abate :   (emphasis added)

The Second Proviso cited above mentions that only the pending assessments or reassessments on the date of initiation of search or requisition shall stand abated. 

The State contended that even if no incriminating material is found during the search or requisition then additions to completed assessments could also be made by the Assessing Officer in respect of other material on record. The primary basis of the State’s argument was that the mandate of the Assessing Officer under Section 153A is with respect to ‘total income’ read with Section 4, IT Act, 1961, i.e., the charging provision under the statute which provides for assessment of total income. And if the Assessing Officer is allowed to only assess ‘partial income’ it would not be in accordance with the IT Act, 1961. Accordingly, the State argued that the Assessing Officer is authorized to make additions to completed assessments based on other material even if no new material was found during the search or requisition.  

The assessees, on the other hand, argued for a contextual interpretation of the term ‘income’ and Section 153A, IT Act, 1961. The assesses argued that the purpose of Section 153A is to discover information through search or requisition which could not ordinarily discovered. And, if no incriminating material is found after such search or requisition there is no justification for opening completed assessments by using other material on record. The assessees also had the strength of various High Court judgments which had taken a similar view.        

Delhi High Court’s Interpretation Approved by the Supreme Court

Various High Courts had expressed differing opinions on the issue before the Supreme Court. One such judgment which was the subject of appeal was the Delhi High Court’s judgment in Kabul Chawla case.[2] The Delhi High Court through a well-reasoned judgment in Kabul Chawla case, had laid down the scope of Section 153A in clear terms. The High Court had observed that once search under Section 132 takes place, a notice is mandatorily issued to the person requiring him to file returns for six assessment years preceding the previous year. And the Assessing Officer has the power to assess or reassess the total income for each of the said six years in separate assessment orders for six years. It added that while Section 153A does not expressly state that additions to assessment should be strictly based on evidence found during search, it does not mean that assessment ‘can be arbitrary or made without any relevance or nexus with the seized material. Obviously an assessment has to be made under this Section only on the basis of seized material.’ (para 37) The Delhi High Court had clarified that in the absence of any incriminating material, the abated/completed assessment can be reiterated and the abated assessment or reassessment can be made under Section 153A. 

The Delhi High Court had made it amply clear that completed assessments could be interfered by the Assessing Officer under Section 153A only on the basis of incriminating material found during search or requisition and not by relying on material already disclosed or known in the course of original assessment. 

The Supreme Court expressed ‘complete agreement’ with the observations of the Delhi High Court. (para 8) In doing so, the Supreme Court added its own reasons:  

First, it adopted a purposive interpretation of Section 153A to observe that the very purpose of search and seizure – which triggers Section 153A – is detection of undisclosed income through extraordinary powers. Thus, the foundation for search assessments under Section 153A is incriminating material discovered during such search or seizure.  

Second, it again referred to legislative intent behind the Second Proviso and observed that only pending assessments/reassessments for the six assessment years abate on initiation of search or requisition. Also referred to Section 153A(2) which states that if any proceeding or any order of assessment or reassessment under Section 153A(1) is annulled in appeal or any legal proceeding, then the assessment or reassessment which abated under the Second Proviso shall revive. Referring to the afore-stated provisions, it observed ‘the intention does not seem to be to re-open the completed/unabated assessments, unless any incriminating material is found with respect to concerned assessment year falling within last six years preceding the search.’ (para 11)  

Third, it stated that if the Revenue Department’s argument that completed assessments can be re-opened even if no incriminating material is found during the search or seizure, is accepted it would lead to two assessments order which was impermissible under the law and would make the Second Proviso redundant. This observation is pertinent because Section 153A replaced the previous provision Section 158BA to do away with the concept of parallel assessments for undisclosed income. And, under Section 153A the undisclosed income is taxed at the same rate as the rest of income, as opposed to the previous regime where undisclosed income was tax at a higher rate thereby necessitating two assessments. And IT Act, 1961 no longer recognises the concept of parallel assessments.     

‘Remedy’ to the Revenue 

The Delhi High Court’s interpretation of Section 153A, IT Act, 1961 was supported by adequate and articulate reasoning and the Supreme Court’s decision to that extent was also well-reasoned. The Supreme Court, however, made another observation that ‘the Revenue cannot be left with no remedy.’ (para 11) The Supreme Court added that even in case of block assessments under Section 153A where no incriminating material is found during a search, ‘the power of the Revenue to have the reassessment under section 147/148 of the Act has to be saved ..’. (para 11) Subject to the fulfilment of the conditions under Sections 147/148, the Supreme Court expressly saved the Revenue Department’s power to re-open assessments. The need to save the powers under Section 147/148 was not necessary and provide a ‘remedy’ to the Revenue seems like a balancing act on the part of the Supreme Court. And not the least, the concept of not providing a remedy to Revenue when its interpretation of the impugned provision was not upheld has no jurisprudential basis.   

Anyhow the implications of the Supreme Court’s these observations are unclear, the Revenue Department filed a Miscellaneous Application, which inter alia sough clarification of the Supreme Court’s judgment vis-à-vis Section 150, IT Act, 1961 which deals with limitation period for assessments/reassessments. At the time of writing, the Supreme Court has directed the Revenue Department to file a review petition. The review will lead to another set of arguments because of the Supreme Court’s unnecessary ‘remedy’. 

[1] Principal CIT v Abhisar Buildwell P. Ltd 2023 SCC OnLine SC 481. 

[2] CIT, Central-III v Kabul Chawla (2015) 61 taxmann.com 412 (Delhi).  

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

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

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

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

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

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

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

Interpretation of Amended Section 153C, IT Act, 1961      

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

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

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

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

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

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

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

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

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

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

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

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

Conclusion 

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

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

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

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

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

e-Commerce Operators Constitute a Distinct Category Under GST

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

Arguments

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

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

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

Decision

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

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

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

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

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

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

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

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

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

Conclusion

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

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

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

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

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

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