GST

Section 16, CGST Act is Constitutional: Kerala HC

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The Kerala High Court recently[1] dismissed a taxpayer’s challenge that Section 16(2)(c) and Rule 36(4) of CGST Rules, 2017 were violative of Article 14 and unconstitutional. The High Court ruled that the taxpayer’s challenge was vague, and the impugned provisions did not suffer from the vice of manifest arbitrariness and were not unconstitutional.   

Facts 

The brief facts of the case are: taxpayer was denied ITC under the CGST and SGST Acts on the ground of difference in GSTR 2A and GSTR 3B returns. The Assessing authority levied interest, penalty, and initiated recovery proceedings against the taxpayer. The taxpayer challenged the assessment order and the constitutional validity of Section 16(2)(c) and Rule 36(4).

Section 16(2)(c) states that no registered person shall be entitled to ITC in respect of any supply of goods or services unless the tax charged in respect of such supply has been actually paid to the Government either in cash or through utilization of ITC admissible in respect of such supply. Rule 36(4) states that ITC to be availed by a registered person in respect of invoices or debit notes the details of which have not been furnished by suppliers in GSTR-1 shall not exceed 5% of eligible ITC available in respect of invoices or debit notes the details of which have been furnished by the suppliers. 

Since the judgment didn’t mention in detail the arguments of the parties, it is difficult to decipher the exact ground on which the constitutional challenge was made by the taxpayer. One can only glean the arguments from the Kerala High Court’s reasoning and its conclusion.  

Decision 

The Kerala High Court articulated four reasons to dismiss the taxpayer’s challenge. 

First, the High Court noted that ‘it is settled’ that ITC is a benefit/concession and not a right extended to a dealer. And that ITC can only be claimed by a taxpayer as per the conditions prescribed in the statute. (para 5) And that the State in exercise of its rule making powers can provide additional conditions for availing the concession. This view aligns with recent decisions wherein ITC has been labelled as a concession thereby providing the State ample, if not infinite space, to impose conditions on taxpayers before they can successfully claim ITC.  

Second, the High Court relied on the doctrine of deference to tax statutes, encoded in Indian tax jurisprudence and is dutifully invoked by Courts without scrutinizing the merits of the doctrine. In the impugned case, the High Court noted there was need for judicial restraint before interfering with tax statutes unless the statute was manifestly unjust or glaringly unconstitutional. (para 10)

Third, the High Court rejected the taxpayer’s claims that Section 16(2)(c) and Rule 36(4) of CGST Rules, 2017 were violative of Article 14 on the ground that the argument was vague. The High Court further noted that neither did the provisions discriminate between the purchaser and seller nor were they manifestly arbitrary and were not contrary to Article 14. 

Fourth, the High Court relied on the facts to observe that the taxpayer did not produce tax invoice as required by Section 16 despite various opportunities, nor did it appear for personal hearing and equally did not discharge the burden on a dealer as per Section 155, CGST Act, 2017. Section 155 states that where any person claims that he is eligible for ITC, the burden of proving such claim shall lie on such person. Since the taxpayer did not meet the prescribed conditions under Section 16 and did not provide the documents, the High Court was correct in holding that the taxpayer did not discharge the burden under Section 155. 

Conclusion 

The Kerala High Court’s decision is defensible and cogent when it invokes Section 155 and non-fulfilment of the conditions of Section 16. However, the High Court is on tricky ground when it claims that ‘it is settled’ ITC is a concession. Undoubtedly, some of recent decisions have taken a similar view, but it is ordinarily incumbent on a Court to acknowledge the divergent interpretations and that ITC has not always been interpreted to be a concession. Similarly, the invocation of doctrine of deference to tax statutes, while well-established, needs to be scrutinized as to its relevance if not its merits in constitutional challenges to tax statutes. Surely, there is room to suggest that the doctrine is not holy grail in all constitutional challenges to tax statutes. The High Court was remiss in not paying adequate attention to the aforementioned facets of the reasoning.               

[1] Nahasshukoor v Asst Commr, Second Circle, SGST, Colletorate 2023:KER:69725. 

Jharkhand HC Allows State Authorities to Continue Proceedings, Rejects DGGI’S Arguments on Nationwide Fake ITC Fraud

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The Jharkhand High Court recently adjudicated a writ petition where the petitioner had argued that only the authority which had initiated the entire process of investigation can complete the modalities and any subsequent actions by other authorities need to be quashed. The High Court interpreted Section 6, CGST Act, 2017 and the relevant notifications to adjudicate in favor of the petitioner. 

Facts 

The petitioner was the proprietor of M/s Manish Trading, Ranchi carrying on the business of iron, steel and cement. An inspection was carried out by the Intelligence Branch of the Jharkkhand State GST Dept and subsequently the petitioner was made to make certain deposits. Therafter, the Preventive Branch of CGST, Ranchi issued a notice to the petitioner directing reversal of ITC due to purchases made from certain non-existent entities. It was followed by a search carried out by DGGI, Central Tax which seized certain items from the petitioner and prepared a Panchnama to that effect. The petitioner was sent various summons. 

The petitioner approached the Jharkhand High Court with the prayer that it had been issued summons by 3 different authorities and that only the authority which had initiated the proceeding prior in point in time shall be authorized to carry out the proceedings. The petitioner relied on the Notification and subsequent clarificationissued by CBIC, wherein the latter stated that: 

            It is accordingly clarified that the officers of both Central tax and State tax authorized to initiate intelligence based enforcement action on the entire taxpayer’s base irrespective of the administrative assignment of the taxpayer to any authority. The authority which initiates such action is empowered to complete the entire process of investigation, issuance of SCN, adjudication, recovery, filing of appeal etc. arising out of such action. (para 3)

The petitioner elaborated that the said Notification had been issued under Section 6(2)(b), CGST Act, 2017 and that it was amply clear that the investigation had been initiated by inspecting team of State GST and only it should be authorized to carry forward the proceedings. 

The respondents including DGGI argued that the investigation were initiated by them as part of the investigations against the fake invoice gangs based in Noida. The respondents argued that the investigations had revealed various fake entities that were involved in claiming fraudulent ITC and the petitioner was part of a large scale fraud spread across various States. And that DGGI was better suited to conduct the investigation since it had an all India jurisdiction and normally State GST transfers such cases to DGGI. 

DGGI’s argument was thus two-fold: not only did it initiate the investigation but also it was more competent to handle the investigation since the case had inter-State ramifications. 

Decision 

The Jharkhand High Court noted that Section 6(2)(b) and the clarification issued under it made it amply clear that the chain of a particular event and the investigation carried out at behest of the Department are interrelated. The High Court observed that even if it accepted that the DGGI initiated an independent investigation based on information received in Noida:

… in that event also, we are at loss to say that the DGGI is raising a question about credibility and competence of the State GST Authorities, in carrying out the investigation concerning wrong/inadmissible availment of Input Tax Credit, inasmuch as, the officers of the DGGI does not enjoy any special power or privilege in comparison with the officers of the State GST Authorities. (para 14) 

Based on the above, the Jharkhand High Court concluded that since the investigation by State authorities were prior in time, including the search and seizure operation and since all proceedings are inter-related, the State authorities shall continue with the proceedings. 

Conclusion 

The impugned decision reveals the administrative complexity of a nationwide dual levy. Empowering officials both the Central and State level to administer a single tax in India is unprecedented and some administrative tensions are bound to arise. And this isn’t the first nor the last instance of jurisdictional tussles. The Jharkhand High Court did well to rely only on the relevant statutory provisions and notifications/clarifications to arrive at its decision. Whether it is the best decision from an administrative standpoint is not easy to tell. At least not yet.  

An Ambiguous Circular: Is Electricity Indirectly under GST?

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On 31.10.2023, CBIC issued a Circular clarifying the applicability of GST on certain services. The Circular, inter alia, clarified one issue which is the focus of this article. The issue, as framed by the Circular, was: Whether GST is applicable on reimbursement of electricity charges received by real estate companies, malls, airport operators etc. from their lessees/occupants? The Circular instead of clarifying the issue has raised further questions about the immediate GST implications on the transactions and is an example of the larger issue afflicting Indian tax policy: making rather than clarifying law through Circulars.  

Separate Invoices Are Immaterial 

The first transaction that the Circular mentions is supply of electricity by real estate companies, airports, malls, etc. to their occupants. The Circular mentions that if electricity is supplied as part of a composite supply then it shall be taxed accordingly. Section 2(30), CGST Act, 2017 defines composite supply to mean a supply made to a taxable person consisting of two or more taxable supplies of goods or services, which are naturally bundled together and supplied in conjunction with each other, in the ordinary course of business, one of which is a principal supply. And that the applicable GST rate is that of the principal supply. The first issue is that electrical energy is exempt from GST under Notification No. 2/2017 – Central Tax (Rate) (See Serial No. 104). Since electrical energy is exempt, it cannot, in my view, be included in a composite supply since the essential condition for a composite supply is that it should include two taxable supplies. An exempt supply cannot indirectly be transformed into a taxable supply by a Circular by treating it as an ancillary of a composite supply.         

The Circular curiously adds that even if electricity is billed separately, the supply will constitute a composite supply and shall be billed at the rate of principal supply, i.e., renting of immovable property. This position is again questionable, especially if one accounts for a previous Circular issued in June 2018. Serial No. 2 of the Circular answered the question: how servicing of cars involving both supply of goods and supply of services are to be treated under GST? The Circular clarified that where supply involves both supply of goods and supply of services and their value is shown separately, the goods and services will be liable to tax at the rates as applicable to such goods and services separately. Why is the position different if invoice for supply of electricity is issued separately? Why shouldn’t supply of electricity and renting of immovable property, be liable to GST at their applicable rates if they are billed separately? A cynical view would suggest that it is because if electricity is billed separately, it would be treated as an exempt supply, but if it is included in a composite supply it allows levy of GST on supply of electricity. One thing is evident that the Circular of 2018 and Circular of 2023 do not show a consistent view on taxability under GST if separate invoices for goods and services are issued.         

Pure Agent Acquires a New Meaning

Paragraph 3.3 of the Circular of 2023 invokes the concept of pure agent and is worth citing in full: 

However, where the electricity is supplied by the Real Estate Owners, Resident Welfare Associations (RWAs), Real Estate Developers etc., as a pure agent, it will not form part of value of their supply. Further, where they charge for electricity on actual basis that is, they charge the same amount for electricity from their lessees or occupants as charged by the State Electricity Boards or DISCOMs from them, they will be deemed to be acting as pure agent for this supply. 

The first and second sentences seem to refer to the pure agent in varied terms. The first sentences aligns with Rule 33, CGST Rules, 2017 which states that expenditure or costs incurred by a  supplier as a pure agent of recipient of supply shall be excluded from the value of supply. The latter sentence introduces a deeming fiction wherein the real estate owners, real estate developers, etc. are ‘deemed to be acting as pure agent’ if they charge for electricity on an actual basis. Does this mean that in this particular instance, the conditions specified in Rule 33, CGST Rules, 2017 for a person to be considered as a pure agent need not be satisfied? While a deeming fiction can be introduced, it is suspect if a Circular can introduce a deeming fiction bypassing the conditions specified in the Rules. A more prudent approach would have been to amend the Rule 33 if the intent was that certain entities were to be treated as pure agents irrespective of whether they fulfil the conditions specified in the said Rule. For now, we do not know if the Circular should prevail over the Rules or vice-versa, introducing an avoidable layer of indeterminacy on the issue.    

Conclusion 

The impugned Circular, in so far as it sought to introduce clarity on the applicability of GST on electricity charges has, in my view, not achieved its objective. In fact, it has introduced more uncertainty. And apart from the ambiguity that the Circular has introduced, this is an apt example of law making through Circulars. The statutory provisions and the relevant Rules do not, in any manner, support some of the clarifications issued by CBIC through its Circular. In fact, it is an exercise of law making with the Circular stating certain legal positions and articulating interpretations that cannot be directly linked to the parent statute. This leaves GST policy at the mercy of convenient interpretations that may find favor with CBIC at a particular point.     

ITC Can be Denied if Delay in Filing Returns: Cal HC

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The Calcutta High Court recently decided the question whether an assessee filing its tax returns after the stipulated time – prescribed under Section 16(4), CGST Act, 2017 – is entitled to claim ITC. The High Court answered in the negative and upheld the GST Department’s order denying ITC to the assessee on the ground of belated filing of returns.  

Facts and Arguments 

Assessee in the impugned case submitted the returns in GSTR-3B for the period from November 2018 to March 2019 on 20.10.2019 which was beyond the due date of submission, i.e., September 2019. The assessee was asked to show cause as to why its claim for ITC should not be denied since the returns were filed after the due date. On assessee’s failure to respond, the GST Department initiated recovery proceedings and debited the requisite amount from the cash ledger balances of the assessee. The assessee challenged the recovery actions before the Calcutta High Court. 

To begin with, it is important to briefly note that Section 16, CGST Act, 2017 prescribes the eligibility and conditions for an assessee to claim ITC. Section 16(2) requires fulfilment of certain conditions such as possession of tax invoices, receipt of goods or services or both while Section 16(4) prescribes the time within which an assessee is required to file returns to be eligible to claim ITC. And, another aspect that would become relevat in the subsequent discussion, Section 16(2) begins with  non-obstante clause, ‘Notwithstanding anything contained in this section’ while a similar clause is absent in Section 16(4). 

The assessee’s argument was that once the conditions stipulated in Section 16(2), CGST Act, 2017 have been fulfilled by the assessee, it is entitled to the right to claim ITC. And that availing or utilizing the ITC through procedural formalities of filing returns is a matter of choice for the assessee. The assessee further argued that ITC is not claimed through returns but through books of account under Section 16(2). And that the non-obstante clause used in Section 16(2) cannot be negated by stipulating an outer time for filing returns as an additional condition for claiming ITC under Section 16(4). If an assessee is denied the right to claim ITC for failure to file returns within the time stated under Section 16(4), it would negate the non-obstante clause of Section 16(2). 

The Revenue Department, on the other hand, argued that the non-obstante clause used in Section 16(2) cannot be interpreted in isolation. And that Section 16(2) and Section 16(4) were complementary provisions and not contradictory provisions. Section 16(2) prescribed the conditions necessary to avail ITC and Section 16(4) added the condition of time. Only by relying on the non-obstante clause, Section 16(2) cannot be interpreted in a manner to render Section 16(4) otiose. 

Calcutta High Court Decides 

The Calcutta High Court referred to various precedents decisions pronounced under GST and under VAT laws to emphasise three things: 

First, in matters of taxation the legislature deserves greater latitude and courts should be circumspect before intervening in tax disputes. While the doctrine of deference to taxation statutes has a long standing and questionable traction in Indian jurisprudence, it served no immediate purpose in deciding the issue at hand.  

Second, the High Court noted that a provision in a statute cannot be interpreted in isolation and there is a need to read it along with other provisions in the statute especially if the subject matter in the different provisions or different parts of the statute is similar. 

Third, the High Court cited a slew of precedents to express its agreement with the view that ITC is a concession and can only be claimed as a matter of right by an assessee on fulfilling the conditions prescribed in the statute. Relying on the same, the High Court observed that:

Section 16(2) does not appear to be a provision which allows Input Tax Credit, rather Section 16(1) is the enabling provision and Section 16(2) restricts the credit which is otherwise allowed to the dealers who satisfied the condition prescribed the interpretation given by the court that the stipulation in Section 16(2) is the restrictive provision is the correct interpretation given to the said provision. (para 12)

The Calcutta High Court also relied on the Patna High Court’s recent judgment to observe that Section 16(4) did not suffer from ambiguity and an assessee’s right to claim ITC can only materialise on fulfilling the conditions prescribed under Section 16(2) as well the condition prescribed under Section 16(4), i.e., filing of returns within a stipulated time. 

Conclusion 

There are, in my view, two important takeaways from the impugned judgment: first, the Calcutta High Court’s view that ITC is a concession/benefit granted by the State to an assessee and it can be claimed only if the conditions prescribed in the statute are strictly followed, though the nature of ITC is not as straightforward and may require a deeper look; second, all the conditions prescribed in Section 16 need to be fulfilled to claim ITC successfully and the condition to file returns within a prescribed time cannot be understood to be as optional. Failure to adhere to the time of filing returns will rightly result in denial of ITC.  

Allahabad HC Clarifies Govt’s Scope of Power under Section 3 and 5, CGST Act, 2017

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In a recent decision[1], the Allahabad High Court interpreted Sections 3 and 5 of the CGST Act, 2017 and clarified the scope of power of the Central Govt and the CBIC under these provisions. Section 3 confers the Central Govt with the power to appoint classes of officers for the purposes of CGST Act, 2017. Section 5 provides that officer of central tax may exercise powers and discharge duties subject to such conditions as the CBIC may impose. The High Court rejected petitioner’s argument that the Central Govt does not have the authority to confer powers on the officers under Section 5 and observed that the petitioner’s contention lacked substance. 

Facts 

The petitioner invoked extraordinary writ jurisdiction of the Allahabad High Court challenging Notification No. 14/2017 – Central Tax dated 01.07.2017 on the ground that it was ultra vires to the power of the Central Govt. The petitioner also made additional arguments about the jurisdiction of the concerned officers to carry out inspection/search proceedings under Section 67 and power to issue summons. I will though confine this post to the petitioner’s first argument involving power of the Central Govt and CBIC under Sections 3 and 5 of CGST Act, 2017. 

According to the petitioner, the Central Govt in exercise of its powers under Section 3 has issued the Notification No. 14/2017 – Central Tax wherein it has appointed officers of Director General of Goods and Services Tax Intelligence (‘DGSI’) as Central Tax Officers and invested them with all the powers under CGST Act and IGST Act. The petitioner contended that appointing officers does not confer them with powers and the latter was outside the remit of the Central Govt’s powers under Section 3. The petitioner’s case was that only the Commissioner in Board can confer powers to Central Tax Officers under Section 5 read with Section 167 and Section 168. 

The relevant statutory provisions are worth citing before examining the Allahabad High Court’s reasoning and its decision. Section 3, CGST Act, 2017 states that the Central Government shall, by notification, appoint the following classes of officers for the purposes of this Act. The classes of officers include the Principal Chief Commissioners or Directors General of Central Tax, Principal Commissioners of Central Tax or Directors General of Central Tax among others. Section 5 states that subject to such conditions and limitations as the Board/CBIC may impose, an officer of central tax may exercise the power and discharge the duties conferred or imposed on him under this Act. 

Simply put, the petitioner was arguing that the Central Government could only appoint certain officers as central tax officers while conferring them with powers could be done by the Board/CBIC under Section 5. Since the Notification No. 14.2017 – issued by the Central Govt – also performed the latter function, it was ultra vires Sections 3 and 5 of the CGST Act, 2017. Ironically, the said Notification was previously issued by CBIC and later via a corrigendum it was substituted by the word Central Govt.  

Decision 

The Allahabad High Court stated that the petitioner’s argument lacked substance. It traced the timeline relating to Notification No. 14/2107 – Central Tax and wording of Sections 3,4, and 5 of CGST Act, 2017. The High Court agreed with the petitioner’s contention that it was essentially the CBIC which had been empowered to entrust the power to the officers under Section 5, CGST Act, 2017. The High Court though treated the CBIC as an extension of the Central Govt. Referring to the constitution of CBIC, the High Court observed that it was constituted under Central Boards of Revenue Act, 1963 and that: 

Further, section 3 of the Central Boards of Revenue Act, 1963 relating to Constitution of Central Boards for Indirect Taxes and Customs says that it is the Central Government, which shall constitute the Central Board of Indirect Taxes and Customs and the said Board shall be subject to the control of the Central Government and shall exercise such powers and perform such duties, as may be entrusted to that Board by the Central Government or by or under any law. (para 18)

 The High Court concluded that it appears that the CBIC is subservient to the Govt and it can be argued that when the power has been invested with CBIC to do certain things, how can the Govt not exercise such a power. (para 18) The CBIC is to be understood as an alter ego of the Central Govt?  

Conclusion 

The necessary corollary of the High Court’s decision is that any power conferred on CBIC can be exercised by the Central Govt and more crucially, this could also mean that CBIC lacks autonomy. Undoubtedly, CBIC is a creation of the Central Govt under a statutory provision, but that cannot necessarily lead to the conclusion that the powers of CBIC are exercisable by the Govt in all cases and for all purposes. An analogy would be that a sectoral regulator such as RBI or SEBI is a creation of the statute, but that does not mean that any power of these statutory bodies can be exercised by the Central Govt. The Govt does has the power to supplant a statutory body only in exceptional or specified circumstances. And if CBIC and the Central Govt are to read interchangeably, what is the point of mentioning one and not the other in certain provisions? 

[1] R.C. Infra Digital Solutions Inc v Union of India TS-02-HCALL-2024-GST. 

Appellate Authority Ignored CBIC’s Circular: Bombay HC

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In a recent decision[1] the Bombay High Court expressed surprise that the appellate authority ignored CBIC’s Circular while ordering the assessee to pay back the Input Tax Credit (‘ITC’) refund granted to it along with interest. The High Court set aside the order by appellate authority.  

Facts 

The assessee had filed an application on 29.08.2018 seeking refund of ITC under Section 54(3), CGST Act, 2017 on export of goods made under a Letter of Undertaking. The assessee was granted a 90% refund of ITC via the first order and via a subsequent order, after scrutiny, the entire amount claimed as refund was granted. The Department, however, challenged the order granting refund to the assessee before the Commissioner/appellate authority claiming that the assessee must pay back the entire refund amount along with the interest. The Commissioner passed an order in favor of the Department which was assailed by the asssessee before the Bombay High Court. The primary ground of the assessee’s challenge was the legality of the Commissioner’s order.    

Two Circulars 

The legality or sustainability of the Commissioner’s order rested on CBIC’s Circular issued on 18.11.2019 (‘Circular of 2019’). The Department argued that the assessee was not allowed to make a simultaneous claim for refund that related to different financial years. And that in the impugned case, the assessee had claimed credit for the period from 1.04.2018 to July 2019 and financial year 2017-18. 

The assesee, on the other hand, argued that the refund was in conformity with Rule 89(4), CGST Rules, 2017 which provide a detailed formula for computing the refund for the assessee. Further, the assessee argued that the Commissioner’s view was not in accordance with the CBIC’s Circular dated 31.03.2020 (‘Circular of 2020’) which clarified and negated some of the refund related conditions mentioned in the Circular of 2019. 

The Commissioner was correct in interpreting the Circular of 2019. Paragraph 8 of Circular of 2019 stated that while an applicant file a refund for a tax period or by clubbing different tax periods, the refund claim cannot spread across different financial years.  The Commissioner was remiss in not noting that the Circular of 2020 had categorically modified the Circular of 2019 and removed the condition that a refund cannot be spread across more than one financial year. (para 2.5) Paragraph 2.4 of Circular of 2020 stated that: 

On perusal of the provisions under sub-section (3) of section 16 of the Integrated Goods and Services Tax Act, 2017 and sub-section (3) of section 54 of the CGST Act, there appears no bar in claiming refund by clubbing different months across successive Financial Years. (emphasis added) 

The rationale for modification was motivated by the underlying legal principle that a Circular cannot introduce a more stringent condition than imposed by the statutory provision. Circular of 2020 was also prompted by the Delhi High Court’s decision wherein it termed the condition imposed Paragraph 8 of the Circular of 2019 as arbitrary and stayed the condition which prevented an assessee from claiming refunds that spread across more than one financial year. The High Court had ordered opening of portal to allow the exporters to claim refunds that were tied to more than one financial year.   

Decision 

A persual of Rule 89(4) along with the Circular of 2020 clarifies the legal position amply, and the Bombay High Court correctly noted that the assessee was entitled to claim the ITC credit available for the prior financial years too. The High Court stated that it was a matter of wonder as to how the Commissioner could arrive at a decision contrary to both the Rule and the Circular of 2020 to deny the refund to the assessee. And that either the Commissioner had overlooked or not addressed the matter because it did not record a finding on the issue, which was impermissible. (para 11) Accordingly, the High Court concluded that the order of the Commissioner could not be sustained and was liable to be set aside. 

Conclusion 

The impugned decision is an instance of the Department challenging a legally sound order of one of its own officers, and the appellate authority, in this case the Commissioner, adopting a view that was contrary to the CBIC’s Circular. Either the Circular of 2019 was cherrypicked because it favored the Department or there was a genuine oversight by the Commissioner in not referring to the Circular of 2020, which had diluted the Circular of 2019. Either way, through the impugned case, the GST Department does not give the impression of a sound tax administration that is taking decisions as per the applicable law.  

[1] M/s Sine Automation and Integration Pvt Ltd v Union of India TS-697-HCBOM-2023-GST. 

Madras HC Holds Prescribed Time Period for Filing Returns as ‘Directory’: Interprets Section 62, CGST Act

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In a recent decision[1], the Madras High Court had to decide if an assessee loses the right to file tax returns after expiry of 30 days under Section 62(2), CGST Act, 2017. Section 62(2) provides an assessee 30 days to file returns after the proper officer passes a ‘best judgment’ assessment order. The High Court held that the assessee does not lose its right to file returns, but its interpretation of the provision is not founded on cogent reasoning. 

Facts 

In the impugned case, the asssessee failed to file its tax returns for the months of December 2022, January 2023 and February 2023. Thus, in exercise of the powers under Section 62(1), the proper officer passed best judgment assessment orders on 28.03.2023 for the month of December 2022 and on 30.04.2023 for the months of January 2023 and February 2023. Under Section 62(2), the assessee can file a valid return within 30 days of the service of best judgment assessment order passed by a proper officer under Section 62(1). And if the return is filed, the best judgment assessment order is deemed to have been withdrawn but the assessee’s liability for payment of fine and penalty continues. 

In the impugned case, the assessee did not file its return within 30 days of the passing of the best judgment assessment order and pleaded that the delay be condoned on account of financial difficulties. The Madras High Court framed the issue as: whether the assessee loses the right to file returns after expiry of 30 days or is right retained by providing sufficient reasons for non-filing of returns. (para 13) 

Decision 

The Madras High Court examined the relevant provision, i.e., Section 62, CGST Act, 2017 and stated that under Section 62(1) the proper officer has been granted a period of 5 years for completing the best judgment assessment. The 5 years are calculated from the due date of filing of annual return of the relevant financial year. Thus, the High Court deduced that in the impugned case, the proper officer could finalise the best judgment assessment order until 31.12.2029. And thereafter elaborated:

In such case, if the best judgement assessment order is passed by the respondent on 31.12.2029, which is permissible under Section 74 of the GST Act, the petitioner can file his returns within a period of 30 days therefrom i.e., on or before 30.01.2030. Hence, the time limit is available up to 30.01.2030 for the petitioner to file their returns. (para 14) 

The above paragraph is a peculiar reading of Section 62. Under Section 62(1), the proper officer has an outer time limit of 5 years to finalise the best judgment assessment order. This does not automatically extend the right of an assessee to file their tax returns to 5 years and 30 days. The assessee, under Section 62(2), must file a valid tax return within 30 days of passing of the best judgment assessment. Only because in the impugned case the proper officer finalized the best judgment assessment much before expiry of 5 years does not mean that the right of assessee extends to 5 years and 30 days. If the right of an assessee is interpreted to survive for 5 years and 30 days in all cases, then prompt passing of best judgment assessment orders would negate the 30 day outer limit as assessee can file valid returns anytime within 5 years and 30 days. The intent of the provision seems to be to allot the proper officer a window of 5 years to pass an order and the assessee 30 days once the order has been passed.    

The other issue, about condonation of delay was where the Madras High Court’s observations were on sounder footing. The High Court observed that if there is a sufficient reason for not filing returns within 30 days then the delay can be condoned. But, this does not lead to the High Court’s conclusion that ‘the limitation of 30 days period prescribed under Section 62(2) of the Act appears to be directory in nature’. (para 16) Here again, interpreting the 30-day time period allotted to the assessee as directory in nature is an opinion manufactured by the High Court without any cogent reasoning or a detailed analysis of the intent of the provision. 

Conclusion 

The Madras High Court’s conclusion that if there is delay on assessee’s part, i.e., beyond 30 days, then the delay can be condoned if sufficient reasons are presented is appreciable. However, the interpretation that the period of 30 days is only directory in nature and right of the assesse to file valid returns extends beyond 5 years lacks teeth. The High Court was remiss in not noticing that the period of 5 years was for the proper officer and not the assessee. The latter only has 30 days which commence from the service of the assessment order.    

[1] Comfort Shoes Components v Assistant Commissioner, Ambur, Vellore TS-694-HCMAD-2023-GST. 

Supreme Court Reduces Penalty under Section 129, CGST Act: Clarifies that Decision is Not a Precedent

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Supreme Court in a recent case[1], directed that the penalty imposed on the assessee for transporting goods without a valid e-way bill should be reduced by 50%. While the Calcutta High Court had upheld the levy of penalty, the Supreme Court to serve ‘ the ends of justice’ reduced the penalty amount by half, without articulating any convincing reason for its conclusion and stated that its order in the impugned case should not be treated as a precedent.   

Facts 

The brief facts of the case are: the assessee was in the business of horizontal drilling in underground utilities and availed the services of M/s Hariom Freight Carriers for transportation of one its machines weighing 68 tons from its previous work site in Uttar Pradesh to West Bengal. The e-way bill for transportation was generated on 30 May 2019, and it was valid until 9 June 2019. The transportation was not done within the validity period and the vehicle was intercepted on 17 June 2019 and was found carrying goods without a valid e-way bill. Accordingly, the assessee was issued a notice as to why it should not pay a tax of Rs 54,00,000 and a penalty of equivalent amount. The said amount was confirmed against which the assessee filed an appeal. The assessee deposited 10% of the tax demand and furnished a bank guarantee of the amount of demand to secure release of its machine. However, the appeal was not decided and the Calcutta High Court directed that the appeal be decided. Eventually, the High Court ordered that the tax be paid in cash, 50% of the penalty amount be paid in cash and the remaining 50% of the penalty amount be paid by furnishing a bank guarantee which should be valid for 1 year. Against the said order, the assessee approached the Supreme Court.     

Arguments and Decision 

The assessee’s arguments before the Supreme Court centred around reduction of the penalty amount. The assessee argued that the imposition of such a heavy penalty would lead to financial hardship for it. The assessee had no justifiable reason for not generating another e-way bill after expiry of the first one. The assessee could only suggest that M/s Hariom Freight Carriers did not have another vehicle available for transportation and it did not inform the assessee about it, which led to transportation of the machine accompanied by an expired e-way bill. The assessee also added that the transaction in question was not a sale/purchase but merely the transport of its capital goods from one place to another and the entire set of circumstances should be taken cognizance of to reduce its penalty.

The Revenue Department, on the other hand, defended the imposition of penalty by clearly and cogently arguing that the assessee had no valid reason for not carrying a valid e-way bill and in the absence of a valid e-way bill, it was completely justified to levy a tax and penalty on the assessee. The Revenue Department added that there was a gap of 10 days between expiry of e-way bill and interception of the transport, and the assessee should have been more vigilant. And if another vehicle was not available, then the assessee should not have agreed to transport the machine without a valid e-way bill. 

The Supreme Court referred to three distinct facts: first, an e-way bill was generated by the assessee, even if goods were transported after it had expired; second, the fact that the machine was being transported for use of the assessee itself, but in another place and there was no sale/purchase involved; third, that the penalty of a huge amount of Rs 54,00,000 was imposed on the assessee. The Court said that while it would not have ordinarily interfered, ‘the ends of justice’ would be served if the penalty amount is reduced by 50%. And concluded its order by clarifying that the order was passed under Article 142 of the Constitution and should not be treated as a precedent. 

Conclusion 

Ordinarily, one would not quibble if a Court intervenes to reduce the penalty imposed on an assessee if it in the opinion of the Court the penalty is unjust or harsh. However, in such scenarios the onerous nature of the penalty should be obvious. In the impugned case, while the penalty amount was certainly on the higher side, it is difficult to see how the assessee was not at fault. It was negligent behaviour on assessee’s part for allowing goods to be transported on an e-way bill that had expired 10 days before the vehicle was intercepted. While the fact that a penalty may impose financial hardship is an acceptable reason for reducing the quantum of penalty, the assessee’s conduct, in my opinion, did not merit the leniency shown by the Supreme Court.     

[1] Vardan Associates Pvt Ltd v Assistant Commissioner of State Tax, Central Section & Ors TS-692-SC-2023-GST. 

Pre-Deposit Under CGST Act Does not Include Penalty and Fee: Kar HC

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The Karnataka High Court in a recent decision[1] interpreted Section 107, CGST Act, 2017 and adopted a literal interpretation of Section 107(6)(b) to hold that it only mentions that the remaining amount of tax in dispute needs to be deposited before filing an appeal excluding fee, penalty and fee. Since the provision does not mention interest, fine or fee, the same cannot be read into the provision to create an onerous burden on the assessee before admitting its appeal. 

Facts and Arguments 

The facts of the case are brief: the petitioner’s appeal before the appellate authority was rejected on the ground that the condition prescribed under Section 107, CGST Act, 2017 had not been fulfilled. Section 107(1) states that any decision or order passed under CGST Act, CGST Act or UTGST Act by an adjudicating authority may be appealed by a person to such Adjudicating Authority as may be prescribed. Section 107(6) states that no appeal shall be filed under sub-section (1), unless the appellant has paid – 

  • in full, such part of the amount of tax, interest, fine, fee and penalty arising from the impugned order, as is admitted by him; and 
  • a sum equal to ten per cent of the remaining amount of tax in dispute arising from the said order, subject to a maximum of twenty-five crore rupees, in relation to which the appeal has been filed: (emphasis added)

The petitioner argued that it was disputing the entire amount confirmed in the confiscation order and under Section 107(6)(b), the tax in dispute would only include the tax component and not the interest, fee and fine. The appellant authority erred in not admitting its appeal by stating that 10% of the entire amount needs to be deposited and not 10% of the tax in dispute. The petitioner approached the Karnataka High Court via a writ seeking appropriate directions. 

The Revenue Department had a meek reply and argued that the petitioner was virtually trying to defeat the provision of appeal under Section 107. The Revenue Department argued that since the petitioner was disputing the entire amount, it was obliged to deposit 10% of the entire amount and not 10% of the tax. 

High Court Adopts Strict Interpretation 

The Karnataka High Court gave three broad reasons for agreeing to the petitioner’s arguments: 

First, the High Court cited Section 107(6) and observed that there was a statutory basis for asserting that the petitioner should only deposit 10% of the disputed tax before filing an appeal. The High Court noted that the interpretation also aligned with the legal principle that penalties are consequent to determination of tax liability. 

Second, it observed that if the statute provides that a thing has to be done in a particular manner, it should be done only in that manner. (para 8) Adopting the principle of strict interpretation of tax statutes, the High Court observed that the terms fine, fee, penalties were not used in Section 107(6)(b), but only the term ‘disputed tax’ was used, and the provision should be interpreted as per the words mentioned in it. The High Court added that the isolation of the term ‘a sum equal to ten per cent of the remaining amount of tax’ reflected legislative design and an intention to limit the pre-deposit requirement to only 10% of the disputed tax amount.  

Third, the High Court noted that the presumption is that the legislature has not made any mistake and the language employed is the determinative factor in ascertaining legislative intent. If there is any omission or defect in the provision, the Courts cannot correct it.

Conclusion The Karnataka High Court in the impugned case adopted a reasonable approach and appreciably adhered to the principle of strict interpretation of tax statutes to rule in favor of the petitioner. The High Court’s decision is clearly and unequivocally supported by the language of the provision. In fact I would argue further and recommend and in similar cases where the appellate authority takes such stance which is obviously and clearly against the written text, Courts should consider levying a penalty or costs for forcing the assessee’s hand to approach the High Court merely to get its appeal admitted.   

[1] M/S Tejas Arecanut Traders v Joint Commissioner of Commercial Taxes TS-686-HCKAR-2023-GST. 

SEZ Unit Not Entitled to Exemption from GST Compensation Cess: Andhra High Court

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In a recent decision[1], the Andhra Pradesh High Court decided two similar writ petitions and held that the SEZ unit was not eligible for exemption from GST Compensation Cess. The High Court noted that there were three specific provisions under the SEZ Act, 2005 which provided a tax exemption and interpreted the said provisions strictly to conclude that the petitioner’s claim for exemption from GST Compensation Cess did not have merit and dismissed both the writ petitions. 

Facts 

The petitioner was a company engaged in the business of ferro alloys manufacturing and was established as a SEZ unit under the SEZ Act, 2005. As per Section 26 of the SEZ Act, the petitioner was exempt from paying any duty, tax or cess under the Customs Act, 1962 and Customs Tariff Act, 1975. The petitioner sought clarification from Director (SEZ) if it was eligible for exemption from GST Compensation Cess on import of coal. The Director replied in the negative and stated that CBEC had issued a Notification No. 64/2017 under which payment of IGST was exempt on import of coal by a SEZ unit, which was otherwise leviable under Section 3 of the Customs Tariff Act, 1975. And under Section 26(1)(a), a SEZ unit is exempt only from duty of custom under the Customs Act, 1962 and Customs Tariff Act, 1975. Thus, there was no exemption from GST Compensation Cess under Section 26(1)(a) of SEZ Act, 2005. The petitioner challenged the aforesaid opinion of the Director (SEZ) as erroneous via writ petition before the Andhra Pradesh High Court.  

The Revenue Department’s arguments before the Andhra Pradesh High Court were like that of Director (SEZ). 

Decision

The Andhra Pradesh High Court spent considerable space in elaborating the nature and rationale of GST Compensation Cess, which wasn’t entirely germane to the issue in the impugned case. The High Court noted the scheme of SEZ Act and observed that tax exemption can be granted under three provisions of the SEZ Act, i.e. Sections 7, 26, and 50. 

Under Section 7 the exemption from taxes and cesses is available subject to certain conditions, but only if the relevant enactments are specified in the First Schedule of the SEZ Act, 2005. The petitioners desisted the claim that they were exempt from GST Compensation Cess under Section 7, since the relevant enactment – GST (Compensation to States) Act, 2017 – was not specified in the First Schedule of the SEZ Act. 

Second, petitioners did not press their claim under Section 50 since the said provision empowered the State Governments to grant tax exemptions, and there is presumably no State level legislation to implement SEZ Act, 2005.

The petitioners claim for exemption from GST Compensation Cess rested entirely on their interpretation of Section 26 of the SEZ Act. The petitioner’s argument for exemption was as follows: petitioner is exempted from custom duties under Section 26(1)(a) of SEZ Act including all the duties enumerated in the Customs Tariff Act, 1975. And since GST Compensation Cess is leviable on imports under Section 3(9) of the Customs Tariff Act, 1975, the petitioner is also exempt from paying it under Section 26(1)(a) of SEZ Act. The Revenue Department counter argued that what was exempt under Section 26(1)(a) was ‘duty of customs’ under Customs Act, 1962 or Customs Tariff Act, 1975. The Department elaborated and correctly so, that GST Compensation Cess owed its origin to the GST (Compensation to States) Act, 2017 and Section 3(9) of the Customs Tariff Act, 1975 only prescribes the rate applicable. Succinctly put, the petitioner cannot be allowed to interpret Section 26(1)(a) to include GST Compensation Cess when the provision only mentioned customs duty.  

The Andhra Pradesh High Court agreed with the Revenue Department, and concluded that: 

when Section 26 of SEZ Act is perused, it is discernible that the word “duty” alone is used in the said section but not the word “cess”. More prominently U/s 26(1)(a), on which much reliance is placed by the petitioners, what is exempted is only duty of customs but not any cess much-less the GST Compensation Cess. Therefore, it is difficult to accept the contention that the exemption of duty of customs under the Customs Act, 1962 or the Customs Tariff Act, 1975 or any other law on import of goods encompasses the Compensation Cess also merely because its rate of tariff is mentioned in Section 3(9) of Customs Tariff Act, 1975. In our considered view, such an argument is of no avail to the petitioners. (para 27)

In adopting a strict interpretation of Section 26(1)(a), the Andhra Pradesh High Court was clear in its conclusion that the term duty could not include within its scope GST Compensation cess. To emphasise that the scope of Section 26(1)(a) was deliberately narrow, the High Court noted that Section 7 of SEZ Act used the term ‘tax, duty or cess’, but Section 26(1)(a) did not include cess within its scope and only mentioned the term duty. And since Section 26(1)(a) only uses the term duty thereby negativing the petitioner’s argument that cess should be read into the provision. 

Conclusion  

The impugned decision is an appropriate example of the Court interpreting the provisions of a tax statute in a strict manner and rightly so. There is a well-established doctrine of interpreting the tax statutes in a strict manner and not read into the provision words and phrases that are not used in the relevant provision. The Andhra Pradesh High Court correctly adopted the said interpretive doctrine to deny petitioner’s claim of exemption from GST Compensation Cess.  

[1] Maithan Alloys Ltd v Union of India TS-677-HCAP-GST. 

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