GST

Uncertain Purchaser Obligations under GST: ITC Claims Hit a Roadblock

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On 12.06.2023, the Calcutta High Court pronounced a judgment[1] urging the Revenue to thoroughly review the petitioner’s supporting documents before rejecting its ITC claim. In the impugned case, the Revenue disallowed the petitioner’s ITC claim because the supplier’s registration had been cancelled with retrospective effect. The case is an example of how, in certain situations, the Revenue unjustifiably burdens the purchaser for the supplier’s lack of bona fide, even though it is the Revenue that belatedly discovers the supplier’s deficient credentials. I examine the High Court’s judgment and suggest that the Courts need to take a sterner view of the Revenue’s approach when it disallows an ITC claim based on inadequate examination of relevant documents.   

Introduction

The petitioner filed ITC claim against supplies purchased from its various suppliers including a certain Global Bitumen (‘supplier’). Petitioner’s ITC claim for purchases from the supplier was rejected by the Revenue. The Revenue’s reasons for rejection were as follows: the supplier was fake, non-existent, and opened its bank account based on fake documents. The Revenue alleged that the petitioner did not verify the credentials of supplier, claimed ITC without the support of any relevant documents and further asked the petitioner to pay penalty and interest under the relevant provisions of GST laws.

There are two specific claims of the Revenue that are worth noting: first, that the petitioner did not ascertain and verify genuineness of the supplier; second, that the supplier’s registration has been cancelled with retrospective effect covering the period of petitioner’s ITC claim. 

The petitioner, on the other hand, argued that the Revenue did not consider the documents which proved that it had purchased goods from the supplier, evidenced the transport of goods and proved that it had made payment to the supplier. The petitioner argued that the failure of supplier to pay the GST to the State cannot be attributed to it since at the time of transaction, the supplier had a valid registration and its status as a GST-registered supplier was reflected on the Revenue’s portal.       

High Court Dismisses Revenue’s Claims 

The Calcutta High Court observed that foundation of the petitioner’s case was that its transaction with the supplier was a genuine transaction. The High Court observed that it was not possible to determine whether the petitioner had failed to meet any of its statutory obligation unless all the petitioner’s documents relating to the purchase were examined by the Revenue. The High Court noted that the Revenue only took into consideration the retrospective cancellation of the supplier’s registration to disallow ITC claim; but did not consider other documents presented by the petitioner. Accordingly, the Revenue’s orders were set aside, and the High Court directed the Revenue to take up petitioner’s case afresh by taking into consideration other documents relating to the transaction in question.

Purchaser Obligations under GST 

The Calcutta High Court, in its judgment, relied on a precedent, i.e., M/s Lgw Industries case[2], where the Calcutta High Court adjudicated a similar set of facts and ordered the Revenue to consider the petitioner’s ITC claim afresh by scrutinizing its documents to verify if the transactions in question were genuine or not. The Revenue was also directed to ascertain if the transactions in question took place before or after the cancellation of registration and whether the purchaser fulfilled its statutory obligation to verify the identity of the supplier.

It is important to note that the purchaser’s obligation extends to establishing the genuineness of the supplier’s identity which includes checking the supplier’s registration status at the time of entering the transaction. If subsequently, the Revenue finds that the supplier lacks bona fide and cancels the registration retrospectively, why should the purchaser’s ITC be blocked for transactions entered before the cancellation of registration? Blocking purchaser’s ITC is especially unfair if the Revenue is not alleging and proving collusion between the purchaser and supplier.

If the purchaser transacts with the supplier after cancellation of latter’s registration, the Revenue has a good reason to deny the purchaser’s ITC claim. However, if the Revenue cancels the supplier’s registration retrospectively, it should not invalidate the purchaser’s ITC claim if the purchaser is able to prove genuineness of the transaction. And if purchaser can establish that at the time of transaction it inquired into and verified that the supplier was validly registered. 

While the Calcutta High Court in both the above-mentioned cases has taken a favorable approach towards petitioners, I suggest that the Revenue needs to be made accountable in a more meaningful manner for treating ITC claims in a casual manner. In both the above cases, the Revenue dismissed ITC claims without taking into consideration the documents presented by the purchaser. Not considering relevant documents is a cavalier way of judging ITC eligibility and gives the impression of pre-judging purchaser’s claims. The High Court directing the Revenue to consider the case afresh is a necessary but not sufficient reprimand to prevent occurrence of similar instances in the future. Courts need to consider if, in certain cases, erring officials should pay damages for not performing their statutory duties.          

[1] M/s Gargo Traders v The Joint Commissioner, Commercial Taxes WPA 1009 of 2022, available at https://www.livelaw.in/pdf_upload/ms-gargo-traders-476282.pdf

[2] M/S Lgw Industries Ltd & Ors v Union of India & Ors, Available at https://indiankanoon.org/doc/109803748/

Limits of Deeming Fiction: Intermediaries under GST-I

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Constitutionality of Section 13(8)(b), IGST Act, 2017

Introduction

Constitutionality of Section 13 (8)(b), IGST Act has attracted the attention of different Courts. The reason for suspect constitutionality of Section 13 (8)(b), IGST Act is that incorporates a deeming fiction whereby the place of supply for services by an intermediary is in India, i.e., place of service provider instead of the place of recipient. The petitioner’s case was that Section13(8)(b), IGST Act departs from the destination-based character of GST, violates Fundamental Rights under Art 14 and Art 19(1)(g) of the Constitution, and is beyond the Parliament’s competence. There are multiple and varied judicial opinions on the issue and I will explore them in a two-part post. In the first part of this post, I will focus on the judgment pronounced by the Gujarat High Court and by a 2-Judge Bench of the Bombay High Court, both of which leave a lot to be desired. I argue that both decisions engage with the underlying issue superficially and adopt less than adequate reasoning to support their conclusions.    

The Gujarat High Court Upholds GST on Intermediaries

In Material Recycling Association of India case[1], petitioners challenged the constitutional validity of Section 13 (8)(b), IGST Act, 2017. Petitioners were intermediaries providing services to their clients located outside India and earning in foreign convertible currency. As per Section 13 (8)(b), IGST Act, 2017 if a supplier provides intermediary service to a person situated outside India, place of supply of services is deemed to be where the supplier is located. This deeming fiction thereby treats such a transaction as liable to GST. The petitioner challenged the provision as ultra vires of Art 265, 286, Art 14, and Art 19 of the Constitution. Petitioner’s various arguments were underpinned by the central idea that their services constituted as export of services. And export of services or goods could not be subjected to GST since it was a destination-based tax whereunder exports were zero-rated. Further, since the supply of services took place outside India the Parliament lacked competence to enact such a provision.

The Gujarat High Court’s analysis is pithy, and essentially gives a free pass to the legislature by stating that the petitioner’s services could not be considered as an export of services ‘in order to levy CGST and SGST’ and that:

            … it would not qualify to be export of services, more particularly when the legislature has thought it fit to consider the place of supply of services as place of person who provides such service in India. (para 66)

It then curiously did not even agree with the petitioner that the provision in question was a deeming provision and instead upheld the constitutionality of the provision by relying on the fact that a similar situation existed in the pre-GST regime and noted: 

            Therefore, this being a consistent stand of the respondents to tax the service provided by intermediary in India, the same cannot be treated as “export of services” under the IGST Act, 2017 and therefore, rightly included in Section 13(8)(b) of the IGST Act to consider the location of supplier of service as place of supply so as to attract CGST and SGST. (para 67)

Both reasons collapse under the burden of scrutiny. First, let’s decode ‘legislature’s wisdom’. As per the Gujarat High Court, the legislature ‘thought it fit’ to include various transactions in the scope of GST to maximize revenue collection. Legislature enacting provisions to increase revenue collection in no way precludes Courts from examining if the provisions under challenge transgress the Constitution. In fact, one would argue that the primary function of a constitutional Court is to examine if the legislature is enacting provisions within the constitutional limits. For example, in this case, it was incumbent on the Gujarat High Court to examine if the impugned provision satisfied the requirements of Art 286 and/or Art 269A of the Constitution, and whether Art 14 and Art 19(1)(g) were not violated; but the judgment is completely bereft of any such analysis. 

The second reason proffered by the Gujarat High Court was that a similar legal position prevailed in the pre-GST regime. To conclude that a similar provision existed in the pre-GST regime is evidence of the constitutionality of a provision enacted under the IGST Act, 2017 is an unwarranted and unreasonable statement especially when the High Court could not cite any precedent that squarely covered the issue. The Gujarat High Court’s reliance on the fact that similar provision existed in service tax regime to conclude that the Revenue Department has a ‘consistent stand’ and creates a presumption of constitutionality in favour of the provision is a dereliction of duty by a constitutional Court. And, even if there was a judicial decision that upheld the constitutionality of the pre-GST provision, it was incumbent on the Gujarat High Court to examine if the decision remained valid after the constitutional changes that accompanied GST. Nonetheless, the Gujarat High Court’s decision did not conclusively settle this matter as a similar matter was argued before a Division Bench of the Bombay High Court.       

Division Bench of The Bombay High Court Issues a Split Verdict 

The Bombay High Court in Dharmendra M. Jani case[2] decided a similar petition almost a year after the Gujarat High Court’s decision in Material Recycling Association of India case, but it ended in a stalemate with the Division Bench rendering a split decision.  

Justice Ujjal Bhuyan, held that Section 13 (8)(b), IGST Act, 2017 was unconstitutional and rested his conclusion on three observations. First, he examined the aforesaid provision on the touchstone of Art 286 of the Constitution and noted that the supply of service by an intermediary was outside Maharashtra and India. As per him, Section 13 (8)(b), IGST Act, 2017 had created a deeming fiction treating the export of service by an intermediary as an intra-State supply and it was definitely ‘an artificial device created to overcome a constitutional embargo.’ (para 49) Second, he observed that creating a deeming provision such as Section 13(8)(b) where the location of the recipient of service provided by an intermediary though outside India has been treated in India ‘runs contrary to the scheme of the CGST Act as well as the IGST Act besides being beyond the charging sections of both the Acts.’ (para 54) His third reason referred to the transaction’s lack of nexus with India and he concluded that: 

            … section 13(8)(b) of the IGST Act not only falls foul of the overall scheme of the CGST Act and the IGST Act but also offends Articles 245, 246A, 269A and 286(1)(b) of the Constitution. The extra-territorial effect given by way of section 13(8)(b) of the IGST Act has no real connection or nexus with the taxing regime in India introduced by the GST system. (para 56)   

While Justice Bhuyan’s opinion was correct in identifying the lack of nexus and that the provision undermined GST’s fundamental principle of destination-based consumption tax, he failed to clearly articulate as to ‘how’ Section13(8)(b), IGST Act, 2017 contravened Art 286 of Constitution. Art 286(1) prevents the State from levying GST on a supply that takes place outside the State or a supply that takes place in the course of import of goods or services into India’s territory or their export out of India’s territory. While Art 286(2) empowers the Parliament to determine principles for determining when a supply of goods or services takes place in any of the two ways mentioned in Art 286(1). It is unclear in Justice Bhuyan’s opinion as to which aspect of Art 286 does Section 13 (8)(b), IGST Act, 2017 specifically contravene and what is the constitutional embargo that the legislature is trying to circumvent. 

At the same time, Justice Bhuyan’s opinion was notable for understanding that while the source of legislative power regarding the inter-State supply of goods or services could be traced to Art 246A and Art 269A of the Constitution, there were constitutional restraints on such power, such as Art 286 of Constitution, and the impugned provision needed to be examined on those touchstones. More importantly, unlike the Gujarat High Court, he did not accept the argument that the existence of a similar provision under the service tax regime precluded a challenge to Section 13 (8)(b), IGST Act, 2017. He instead stated that the validity of Section 13 (8)(b) read with Section 8 of the IGST Act, 2017 had to be examined on the touchstone of relevant constitutional provisions and not by relying on previous legal provisions. Though he fell short of clearly specifying the nature and extent of constitutional transgression.  

Justice Abhay Ahuja in his separate opinion upheld the constitutionality of Section 13 (8)(b), IGST Act, 2017. He gave a ringing endorsement to the Gujarat High Court’s decision in Material Recycling Association of Indiacase, though he added his reasons, which were equally if not less convincing. I will only briefly mention his reasons since his engagement with the petitioner’s argument is almost cavalier. 

Justice Abhay Ahuja pithily observed that Section 13 (8)(b), IGST Act, 2017 was not contrary to the destination-based principle of GST. He observed that since under GST taxation is on supply by intermediaries and the same was characterized as an inter-State supply, there was no conflict thereby completely missing the thrust of the petitioner’s argument. He also incorrectly stated that the definition of export of services being a general provision would be inapplicable since there was a specific provision defining intermediary. Again, not realizing that the two provisions operated independently and performed different functions. 

Justice Ahuja’s examination of the constitutional dimension is worth discussing in more detail. He began by interpreting the scope of Parliament’s power under Art 269A and Art 286 of the Constitution too widely. He noted that while imports had been deemed to be inter-State trade or commerce under IGST Act, 2017, Art 269A of the Constitution did not take away the power of the Parliament to stipulate ‘any other supply’ to be a supply in the course of inter-State trade or commerce. (para 103) Art 269A(5) specifically provides that:

            Parliament may, by law, formulate the principles for determining the place of supply, and when a supply of goods or of services, or both takes place in the course of inter-State trade or commerce.   

Clearly, Art 269A (5) of the Constitution empowers the Parliament to determine the situs/place of supply for inter-State trade or commerce. Thus, when Justice Ahuja says that Art 269A does not take away power to include any supply as inter-State trade or commerce, it should have been preceded by an examination if the Parliament by exercising its power under Art 269A(5) – to enact Section13(8)(b), IGST Act, 2017 – has acted within the scope of its power and has adhered to the limitations imposed by Art 286 of Constitution. Instead, he held that the ‘whole purpose’ of Art 286(2) of the Constitution was to empower Parliament to determine the situs of supply and since Section13(8)(b), IGST Act, 2017 specifically does that it could not be said to contravene Art 286 of Constitution. His understanding of the nature and purpose of Art 286(2) is partly wrong. And his conclusion about the constitutionality of Section 13 (8)(b), IGST Act, 2017 lacks any examination of the Parliament’s powers under Art 269A read with Art 286 of the Constitution. 

The reasoning adopted by both the Gujarat and the Bombay High Court only contributes to greater uncertainty on GST’s applicability to intermediaries. Further, we have no clarity on the role of Art 286 in the GST regime, no clear articulation on the interplay of Art 246A and Art 269A and a lack of appreciation as to whether and to what extent GST’s identity as a destination-based tax is supposed to constrain Parliament’s legislative power. Are no deviations allowed from the destination-based principle? If they are, on what grounds and to what extent?

Finally, both the Gujarat High Court and Justice Abhay Ahuja of the Bombay High Court endorsed the deeming fiction contained in Section13(8)(b), IGST Act, 2017 by stating that it was essential to bring such intermediary services within the scope of GST to raise revenue. Adopting a revenue-maximising approach is the prerogative of the legislature; but, from the standpoint of Courts, it is crucial that the provision in question is constitutional. The fact that the legislature is better placed to frame a tax policy cannot be cited as a reason to enact provisions that are unconstitutional. We need a more robust examination of the tax dimensions of the Constitution and not a judicial approach that uncritically endorses the view that the legislature deserves a wide leeway in enacting tax laws. Such an approach has a little analytical basis, presumes that the legislature is adequately examining each law minutely and certainly does not warrant giving short shrift to arguments based on constitutional law. 

[1] Material Recycling Association of India v Union of India & Others 2020-VIL-341-GUJ. 

[2] Dharmendra M. Jani v Union of India 2021 SCC OnLine Bom 839. 

Budgetary Support Scheme: High Court Interprets Eligibility Criteria Strictly

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Budgetary Support Scheme (‘BSS’) was introduced by the Union of India (‘Union’) for taxpayers to smoothen their transition to GST. Taxpayers who received concessions or exemptions under the pre-GST indirect tax regime would cease to receive the said concessions or exemptions due to subsumption of various indirect levies by GST. To ameliorate cessation of tax benefits due to introduction of GST, the State introduced BSS under which taxpayers who received exemptions under pre-GST indirect levies were eligible to receive partial refund of GST if they fulfilled the eligibility conditions. The High Court of Jammu & Kashmir and Ladakh pronounced a judgment[1] on 23 May 2023, interpreting the eligibility condition for BSS strictly and rejecting taxpayer’s claim to receive refund of GST. 

Taxpayers Claim 

The petitioner/taxpayer in the impugned case received exemption from payment of excise duty under a Notification issued by the Union under Central Excise Act, 1944. The benefit of excise duty exemption extended to goods described in the Table falling within different Chapters of the Notification. In the impugned case the Chapter 38 was the relevant Chapter. The petitioner claimed it was eligible to claim excise duty exemption under the broad HSN Code 3808 under Chapter 38. The petitioner was originally entitled to claim the exemption until October 2026, but due to the introduction of GST – and subsumption of excise duty – in July 2017, the petitioner had to apply for budgetary support under BSS. 

The petitioner claimed budgetary support by arguing that the exemption Notification covered all goods under the broad HSN Code 3808 and did not distinguish between various sub-headings under Chapter 38. While the Union resisted the claim by arguing that the exemption Notification covered specific goods and not all goodsunder the HSN Code 3808. The Union argued that the goods manufactured by the petitioner when it availed benefit under the exemption Notification were different than those manufactured after commencement of GST. As per the Union, the petitioner was only eligible for budgetary support if the goods manufactured after introduction of GST co-related to the same sub-headings as goods manufactured prior to GST.  While as per the petitioner, if the goods manufactured were covered under the umbrella code of 3808, they were eligible for budgetary support and the exact sub-heading was immaterial.

Since the goods manufactured by the petitioner before GST were different from those manufactured after introduction of GST, it adopted a broader interpretation of the exemption Notification and BSS eligibility conditions. The Union, on the other hand, adopted a comparatively more restrictive interpretation.  

High Court Rejects Taxpayers Claim 

The High Court stated that the appropriate manner to determine if the taxpayer was eligible to claim budgetary support was to examine the conditions specified for eligibility. One of the conditions, relevant for the purposes of the case, was that the taxpayer must be manufacturing specified goods. And specified goods were defined in BSS as goods which were being manufactured and cleared by the eligible unit by availing the benefit of excise duty exemption upto 1.07.2017. 

The High Court read the eligibility conditions of BSS with the definition of specified goods to mean that a taxpayer to claim the budgetary support must: be manufacturing goods covered under the HSN Code 3808, must have availed excise duty exemption under the Notification and the goods must have been cleared by the manufacturing unit by availing the exemption upto 1.07.2017, i.e., the date of implementation of GST. This was a fair and reasonable interpretation of the conditions specified in the BSS. 

The High Court’s interpretation of the conditions led to at least one straightforward conclusion: if the taxpayer was manufacturing the goods and availing exemption before 1 July 2017, it was eligible for BSS. While if it was not manufacturing the goods and not availing the exemption, it was not eligible for budgetary support. In view of the above, the petitioner’s argument seems attractive, i.e., if the goods under the HSN Code 3808 were manufactured by it before introduction of GST, the budgetary support should be available. However, the High Court noted that the second condition also needs to be satisfied, i.e., the goods must have been cleared by availing the exemption. And crucially the exemption could only be availed if the relevant sub-heading under HSN Code 3808 was mentioned alongside the 6-digit or 8-digit code. Thus, under the exemption Notification excise could only be availed for specific goods and not any goods manufactured under the HSN Code 3808. Accordingly, the High Court held that:

… even if any unit manufactures an item now which is covered under the Tariff Head of 3808, if the same had not been manufactured earlier during the subsistence of the Exemption Notification and had not availed excise duty exemption, such good would not qualify for claim of budgetary support under the Scheme. (para 43)

The High Court rejected the petitioners arguments on various grounds. It observed that accepting the petitioner’s argument would make the definition of specified goods redundant. It also observed that the Union was not adding words to the conditions of the BSS, instead it was interpreting the conditions correctly and strictly. And the High Court correctly endorsed the Union’s interpretation of the conditions provided in the BSS. The High Court also adopted a reasonable approach to the dispute and observed that there was no discernible ambiguity in the conditions specified in the BSS. The High Court rejected the petitioner’s claim by holding that the petitioner was adopting a generalised approach while the conditions mentioned in the BSS were specific and clear that did not allow for an interpretive approach adopted by the petitioners to support their claim of tax exemption.    

Conclusion

The High Court’s decision is a successful attempt to adhere to strict interpretation of tax statutes. At the same time, the High Court was clear in its understanding of the scope and aim of BSS. It clarified that the budgetary support is conditional and not a blanket support; to be eligible for BSS, a taxpayer needs to meet the conditions so specified. (para 27) Discounting the need for liberal interpretation of the relevant conditions, the High Court stated that the eligibility was clearly mentioned and rightly concluded that the decision to not extend BSS benefits to the petitioner did not suffer from the vice of illegality or arbitrariness. (paras 49 and 52)           

[1] M/S Best Crop Science Industrial Area, Kathua v Union of India and others 2023 LiveLaw (152).

Revenue Misinterprets Jurisprudence on Game of Skill: Kar HC Introduces Sanity Through Gameskraft Judgment

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On 11 May 2023, a Single Judge Bench of the Karnataka High Court delivered a judgment in the Gameskraftcase[1] deciding that the actions of the Revenue Department against online intermediary company, M/s Gameskraft Technologies Pvt Ltd (‘GTPL’) had no basis in law. The Revenue Department inter alia has issued an intimation notice under Section 74(5), CGST Act, 2017 calling GTPL to deposit Rs 21,000 crores (appx) along with penalty and interest. The impugned intimation notice, and the subsequent show cause notice issued under Section 74(1), CGST Act, 2017 were the subject of the dispute. 

Before I delve into the judgment, I think it is worth clarifying that the gambling law jurisprudence in India divides games into games of skill and games of chance. The latter are typically understood to be synonyms of gambling/betting. And if a game has elements of both skill and chance, then the predominant element decides the nature of the game, e.g., a game which is predominantly skill-based is understood to be a game of skill while a game which is predominantly game of chance is classified as a game of chance.    

Core Issue 

GTPL’s/Petitioner’s main argument was that they are not involved in ‘betting/gambling’. While the petitioners relied on various judgments to support their two claims, their claim is best understood through description of their business model. The petitioners claimed that they operated a platform and acted as an intermediary for players to play a game of rummy. For example, two players ‘A’ and ‘B’ intending to play rummy would download their mobile application. Both players would deposit Rs 200 each, and the petitioner for facilitating and hosting the game would charge Rs 20 each from both the players and keep the remaining Rs 360 in trust. At the end of the game, the petitioner would disburse Rs 360 to the winner. The petitioner claimed that it had no lien or right over the prize money of Rs 360. Its revenue from the above transaction was only Rs 40 on which it paid GST. 

Petitioners claimed that the ‘buy-in’ amount or gross transaction money facilitated through their platform – which in the above example was Rs 400 – could not be treated as their revenue. The amount belonged to the players, and petitioners had no lien or right over the said amount, which in this case the Revenue Department alleged was Rs 70,000 crores. And presumably the gross transaction amount was the basis of GST demand of Rs 21,000 crores.      

Petitioners further claimed that they were not involved in supply of actionable claims. And that actionable claims if any were between the players which was also irrelevant because actionable claims were exempt from GST. Schedule III of the CGST Act, 2017 lists activities or transactions which shall be treated as neither supply of goods nor supply of services. Entry 6 of Schedule III states as follows: 

            Actionable claims, other than lottery, betting and gambling. 

Thus, actionable claims unless they are lottery, betting and gambling are outside the purview of GST. And the petitioners claimed that neither are they involved in supply of actionable claims nor are the games on their platform, specifically rummy, captured by ‘lottery, betting and gambling’ since rummy is a game of skill and not a game of chance.  

The petitioners relied on the decades old Indian jurisprudence that has clearly held rummy to be a game of skill. And petitioners argued that playing rummy online does not impart it the character of a game of chance and neither does playing rummy with stakes change its character from a game of skill to a game of chance. 

Revenue Department Makes Incredulous Arguments 

As is evident from the preceding discussion, the Revenue Department’s claim that the petitioner’s activities were subject to GST would have only succeeded if they could prove that the petitioners supplied actionable claims in the form of lottery, betting and gambling. And since it was the game of rummy in question, they had to establish that the game of rummy played online and with stakes would amount to a game of chance for it to be included in the phrase ‘lottery, betting and gambling’. To establish its case, the Revenue Department indulged in an exercise of selective, non-contextual and self-serving interpretation of relevant precedents. The Revenue Department made various far-fetched arguments, and to highlight its approach, I will elaborate on its two central claims, i.e., a game of skill when played with stakes transforms into a game of chance. In this case, it meant that rummy, a game held to be a game of skill, should be viewed as a game of chance since the players involved placed stakes on the game. Further, the commission charged by the petitioners should not be viewed as a commission but earning profits and gains from stakes because their commission amount varied depending on the stakes placed on the game and was not an across the board charge.      

The Revenue made bizzare claims based on their incorrect interpretation of the jurisprudence on game of skill and game of chance. To begin with, they denied that rummy was a game of skill, contrary to well-established jurisprudence[2] that stated otherwise. Instead, they quoted selective paragraphs out of context to back their incredulous claim.

The High Court was not swayed by the Revenue Department’s fanciful interpretive exercise and instead reiterated that rummy is a game of skill ‘where predominantly skill is exercised to control the outcome of the game.’ (para 5) It added that a playing rummy with stakes does not make it a wagering contract, since a wager requires that the person placing the wager should have no interest in the outcome of a game while a player is clearly interested in winning the game. The High Court stated that: 

The game of rummy played with stakes is played between players on the basis of the assessment of their own skill. Therefore, while playing for stakes, the player makes a value judgment on his/her skill. The outcome of the game is determined predominantly by the skill of the players. Therefore, rummy played with stakes same cannot be viewed as a ‘forecast’ or a shot at the “hidden target”. (para 11)

The Revenue relied on the Satyanarayana case to argue that petitioner’s earning commission fee for facilitating rummy with stakes on its platform amounted to facilitating gambling and running a gaming house. Satyanarayana case had clearly held that rummy is a game of skill even if played with stakes. The Supreme Court had added that if there is evidence of gambling or owner of house or club was making a profit or gain from rummy, the offence of running a gaming house could be established. The Karnataka High Court correctly read the ratio of Saynarayana case to hold that charging a sitting fees is not profit in context of a common gaming house and that organizer of a skill-based game is not prohibited from charging a fee from the players of the game. (para 5 and 7). Accordingly, petitioners making profits and gains from rummy played on their platform cannot be accused of running a common gaming house. The High Court concluded that: 

Irrespective of who wins, the Petitioners, in terms of its contract with the players, collects a percentage of the amounts staked as its platform fees / commission for providing its services as an intermediary. Thus, the Respondents cannot be permitted to supply words to these observations and say that placing of stakes on a game of skill amounts to gambling. In any event, from a reading of the whole judgment, it is evident that this last line is not the ratio of the judgment at all. (para 10)  

The edifice of the Revenue’s case collapsed with the Karnataka High Court rejecting its above two arguments. The High Court concluded that all the issues raised and argued were covered by Supreme Court’s judgment in All India Gaming Federation case[3], i.e., whether played physically or online, with or without stakes, game of skill does not lose its character and is determined by applying the predominance test. 

Karnataka High Court Dismisses the Revenue’s Case  

The Karnataka High Court combed through practically the entire post-Independence jurisprudence on game of skill v/s game of chance, cited the precedents copiously, highlighted relevant paragraphs of the ratio to emphasise that the context and meaning of the judgments was opposite to the Revenue Department’s arguments. The High Court concluded that the Revenue Department’s case was based on fragile footing and observed:  

After having dealt with the rival contentions as stated supra, it is significant to state that a perusal of the impugned show cause notice as well as contentions and submissions of the respondents will clearly indicate that the same are an outcome of a vain and futile attempt on the part of the respondents to cherry pick stray sentences from the judgments of various Courts including the Apex Court, this Court and other High Courts and try to build up a non-existent case out of nothing which clearly amounts to splitting hairs and clutching at straws which cannot be countenanced and is impermissible in law. (emphasis added) (para 7)

Accordingly, the High Court held that there is no difference between online and offline games of rummy and rummy does not become a game of chance if played with stakes. It held that Entry 6, Schedule III of CGST Act, 2017 was not applicable to only rummy played with or without stakes or any games which is preponderantly a game of skill and thus petitioner’s platforms were not taxable as ‘betting and gambling’ as contended by the Revenue Department. The show cause notice issued to petitioner’s was quashed for being illegal, arbitrary and without jurisdiction or authority of law.    

Way Forward 

The Revenue Department has made repeated claims that online gaming companies indulge in significant tax evasion. The credibility of tax evasion claims has not been established through actual numbers and neither has any evidence been shared publicly. But, CGST Act, 2017 and the IT Act, 1961 empower the Revenue Department sufficiently to tackle tax evasion and build a case of contravention of tax laws. 

However, after reading the Gameskraft judgment, the picture that emerges is that the Revenue Department had pre-determined that the online gaming platforms facilitate games of chance/gambling and earn the entire amount of transactions undertaken through them. And every argument was then moulded and force-fitted to reinforce the initial conclusion. The Karnataka High Court saw through the Revenue Department’s exercise and correctly chided it for indulging in such an exercise. In fact, so far-fetched was the Revenue Department’s claim that the High Court could have just referred to its previous decision in All India Gaming Federation caseand dismissed the Revenue Department’s claims. However, the detailed 325 page decision in this case might act as a deterrence for the Revenue Department since its central premise has been outrightly, painstakingly and comprehensively dismissed by the High Court by citing every major case on gambling law in detail. Whether the Karnataka High Court’s decision would deter the Revenue Department in any manner is tough to predict; but, if past is any indication the Revenue Department is likely to treat it as a minor hiccup in its pursuit of revenue, come hell or high water. 

[1] Gameskraft Technologies Pvt Ltd v DGGSTI 2023 SCC OnLine Kar 18. 

[2] State of Andhra Pradesh v K. Satyanarayana & Ors AIR 1968 SC 825, at para 12. 

[3] All India Gaming Federation v State of Karnataka & Ors AIR 2022 SCC OnLine Kar 435. 

Refunds for Zero-Rated Exports Viewed as Fundamental to GST Regime

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In a judgment pronounced on 16 February 2023, a Single Judge Bench of the Karnataka High Court in Tonbo Imaging India case[1] held that Rule 89(4)(C), CGST Rules, 2017 ‘is illegal, arbitrary, unreasonable, irrational, unfair, unjust and ultra vires Section 16 of the IGST Act and Section 54 of the CGST Act …’. (para 17) The writ petition filed by the petitioners challenged that the amendment to Rule 89(4)(C) – via Notification 16/2020-CT dated 23.03.2020 – was unconstitutional and the High Court upheld the same. I explore the arguments and the High Court’s reasoning in this post.  

Background to the Writ Petition  

The petitioners were engaged in designing, developing, and deploying various types of advanced imaging and sensor systems to control and understand complex environments. The petitioners exported the aforementioned products from May 2018 to March 2019. Accordingly, the petitioners claimed refunds of its zero-rated exports under Section 16, IGST Act, 2017 read with Section 54(3)(i), CGST Act, 2017 and Rule 89, CGST Rules, 2017. The petitioners claim was rejected by the Revenue Department for not filing proof as required under the amended Rule 89(4)(C) despite the petitioner contending that their case related to the period before the amendment and should be governed by the pre-amended rule. The petitioner argued that its case should be governed by the pre-amended version of Rule 89(4)(C) which stated as follows:

Turnover of zero-rated supply of goods means the value of zero-rated supply of goods made during the relevant period without payment of tax under bond or letter of undertaking as declared by the supplier, whichever is less, other than the turnover of supplies in respect of which refund is claimed under sub-rules (4A) or (4B) or both.

While the Revenue Department’s case was that the petitioner must show proof as required under the amended version of Rule 89(4)(C), which states as follows: 

Turnover of zero-rated supply of goods means the value of zero-rated supply of goods made during the relevant period without payment of tax under bond or letter of undertaking or the value which is 1.5 times the value of like goods domestically supplied by the same or, similarly placed supplier, as declared by the supplier, whichever is less, other than the turnover of supplies in respect of which refund is claimed under sub-rules (4A) or (4B) or both. (emphasis added)

The amended rule introduced the concept of comparing the value of exports of the supplier with its domestic supplies, and introducing an upper cap to the refunds based on the comparison. This would mean that if an exporter has paid a certain amount by way of GST on its purchases, then the Revenue Department may not refund the entire tax amount but only 1.5 times the value of like goods supplied domestically. 

Petitioner’s Arguments

The petitioner assailed the amendment to Rule 89(4)(C) on various grounds. First, that while Section 16(3) allowed refund of taxes made in the course of making a zero-rated supply, the Rule in whittling the refund is ultra vires the parent statute. Second, the petitioners claimed that the amendment to Rule 89(4)(C) creates a hostile discrimination between exporters who export without payment of duty under a Bond/Letter of Undertaking and those who pay duty. And only exporters who made exports without payment of duty were subjected to the restriction under Rule 89(4)(C). Extending the Article 14 argument, the petitioners argued that the impugned Rule was arbitrary and unreasonable because it had no rational nexus with the objective sought to be achieved by Section 16, IGST Act, 2017, i.e., zero-rating of exports. Third, the petitioners argued that amendment to the impugned Rule was violative of Article 19(1)(g) since it will affect availability of funds and hamper the rotation of their funds. Finally, the petitioners assailed the impugned Rule on the ground that it suffered from the vice of vagueness, did not define key terms nor did it prescribe the consequences if a similarly placed supplier was not found or the supplier did not supply similar goods domestically.       

High Court Accepts Petitioner’s Arguments 

The Karnataka High Court accepted almost all the petitioner’s arguments. It traced a brief legislative history of GST to conclude that zero-rating of exports was a core feature of GST in Section 16, IGST Act, 2017 and Section 54, CGST Act, 2017 with Rule 89 as a machinery provision to implement the policy of zero-rating. Based on this understanding, the High Court almost repeated all of the petitioner’s arguments approvingly. 

The High Court held that the amended Rule 89(4)(C) overrides the parent legislation since it restricts refunds while the parent provisions, i.e., Section 16, IGST Act, 2017 and Section 54, CGST Act, 2017, allow for full refunds for zero-rated supplies such as exports. It accepted the argument that the impugned Rule created hostile discrimination between two kinds of exporters, i.e., those who export without payment of duty and those who pay duty violating Article 14; especially since there was no rational nexus with the objective contained in Section 16, IGST Act, 2017. The High Court also opined that the impugned Rule was unreasonable since it affected the availability of funds and caused hardship to exporters. Further, it held the impugned Rule to be vague as phrases such as ‘like goods’ and ‘similarly placed supplier’ were not defined in the statute or relevant Rules. It concluded that:  

The object of zero rating would be lost if exports are made to suffer GST as the exporter would either pass it on to the foreign supplier or would absorb it himself; firstly it would mean that taxes are exported which is against the policy of zero rating supra and secondly, it would make exports uncompetitive being against the stated policy of the Government. The amending words therefore, do not sub serve the objectives set out in Section 16 of the IGST Act, 2017 nor Section 54 of the CGST Act, 2017 and are contrary to the clarifications given above. (Para 17(h))

The High Court viewed the impugned Rule at odds with the GST’s objective of making exports zero-rated and not subjecting them to the burden of tax. Zero-rating of goods is also in consonance with GST’s identity as a destination-based tax. The State had to discharge a heavy burden in arguing the reason for the departure from the core characteristics and policy of GST. However, no persuasive reason was argued by the State.  

Conclusion

The judgment is a closely reasoned judgment and supports its conclusions adequately. The entire premise of the judgment is that zero-rating of exports is a core feature of GST encoded in the legislation, and deviation from its via secondary legislation without a persuasive reason is impermissible. However, the judgment offers no perspective from the State and/or the Revenue Department. The Karnataka High Court never elaborated on the State’s arguments because considered them to be ‘neither relevant nor germane’ for adjudication of the petition. (para 27) Only argument of the State, i.e., the impugned Rule was amended to prevent misuse was referred to dismissed summarily. The High Court rightly held that in the absence of defining data the reason of misuse has no reasonable basis in law and neither can amendments to law be made on the premise of distrust without actually ascertaining the misuse. (para 22) Apart from the above, no detailed reference is made to the State’s arguments. Consequently, we never really get an insight as to why the amendment to Rule 89(4)(C) was made and the objective sought to be achieved by restricting refunds of exporters. And, at the time of writing, there seems to be no move to challenge this judgment either.    

[1] M/s Tonbo Imaging India Pvt Ltd v Union of India 2023 LiveLaw (Kar) 134. 

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

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

Introduction

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

Conditions to Claim ITC 

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

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

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

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

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

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

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

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

Attributing Fault, Denying ITC, and Position under GST  

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

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

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

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

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

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

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

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

e-Commerce Operators Constitute a Distinct Category Under GST

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

Arguments

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

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

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

Decision

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

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

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

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

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

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

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

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

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

Conclusion

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

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

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

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

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

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