Allahabad High Court

Single Administrative Interface under GST: Identifying Two Rough Patches  

by

GST is a dual nationwide tax implying that both the Union and States concurrently levy it on supply of goods or services. While a single indirect tax jointly administered by the Union and States is supposed to augur well for ease of doing business and improve other economic efficiencies, it also requires demarcating administrative responsibilities to prevent the taxpayer from being subjected to proceedings by two different authorities. One such issue is demarcating and assigning tax base to tax authorities of the Union on one hand and the States/Union Territories on the other. GST laws anticipated overlap of tax administration in a dual tax such as GST and incorporated a specific provision – Section 6, CGST Act and Section 6 in SGST Act/UTGST Acts to prevent taxpayer harassment.  

Section 6, CGST Act, 2017 is pari materia with SGST and UTGST and provides for the following: 

First, officers appointed under SGST and UTGST Acts are authorized to be proper officers for purposes of CGST Act as well; 

Second, where a proper officer issues an order under CGST Act he shall also issue an order under the SGST or UTGST Act under intimation to the jurisdictional officer of State tax or UT tax. 

Third, where a proper officer under the SGST Act or UTGST Act has initiated any proceedings on a subject matter, no proceedings shall be initiated by the proper officer under CGST Act on the same subject matter. 

Finally, any proceedings for rectification, appeal, and revision, wherever applicable, of any order passed by an officer under CGST Act shall not lie before an officer appointed under the SGST Act or UTGST Act.        

While the cross empowerment of officials is a sound policy encoded in Section 6, there are two dominant uncertainties that prevail in the interpretation and implementation of the impugned provision: first, is the meaning and scope of the term ‘intelligence-based’ enforcement action’; second, is the implication of the term ‘proceedings on the subject matter’. The former term is not used in Section 6 but is proving to be crucial in allocation of tax administrative responsibilities. I will discuss the uncertainties that revolve around both phrases.   

Intelligence-Based Enforcement Action 

The 9th GST Council meeting discussed the issue of cross empowerment of tax officials under GST. There was detailed discussion on the issue of allocation of tax base as per turnover of the taxpayer, powers relating to audits, and issues relating to administration of IGST. In so far as is relevant to the current discussion, the GST Council agreed that:

Of the total number of taxpayers below Rs. 1.5 crore turnover, all administrative control over 90% of the taxpayers shall vest with the State tax administration and 10% with the Central tax administration; 

In respect of the total number of taxpayers above Rs. 1.5 crore turnover, all administrative control shall be divided equally in the ratio of 5O% each for the Central and the State tax administration; (para 28)

In view of the same, the CBIC issue a Circular reiterating the same as well as prescribing broad guidelines for computing turnover of the taxpayers.  

Apart from the above division of tax base to smoothen administration of GST, there was another agreement reached in the GST Council, i.e., both the Union and State administrations shall have the power to take ‘intelligence-based enforcement action’ across the entire value chain. The import of the GST Council’s above decision was clarified via a letter issued on 05. 10. 2018. Two important things that were clarified through the letter were:

First, that irrespective of assignment of taxpayer base as per turnover, both the Union and State are empowered to initiate intelligence-based enforcement action on the entire tax base which includes entire process of investigation, issuance of SCN, recovery, appeal, etc. 

Second, it added that:

If an officer of the Central tax authority initiates intelligence based enforcement action against a taxpayer administratively assigned to State tax authority, the officers of Central tax authority would not transfer the said case to its Sate tax counterpart and would themselves take the case to its logical conclusions. (para 4)  

The initial allocation of taxpayer base is thus subject to intelligence-based enforcement action, and once the latter is initiated by any authority it will retain the jurisdiction over that particular taxpayer and take the case to its logical conclusion.   

Reading both the above legal instruments alongside minutes of the 9th GST Council meeting clarify the division of taxpayer base amongst the State and Union tax officers, but the term ‘intelligence-based enforcement action’ adds a layer of uncertainty. To what extent and what action exactly amounts to such an ‘intelligence-based action’ remains unclear. The phrase indicates that the action is based on some information obtained by tax officers and not a random scrutiny of taxpayer. But, the scope and limit of the phrase needs a more precise understanding which is currently lacking. And the same will, hopefully, be available as the jurisprudence on the issue develops.  

‘Proceedings’ on Same ‘Subject-Matter’  

The other prong of uncertainty is if a taxpayer can be subjected to proceedings on the same subject matter by two different authorities – at the Union and State level. Section 6(2)(b) states:  

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

While Section 6(2)(b) uses the phrases ‘proceedings’ and ‘subject matter’, they are not defined under GST laws. Courts in certain cases have attempted to unravel the meaning of the two terms ‘proceedings’ and ‘subject-matter’. The most prominent attempt was by the Allahabad High Court in GK Trading case where the petitioner’s contention was that once the Deputy Commissioner, Ghaziabad has conducted survey of its business premises and is investigating the matter pursuant to the survey, the issuance of summons by another authority – DGGSTI, Meerut – under Section 70 of CGST Act, 2017 is barred by Section 6(2)(b).

The Allahabad High Court relied on previous judicial decisions – largely unrelated to GST – to conclude that the term ‘inquiry’ used in Section 70, under which summons were issued and the term ‘proceedings’ used in Section 6(2)(b) had different meanings. The High Court noted that the term ‘inquiry’ under Section 70 was limited to requiring the presence of a person to produce evidence or documents and cannot be intermixed with steps that may ensue on conclusion of the inquiry. Noting that words ‘proceeding’ and ‘inquiry’ are not synonymous, the High Court held that: 

The word “proceedings” used in Section 6(2)(b) is qualified by the words “subject-matter” which indicates an adjudication process/ proceedings on the same cause of action and for the same dispute which may be proceedings relating to assessment, audit, demands and recovery, and offences and penalties etc. These proceedings are subsequent to inquiry under Section 70 of the Act. (para 17) 

The above observation implies that the power of inquiry under Section 70 – and issuance of summons – can be invoked against a taxpayer even if proceedings have been initiated by another tax authority, but the steps subsequent to inquiry cannot be taken if proceedings are underway. What is the point of inquiry if Section 6(2)(b) bars the inquiry authority to take steps subsequent to an inquiry? The answer is unclear, and the High Court does not delve into the issue, and rightly so. Nonetheless, the High Court’s strict interpretation of the relevant statutory provisions ensure that the bar under Section 6(2)(b) has been interpreted in a strict fashion, but the implications of the High Court’s interpretation will only become clear in due time.   

Conclusion 

On both the above discussed issues, single-interface GST administration is likely to remain in a state of flux. Given that ‘intelligence-based enforcement action’ is a phrase of uncertain scope and the words ‘proceedings’ and ‘subject-matter’ are not defined under the GST Acts, the tax officers are likely to interpret in differing manner and as per the facts of each case. While the Allahabad High Court has tried to demarcate the scope of latter, and to some extent succeeded, the meaning of the phrase ‘intelligence-based enforcement action’ remains even more elusive. And we are likely to witness some disputes over the same.     

Penalties for e-way bills cannot be imposed in absence of Mens Rea: Allahabad HC

by

The Allahabad High Court in a recent judgment took the view that the GST Department cannot impose a penalty on taxpayers – under Section 129(3), CGST Act, 2017  – for not possessing e-way bills in the absence of an intention to evade tax. The High Court held that the essence of any penal imposition is linked to the presence of mens rea which was clearly absent as revealed from the facts and records of the impugned case. In stating so, the High Court aligned with an emerging jurisprudence on Section 129 that requires intent to evade tax as an essential requirement for passing orders under Section 129(3). 

Facts  

The petitioner, an authorized dealer of Steel Authority of India Ltd (‘SAIL’) purchased a bar of TMT on 19.02.2021. Tax invoices were issued by SAIL to the petitioner, and they contained the registration number of the transportation vehicle. The petitioner claimed that the e-way bills could not be generated at the onset of transportation since there were glitches in the e-way bill system of the Department. The e-way bills were generated on 20.02.2019 and 21.02.2019. The petitioner’s claim was that the e-way bills were presented at the time of interception of goods before the issuance of showcause notice and before passing the detention order. Aggrieved by the orders of detention passed on 21.02.2019 and 20.10.2019 by the Assistant and Additional Commissioner respectively, the petitioner approached the Allahabad High Court. 

Allahabad High Court Quashes Orders of Detention 

The Allahabad High Court noted that the relevant question was: despite the petitioner failing to generate the e-way bills on time, did it have an actual intent to evade payment of tax? The High Court cited relevant precedents to note that for proceedings under Section 129(3) intent to evade tax is mandatory and that even in the absence of an e-way bill if there is no discrepancy in the accompanying documents and no intent to evade tax, then penalty cannot be levied. Courts have also held that not generating Part B of the e-way bill is a mere technical error, and if the accompanying invoice has the vehicle details, then it can be reasonably concluded that the taxpayer has no intent to evade tax. Based on an examination of the relevant precedents, the High Court’s summation of the current legal position was: 

What emerges from a perusal of the aforesaid judgments is that, if penalty is imposed, in the presence of all the valid documents, even if e-Way Bill has not been generated, and in the absence of any determination to evade tax, it cannot be sustained. (para 15) 

As per the facts of the impugned case, the petitioner had generated both the e-way bills, one before detention and one after detention, but both before the order under Section 129(3) was passed. The Allahabad High Court noted, neither of the two orders contained a reasoning as to how and why an intention to evade tax was established. The High Court noted that the petitioner was made to suffer due to a technical error without there being an intent to evade tax on petitioner’s behalf. Elaborating on the importance of establishing intent to evade tax before imposing penalties under Section 129(3), CGST Act, 2017, the High Court observed: 

A penal action devoid of mens rea not only lacks a solid legal foundation but also raises concerns about the proportionality and reasonableness of the penalties imposed. The imposition of penalties without a clear indication of intent may result in an arbitrary exercise of authority, undermining the principles of justice. Tax evasion is a serious allegation that necessitates a robust evidentiary basis to withstand legal scrutiny. The mere rejection of post-detention e-Way Bills, without a cogent nexus to intention to evade tax, is fallacious. (para 18) 

The Allahabad High Court further added that it was incumbent on the tax authorities to distinguish technical errors from deliberate attempts to avoid tax. And that mere technical errors that do not have financial implications should not lead to imposition of penalties. 

Conclusion 

The Allahabad High Court through its judgment in the impugned case follows a line of judicial precedents – and the High Court duly cited some of them – that underline the need to establish or indicate the presence of intent to evade tax before tax authorities pass an order under Section 129(3) of CGST Act, 2017. Either the officers are not understanding the scope and objective of the provision or are deliberately ignoring the requisite conditions of the provision before passing orders under Section 129(3). Irrespective, the burgeoning no. of cases by taxpayers claiming violation of Section 129(3) indicates a lack of adherence to the law laid down by Courts in an increasing no. of cases.  

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

by

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. 

Allahabad HC Quashes Letter Issued by YEIDA Demanding Payment of GST

by

Allahabad High Court recently allowed a writ petition[1] and quashed a letter issued by the Advisor to Yamuna Expressway Industrial Development Authority (YEIDA) requiring the petitioner to pay GST of 18% on the premium of Rs 3.80 crores charged by the YEIDA against an institutional plot allotted to the petitioner. The High Court inter alia observed that the YEIDA did not have the authority to demand payment of GST. 

Introduction 

The petitioner’s case was that it be allowed to claim tax exemption under Notification No. 12/2017 dated 28 June 2017 read with Notification No. 32/2017 dated 13 October 2017. The petitioner argued that YEIDA had doubt as to the applicability of the Notification to the case and had applied to Authority for Advance Rulings (‘AAR’) which had decided in petitioner’s favor. YEIDA, on the other hand, defended its demand of tax from the petitioner on the ground that the petitioner did not fulfil the requirement of exemption and further that its demand for tax was only provisional in nature and the petitioner could seek refund from the Revenue Department. 

Allahabad HC Decides 

Allahabad High Court examined the relevant entries of the Notifications wherein the exemption was claimed by the petitioner. The entries allowed exemption to upfront amounts such as premium, salami, development charges, etc. leviable in respect of the service of long term lease provided by the Development Corporations/Undertakings. The High Court observed that the plain letter of the law did not allow any doubt to arise with regard to applicability of the exemption to the impugned case. The only doubt that YEIDA had was whether the exemption was applicable to allotment of plots made for public health purposes. To this end, the High Court noted that YEIDA had approached AAR with a specific query, i.e., whether GST was chargeable on premium and lease rent on plots allotted to hospitals against lease granted for 30 years. And AAR had clarified that the GST was not applicable. 

Despite the advance ruling issued by AAR which was not challenged, YEIDA issued a letter to the petitioner demanding deposit of GST @18%. It was this letter which was the subject matter of challenge. 

The Allahabad High Court observed that the stand taken by YEIDA was wholly unfounded in law. And that any doubt that arose from the language of the exemption notification was resolved by AAR. Further, the High Court noted that the AAR had confirmed GST exemption subject to the conditions mentioned in the Notification. But a look at the Notification revealed that the legislature had chosen to give unconditional exemption with respect to upfront amounts paid for such plots. Thus, it concluded that: 

Consequently, the letter dated 24.08.2018 issued on behalf of YEIDA is wholly unfounded in law and also in facts. Besides absence of conditions imposed by the legislature while granting exemption, no fact allegation has been made in the said communication of any specific condition having been violated by the petitioner. (para 22) 

The Allahabad High Court thereby quashed the letter issued by YEIDA and ordered that any amount paid by the petitioner in pursuant of such communication be refunded.  

Conclusion 

The impugned case is one of those cases where one wonders why the dispute arose in the first place. YEIDA’s doubt – superfluous to begin with – as regards applicability of the exemption was clarified by AAR, but it still demanded payment of GST from the petitioner despite no claim by the Revenue Department that the transaction was exigible to GST. YEIDA’s argument that the demand for tax was ‘provisional’ and the petitioner could seek a refund missed the point completely. Why should the tax be paid if there is no liability to pay tax in the first place? Whether it will be refunded or not is immaterial.    

[1] M/S Ram Kamal Healthcare Pvt Ltd v Union of India & Ors 2023:AHC: 191485-DB. 

Allahabad HC Opines on Section 129, CGST Act, 2017

by

In a recent case[1], the Allahabad High Court has reiterated an essential condition to invoke Section 129, CGST Act, 2017, i.e., an intention to evade tax. While a similar observation has been made by Supreme Court in M/s Satyam Shivam Papers case[2], the High Court’s reinforcement is perhaps necessary due to repeated transgressions by the Revenue Department.

Facts 

In the impugned case, the petitioner was engaged in the business of manufacture and sale of industrial grade steel components such as channels, beams, etc. The petitioner was transporting the said goods to M/s Maa Ambey Steels with the relevant tax invoices, e-way bills, etc. During transport, the said goods were intercepted, and the relevant officers found that the e-way bill accompanying the goods had been cancelled by the purchaser, M/s Maa Ambey Steels. In the absence of a valid e-way bills, the goods were seized. The petitioner subsequently explained to the Revenue Department that all the relevant e-way bills had been completed but the it was unaware of the fact that e-way bills had been cancelled by the purchaser. The petitioner tried to convince the Revenue Department that the transaction in question was genuine and goods were being sold by a registered dealer to another registered dealer. Dissatisfied with the petitioner’s response, the Revenue Department passed an order under Section 129(3), CGST Act, 2017 and a penalty was imposed on the petitioner. The petitioner assailed the said order via writ petition before the Allahabad High Court. 

No Intention to Evade Tax 

The Allahabad High Court engaged with the arguments of the petitioner and the Revenue Department. The petitioner’s primary argument was that while an order was passed against it under Section 129 whereby a penalty imposed, but in the said order there was no reference to the petitioner’s intention to evade tax. The petitioner argued that in the absence of an intent to evade tax, the penalty should have been imposed on it under Section 122(ix), CGST Act, 2017 and not Section 129(3), CGST Act, 2017. (para 5) The Revenue Department, on the other hand, argued that Section 129 starts with a non-obstante clause and thus it overrides every other provision of CGST Act, 2017. (para 7) And that transporting goods without a valid e-way bill attracted Section 129, CGST Act, 2017. 

The Allahabad High Court observed that once the dealer had informed the Revenue Department of the attending and mediating circumstances that led to cancellation of the e-way bill, it was a minor breach on the petitioner’s end. The purchaser had cancelled the e-way bill due to valuation issues of the goods. And the petitioner had sold the goods in question to another purchaser subsequently. And thus the High Court observed that: 

The authority could have initiated proceedings under section 122 of the CGST Act instead of proceedings under section 129 of the CGST Act. Section 129 of the CGST Act must be read with section 130 of the said Act, which mandate the intention to evade payment of tax. Once the authorities have not observed that there was intent to evade payment of tax, proceedings under section 129 of the CGST Act ought not to have been initiated, but it could be done under section 122 of the CGST Act in the facts & circumstances of the present case. (para 10) 

The Allahabad High Court further added that while Section 129 deals with detention and seizure of goods and Section 130 with confiscation of goods; a purposive reading of both the provisions deals indicates that the legislature intended that an intent to evade tax is sine qua non to initiate proceedings under the aforesaid provisions. (para 11) 

Conclusion

The Allahabad High Court’s observations in the impugned case are not unprecedented. The Supreme Court in M/s Satyam Shivam Papers case had observed that the goods in question could not be transported in time due to factors beyond the taxpayer’s control and thus an intent to evade tax could not be attributed to the taxpayer. It is not unsurprising that an elemental issue needs reiteration by different Courts repeatedly to underline the legislative intent and scope of the provision. Hopefully, this judgment will prove constructive in enhancing the Revenue Department’s understanding of the scope of Section 129 and by extension, of the scope of Section 130 of CGST Act, 2017.    

[1] M/s Shyam Sel and Power Ltd v State of UP and Others 2023 LiveLaw (AB) 374. 

[2] Assistant Commissioner (ST) & Others v M/s Satyam Shivam Papers Pvt Ltd (2022) 134 taxmann.com 241.  

LinkedIn