Andhra Pradesh High Court

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

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

Facts 

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

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

Decision

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

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

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

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

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

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

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

Conclusion  

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

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

Andhra HC Sets Aside SCN: Holds that it is Vague and Dubious

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The Andhra Pradesh High Court in a recent judgment[1] set aside the showcause notice (‘SCN’) issued by the Revenue Department on the ground that the SCN was vague and dubious. The High court held that the SCN did not contain sufficient details and particulars to enable the taxpayer to reply or file appropriate objections. 

Facts 

The petitioner in the impugned case, M/s Sakhti Steel Industries Pvt Ltd, was in the business of trading TMT bars, billets and ferrous scrap and importing iron scrap from foreign countries. The parent company of the petitioner, M/s Sakhti Ferroy Alloys Pvt Ltd, manufactured TMT bars and billets. The petitioner used to purchase the TMT bars and billets from its parent company and sell them to various States. The petitioner stated that to maintain better operational efficiency it took on lease vacant land with small builtup area that belonged to its parent company and in a portion of the said premises the parent company also operated. The petitioner had obtained registration in Andhra Pradesh where the said premises were located. 

The concerned Deputy Assistant Commissioner visited the business premises of the petitioner and issued a SCN with allegations that the petitioner had obtained registration by ‘fraud, wilful misstatement or misrepresentation of facts’ and the petitioner was asked to file a reply within 7 days. The SCN was issued because the Deputy Assistant Commissioner based on commonality of premises of the petitioner and its parent company concluded that the former had obtained registration by fraud. The petitioner filed a reply denying all allegations of fraud and refuting the fact that its business was not genuine, but the report of Deputy Assistant Commissioner was accepted by the appellate authorities and petitioner’s registration was cancelled. Against the said orders, the petitioner approached the Andhra Pradesh High Court. 

High Court Sets Aside SCN 

The Andhra Pradesh High Court was precise and unforgiving in its observations about the conduct of the Revenue Department. The High Court cited Section 29, Andhra Pradesh Goods and Services Tax, 2017 and noted that the grounds on which the registration of a taxpayer can be cancelled are specifically enumerated in the provision. Some of the grounds in the provision are: registered taxpayer has contravened any of the provisions of the Act or rules made thereunder, not filing of returns and obtaining registration by fraud, misstatement or misrepresentation of facts. The High Court noted that the SCN issued to the petitioner only mentioned the latter and observed that grounds mentioned in SCN were vague, dubious and did not furnish enough details for the taxpayer to respond to them meaningfully. The High Court added that the purpose of SCN is to state the formal grounds of accusation to enable the accused to reply in satisfaction of principles of natural justice and equity. (para 7) The nature of SCN was enough for the High Court to conclude that principles of natural justice had bene flagrantly violated and that the ‘very foundation for invocation of cancellation is feeble as it has no legal sanctity.’ (para 7)

While the vagueness in the SCN was enough for the Andhra Pradesh High Court to quash it, the High Court nonetheless added that the petitioner in its reply to SCN had stated that it was not involved in any fake business and vouched for the authenticity of its bills and details of all its invoices involving purchases and sales. The petitioner was willing for its records to be scrutinized to disprove allegations of it running a fake business. However, the High Court observed, instead of resorting to such a ‘logical and legal exercise’ the authorities relied on the conjecture of the inspecting authority who suspected the petitioner to be involved in bill trading without movement of goods, for which there was no proper basis. (para 10)

The Andhra Pradesh High Court was thus unsparing in its comments on the Revenue Department’s conduct at the time of issuance of SCN and thereafter. And its observations about the lackadaisical approach of the Revenue Department were certainly not inaccurate. 

Conclusion 

The Andhra Pradesh High Court adopted a pro-taxpayer approach in the impugned case without detracting from the basic principles of law. It interpreted the relevant provision – Section 29, Andhra Pradesh Goods and Services Tax, 2017 – reasonably to cast a burden on the State to articulate specific grounds of accusation in a detailed manner to enable the taxpayer to respond meaningfully. Merely reproducing the language of the statutory provision in the SCN was not sufficient to prove that the ground for cancellation of taxpayers’ registration were satisfied. And the High Court went further to castigate the authorities to follow a logical path once the taxpayer replies to the SCN instead of merely providing their stamp of approval to the suspicions of the inspecting officer.    

[1] M/s Sakhti Steel Industries Pvt Ltd v Appellate Additional Commissioner Sales Tax (Tirupati) TS-496-HCAP-2023-GST. 

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