RavPratapSingh

Supreme Courts Uses Tax Sovereignty to Hunt Tiger Global

by

The Supreme Court recently handed a significant legal victory to the Income Tax Department (‘Revenue’) in The Authority for Advance Rulings (Income-Tax) & Ors v Tiger Global International III Holdings (‘Tiger Global case’). And in the process created a significant shift in our understanding of income tax jurisprudence and tax treaty obligations. But, before we get to what the Supreme Court held, a short prologue.  

Prologue: Underlying Procedural Knot

Justice Mahadevan, in his leading opinion, concluded that the Revenue has proved that transactions in ‘the instant case are impermissible tax-avoidance arrangements, and the evidence prima facie establishes that they do not qualify as lawful.’ (para 50) (emphasis added)  

The above conclusion – lacking adequate basis – is crucial because of procedural backdrop of the case. Tiger Global companies (‘Tiger Global’) had filed an application before Authority for Advance Ruling (‘AAR’) seeking clarity on their obligation to withhold taxes. But, AAR rejected Tiger Global’s application on the ground that its arrangement was for avoidance of tax in India. If a transaction is ‘designed prima facie for the avoidance of income tax’, then AAR is obligated to reject the application under proviso (iii) to Section 245R(2). AAR found the above provision to be ‘squarely applicable’ to the case and rejected the application. The core finding of AAR was that Tiger Global incorporated in Mauritius lacked economic substance and its head and brain were located in the United States of America. Tiger Global, AAR noted, were ‘conduits’ for investments in Singapore and Mauritius.   

Tiger Global impugned AAR’s ruling before the Delhi High Court (‘High Court’). The Revenue contended that AAR had only given a preliminary opinion on chargeability to tax and there was no justification for the High Court to exercise judicial review. The High Court reasoned that reports of both Commissioner of Income Tax and AAR had ‘trappings of finality’ and ‘evident element of resolute decisiveness’. The High Court’s view was fortified by AAR’s observations on treaty eligibility and on chargeability of capital gains. The High Court, convinced that AAR had made substantial findings and not expressed a prima facie view, pronounced a detailed decision on merits. The High Court held that Tiger Global was not liable to tax in India and could avail treaty benefits under the India-Mauritius tax treaty.     

In appeal against the High Court’s decision, the Supreme Court has pronounced a detailed judgment but not gone into merits of the case. A fact that is difficult to come terms with once you read the judgment. Nonetheless, as per the Supreme Court the core question before it was: whether AAR was right in rejecting applications for advance rulings on grounds of maintainability and whether enquiry can be made if capital gains is chargeable.

In view of the above procedural history, the Supreme Court’s conclusion that the Revenue has succeeded in proving that ‘prima facie’ Tiger Global’s arrangements are unlawful is vital. Since the Supreme Court Revenue has ruled in favor of the Revenue, the assessment of Tiger Global will materialize. Tiger Global, if it chooses, can lend quietus to the issue and pay tax or challenge the imminent assessment orders and indulge in another round of legal bout with the Revenue. That is all in the untold future, until then we have the Supreme Court’s judgment to contend with.   

Introduction

Supreme Court’s judgment can be analyzed on various axes: international tax law-domestic law dynamic, application of judicial anti-avoidance rule, prospective and retrospective applicability of amendments, trajectory of India-Mauritius tax treaty, eligibility for tax treaty benefits, relevance of secondary legislation such as circulars issued by the Revenue and norms of judicial propriety. Two crucial threads of the case – in my view – are the relevance of tax residency certificate (‘TRC’) and applicability of GAAR.

In brief, Supreme Court has held that TRC is necessary but not a sufficient condition to claim tax treaty benefits. Tiger Global possessing TRC of Mauritius does not preclude the Revenue from applying the substance over form test and deny assessee tax treaty benefits. In this article, I forsake an exhaustive commentary on the case, to make two narrow claims: 

First, the Supreme Court in holding that TRC is a necessary but not sufficient condition for claiming tax treaty benefits plays fast and lose with strict interpretation of Section 90(4) of the Income Tax Act, 1961 (‘IT Act, 1961’) and instead places greater reliance on legislative history and legislative intent while ignoring binding judicial precedents.

Second, I suggest that Tiger Global case unsettles well-entrenched axioms in income tax and tax treaty landscape. The most significant rupture is of the doctrine that tax treaties override domestic law if the former are more beneficial to the assessee. The Supreme Court had no qualms in stating that GAAR contained in a domestic law can be used to deny tax treaty benefits. An observation that appears unblemished, if we look at the underlying provision(s), but holds wider consequences for India’s tax treaty obligations.   

I conclude that the sub-par reasoning of the Supreme Court is attributable to its half-baked idea of tax sovereignty. The concurring opinion of Justice Pardiwala invokes tax sovereignty expressly while the leading opinion of Justice Mahadevan relies on it impliedly. In Tiger Global case, Indian Supreme Court has couched tax sovereignty in legal sophistry, without articulating it in any meaningful manner. In fact, the Supreme Court has exhibited a shallow view of international law – and by extension tax treaty – obligations by viewing them as dispensable and permitted unilateral actions by the Revenue in the name of tax sovereignty.     

I make the above claims fully cognizant of the fact that the Supreme Court’s judgment is, technically, not on merits of the case. But the Supreme Court’s observations are sufficiently detailed and such judicial observations deserve a scrutiny irrespective of narrowing framing of the issue. 

Factual Background 

The brief facts of the case are that Tiger Global acquired shares in Flipkart Singapore before 1 April 2017. The value of shares of Flipkart Singapore was primarily due to the assets the company held in India. In simpler terms, Tiger Global held some shares in holding company of Flipkart – Flipkart Singapore – which in turn controlled subsidiary Indian companies. And the value of shares of Flipkart Singapore was derived from the business and assets owned by its Indian subsidiaries. In August 2018, Tiger Global sold the shares as part of the larger restructuring wherein Walmart acquired majority shareholding in Flipkart Singapore. 

The sale of shares was an ‘indirect transfer’ because sale of shares of Flipkart Singapore indirectly transferred control of Flipkart’s Indian companies and business to Walmart. The sale, as per the Revenue was chargeable to tax under IT Act, 1961. Since the value of shares in Flipkart Singapore was primarily due to the assets it held in India, the legal fiction under Explanation 5, Section 9 was applicable as it deems such shares as located in India. Tiger Global contended that it was a resident of Mauritius, it had acquired the shares before 1 April 2017, and as per the India-Mauritius tax treaty it was liable to pay tax only in Mauritius.    

Tiger Global was riding on two major factors: firstly, that under the India-Mauritius treaty all investments made by residents of Mauritius before 1 April 2017 were grandfathered and were liable to tax only in Mauritius; secondly, if an assessee is resident of India’s tax treaty partner the IT Act, 1961 will only apply if it is more beneficial to the assessee. Thus, as per Tiger Global even if the transaction was liable to tax under Section 9, IT Act, 1961 the India-Mauritius tax treaty exempted it from tax in India and the treaty should override the statute. Widely held views amongst lawyers backed the former claim, decades of jurisprudence the latter.  

The Supreme Court rejected the arguments of Tiger Global and wrote a judgment premised on fanciful ideas of tax sovereignty and autonomy.    

Tax Residency Certificate: Necessary but not Sufficient  

In April 2000, the Revenue had issued Circular No. 789 to address the anxieties about tax liabilities of FIIs and other investment funds which operated from Mauritius and were incorporated there. The relevant portion of the Circular stated that: 

It is hereby clarified that wherever a Certificate of Residence is issued by the Mauritian Authorities, such Certificate will constitute sufficient evidence for accepting the status of residence as well as beneficial ownership for applying the DTAC accordingly. (emphasis added)

In October 2003, the validity of Circular No. 789 was upheld by a Division Bench of the Supreme Court in Union of India v Azadi Bachao Andolan and Anr. The Supreme Court in upholding the Revenue’s power to issue Circular No. 789 endorsed its contents and the Revenue’s interpretation of the India-Mauritius tax treaty. In Tiger Global case, the Supreme Court instead of accepting this unequivocal position of law and engaging with it a meaningful manner, pursued the tangent of legislative history and amendment of Section 90 to conclude that TRC is not sufficient evidence of residence. The legislative history was the amendments made to IT Act, 1961 in 2012 and 2013 to primarily undo the effect of Supreme Court’s judgment in the Vodafone case.    

Finance Act, 2012 amended Section 90(4), IT Act, 1961 to state that an assessee is not entitled to claim relief under a tax treaty unless he obtains a certificate of being residence. In 2013, Finance Bill, 2013 proposed to introduce Section 90(5) in IT Act, 1961 to state that: 

The certificate of being a resident in a country outside India or specified territory outside India, as the case may be, referred to in sub-section (4), shall be necessary but not a sufficient condition for claiming any relief under the agreement referred to therein.

Due to backlash and concerns about the effect of proposed sub-section(5) on the Mauritius route, Finance Act, 2013 dropped the above version and instead introduced the current Section 90(5) which states that an assessee referred to in sub-section(4) shall also provide ‘such other documents and information’ as may be required.

Presuming the legislative history of Section 90 is relevant to adjudicate the issue in Tiger Global case, it is possible to derive two possible views from the above developments. One, adopted by the Delhi High Court was that:

issuance of a TRC constitutes a mechanism adopted by the Contracting States  themselves so as to dispel any speculation with respect to the fiscal residence of an entity. It therefore can neither be cursorily ignored nor would the Revenue be justified in doubting the presumption of validity which stands attached to that certificate bearing in mind the position taken by the Union itself of it constituting ―sufficient evidence‖ of lawful and bona fide residence. (para 199)

The High Court cited the Vodafone case to note that the Revenue’s power to investigate despite a TRC was confined only to cases of tax fraud, sham transactions or where an entity has no vestige of economic substance. 

The Supreme Court pointed the needle in other direction. The Supreme Court referred to the Explanatory Memorandum of Finance Bill, 2012 to observe that intent of amending Section 90(4) was that TRC is necessary but not sufficient evidence of residence. Reliance on supporting sources instead of interpreting the provisions is a curious approach and even the High Court traversed this path for no clear reason. 

The Supreme Court noted that while the legal position – that TRC is necessary but not sufficient – could not be codified due to withdrawal of previous version of Section 90(5), introduction of current version of Section 90(5) still introduced ambiguity if TRC was sufficient. But the Finance Ministry issued a clarification in 2013 that the Revenue ‘will not go behind the TRC’ and Circular No. 789 continues to be in force. And yet, the Supreme Court’s conclusion seems at odds with the clarification issued by the Finance Ministry. The Supreme Court concluded that: 

Section 90(4) of the Act only speaks of the TRC as an “eligibility condition”. It does not state that a TRC is “sufficient” evidence of residency, which is a slightly higher threshold. The TRC is not binding on any statutory authority or Court unless the authority or Court enquires into it and comes to its own independent conclusion. The TRC relied upon by the applicant is non- decisive, ambiguous and ambulatory, merely recording futuristic assertions without any independent verification. Thus, the TRC lacks the qualities of a binding order issued by an authority. (para 37)

The legislative intent in amending Section 90(4) was that TRC is necessary but not sufficient to claim treaty benefits. But such an unambiguous position never found its way in the statute. Instead, the Revenue to clarify the import of amendments to Section 90 stated – via the Finance Ministry – that Circular No. 789 is still in force. But the Supreme Court, relied on legislative intent and observed that TRC has ‘limited evidentiary value’ because of the statutory amendments that govern the field. Failing to note that the Finance Ministry issued its clarification in March 2013 – after the amendments.  

The import and of Section 90(5) was understood by the Supreme Court in following words: 

Section 90(5) mandated that the assessee shall also provide such other documents and information, implying that the existence of a TRC alone need not be treated as sufficient to avoid taxation under the domestic law. (para 12.24) (emphasis added)

Even if legislative history is relevant, the failure to engage with a binding judicial precedent – Azadi Bachao Andolan case – is indefensible. Supreme Court’s refuge was that amendments to IT Act, 1961 have changed the law. In stating so, it refused to acknowledge jurisprudence that High Courts have developed jurisprudence on TRC even after the amendments and the judicial view has largely been consistent with Azadi Bachao Andolan case. Perhaps engagement with the reasoning of High Court judgments and expressing better reasons for disagreement could have lent some credibility and weight to Supreme Court’s conclusions. And as the Revenue itself argued, Vodafone was not a treaty case, it involved interpretation of statutory provisions. Amendments to IT Act, 1961 in 2012 and 2013 to undo Vodafone cannot be used to bypass treaty obligations.  

The non-engagement with Azadi Bachao is what led Supreme Court to say that since the object of a tax treaty is to prevent double taxation, ‘for the treaty to be applicable, the assessee must prove that the transaction is taxable in its State of residence.’ (para 19) How damaging is this statement, we will only know in due time. For now, it suffices to say that it flies in the face of settled law on treaty interpretation that to avail a treaty benefit, a resident must only be liable to tax in another jurisdiction. Liability to tax cannot be equated to actual payment of tax. 

Also, interpreting tax statutes based on implication is a rare approach. Courts, including the Indian Supreme Court, have repeatedly exhorted that tax statutes need to be interpreted strictly. Adherence to strict interpretation is a sine qua non that courts only abandon in the face of ambiguity in a provision. In Tiger Global case, the Supreme Court seemed comfortable relying on legislative intent – revealed by Explanatory Memorandum – and dismissing binding judicial precedents and valid circulars by pointing at statutory amendments. 

Cumulatively, Supreme Court’s observations on TRC fall foul of strict interpretation of tax laws, disrespect judicial precedents, allow the Revenue to conveniently sidestep its own binding circulars and bring into question legitimacy of documents issued by India’s treaty partners. A stirred cocktail of tax misgovernance.   

Tax Treaty Overrides Domestic Law, GAAR is an Exemption  

The Revenue’s argument was that TRC only constitutes prima facie evidence of residence and cannot override substance over form. Even if TRC was not considered as sufficient, the Revenue had to rely on anti-tax abuse rules to claim that Tiger Global was a sham or a conduit. But the Limitation of Benefits clause (‘LOB clause’) in the India-Mauritius treaty was inapplicable to the transaction. So? GAAR came to the rescue. But the Supreme Court had to jump a few interpretive hoops to allow the Revenue to apply GAAR.  

Section 90(2) states that where the Union has entered a tax treaty with another State or jurisdiction that provisions of IT Act, 1961 shall apply to the extent they are more beneficial to the assessee. The import of this provision is that if a tax treaty is more beneficial it shall apply even if it is at variance with the IT Act, 1961. In successive decisions courts have upheld the above legal position and held that charge of income tax and determination of scope of income under sections 4 and 5 of IT Act, 1961 are subject to tax treaties. An uncontroversial position until 2012.   

In 2012, the Finance Act added sub-section (2A) to section 90 which states that: 

Notwithstanding anything contained in sub-section (2), the provisions of Chapter X-A of the Act shall apply to the assessee even if such provisions are not beneficial to him.

Chapter X-A contains provisions relating to General Anti-Avoidance Rule, also introduced via the Finance Act, 2012. Section 90(2A) empowers the Revenue to apply a statutory anti-tax abuse rule to assessees who are covered by tax treaties. The exception in subsection (2A) then ensures that if the LOB clause of a tax treaty is not sufficient, GAAR can be invoked to address tax avoidance strategies.  

The Supreme Court took cognizance of the above provision, interpreted it strictly and noted that GAAR can apply to assessees covered by tax treaties. On the touchstone of strict interpretation, the Supreme Court was right in observing that GAAR can apply to assessees covered by tax treaties. But Supreme Court’s failure to engage to engage with decades of judicial precedents stating that domestic tax law cannot override tax treaties remains a fatal flaw of the judgment. Unless tax treaty provides that GAAR can apply in the absence/insufficiency of a LOB clause, Section 90(2A) amounts to a unilateral amendment of tax treaties. And the Supreme Court seems to have endorsed it.   

The other hurdle was grandfathering. Rule 10U(1)(d), Income Tax Rules, 1962 states that Chapter X-A containing GAAR shall not apply to income accrued or arisen from investments made before 1 April 2017. Tiger Global argued against application of GAAR citing the grandfathering contemplated in the domestic provisions. But the Revenue relied on Rule 10U(2) which states that: 

Without prejudice to the provisions of clause (d) of sub-rule (1), the provisions of Chapter X-A shall apply to any arrangement, irrespective of the date on which it has been entered into, in respect of the tax benefit obtained from the arrangement on or after the 55[1st day of April, 2017]. (emphasis added) 

Rule 10U(2), on first glance, negates the grandfathering contemplated by Rule 10U(1)(d). The Revenue made a similar argument. The High Court had refused to interpret ‘without prejudice’ to mean that GAAR could be applied to income from arrangements entered before 1 April 2017. The High Court noted that it should ‘eschew from’ interpreting a provision in a domestic statute that conflicts with a treaty provision. And concluded that accepting the Revenue’s argument would mean:

A subordinate legislation would thus stand elevated to a status over and above a treaty entered into by two nations in exercise of their sovereign power itself. (para 230)

The Supreme Court did not have similar qualms  as the High Court and accepted the fine distinction made by the Revenue. The distinction was that Rule 10U(1)(d) only grandfathered investments, while Rule 10U(2) uses the word ‘arrangement’ and thus the grandfathering benefit can only extend to investments and not tax avoidance arrangements, even if the latter were entered into before 1 April 2017. A strict interpretation of both Rules – supported by observations of the Shome Committee – will place Supreme Court’s conclusion in a defensible category. But what does it mean for India’s tax treaty obligations?   

A two-pronged thorn emerges: 

First, tax treaty override over domestic law will no longer be exhaustive by virtue of Section 90(2); Revenue can apply GAAR if LOB clause of tax treaty is insufficient by invoking Section 90(2A) read with Rule 10U. Domestic law, specifically, GAAR will act as a backstop to prevent tax avoidance. A legal position that the Supreme Court has accepted in Tiger Global case but flies in the face of decades of jurisprudence on income tax law and tax treaty interpretation.  

Second, relevant provisions of the India-Mauritius tax treaty refer to ‘gains’ not to investments or arrangements. Can domestic laws – including secondary legislation – now determine the scope of taxability and allocation of rights agreed upon tax treaties? The High Court said a categorical no, the Supreme Court said yes. The Supreme Court took refuge in the fact that amendments of IT Act, 1961  – specifically Section 90 – had changed legal landscape. Domestic landscape, yes. Treaty obligations, not. But, I guess, we are a sovereign country that can act independently and if need be in flagrant disregard of our treaty obligations.   

Conclusion

Tiger Global case is an attempt by Indian Supreme Court to flex tax sovereignty, without truly understanding it. The concurring opinion of Justice Pardiwala exemplifies this lack of understanding. He lauds India’s unilateral revocation of Bilateral Investment Treaties in 2016 and adds that an assertion of tax sovereignty is the power to make unilateral moves. What is being termed as tax sovereignty is polite speak for reneging on tax treaty commitments if revenue demands are not accepted unconditionally. Such prescriptions appeal to baser instincts of the State and do not aspire to tax governance founded on rule of law. Justice Pardiwala perfunctorily adds that India should negotiate tax treaties by including certain safeguards such as: GAAR should override tax treaty benefits. Another example of how he misunderstands manifestation of tax sovereignty. Is the assumption here that India’s treaty partners will simply agree to such clauses and not extract similar concessions for themselves. Justice Pardiwala not only exceeds his remit by providing policy prescriptions but provides them based on a shallow understanding of treaty dynamics and negotiations.    

To book end this article, Justice Mahadevan’s conclusion cited at the beginning where he concludes that the transactions of Tiger Global are impermissible anti-avoidance arrangements is based on facts that seem only privy to him and the Revenue. There is nothing in both the leading opinion and the concurring opinion to even provide a glimpse of reasons as to why the transactions and arrangements are impermissible anti-avoidance arrangements. If only Supreme Court judgments on tax issues were to provide us less tax history lessons, fewer policy prescriptions and substitute them with better reasoning, sound analysis of facts and accurate application of law.   

Health and National Security Cess: Some Context

by

The Lok Sabha on 5th December 2025, passed the Health Security se National Security Cess Bill, 2025. The Health se National Security Cess (‘Health and National Security Cess’) is an unusual marriage of public health and national security. And an example that when the State is determined for revenue, even tax law is not alien to creativity. 

In the first part of this article, I examine the Union of India’s previous conceptualization – but inability to operationalize – a standalone National Defence Fund. Instead, six years after mooting the idea of a National Defence Fund, the Union seems to have adopted the relatively easy way of levying another cess for funding national security related expenses. In the second part of this article, I address the public health component. I state that income taxpayers currently pay a Health and Education Cess. The introduction of Health and National Security Cess means we have two ‘partial cesses’ for public health. Public health is crucial – and underfunded – to necessitate additional money via two cesses, but not crucial enough to deserve its own dedicated cess. Ironically, we still won’t know how much money from both cesses is will be specifically spent on public health. 

I conclude that while both national security and public health are crucial, the need for a cess apart from the general budgetary allocation requires a stronger – and better articulated – jusitifcation. Merely saying that the State needs additional revenue is not sufficient. Union and even States increasingly prefer cesses because they offer an easy route to raise additional money without adequate accountability. Successive Finance Commissions have recommended reduction in cesses on grounds of their misuse and lack of transparency. But the Indian tax policy landscape stubbornly moves in the opposite direction. 

I. Introduction 

Preamble of the Health Security se National Security Cess Bill, 2025 (‘Bill’) states that resources need to be augmented for meeting expenses on national security and for public health. The Health and National Security Cess has been termed as a ‘special excise cess’. Clause 3 of the Bill imposes tax liability on any person who owns, possesses, or controls or undertakes a process by which specified goods are manufactured. And Schedule I of the Bill lists pan masala as the specified good. Though the Union of India is empowered to notify ‘any other goods’ as specified goods under the Bill. Clearly the Health and National Security Cess can be extended to other ‘demerit’ goods to further augment revenue collection. Why do we need this cess? Augmenting of revenues is a standard reason and can be used for any tax and doesn’t fully explain the imposition and levy of Health and National Security Cess. The proximate reasons for the Health and National Security Cess are two-fold: 

One, as the finance minister explained in the Rajya Sabha, until September 2025 the levy of GST Compensation Cess ensured that de-merit goods such as tobacco and pan masala were subjected to a high tax rate of approximately 88%. With the rationalization of GST rates, the highest tax rate is now 40%, and GST Compensation Cess has been phased out. The Health and National Security Cess aims to preserve the previous revenue stream from demerit goods such as pan masala without disturbing the new three-tier GST rate structure.   

Second – and this is specifically for national security – the Union has been unable to operationalise a standalone Defence Fund. The idea of a Defence Fund was mooted by the Union six years ago. The Union in July 2019, amended the Terms of Reference of the 15th Finance Commission (‘Commission’) to specifically require the Commission to examine a separate mechanism for funding defence and internal security. The Commission was required to examine if a standalone Defence Fund should be set up and how it should be operationalized. The Commission in its final report – submitted in October 2021 – recommended establishment of the Defence Fund and also provided detailed and specific targets for a five-year period. But the Union did not take any concrete steps. Eventually, in December 2025 the Union has instead adopted the familiar path of levying a cess, i.e., the Health and National Security Cess.   

II. Defence and Internal Security

a. A ‘Defence Fund’ Conceptualized    

The Terms of Reference (ToR) of the 15th Finance Commission required it to examine whether a separate mechanism for funding of defence and internal security ought to be setup and how to operationalize the fund. The above clause was added in ToR via an amendment. And the request was also unprecedented since no previous Finance Commission had been tasked with a similar obligation. The immediate concern from States was that the Union may reduce funds available in the common divisible pool by earmarking a portion of States’ funds towards the ‘Defence Fund’. Various States made similar representations to the Commission arguing that they were not opposed to a Defence Fund if it does not shrink the common divisible pool. 

The Union – primarily through the Ministry of Defence and Ministry of Home Affairs – made a strong case for a Defence Fund before the Commission. Both Ministries made similar arguments, i.e., the budgetary allocations were insufficient to meet their capital expense needs for defence and internal security. And a Defence Fund will partially meet the shortfall.  

The Commission examined the issue in detail and recommended that the Union setup a dedicated, non-lapsable fund called Modernisation Fund for Defence and Internal Security (MFDIS). The Ministry of Defence was to retain exclusive rights over the MFDIS and Ministry of Home Affairs could only utilize a part amount for internal security. The Commission identified four specific sources for incremental funding and even provided annual targets to the Union of India. A screenshot from the Finance Commission’s report below shows it ambitious plan to earmark funds for defence and internal security. 

If the Commission’s recommendations were followed in totality, then in the past five years the fund would have accumulated more than two lakh crore rupees. While the amount may seem optimistic, we didn’t witness even an effort by the Union in meeting the Commission’s target. There was no public dissent from the Commission’s recommendations or a disagreement about its estimation or mention by the Union about the feasibility of a Defence Fund as understood by the Commission.

b. Defence Fund ‘Abandoned’, Cess Operational    

We have no publicly available information whether the concept of Defence Fund has been permanently abandoned. Or Defence Fund as envisaged by the Commission was not agreeable to the Union. We do have a curious situation where the entire idea of a standalone Defence Fund mooted by the Union seems to have been abandoned by it with no explanation. The Commission not only endorsed the idea of a Defence Fund but also provided a roadmap for operationalizing it. But the Union seems to have moved on. And instead, in December 2025, the Union has chosen to levy a Health and National Security Cess to meet defence needs. And the cess name indicates, it is a half measure towards defence needs. All funds raised through the Health and National Security Cess will not be exclusive to defence; a portion will be earmarked towards internal security needs and another portion towards public health. In what proportion will the funds of Health and National Security Cess be divided between defence, internal security, and public health is unknown. And probably will be for life.   

II. Public Health

Under Seventh Schedule of the Constitution, public health has been included in the State List. But income tax is the Union’s domain. The Constitution is silent if the Union can collect cess on a subject listed in the State List. The ‘constitutional silence’ on legislative competence on cess has allowed the Union to collect Health and Education Cess over and above the income tax. And the same leeway will probably extend to the Health and National Security Cess.   

a. Health and Education Cess 

Under the Income Tax Act, 1961 a ‘Health and Education Cess’ is levied and collected on 4% of income tax payable by an assessee. It is a compulsory levy on all income taxpayers. Again, how much of the money collected under this cess is allocated to health and education respectively remains unknown. From 2004 to 2018, income taxpayers paid an Education Cess which was levied at 2% and was later increased to 3% of income tax. In 2018, Education Cess was renamed to Health and Education and the rate was increased to 4% of total income tax. The Finance Minister estimated an additional Rs 11,000 crores annually because of the increase in cess rate. But the Finance Minister didn’t specify if the additional amount would be allocated to public health or education or generally the proportion in which the amount will be split between the two. Are we to presume that the additional 1% of the money collected under the Health and Education Cess is allocated to public health? Or is the money now equally divided between public health and education? We don’t have any clarity.    

b. Another Health Cess 

Despite there being a Health and Education Cess, the Union has chosen to levy the Health and National Securiy Cess. A relevant question is: if there is an already existing health cess, why levy another one? Is the money collected under the pre-existing Health and Education Cess insufficient for public health expenses? If yes, why not levy a dedicated public health cess? And what is the justification of coupling public health with national security? National security encompasses both defence and internal security. It won’t be unreasonable to presume that national security will claim lion’s share of the funds collected under the Health and National Security Cess. And since public health is not the Union’s domain, it is difficult to hold it accountable for utilization of funds for public health. At the same time, it is evident that the Union considers public health important to warrant two ‘partial cesses’. But not enough for public health to deserve a dedicated cess. Two half measures don’t make a full one. 

Conclusion 

The 15th Finance Commission in its report noted that the Ministry of Defence receives the maximum budget allocation amongst all the Union’s ministries. And yet, the Ministry of Defence argued before the Commission that a separate non-lapsable Defence Fund was necessary to meet increasing need for capital expenses. The Ministry of Home Affairs had also advocated for the Defence Fund since its budgetary allocations were termed as insufficient. And yet for four years – since the Commission provided a roadmap – we haven’t seen any concrete action to make the Defence Fund a reality. Instead, after six years of mooting the idea of Defence Fund and even receiving endorsement from the Commission the Union has decided to levy a cess to partially fund national security expenses. Levying a cess is convenient for the Union as it has to provide no estimate of fund collection, transparency is limited, and there is no clear roadmap of expenses and their allocation. And reliance on yet another cess reveals that national security rhetoric is easier but substantive measures on national security – even on the revenue side – require long, consistent groundwork.     

Finally, a general word on cesses. Cesses are a trick on the Constitution. The legal limits on powers to levy cess – of both the Union and States – are hazy. Supreme Court in a few instances has clarified the power to levy cesses in specific contexts, but broader issues remain unresolved and, in some instances, even unknown. It is the legal uncertainty on cesses that allows States to collect a ‘cow cess’ from purchasers of alcohol. It is the same legal uncertainty that allows the Union to levy cess on public health, a State subject. And the same uncertainty allows the Union to levy multiple cesses without appropriate accountability. Despite repeated recommendations from successive Finance Commissions, Comptroller and Auditor General of India, and even some States to reduce the no. of cesses the tax policy landscape in India stubbornly moves in the opposite direction.    

In Applause of a Repeal: Place of Supply for Intermediary Services

by

The Goods and Services Tax Council (‘GST Council’) in its 56th meeting took multiple decisions and made a series of recommendations. The headline, of course, was dominated by the change in tax rates of various goods. An equal, or to my mind, a more substantive reform was the recommendation for omission of Section 13(8)(b) of the Integrated Goods and Services Tax Act of 2017 (‘IGST Act of 2017’).  

Section 13 of the IGST Act of 2017 prescribes place of supply rules where location of supplier or location of recipient is outside India. Section 13(2) lays down the general rule and states that the place of supply for the above-mentioned services shall be location of recipient of services. Section 13(8)(b) incorporates a deeming fiction – at variance with the general rule – and states that the place of supply for intermediary services shall be the location of supplier of services. Section 13(8)(b) proved be an interpretive challenge producing a split judgment by the Bombay High Court and subsequently an opinion by a third judge to resolve the interpretive disagreement. And yet, no clear resolution seemed to be in sight. I’ve previously commented both judicial opinions here and here.  

In this article, I briefly explain the provision, the interpretive challenge it presented, and the resulting position of law that proved to be unimplementable. I argue that  interpretive approach adopted by the third judge – of the Bombay High Court –  in upholding constitutional validity of Section 13(8)(b) of the IGST Act of 2017 was not incorrect. But, it resulted in a legal position that resembled a riddle wrapped inside an enigma. I conclude that the impending omission of Section 13(8)(b) of the IGST Act of 2017 is a step in the right direction. It will provide much needed clarity for GST liabilities of intermediary services. And the omission aligns with a core feature of GST – a destination-based tax. Finally, the omission reduces an unnecessary complexity in IGST Act of 2017. While one of the Revenue Department’s arguments was that Section 13(8)(b) was introduced for purpose of collecting additional revenue; removing it introduces more simplicity which may prove to be a more meaningful reform of GST in the long run. 

‘Exceptional’ Nature of Section 13(8), IGST Act of 2017  

Section 13(2) of the IGST Act of 2017 lays down the default rule to determine place of supply for services where location of either supplier or recipient is outside India. The location of recipient of services is the default place of supply as per Section 13(2). Section 13(8) contains exceptions to the above rule. Section 13(8)(b) states that for intermediaries, the place of supply shall be the location of supplier of services. Thus, if an intermediary with a registered office in Bombay supplies intermediary services to a recipient located outside India, the place of supply shall be Bombay. But wouldn’t a supply of intermediary services to a recipient outside India amount to export of services and thus outside the net of GST? Ideally, yes. But the deeming fiction under Section 13(8)(b) was introduced precisely to levy tax on export of intermediary services by deeming it to be a domestic service. This was just the first level of complication. 

Section 8(2) of the IGST Act of 2017 states that:

.. supply of services where the location of the supplier and the place of supply of services are in the same State or same Union territory shall be treated as intra-State supply:

In the above example, the location of supplier and place of supply is Bombay, State of Maharashtra. And as per the mandate of Section 8(2) of the IGST Act of 2017, the supply shall be treated as an intra-State supply. What is the implication of the latter?  

Under GST laws, an intra-State supply is subjected to Central Goods and Services Tax (‘CGST’) + State Goods and Services Tax (‘SGST’). The latter is collected by the State if the place of supply is its jurisdiction. In the above example, the SGST component would be levied and collected by the State of Maharashtra under its State-level GST law. Now, we enter the next level of complication. 

Article 286(1)(b) of the Constitution states that no law of a State shall impose, or authorize the imposition of, a tax on the supply of goods or of services or both, where such supply takes place in the course of the export of the goods or services or both out of the territory of India. 

The embargo placed by Article 286(1)(b) in this context meant that States cannot levy SGST on intermediary services. Why? Because the intermediary services provided by a supplier from India to a recipient outside India are export of services. Section 13(8)(b) via deeming fiction, shifted the place of supply of export of services and deemed it to be a domestic transaction. But a statute cannot incorporate a deeming fiction that empowers State to levy tax beyond the constitutional boundary marked by Article 286(1)(b) of the Constitution. 

The deeming fiction contained in Section 13(8)(b) of the IGST Act of 2017 was the subject of a constitutional challenge. And the resulting judicial opinions did not make the legal position any better.  

A Split Judgment of the Bombay High Court 

In Dharmendra M. Jani v Union of India, the Bombay High Court delivered a split judgment. Justice Ujjal Bhuyan held that Section 13(8)(b) of the IGST Act of 2017 violated Article 286(1)(b) of the Constitution and was unconstitutional. He noted the extra-territorial effect being attempted via Section 13(8)(b) of the IGST Act of 2017 ran counter to a fundamental principle of GST, i.e., it is a destination-based consumption tax. Justice Abhay Ahuja though disagreed and – by applying a convoluted logic – held that Section 8(2) of the IGST Act of 2017 is inapplicable to the transaction of an intermediary providing services to a recipient located abroad. He also stated that the Parliament has the power to determine place of supply for inter-State supplies under Article 246A read with Article 269A of the Constitution. And thus, upheld that vires of Section 13(8)(b) of the IGST Act of 2017 by conveniently ignoring Article 286 of the Constitution.  

The obvious result of this interpretive disagreement was a stalemate. 

Opinion of Justice G.S. Kulkarni: An ‘Unimplementable’ Legal Position  

In view of the split judgment of the Division Bench, the proceedings of case were referred to Justice G.S. Kulkarni. And he issued a peculiar opinion in Dharmendra M. Jani v Union of India. Though to be fair to him, the peculiarity emerged largely from the deeming fiction contained in Section 13(8)(b) of the IGST Act of 2017. He was tasked with unravelling a knot that could have no simple or elegant result. 

Justice Kulkarni accepted that an intermediary service provided by a taxpayer located in India to a recipient located in a foreign jurisdiction amounted to export of services as defined under Section 2(6) of the IGST Act of 2017. And that by virtue of Section 8(2) of the IGST Act of 2017 an export service was deemed to be an intra-State supply of service. But since an intra-State supply is subjected to tax under the CGST Act of 2017 and relevant State GST Act of 2017; Justice Kulkarni added that reading Section 13(8)(b) of the with Section 8(2) amounted to reading a provision of the IGST Act of 2017 into other GST statutes. He observed: 

… that the fiction which is created by Section 13(8)(b) would be required to be confined only to the provisions of IGST Act, as there is no scope for the fiction travelling beyond the provisions of IGST Act to the CGST and the MGST Acts, as neither the Constitution would permit taxing of an export of service under the said enactments nor these legislations would accept taxing such transaction.  

Justice Kulkarni was clear in one crucial respect: the domain of IGST Act of 2017 was separate – inter-State supplies. CGST Act of 2017 and State-level GST laws also operated in their own respective domains – intra-State supplies. In the absence of a specific incorporation of provision of one statute in another – ideally introduced by the legislature expressly – the provisions of the IGST Act of 2017 cannot by a process of interpretation be applied to other GST statutes.

Based on his above reasoning and understanding of the legislative landscape in GST, Justice Kulkarni concluded that operation of Section 13(8)(b) of the IGST Act of 2017 was to be confined only to the IGST Act of 2017. But he refused to term the provision as unconstitutional. Justice Kulkarni, by upholding the vires of Section 13(8)(b) of the IGST Act of 2017, resolved the stalemate caused by the split judgment. However, it presented the challenge of implementing his opinion. How to confine Section 13(8)(b) of the IGST Act of 2017 only to the IGST Act of 2017?  

If the fiction of Section 13(8)(b) was to be confined only to the IGST Act of 2017, it would mean intermediary services exported to other countries could only be subjected to IGST. But IGST is levied only on inter-State supplies. Or imports which are deemed to be inter-State supplies. So, would Justice Kulkarni’s opinion mean that the Union would now levy IGST on export of intermediary services? Such a levy would be diametrically opposite to the underlying policy of levying IGST only on inter-State supplies or imports. Also, wouldn’t levying IGST defeat the fiction contained in Section 8(2) of the IGST Act of 2017? As per Section 8(2) if place of supply and location of supplier are in the same State, the supply is an intra-State supply. But States cannot levy SGST on such supplies by virtue of the opinion of Justice Kulkarni. So, would the net result be that an export of service that is treated as an intra-State supply will be subjected to IGST? If yes, it would not only challenge but practically defeat all fundamental principles that inform the design of GST. One way out of this puzzle would have been to amend the relevant provisions of CGST Act of 2017, and relevant State-level GST laws and specifically incorporate Section 8(2) and Section 13(8)(b) of the IGST Act of 2017 in such legislations. It would address the issue highlighted by Justice Kulkarni but would perhaps risk make the provision even more complex. It is unknown if the option to amend the provisions was seriously considered by the GST Council. 

Irrespective, Justice Kulkarni while did not hold Section 13(8)(b) of the IGST Act of 2017 to be unconstitutional; his peculiar – and internally consistent logic – resulted in making the provision unimplementable. At the very least an appropriate amendment to the relevant provisions was needed to levy tax under the deeming fiction contained in Section 13(8)(b). 

GST Council Recommends Repeal of Section 13(8)(b) of the IGST Act of 2017 

In the face of such a challenge, the GST Council perhaps thought that a repeal of the provision is the best option. But what we don’t know – at least for now – is the precise reason why repeal of Section 13(8)(b) of the IGST Act of 2017 was recommended by the GST Council. Was it truly because the provision has become ‘implementable’? Or is it because an alternate and ‘implementable’ provision to levy tax on cross-border intermediary services is in the works? If one vital reason for incorporation of Section 13(8)(b) of the IGST Act of 2017 was to collect additional tax, is that reason abandoned for good? I guess we will have to wait until at least the minutes of the 56th meeting of the GST Council are made public.          

Section13(8)(b) of the IGST Act of 2017: Repeal Recommended in December 2017 

We currently do not know the reasons why the GST Council recommended repeal of Section 13(8)(b) of the IGST Act of 2017. However, we do know that a suggestion for repeal was made previously but was not adhered to by the Union and States. In December 2017, a report of the Department Related Parliamentary Standing Committee on Commerce was laid before the Rajya Sabha. The 139th Report titled ‘Impact of Goods and Services Tax (GST) on Exports’ made various recommendations for changes to GST from the perspective of promoting exports. One of the recommendations in the Report specifically stated: 

The Government may also cause amendment to section 13(8) of the IGST Act to exclude ‘intermediary’ services and make it subject to the default section 13(2) so that the benefit of export of services would be available. (para 15.3)

The Committee reasoned that since GST was a destination-based tax, the place of supply should as per the default rule under Section 13(2), i.e., location of the recipient of services. And the amendment to Section 13(8) of the IGST Act of 2017 would ensure that the intermediary services provided from India to foreign recipients are treated as exports and receive an exemption from the levy of IGST. 

The recommendation of the Committee was based on sound logic. Section 13(8)(b) militated not only against the destination-based character of GST; it also stretched the concept of a deeming fiction too far. By treating an export of intermediary service as an intra-State supply of service, the attempt to gain more revenue created a set of complications that the Revenue Department did not anticipate. Or maybe the Revenue Department was blinded by the thirst for additional revenue.       

A Welcome Repeal 

Overall, the GST Council’s recommendation for repeal of Section 13(8)(b) is welcome – to some extent – preserves the integrity of GST as a destination-based tax. At the same time, the repeal will reduce an unnecessary complexity from the GST laws, making compliance with and comprehension of place of supply rules easier. As for potential loss of revenue. I think reduced complexity in tax laws only tends to promote business activities. If not directly and immediately, at least in an incidental manner. And reduced complexity in tax laws is always beneficial for revenue collections in the long run. Export of intermediary services, on principle, should not be within the remit of GST since it is a destination-based tax. A deviation from the basic character of GST should be based on sound justification and sounder reasons. Collection of more revenue was a less-than-ideal reason to incorporate and continue with Section 13(8)(b) of the IGST Act of 2017. A more compelling reason seems to have prevailed even if we yet don’t know the precise reason that motivated the GST Council’s recommendation.           

Time Restraint on Power of Provisional Attachment under GST 

by

Introduction 

The Supreme Court in Kesari Nandan Mobile v Office of Assistant Commissioner of State Tax (‘Kesari Nandan Mobile’) held that an order of provisional attachment under Section 83 of the Central Goods and Services Act, 2017 (‘CGST Act of 2017’) cannot extend beyond one year. A plain reading of Section 83(2) of the CGST Act of 2017 reveals that every provisional attachment shall cease to have effect after expiry of one year. However, Section 83(2) doesn’t expressly prohibit renewal of an attachment order after expiry of one year.  

In Kesari Nandan Mobile, the Revenue Department after expiry of one year issued a new attachment order terming it as ‘renewal’ of the previous attachment order. The Gujarat High Court dismissed the assessee’s challenge to ‘renewal’ of the attachment order. The Gujarat High Court provided two major reasons: 

first, prima facie the assessee was engaged in supply of bogus invoices and claiming Input Tax Credit (‘ITC’) based on those invoices. In view of the assessee’s conduct, the Gujarat High Court held that the order of provisional attachment cannot be said to cause any harassment to the assessee;  

second, the Gujarat High Court added that under Section 83(2) of the CGST Act of 2017, there was no embargo to issue a new provisional attachment order after lapse of the previous attachment order. And that a provisional attachment order passed after one year was intended to safeguard the revenue’s interest and was not in breach of Section 83(2) of the CGST Act of 2017.                   

The Supreme Court set aside the Gujarat High Court’s decision by interpreting Section 83(2) in favor of the assessee. The Supreme Court referred to comparable legislations – Income Tax Act, 1961 (‘IT Act, 1961’) as well as Customs Act, 1962 and The Central Excise Act, 1944 – and noted that the authorities can renew an order of provisional attachment only when a statute expressly provides for it. But, if the statute does not expressly confer a power for extension of provisional attachment, the executive ‘cannot overreach the statute’. 

In this article, I argue that the Supreme Court in Kesari Nandan Mobile has added a welcome restraint on the Revenue Department’s power of provisional attachment by correctly interpreting Section 83(2) of the CGST Act of 2017. I further suggest that the Supreme Court in the impugned case reinforced the legal framework on provisional attachment elaborated in in M/S Radha Krishan Industries v The State of Himachal Pradesh(‘Radha Krishan Industries’). The Supreme Court in Radha Krishan Industries was categorical that the power of provisional attachment was ‘draconian in nature’ with serious consequences. And the rights of assessees against such a power were valuable safeguards that needed protection. The Supreme Court in Kesari Nandan Mobile builds on the foundation laid in Radha Krishan Industries and expressly states that provisional attachment is only a pre-emptive measure and not a recovery mechanism. 

Radha Krishan Industries on Provisional Attachment 

The Supreme Court in Radha Krishan Industries noted that the legislature was aware of the draconian nature of provisional attachment and serious consequences that emanate from it. And use of power of provisional attachment is predicated on specific statutory language used in Section 83 of the CGST Act of 2017. Interpreting Section 83(1) of the CGST Act of 2017, the Supreme Court emphasized that the Commissioner must only issue an order of provisional attachment if it is necessary to do so and not because it was practical or convenient. Necessity of protecting the interest of the revenue is the fountainhead reason that triggers the power of provisional attachment. 

Supreme Court in Radha Krishan Industries also interpreted Section 83(1) of the CGST Act of 2017 alongside Rule 159 of the CGST Rules of 2017. The latter provided detailed procedure and rights of assessee’s vis-à-vis provisional attachment. The Supreme Court specifically interpreted Rule 159(5) of the CGST Rules and held that it provided two procedural entitlements to the person whose property was attached: first, the right to file an objection on the ground that the property was not or is not liable to be attached; second, an opportunity of being heard. The Supreme Court underlined the importance of these rights and dismissed the Revenue Department’s stance that the right to file objections was not accompanied by a right to be heard.  

Finally, in Radha Krishan Industries, the Supreme Court took umbrage that a previous attachment order against the assessee was withdrawn by the Revenue Department after considering representations of the assessee; but a subsequent order of provisional attachment was passed on the same grounds. The Supreme Court observed that unless there was a change in circumstances it was not open to the Revenue Department to pass another order of provisional attachment. While this observation of the Supreme Court was not in the context of outer time limit, it laid down the law that even if a new provisional attachment order is issued within one year, the onus is on the Revenue Department to prove that there was a change in circumstances that necessitated a new order.  

It is in the backdrop of the Supreme Court’s above observations in Radha Krishan Industries on provisional attachment that we need to understand the issue of time restraint addressed in Kesari Nandan Mobile. 

Supreme Court Adds Time Restraint

In Kesari Nandan Mobile, the Supreme Court was faced with the issue of whether an order of provisional attachment can be issued after expiry of one year of issuance of the previous attachment order. The Supreme Court noted that issuance of an order of provisional attachment after one year cannot be justified on the ground that it is not prohibited under a legislative or executive instrument. The Supreme Court added three more reasons to support its conclusion that provisional attachment cannot take place after expiry of one year: 

First, the ‘complete absence of any executive instruction’ that is consistent with the legislative policy of allowing renewal of orders of provisional attachment after expiry of one year. 

Second, the Supreme Court reasoned that Section 83(2) of the CGST Act of 2017 must be interpreted in a manner that does not reduce it to a dead letter. As per the Supreme Court, conceding to the Revenue Department’s argument of allowing renewal of provisional attachment after expiry of one year would make Section 83(2) otiose. The Supreme Court – impliedly invoked Radha Krishan Industries – and held that Section 83(1) conferred a draconian power and Section 83(2) should not be interpreted to ‘confer any additional power over and above the draconian power’ upon the lapse of one year envisaged under Section 83(2).     

Third, the Supreme Court further observed that issuance of a fresh provisional attachment order on substantially the same grounds as previous one would be in disregard to the safeguard provided under Section 83(2) of the CGST Act of 2017. In Radha Krishan Industries the Supreme Court had disallowed issuance of a fresh provisional attachment order on similar grounds as the previous order. But the Supreme Court’s primary objection was that the new provisional attachment order was issued despite there being no change in facts. However, in Kesari Nandan Mobile, the Supreme Court expressed concern that issuance of new order after expiry of one year may lead to continuous issuance of provisional attachment under the garb of renewal and would be contrary to a plain reading of Section 83(2). 

The Supreme Court’s observations in Kesari Nandan Mobile are an important win for taxpayer protection, a plain reading of tax statutes, and a welcome restraint on the Revenue Department’s power. The Gujarat High Court’s decision was influenced by dishonest conduct of the taxpayer. Ideally, the taxpayer’s conduct should not intervene in plain and strict reading of the tax statutes unless the context warrants otherwise. In the impugned scenario, there was little reason for the Gujarat High Court to interpret Section 83(2) in a way that provided additional powers to the Revenue Department. Especially when the powers in question are intrusive and can cause permanent damage to the assessee’s business.  

Incongruity Between Section 83(2) and Rule 159(2)

The Supreme Court in Kesari Nandan Mobile also took note of the incongruity between Section 83(2) of the CGST Act of 2017 and Rule 159(2) of CGST Rules of 2017. The former provides that every order of provisional attachment shall cease to have effect after expiry of one year. Rule 159(2) in turn provides that an order provisional attachment shall cease to have effect only when the Commissioner issues written instructions. Thus, even after expiry of one year the provisional attachment continues unless written instructions are issued by the Commissioner. The Supreme Court noted that the incongruity had been brought to the notice of the GST Council and an amendment to Rule 159(2) was proposed. The amendment to Rule 159(2) will provide that a provisional attachment shall cease to have effect after one year or from the date of order of the Commissioner, whichever is earlier. 

But even though the proposed amendment – though approved by the GST Council – has not been effectuated, the Supreme Court held that it is important that Section 83(2) is complied with strictly. Implying that an order of provisional attachment should not extend beyond one year.     

Conclusion 

The power of provisional attachment is certainly intrusive, but at the same time necessary. The necessity stems from preventing an eventual frustration of the tax demand because the assessee has disposed of their properties. At the same time, as courts have reminded the Revenue Department: the power of provisional attachment is not a recovery measure. It is temporary until the investigation is over. And failure to complete the investigation or recover tax cannot be used as a cover to extend the duration of provisional attachment beyond the statutory mandate. And each time, the Revenue Department must be mindful of the consequences that provisional attachment entails and its disruption to assessee’s business and profession. 

Parallel Proceedings under GST: Supreme Court Misses an Opportunity

by

Introduction 

Recently, the Supreme Court in M/S Armour Security (India) Ltd v Commissioner, CGST, Delhi East Commissionerate & Anr (Armour Security case) clarified scope of the terms ‘proceedings’ and ‘same subject matter’ used in Section 6(2)(b) of the Central Goods and Services Act, 2017 (CGST Act of 2017). The need to clarify the import of both phrases was necessary to ensure that taxpayers are not subjected to parallel proceedings by the Union and State GST officers on the same subject matter. 

The judgment largely succeeds in earmarking the scope of both phrases but feels like a missed opportunity. 

In this article, I suggest that Armour Security case offered the Supreme Court a chance to elucidate on the inter-relatedness of various proceedings under CGST Act of 2017. Instead, the Supreme Court focused narrowly only on Section 6(2)(b) and eschewed a broader examination of inter-dependency of various provisions of the CGST Act of 2017. I also argue that the Supreme Court’s guidelines are not a substantive contribution to the challenge of preventing parallel proceedings. GST is the first time that both the Union and States have jurisdiction over the same taxpayer base. Overlaps, frictions, and disputes in administrative actions of both entities are expected and addressing them will require time, deft adjudication, and interpretive balance. Broad guidelines for tax administration wherein courts urge respective tax authorities to ‘communicate with each other’ is a simplistic approach to a novel and complex issue.   

Scope and Aim of Section 6(2)(b), CGST Act of 2017 

Section 6 of the CGST Act of 2017 performs two crucial roles in GST administration: 

first, Section 6(1) ensures ‘cross empowerment’ wherein officers appointed under the State Goods and Services Tax Act or the Union Territory Goods and Services Tax Act are authorized to be the proper officers for the purposes of the CGST Act of 2017 as well. This ensures that appointment and orders of proper officers have effect under both the Union and State GST laws simultaneously.   

second, Section 6(2)(b) ensures a ‘single interface’ for the taxpayer by providing: 

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) 

Section 6(2)(b) serves a salutary purpose of ensuring that a taxpayer is not subjected to overlapping investigations by two different authorities and is accountable to only one authority, i.e., there is a ‘single interface’ for the taxpayer. But ensuring a single interface is not as straightforward. The Supreme Court in Armour Security case had to interpret the phrases ‘proceedings’ and ‘same subject matter’ to clarify the powers of officers and various actions that they are allowed or restrained from initiating against a taxpayer.      

Issuance of Summons is not Initiation of Proceedings 

In the impugned case, Armour Security had received a show cause notice (‘SCN’) under Section 73 of the CGST Act of 2017. The SCN raised a demand for tax, interest, and penalty for excess claim of ITC. Approximately three months later the premises of Armour Security were searched by another authority. Armour Security subsequently received summons under Section 70 of the CGST Act of 2017 requiring one of its directors to produce relevant documents. Armour Security challenged the latter on the grounds of lack of jurisdiction in view of Section 6(2)(b). 

The Supreme Court in Armour Security case clarified that issuance of summons to a taxpayer under Section 70 of the CGST Act of 2017 does not amount to initiation of proceedings. The Supreme Court endorsed the view of the Allahabad High Court in GK Trading v Union of India & Ors where it was held that Section 70 of the CGST Act of 2017 empowers a proper officer to issue a summon to obtain evidence or document in any inquiry. The High Court added that the use of the word ‘inquiry’ in Section 70 had a specific connotation and was not synonymous with use of the word “proceedings” used in Section 6(2)(b) of Uttar Pradesh GST Act (pari materia with Section 6(2)(b) of the CGST Act of 2017).  

The Supreme Court reasoned that summons do not culminate an investigation but are merely an information gathering device during an ‘inquiry’ to determine if proceedings should be initiated against the taxpayer. If and any information received consequent to summons can influence initiation of proceedings. Thus, the Supreme Court correctly held that issuance of summons does not amount to proceedings. In stating the above, the Supreme Court largely reiterated the reasoning and conclusion of the Allahabad High Court. But let’s suppose proceedings against a taxpayer are pending before the Union GST officers. During the pendency, State GST officers issue summons to the taxpayer. And the latter discover new information as part of their inquiry; information that justifies initiation of proceedings. Wouldn’t pending proceedings before the former constrain the latter from initiating proceedings against the latter? It would defeat the entire purpose of obtaining the information via summons. In such a situation, it seems the State GST officers can only transfer the information that they obtained to the Union GST officers who initiated the proceedings.   

‘Proceedings’ Galore under CGST Act of 2017 

In interpreting the scope of ‘proceedings’, the Supreme Court chose to focus only on Section 6(2)(b) of the CGST Act of 2017. The Supreme Court’s narrow lens on Section 6(2)(b) is a defensible judicial choice but has left a few issues unaddressed. I will take two examples from the CGST Act of 2017 to highlight the crucial nature of inter-relatedness of various proceedings. 

First, let me cite Section 83 of the CGST Act of 2017 which states: 

Where, after the initiation of any proceeding under Chapter XII, Chapter XIV or Chapter XV, the Commissioner is of the opinion that for the purpose of protecting the interest of the Government revenue it is necessary so to do, he may, by order in writing, attach provisionally, any property. Including bank account, belonging to the taxable person … (emphasis added)

Chapter XIV of the CGST Act of 2017 contains Section 70 which empowers a proper officer to summon any person. Chapter XII also contains Section 67 empowering a proper officer to conduct inspection, search and seizure. So, it is not unreasonable to deduce that as per Section 83(1) cited above, issuance of summons and conduct of inspection, search and seizure amounts to proceedings. Initiation of either of the two will satisfy the pre-condition of exercising the power of provisional attachment under Section 83(1). 

So, after Armour Security case, this is the position: issuance of summon under Section 70 of the CGST Act of 2017 does not amount to initiation of ‘proceedings’ under Section 6(2)(b); but as per Section 83(1), issuance of summons continues to be a ‘proceeding’. Not only is the taxpayer liable to respond to the summons, but the taxpayer becomes susceptible to provisional attachment immediately after issuance of summons. The current position of law is unlikely to be a respite for the taxpayer.  

Second, Section 66 of the CGST Act of 2017 empowers an officer not below an Assistant Commissioner to direct a special audit ‘at any stage of scrutiny, inquiry, investigation or any other proceedings before him’. Does issuance of a summon satisfy the pre-condition for a special audit under Section 66 too? Section 66 is under Chapter XIII of the CGST Act of 2017, so we can argue that proceedings under this provision does not have the same meaning as ascribed to it under Section 6(2)(b) or Section 83(1). And that the Armor Security case needs to be read narrowly. But there is no clear or definitive answer yet. 

The term ‘proceedings’ has been used in several places in different contexts throughout the CGST Act of 2017. One can argue that the context of the provision may alter the meaning of the term ‘proceeding’ and the Supreme Court’s observations in Armour Security case must be understood solely in the context of Section 6. It is a fair argument but does not set aside the possible interpretive disagreements that may arise. Not the least because of the inter-related nature of various proceedings under the CGST Act of 2017 – an issue that the Supreme Court chose to not address.      

Scope of ‘Same Subject Matter’ 

The bar against parallel proceedings under Section 6(2)(b) of the CGST Act of 2017 is only regarding ‘the same subject matter.’ The meaning of same subject matter thus acquiring a crucial role in preventing parallel proceedings. The Supreme Court in the impugned case was clear that proceedings are initiated only on issuance of SCN. And it is only in a SCN that various grounds and challenges alleged against an assessee are penned down for the first time. Based on its above observations about SCN, the Supreme Court concluded that: 

The expression “subject matter” contemplates proceedings directed towards determining the taxpayer’s liability or contravention, encompassing the alleged offence or non-compliance together with the relief or demand sought by the Revenue, as articulated in the show cause notice through its charges, grounds, and quantification of  demand. Accordingly, the bar on the “same subject matter” is attracted only where both proceedings seek to assess or recover an identical liability, or even where there is the slightest overlap in the tax liability or obligation. (para 86)

Thus, same subject matter is determined on the basis that an authority has already proceeded on an identical tax or offence and the demand or relief sought subsequently is identical. 

The Supreme Court’s delineation of what constitutes the same subject matter flows logically from its identification of issuance of SCN as the initiation of proceedings against an assessee. And it is the demand mentioned in a SCN that will be the reference point to determine if the latter set of proceedings are on the same subject matter.

There is little to dispute about the Supreme Court’s interpretation of scope and meaning of the ‘same subject matter’. But whether the above understanding will be applied appropriately – by GST officers and courts – to various fact situations will only be known in future.       

Supreme Court’s Guidelines    

The Supreme Court did not stop at interpreting the term proceedings and same subject matter. Though the interpretation would have sufficed given the issue involved in the impugned case. The Supreme Court went ahead and issued guidelines in its over eagerness to ensure that parallel proceedings against a taxpayer are avoided. The Supreme Court’s guidelines are perhaps the weakest part of Armour Security case. Mostly, because they were not needed. Additionally, the guidelines are a simplistic take on an issue that requires frequent administrative decisions and co-ordination. A task that the judiciary is not best suited to accomplish. The Supreme Court as part of its guidelines urges the tax authorities to decide inter se who should have jurisdiction over the proceedings against the taxpayer if it comes to their notice that a taxpayer is subjected to parallel proceedings. And enjoins an assessee to bring parallel proceedings to the notice of tax authorities by writing a complaint to have that effect. Equally, the Supreme Court clarified that both authorities have a right to pursue a matter until it is established that it concerns the same liability and demand. In other words, both authorities are allowed to pursue their actions until they can ascertain if they relate to the same subject matter.

Maybe – by way of abundant caution – the Supreme Court felt the need to communicate certain obvious issues to the Revenue Department. But, on balance, it seems that the guidelines are superfluous and could have been easily avoided. The Revenue Department – if it feels necessary – is better positioned to issue suitable guidelines on how to address the issue of parallel proceedings, prevent duplication of efforts, and ensure that the taxpayer is not subject to repeated and unnecessary queries on the same subject matter.  There are likely to be finer nuances of dual tax administration that the Revenue Department can appreciate as opposed to a judicial forum. And some of the issues may need time and experience to be ironed out adequately.     

Conclusion

The Armor Security case is a welcome addition to the jurisprudence on parallel proceedings. It clarifies some crucial elements regarding proceedings and subject matter. And, at the same time, provides additional guidance to the taxpayers and tax authorities on how to ensure better communication when caught in the crosshairs of multiple proceedings. While the guidelines seem superfluous, the Supreme Court’s narrow focus on Section 6(2)(b) may create a bigger uncertainty. The meaning of ‘proceedings’ used in other provisions of the CGST Act of 2017 can either be aligned with or be at variance with the Armor Security case. Either way, there is no clear answer for now.  

Taxation of ESOP-Related Compensation: Reviewing the Flipkart Cases

by

Introduction 

In April 2023, the Board of Flipkart Private Limited (‘FPS’), Singapore decided to pay a one-time voluntary compensation – 43.67 US dollars per stock option – to all the option grantees of its Employee Stock Options (‘ESOPs’). FPS paid the compensation because the value of its ESOPs had reduced after divestment of its stake in PhonePe, a digital payments company. Under the Flipkart Stock Option Scheme of 2012, FPS was under no obligation to compensate option grantees for loss in the value of its ESOPs. Nor did the option grantees have a right to compensation for FPS’s failure to protect the value of its ESOPs. However, FPS exercised its discretion and decided to compensate all the option grantees on a pro rata basis. 

The question from a tax standpoint was: whether the option grantees are liable to pay tax on the one-time voluntary compensation paid by FPS? In the absence of a clear charging provision under the Income Tax Act, 1961 (‘IT Act, 1961) vis-à-vis such a compensation, three High Courts have arrived at two different answers. The Delhi High Court in Sanjay Baweja v Deputy Commissioner of Income Tax, TDS Circle, 77(1), Delhi & Anrand the Karnataka High Court in Manjeet Singh Chawla v Deputy Commissioner of TDS Ward-(1)(2), Bangalore have answered in favor of the option grantees, while the Madras High Court in Nishithkumar Mukeshkumar Mehta v Deputy Commissioner of Income Tax, TDS Circle 2(1), has held in favor of the Income Tax Department. In all three cases, the options had vested in favor of the option grantees, but they had not exercised the options on the date of receiving the compensation. A fact which is crucial to understand all three decisions.    

There were two possible ways the Income Tax Department tried to shoehorn the compensation as income under the IT Act, 1961: first, by classifying the compensation as a perquisite under Section 17(2)(vi) of the IT Act, 1961; second, by categorizing the compensation as capital gains under Section 45 of the IT Act, 1961. This article suggests that – contrary to the Income Tax Department’s claims – the compensation paid by FPS is not taxable either as a perquisite or as capital gains under existing provisions of the IT Act, 1961. 

The two arguments against levy of income tax on the compensation are: 

first, Section 17(2)(vi) of the IT Act, 1961 only envisages the difference in exercise price and fair market value of the options as a taxable perquisite. A one-time voluntary compensation paid to compensate for loss in value of ESOPs is not within the purview of Section 17(2)(vi). 

second, while the one-time compensation paid by FPS is appropriately categorized as a capital receipt, in the absence of transfer of the underlying capital asset – stocks- it cannot be considered as capital gains under the IT Act, 1961. And even if one assumes that the compensation is capital gains, in the absence of a corresponding computation provision for such payments, the attempt to levy tax on such a compensation should fail.   

Scope of Perquisite under Section 17(2)(vi) 

Section 17(2)(vi) of the Income Tax Act, 1961 (‘IT Act, 1961’) defines ‘perquisite’ to include the value of any specified security or sweat equity shares allotted or transferred, directly or indirectly, by the employer, or former employer, free of cost or at a concessional rate to the assessee. Explanation (c) to the above sub-clause adds that: 

the value of any specified security or sweat equity shares shall be the fair market value of the specified security or sweat equity shares, as the case may be, on the date on which the option is exercised by the assessee as reduced by the amount actually paid by, or recovered from, the assessee in respect of such security or shares;

Section 17(2)(vi) read with Explanation (c) makes ESOPs taxable in the hands of an assessee as a perquisite. And difference in the fair market value of ESOPs and the cost paid by the assessee for ESOPs is treated as a perquisite on which income tax is payable. But the difference between two prices is only relevant if the option grantee exercises the option because the difference is calculated in reference to the ‘date on which the option is exercised by the assessee.’ One can then plausibly argue that it is the exercise of stock options that triggers an option grantee’s income tax liability under Section 17(2)(vi). 

The Madras High Court though held that the compensation received by an option grantee from FPS was taxable under Section 17(2)(vi) since the former ‘continues to retain all the ESOPs even after the receipt of compensation’. This conclusion has no basis in Section 17(2)(vi) since retention or otherwise of vested ESOPs is irrelevant to their taxability. It is the exercise of options that is material in determining the tax liability. The Madras High Court added another problematic observation to its above conclusion, i.e., computation of tax payable on the compensation. Section 17(2)(vi) does not provide for a computation mechanism for a voluntary compensation paid in respect of ESOPs. In this respect, the Madras High Court created its own computation mechanism by observing that:

If payments had been made by the petitioner in relation to the ESOPs, it would have been necessary to deduct the value thereof to arrive at the value of the perquisite. Since the petitioner did not make any payment towards the ESOPs and continues to retain all the ESOPs even after the receipt of compensation, the entire receipt qualifies as the perquisite and becomes liable to be taxed under the head “salaries”. 

Again, there is nothing in Section 17(2)(vi) that supports the above observation. Section 17(2)(vi) does envisage an option grantee receiving ESOPs free of cost. And in that case, the import of Explanation(c) would be that since ‘the amount actually paid’ by the option grantee is nil, the fair market value of ESOP would be computed as the taxable perquisite, without any deduction of cost. The foundational condition of exercise of options though must still be satisfied. But the Madras High Court overlooked the condition of exercise of options. Overall, the Madras High Court’s observations on taxability and computation of tax on the compensation, via a liberal reading of Section 17(2)(vi), are suspect.

On the other hand, by adopting a comparatively more strict and reasonable interpretation of Section 17(2)(vi), the Delhi High Court noted that ‘a literal understanding’ of the provision would reveal that the value of specified securities or sweat equity shares is dependent on exercise of options. And that for an income to be included as a ‘perquisite’ under Section 17(2)(vi), it is essential that the option grantee exercises the options. In the absence of exercise of options, the benefits derived in the form of a one-time voluntary compensation were not taxable as a perquisite under Section 17(2)(vi). The Karnataka High Court in a similar vein added since the assessee had not exercised the stock options the voluntary compensation paid by FPS was not taxable under Section 17(2)(vi) a perquisite. The Karnataka High Court stated that in the impugned scenario ‘a computational impossibility’ arises since taxability under Section 17(2)(vi) only arises when the option grantee exercises the option.  

Charge and Computation of Capital Gains 

Section 45 of the IT Act, 1961 states that any profits or gains arising from transfer of a capital asset shall be chargeable to income tax under the head “capital gains”. To levy a charge of tax under this provision, there must be transfer of a capital asset from which a profit or gain is made by the asssesse. None of the conditions specified in Section 45 were satisfied in the impugned scenario. The arguments against equating the one-time voluntary compensation to capital gains are manifold. 

To begin with, the option grantees stated that since they had not exercised their stock options at the time of receipt of compensation, there was no transfer of the underlying capital asset, i.e. the stocks. An essential ingredient of Section 45 was not fulfilled and thus the assertion that the compensation amounted to capital gains must fail. 

Another reason for not considering the compensation as capital gains was that in the absence of exercise of stock options, the option grantees had paid no cost for acquiring them. The cost of acquisition, essential to compute capital gains, could not be determined. Section 48 of the IT Act, 1961 contains details on how to compute income chargeable to tax under the head of capital gains. But, Section 48 of the IT Act, 1961 does not specify how to compute capital gains tax for a voluntary compensation received by an option grantee; specifically, when the option grantee has not exercised options at the time of receiving a voluntary compensation in relation to ESOPs. 

Even if one assumes there was transfer of a capital asset within the meaning of Section 45 of the IT Act, 1961 the lack of a corresponding computation mechanism would mean that the charge of tax must fail. The Karnataka High Court endorsed a well-established dictum of law on this issue, i.e., a charging provision and computation provision constitute an integrated code. The Karnataka High Court relied on Mathuram Aggarwal v State of Madhya Pradesh, where the Supreme Court has held that if any of the three elements: the subject of tax, the person liable to pay tax and rate of tax are ambiguous, there is no tax under the law. The Karnataka High Court’s reasoning that in the absence of a computation mechanism – for the compensation received by the option grantees – the charge of tax fails is based on a correct reading of the tax statute and aligns with the Supreme Court’s unchallenged view.

Finally, the option grantees argued that the compensation is a capital receipt, and the levy of income tax must fail. The Income Tax Department tried to argue that the compensation is a revenue receipt on the ground that FPS intended to deduct tax at source implying that the compensation is taxable under the IT Act, 1961. The Delhi High Court correctly negatived this assertion by the Income Tax Department and observed that: 

It is pertinent to note that the manner or nature of payment, as comprehensible by the deductor, would not determine the taxability of such transaction. It is the quality of payment that determines its character and not the mode of payment. Unless the charging Section of the Act elucidates any monetary receipt as chargeable to tax, the Revenue cannot proceed to charge such receipt as revenue receipt and that too on the basis of the manner or nature of payment, as comprehensible by the deductor.

The Delhi High Court added that the compensation paid by FPS to the option grantees was a one-time voluntary payment not linked to employment or business of the latter, and neither did it arise from a statutory or contractual obligation and correctly categorized it as a capital receipt. The Delhi High Court cited various precedents to emphaise on the voluntary nature of the payment to conclude that the compensation paid by FPS was a capital receipt. The Delhi High Court’s conclusion on the compensation being a capital receipt was in the context of Section 17(2)(vi). However, the Delhi High Court’s above observation was partially applicable to rebut the argument of capital gains as well. To put it succinctly, a capital receipt is subject to tax only if there is an express charging provision under the relevant income tax statute, there is a corresponding computation provision, and the capital receipt is included in the definition of income. Else, a capital receipt remains outside the purview of an income tax statute. In the impugned case, the lack of a specific computation provision for such compensation establishes that it is a capital receipt that is not charged to tax under the IT Act, 1961. The Karnataka High Court went a step ahead and pointedly held that the compensation was a capital receipt not chargeable to income tax under Section 45. And that a capital receipt which cannot be taxed under Section 45, cannot be taxed under any other head of income. And in stating so, the Karnataka High Court refused to categorize the compensation under the head of ‘salaries’, ‘capital gains’ or ‘income from other sources.’      

Conclusion  

Overall, the Delhi and Karnataka High Court’s approach to the impugned issue of taxability of a one-time compensation seems to be on much sounder footing. The latter copiously cited the former judgment and endorsed it unqualifiedly while adding its own similar interpretation. The reason that the Madras High Court’s judgment is unpersuasive is because it at odds with some of the fundamental interpretive tools used in tax law. For example, the position under tax law is clear and unimpeached: an income cannot be subjected to tax in the absence of an express charging provision. The charge of tax also fails in the absence of a corresponding computation mechanism. The former only establishes that the tax is payable, quantifying the amount payable via a computation provision is equally vital. Absence of either proves fatal to the charge. The Madras High Court by holding that the one-time voluntary compensation paid by FPS is taxable under Section 17(2)(vi), and that the entire sum received as compensation is taxable as perquisite, contradicts both the above well-accepted positions in tax law. It is not the remit of courts to interpret charging provisions liberally or prescribe computation mechanisms. The Madras High Court’s interpretive approach was an unwelcome intervention in adjudication of tax disputes. The Delhi and Karnataka High Court judgments – based on strict interpretation and defensible reasoning – hopefully will be a persuasive source for any future disputes that may arise on tax disputes of similar nature. 

The Monsoon of Tax ‘Reform’ 

by

It’s raining tax ‘reform’. Income Tax Bill, 2025 (‘IT Bill, 2025’) will soon replace the six decades old Income Tax Act, 1961. Goods and Services Tax (‘GST’) will ostensibly be simplified by Diwali of 2025. And we will have a two-tier GST consisting of 5% and 12%, with a ‘special’ tax rate of 40% applicable to select goods and services. Income Tax Return forms are being simplified, money limits for filing appeals across all tax domains are being enhanced to reduce tax litigation. Cumulatively, the changes – we are informed – are part of the larger goal of ushering in ‘Next-Generation Reforms’. There is a lot of activity, but something seems amiss.

Substantive tax reform is amiss. 

IT Bill, 2025: Simple Language, Uncertain Policy 

The use of simple, comprehensible, and coherent legal language is a goal worth spending thousands of hours. But such an exercise proves to be shallow and limited if the underlying policy is unclear and operating at cross purposes. Is faceless assessment scheme now the default manner of assessment or some aspects of human interaction are to be retained permanently? Do CSR activities deserve an unqualified tax-free status? What is the appropriate manner to levy tax on trusts? If the questions seem too narrow and pointed, what about the broader ones. Do we decisively move to the new tax regime and shed the old tax regime? Do we provide revenue targets to officers, but ensure that they don’t adopt absurd positions? Can we ensure that the Revenue Department does not adopt a position that is contrary to plain language of the statute? Do we repose faith in taxpayers and make policies from that starting point or is the default position otherwise? Should every tax treaty now be necessarily notified or was it just a convenient argument adopted by the Income Tax Department to deny benefits to a handful of taxpayers? I can go on, but you get the gist. 

If core income tax policies are in a state of flux, the language to express that policy can only provide limited clarity. Ironically, most clarity emerges in only in provisions which endow powers to the Income Tax Department. This includes powers of search and seizure, powers of arrest, and now that the dust has settled a bit: powers to reopen assessments. Otherwise, use of phrases such ‘tax year’ for ‘assessment year/previous year’ or use of ‘irrespective’ instead of ‘notwithstanding’ is a choice in favor of alternate words, not necessarily clarity. The IT Bill, 2025 may be more readable compared to its predecessor. The unending provisos and explanations may have been removed, redundant provisions to some extent been deleted, and use of legalese comparatively lesser. But improved readability should not be confused with clarity.    

GST: Multiple Tax Rates are not THE Enemy

Multiple tax rates in GST only take the heat because they are an obvious and low hanging target on which we like to hang all the flaws of GST. But the truth is that the Union and States cannot express their GST governance in clear and unambiguous terms. Why are purchaser’s dependent on suppliers to file their returns to claim Input Tax Credit? Why is provisional attachment of taxpayer properties so commonplace that courts must intervene repeatedly, and caution about the draconian nature of the power of provisional attachment? What policy is guiding levy of GST on health and life insurance? Why was online gaming target of ludicrous GST claims despite the law being obviously silent on come crucial issues? Why cannot the Revenue Department not digest any loss in courts? Any major loss in courts for the Revenue Department immediately triggers an amendment to nullify the decision. If possible, a through retrospective amendment. You want examples of these amendments? I’ve enlisted some here. 

The upward trajectory of GST collections hides the many flaws of GST governance. Instead of undertaking long, painful substantive reform, and building on the many gains of GST, we have chosen to focus on tinkering with GST rates. It is an easy sell on the political front. Come Diwali, it is easy to sell reduction of GST rates on cars and claim brownie points. But does that solve the broader issues caused by multiple tax rates in GST. The classification disputes – though source of occasional amusement – are unlikely to see end of the day until GST magically adopts a single-rate structure. Is revenue neutral rate now completely irrelevant to determine GST tax rates? If GST Compensation Cess is phased out, will the new policy be of no more cesses on GST? Because if the Union and States are simply going to levy ad hoc cesses on narrowed down tax slabs to compensate for revenue loss, we may as well stick with the current tax rates. And, while we at it, can someone tell me: why do gold and precious stones that they deserve a tax rate of their own?    

Tax Administration IS Tax Policy

There is a credible viewpoint in tax law scholarship: tax administration IS tax policy. You can understand this pithy quote in any number of ways. First, that tax administration can elevate or bury the most prudent tax policy. Delay in processing bona fide tax refunds can defeat a well-intentioned policy of reducing tax burdens of certain taxpayers. Cancelling GST registrations for sham reasons can defeat the policy of providing registrations within three working days of filing an application of registration. The above viewpoint can also be understood to mean that tax administration is an integral part of tax policy. Or if not integral, tax policy is certainly not distanced from tax administration. And that any tax reform or change in tax policy that does not bring a simultaneous change in tax administration is a flawed, if not a doomed tax reform. 

We cannot expect a rewrite of a law or a change in the tax rates to simply reduce unnecessary litigation, improve compliance, or otherwise improve tax governance. We need accompanying changes in attitudes of tax officers which in turn may require a broader systemic change in the administration of our Revenue Departments. Forsaking pedantic interpretation of law, aspiring for tax coherence, letting go of smaller tax demands in the short run for long term gains of simplicity and coherence can be some of the changes. But, as I write and advocate for these changes, I’m already convinced that they will take a long time to be realized. If at all.   

Conclusion – Buzzwords Abound  

The landscape of tax law and policy is increasingly being populated by buzzwords of no consequence. ‘One Nation, One Tax’ was a slogan that hid the reality that some indirect taxes will survive the implementation of GST. Now the ‘Diwali gift’ of GST tax rates restructuring is being thrown around as if sane tax policy is a largesse of the state and not a basic expectation of taxpayers. Income tax law has a ‘new look’ while it retains its old soul. And, while one cannot grouse political priorities because buzzwords sell, it is vital to understand the substance or the lack of it that hides behinds these quasi-marketing slogans. India’s tax landscape needs reform – deep, wide, and substantive. Anything else is activity, not meaningful change.    

Shelf Drilling Judgment: A Case of Interpretive Disagreements

by

The Supreme Court in a split judgment left unresolved the long standing issue of interplay between Section 144C-Section 153 of the Income Tax Act, 1961 (‘IT Act, 1961’). The absence of a clear resolution while not ideal, provides an insight into different interpretive attitudes towards procedural issues in tax. In this article, I make a few broad points on the interpretive approaches both the judges adopted when faced with a question that did not have a clear answer, but at the same time, a question seems to have acquired more complexity than  warranted. 

Issue 

The panoramic question was: whether timelines for ‘specific assessments’ in Section 144C of the Income Tax Act, 1961 (‘IT Act, 1961’) are independent of or subsumed in the general timelines for assessments provided in Section 153 of the IT Act, 1961? 

Section 144C provides the procedure and timelines for a specific kind of assessments which typically involve foreign companies. If the assessing officer makes any change in the assessment which is prejudicial to the assessee, then Section 144C prescribes a procedure which includes forwarding a draft assessment order to the assessee. If the assessee has any objections after receiving the draft assessment order, it may approach the Dispute Resolution Panel (‘DRP’). Section 144C, in turn, empowers DRP to issue binding directions to the assessing officer. And the latter has to complete the assessment as per the said directions. Section 153, in comparison, is a general provision which prescribes timelines for completion of assessments and reassessments. The assessing officer ordinarily has 12 months, after the end of a financial year, to complete any assessment.  

Opinions that do not ‘Converse’ 

In the impugned case, both judges framed the issue identically but answered it in diametrically opposite fashion. The divergent conclusions were a result of the different interpretive approaches adopted by both judges and their differing opinions as to what each of them considered relevant factors to adjudicate the case. The jarring part is that there seems to be no single point of consensus between the two judges. At the same time, while Justice Nagarathna does mention some points of disagreement with Justice SC Sharma’s opinion, the latter does not even mention or even superficially engage with her opinion. And consequently, Justice SC Sharma fails to tell us as to why he disagrees with Justice Nagarathna. It is left for us to arrive at our deductions and conclusions. I indulge in a preliminary attempt at this exercise and identify how both judges approached the issue and interpreted the relevant provisions and their respective reasonings.          

Modes Of Interpretation 

It is trite that tax statutes need to be interpreted strictly. Justice Nagarathna in her opinion went into significant detail about the appropriate interpretive approach in tax law disputes and cited various judicial precedents to lend support to her view of the necessity of strict interpretation. One offshoot of the doctrine of strict interpretation is that if the provision(s) is clear, plain, and unambiguous and inviting only one meaning, the courts are bound to give effect to that meaning irrespective of the consequences. It is this interpretive approach that guided her opinion that the issue of interplay between Section 144C-Section 153 was simply of statutory interpretation. She added that courts should not opine about the adequacy of the timelines available to the assessing officer or to the assessee as it would undermine the cardinal principles of tax law interpretation. So, if a strict interpretation of the provisions meant that an assessing officer would have limited time to complete assessments, so be it. It is for the Parliament to look into the adequacy of time available to the officers and assessees, not courts.      

Justice SC Sharma had no qualms – superficial or otherwise – about the need to follow strict interpretation. His approach was of a ‘balancing act’, literally. He clearly says that the Court must be alive to the ‘fine balance’ that needs to be maintained between tax officers having sufficient time to scrutinise income tax returns to prevent tax evasion and the right of assessees to not have their returns scrutinised after a certain amount of time. And in doing so, he stresses on the need for harmonious interpretation, the need to make various provisions of the IT Act, 1961 work. As is wont, a balancing act tends to lead to a half-baked solution. And Justice SC Sharma’s conclusion is one such solution where he concludes that the timelines prescribed in Section 153 are not completely irrelevant to Section 144C. The assessing officer is bound to complete the draft assessment order within the timelines mentioned in Section 153, and not the final assessment order. So he binds the assessing officer to complete half a job within the timeline prescribed by Section 153, but not the complete job. As per him, the final assessment order can be passed even after the limit set of Section 153. This is certainly not a strict interpretation of tax law provisions, but a judge’s subjective view of what is a ‘reasonable time’ for an assessing officer to complete an assessment.  

Relevance of Administrative Inconvenience 

Justice SC Sharma’s opinion is littered with his concern for tax officers of this country and their inability to complete assessments in a short time if the time period under Section 144C is interpreted to be subsumed in the time period provided in Section 153. He stated that in such a scenario, the tax officer will have to work ‘backwards’ and allow for a period of nine months to the DRP. As per Section 144C, if an assessee objects to the draft assessment order and refers it to a DRP, the latter has nine months to issue directions to the officer for completion of assessment and its directions are binding on the assessing officer. So, the assessing officer has to complete the draft assessment order by anticipating that objections may be raised before DRP, else the final assessment may not be completed within the timeline prescribed in Section 153. Justice Sharma was of the opinion that the Parliament ‘could not have conceived’ such a procedure to be followed by an assessing officer. The root cause of his concern was that the time window to complete the final assessment would be ‘negligible’ since ordinarily an assessment is to be completed within 12 months from end of the financial year in which the remand order is received from the tribunal. And this narrow time window, in his view, would ‘result in a complete catastrophe for recovering lost tax.’

Justice Nagarathana, however, dismissed the concern of unworkability of timelines. She said that failure of the assessing officer to meet the statutory timeline cannot be the basis of assuming any absurdity. The Revenue argued that if an assessing officer has to work backwards, the timelines may not be met, leading to an absurdity. I do agree with Justice Nagarathana that if for a specific set of assesses the assessing officers have to work backwards to respect the timelines, it does not make the provisions unworkable or absurd. How is working backwards to accommodate statutory prescribed timelines an absurd position? An assessing officer has to essentially accommodate nine months of time accorded to DRP in Section 144C and issue a draft assessment order accounting for that time. The actual absurdity is in the Revenue’s argument that an assessing officer accounting for the time that DRP may consume is a ground for extending statutory prescribed timelines. 

Also, Justice Nagarathana made it clear that merely because the assessee may opt for raising objections against the draft assessment order and approach the DRP cannot be a factor for increasing the timeline. The assessee cannot be prejudiced for exercising a right prescribed in the statute. Justice SC Sharma’s opinion though suggests that the exact opposite and implies that the assessee exercising the right to file objections and approach DRP is a good reason to extend timelines. And in implying so, he adopts a tenuous position. 

Impact of Non Obstante Clause(s) 

Our tax statutes contain non-obstante clauses galore, but their import and impact is understood differently based on the context. In the impugned case, Justice Nagarathana noted that the context and legislative intent of a non-obstante clause is vital to understand its import. Applying the above dictum, she held that the non-obstante clause in Section 144C(1) was only regarding the special procedure prescribed in the provision and not for the timelines enlisted in Section 153. She elaborated that Section 144C is only applicable to ‘eligible assessees’ and the provision mandates the assessing officer to forward a draft assessment order, while in all other cases a final assessment order is issued directly. Since Section 144C prescribes a special procedure for the eligible assessees, it overrides only those provisions of the IT Act, 1961 which prescribe a different procedure. Section 144C does not override all the provisions of the IT Act, 1961.  

Based on the above reasoning, Justice Nagarathana concluded that  the effect of non-obstante clause of Section 144C(1) is not to override Section 153. But why? This is because as per Justice Nagarathana, the latter was not contrary to the former. She added that if Section 144C is construed to extend the limitation period prescribed under Section 153, it would lead to an ‘absurd result’ as the scope and ambit of two provisions is distinct. She was clear that Section 153 prescribes timelines for assessments and reassessments while Section 144C prescribes procedure for a specific set of eligible assessees. In other words, Section 153 controls the timelines for all assessments while Section 144C controls procedure for specific assessments that may encompass only a limited set of assessees. Thus, both provisions had different scope and were not at odds with each other.  

One can also understand the above interpretive dilemma as an occasion where a judge faced with the relation between a general and specific provision, held that the former should serve the object and aims of the latter. Section 153 is certainly a general provision, and the timelines prescribed in it must be respected by a narrower and more specific provision such as Section 144C. Latter cannot operate at odds with the former and defeat the larger objective of completing assessments within prescribed time periods.  

Justice SC Sharma’s emphasis was on the non-obstante clauses in Section 144C(4) and Section 144C(13) which specifically override Section 153. Both these sub-sections mention the assessing officer’s obligation to pass a final assessment order. Both these sub-sections obligate an assessing officer to pass a final assessment order within one month (approximately) of receiving the assessee’s acceptance and DRP’s directions respectively. Justice Sharma somehow reads into the non-obstante clauses in these two sub-sections the idea that their effect was to only extend the timeline for passing a final assessment order and not the draft assessment order. He concluded that an assessing officer will have to complete the draft assessment order within the limitations stated in Section 153. 

Justice Sharma insisted that the non-obstante clauses must be construed to ‘not defeat’ the working of the IT Act, 1961 and ensure a harmonious construction of both the provisions. However, the real reason was his belief that if timelines of cases in Section 144C were subsumed in Section 153, it would be ‘practically impossible’ to complete the assessments. As discussed above, Justice Nagarathana was clear – and rightly so – that such a belief should have no role in interpretation of tax statutes. Also, Justice Sharma added that the assessing officer only acts in an executing capacity once the draft assessment order is passed, since the no new fresh issues can be raised thereafter. The implication being that the draft assessment order issued under Section 144C is effectively a final assessment order. This is convoluted phrasing and also an inaccurate understanding of assessment orders.      

Use of ‘Internal’ and ‘External’ Aids for Interpretation 

In the context of this discussion, let me say that an internal aid for interpretation can be understood be other provisions of the IT Act, 1961. While an external aid can include the Parliamentary discussions, committee reports, etc. Both the judges referred to external aids in the impugned case and tried to understand the rationale of impugned provisions, especially Section 144C, by citing memorandums and explanatory notes of the relevant finance acts. Justice Nagarathna cited them in significant detail and one can see that her conclusion was influenced by these external aids. The Finance Minister, when introducing the amendment via which Section 144C was inserted in the IT Act, 1961 had mentioned the need to improve climate for tax disputes, expedite the dispute resolution process, and provide an alternate dispute resolution process. Since the assessees that would benefit from Section 144C would primarily be foreign companies, the aim was to signal a more receptive tax environment for foreign investment. If expediting dispute resolution process was one of the aims of Section 144C, one could argue it was a reasonable deduction that timelines of Section 144C were subsumed in timelines of Section 153. Holding otherwise would delay the process instead of expediting it. And Justice Nagarathna was partially influenced by the purpose of introducing Section 144C before arriving at her conclusion.      

Justice SC Sharma’s reliance on external aid was comparatively much more limited. He cited the relevant extracts that explained the need for Section 144C, but his focus was more on the need to harmoniously interpret Section 144C and Section 153. He tried to reason that his conclusions were aimed at making sure the IT Act, 1961 remained workable and absurdities were avoided. He primarily relied on internal aids, i.e., other provisions of the IT Act, 1961 to defend his conclusions that he said were aimed to ensure harmony amongst the various statutory provisions.    

While We Await Another Judicial Opinion  

Until a three-judge bench weighs in with their opinion, the interplay of Section 144C-Section 153 obviously remains without a clear answer. On balance, the reasoning adopted by Justice Nagarathna is more aligned to classical principles of tax law interpretation. But, the Indian Supreme Court has an uneven record in tax law matters and predicting what may happen next is as good as rolling the dice. In recent times, the Supreme Court’s uneven history on tax matters includes but is not limited to providing remedy to the Revenue Department without them even making a request for it. Or adopting gymnast worthy legal fictions and altering the concept of time to ostensibly balance the rights of the Revenue and the assessees. Thus, there is no predicting the outcome of this dispute, though I can go out on a limb and say that the relevant provision(s) maybe amended, and retrospectively so, if the Income Tax Department does not agree with the final verdict. Such amendments are certainly not unheard of!     

LinkedIn