Allahabad High Court: In a writ petition filed by Samsung India Electronics Pvt. Ltd. (‘Samsung’) challenging the order passed by the Additional Commissioner, Shekhar B. Saraf, J. while setting aside the impugned orders, held the following:
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While the principle of res judicata does not apply to taxation matters, it is incumbent upon authorities to take a consistent approach when dealing with similar factual and legal circumstances. The principle of consistency states that when faced with analogous factual and legal circumstances, the treatment should remain uniform. Taxpayers have a legitimate expectation that similar factual and legal circumstances will be met with uniform treatment, and any deviations from this principle undermine the credibility and legitimacy of the actions taken by tax authorities.
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When facts and circumstances in a subsequent assessment year are the same, no authority, whether quasi-judicial or judicial, can generally be allowed to take a contrary view. The arbitrary withholding of refund claims for specific periods, despite precedents and the absence of any material change in circumstances, is contrary to the principles of fairness and equity.
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Capital goods are intended for long-term use and are typically subject to capitalization. However, inputs are goods used in the day-to-day operations of the business and are not subject to capitalization.
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While issuing a show cause notice, it is incumbent upon the Department to clearly outline the specific allegations or concerns against the recipient. In no case, the Department can be allowed to traverse beyond the confines of the Show Cause Notice, since the same will trample upon the recipient’s right to defend itself. Any attempt by the issuing authority to expand the scope of inquiry or introduce new allegations beyond those articulated in the show cause notice would constitute a violation of the principles of natural justice.
Background:
Samsung is engaged in the export of Information Technology design and software development services pertaining to mobile devices to its overseas holding company, namely, Samsung Electronics Company Limited, Korea (‘SEC Korea’) in terms of prevalent service agreement. Such export of IT services is made by Samsung under Letter of Undertaking (‘LOU’) without payment of IGST which constitutes zero rated supply as per Section 16 of the Integrated Goods and Services Tax Act, 2017 (‘IGST Act, 2017’).
For rendering IT Services to SEC Korea, Samsung procures various inputs, input services, and capital goods and accordingly avails Input tax credit (‘ITC’) of the CGST, SGST, and IGST paid thereon, in accordance with the applicable provisions of the GST laws.
Samsung filed a refund claim for unutilised ITC paid on various inputs and input services for the period of April 2019 to June 2019. After due consideration by the Department, said refund claim was sanctioned by the Department barring for an amount of Rs.7,500/ on the ground of claiming refund of unutilised ITC on invoices missing in the GSTR-2A returns.
Samsung then filed for the refund of the unutilised ITC paid on various inputs and input services, for the period of July — September 2019 and October — December 2019. Against the aforesaid refund applications, deficiency memos and later show cause notices were issued by the Department proposing to reject the refund for the aforesaid periods.
Thereafter, Samsung filed a reply to the show cause notices and attended a personal hearing, after which the Department partially allowed the refund and rejected a portion of the demand on the ground that the specific goods are capital goods, and not input. Thereafter, Samsung filed appeals against the aforesaid orders, which were rejected. Aggrieved, Samsung preferred the writ petition before this Court and aggrieved by the order dated 24-02-2023, it preferred the writ tax before this Court.
Analysis:
The Court said that the refund claims arising from precisely similar facts and circumstances for previous and subsequent assessment periods were duly sanctioned. However, a stark deviation from this precedent is observed in the treatment of refund claims for the periods of July-September 2019 and October-December 2019, which have been inexplicably withheld by the Department. This sudden change in the Department’s stand is not only inconsistent but also irrational.
Citing the principle of consistency, which dictates that when faced with identical factual and legal circumstances, the treatment should remain uniform, the court said that the Department’s decision to withhold refund claims for the afore-mentioned periods, despite having sanctioned similar claims in the past and subsequently in the future, lacks cogent rationale.
The Court said that when taxpayers find themselves in analogous factual and legal circumstances, tax authorities must apply consistent treatment to avoid perceptions of unfairness. Inconsistencies in addressing comparable factual circumstances can lead to distrust in the fairness of the tax system and compromise compliance. Taxation departments must adhere to consistent interpretations and applications of tax laws and regulations. This adherence ensures that taxpayers are treated equitably under the law and prevents arbitrary decision-making by tax authorities.
The Court said that the factual and legal circumstances surrounding the refund claims for July-September 2019 and October-December 2019 are indistinguishable from those of previous assessment periods and the subsequent assessment periods for which the refunds have been approved. The Department’s failure to provide a valid justification for this disparate treatment further underscores the inconsistency and irrationality of its actions. Moreover, such inconsistencies create uncertainty and confusion among taxpayers, leading to potential disputes and litigation. In the absence of clear and consistent guidelines, taxpayers may find it challenging to navigate the tax system, resulting in increased compliance costs and administrative burdens. It added that the taxpayers have a legitimate expectation that similar factual and legal circumstances will be met with uniform treatment, and any deviations from this principle undermine the credibility and legitimacy of the actions taken by tax authorities.
After referring to various decisions of the Supreme Court, the Court said that the principle of consistency is sacrosanct in taxation matters. The Supreme Court has consistently emphasized that Revenue cannot take a different stand when facts are almost identical. The arbitrary withholding of refund claims for specific periods, despite past precedents and the absence of any material change in circumstances, is contrary to the principles of fairness and equity.
The Court examined the distinction between ‘inputs’ and ‘capital goods’ and said that the specific goods used for R & D and software development are essential for providing IT services, and therefore, qualify as inputs under the CGST Act, 2017.
The Court also said that the issuance of a show cause notice entails the obligation on the authority to meticulously delineate specific allegations or concerns prompting its issuance. The principles of natural justice demand that the recipient be accorded a fair and impartial opportunity to respond to the allegations raised in the show cause notice.
The Court said that, in the present case, the Department has deviated from the show cause notice, and as such any order passed by it running contrary to the grounds taken in the show cause notice, cannot be sustained, as adherence to the show cause notice is not merely a procedural formality but a mandatory requirement, beyond the scope of which, no action can be taken.
[Samsung India Electronics Private Limited v. State of U.P., 2024 SCC OnLine All 651, decided on 12-03-2024]
