Experts CornerTarun Jain (Tax Practitioner)

Introduction

The very fact that a tax is recognised as a transaction tax on a conceptual basis implies that there must be a transaction to begin with in order to levy such a tax. Admittedly goods and services tax (GST), introduced in India in 2017, is one such tax. It is hinged upon the existence of a supply which has been legislatively defined to essentially refer to a transaction between two persons. A key element for the levy of GST is existence of “consideration”. Albeit there are certain circumstances in which consideration is not necessary and by way of a legal fiction is “deemed” to exist. In all other cases, however, consideration must flow from the recipient of the supply to the supplier in order for the transaction to be exigible to tax. Thus is introduced within the GST realm an important aspect of the law of contract, the “privity of consideration” doctrine. This post examines the nuances of the doctrine to explore its interplay under the GST law and explore its increasing application to address intricate issues which may arise owing to the peculiarities of “consideration”.

Privity of consideration: Not a sine qua non for a valid contract unlike privity of contract

Under the law of contract, privity between parties to the contract (i.e. privity of contract) is a necessity. “It is an elementary principle of English law known as the ‘doctrine of privity’ that contractual rights and duties only affect the parties to a contract, and this principle is the distinguishing feature between the law of contract and the law of property.”1 The same legal position exists under the Contract Act, 1872 (ICA). Pollock & Mulla, describing this doctrine, state “a contract cannot confer rights or impose obligations arising under it on any person except the parties to it. No one but the parties to a contract can be entitled under it or bound by it. This principle is known as that of privity of contract”.2

By contrast, privity of consideration is not a requirement for valid contract. This is on account of the definition of “consideration” set out in Section 2(d) of the ICA which permits the consideration for a contract to flow from a third party. It states that “when, at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing, something, such act or abstinence or promise is called a consideration for the promise”. In other words, for a contract to come into existence, it is not necessary that the consideration for the contract must necessarily come from the parties to the contract; the consideration can flow even from any other person. This aspect was resounded by the Delhi High Court, inter alia observing that “in India, whereas privity of contract is a must to create a jural relationship, privity of consideration is not essential and pertaining to a contract, consideration may flow to a contracting party from a third party, but at the instance of the other contracting party.”3

Even though there has been a proposal to amend this legal position,4 nonetheless “under the Act, the consideration for an agreement may proceed from a third party, but it does not follow that the third party can sue on the agreement”.5

Privity of consideration under GST laws: Exploring the interplay

The relevance of the aforesaid discussion under the law of contracts qua transaction taxes is brought out from the following consequences flowing from the privity doctrine:6

“The doctrine has two aspects. The first aspect is that no one but the parties to the contract are entitled under it. Contracting parties may confer rights or benefits upon a third party in the form of a promise to pay, or to perform a service, or a promise not to sue (at all or in circumstances covered by an exclusion or a limitation clause). But a third party on whom such right or benefit is conferred by contract can neither sue under it nor can rely on defences based on the contract.

The second aspect of the doctrine is that parties to a contract cannot impose liabilities on a third party. A person cannot be subject to the burden of a contract to which he is not a party. It is the counterpart of the proposition that a third person cannot acquire rights under a contract. This rule, for example also bars a person from being bound by an exemption clause contained in a contract to which it is not a party, so that a contract between A and B cannot impose a liability upon C.”

For our purpose, this summation of the legal position brings forth two aspects which may be relevant for transaction tax perspective. First, a contract between A and B can cause a benefit to flow from A to C. Second, in a contract between X and Y, the consideration to X can flow from Z (upon insistence of Y) even though Z is not a party to the contract. Let us exemplify these aspects in form of illustrations.

Illustration 1-A. A, a philanthropist executes a contract with B, a renowned NGO. Under the contract, B will carry out free evening teaching classes in identified areas to all daily wagers and their children, who are collectively referred as C. In turn, A shall compensate B for carrying out the teaching activity.

Having noted the contract law propositions, let us transpose them in transaction tax domain. For this purpose, it is imperative to take note of the legal provisions of the GST laws. The provisions of the Central Goods and Services Tax Act, 2017 (CGST Act) carry specific stipulations to this end. Section 2 of the CGST Act inter alia defines a “recipient” and “supplier” in the following terms:

(93) “recipient” of supply of goods or services or both, means — (a) where a consideration is payable for the supply of goods or services or both, the person who is liable to pay that consideration; (b) where no consideration is payable for the supply of goods, the person to whom the goods are delivered or made available, or to whom possession or use of the goods is given or made available; and (c) where no consideration is payable for the supply of a service, the person to whom the service is rendered, and any reference to a person to whom a supply is made shall be construed as a reference to the recipient of the supply and shall include an agent acting as such on behalf of the recipient in relation to the goods or services or both supplied;

* * *

(105) “supplier” in relation to any goods or services or both, shall mean the person supplying the said goods or services or both and shall include an agent acting as such on behalf of such supplier in relation to the goods or services or both supplied.

Let us apply the aforesaid statutory stipulations in the illustration. Theoretically, there can be two versions on its treatment under the GST law. The first version supports the view that there is only one supply in this situation. The second version, however, moots two supplies in this illustration.

  • In the first version, A will be the recipient, as A is liable to pay for the service which B is supplying and accordingly B will be the supplier. In this version, C is a third party to the contract and thus at best a beneficiary.

  • However, second version opines that there are two supplies; the first supply being between A and B and the second supply being occasioned when B undertakes teaching to C. Accordingly to this version, B is the supplier in both supplies. However, the recipient is A (who pays for the supply) in the first supply. In the second supply C is the recipient in terms of Section 2(93)(c) of the CGST Act, which specifically identifies “where no consideration is payable for the supply of a service, the person to whom the service is rendered” is construed as the recipient of the service.

The dichotomy in the two versions under the GST law is best reconciled when the privity of consideration doctrine from contract law perspective is introduced in this scenario. The doctrine of privity of consideration clearly demystifies that there is only one contract in this situation where only A and B are the parties to the contract. The doctrine of privity of consideration is clearly able to delineate that C, even though it gets benefit from the contract between A and B, is at best a third party and thus only a beneficiary which reveals that there is no second supply.

Illustration 1-B. Let us take another illustration on similar lines. Here, P is a pauper litigant. Q is a legal aid society which empanels counsels willing to act pro bono of which R is a member. In view of P approaching Q, R represents P before the court for which R is compensated by Q.

Even in this illustration, theoretically, there can be two versions on its treatment under the GST law. The first version supports the view that there is only one supply in this situation. The second version, however, moots two supplies in this illustration.

  • In the first version, R is the service provider (of legal services) and Q is the service recipient as Q is the person liable to pay for the service which R is supplying. In this version ,P is a third party to the contract, thus, at best a beneficiary.

  • However, second version opines that there are two supplies; the first supply being between R and Q and the second supply being occasioned when R undertakes to represent P. Accordingly to this version, R is the supplier in both supplies. However, the recipient is Q (who pays for the supply) in the first supply. In the second supply P is the recipient in terms of Section 2(93)(c) of the CGST Act, similar to Illustration 1-A.

Similar to Illustration 1-A, the dichotomy amongst the two versions under the GST law in this illustration is best reconciled by the doctrine of privity of consideration. Here R has agreed to represent P on account of the contract between R and Q in terms of which Q has recommended and paid for R to represent P. Thus, the contract is between R and Q and the doctrine of privity of consideration explains why R is representing P in this situation and there is no independent transaction between R and P and there is no separate supply by R to P.

Admittedly both the above illustrations are qua philanthropic activities. However, that fact alone does not take them out of the purview of tax legislations as it is now virtually well established that mere absence of profit motive is not sufficient to ward-off tax liability.7 In any case, there is nothing in these illustrations which cannot accommodate purely commercial transactions, and thus the relevance of doctrine of privity of consideration cannot be overemphasised in the realm of GST law.

Illustration 2. X is a start-up entity which has launched a new product. X is desirous of having a wide user base for its product. X contracts with Y, a marketing company, to make the product popular by getting at least 10,000 users sign up on X‘s website and order one product each. Y would charge marketing fee from X if Y is successful in this assignment. Through intensive marketing, Y is able to successfully get the requisite number of users sign up on X’s website and order the products. These users are collectively referred to as Z. Thus, Y charges the marketing fee from X.

Even though it may be fairly obvious as to who is the supplier and who is the recipient in this illustration from a GST perspective, the doctrine of privity of consideration nonetheless confirms the analysis. By applying the doctrine of privity of consideration, it is clear that the contract is between X and Y where the consideration to X flows from Z (through activities of Y) even though Z is not a party to the contract. Thus, X is the recipient and Y is the supplier. This is so, notwithstanding the conspicuous absence of “consideration” element in the definition of “supplier” under the CGST Act.

The aforesaid illustration has a real life parallel. In the year 2016, owing to demonetisation being announced by the Government, there were difficulties for certain users to carry the cash required to be paid, for crossing a toll bridge. In order to obviate such difficulties, the Ministry permitted users to cross the bridge without making any payment during a particular period. In lieu of the loss suffered by the toll operator on this account, the Ministry compensated the toll operator. The services by way of toll were specifically exempt under the service tax law. However, when the payments were made by the Ministry to the toll operator, certain tax officers sought to levy service tax on the payment made by the Ministry to the toll operator, on the premise that the payments represented an independent service by the toll operator to the Ministry. To address the issue, the Tax Board issued a circular8 clarifying that the activity carried out by the toll operator (i.e. allowing use of the road) remained the same and it was only because the toll operator received the consideration from the Ministry that it permitted the users to use the road without payment of the toll by them. Thus, there was no change in the contract (between the toll operator and user of road) and only the flow of consideration changed. Inter alia the following conclusions were drawn in the circular:

“The service that is provided by toll operators is that of access to a road or bridge, toll charges being merely a consideration for that service. On Ministry of Road Transport and Highways of India (MoRTH)/National Highways Authority of India (NHAI’s) instructions, for the period 8-11-2016 to 1-12-2016 this service of access to a road/bridge was continued to be provided without collection of consideration from the actual user of service. Consideration came from the project authority. The fact that for this period, for the same service, consideration came from a person other than the actual user of service, does not mean that the service has changed.”

Thus, even though the circular did not make specific reference to the doctrine of privity of consideration, it nonetheless gave effect to it in practice by (a) acknowledging that consideration can flow from a third person which is not a party to the contract; and (b) accepting that flow of consideration from a third party does not change the nature of transaction between the parties to a contract. The logic underlying this circular has been extended even to GST laws,9 which clearly reveals the importance of appreciating the finer nuance of doctrine in transaction tax space, including GST.

Conclusion

The aforesaid analysis has multiple implications. First, it reveals how tax law does not operate in isolation. Instead, the contours of tax law are intrinsically interwoven with many other laws, including the law of contract. Second, there can be innate difficulties in applying the tax law on a literal paradigm, which difficulties can be smoothened by taking recourse to relevant doctrines under other laws. Third, in the specific context of the privity of consideration paradigm, the discussion clearly highlights that under GST, determining the existence of a transaction on the basis of the flow of consideration may not reveal the correct legal position given the explicit recognition of third-party consideration under the Indian law. In such view of the matter, the doctrine of privity of consideration may be gainfully employed to decipher the real contracting parties (which often gets clouded when the appraisal is from the perspective of consideration flow), and thus GST can be levied on the correct transaction instead of chasing artificial constructs. The invocation of the substance of this doctrine, as illustrated by the circular, vindicates this analysis.


†Tarun Jain, Advocate, Supreme Court of India; LLM (Taxation), London School of Economics

1. P.S. Atiyah, Atiyah’s Introduction to the Law of Contracts, (3rd Edn., 1981) p. 265, as quoted in P. Ramanatha Aiyar’s, Advanced Law Lexicon, (5th Edn., 2017) p. 4077. The same Lexicon also quotes G.H. Treitel, The Law of Contract, (8th Edn., 1991) p. 538 to state “the doctrine of privity means that a person cannot acquire rights or be subject to liabilities arising under a contract to which he is not a party. It does not mean that a contract between A and B cannot affect the legal rights of C indirectly”.

2. Pollock & Mulla, Indian Contract & Specific Relief Act, (12th Edn., 2010) p. 102. Elaborating further, the authors state that the “doctrine of privity may involve any (or more) of the four questions: (i) can a person enforce a contract to which he is not a party? (ii) can a person set up a defence based on the terms of a contract to which he is not a party in order to answer a claim brought by a person who is a party to the relevant contract? (iii) can a contracting party set up a defence based on the terms of his own contract in order to answer a claim brought by a person who is not a party to the relevant contract? (iv) can a contracting party enforce his own contract against a person who is not a party to the relevant contract?”

3. Paam Antibiotics Ltd. v. Sudesh Madhok, 2011 SCC Online Del 4911: (2012) 186 DLT 652. See also, Krishna Devloor v. N. Madhavi, 2013 SCC Online AP 160: AIR 2013 AP 138: which inter alia explains this legal position in the following terms; “Mere payment of money by one individual to another, does not, by itself, bring about the transaction of a particular description. It is only when there exists unity of opinion, or what is commonly known in the realm of contracts, as consensus ad idem, that it can be treated as a consideration of the contract of a particular description. The money can certainly constitute the consideration, in a given transaction. However, it is only when it is paid by one, to another, with a specific understanding, that it is the consideration for a contract, that the contract can be said to have come into existence. The money paid for one purpose, cannot be treated as consideration for another. Even if a person pays the amount to another, with an idea that it is the consideration for purchase of an item of property, law would recognise such event, if only the person who paid the amount establishes that the one, who received it, was also of the same idea and understanding.”

4. See, 13th Report of the Law Commission of India (1958). In Para 16, the Law Commission had noted the following:

“That a rigid adherence to the doctrine of privity is bound to cause hardship is obvious. The present state of law in India is not quite uncertain and the particular exceptions which have been acknowledged by case law and statutes do not cover all cases of hardship and thus enhance the bewilderment of the layman. As we anticipated in our Report on the Specific Relief Act, the better course would be to adopt a general exception to cover all cases of contracts conferring benefit upon third parties and dispense with the particular instances where the rule of privity should not apply. We consider the recommendations of the Law Revision Committee best suited for the purpose, and recommend that a separate section be incorporated on the lines thereof.”

5. Pollock & Mulla, Indian Contract and Specific Relief Act, (12th Edn., 2010) p. 103. For English law on the subject, see Dunlop Pneumatic Tyre Co. v. Selfridge & Co., 1915 AC 847 inter alia observing that “My Lords, in the law of England certain principles are fundamental. One is that only a person who is a party to a contract can sue on it. Our law knows nothing of a jus quaesitum tertio arising by way of contract. Such a right may be conferred by way of property, as, for example, under a trust, but it cannot be conferred on a stranger to a contract as a right to enforce the contract in personam. A second principle is that if a person with whom a contract not under seal has been made is to be able to enforce it consideration must have been given by him to the promisor or to some other person at the promisor’s request. These two principles are not recognised in the same fashion by the jurisprudence of certain continental countries or of Scotland, but here they are well established. A third proposition is that a principal not named in the contract may sue upon it if the promisee really contracted as his agent. But again, in order to entitle him so to sue, he must have given consideration either personally or through the promisee, acting as his agent in giving it.” (per Viscount Haldane L.C.) See also, Scruttons Ltd. v. Midland Silicons Ltd. 1962 AC 446: (1962) 2 WLR 186: (1962) 1 All ER 1, etc.

6. Pollock & Mulla, Indian Contract and Specific Relief Act, (12th Edn., 2010) p. 106.

7. See generally, State of T.N. v. Port of Madras, (1999) 4 SCC 630. In any case, in a transaction tax (unlike income tax), there would ordinarily be no difference between commercial activities and non-profit driven activities.

8. Circular No. 212/2/2019-Service Tax dated 21-5-2019.

9. Refer, Circular No. 178/10/2022-GST dated 3-8-2022, relevant at Paras 8-8.1.

Case BriefsSupreme Court

Supreme Court: In an important ruling of Goods and Service Tax (GST), the bench of  KM Joseph* and Hrishikesh Roy, JJ has directed that, in order to also ensure that the successful tenderer pays the tax due and to further ensure that, by not correctly quoting the GST rate, there is no tax evasion, in all Government contracts, a copy of the document, by which, the contract is awarded containing all material details shall be immediately forwarded to the concerned jurisdictional Officer. Further, for effective compliance of the direction, the tenderers must, in their bids, indicate the details of their Assessing Officers.

The Court was deciding the case where the Railway has invited e-tenders for procurement of turbo wheel impeller balance assembly. According to the Notice Inviting Tender (NIT), the bidders were directed to specify the percentage of local content of the material being offered, in accordance with the ‘Make in India’ Policy. In terms of the said Policy, preference would be given to those projects, which have at least 50 per cent local content ordinarily, such purchase preference being limited to a margin of 20 per cent.

The writ petitioner knocked the door of the Court. It was submitted that the Council has declared in the Code that as far as the product is concerned, the rate has been shown as 18 per cent. The further case of the writ petitioner is that, neither the NIT nor the bid documents, mention the relevant Harmonised System of Nomenclature (HSN Code) applicable to the product. It has sabotaged the preservation of the level playing field. This is for the reason that while the writ petitioner honestly revealed the correct GST rate, whereas other bidders showed the GST rate at a far lower rate. This has distorted the tendering process

The High Court was of the opinion that if the GST value is to be added in the base price, to arrive at the total price, and it is used to determine the inter se ranking in the selection process, it was the duty of the State to clarify the HSN Code. It is further found that, mentioning of the HSN Code in the tender document itself, will resolve ‘all disputes’ relating to fairness and transparency, by providing a level playing field in the true spirit of Article 19(1)(g) of the Constitution of India.

When the matter reached the Supreme Court, the State contended that that it was the responsibility of the bidders to quote the HSN number and GST rate. Since the liability to pay the tax is on the successful tenderer (supplier) and Sections 59 and 60 of the Goods and Service Tax Act casts the burden on the tenderers to file return, self-assess and pay the tax, it is the jurisdictional officer relevant to the supplier who can make the proper classification. The State would stand in the shoes of a purchaser. It cannot therefore be expected to find out the HSN Code and announce it so as to bind the tenderers or fetter the power of jurisdictional officer of the supplier.

The Supreme Court was of the opinion that, in the name of producing a level playing field, the State, when it decides to award a contract, cannot be obliged to undertake the ordeal of finding out the correct HSN Code and the tax applicable for the product, which they wish to procure. This is, particularly so when the State is not burdened with the liability to pay the tax. The liability to pay tax, in the case at hand, was squarely on the supplier. There are adequate safeguards and Authorities under the GST Regime must best secure the interests of the Revenue.

“The liability to pay tax under the GST regime is on the supplier. He must make inquires and make an informed decision as to what would be the relevant HSN Code applicable to the items and the rate of tax applicable.”

The Court further explained that though, for determining the local content, the HSN Code of the item, for the purpose of custom duty, is to be found, it may not justify the writ petitioner from contending that the HSN Code for the GST must be included in the tender conditions. The liability to pay the tax under the GST regime is with the supplier unless it falls under Section 9(3) of the GST Act. Further, the State cannot declare a GST rate and make it binding on the bidder.

The Court, hence, refused to hold that in view of the Make in India policy as contained in the order dated 15.06.2017, there is duty to declare the HSN code in the tender and what is more, make the tenderers quote the rate accordingly.

[Union of India v. Bharat Forge Ltd, 2022 SCC OnLine SC 1018, decided on 16.08.2022]


*Judgment by: Justice KM Joseph


For UOI: ASG N. Venkataraman,

For writ petitioner: Advocate Amar Dave

For Second Respondent: Advocate Girdhar Govind

Uttarakhand High Court
Case BriefsHigh Courts

Uttaranchal High Court: The division bench of Sanjaya Kumar Mishra, acting C.J., Ramesh Chandra Khulbe, J., held in the writ petition is maintainable, as the cancellation of GST registration affects the rights of livelihood enshrined under Article 21 of the Constitution of India.

The division bench observed that in absence of a GST registration number, a professional cannot raise a bill which affects the chances of getting employment or executing works. Such denial of registration, therefore, affects the right of livelihood that is violative of Article 21 of the Constitution. If the situation so prevailing continues, then it will not only amount to a violation of Article 21 but also the right to life of a citizen of this country.

Facts:

The petitioner is a working mason/ painting professional who applied for GST registration and the registration no. was allotted to him but, hee failed to file his return for a continuous period of six months which was mandatory under the Uttarakhand Goods and Services Tax Act, 2017. Hence, his registration got canceled on 21-09-2019.

The petitioner preferred an appeal before the First Appellate Authority which got dismissed on the grounds of delay. Thereafter, a writ petition was filed which was also dismissed as not maintainable by the Single Judge. It was observed in the writ petition that an alternative remedy of appeal was available to the petitioner under Section 107 of the Uttarakhand Goods and Services Tax Act, 2017. Aggrieved by the order of the Single Judge, the petitioner filed this intra court appeal.

The appellant argued that the High Court can exercise its jurisdiction even in cases where alternative and efficacious remedies are available. It was also argued that the Statute does not provide any prohibition against the exercise of the writ jurisdiction under Article 226 by the High Court.

Issue:

1. Whether a writ petition is maintainable when the limitation period provided for filing an appeal is not extendable?

2. Whether the Assistant Commissioner of GST, whose order is challenged in this case, is an adjudicating authority, or not?

Analysis & Observation:

The Court observed that the law made by the Parliament regarding appeals is very strict. It was pointed out that the law does not grant the First Appellate Authority to extend the limitation beyond one month after the expiry of the prescribed limit due to which the petitioner is put to hardship and left with no remedy.The Court noted that a notice was given on the website regarding the cancellation of GST registration which was not sufficient and a personal notice was supposed to be given. . The Court while allowing the appeal and remanding the matter back said that the petitioner is a semi-skilled labourer and now-a-days bills for any work executed for a private player or, even for the Government agency, are drawn on-line. In most cases, the payments are made direct to the bank on production of the bill with the GST registration number. In the absence of GST registration number, a professional cannot raise a bill. So, if the petitioner is denied a GST registration number, it affects his chances of getting employment or executing works. Such denial of registration of GST number, therefore, affects his right to livelihood. The Court relied on Radha Krishan Industries vs State of Himachal Pradesh, (2021) 6 SCC 771,

wherein it was held that a Commissioner is not an adjudicating authority, hence an appeal will not lie against the orders passed by him under Section 107 of the Uttarakhand Goods and Services Tax Act, 2017. The Court, hence, set aside the order by learned Single Judge and held that the learned Single Judge has committed error by holding that the writ petition is not maintainable.

[Vinod Kumar v. Commissioner Uttarakhand State 2022 SCC OnLine Utt 777, decided on 20-06-2022]

AAR GST
Case BriefsTribunals/Commissions/Regulatory Bodies

   

Appellate Authority for Advance Ruling, Punjab: Arun Narayan Gupta Chief Commissioner, CGST Commissionerate, and Kamal Kishor Yadav, Commissioner of State Tax held that the distribution of match tickets to related persons for the promotion of business attracts GST.

The factual background of the case

The appellant entered into a Franchise Agreement in April 2008 with the Board of Control for Cricket in India (BCCI) to establish and operate a cricket team in the Indian Premier League (IPL) under the title of ‘Punjab Kings’. The Appellant intended to distribute match tickets free of cost as a goodwill gesture for the promotion of business. These tickets were distributed without any consideration by the Appellant. The Appellant approached the Authority for Advance Ruling, Punjab (AAR Punjab) to clarify the treatment of GST liability on the supply of complimentary tickets.

AAR Punjab held the act of Appellant of issuing complimentary tickets displayed an act of forbearance. Aggrieved with the judgment the Appellant filed an appeal under Section 99 of the Punjab GST Act and Central Good and Services Act, 2017 (CGST) before the Appellant Authority of Advance Ruling to seek advance ruling for the following:

  • Whether the activity of providing “Complimentary tickets” by the appellant falls within the definition of supply under the Punjab GST Act, 2017 /CGST Act, 2017?

  • Whether the appellant would be required to pay tax on such complimentary tickets?

Analysis and Decision

The Bench stated that the two key elements that are required to be present for any activity or transaction to fall within the ambit of supply are “consideration” as well as “furtherance of business”. Therefore, the Bench opined that if any activity or transaction mentioned in Schedule II of the CGST the same has to fulfill the two key parameters i.e., presence of “consideration” as well as “furtherance of business” for it to be treated as supply under the Act.

The Bench observed that even for the consideration in the form of payment in kind, it should not be vague or illusory and there should be an element of reciprocity, and the expression “exempt supply” as defined under the CGST means the supply of any goods or services or both which attracts nil rate of tax or which may be wholly exempt from tax under Section 11, or under Section 6 of the Integrated Goods and Services Tax Act, 2017 and includes the non-taxable supply.

Therefore, the Bench held that the activity of providing complimentary tickets is an exempt supply, and there shall be no availment of Input Tax Credit according to Section 17 (2) of the CGST.

Hence, complimentary tickets provided by the Appellant fall within the ambit of supply on account of Schedule I of the CGST, and the Appellant would be liable to pay tax on the same.

[KPH Dream Cricket Pvt. Ltd., 01/AAAR/CGST/KPH/2022, decided on 01-06-2022]

AAR GST
Case BriefsTribunals/Commissions/Regulatory Bodies

   

Tamil Nadu Authority for Advance Ruling: T.G. Venkatesh, Additional Commissioner of GST & Central Excise, and K. Latha, Joint Commissioner of State Tax has held that the contracts relating to solid waste management and removal of legacy waste dumped at bio-mining sites, except Bio-CNG are exempted from GST.

Factual Background of the case

The applicant is in the bio-waste management sector and does all types of waste management like collection and transportation, manpower supply, bio-mining, micro composting center, and bio- CNG gas.

An application was filed by the applicant, before the Tamil Nadu Authority for Advance Ruling to seek an Advance Ruling on the following:

  • Whether contracts received from various city corporations and a municipality towards solid waste management are exempted from GST?

  • Whether contracts received from various city corporations and a municipality towards the removal of legacy waste dumped at dump sites through Bio-Mining process is exempted from GST?

Analysis and Decisions

The Bench referred to the definition of ‘pure services' as defined under Sl. No.3 of Notification 12/2017- C.T. (Rate) dated 28-06-2017. According to the definition, “Pure services (excluding works contract service or other composite supplies involving supply of any goods) provided to the Central Government, State Government or Union territory or local authority or a governmental authority by way of any activity in relation to any function entrusted to a Panchayat under Article 243-G of the Constitution or in relation to any function entrusted to a Municipality under Article 243-W of the Constitution.

In the light of the above definition, the Bench gave the following decision-

A. Removal of Legacy waste

The Bench observed that removal of legacy waste and reclamation of land is a process whereby the accumulated legacy solid waste is segregated, and the dump site is cleared to reclaim the lands for better usage. Therefore, the Bench held that the contracts received from various city corporations and municipalities towards the removal of legacy waste dumped at the site through the bio-mining process are pure services rendered to local authority and such act is being entrusted to a municipality under Art. 243-W of the Constitution. Hence, such contracts are eligible for exemption from GST.

B. Micro-composting and labour services

The Bench observed that the applicant, to carry out the activity of removal of legacy waste, needs to maintain micro compost centers and employ labourers and operators in order to carry out the service. Therefore, the bench held that contracts entered into for Maintenace of micro-composting and labour contracts for collection of solid waste are ‘pure services' rendered to local authorities and are activities rendered to local authorities and entrusted to the municipality under Art. 243-W of the Constitution.

C. Production of Bio-CNG

Further, the Bench opined that conversion of wet waste into BIO-CNG does not fall under the pure services as the applicant needs to set up a separate plant and machinery and structure as a new product is being produced and no service is being rendered to a local authority or the Government. Therefore, the bench held that the contract on Bio-CNG does not qualify as pure services. Hence, it was not eligible for GST exemption.

[Srinivas Waste Management Services Pvt. Ltd., Or, No. 23/AAR/2022, decided on 30-06-2022]

AAR GST
Case BriefsTribunals/Commissions/Regulatory Bodies

Ahmedabad Authority for Advance Ruling: Members Atul Mehta and Arun Richard, has held that 18% GST is payable on value for intended supply on the sale of a car by a company after using it for business purposes.

Factual Background of the case

The applicant purchased a new SUV (i.e., sports utility vehicle) for Rs. 80 Lakhs on 16-02-2018 for use in its business. It did not use GST Input Tax Credit at the time of purchase as it is restricted under Section 17(5) of the Central Goods and Services Tax Act, 2017 (CGST Act). The depreciation on the car was claimed under the Income Tax Act, 1961. The Applicant intends to sell the used car for Rs 55,00,000/-. The written down value of the car as per books of accounts is Rs 47,00,000/-.

An application was filed by the applicant, under Section 97(2) of the CGST Act before the Ahmedabad Authority for Advance Ruling to seek an Advance Ruling on the following:

  • At what rate of GST, the new car purchased by the company is sold after using it for business purposes, shall the GST be charged?
  • Whether the value of the old and used car, sold by the company as mentioned above, can be taken as the value that represents the margin of the supplier, on the supply of such car, and whether the GST can be charged on such margin?
  • The value that represents the margin of the supplier, on supply of such old and used goods/Car will be inclusive of GST or exclusive?

Decision and Analysis

The bench opined that concerning the submissions made on behalf of the applicant, the used car falls under the category of Serial No. 3 of the Notification 8/2018- CT dated 25-01-2018.

As per the notification, 9% CGST is payable on old and used motor vehicles of engine capacity exceeding 1500 cc, popularly known as SUVs including utility vehicles. According to the notification, an SUV includes a motor vehicle of length exceeding 4000 mm and having ground clearance of 170 mm. and above.

The relevant part of the notification which forms the subject matter of the case is as follows-

Explanation- for the purpose of this notification –

In case of a registered person who has claimed depreciation under Section 32 of the Income-Tax Act, 1961 (43 of 1961) on the said goods, the value that represents the margin of the supplier shall be the difference between the consideration received for supply of such goods and the depreciated value of such goods on the date of supply, and where the margin of such supply is negative, it shall be ignored.

Hence, the bench applied the abovementioned provisions and held that 18% (9% CGST and 9% SGST) GST shall be levied upon the difference between the consideration received for the supply of the car and the depreciated value of the car on the date of supply i.e., the value intended for supply.

[Dishman Carbogen Amcis Ltd., 2021 SCC OnLine Guj AAR-GST 19, decided on 01-06-2022]

Case BriefsSupreme Court

Supreme Court: In the case where the constitutionality of two Central Government notifications related to levy of Integrated Goods and Services Tax (IGST) was under scanner, the 3-judge bench of Dr. DY Chandrachud*, Surya Kant and Vikram Nath, JJ has held that since the Indian importer is liable to pay IGST on the ‘composite supply’, comprising of supply of goods and supply of services of transportation, insurance, etc. in a CIF contract, a separate levy on the Indian importer for the ‘supply of services’ by the shipping line would be in violation of Section 8 of the CGST Act.

The Court observed that,

“If Indian shipping lines continue to be taxed and not their competitors, namely, the foreign shipping lines, the margins arising out of taxation from GST would not create a level playing field and drive the Indian shipping lines out of business.”

Issue

Whether an Indian importer can be subject to the levy of Integrated Goods and Services Tax (IGST) on the component of ocean freight paid by the foreign seller to a foreign shipping line, on a reverse charge basis?

Discussion

It was argued before the Court that the transaction between the foreign exporter and the respondents is already subject to IGST under Sections 5 of the IGST Act read with Sections 3(7) and 3(8) of the Customs Tariff Act as “supply of goods”. An additional levy of IGST on imported goods, that is on the supply of transportation service, by designating the importer as the recipient would amount to double taxation.

The Court explained that any Ocean Freight transaction involves three parties- the foreign exporter, the Indian importer and the shipping line. The first leg of the transaction involves a CIF contract, wherein the foreign exporter sells the goods to the Indian importer and the cost of insurance and freight are the responsibility of the foreign exporter. In other words, the foreign exporter is liable to ensure that the goods reach their place of destination and the Indian importer pays the transaction value to the exporter. The second leg of the transaction involves an agreement between the foreign exporter and the shipping line (whether foreign or Indian) for providing services for transport of goods to the destination, i.e., in the territory of India.

On the first leg of the transaction, between the foreign exporter and the Indian importer, the latter is liable to pay IGST on the transaction value of goods under Section 5(1) of the IGST Act read with Section 3(7) and 3(8) of the Customs Tariff Act. Although this transaction involves the provision of services such as insurance and freight it falls under the ambit of ‘composite supply’.

The Union Government had, however, submitted that the impugned levy is on the second leg of the transaction, which is a standalone contract between the foreign exporter and the foreign shipping line. Thus, the contract between the foreign exporter and the foreign shipping line- of which the Indian importer is not a party- cannot be deemed to be a part of ‘composite supply’.  The Court, however, refused to agree with the submission and observed,

“The Union of India cannot be heard to urge arguments of convenience – treating the two legs of the transaction as connected when it seeks to identify the Indian importer as a recipient of services while on the other hand, treating the two legs of the transaction as independent when it seeks to tide over the statutory provisions governing composite supply.”

This observation was made in reference to the fact that the Court had agreed to Union of India’s submission to hold that when the place of supply of services is deemed to be the destination of goods under Section 13(9) of the IGST Act, the supply of services would necessarily be “made” to the Indian importer, who would then be considered as a “recipient” under the definition of Section 2(93)(c) of the CGST Act. The supply can thus be construed as being “made” to the Indian importer who becomes the recipient under Section 2(93)(c) of the CGST Act.

Stating that the Court is bound by the confines of the IGST and CGST Act to determine if this is a composite supply, the Court said that it would not be permissible to ignore the text of Section 8 of the CGST Act and treat the two transactions as standalone agreements.

The Court explained that the supply of service of transportation by the foreign shipper forms a part of the bundle of supplies between the foreign exporter and the Indian importer, on which the IGST is payable under Section 5(1) of the IGST Act read with Section 20 of the IGST Act, Section 8 and Section 2(30) of the CGST Act. Hence, to levy the IGST on the supply of the service component of the transaction would contradict the principle enshrined in Section 8 and be in violation of the scheme of the GST legislation.

It was, hence, held that while the impugned notifications are validly issued under Sections 5(3) and 5(4) of the IGST Act, it would be in violation of Section 8 of the CGST Act and the overall scheme of the GST legislation.

Conclusion

(i) The recommendations of the GST Council are not binding on the Union and States for the following reasons:

(a) The deletion of Article 279B and the inclusion of Article 279(1) by the Constitution Amendment Act 2016 indicates that the Parliament intended for the recommendations of the GST Council to only have a persuasive value, particularly when interpreted along with the objective of the GST regime to foster cooperative federalism and harmony between the constituent units;

(b) Neither does Article 279A begin with a non-obstante clause nor does Article 246A state that it is subject to the provisions of Article 279A. The Parliament and the State legislatures possess simultaneous power to legislate on GST. Article 246A does not envisage a repugnancy provision to resolve the inconsistencies between the Central and the State laws on GST. The ‘recommendations’ of the GST Council are the product of a collaborative dialogue involving the Union and States. They are recommendatory in nature. To regard them as binding edicts would disrupt fiscal federalism, where both the Union and the States are conferred equal power to legislate on GST. It is not imperative that one of the federal units must always possess a higher share in the power for the federal units to make decisions. Indian federalism is a dialogue between cooperative and uncooperative federalism where the federal units are at liberty to use different means of persuasion ranging from collaboration to contestation; and

(c) The Government while exercising its rule-making power under the provisions of the CGST Act and IGST Act is bound by the recommendations of the GST Council. However, that does not mean that all the recommendations of the GST Council made by virtue of the power Article 279A (4) are binding on the legislature’s power to enact primary legislations;

(ii) On a conjoint reading of Sections 2(11) and 13(9) of the IGST Act, read with Section 2(93) of the CGST Act, the import of goods by a CIF contract constitutes an “inter-state” supply which can be subject to IGST where the importer of such goods would be the recipient of shipping service;

(iii) The IGST Act and the CGST Act define reverse charge and prescribe the entity that is to be taxed for these purposes. The specification of the recipient – in this case the importer – by Notification 10/2017 is only clarificatory. The Government by notification did not specify a taxable person different from the recipient prescribed in Section 5(3) of the IGST Act for the purposes of reverse charge;

(iv) Section 5(4) of the IGST Act enables the Central Government to specify a class of registered persons as the recipients, thereby conferring the power of creating a deeming fiction on the delegated legislation;

(v) The impugned levy imposed on the ‘service’ aspect of the transaction is in violation of the principle of ‘composite supply’ enshrined under Section 2(30) read with Section 8 of the CGST Act. Since the Indian importer is liable to pay IGST on the ‘composite supply’, comprising of supply of goods and supply of services of transportation, insurance, etc. in a CIF contract, a separate levy on the Indian importer for the ‘supply of services’ by the shipping line would be in violation of Section 8 of the CGST Act.

[Union of India v. Mohit Minerals Pvt. Ltd., 2022 SCC OnLine SC 657, decided on 19.05.2022]


*Judgment by: Justice Dr. DY Chandrachud


Counsels

For UOI: ASG N Venkataraman

For respondent: Senior Advocates V Sridharan, Harish Salve, Arvind Datar, Vikram Nankani and Advocate Uchit Sheth

For intervenors: Advocate Rajesh Kumar Gautam

Case BriefsHigh Courts

Rajasthan High Court: Narendra Singh Dhaddha rejected bail and dismissed the petition being devoid of merits.

The present bail application has been filed under Section 439 Criminal Procedure Code i.e. Cr.P.C. relating to offence punishable under Sections 132 (1)(A), (F),(H),(I),(L) of Central Goods and Services Tax Act, 2017 i.e. CGST Act.

Counsel for the petitioner submitted that in initial complaint, allegation was against the Vinaykant Ameta not against the petitioner and the respondent’s department does not have adequate data for evasion of tax of Rs.869 Crores. It was further submitted that the case against the petitioner is on surmises and conjectures and that the maximum punishment in this case is 5 years and case against the petitioner is triable by Magistrate. It was further submitted that offence against the petitioner is compoundable and the provision of Section 173(8) Cr.P.C. is not applicable in this case and Department had not taken leave from concerned Court for further investigation. Hence, the petitioner be enlarged on bail.

Counsel for respondent submitted that the petitioner and Vinay Kant Ameta were working as Director in M/s Miraj Products Private Limited and is responsible for the tax evasion. It was further submitted that as per Investigation, total tax evasion of Rs.869 Crores wherein M/s Miraj Products Private Limited had created the fake firm for tax evasion. It was also brought forth that the Supreme Court granted the bail of Vinay Kant Ameta on depositing of Rs.200 crores and if the petitioner is ready to deposit evasion of tax with penalty then he has no objection in granting the bail. However it was submitted that department had summoned the various persons of the M/s Miraj Products Private Limited Group for investigation but they had not turned up for investigation till today. So, on account of gravity of offence, bail be dismissed.

The Court observed that the petitioner and Vinaykant Ameta were Director in M/s Miraj Products Private Limited. As per the prosecution story, they had evaded tax of Rs. 869 Crores. GST department had seized one truck which was being unloaded at their premises. The Supreme Court in various pronouncement held that the economic offender should not be dealt as general offender because economic offenders run parallel economy and they are serious threat to the national economy.

The Court thus held “in the facts and circumstances of the present case and also looking to the seriousness of the offence(s) alleged against the petitioner without expressing any opinion on the merits of the case, I do not consider it a fit case to enlarge the petitioner on bail under Section 439 Cr.P.C.”[Sohan Singh Rao v. Union of India, S.B. Criminal Miscellaneous Bail Application No. 2555/2022, decided on 24-03-2022]


Appearance:

For Petitioner(s): Mr. V. R. Bajwa, Senior Adv. With Mr. Rishabh Sancheti, Adv. & Mr. Snehdeep Khyaliya, Adv.

For Respondent(s): Mr. Kinshuk Jain for DGGI


Arunima Bose, Editorial Assistant has reported this brief.