Case BriefsHigh Courts

Delhi High Court: Sanjeev Narula, J., refused to interfere in the interim arbitral award whereby the sole arbitrator had allowed certain claims of the respondent in arbitration proceedings against the appellant-IRCTC.

IRCTC sought the setting aside of the interim arbitral award, whereby Sole Arbitrator had allowed certain claims of the Respondent in arbitration proceedings.

Summary of Facts

Respondent, a private railway catering service provider empanelled with IRCTC and entitled to be considered for allotment of temporary licenses on category ‘A’ trains. on 07th September, 2016, IRCTC published a limited tender inviting bids from empanelled parties for providing on-board catering services in respect of Train No. 12951- 52/12953-54 (Rajdhani/August Kranti Express) for six months.

On being the highest bidder, respondent was awarded a temporary license.

What was the dispute?

Welcome drink served to the passengers was provided by IRCTC. Later, IRCTC decided that:

  • service provider to provide welcome drink to passengers at no extra-charge receivable by it, and if unwilling to do so, it could opt to exit the temporary license;
  • where service provider was providing meals to passengers on account of short supply by IRCTC, it would be reimbursed production charges @ Rs. 84/- (inclusive of taxes) per passenger for lunch/dinner for 2nd and 3rd A.C. passengers.
  • where additional meals were being served due to late running of train for more than 2 hours, service provider would be reimbursed @ Rs. 26.40 + service tax, per passenger.

For the above-stated policy decision, DC raised the following concerns:

  • DC reasoned that welcome drink was not included in the tender document;
  • expressed reservation with regard to reimbursement of charges on account of late running of trains for more than 2 hours.
  • emphasised that having made a substantial investment in setting up a base kitchen and infrastructure, it was unwilling to exit from the contract.

Later, on 13-2-2017, respondent intimated that it would provide the welcome drink in case the same would not be provided by IRCTC, but it would be charging for services as well as production charges for the same. In the event of train being late, charge of Rs 30 would be applied along with service tax for additional meal.

From 5-03-2017, the above-said service commenced. Further, in the month of April, IRCTC sought an unconditional acceptance of the policy decision from respondent and unless unconditional acceptance would be tendered, it would be presumed that respondent are not interested in extension of the license.

Further, it was added that, for a certain period when respondent did not provide the welcome drink and IRCTC had to provide the same, the charges in that respect would be adjusted against the bills raised by respondent.

Respondent raised an issue with regard to the above-stated, asserting that it was not liable for the charges. It further raised the issue of non-payment of service tax on service charge for food and drink for the period from 19th December 2016 to 04th March 2017, as well as other charges allegedly payable to it.

Respondent unconditionally accepted the policy decision and a 6-month extension of license was granted.

Respondent invoked arbitration with regard to deductions made on account of welcome drink as well as other issues. Hence, a petition was filed under Section 11 of the Arbitration and Conciliation Act.

What all were the claims?

  • Claim towards non-payment for a welcome drink: DC contended that the welcome drink did not form part of the tender document. It should not be liable to serve the same or reimburse the expenses incurred by IRCTC for serving the same from 19th December, 2016 to 04th March, 2017.
  • Reimbursement of GST on production charges/supply of meals with effect from 1st July 2017.
  • Claim towards wastage of food due to cancellation/non-turning- up of passengers.

Two claims of respondent were allowed: (i) payment with respect to welcome drink; and (ii) reimbursement of GST on production charges.

IRCTC filed an objection against the impugned award before District Judge at Patiala House Court Complex, Delhi, however, the claim calculated by IRCTC exceeded its pecuniary jurisdiction as per the provision of Section 12(2) of the Commercial Courts Acts, 2015.

Analysis, Law and Decision

Whether welcome drink formed a part of initial period of contract?

As per the tender document which refers to CC No. 32 of 14 states the Clause 2.1 requires the service provider to deliver free of cost catering to passengers.

Arbitrator meticulously examined the tender conditions, circulars issued by Railway Board, IRCTC’s policy, contractual provisions and testimonies of the witnesses and went on to answer the question in negative.

CC No. 32 of 14 dated 6-08-2014 laid down rates of composite contract for the service provider and noting the admitted position that catering services under the tender were invited through the mode of partial unbundling of services, the learned Arbitrator noted that respondent was required to provide quotations for the sector-wise services mentioned in Annexures, which had no direct or specific reference to the condition of providing a welcome drink. In the said circumstances, it was concluded that the bid was not invited for the service of provision of welcome drink, and thus no charge was quoted towards the same.

Arbitrator gave a finding that there was no contractual stipulation in the tender document that specifically put the obligation on respondent to provide welcome drink and the said finding was held to be sound, credible and comprehensive by the High Court.

 Binding Effect of Respondent’s ‘unconditional acceptance’

the policy decision dated 07-02-2017 became a part of the contract between the parties has rightly been disallowed by the learned Arbitrator, by holding the same to be a fresh policy decision brought in by IRCTC post entering into the licensing agreement with DC. IRCTC could not give any justification for bearing the burden for the initial period between 19-12-2016 to 4-03-2017, despite it’s alleged understanding to the contrary. Its continued supply of welcome drink without expressly affirming that the contractual obligation for the job lay on DC, reaffirms the uncertainty of contractual obligations.

On the basis of the conduct and the testimony of witnesses, the Arbitrator rightly held that the actions of IRCTC exhibit ambiguity about DC’s contractually stipulated obligations, which were then redressed by way of the ex post facto policy decision.

GST

The GST laws has replaced the erstwhile indirect taxation regime.

Respondent had explained that since the trains were moving through several states and each state had a different rate of tax under State VAT laws, it was not feasible to account for the same, therefore production charges were paid inclusive of taxes.

Besides, no Input Tax Credit was available to IRCTC for VAT.

However, the position underwent a change with the introduction of GST laws.

GST is available as Input Tax Credit for paying the outgoing tax liability. With restructuring of indirect tax system, railways introduced CC No. 44/17 which specifically provides for GST on catering services in the subject trains. The bifurcation of production charges was done under the afore-noted circular and it was advised that GST is to be reimbursed to the service provider on submission of proof of deposit.

the said circular specifies the revised catering apportionment charges for the trains in question where catering charges are built-in to the ticket fare. The table thereunder shows ‘catering charges disbursed to the service provider’ both with and without 18% GST in separate columns.

 Hence, IRCTC’s contention that claim of service tax on production charges was identical and since the same had been given up, the claim of GST would not survive.

Further, it was added that,

Applicability of service tax on production charges is a different plea intertwined with determination of factual position of whether there is an incidence of service in the activity of production or if the nature of service could be held as a composite supply.

GST is clearly attracted on supply of food. 

The claim of service tax over and above the amounts agreed to, was premised on a different footing and cannot be read at par with the claim of GST.

Arbitrator has given a finding that GST has been deposited by DC and proof thereof had been furnished to IRCTC. Court found no fault in interpretation of terms of contract.

Hence no ground for interference was made out. [Indian Railway Catering & Tourism Corporation Ltd. v. Deepak & Co., 2021 SCC OnLine Del 3609, decided on 5-07-2021]


Advocates before the Court:

For the Petitioner: Mr Nikhil Majithia and Mr Piyush Gautam, Advocates

For the Respondent: Mr Naresh Thanai and Ms Khushboo Singh, Advocates


About Justice Sanjeev Narula

Born on 24th August, 1970. Studied at St. Mary’s Presentation Convent School, Jammu. Graduated in B.Sc.(Computer Science) from Kirorimal College, University of Delhi. He acquired Degree in Law in 1994 from Law Faculty, University of Jammu and got enrolled with Bar Council of Delhi in 1995.

Practiced primarily before the Delhi High Court and also before the Supreme Court of India, District Courts of Delhi and various judicial forums in Delhi. Advised and represented clients in litigation relating to Civil, Commercial, Corporate, Criminal, Customs, Indirect taxes, Service, Banking & Finance, Land &Property, Arbitration, Indirect Taxes, GST, Intellectual Property, Constitutional, Cyber, E-Commerce, Consumer and Family Laws.

He was appointed as Central Government Standing Counsel; Senior Standing Counsel (Customs and Indirect Taxes) and Standing Counsel for Central Information Commission (CIC) for the Delhi High Court, positions he retained until he was appointed as a Judge.

Appointed as Permanent Judge of Delhi High Court on 22nd October 2018.


Source: Delhi High Court Website

Case BriefsHigh Courts

Kerala High Court: The Division Bench comprising of S. Manikumar, CJ., and Shaji P. Chaly, J., asked the Union government if petrol and diesel should fall under GST regime, the Bench granted six weeks time to the Centre to decide the same.

The petitioner-Kerala Pradesh Gandhi Darshanvedi had filed the instant PIL the following reliefs:

  1. To issue a writ of mandamus or any other writ or order directing the Centre and Ministry of Petroleum and Natural Gas to include petrol and diesel under the GST regime.
  2. To issue a writ of mandamus or any other writ or order directing the GST Council to recommend the inclusion of petrol and diesel under the GST regime so as to achieve a harmonized national market as contemplated under Article 279 A (6) of the Constitution of India.
  3. To declare that the non-inclusion of petrol and diesel under the GST regime was violative of Article 14 and 21 of the Constitution of India.

The petitioner had also submitted a representation to the Government of Kerala to request the GST Council to include the petrol and diesel in the GST regime and had also proposed that till a decision is taken by the GST Council, the Government of Kerala may refrain from levying the state tax on petrol and diesel.

However, the stand taken by the Centre government and the Ministry of Petroleum and Natural Gas was that inclusion or deletion of GST is a policy decision. Adopting the same line of argument, and placing reliance on the decision in Union of India v. Shiyaad, W.A.No.2061 of 2017, the GST Council submitted that a no mandamus can be issued to the GST Council to take any decision and that the Union government is the competent authority to take a decision on the above said issue.

In the light of the above, the Bench directed the GST Council to forward the representation made by the petitioner to the Centre government. Similarly, the Centre government was asked to take an appropriate decision within a period of six weeks.[Kerala Pradesh Gandhi Darshanvedhi v. Union of India, 2021 SCC OnLine Ker 2778, decided on 21-06-2021]


Kamini Sharma, Editorial Assistant has reported this brief.


Appearance before the Court by:

For the Petitioner: Adv. Arun B. Varghese and Adv. Aiswarya V.S.

For the Respondents: ASG P.Vijaykumar, Sr. Counsel P.R.Sreejith, SPL GP Gopikrishnan Nambiar

Case BriefsHigh Courts

Bombay High Court: The Division Bench of Ujjal Bhuyan and Abhay Ahuja, JJ., gave a splitting verdict on the constitutionality of Sections 13(8)(b) and 8(2) of the Integrated Goods and Services Tax Act, 2017.

The petitioner, who was engaged in providing marketing and promotional services to customers located outside India had challenged the validity of Sections 13(8)(b) and 8(2) of the Integrated Goods and Services Tax (IGST) Act, 2017 contending that these provisions were ultra vires Articles 14, 19, 245, 246, 246A, 269A and 286 of the Constitution and also ultra vires the provisions of the Central Goods and Services Tax  (CGST) Act, 2017, IGST Act, 2017 and Maharashtra Goods and Services Tax (MGST) Act, 2017. The case of the petitioner was that he is a proprietor of a proprietorship firm  Dynatex International having its registered office in Mumbai which was engaged in providing marketing and promotion services to customers located outside India. It was registered as a supplier under the provisions of the CGST Act, 2017.

Grounds for Challenge

  1. The petitioner contended that Section 13(8)(b) of the IGST Act seeks to levy GST on services provided to, used and consumed by recipients located outside India and treating the same as intra-state supply leviable to CGST and MGST which is not only illegal, void, arbitrary and unreasonable but also ultra vires Articles 14, 19(1)(g), 21, 286, 246A, 265, 269A and 300A of the Constitution Section 9 of the CGST Act and the MGST Act.
  2. Though all service providers like the petitioner should be treated in the same manner, service providers like marketing agents, marketing consultants, professional advisers etc. provide similar services. But by virtue of the exception carved out under section 13(8)(b) of the IGST Act, the service rendered by the petitioner despite satisfying all the conditions of section 13(2) read with section 2(6) of the IGST Act would be subject to GST. Therefore, the levy was most unreasonable and arbitrary, thus violative of Article 14.
  3. Article 269A only grants power to the Parliament to frame laws for interstate trade and commerce i.e., for determining inter-state trade or commerce. It does not permit imposition of tax on export of services out of the territory of India by treating the same as a local supply. Hence, section 13(8)(b) of the IGST Act was ultra vires Articles 246A and 269A of the Constitution.
  4. That Article 286(1) provides that no law of a state shall impose or authorize the imposition of a tax on the supply of goods or services or both where such supply takes place outside the state or in the course of import of the goods or services or both into the territory of India or export of goods or services out of the territory of India. Thus no state has authority to levy local tax on export of services. Section 13(8)(b) of the IGST Act had deemed an export to be a local supply. This was violation of Article 286(1).
  5. That section 13(8)(b) of the IGST Act leads to double taxation and more as the same supply would be taxed at the hands of the petitioner and following the destination based principle it would be an import of service from India for the foreign service recipient and would be taxed at his hands in the importing country.

Analysis by the Court

In All India Federation of Tax Practitioners, it was held that service tax is a VAT which in turn is a destination based consumption tax in the sense that it is on commercial activities. It is not a charge on the business but on the consumer and it would logically be leviable only on services provided within the country. Similarly, in Commissioner of Service Tax Vs. SGS India Pvt. Ltd., 2014 (34) STR 554 (Bom.), the High Court had held that if services were rendered to such foreign clients located abroad then such an act can be termed as ‘export of service’ which act does not invite a service tax liability.

Section 13 of the IGST Act deals with place of supply of services where location of supplier or location of recipient is outside India. However, as per the proviso, where the location of the recipient of services is not available in the ordinary course of business, the place of supply shall be the location of the supplier of services. Thus sub-section (2) lays down the general proposition that place of supply of services shall be the location of the recipient of services barring the exceptions carved out in sub-sections (3) to (13). Thus what sub-section (8)(b) says is that in case of supply of services by intermediary the place of supply shall be the location of the supplier of services i.e., the intermediary which is an exception to the general rule as expressed in sub-section (2) of section 13.

The Bench explained, while Article 246A deals with special provision with respect to GST, Article 269A provides for levy and collection of GST in the course of inter-state trade or commerce. Therefore,

“A conjoint reading of the two Articles would show that the Constitution has only empowered Parliament to frame law for levy and collection of GST in the course of inter-state trade or commerce, besides laying down principles for determining place of supply and when such supply of goods or services or both takes place in the course of inter-state trade or commerce. Thus the Constitution did not empower imposition of tax on export of services out of the territory of India by treating the same as a local supply.”

Further, Article 286 lays down restrictions as to imposition of tax on the sale or purchase of goods. Similarly, Article 286(1) imposes an expressed bar that no law of a state shall impose or authorize imposition of a tax on the supply of goods or services or both where such supply takes place in the course of import into or export out of the territory of India. The Bench expressed, though Article 286(2) empowers the Parliament to make laws formulating principles for determining supply of goods or of services or both certainly the same could not be used to foil or thwart the scheme of clause (1).

Noticeably, the petitioner fulfilled the requirement of an intermediary as defined in Section 2(13) of the IGST Act, and all the conditions stipulated in sub-section (6) of Section 2 for a supply of service to be construed as export of service were complied with. The overseas foreign customer of the petitioner fell within the definition of ‘recipient of supply’ in terms of section 2(93) of the CGST Act read with Section 2(14) of the IGST Act. Therefore, it was an ‘export of service’ as defined under section 2(6) of the IGST Act read with Section 13(2) thereof. Hence, Justice Ujjal Bhuyan opined,

“Evidently and there is no dispute that the supply takes place outside the State of Maharashtra and outside India in the course of export. However, what we notice is that section 13(8)(b) of the IGST Act read with section 8(2) of the said Act has created a fiction deeming export of service by an intermediary to be a local supply i.e., an inter-state supply. This is definitely an artificial device created to overcome a constitutional embargo.”

In State of Travancore – Cochin Constitution Bench of the Supreme Court referred to Article 286(1) and held that whatever else may or may not fall within Article 286(1)(b), sales and purchases which themselves occasion the export or the import of the goods, as the case may be, out of or into the territory of India would come within the exemption. Reliance was placed on GVK Industries Ltd., wherein the Supreme Court had held that the Parliament is constitutionally restricted from enacting extra-territorial legislation but such restriction should be made subject to certain exigencies, such as, it should have a real connection to India which should not be illusory or fanciful.

Similarly, in Electronics Corporation of India Limited v. Commissioner of Income Tax, 1989 Supp (2) SCC 642 , it was held that unless a nexus with something in India exists, Parliament would have no competence to make the law. Article 245(1) empowers Parliament to enact law for the whole or any part of the territory of India. The provocation for the law must be found within India itself. Such a law may have extra-territorial operation in order to subserve the object and that object must be related to something in India. It is inconceivable that a law should be made by Parliament in India which has no relationship with anything in India.

Thus, the Bench held that it was apparent that Section 9 of the CGST Act cannot be invoked to levy tax on cross-border transactions i.e., export of services. Likewise from the scheme of the IGST Act, it is evident that the same provides for levy of IGST on inter-state supplies. Import and export of services have been treated as inter-state supplies in terms of Section 7(1) and Section 7(5) of the IGST Act. On the other hand sub-section (2) of Section 8 of the IGST Act provides that where location of the supplier and place of supply of service is in the same state or union territory, the said supply shall be treated as intra-state supply. However, the Bench remarked,

“By artificially creating a deeming provision in the form of Section 13(8)(b) of the IGST Act, where the location of the recipient of service provided by an intermediary is outside India, the place of supply has been treated as the location of the supplier i.e., in India. This runs contrary to the scheme of the CGST Act as well as the IGST Act besides being beyond the charging sections of both the Acts.”

In the light of the above, Ujjal Bhuyan, J., held that Section 13(8)(b) of the IGST Act, 2017 was ultra vires the said Act besides being unconstitutional. However, Abhay Ahuja, J., stated that he was unable to share the opinion of Justice Ujjal Bhuyan and directed to list the matter on 16-06-2021 to express his opinion.[Dharmendra M. Jani v. Union of India, 2021 SCC OnLine Bom 839, decided on 09-06-2021]


Kamini Sharma, Editorial Assistant has reported this brief


Appearance before the Court by:

Counsel for the Petitioner: Adv. Bharat Raichandani a/w. Adv. Pragya Koolwal Counsel for Union of India: ASG Anil C. Singh a/w. Sr. Adv. Pradeep S. Jetly
Counsel for Respondent 1 to 4: Adv. J. B. Mishra
Counsel for State of Maharashtra: AGP S.G. Gore

Op EdsOP. ED.

Introduction

More than twenty years since liberalisation, as the Indian economy matured and marched towards global competitiveness, a dire need was felt to overhaul the existing legal regime governing the corporate and commercial sector and make it more modern and robust. This led to the enactment of several new legislations and significant amendments in existing legislations impacting these sectors. These include the Companies Act, 2013[1], the Commercial Courts Act, 2015[2], statutes incorporating the Goods and Service Tax, the Insolvency and Bankruptcy Code, 2016 (IBC)[3], the Arbitration and Conciliation (Amendment) Act, 2015[4], the Specific Relief (Amendment Act), 2018[5], etc. all of which were aimed at streamlining the functioning of business, simplifying the tax structure and payment of taxes, enabling easier enforcement of contracts and quicker resolution of disputes. These legislations enabled India to leap frog its way to 77th place in the Work Bank’s “Ease of Doing Business” rankings in 2019[6] from a dismal 142nd place in 2015.[7]

While the intent and substance of these legislations may be noble, there are a few transitional glitches which have impaired their effective implementation. As a matter of fact, transitions in law always bring about some uncertainties requiring judicial or parliamentary clarifications. However, the transitional phase in respect of these legislations has been more disruptive than one would have imagined.

Summary

Where an Act contains substantive, amending or repealing enactments, it commonly also includes provisions which regulates the coming into operation of those enactments and modify their effect during the period of transition.[8] These provisions generally are intended to take care of the events during the period of transition. This article undertakes a critical analysis of the transitional provisions of three recent legislations, more particularly the Goods and Service Tax Acts, the Insolvency and Bankruptcy Code, 2016 and the Arbitration and Conciliation (Amendment) Act, 2015. The article opines how the transitional provisions in these legislations have been drafted with a lack of foresight and vision, which in turn has led to multiple litigations and manifold issues in interpretation of these provisions. The article highlights the immediate need for legislative review and revision of these transitional provisions so as to infuse some much-needed clarity, avoid multiple litigations and ensure a smoother transition to a new legal and regulatory regime.

Part I Goods and Service Tax

A. Brief legislative history

India’s move towards a unified and comprehensive goods and service tax (GST) regime took concrete shape with the enactment of the Constitution (101st Amendment) Act, 2016 [9] (the “Amending Act”) notified in the Official Gazette on 8-8-2016. The Amending Act made suitable changes to the Constitution to pave way for implementation of GST.

Pursuant to the redefining of legislative powers between the State and the Centre under the aforesaid Amending Act, Parliament enacted the Central Goods and Services Tax Act, 2017[10] (CGST), the Integrated Goods and Services Tax Act, 2017[11] (IGST) and the Union Territory Goods and Services Tax Act, 2017[12] (UGST) and the States also enacted their respective State Goods and Services Tax Acts (SGST). Consequently, GST was launched at midnight on 1-7-2017 bringing into effect all these statutes with the hope of creating a simple and integrated system of indirect taxation in India. Almost all indirect taxes (apart from customs) including excise, sales tax, service tax, etc. were sought to be done away with and subsumed under one umbrella head of “Goods and Service Tax”.

B. The transitional provision

Section 19 of the Amending Act[13] sets out the overarching transitional clause and provides as under:

  1. Transitional provisions.Notwithstanding anything in this Act, any provision of any law relating to tax on goods or services or on both in force in any State immediately before the commencement of this Act, which is inconsistent with the provisions of the Constitution as amended by this Act shall continue to be in force until amended or repealed by a competent legislature or other competent authority or until expiration of one year from such commencement, whichever is earlier.

The aforesaid provision is a sunset clause which mandates the State/Parliament to either repeal or amend all existing indirect tax laws (including sales tax/value added tax, excise, service tax etc.) and make them consistent with the Amending Act within a period of one year from 8-9-2016 (the date of notification of the Amending Act) after which all such laws would cease to remain operational.

 C. Cause for concern

It is pertinent to note that while the Amending Act saves the applicability of the erstwhile indirect tax laws up to 8-9-2016, there are no provisions saving actions initiated/proposed to be initiated under such laws against erring assessees. Most State Sales Tax/VAT Acts permit assessment up to 3-5 years from the date of assessable tax[14]. Similarly, the Central Excise Act, 1944[15] permits initiation of proceedings up to 2 years from the incidence of non-payment of duty[16] and up to 5 years in cases where extended period of limitation can be invoked[17]. There is no clarity on whether such right to initiate action/undertake assessment for past years (provided for under the earlier indirect tax laws) survives after GST is brought into effect.

In order to safeguard the rights of initiating actions/continuing proceedings already initiated under the erstwhile indirect tax laws, Parliament and the State Legislatures sought to incorporate wider transitional clauses in the principal Acts introducing GST. For instance, the CGST Act incorporates a wide savings clause under Section 174[18] which is similar to Clause 6 of the General Clauses Act, 1897 and provides for saving of all actions initiated, rights accrued and remedies proposed to be instituted under the repealed Central Acts including Excise Act, Chapter 5 of the Finance Act, 1994[19] (Service Tax) etc. Furthermore Section 174(3) also saves the applicability of Section 6 of the General Clauses Act, 1897[20]. Similarly, even the various SGST Acts provide for wide transitional clauses under Section 174 of their respective State GST legislation, saving all actions undertaken/proposed to be undertaken thereunder the erstwhile State tax laws including the Sales Tax/VAT Act, tax on entry of goods, etc.

Thus, on account of the absence of a wide, all encompassing transitional clause under the Amending Act, Parliament and the State Legislatures have provided for additional transitional clauses (under the head of repeal and savings clauses) in the CGST Act and respective SGST Acts. This gives rise to a debatable issue as to whether a principal Act, which owes its genesis to a constitutional Amendment Act, can incorporate provisions which not only go beyond such an Amending Act but are also seemingly in variance with the provisions of the Amending Act.

Moreover, different States have incorporated different repeal and savings clauses in their respective SGST legislations. For instance, the Value Added Tax Acts in Kerala, Karnataka and Delhi are repealed under Section 173 of the Maharashtra Goods and Services Tax Act, 2017 of their respective SGST legislations. On the other hand, the Value Added Tax Acts in Gujarat and Maharashtra do not find a mention in the list of repealed Acts under their respective SGST legislations. While the savings provisions under Section 174 of most of these SGST statutes are identical, these savings provisions only save actions undertaken/proposed to be undertaken under the repealed statutes (referred to in Section 173). Conversely, if a statute is not repealed under Section 173, actions undertaken/proposed thereunder are not saved under Section 174. Therefore, while pending and proposed actions under the State VAT Act may get saved in Kerala, Karnataka and Delhi similar actions under the Gujarat VAT Act, 2003 may not be saved based on a literal interpretation of the repeal and savings provisions of the respective SGST Acts of these States. While even the Maharashtra VAT Act, 2002 (MVAT Act) is not repealed under Section 173 of the Maharashtra Goods and Services Tax Act, 2017 (MGST Act). The MGST Act carves out an extremely wide-ranging savings provision which saves the levy, returns, assessment, reassessment, etc. of taxes under all erstwhile laws in force immediately before the enactment of the MGST Act[21]. Thus, the difference in the repeal and savings provisions in different SGST legislations is likely to lead to an unwelcome situation where the impact of GST on the applicability of erstwhile indirect tax laws will have to be looked into separately for each individual State based on its respective SGST legislation and the repeal and savings clauses incorporated therein. This, in turn leads to multiplicity in litigations and brings about ambiguity, uncertainty and inefficiency in the implementation of the GST regime.

D. Judicial opinion

A plethora of litigations in relation to the transitional issues arising pursuant to implementation of GST have been filed across various high courts. The Kerala High Court recently disposed of 3250 petitions (the lead matter being Sheen Golden Jewels (India) (P) Ltd. v. State Tax Officer[22]) upholding the right of the State Authorities to proceed against pre-existing VAT liability even after the introduction of the GST regime on the strength of the savings provision incorporated in Section 174 of the State GST Act.  A similar view was taken by the High Court of Karnataka in Prosper Jewel Arcade LLP v.  CCT[23], although on the basis of different reasoning. It was observed that it is the law applicable on the date of the taxable event which is relevant for the purpose of imposition of tax and therefore the introduction of GST cannot weigh down the legality of orders passed under the Karnataka VAT Act for taxable events of the past, even if such orders were passed after the introduction of the GST regime. The Gauhati High Court, in Laxminarayan Sahu v. Union of India[24] was called upon to determine the validity of show-cause notices issued for non-payment of service tax under the Finance Act after the introduction of GST. In conjunction with the rulings of the Karnataka High Court and the Kerala High Court, the Gauhati High Court upheld the validity of such notices. The reasoning adopted however, was that the actions under the erstwhile laws get saved under Section 6 of the General Clauses Act, 1897.  Thus, the view taken by a majority of courts, although based on different reasoning, is that the revenue authorities retain the power to levy appropriate taxes under the erstwhile indirect tax laws for events prior to the introduction of GST.

A similar challenge to the authority of the State to levy, assess and collect tax under the State GVAT Act, 2003 after the introduction of the GST regime was brought before the High Court of Gujarat[25] but vide order dated 26-2-2020 the petitions were withdrawn without any arguments on merits.

E. Analysis and way forward

Section 19 of the Amending Act sets out the date when the new GST regime comes into effect and at the same time provides for continuance of operation of provisions of erstwhile indirect laws up to a period of 1 year from 8-9-2016. The provision contains elements of both, a transitional clause and a savings clause. One of the generally accepted norms of legislative drafting is that lumping transitional and savings provisions in a single section is never a good idea[26].

As stated earlier, most taxing statutes envisage a substantial time gap between occurrence of cause of action against assessees and actual institution of proceedings. In such a scenario, if the power to initiate proceedings/levy taxes under the erstwhile laws for past events of default/past assessment years, is taken away upon the introduction of GST, it will practically create a legal vacuum in respect of levy, assessment and collection of taxes for a certain time period prior to the introduction of the GST. This would deprive the revenue of legitimate and tax arrears, interest and penalty and enable assessees to unjustifiably escape from the tax network, which certainly could not have been the legislative intent. In this background, clubbing a savings provision with a transitional clause, and failing to provide a comprehensive savings provision in the Amending Act, is absurd and irrational, more so when the country is on the cusp of a revolutionary overhaul of the entire indirect tax regime

While it may be argued that States/Centre have the right to incorporate appropriate repeal and savings provisions in their respective GST legislations, the same may lead to a lot of ambiguity and discrepancies as observed earlier. It is suggested that in order to remove any scope for ambiguities and uncertainties, it would be advisable to amend the Amending Act so as to incorporate a broad, comprehensive savings clause akin to Section 6 of the General Clauses Act in order to save actions/proposed actions under all the erstwhile indirect tax laws. Section 19 of the Amending Act ought to be immediately amended to provide for an additional savings sub-clause, which may read as under:

Section 21(2)-Notwithstanding anything contained in clause (1) above, the coming into operation of this Act shall not affect the previous operation of any enactment relating to tax on goods or services or on both in force in any State for the purpose of or the purposes of determination of the levy, returns, assessment, reassessment, appeal, revision, rectification, reference or any other proceedings initiated or proposed to be initiated under the said enactments within the period of limitation as envisaged under the said enactments.

 Part II Insolvency and Bankruptcy Code, 2016

A. Legislative history

In order to address the concerns of an inadequate framework governing bankruptcy in India, a Bankruptcy Law Reforms Committee (BLRC) was constituted in October 2014 and tasked with drafting a single unified framework which provides for a quick and effective insolvency process for individuals, partnerships, companies, etc. In November 2015, the BLRC came out with a report which proposed a complete institutional overhaul of the existing framework and suggested a quick, time-bound, creditor controlled and regulator driven insolvency process[27].  This led to the enactment of the Insolvency and Bankruptcy Code, 2016.

B. Transitional provisions

The enactment of the Insolvency Code led to repeal and amendments of several enactments in order to unify a fragmented network of laws dealing with insolvency. The repealed enactments include the Presidency-Towns Insolvency Act, 1909[28], the Provincial Insolvency Act, 1920[29] and the Sick Industrial Companies Act, 1985[30]. Unlike the repeal and savings provision of the Amending Act heralding GST, Section 243 of the IBC[31] provides for an exhaustive savings clause clearly specifying what is proposed to be saved under the repealed statutes.

In addition to repeal of the aforesaid statutes, the Insolvency Code also provided for amendments to approximately 11 other statutes, most significant amongst those being amendments to the Companies Act, 2013.[32]

Since the CA 2013 and the IBC function in overlapping areas, more particularly in the area of winding up of companies, there is a likelihood of transitional conflict over the pending cases with regard to the appropriate forum as well as the applicable statute. In order to deal with such conflict, the Central Government notified the Companies (Transfer of Pending Proceedings) Rules, 2016[33] (the “Rules”) in exercise of powers under Section 434 of the CA, 2013[34] and Section 239 of the IBC[35]. The Rules provide for the bifurcation of proceedings between the CA, 1956[36]/CA, 2013 and the IBC and between Court and National Company Law Tribunal (NCLT). So far as treatment of pending winding-up petitions is concerned, based on the nature stage of the proceedings, some winding-up petitions were to be retained by the High Court while others were to be transferred to NCLT[37]

 C. Cause for concern

The aforesaid Rules brought into place a splintered structure for dealing with the transition of various proceedings from the CA 1956/CA 2013 to the IBC. The overlapping of jurisdiction as well as subject-matter is riddled with severe concerns and needs to be addressed urgently.

The constitutional validity of these Rules was challenged by Nissan Motor India and Renault Nissan Automotive before the High Court of Madras. It was alleged that on account of operation of the Rules, winding-up petitions filed against these companies in the High Court were transferred to the NCLT in spite of the fact that the entire pleadings were already over, and the matter was about to conclude, thereby causing severe prejudice to these companies. The High Court granted an interim order in favour of the companies by staying the NCLT proceedings against them.[38]

Furthermore, there is no clarity on a scenario where multiple proceedings in respect of the same company have arisen before different forums. For instance, in a situation where a notice for winding-up petition has been served upon the respondent prior to 15-12-2016, the same is retained by the Court for adjudication as per the stipulations under the Rules and is not transferred to the Tribunal. Now, if a fresh petition for winding up against the same company is filed by a financial or operational creditor or the corporate debtor itself under the provisions of IBC, it gives rise to several questions including:

  • Whether such a fresh petition is maintainable notwithstanding the pendency of another winding-up petition against the same company in the Court?
  • If maintainable, whether the parallel proceedings before the Tribunal under the IBC and those before the court under the Companies Act, 1956 can proceed simultaneously?
  • If simultaneous proceedings are permitted, would the proceedings under the Companies Act, 1956 stall in the event of a moratorium under Section 14 of the IBC[39]? On the other hand, would proceedings under IBC stall in the event a winding-up order is passed under Companies Act, 1956 on account of the operation of a moratorium under Section 446 of the Companies Act?
  • If simultaneous proceedings are not permitted, which statute is to be given a primacy over the conduct of winding-up proceedings?

D. Judicial opinion

The aforementioned issue as to whether the IBC can be triggered in the face of a pending winding-up petition has led to wide-spread litigations seeking judicial clarification on the quandary being faced by all stakeholders in an insolvency proceeding.

The NCLT Benches at Chennai (Alcon Laboratories (India) (P) Ltd. v. Vasan Health Care (P) Ltd.[40]) and Ahmedabad (SBI v. Alok Industries Ltd. [41]) took the view that the pendency of a winding-up petition cannot be a bar under the Code for initiating a corporate insolvency resolution process unless a winding-up order is passed by the  High Court or Official liquidator is appointed.   On the other hand, the Hon’ble NCLT Bench at Delhi (Nauvata Engg. (P) Ltd. v. Punj Llyods Ltd.[42]) took the view that in cases where winding-up petitions are pending against a company, it would not be conducive for the NCLT to trigger insolvency resolution process against that very company and therefore, the proceedings instituted earlier in point of time may constitute a better basis for adjudication. On account of the aforesaid divergent views taken by coordinate benches of the NCLT, a Special Bench at NCLT, Delhi referred the issue to a larger Bench in Union Bank of India v. Era Infra Engg. Ltd.[43]. The Hon’ble three-member larger Bench came to the conclusion that there is no bar on NCLT against triggering an insolvency resolution process even when a winding-up petition is pending, unless an official liquidator is appointed and winding-up order is passed.

Apart from various NCLT Benches, the issue has also been raised before the  High Court of Bombay on several occasions. In Ashok Commercial Enterprises v. Parekh Aluminex Ltd.[44] the  Court was pleased to pass a winding-up order notwithstanding the pendency of the IBC proceedings, observing that as per the Rules, not all winding-up proceedings are to be transferred to NCLT. The legislative intent was that two sets of winding-up proceedings would be heard by two different forum i.e. one by NCLT and another by the High Court depending upon the date of service of petition.

On the other hand, in Jotun India (P) Ltd. v. PSL Ltd.[45], the Bombay High Court observed that there was no bar on NCLT from proceeding with an application filed by a corporate debtor under Section 10 of IBC[46] even though a winding-up petition was admitted against the same corporate debtor in the High Court. It was observed that “Till the company is ordered to be wound up i.e. the final order is passed, NCLT can entertain a petition or an application.

In order to address the ambiguities arising as a consequence of divergent judicial opinions, the Insolvency Law Committee in its report of March 2018 proposed amendments to the CA, 2013 to clarify that there was no bar on the application of the Code to winding-up petitions pending under prior legislations before any court of law. However, to avoid duplication of proceedings, it was suggested that the leave of the High Court or NCLT, if applicable, under Section 446 of the CA, 1956[47] or Section 279 of the CA, 2013[48], must be obtained, for initiating corporate insolvency resolution process (CIRP) under the Code, if any petition for winding up is pending in any High Court or NCLT against the corporate debtor.[49]

In pursuance of the aforesaid recommendation, Section 434 of the Companies Act, 2013[50] was amended with effect from 6-6-2018[51] and a proviso was added permitting parties to approach the High Court and request for transfer of a pending winding-up proceeding to the NCLT under the IBC regime. However, it is pertinent to note the amendment is not in consonance with the recommendation of the Committee. The recommendation of the Committee was to seek permission of the High Court/NCLT, if applicable, for initiation of CIRP under the Code. Therefore, the recommendation presupposes the grant of permission for even initiation of CIRP. However, the amendment proposes that the High Court is to be approached only for the purpose of seeking a transfer of proceedings and not for initiation of CIRP per se.

Pursuant to the amendment to Section 434 of the CA, 2013 the Supreme Court in Forech India Ltd. v. Edelweiss Asset Reconstruction Co. Ltd.[52], somewhat settled the issue with regard to the apparent transitional conflict between the IBC and the Companies Act holding that an insolvency resolution may be filed against a corporate debtor notwithstanding the pendency of a winding-up petition before the High Court, since proceedings under IBC are independent proceedings. It further gave liberty to the party that had filed the pending petition before the  High Court to seek transfer of the petition to NCLT in accordance with the amendment to Section 434 of the Companies Act, 2013.

While the aforesaid judgment lends clarity on the right to initiate CIRP under the IBC during the pendency of a winding-up proceedings in the High Court under the CA 1956, there is no clarity on the probable issues that are bound to arise as a consequence of the duality in proceedings under the IBC and the Companies Act. Questions with regard to the impact of moratorium period on the winding-up proceedings in the High Court, potential revival of winding-up proceedings at the end of the moratorium period in case of failure of resolution, etc. remain unanswered. Furthermore, there is no clarity with regard to the stage of winding-up proceedings at which fresh applications may be made under the IBC and proceedings before the High Courts may be allowed to be transferred to the NCLT. In Sicom Ltd. v. Hanung Toys & Textiles  Ltd.[53], the High Court of Delhi observed that if the process is at a nascent stage and only a provisional liquidator is appointed, proceedings before the High Court may be transferred to the NCLT, but if the proceedings are at an advanced stage and the chances of insolvency resolution process are bleak, proceedings are not to be transferred to the NCLT.  Recently, the Supreme Court, in the case of Action Ispat and Power Pvt. Ltd. v. Shyam Metalics and Energy Ltd.[54] held that even post-admission and appointment of Official Liquidator transfer of winding up petition to NCLT may be permitted, if no irreversible steps have been taken in relation to the properties of the company in liquidation i.e. so long as no actual sale of movable or immovable properties has taken place.

E. Analysis and way forward

The Rules failed to clarify if fresh proceedings could be initiated under the IBC even where there were pending winding-up proceedings against the same debtor company being heard by Court and left the same to judicial discretion. After divergent views taken by different forums, the Supreme Court in Forech International case[55] (supra) finally took the position that the pendency of winding-up proceedings under the CA, 1956/CA, 2013 has no bearing on fresh proceedings under the IBC. However, this stand taken by the Supreme Court does not appear to be in tune with legislative intent and raises other important issues as a consequence.

First and foremost, it is questionable as to what purpose the savings provision in the Rules retaining certain proceedings in the High Court would serve if the legislative intent was to anyway permit fresh proceedings under the IBC notwithstanding the pending proceedings in the High Court. The interpretation sought to be given by the Supreme Court destroys the very purpose and essence of saving proceedings under the Rules.

Secondly, the Rules were amended vide Notification dated 29-6-2017[56]. Pursuant to the same a proviso was added under Section 5 of the Rules clearly laying down that where a winding-up petition is retained by the High Court in accordance with the Rules, all other winding-up petitions against the same company pending on the cut-off date would also be retained by the High Court, regardless of service/non-service of such petitions.[57] The proviso appears to indicate that the legislative intent is to ensure that once the High Court is seized of a winding-up matter of a particular debtor company in accordance with the Rules, it should operate as the sole forum to adjudicate upon all winding-up petitions pertaining to such debtor company. However, the  Supreme Court has taken a different view which appears to be contrary to legislative intent.

Furthermore, even from a practical perspective, this duality in regime for dealing with winding-up matters has harsh consequences for all stakeholders involved. Petitioner creditors who have spent a considerable amount of time and resources in a winding-up petition may have to restart all over again and prove their claims before the insolvency resolution professsional and the Committee of creditors.  Corporate debtors may be burdened with the task of defending themselves in two parallel proceedings of a similar nature. Even resolution applicants will be circumspect and cautious in submitting resolution plans during the moratorium period under the IBC, if faced with the prospect of revival of a winding-up petition against the corporate debtor under the CA, 1956/CA, 2013, after the end of the moratorium period/approval of the resolution plan.

In order to avoid multiple proceedings, ensure a smooth transition and avoid the risk of contrary orders by different forums in parallel winding-up petitions, it would be advisable to suitably amend the Rules in such a manner that the transitional/savings provision in the Rules operate upon the debtor company as a whole and not only upon a particular winding-up proceeding against that debtor company. In other words, once winding proceedings against a particular debtor company are retained by the High Court in terms of the Rules, all other pending winding-up petitions, if any, as well as fresh proceedings under the IBC in respect of the same debtor company ought to be consolidated and continued before the said High Court. Furthermore, in order to ensure that the benefit of a time-bound process is not lost out in the course of a winding-up proceeding, it would be apt to amend the law in a manner so as to ensure that all pending winding–up proceedings are completed within a period of one year from a particular cut-off date, failing which the proceedings pertaining to the corporate debtor concerned would automatically be transferred to the Tribunal. In light of the aforesaid, it would be appropriate to suitably amend Rule 5 of the Transfer Rules and add an additional proviso, in the following manner:

Provided also that where a petition relating to winding up of a company is not transferred to the Tribunal under this rule and remains in the High Court and where there is another petition under clause (e) of Section 433 of the Act for winding up against the same company pending as on 15-12-2016 or a fresh petition under Sections 7, 9 or Section 10 of the 1BC is initiated in respect of the same company after 15-12-2016, such other petitions shall not be transferred to or heard by the Tribunal, even if the petition has not been served on the respondent.

 Provided that all pending winding-up petitions pending and retained before the High Court pursuant to the commencement of these Rules shall be disposed of by the Hon’ble Court by (cut-off date) failing which such proceedings shall be converted to IBC proceedings and transferred to the Tribunal.[58]

A legislative clarification in accordance with the aforesaid terms will ensure that winding-up proceedings in the High Court do not get delayed indefinitely. Moreover, certainty in forum of adjudication will also resolve jurisdictional conflict, reduce the burden on NCLTs and ensure finality and conclusiveness in adjudication of winding-up matters.

Part III –Arbitration and Conciliation (Amendment) Act, 2015

 A. Legislative history

The Arbitration and Conciliation (Amendment) Act, 2015 (the “Amendment Act”) was enacted on the basis of the proposals made by the Law Commission of India in its 246th Report on “Amendments to the Arbitration and Conciliation Act, 1996”[59].  The Commission was tasked with reviewing the provisions of the Arbitration and Conciliation Act, 1996 (the “Act”) in view of the several inadequacies observed in the functioning of the Act, which included exorbitant costs, protracted proceedings, excessive court intervention, etc. In order to address these issues and promote India as an arbitration friendly regime, the Commission recommended ample amendments to the Act.

The amendments are promising and in sync with the larger objectives of bringing about expediency, transparency and efficiency in arbitral proceedings. However, as was the case with GST and the IBC, the lack of clarity in transitional provisions led to a flurry of litigations on technical and transitional issues, which somewhat constricted the impact and essence of the Amendment Act.

 B. Transitional provisions

The transitional provision, provided for under Section 26 of the Amendment Act[60], reads as under:

  1. Act not to apply to pending arbitral proceedings.—Nothing contained in this Act shall apply to the arbitral proceedings commenced, in accordance with the provisions of Section 21 of the principal Act, before the commencement of this Act unless the parties otherwise agree but this Act shall apply in relation to arbitral proceedings commenced on or after the date of commencement of this Act.

 On a prima facie reading, it appears as though the Amendment Act is to apply prospectively to arbitrations commencing after the date of enforcement of the Amendment Act i.e. 23-10-2015. However, there is no clarity on whether the Amendment Act applies to court proceedings emanating from arbitral proceedings commenced under the Act prior to 23-10-2015. The Act envisages court intervention at various stages before, during and after the commencement of arbitral proceedings.[61] Considering the same, it is baffling as to how and why the Amendment Act is silent on the said issue.

It is pertinent to note that the Law Commission of India, which proposed the amendments in the Act had recommended the insertion of Section 85-A, a comprehensive transitory provision that provided clarity to the effect that the Amendment Act was prospective in nature and was to apply only to fresh arbitrations and to fresh applications filed before the court or a tribunal after the date of enforcement of the Amendment Act. However, for some inexplicable reason, the proposed Section 85-A never found its way into the Act and instead the legislature enacted Section 26 in the Amending Act.

 C. Cause for concern

The lack of clarity in Section 26 of the Amendment Act highlights the apparent lack of legislative foresight to consider three peculiar but extremely foreseeable issues:

  • Applicability of the Amendment Act to court proceedings initiated prior to 23-10-2015 under the Act;
  • Applicability of the Amendment Act to court proceedings initiated/proposed to be initiated on/after 23-10.- the Act,
  • Applicability of the Amendment Act to fresh applications before the Arbitral Tribunal for pending arbitrations initiated prior to 23-10-2015; (for instance whether an application filed under Section 17 of the Act[62] after 23-10-2015 in a pending arbitration which has commenced prior to 23-10-2015 would be governed by the old provision or the amended provision)

Since the Amendment Act has made some significant and substantial changes in the arbitration regime, the aforesaid issues have caused confusion and chaos in pending arbitrations. The lack of procedural clarity has led to multiple litigations for determining the appropriate applicable provisions under the Act in pending arbitrations at the cost of the merits of disputes being sidetracked. This in turn has caused unnecessary delays in arbitrations, which ironically, was one of the primary issues sought to be addressed by the Amendment Act.

D. Judicial opinion

One of the foremost issues that has arisen on account of the ambiguity in Section 26 of the Amendment Act is with regard to the applicability of Section 36 as substituted under the Amendment Act to (1) court proceedings initiated prior to the enforcement of Amendment Act; and (2) court proceedings initiated after the enforcement of the Amendment Act.

Prior to the Amendment Act, Section 36 provided that an arbitral award shall be enforced only after the time-limit for filing an application for setting aside the award under Section 34 of the Act has expired, or such application having been made has been refused. Thus, this implied that there would be an automatic stay on enforcement of the award as soon as an application is filed under Section 34 for setting aside the award. The Amendment Act sought to do away with such automatic stay on enforcement by appropriately substituting Section 36. The substituted Section 36 provided that in order to stay enforcement of an arbitral award, it was necessary for the party seeking to set aside the award to file a separate application for stay of enforcement. Further, upon filing of the application, the stay is not to be granted as a matter of right, but the Court “may” in its discretion grant such a stay, subject to such conditions, and on recording of specific reasons.

In light of such substitution of Section 36, various courts have given divergent opinions with regard to the application of substituted Section 36 to court proceedings initiated/proposed to be initiated in respect of arbitrations which took place prior to the enforcement of the Amendment Act i.e. prior to 23-10-2015.

The view taken in Electrosteel Castings Ltd. v. Reacon Engineers (India) (P) Ltd.[63], and Ardee Infrastructure Pvt. Ltd. v. Anirudh Bhatia[64] was that that if an arbitration has commenced before 23-10-2015, the entire gamut court proceedings in respect of such arbitrations will be governed under the old regime and will not be covered by the Amendment Act. As a consequence, the unsubstituted Section 36 would continue to apply to such court proceedings, and this would amount to an automatic stay on enforcement of award pursuant to filing of a Section 34 petition. On the other hand, a starkly contrasting view was taken in New Tirupur Area Development Corporation Ltd. v. Hindustan Construction Co. Ltd. and Rendezvous Sports World v. Board of Control for Cricket in India[65] (Bombay High Court) that that the Amending Act will be applicable to all court proceedings pending on 23-10-2015 or filed after 23-10-2015 in relation to arbitration proceedings initiated prior to the enforcement date of the Amendment Act. As a consequence, Section 36 in its substituted form would be applicable to such court proceedings and there would be no automatic stay on enforcement of an arbitral award.

The divergent views taken by different high courts culminated into a series of special leave petitions before the  Supreme Court of India, which heard these petitions together with the lead matter being Board of Control for Cricket in India v. Kochi Cricket (P) Ltd.[66]

Analysing the language of Section 26 of the Amending Act, the Supreme Court came to the conclusion that a careful reading of the section indicates that :-(1) the Amendment Act will not apply to arbitrations that commenced prior to 23-10-2015, unless the parties agree; but (2) the Amendment Act will apply to court proceedings initiated after 23-10-2015 emanating from arbitrations that commenced prior to 23-10-2015.

With regard to the question as to whether the Amendment Act will retrospectively apply to court proceedings initiated before 23-10-2015, the Court observed that Section 36 embodies the procedure of enforcement. The same being procedural in nature any change/amendment in Section 36 does not affect any accrued/vested substantive rights of the judgment-debtor and therefore, the substituted Section 36 ought to be applied retrospectively. The Court further opined that if the substituted Section 36 is not applied retrospectively, it would defeat the very object of the Amendment Act, which is to ensure speedy dispute resolution and reduce court interference at various stages.

Thus, pursuant to the aforesaid judgment, the position with regard to the applicability of the Amended Act was clarified in the following manner:

  • The Amended Act will not apply to arbitration proceedings instituted prior to 23-10-2015 unless parties agree otherwise.
  • The Amended Act will apply to all court proceedings instituted on or after 23-10-2015 in relation to arbitration proceedings which commenced prior to 23-10-2015
  • Section 36 as substituted under the Amended Act will apply retrospectively to all court proceedings instituted before 23-10-2015 in relation to arbitration proceedings which commenced prior to 23-10-2015

E. Analysis and way forward

While the aforesaid judgment rendered by the Supreme Court rendered some much-needed clarity on the interpretation of Section 26 of the Amendment Act, the issue was rekindled when in 2017, a High-Level Committee headed by Justice (Retd.) B.N. Srikrishna suggested that the Amendment Act should apply only to arbitral proceedings commenced on or after the enforcement of the Amendment Act and to court proceedings arising out of or in relation to such arbitral proceedings.[67] The proposal found its way in the Arbitration Amendment Bill, 2018 which provided for insertion of Section 87 in the principal Act[68] as per which, in the absence of an agreement between the parties, the Amendment Act shall not apply to: (1) arbitral proceedings that have commenced prior to 23-10-2015; and (2) court proceedings arising out of or in relation to such arbitral proceedings irrespective of whether such court proceedings are commenced prior to or after 23-10-2015. The said Bill received assent from the President on 9-8-2019 and led to the enactment of Arbitration and Conciliation (Amendment) Act, 2019. (2019 Amendment Act).  As a consequence, the Act stood amended with effect from 30-8-2019 (date of notification in Official Gazette) with a newly inserted Section 87 which specified that:

Unless the parties otherwise agree, the amendments made to this Act by the Arbitration and Conciliation (Amendment) Act, 2015 shall—

(a) not apply to––

(i) arbitral proceedings commenced before the commencement of the Arbitration and Conciliation (Amendment) Act, 2015;

(ii) court proceedings arising out of or in relation to such arbitral proceedings irrespective of whether such court proceedings are commenced prior to or after the commencement of the Arbitration and Conciliation (Amendment) Act, 2015;

(b) apply only to arbitral proceedings commenced on or after the commencement of the Arbitration and Conciliation (Amendment) Act, 2015 and to court proceedings arising out of or in relation to such arbitral proceedings.

The aforesaid legislative clarification with regard to the applicability of 2015 Amendment  completely diluted the ratio of the Kochi Cricket case[69] and reversed the position in respect of applicability of the 2015 Amendment Act. In other words, pursuant to the 2015 Amendment Act would no longer apply to any proceedings under the Act initiated prior to 23-10-2015, regardless of whether such proceedings were arbitral proceedings or court proceedings in relation to such arbitral proceedings.  This led to a scathing criticism of the 2019 Amendment Act, which was derided by jurists and practitioners for completely watering down the beneficial impact of the 2015 Amendment Act, which aimed at reducing court interference and improving the speed and efficacy of proceedings under the Act. The constitutional validity of Section 87 of the 2019 Amendment Act was subsequently challenged in the case of Hindustan Construction Company v. Union of India[70] and vide a unanimous verdict of a 3-judge bench of the Hon’ble Supreme Court, the said Section was set aside on the ground of being manifestly arbitrary, and the position as propounded by the Kochi Cricket case was restored.

Thus, as seen in the case of other legislations, failure to draft a conspicuous transitional provision in the Arbitration Amendment Act, 2015 led to confusion regarding the applicability of the amendments proposed therein, which in turn led to multiple litigations as discussed hereinabove. While the dust seems to have been finally settled on the issue with the Supreme Court’s seminal verdict in the Hindustan Construction Company case, one cannot help but ponder how a needless squandering of judicial time and resources could have been avoided with clear, concise and unambiguous legislative drafting.

 Conclusion

Transitional provisions in a legislation play a key role in regulating its coming into operation and effect. A carefully worded transitional provision is therefore an indispensable necessity to ensure a smooth change in a legal regime with minimum disruption of existing rights and liabilities. Transitional provisions, may affect relatively few cases, but they are extremely complicated; and they can be important to the cases affected.[71] The absence of clarity in transitional provisions causes chaos and confusion leading to multiple litigations requiring the judiciary to draw inferences based on apparent legislative intent.

The newly enacted commercial legislations in India aim at making business easier, transparent, and efficient by providing for simplicity in taxation structure, facilitating easy exits and offering a speedier mode for dispute resolution. However, loosely worded transitional provisions in these legislations coupled with baffling judicial opinions have substantially diluted the impact of positive changes sought to be brought about by these legislations. The colossal litigations that have arisen in respect of these transitional provisions stand as a testimony to the poor draftsmanship. As discussed in the chapters hereinabove, the judiciary often outweighs practical considerations in the eagerness to give effect to the so-called object and purpose of a newly enacted legislation. Based on the developments so far, it appears as though the judiciary as well as the Government are bent upon simply ensuring quick operationalisation of these legislations at the cost of their effective implementation. Such an approach will defeat the very purpose and essence of these legislations. It is imperative for India to immediately address these transitional issues through appropriate legislative amendments and clarifications, failing which, the true potential of these newly enacted legislations are likely to get sidetracked in the face of a convoluted web of unnecessary and avoidable litigations.


* Advocate, High Court of Gujarat.

[1]  http://www.scconline.com/DocumentLink/A5aqjfDv.

[2]  http://www.scconline.com/DocumentLink/7566Y3w5.

[3] http://www.scconline.com/DocumentLink/86F742km.

[4]  http://www.scconline.com/DocumentLink/9ajA4z9b.

[5]  http://www.scconline.com/DocumentLink/0mV0KcW4.

[6]  http://www.doingbusiness.org/en/rankings

[7] World Bank Group Project Report, Doing Business 2015: Going Beyond Efficiency, 12th Edition, sourced from: http://www.doingbusiness.org/content/dam/doingBusiness/media/Annual-Reports/English/DB15-Full-Report.pdf

[8]  Francis Bennion, Bennion on Statutory Interpretation, 14th Edn., LexisNexis, p. 442 (as cited in Union of India v. Filip Tiago De Gama of Vedem Vasco, (1990) 1 SCC 277

[9] http://www.scconline.com/DocumentLink/4386Cb1k.

[10] http://www.scconline.com/DocumentLink/ZN57RKH6.

[11] http://www.scconline.com/DocumentLink/ADSpTtpt.

[12] http://www.scconline.com/DocumentLink/ni9RfDmQ.

[13] http://www.scconline.com/DocumentLink/4386Cb1k.

[14] See Gujarat Value Added Tax Act, 2003-, S.38(9); Karnataka Value Added Tax, 2003-,S. 40 http://www.scconline.com/DocumentLink/0s79tGDg.

[15] http://www.scconline.com/DocumentLink/E4zd0gLl.

[16] See Central Excise Act, 1944, S. 11-A(1) 

[17] See Central Excise Act, 1944, S. 11-A(4) 

[18] http://www.scconline.com/DocumentLink/1OzBQOxZ.

[19] http://www.scconline.com/DocumentLink/EO3l1CkL.

[20] http://www.scconline.com/DocumentLink/r556YlOs.

[21] See Maharashtra Goods and Services Tax Act, 2017, S. 174(g)

[22] 2019 SCC OnLine Ker 973

[23] 2018 SCC OnLine Kar 3887

[24] 2018 SCC OnLine Gau 1457

[25] Preston India (P) Ltd. v. State of Gujarat, 2020 SCC OnLine Guj 3048

[26]  Prof. Henlen Xanthaki, Thornton’s Legislative Drafting, Bloomsbury Professional, 5th Edn., 2013 (as cited in Sheen Golden Jewels (India) (P) Ltd. V. State Tax Officer, supra note 22, para 98).

[27] <https://ibbi.gov.in/BLRCReportVol1_04112015.pdf>.

[28] http://www.scconline.com/DocumentLink/k84vmP4Y.

[29]  http://www.scconline.com/DocumentLink/f2dr6UL1 S. 243, IBC, 2016.

[30] Sick Industrial Companies (Special Provisions) Repeal Act of 2003 notified on 1-12-2016

[31] http://www.scconline.com/DocumentLink/30VFrXzu.

[32] S. 255 of the Code read with Sch. 11, provides for about 36 amendments to the Companies Act, 2013.

[33] http://www.scconline.com/DocumentLink/bK498A3y.

[34] http://www.scconline.com/DocumentLink/z7lc38J9.

[35] http://www.scconline.com/DocumentLink/rYQ78CX4

[36] http://www.scconline.com/DocumentLink/pm3Rt2A0

[37] See Rr. 4 and 5 of the Companies (Transfer of Pending ProFceedings) Rules, 2016

[38] https://barandbench.com/madras-hc-stays-winding-up-proceedings-in-nissan-renault-case/.

[39] http://www.scconline.com/DocumentLink/e2E5pU46.

[40]  2017 SCC OnLine NCLT 547

[41] 2017 SCC OnLine NCLT 7586

[42] 2017 SCC OnLine NCLT 16255

[43] 2018 SCC OnLine NCLT 813

[44] 2017 SCC OnLine Bom 421

[45] 2018 SCC OnLine Bom 1952  .

[46] http://www.scconline.com/DocumentLink/Kp5IKPzm.

[47] http://www.scconline.com/DocumentLink/Q8FHMgT3.

[48] http://www.scconline.com/DocumentLink/8et977Qj.

[49] Report of the Insolvency Committee, March 2018, Para 25.7 accessed at: http://www.mca.gov.in/Ministry/pdf/ReportInsolvencyLawCommittee_12042019.pdf.

[50] http://www.scconline.com/DocumentLink/z7lc38J9.

[51] Insolvency and Bankruptcy Code (Second Amendment) Act, 2018 http://www.scconline.com/DocumentLink/4mkp5CaB, S. 39 – Amendment of Section 434 of CA 2013: “Provided further that any party or parties to any proc eedings relating to the winding up of companies pending before any Court immediately before the commencement of the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018, may file an application for transfer of such proceedings and the Court may by order transfer such proceedings to the Tribunal and the proceedings so transferred shall be dealt with by the Tribunal as an application for initiation of corporate insolvency resolution process under the Insolvency and Bankruptcy Code, 2016.”

[52] (2019) 18 SCC 549

[53]  2019 SCC OnLine Del 10399

[54] 2020 SCCOnline SC 1025

[55] (2019) 18 SCC 549

[56] Companies (Transfer of Pending Proceedings) Second Amendment Rules, 2017, Ministry of Corporate Affairs, Notification dated 29-6-2017

[57] R. 5 http://www.scconline.com/DocumentLink/bK498A3y; The proviso states that “Provided also that where a petition relating to winding up of a company is not transferred to the Tribunal under this rule and remains in the High Court and where there is another petition under cl. (e) of Section 433 of the Act for winding up against the same company pending as on 15-12-2016, such other petition shall not be transferred to the Tribunal, even if the petition has not been served on the respondent..”

[58] The portion highlighted in bold is the suggested amendment

[59] http://www.scconline.com/DocumentLink/N7O69Zxv.

[60] http://www.scconline.com/DocumentLink/9ajA4z9b.

[61] See, S. 8 (reference to arbitration) , S. 9 (grant of interim measures) , S. 11 (appointment of arbitrator) , S. 34 (Setting aside of arbitral award), S. 36 (enforcement of awards)

[62] http://www.scconline.com/DocumentLink/27KJ0N1c.

[63] 2016 SCC OnLine Cal 1257

[64] 2017 SCC OnLine Del 6402

[65] 2016 SCC OnLine Bom 16027

[66] (2018) 6 SCC 287

[67] Report of the High Level Committee to Review the Institutionalisation of Arbitration Mechanism in India

accessed at <http://legalaffairs.gov.in/sites/default/files/Report-HLC.pdf>.

[68] Unless parties agree otherwise the Amendment Act, 2015 shall not apply to the following:

(1) arbitral proceedings that have commenced prior to the Amendment Act, 2015 coming into force i.e. prior to 23-10-2015; (2) -court proceedings arising out of or in relation to such arbitral proceedings irrespective of whether such court proceedings are commenced prior to or after the commencement of the Amendment Act, 2015.

[69] (2018) 6 SCC 287 

[70] 2019 SCC OnLine SC 1520, Decided on 27th November, 2019

[71] Craies on Legislation, Sweet & Maxwell, South Asian Edn. 2010, p. 399 (cited in Sheen Golden Jewels (India) (P) Ltd. v. State Tax Officer, supra note 22,para 97).

Op EdsOP. ED.

Introduction

 We begin with the comments of the eminent jurist Professor Sir William Wade in his treatise, Administrative Law (9th Edn.):

The whole conception of unfettered discretion is inappropriate to a public authority, which possesses powers solely in order that it may use them for the public good.

There is nothing paradoxical in the imposition of such legal limits. It would indeed be paradoxical if they were not imposed.

With these prefatory remarks, we delve straight into the legislative provision in question. The Goods and Services Tax (GST) regime was introduced in the country with effect from 1-7-2017 through the 101st Amendment of the Constitution of India[1]. As per the Statement of Objects and Reasons of the Central Goods and Services Tax Act, 2017[2] (CGST Act”), the Act was meant to “simplify and harmonise the indirect tax regime in the country” by subsuming the extant indirect taxes such as central excise, service tax and value added tax, etc. into a unified destination and consumption based indirect tax known as the Goods and Services Tax, which would be payable on “supply” of goods and services.

The present research paper seeks to deliberate on a specific provision of the fiscal legislation that allows the taxation authorities to provisionally attach the properties of the assessee, including bank accounts i.e. Section 83 of the CGST Act[3]. For ready reference, Section 83 is reproduced below:

  1. Provisional attachment to protect revenue in certain cases. —

(1) Where during the pendency of any proceedings under Section 62[4] or Section 63[5] or Section 64[6] or Section 67[7] or Section 73[8] or Section 74[9], 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 in such manner as may be prescribed.

(2) Every such provisional attachment shall cease to have effect after the expiry of a period of one year from the date of the order made under sub-section (1).

Without even going into the text of the section, the heading of Section 83, gives a brief indication of the scope of the section. It is now well settled that heading of the section can be regarded as a key to the interpretation of the operative portion of the section and if there is no ambiguity in the language or if it is plain and clear, then the heading used in the section strengthens that meaning[10]. According to the heading, Section 83 provides for “provisional attachment”, “to protect revenue”, “in certain cases”. Thus, this section was enacted, as is commonplace in other fiscal statutes (discussed hereinbelow), to provisionally attach properties of the assessee pending certain proceedings in order to protect the interest of the revenue. Such discretion is based on the formation of opinion of the Commissioner.

Such is the nature of the provisional attachment that no notice is given to the assessee before such an attachment, lest such attachment should lose its purpose i.e. the fear of the assessee alienating its properties before recovery can be made. It also cannot be gainsaid that a provisional attachment order, in a way, directly places fetters on the right of an assessee to conduct its business. Thus, it must be clearly understood that this power, as with all discretionary powers, must be exercised sparingly and not in a routine manner because of its far-reaching consequences. Section 83 itself, read with the corresponding rules[11], provides for stringent conditions for invoking this section and the procedure to be followed – this being in consonance with the law regarding provisional attachments i.e., that drastic and far-reaching powers must be used only on weighty grounds and reasons.

However, with the benefit of hindsight, we can safely say that law on statute books and law in its practical application, are two very separate phenomenon. The taxing authorities have been issuing orders under Section 83 at the drop of a hat, much to the dismay of the assessees. This has led to evolvement of significant jurisprudence since the assessee is left with no option but to knock on the doors of the constitutional courts, eventually culminating into the judgment of the Supreme Court in Radha Krishan Industries v. State of H.P.[12], which is most likely to become (even without the benefit of foresight) a locus classicus. This paper also discusses how the evolvement of Judge-made law on Section 83, particularly by the High Courts, has led to issuing of clarificatory guidelines as well as the amendment of the section itself (yet to be notified).

Taking a leaf from earlier statutes

 Before dissecting Section 83 of the CGST Act, it is worth noting that powers relating to provisional attachment are normal currency in fiscal statutes. There obviously exists a need to protect the revenue from unscrupulous dealers/assessees. Therefore, various earlier provisions such as Section 281-B of the Income Tax Act, 1961[13]; Section 73-C of Chapter 5 of the Finance Act, 1994[14]; Section 11-DDA of the Central Excise Act, 1944[15]; Section 127-D of the Customs Act, 1962[16]; Section 46-A of the Delhi Value Added Tax Act, 2004; Section 35 of the Maharashtra Value Added Tax, 2002; Section 45 of the Gujarat Value Added Tax Act, 2003, to name a few, contained pari materia provisions for provisional attachment. The basis of it however stems from Order 38 Rule 5 of the Code of Civil Procedure, 1908[17], (CPC) which provides for attachment before judgment.

One may profitably refer to how these provisions have been interpreted by the courts. This is more so in light of the settled principle of law that that where a word has received a clear judicial interpretation, the subsequent statute which incorporates the same word or the same phrase in a similar context must be construed so that the word or phrase is interpreted according to the meaning that has previously been ascribed to it[18]. This principle, first evolved by courts in England[19], has also found acceptance by the courts in India[20].

Order 38 Rule 5 of the Code of Civil Procedure, 1908 – In Raman Tech. & Process Engg. Co. v. Solanki Traders, the Supreme Court of India held that the purpose of attachment before judgment is to prevent the ends of justice from being defeated[21]. Such power “not be exercised mechanically or merely for the asking”[22] and that a defendant is not debarred from dealing with her/his property merely because a case is filed against him[23].

Section 281-B of the Income Tax Act, 1961

  1. Gandhi Trading CIT[24]The Bombay High Court inter alia held that the power of provisional attachment is a drastic power and must only be exercised if there is sufficient material on record to justify the apprehension that the assessee is about to dispose of the whole or any part of her/his property with a view to thwart the ultimate collection of the demand. It was also warned that such power must not be used to harass the assessee.
  2. VLS Finance Ltd. v. CIT[25]The Delhi High Court inter alia held that the principles of Order 38 Rule 5 CPC is implicit in Section 281-B of the Income Tax Act, 1961.
  3. Society for Integrated Development in Urban and Rural Areas v. CIT[26]The High Court of Andhra Pradesh held that there must be some material on record to show that the Assessing Officer had formed an opinion on the basis thereof that it was necessary to attach the property in order to protect the interests of the revenue.
  4. Gopal Das Khandelwal v. Union of India[27] – According to the Allahabad High Court, the power of attachment must be exercised for attachment of the property of only the assessee and no one else.

Section 45 of the Gujarat Value Added Tax Act, 2003

  1. Vishwanath Realtor v. State of Gujarat[28] – The opinion formed by the Commissioner must be on some tangible material on objective facts available with the Commissioner such as the past conduct of the dealer or that the dealer is likely to sell her/his property.
  2. Automark Industries (I) Ltd. State of Gujarat[29] – Powers under Section 45 of the Gujarat Value Added Tax Act, 2003 are drastic in nature and must be exercised with due care. Such power cannot be exercised merely because assessment proceedings are pending, since it is merely prima facie, ex parteopinion of the assessing authority that a provisional attachment is necessary.

These are settled rules of provisional attachment which find expression not only in statutes but also time-honoured hallowed principles which are followed by the courts of our country. Thus, the legislature, at the time of enacting the CGST Act, was conscious of these principles of provisional attachment (it would be deemed to have been aware of it in any instance[30]).

Analysis of Section 83 of the CGST Act

It would be apposite to segregate Section 83 into distinct parts for a better understanding thereof:

  1. The power under Section 83 can be exercised only during the pendency of proceedings under certain sections.
  2. These sections are exhaustive – Sections 62, 63, 64, 67, 73 or 74 of the CGST Act.
  3. The power under Section 83 must be exercised by the Commissioner.
  4. The Commissioner must form an “opinion” that such attachment is “necessary”, for the purpose of “protecting the interest of the Government revenue”.
  5. The order of provisional attachment must be in writing.
  6. The provisional attachment must be of a property belonging to a taxable person.

Section 83 is further fleshed out by Rule 159 of the CGST Rules, which provides for the following:

  1. The order shall be passed in Form DRC-22, mentioning the details of property.
  2. The assessee, may, within seven days of order of attachment, file an objection to the attachment to the effect that the said property was or is not liable to attachment.
  3. If an objection is filed, the Commissioner shall afford an opportunity of hearing to the assessee.
  4. Thereafter, the Commissioner may release the said property by an order in Form DRC-23.

Probably the most important safeguard against provisional attachment is the formation of an “opinion” by the Commissioner. The term “opinion” was succinctly explained by Lord Bramwell in John Derby Allcroft v. Lord (Bishop)[31]  – “If a man is to form an opinion, and his opinion is to govern, he must form it himself on such reasons and grounds as seem good to him.” In Barium Chemicals Ltd. v. Company Law Board[32], the Supreme Court while construing Section 237 of the Companies Act, 1956[33], held that:

  1. … Therefore, the words, “reason to believe” or “in the opinion of” do not always lead to the construction that the process of entertaining “reason to believe” or “the opinion” is an altogether subjective process not lending itself even to a limited scrutiny by the court that such “a reason to believe” or “opinion” was not formed on relevant facts or within the limits or as Lord Radcliffe and Lord Reid called the restraints of the statute as an alternative safeguard to rules of natural justice where the function is administrative….
  2. … There must therefore exist circumstances which in the opinion of the Authority suggest what has been set out in sub-clauses (i), (ii) or (iii). If it is shown that the circumstances do not exist or that they are such that it is impossible for anyone to form an opinion therefrom suggestive of the aforesaid things, the opinion is challengeable on the ground of non-application of mind or perversity or on the ground that it was formed on collateral grounds and was beyond the scope of the statute.

Again, in Bhikhubhai Vithlabhai Patel v. State of Gujarat[34],  the Supreme Court was concerned with the term “is of opinion” as appearing in Section 17 of the Gujarat Town

Planning and Urban Development Act, 1976, wherein the Supreme Court held that existence of relevant material is condition precedent for formation of opinion[35] and that such opinion cannot be on imaginary grounds or wishful thinking, however laudable they may be[36].

The Supreme Court also importantly went on to hold that construction placed on the expression “reason to believe” will equally be applicable to the expression “is of opinion”[37]. Therefore, one may argue that even the jurisprudence developed around Section 147 of the Income Tax Act, 1961[38], which uses the expression “reason to believe” may also apply to Section 83 of the CGST Act. These inter alia include holding of belief in good faith[39]; such belief not being based on mere suspicion, gossip, or rumour[40]; such belief not being irrational[41]; and the reasons to believe having a rational connection with the formation of belief[42].

Again, what is also important is the use of the word “necessary” as opposed to “expedient”. Necessity would mean something that is indispensable, unavoidable, and impossible to be otherwise or inevitable[43]. In J. Jayalalitha v. Union of India[44],  the Supreme Court, while interpreting the term “as may be necessary” used in Section 3(1) of the Prevention of Corruption Act, 1988[45], held that:

  1. … The legislature had to leave it to the discretion of the Government as it would be in a better position to know the requirement. Further, the discretion conferred upon the Government is not absolute. It is in the nature of a statutory obligation or duty. It is the requirement which would necessitate exercise of power by the Government. When a necessity would arise and of what type being uncertain the legislature could not have laid down any other guideline except the guidance of “necessity”. It is really for that reason that the legislature while conferring discretion upon the Government has provided that the Government shall appoint as many Special Judges as may be necessary. The words “as may be necessary” in our opinion is the guideline according to which the Government has to exercise its discretion to achieve the object of a speedy trial. The term “necessary” means what is indispensable, needful or essential.[46]

Thus, it only when, on the basis of some tangible material, that the taxation authorities deem that to protect the interest of the revenue, provisional attachment of the properties of the assessee is the only viable solution, can such order of provisional attachment be made.

 Interpretation by the High Courts

From a bare reading of the provisions, it is discernible that the legislature had, in its wisdom, provided for safeguards as conditions precedent for the use of such a drastic power. The fact that the taxing authorities have been overzealous in their use of Section 83 of the CGST Act is evident from the considerable body of precedents that have emerged from the High Courts in India, despite the legislation being only at its nascent years. Assessees have been constrained to move to the High Courts for protection of their rights. The High Courts have responded fittingly and have had to constantly remind the taxing authorities about the drastic nature of powers of provisional attachment.

Gujarat High Court – The Gujarat High Court can be safely considered to be the flag-bearer of development of GST jurisprudence in the country. Several judgments of the Gujarat High Court have described the powers of provisional attachment and the principles thereof. So brazen have been the conduct of the tax authorities in the State, that it even led to the High Court remarking “No wonder, the State of Gujarat has topped the list of States with the highest collection of tax under the GST Act in the country for the year 2020-­2021”.

i) Valerius Industries v. Union of India[47]– The formation of opinion of the Commissioner must be based on some credible material disclosing the necessity to provisionally attach the property of the assessee. Further, the reasons to believe for exercise of powers under Section 67 (power of inspection, search and seizure) is in contradistinction to the formation of opinion under Section 83. Just because a search has taken place does not ipso facto necessitate provisional attachment of properties. If the interest of the revenue is sufficiently secured by reversal of the input tax credit (ITC), provisional attachment may not be justified.

ii) Jay Ambey Filament (P) Ltd. v. Union of India[48] – If the subjective satisfaction under Section 83 is arrived at in absence of any cogent or credible material, then such action amounts to “malice in law”. Mechanical exercise of powers under Section 83 ought to be set aside as being arbitrary.

iii) Patran Steel Rolling Mill Commr. of State Tax[49] – Firstly, no proceedings were pending against the petitioner under the sections mentioned in Section 83 above. Further, it was not the case of the department that the petitioner was a fly by night operator or a habitual offender or that it did not have the means to pay the sum that would be ultimately assessed. In such circumstances, order of provisional attachment was quashed.

iv) Vinodkumar Murlidhar Chechani v. State of Gujarat[50] – The Gujarat High Court has deprecated the practice of issuing orders of provisional attachment in a routine matter even when the law is well settled. It was suggested that Union of India may come up with appropriate guidelines in this regard.

Punjab and Haryana High Court

i) Bindal Smelting (P) Ltd. v. Director General[51] – Courts are entitled to determine whether the formation of opinion under Section 83 is arbitrary, capricious or whimsical. Mandate of Section 83 is to attach amount lying in fixed deposit account or savings bank account and not an account having a debit balance such as a cash credit account. Attachment of cash credit account having debit balance does not protect interest of revenue, instead it merely ruins the business of a dealer.

ii) Ufvindia Global Education v. Union of India[52] – The effect of proceedings under Section 83 comes to end as soon as the proceedings pending in any of the aforesaid Sections i.e. 63 or 64 or 67 or 73 or 74 are over because pendency of the proceedings is the sine qua non. Since proceedings under Section 67 were over, there did not arise any case for continuance of the provisional attachment[53]. It may also be noted that an order under Section 83 also loses its force after one year from the date of the order, as per Section 83(2) of the CGST Act.

 Bombay High Court

i) Kaish Impex (P) Ltd. Union of India[54] – Since proceedings were initiated under Section 70 of the CGST Act[55] (“power to summon persons to give evidence and produce documents”), the properties of the assessee could not have been attached, since Section 70 is not one of the sections prescribed in Section 83 of the CGST Act. Even the prescribed form i.e. DRC-22, specifies the particulars of a registered taxable person and which proceedings have been launched against the aforesaid taxable person indicating a nexus between the proceedings pending against a taxable person and provisional attachment of bank account of such taxable person[56].

ii) Siddharth Mandavia Union of India[57] – In exercise of powers under Section 83, the taxation authorities cannot attach bank accounts held by persons other than the taxable person – in this case, bank accounts held jointly by the petitioner with his wife and with his minor son. Moreover there was no allegation that any money belonging to the assessee or to his firm had been credited into the joint accounts with his wife or with his minor son.

iii) AJE India (P) Ltd. v. Union of India[58] – Section 83 order was passed against the assessee since proceedings under Section 67 had been initiated. It was held that merely because there is a proceeding under Section 67 would not mean that recourse to such a drastic power as under Section 83 would be an automatic consequence, more so when petitioner has cooperated with the investigation. Interim protection was thus granted.

Delhi High Court

  1. Proex Fashion (P) Ltd. v. Govt. of India[59] Following the judgments in Kaish Impex[60], Bindal Smelting[61]  and Valerius Industries[62], it was reiterated that powers under Section 83 are far reaching and cannot be invoked when no proceedings under the sections mentioned in Section 83 were pending.

 CBIC Guidelines – Clarification with caveats

 Ostensibly, the purport of Section 83 of the CGST Act has not been fully appreciated by the taxation authorities. The judgment of the Gujarat High Court in Chechani[63]  was perhaps the straw that broke the camel’s back, with the Gujarat High Court observing that judicial time was being wasted due to mechanical exercise of powers under Section 83. It was therefore suggested that Union of India should consider issuing appropriate guidelines in this regard.

Accordingly, the Central Board of Indirect Taxes and Customs (Board), on 23-2-2021 published certain guidelines for provisional attachment of property under Section 83[64]. Though the said guidelines do not mention the section under which it is issued, it clear that same has been issued under Section 168(1) of the CGST Act[65] which empowers the Board to issue instructions/directions to the Central Tax Officers.[66]

It was clarified that for forming an opinion, the Commissioner must exercise due diligence and examine facts of the case such as nature of offence, established nature of business and possibility of the assessee disposing of her/his assets[67]. Importantly, the guideline states that “The basis, on which, Commissioner has formed such an opinion, should be duly recorded in file.”[68] Since the power under Section 83 is “extraordinary”, it had to be resorted with utmost caution. It was clarified that property (preferably immovable property[69]) of only the taxable person should be attached[70] and in such a manner that it does not hamper the business activities of the taxable person[71]. A welcome direction (which is not borne from the rules) issued under the guidelines is that when bank accounts are attached, it may be released in lieu of certain immovable property furnished by the assessee.

The Board has also laid down certain non-exhaustive illustrations in which the power of provisional attachment can be exercised, such as where the taxable person has:

a) supplied any goods/services without an invoice;

b) issued an invoice without supply of goods or services;

c) fraudulently availed input tax credit;

d) fraudulently obtained refund;

e) collected tax but failed to pay the same to the exchequer within three months; and

f) fraudulently passed on input tax credit.

The Board seems to have a missed a trick. The power of provisional attachment is not so much dependent on the merits of the case (as enumerated in the six categories above) as it is on the possibility of the taxable person thwarting the ultimate demand by alienating its assets. A good working test was laid down in Patran Steel[72] i.e., where the taxable person is habitual offender or “fly-by-night” operator or where there exists a reasonable apprehension that such person will alienate assets to defeat the ultimate demand or that the assessee may not be in a position to pay the demand since the assessee is going into insolvency/liquidation. It is this apprehension that must form the basis of opinion of the Commissioner and not strictly the merits of the case itself, since there are multiple ways in which interest of the revenue can be protected.

Supreme Court’s analysis of provisional attachment – Death knell to arbitrary exercise of powers

 We may now turn to the judgment of the Supreme Court in Radha Krishan Industries[73], which, in a sense, seems to be a culmination of jurisprudence developed by the High Courts – with the Supreme Court referring to many of the cases stated hereinabove. It is interesting to note the observations of Justice D.Y. Chandrachud during the course of hearing of this particular case[74]. Justice Chandrachud is reported to have observed that “(t)he Parliament had intended the GST to be a citizen-friendly tax structure. The purpose of the Act is lost by the manner in which tax law is enforced in our country” and that the culture of “business are all fraudulent” needs to be given a go-by.

It was further observed that just because the department has account numbers of the assessee does not give them a licence to start attaching the bank accounts dehors any threat of alienation of assets or the assessee being subject to liquidation or winding up. An order of provisional attachment was likened to a “pre-emptive strike” and such powers were termed to be “draconian”. A need was felt to lay down the law regarding provisional attachment so that the message percolates to the actual authorities.

In the judgment authored by Justice Chandrachud, His Lordship has, in his inimitable style, succinctly and lucidly laid down the law in relation to provisional attachments under the GST regime. The author takes the liberty of summarising this for brevity:

i) The power to levy a provisional attachment is draconian in nature and the legislature was in fact conscious of the draconian nature of the power since it conditioned the exercise of such power by employing specific statutory language[75].

ii) The formation of the opinion must bear a proximate and live nexus to the purpose of protecting the interest of the government revenue[76].

iii) By using the word “necessary” instead of “expedient”, the legislature intended that that the interest of the revenue can be protected only by a provisional attachment. Necessity postulates a more stringent requirement than “expediency”[77].

iv) Provisional attachment orders must conform to both statutory and procedural requirements. Such provisions do not enable the Commissioner to make pre-emptive strikes merely because property is available for being attached[78].

v) There must exist a proximate or live link between the need for the attachment and the purpose which it is intended to secure. Moreover, the Commissioner, in the formation of such belief, acts on some tangible material[79].

vi)Rule 159(5) provides for post-provisional attachment right of (a) submitting an objection to the attachment; and (b) an opportunity of being heard. These dual safeguards have been provided since a business entity whose bank account is attached is seriously prejudiced by the inability to utilise the proceeds of the account (or her/his property) for the purposes of business[80].

vii) The Commissioner who hears such objection must pass a reasoned order accepting or rejecting such objections, lest the purpose of subjecting such order to judicial scrutiny be defeated[81].

viii) Although not provided in the rules, an opportunity should be given to the assessee to offer any alternative form of security in lieu of the attachment[82].

ix) After the final order under Section 74 was passed and an appeal had also been filed, the order of provisional attachment must come to an end[83].

x) In the facts of the case, it was noticed that it was the department’s case that the appellant had availed ITC on the strength of invoices issued by certain other company and such other company had fraudulently passed on the ITC to the appellant. Therefore “in view of the facts involved in (the) case”, it was deemed fit to order provisional attachment of the appellant’s account. The Supreme Court held that the order of the Joint Commissioner contains absolutely no basis for the formation of the opinion that a provisional attachment was necessary to safeguard the interest of the revenue and that no tangible material has been disclosed.

It is extremely germane to note at this stage that in the recent guidelines issued by the Board on 23-2-2021, one of the grounds on which provisional attachment order may be passed is fraudulent availment of ITC and fraudulent passing on of ITC. In the author’s humble opinion if these conditions are the only grounds for invoking such drastic powers, it would be in teeth of the Supreme Court’s judgment, which has held that even in such cases, there must be some tangible material to show that the taxable person intended to defeat the interest of revenue.

The Supreme Court’s judgment in Radha Krishan[84] provides much needed clarity on the scope of powers of Section 83. It is now up to the taxation authorities to follow the Supreme Court’s dicta in letter and spirit and refrain from arbitrary and unreasonable exercise of their discretionary powers.

 The amendment to Section 83 – Two steps backward

 From the body of the case law emerging above, it can be seen that courts had proscribed provisional attachments in cases where requirements of Section 83 were not met such as where proceedings were not pending under the sections mentioned in Section 83 or where attachment had been made of properties of persons/entities other than the taxable person. It seems however that this did not go down well with the Revenue Department.

The first tinge of disapproval can be seen in the 39th meeting of the GST Council held on 14-3-2020[85] wherein it was deliberated that there is a need to amend Section 83 of the CGST Act such that the words “during the pendency” be changed to proceedings initiated under Chapters 12, 14 or Chapter 15. The need to make such amendment was felt since once a search under Section 67 gets completed, the provisional attachment order ceases to exist. It was stated that such interpretation “defeated the very purpose of attachment”. Further, it was also deemed necessary to include not only the properties of the taxable person but also of the “beneficiary” since in most cases of fake invoices, the taxable person hardly has any assets[86].

It is in this background that Section 115 of the Finance Act, 2021[87] substituted Section 83(1) of the CGST Act with the following:

  1. (1) 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 or any person specified in sub-section (1-A) of Section 122[88], in such manner as may be prescribed.

The following comparative chart of the provision as it stood before and after its amendment, will shed light on the nature of changes made (although yet to be notified):

Section 83 before amendment  

Section 83 after amendment

 

The power under Section 83 can be exercised during the pendency of proceedings under certain sections.

 

The powers under Section 83 can be exercised after the initiation of proceedings under certain chapters.
These sections are exhaustive – Sections 62, 63, 64, 67, 73 or  Section 74 of the CGST Act.

 

These chapters include – Chapter 12 (Assessment – Sections 59 to 64); Chapter 14 (inspection, search, seizure and arrest); and Chapter 15 (demands and recovery)

 

The power under Section 83 must be exercised by the Commissioner.

 

Same as before
The Commissioner must form an “opinion” that such attachment is “necessary”, for the purpose of “protecting the interest of the Government revenue”.

 

Same as before
The order of provisional attachment must be in writing.

 

Same as before
The provisional attachment must be of a property belonging to a taxable person. The provisional attachment can be of a property belonging to a taxable person or any person specified in sub-section (1-A) of Section 122.

Therefore, there are three major areas where amendments have been made[89]. The amendments and few issues with regard thereto are delineated:

i) First and foremost is the change from “pendency” of proceedings to “initiation” of proceedings. Therefore, a provisional attachment can technically now continue, even if there are no pending proceedings under the Chapters 12, 14 and 15. The memorandum explaining provisions of Finance Bill, 2021[90] expressly states that such change was made so that provisional attachment shall remain valid for the entire period starting from the initiation of any proceeding under the said chapter till the expiry of period of one year from the date of order. This may have a disastrous impact on the working capital position of the business[91].

ii) Secondly, a provisional attachment can be issued under any of the sections mentioned in Chapters 12, 14 and 15. For instance, merely on issuance of summons under Section 70, the Commissioner may provisionally attach the properties of the taxable person. Further, even when the taxable person cooperates and produces all documents and evidences and seemingly the purpose of issuing summons is over, an order of provisional attachment can still continue since the condition now is “initiation” of proceedings and not its “pendency”. Another instance may be taken – Section 79 [92]authorises the Department to issue garnishee notices to bank for recovery of dues. Now, as per the amended Section 83, not only can the taxable person be subjected to recovery proceedings under Section 79 but also attachment of its bank account under Section 83. This makes little to no sense since, by issuing a garnishee notice, the interest of the revenue is already protected.

iii) The third change is bringing into its bracket, persons other than the taxable persons i.e. persons specified in Section 122(1-A) of the CGST Act. Although the intention of legislature to curb fake invoicing is laudatory, one cannot rule out the possibility of an innocent taxpayer being roped in and having her/his assets blocked only because of the malfeasance of the main taxpayer.

However, what remains after the amendment is the requirement of the Commissioner to form an opinion on tangible material that provisional attachment is “necessary” for the protection of the interest of the revenue. This may prove to be an important safeguard even though the scope of Section 83 may have been enlarged.

Conclusion

 From the entire gamut of the law revolving provisional attachment, it cannot be gainsaid that the power of provisional attachment is drastic and must be exercised sparingly. The High Courts have, even before the GST regime, and especially after coming into force of the GST regime, leaned towards a strict interpretation of these provisions. Provisional attachment is in fact detrimental to the revenue in the sense that if it is utilised in the overzealous manner that it has been, it will eventually lead to closure of business of the taxable person – which will only lead to a drop in revenue.

As rightly remarked by the Supreme Court, the change also needs to be brought in the mentality that all businessmen are fraudsters. The Department needs to be sympathetic to the fact that provisional attachment can lead to stifling one’s business. Such power should be invoked only when extremely necessary. No doubt this power is necessary – but as with any other discretionary power, it is subject to the rigours of judicial review on the grounds of arbitrariness and procedural infirmity.

Finally, the changes brought by the Finance Act, 2021, though yet to be notified, seems to be yet another attempt by the Department to retain unbridled powers unto themselves. These amendments, as highlighted above, expand the scope of exercise of its powers. However, they are still subject to formation of an opinion by the Commissioner, which may be the silver lining. It remains to be seen how such amendment is interpreted by the courts. If past experience is anything to go by, the taxation authorities must be cautious of any arbitrary exercise of their discretion, lest the constitutional courts may have to step in to remind them of their duty to act in furtherance of public good.


* Advocate, Jharkhand High Court.

[1] http://www.scconline.com/DocumentLink/4386Cb1k.

[2] http://www.scconline.com/DocumentLink/ZN57RKH6.

[3] http://www.scconline.com/DocumentLink/HFf8fXg7. Please note that S. 83 of the CGST Act is pari materia to S. 83 the State GST Acts. Thus, all references in this article to S. 83 of the CGST Act may deem to be a reference to Section 83 of the State GST Acts.

[4] http://www.scconline.com/DocumentLink/e2MJL2hh.

[5] http://www.scconline.com/DocumentLink/5d4FLa80.

[6] http://www.scconline.com/DocumentLink/wdV8quZz.

[7] http://www.scconline.com/DocumentLink/90xSH4G7.

[8] http://www.scconline.com/DocumentLink/1M50Giwx.

[9] http://www.scconline.com/DocumentLink/4WfogRLL.

[10] Union of India v. ABN Amro Bank, (2013) 16 SCC 490, para 38

[11] R. 159 of the Central Goods and Services Rules, 2017

[12] 2021 SCC OnLine SC 334

[13] http://www.scconline.com/DocumentLink/6j9ulrSh.

[14] http://www.scconline.com/DocumentLink/wD8UgpM8.

[15] http://www.scconline.com/DocumentLink/Pf23wTW0.

[16] http://www.scconline.com/DocumentLink/fN5HmKk7.

[17] http://www.scconline.com/DocumentLink/CU2Jmtq6.

[18] Barras  v. Aberdeen Steam Trawling and Fishing Co., 1933 AC 402 (HL) http://www.scconline.com/DocumentLink/N9wriQ30

[19] Greaves v. Tofield, (1880) 14 Ch D 563 (CA) ; Cathcart, Ex parte, Camphell, In re, [1870] 5 Ch App 703 ; Webb v. Outrim, 1907 AC 81 (PC) .

[20] See Banarsi Debi v. ITO, AIR 1964 SC 1742; Diwan Bros. v. Central Bank of India, (1976) 3 SCC 800.

[21] (2008) 2 SCC 302   (para 4).

[22] Id., para 5.

[23] Id., para 7.

[24] 1999 SCC OnLine Bom 967 

[25] 2000 SCC OnLine Del 575

[26] 2001 SCC OnLine AP 1457 

[27] 2010 SCC OnLine All 654 

[28] 2015 SCC OnLine Guj 6564

[29] 2014 SCC OnLine Guj 14217.

[30] See Bengal Immunity Co. Ltd. v. State of Bihar, AIR 1955 SC 661, para 104

[31] 1891  AC  666 (HL)

[32] 1966 Supp SCR 311

[33] http://www.scconline.com/DocumentLink/4l3F59pj.

[34] (2008) 4 SCC 144

[35] Id., para 23.

[36] Id., para 24.

[37] Id., para 32.

[38] http://www.scconline.com/DocumentLink/2qy820dO.

[39] Calcutta Discount Co. Ltd. v. ITO, AIR 1961 SC 372

[40] Sheo Nath Singh v. Appellate CIT, (1972) 3 SCC 234

[41] S. Ganga Saran & Sons (P) Ltd. v. ITO, (1981) 3 SCC  143

[42] ITO v. Lakhamani Mewal Dass, (1976) 3 SCC 757 

[43] P. Ramanatha Aiyar, Advanced Law Lexicon (6th Edn. 2009, LexisNexis).

[44] (1999) 5 SCC 138

[45] http://www.scconline.com/DocumentLink/08xrs9fS.

[46] ITO v. Lakhamani Mewal Dass, (1976) 3 SCC 757 , pp. 154-155.

[47] 2019 SCC OnLine Guj 6866

[48] 2020 SCC OnLine Guj 3009

[49] 2019 SCC OnLine Guj 6867

[50] 2020 SCC OnLine Guj 3010 

[51] 2019 SCC OnLine P&H 6015

[52] 2020 SCC OnLine P&H 2796

[53] It is relevant to note that the Punjab and Haryana High Court, has, in reaching the above conclusion that Section 67 proceedings had culminated, relied on the judgment of the Gujarat High Court in Kushal Ltd. v. Union of India, SCA No. 19533 of 2019. Against the said judgment, the Union of India had approached the Supreme Court and vide order dated 16-11-2020 it was directed that the Kushal Ltd. (Supra) shall be kept in abeyance and cannot be followed in other cases.

[54] 2020 SCC OnLine Bom 125 .

[55] http://www.scconline.com/DocumentLink/SsAK2flL.

[56] This judgment has been repeatedly followed to grant similar reliefs in similar fact situations (See DNB Multitrade India (P) Ltd. v. Union of India, 2020 SCC OnLine Bom 2117; Gehna Trading LLP v. Union of India, 2020 SCC OnLine Bom 2115 ).

[57] 2020 SCC OnLine Bom 2110

[58] 2020 SCC OnLine Bom 4489

[59] 2021 SCC OnLine Del 2082.

[60] DNB Multitrade India (P) Ltd. v. Union of India, 2020 SCC OnLine Bom 2117; Gehna Trading LLP v. Union of India, 2020 SCC OnLine Bom 2115.

[61] 2020 SCC OnLine P&H 2796

[62] 2020 SCC OnLine Guj 3009 .

[63] 2019 SCC OnLine P&H 6015

[64] Circular No. CBEC-20/16/05 /2021-GST/359 issued GST Policy Wing, Central Board of Indirect Taxes and Customs available at <https://www.cbic.gov.in/resources//htdocs-cbec/gst/Guidelines%20for%20Provisional%20Attachment.pdf>.

[65] http://www.scconline.com/DocumentLink/9BLU3b0a.

[66] One may refer to Commr. of Customs v. Indian Oil Corpn. Ltd., (2004) 3 SCC 488  which states that circulars/instructions by the department are binding on the department.

[67] 2000 SCC OnLine Del 575 , Para 3.1.3.

[68] Ibid, Para 3.1.4.

[69] Ibid, Para 3.4.4.

[70] Ibid, Para 3.4.3.

[71] Ibid, Para 3.4.5.

[72] 2020 SCC OnLine Guj 3010

[73] 2021 SCC OnLine SC 334

[74] Mehal Jain, Parliament Intended GST as Citizen-Friendly Tax Structure, But its Purpose Lost by the Manner in which it is Enforced: Supreme Court, LiveLaw, 6-4-2021 (available at <https://www.livelaw.in/top-stories/supreme-court-gst-parliament-citizen-friendly-purpose-lost-by-enforcement-government-172211>).

[75] 2021 SCC OnLine SC 334

[76] Id., para 48.

[77] Id., para 49.

[78] Id., para 49.

[79] Id., para 50.

[80] Id., para 56.

[81] Id., para 56.

[82] Id., para 56. Please note that this in line with the guidelines issued by the Board on 23-2-2021 which also speaks of an alternate security.

[83] Id., para 70.

[84] 2021 SCC OnLine SC 334

[85] Minutes of Meeting of the 39th GST Council held on 14-3-2020 in New Delhi (available at <http://www.gstcouncil.gov.in/sites/default/files/Signed%20Minutes%2039th%20GSTCM.pdf> ).

[86] Id., Para 25.4.

[87] http://www.scconline.com/DocumentLink/5cJ44q8n

[88] http://www.scconline.com/DocumentLink/JX2Y8U1V.

[89] It may be noted that Section 115 of the Finance Act, 2021 is yet to be notified.

[90] Memorandum Explaining the Provisions in Finance Bill, 2021, Government of India, available at <https://www.indiabudget.gov.in/doc/memo.pdf>.

[91] Deepak Joshi, Drastic Amendments to The Power of Provisional Attachment Under CGST Act, 2017 – Department Proposes, Budget Disposes, [2021] 83 GST 57 (Mag.).

[92] http://www.scconline.com/DocumentLink/6102yHzR.

Case BriefsHigh Courts

Madhya Pradesh High Court: The Division Bench of Prakash Shrivastava and Vandana Kasrekar, JJ., dismissed a petition which was filed challenging a notice whereby the premises of the petitioner had been sealed under the provisions of The Central Goods and Services Tax Act, 2017 (for short “GST Act”).

The petitioner was the manufacturer of sweet betel nut and which has all the necessary licenses and permissions for this purpose and is regularly paying the GST case of the petitioner is that the Plot No.15-A/B-1, Sector-B, Industrial Area, Sanwer

Road, Indore belonged to Shri Kishore Wadhwani and he had taken this plot on lease from Shri Kishore Wadhwani and was running the manufacturing unit on this plot. The further case of the petitioner was that apart from the above, it had no connection with Shri Kishore Wadhwani. Earlier in the year 2011 Excise Department had taken certain action against the petitioner but nothing incriminating was found. On 20-06-2020, by the impugned notice the factory premises of the petitioner had been sealed. Counsel for the petitioner, Mr Sunil Jain and Mr Kushagra Jain submitted that though the action relating to search and seizure u/S.67 of the GST Act has been taken, but the requisite procedure had not been followed. They further submitted that the petitioner apprehended that the search and seizure may not be carried out in a fair manner and the confession of the petitioner may be recorded under pressure, therefore, a direction be issued for carrying out the search in the present of an Advocate. Counsel for the respondent, Mr Prasanna Prasad submitted that the officials of the respondents had approached the factory premises of the petitioner on 20-06-2020 for the purpose of search and seizure by following the due procedure in accordance with Sec.67 of the Act, but since the premises was found locked, therefore, the option was either to break open the lock and carry out the search or to seal the premises and thereafter carry out the search of the premises in the presence of the petitioner. He also submitted that the two independent witnesses will be kept as required by law and procedure prescribed in law will be duly followed in true letter and spirit.

The Court perused the Section 67 of GST Act and held that the search is yet to take place in the present case and the counsel for respondents had duly assured this court that the aforesaid provision will be complied with therefore no direction in this regard at this stage is required. The Court relied on the judgment of Poolpandi v. Superintendent, Central Excise, (1992) 3 SCC 259 wherein during the investigation and interrogation under the provisions of Foreign Exchange Regulations Act 1973 and Customs Act, a prayer was made for assistance of the lawyer and the Supreme Court had held that,

            “11- We do not find any force in the arguments of Mr. Salve and Mr. Lalit that if a person is called away from his own house and questioned in the atmosphere of the customs office without the assistance of his lawyer or his friends his constitutional right under Article 21 is violated. The argument proceeds thus: if the person who is used to certain comforts and convenience is asked to come by himself to the Department for answering question it amounts to mental torture. We are unable to agree. It is true that large majority of persons connected with illegal trade and evasion of taxes and

duties are in a position to afford luxuries on lavish scale of which an honest ordinary citizen of this country cannot dream of and they are surrounded by persons similarly involved either directly or indirectly in such pursuits. But that cannot be a ground for holding that he has a constitutional right to claim similar luxuries and company of his choice. Mr. Salve was fair enough not to pursue his argument with reference to the comfort part, but continued to maintain that the appellant is entitled to the company of his choice during the questioning. The purpose of the enquiry under the Customs Act and the other similar statutes will be completely frustrated if the whims of the persons in possession of useful information for the departments are allowed to prevail. For achieving the object of such an enquiry if the appropriate authorities be of the view that such persons should be dissociated from the atmosphere and the company of persons who provide encouragement to them in adopting a non cooperative attitude to the machineries of law, there cannot be any legitimate objection in depriving them of such company. The relevant provisions of the Constitution in this regard have to be construed in the spirit they were made and the benefits thereunder should not be “expanded” to favour exploiters engaged in tax evasion at the cost of public exchequer. Applying the ‘just, fair and reasonable test’ we hold that there is no merit in the stand of appellant before us.”

The Court dismissed the petition holding that there was no need for interference.[Subhash Joshi v. Director General of GST Intelligence, WP No.9184 of 2020, decided on 03-07-2020]


Suchita Shukla, Editorial Assistant has reported this brief.

Case BriefsHigh Courts

Delhi High Court: The Division Bench of Manmohan and Sanjeev Narula, JJ., upheld the validity of Sections 132 and 69 of the Central Goods and Services Tax Act, 2017, and refused any interim relief to the petitioner.

Petitioners submitted that Sections 69 and 132 of the Central Goods and Services Tax Act, 2017 are unconstitutional as being provisions of criminal nature, they could have been enacted under Article 246A of the Constitution of India, 1950.

Further, the petitioners emphasized that the power to arrest and prosecute are not ancillary and/or incidental to the power to levy and collect goods and services tax.

Adding to the above submissions, it was further stated that since the power to levy Goods and Services Tax is provided under Article 246A, power in relation thereto could not be traced to Article 246 or any of entries in 7th Schedule.

In the alternative, they submitted that Entry 93 of List 1 confers jurisdiction upon the Parliament to make criminal laws only with respect to matters in List I and CGST. Therefore, according to them, Sections 69 and 132 are beyond the legislative competence of the Parliament.

In the past, many cases occurred wherein an assessee had been arrested at the initial stage of the investigation but the department had subsequently failed to establish its case in adjudication proceedings and in the process, the assessee suffered an irreparable loss on account of the arrest.

In the present cases, no Show Cause Notice had been issued to the Petitioners either under Section 73 or Section 74 of the CGST Act by the Respondents for any unpaid tax, short paid tax, or erroneous refunds or where input tax credit had been wrongly availed or utilized.

Court’s Reasoning

  • There is always a presumption in favour of the constitutionality of an enactment or any part thereof and the burden to show that there has been a clear transgression of constitutional principles is upon the person who impugns such an enactment. Further, Laws are not to be declared unconstitutional on the fanciful theory that power would be exercised in an unrealistic fashion or in a vacuum or on the ground that there is a remote possibility of abuse of power.

Bench while analyzing several aspects of the matter stated that whenever constitutionality of a provision is challenged on the ground that it infringes a fundamental right, the direct and inevitable effect/consequence of the legislation has to be taken into account.

Court referred to the decision of Supreme Court in Namit Sharma v. Union of India, (2013) 1 SCC 745.

In the decision of the Court in Maganlal Chhanganlal (P) Ltd. v. Municipal Corporation of Great Bombay, (1974) 2 SCC 402, it was held that :

“Administrative officers, no less than the courts, do not function in a vacuum. It would be extremely unreal to hold that an administrative officer would in taking proceedings for eviction of unauthorised occupants of Government property or Municipal property resort to the procedure prescribed by the two Acts in one case and to the ordinary civil court in the other. The provisions of these two Acts cannot be struck down on the fanciful theory that power would be exercised in such an unrealistic fashion. In considering whether the officers would be discriminating between one set of persons and another, one has got to take into account normal human behaviour and not behaviour which is abnormal. It is not every fancied possibility of discrimination but the real risk of discrimination that we must take into account. This is not one of those cases where discrimination is writ large on the face of the statute. Discrimination may be possible but is very improbable.”

  • Goods and Service Tax is a Unique Tax, inasmuch as the power as well as field of legislation are to be found in a Single Article, i.e. Article 246-A. Scope of Article 246-A is significantly wide as it grants the power to make all laws ‘with respect to’ Goods and Service Tax.

Unless the Constitution itself expressly prohibits legislation on the subject either absolutely or conditionally, the power of a Legislature to enact legislation within its legislative competence is plenary.

Further, Court added that there is also no conflict between the operation of Article 246A and Article 246 as a non-obstante clause has been added to Article 246A to clarify that both Parliament and the State Legislatures have simultaneous powers in relation to Goods and Services Tax.

  • This Court is of the Prima facie opinion that the ‘Pith and Substance’ of the CGST Act is on a topic, upon which the parliament has power to legislate as the power to arrest and prosecute are ancillary and/or incidental to the power to levy collect goods and service tax.

When a law is challenged on the ground of being ultra vires to the powers of the legislature, the true character of the legislation as a whole has to be ascertained.

Bench opined that when a law dealing with a subject in one list is also touching on a subject in another list, what has to be ascertained. If on examination of the statute, it is found that the legislation is in substance on a matter assigned to the legislature enacting that statute, then it must be held valid, in its entirety even though it may trench upon matters beyond its competence. Incidental encroachment is not prohibited.

In light of the discussion of the above point, Court prima facie opined that the pith and substance of the CGST Act is on a topic, upon which the Parliament has power to legislate as the power to arrest and prosecute are ancillary and/or incidental to the power to levy and collect GST. 

  • Even if it is assumed that power to make offence in relation to evasion of GST is not to be found under Article 246A, then the same can be traced to Entry I of List III. The term ‘Criminal Law’ used in the aforesaid entry is significantly wide and includes all criminal laws except the exclusions.

Supreme Court’s decision in Kartar Singh v. State of Punjab, (1994) 3 SCC 569, has emphasized that the language used in the aforesaid entry is couched in very wide terms and the scope of the term ‘criminal law’ has been enlarged to include any matter that could be criminal in nature.

In view of the above, High Court prima facie opined that even if Sections 69 and 132 of the Act could not have been enacted in pursuance to power under Article 246A, they could have been enacted under Entry 1 of List III, as laying down of a crime and providing for its punishment is ‘criminal law’.

  • This Court, at the interim stage, cannot ignore the view taken by the Gujarat High Court with regard to application of Chapter XII CrPC to the CGST Act.

In Gujarat High Court’s decision in Vimal Yashwantgiri Goswami v. State of Gujarat, R/Special Civil Application No. 13679 of 2019, it was held as under:

♦ When any person is arrested by the authorised officer, in exercise of his powers under Section 69 of the CGST Act, the authorised officer effecting the arrest is not obliged in law to comply with the provisions of Sections 154 to 157 of the Code of Criminal Procedure, 1973. The authorised officer, after arresting such person, has to inform that person of the grounds for such arrest, and the person arrested will have to be taken to a Magistrate without unnecessary delay, if the offences are cognizable and non-bailable.

However, the provisions of Sections 154 to 157 of the Code will have no application at that point of time. Otherwise, Section 69 (3) provides for granting bail as the provision does not confer upon the GST officers, the powers of the officer in charge of a police station in respect of the investigation and report. Instead of defining the power to grant bail in detail, saying as to what they should do or what they should not do, the short and expedient way of referring to the powers of another officer when placed in somewhat similar circumstances, has been adopted. By its language, the sub-section (3) does not equate the officers of the GST with an officer in charge of a police station, nor does it make him one by implication. It only, therefore, means that he has got the powers as defined in the Code of Criminal Procedure for the purpose of releasing such person on bail or otherwise. This does not necessarily mean that a person alleged to have committed a non-cognizable and bailable offence cannot be arrested without a warrant issued by the Magistrate.

♦ The authorised officer exercising power to arrest under section 69 of the CGST Act, is not a Police Officer and, therefore, is not obliged in law to register FIR against the person arrested in respect of an offence under Sections 132 of the CGST Act.

♦ An authorised Officer is a ‘proper officer’ for the purposes of the CGST Act. As the authorised Officers are not Police Officers, the statements made before them in the course of inquiry are not inadmissible under Section 25 of the Evidence Act.

♦ Power to arrest a person by an authorized officer is statutory in character and should not be interfered with Section 69 of the CGST Act does not contemplate any magisterial intervention.

  • In view of the Supreme Court Judgment in Directorate of Enforcement v. Deepak Mahajan and the aforesaid Gujarat High Court Judgment, the arguments that prejudice is caused to the petitioners as they are not able to avail protection under Article 20(3) of the Constitution and/or the provisions of CrPC do not apply even when CGST Act is silent, are untenable in law.

Judicial Scrutiny

 When any person is arrested under Section 132(5) of the CGST Act, the said person has to be informed of the grounds of arrest and must necessarily be produced before a Magistrate under Section 69 (2) within a period of 24 hours.

 The above-stated would ensure judicial scrutiny over the acts of executive and it cannot be termed as unreasonable and/or excessive.

 Adding to its analysis, the Court stated that just because the CGST Act provides for both adjudications of civil liability and criminal prosecution doesn’t mean that the said Act is unfair or unreasonable.

  • Court prima facie finds force in the submission of the ASG that the Central Tax Officers are empowered to conduct intelligence-based enforcement action against taxpayers assigned to State Tax Administration under Section 6 of the CGST Act.
  • What emerges at the prima facie stage is that it is the case of the respondents that a tax collection mechanism has been converted into a disbursement mechanism as if it were a subsidy scheme.

To conclude the Court held that what emerges at the prima facie stage is that it is the case of the respondents that a tax collection mechanism has been converted into a disbursement mechanism as if it were a subsidy scheme.

Hence, in view of the serious allegations, the Court expressed that it is not inclined to interfere with the investigation at the present stage and that too in writ proceedings. At the same time, innocent persons cannot be arrested or harassed. Consequently, the applications for interim protection are dismissed with liberty to the parties to avail the statutory remedies.

It is settled law that though the powers of constitutional courts are wide and discretionary, yet there exist certain fetters in the exercise of such powers.

 In the Supreme Court decision of Hema Mishra v. State of U.P., (2014) 4 SCC 453, it was held that despite the fact that provision regarding pre-arrest bail, had been specifically omitted in Uttar Pradesh, the power under writ jurisdiction is to be exercised extremely sparingly.

Court’s view in the instant case is that the allegation that a tax collection mechanism has been converted into a disbursement mechanism most certainly requires investigation.

Bench stated that it has no doubt that the trial court, while considering the bail or remand or cancellation of bail application, ‘will separate the wheat from the chaff’ and will ensure that no innocent person against whom baseless allegations have been made is remanded to police/judicial custody.

Hence, the observations made herein are prima facie and shall not prejudice either of the parties at the stage of final arguments of the present writ petitions or in the proceedings for interim protection. [Dhruv Krishan Maggu v. Union of India, 2021 SCC OnLine Del 241, decided on 08-01-2021]

Case BriefsTribunals/Commissions/Regulatory Bodies

Tamil Nadu Authority for Advance Ruling (TN AAR): The Coram of Manasa Gangotri Kata, Additional Commissioner and Thiru Kurinji Selvaan V.S., Joint Commissioner, held that DVD/CDs do not contain electronic versions of the journals but an executable software application and therefore do not fall under the explanation of “e-book”.

Applicant in the instant matter supplied printed law journals and DVD’s of the law journal.

Questions that arose for Advance Ruling:

  • Whether the assessee/dealer which publishes law journals in print and sells the same content that is in books in an electronic form in DVD’s/CD’s with a software to search and read it in computers and hand held devices come under the category of ‘E-book’, so that it can avail the benefit of notification dated 26-07-2018 in respect of E-book?
  • Whether the liability on the sale of DVD/pen drive which contains printed version of law citations can be adjusted against the ITC?
  • Whether the liability on the sale of e-book of printed versions of law citation can be adjusted against the available ITC?
  • Whether the balance of ITC after adjustment accrued on the purchase of paper and other material can be reversed while filing GSTR 9?

Applicant in its submissions mentioned that the Law Weekly were registered dealer under the erstwhile Tamil Nadu General Sales Tax Act and Tamil Nadu Value Added Tax Act.

Due to development in technology applicant supplies e-books of the printed version to their customers at their request.

On supply of printed books/journals, they have not collected any GST as it is exempt. However for the supply of DVDs/CDs and pen drives they paid GST at the tax rate of 18%  and subsequent to the issue of Notification 13/2018 Central Tax (rate) dated 26-07-2018 the applicant sought Advance Ruling on the applicability of the above said notification for the supply of the electronic form of DVDs/CDs supplied by them.

Analysis and Ruling

Bench found that DVD/CD & Dongle loaded with the ‘The Law Weekly’ desktop software is an optical media loaded with software and the licence to use the software during the subscription period is a supply of service made along with the principal supply of goods in the said ‘Composite Supply’.

The DVD/CD & Dongle being storage devices containing the software is the principal supply.

AAR expressed that ‘e-books’ are electronic version of a printed book falling under the tariff item 4901 and supplied online which can be read on a computer or a hand held device, while in the case at hand, the contents supplied in the form of DVD/CD is a software which is used to access content containing the judgments of various fora, case laws Act, etc. which provides for searching using a particular case number/period/act/court or a combination of the above.

DVD/CDs do not contain electronic versions of the journals but an executable software application and therefore do not fall under the explanation of ‘e-book’.

Initial supply of DVD/CD is the supply of goods and hence the Notification won’t be applicable.

Ruling

Hence, the supply of DVDs/CDs with ‘The Law Weekly Desktop’ software along with end user license and the supply of access to the on-line database on the applicant’s website are not eligible to avail the benefit of entry at SI. No. 22 of Notification No. 13/2018-C.T. (Rate) dated 26-07-2018.[Venbakkam Commandur Janardhanan Proprietor, Law Weekly Journal; Order No. 13/AAR/2020, decided on 27-02-2020]

Cabinet DecisionsLegislation Updates

The Cabinet Committee on Economic Affairs considered and approved the proposal of Department for Promotion of Industry and Internal Trade for Central Sector Scheme for Industrial Development of Jammu & Kashmir. The scheme is approved with a total outlay of Rs. 28,400 crore upto the year 2037.

Government of India has formulated the New Industrial Development Scheme for Jammu & Kashmir (J&K IDS, 2021) as a Central Sector Scheme for the development of Industries in the UT of Jammu & Kashmir. The main purpose of the scheme is to generate employment which directly leads to the socio-economic development of the area. Considering the historic development of reorganization of Jammu & Kashmir with effect from 31.10.2019 into UT of Jammu & Kashmir under the J&K Reorganisation Act, 2019, the present scheme is being implemented with the vision that industry and service-led development of J&K needs to be given a fresh thrust with emphasis on job creation, skill development and sustainable development by attracting new investment and nurturing the existing ones.

The following incentives would be available under the scheme:

  1. Capital Investment Incentive at the rate of 30% in Zone A and 50% in Zone B on investment made in Plant & Machinery (in manufacturing) or construction of the building and other durable physical assets(in service sector) is available. Units with investment upto Rs. 50 crore will be eligible to avail this incentive. Maximum limit of incentive is Rs 5 crore and Rs 7.5 crore in Zone A & Zone B respectively
  2. Capital Interest subvention: At the annual rate of 6% for maximum 7 years on loan amount up to Rs. 500 crore for investment in plant and machinery (in manufacturing) or construction of building and all other durable physical assets(in service sector).
  3. GST Linked Incentive: 300% of the eligible value of actual investment made in plant and machinery (in manufacturing) or construction in building and all other durable physical assets(in service sector) for 10 years. The amount of incentive in a financial year will not exceed one-tenth of the total eligible amount of incentive.
  4. Working Capital Interest Incentive: All existing units at the annual rate of 5% for maximum 5 years. Maximum limit of incentive is Rs 1 crore.

Key Features of the Scheme:

  1. Scheme is made attractive for both smaller and larger units. Smaller units with an investment in plant & machinery upto Rs. 50 crore will get a capital incentive upto Rs. 7.5 crore and get capital interest subvention at the rate of  6% for maximum 7 years
  2. The scheme aims to take industrial development to the block level in UT of J&K, which is first time in any Industrial Incentive Scheme of the Government of India and attempts for a more sustained and balanced industrial growth in the entire UT
  3. Scheme has been simplified on the lines of ease of doing business by bringing one major incentive- GST Linked Incentive- that will ensure less compliance burden without compromising on transparency.
  4. Scheme envisages greater role of the UT of J&K in registration and implementation of the scheme while having proper checks and balances by having an independent audit agency before the claims are approved
  5. It is not a reimbursement or refund of GST but gross GST is used to measure eligibility for industrial incentive to offset the disadvantages that the UT of J&K face
  6. Earlier schemes though offered a plethora of incentives. However, the overall financial outflow was much lesser than the new scheme.

Major Impact and employment generation potential:

  1. Scheme is to bring about radical transformation in the existing industrial ecosystem of J&K with emphasis on job creation, skill development and sustainable development by attracting new investment and nurturing the existing ones, thereby enabling J&K to compete nationally with other leading industrially developed States/UTs of the country.
  2. It is anticipated that the proposed scheme is likely to attract unprecedented investment and give direct and indirect employment to about 4.5 lakh persons. Additionally, because of the working capital interest subvention the scheme is likely to give indirect support to about 35,000 persons.

Expenditure involved:

The financial outlay of the proposed scheme is Rs.28,400 crore for the scheme period 2020-21 to 2036-37. So far, the amount disbursed under various special package schemes is Rs. 1,123.84 crore.


Cabinet Committee on Economic Affairs (CCEA)

[Press Release dt. 07-01-2020]

[Source: PIB]

Advance RulingsCase Briefs

Authority for Advance Ruling, GST: A Division Bench of Dr Ravi Prasad M.P. (Additional Commissioner of Commercial Taxes) and MashhoodUr Rehman Farooqui (Joint Commissioner of Central Tax) addressed whether the input tax credit can be availed on the distribution of promotional products to distributors/dealer’s showrooms for the purpose of marketing the products and promoting the brand.

In the instant application, it has been stated that the applicant was engaged in the manufacture, distribution and marketing of Knitted and Woven Garments under the brand name of “Jockey”, swimwears and swimming equipment’s under the brand name “SPEEDO”.

Applicant sought advance ruling on the classification of goods and services as under:

“Whether in the facts and circumstances of the case, the promotional products/materials and Marketing Items used by the applicant in promoting their brand and marketing their products can be considered as “inputs” as defined under Section 2(59) of the CGST Act, 2017 and GST paid on the same can be availed as input tax credit in terms of Section 16 of the CGST Act, 2017?”

Applicant submitted that as per Section 16 of the CGST Act, every registered person subject to terms and conditions specified in Section 49 of CGST Act is entitled to avail the same as “Input Tax Credit” the GST paid by him on the supply of goods or service to him, which are used or intended to be used in the cause or in furtherance of his business and same will be transferred to his electronic credit ledger.

Adding to the above submissions, the applicant stated that promotional/marketing items using by them at point of purchase i.e. showrooms or to their distributor/dealer’s showrooms is to promote their brands and made known the range of products manufactured by them.

The said promotional/marketing items are distributed for free by the applicant to promote their brand, hence the same cannot be construed as “gift” and made applicable Section 17(5)(h) of CGST Act.

Applicant add that in respect of the promotional/marketing items to their own showrooms there was neither “supply” nor there was “gift” and hence applying the provisions of Section 17(5)(h) of CGST Act, 2017 and apportioning the input tax credit should not arise.

Analysis and Decision

Promotional/marketing items sent to showrooms and to distributor/dealer’s showrooms to use in promoting their brands and market their products will amount to use of said goods in business or furtherance of the applicant’s busniess. Therefore, the same would qualify as “input” in terms of Section 2(59) of CGST Act, 2017 and GST paid on the same is entitle to avail as “input tax credit” in terms of Section 16 of CGST Act, 2017.

Bench noted that the goods were not transferred out of the accounts of the applicant and remained in the accounts of the applicant as assets, which were returnable items but the applicant did not show any proof of the said being returned to the applicant and disposed at the end of the period of usage.

In light of the above-stated scenarios, the applicant uses the goods till the goods are usable for the promotion of his business and claims depreciation on the same.

In the applicant’s opinion, the above-stated goods are covered under “input”.

AAR expressed that,

Since the ownership of the material is being retained by the applicant, they could be treated as capital goods hence needs to be capitalized in his books of accounts. The said cannot be treated as “input” since the said term excludes capital goods.

Whether input tax credit can be availed on the capital goods?

Section 16 of the GST Act provides for the eligibility for taking/availing input tax credit.

Since the applicant used or intended to use the goods and services procured in the course or furtherance of business, the applicant was entitled to take the input tax credit, subject to other provisions of the Act and hence there was no blockage attributable to Section 17(1) as the applicant used the goods in the course or furtherance of business.

Ruling

  • ITC on GST paid on procurement of the “distributable” products which are distributed to the distributors, franchisees is allowed as the said distribution amount to supply to related parties. The said distribution to the retailers for their use cannot be claimed as gifts to the retailers or to their customers free of cost and hence ITC of GST paid on such procurement is not allowed as per Section 17(5) of the GST Acts.
  • GST paid on the procurement of “non-distributable” products qualify as capital goods and not as “inputs” and the applicant is eligible to claim input tax credit on their procurement, but in case if they are disposed of by writing off or destroyed or lost, then the same needs to be reversed under Section 16 of CGST Act, 2017 read with Rule 43 of the CGST Rules, 2017.

[Page Industries Ltd., In Re., 2020 SCC OnLine Kar AAR-GST 7, decided on 15-12-2020]

Case BriefsTribunals/Commissions/Regulatory Bodies

West Bengal Authority for Advance Ruling, Goods and Services Tax: The Bench of Susmita Bhattacharya (Joint Commissioner, CGST & CX) and Parthasarathi Dey (Senior Joint Commissioner, SGST), held that no GST will be applicable on composite supply of crushing the food grains belonging to the State Government and delivery of the crushed grains will be exempted as provided the proportion of the packing materials in the composite supply in value terms does not exceed 25%.

The applicant intends to supply to the State Government the service of crushing food grains. The processed food grain will be used for distribution through the Public Distribution System. 

Applicant sought a ruling whether the above-stated activity would be exempted under Sl No. 3 or 3A of Notification No 1212017 CT (Rate) dated 28-06-2017 (corresponding State Notification No. 1136 – FT dated 28-O6-2017), as amended (hereinafter collectively called the Exemption Notification).

Applicant was unregistered under the GST Act.

Observations & Findings 

ln Circular No. 5112512018-GST dated 31-07-2018 the Central Government clarified that the service tax exemption under Sl No. 25(a) of Notification No. 2512012 dated 20-06-2012 has been substantially, although not in the same form, continued under GST vide Sl No. 3 and 34 of the Exemption Notification. Sl No. 25(a) of the ST notification under the Service Tax exempts “services provided to the Government, a local authority or a governmental authority by way of water supply, public health, sanitation, conservancy, solid waste management or slum improvement and up-gradation.”

“…under the GST the ambit has been broadened to include any such functions that are performed by a Panchayat or a Municipality under specific provisions of the Constitution. These functions are in the nature of public welfare service that the governments on their own, and sometimes through governmental authorities/entities, do provide to the citizens. When the activity is in relation to any such function, the supply to the governments or governmental authorities/entities or local authorities is exempt from paying GST.”

Hence, in view of the above, applicant’s eligibility under the above-stated SI No. 3 or 3A will have to be examined under three aspects:

  • whether the supply being made is pure service or a composite supply, where supply of goods does not exceed more than 25% of the value of the supply
  • whether the recipient is government, local authority, governmental authority or a government entity, and
  • whether the supply is being made in relation to any function entrusted to a Panchayat or a Municipality, as clarified in the above paragraphs.

Bench observed that the applicant is making the supply of a bundle consisting of the service of crushing the grains and supply of materials required to pack the crushed grains, where the former is the predominant supply. They are supplied in conjunction with each other in the ordinary course of business as food grain cannot be transported without proper packing.

Therefore, the above activity is a composite supply of goods and services where service of crushing food grains is the principal supply and providing packing materials is ancillary to it.

Ruling

In view of the above discussion, it was held that if the applicant’s agreement with the State Government binds both the supplier and the recipient in such a way that neither can divert the food grains to any use other than distribution through PDS, the Applicant’s composite supply of crushing the food grains belonging to the State Government and delivery of the crushed grains will be exempt under Sl No. 3A of Notification No 1212017 CT (Rate) dated 28-06-2017 (corresponding State Notification No. 1136 – FT dated 28-06-2017), as amended, provided the proportion of the packing materials in the composite supply in value terms does not exceed 25%.[Sakshi Jhajharia, In re., 2020 SCC OnLine WB AAR-GST 9, decided on 10-02-2020]

Case BriefsSupreme Court

Supreme Court: The 3-judge bench of Ashok Bhushan*, R. Subhash Reddy and MR Shah, JJ has held that while determining the taxable value of lottery the prize money is not to be excluded for the purpose of levy of GST.

The Court explained that for determining the value of the lottery, there is statutory provision contained in Section 15 read with Rule 31A. Section 15 of the Central Goods and Services Tax Act, 2017 by sub-section (2) provides what shall be included in the value of supply. What can be included in the value is enumerated in sub-clause (a) to (e) of sub-section (2) of Section 15. Further, subsection (3) of Section 15 provides that what shall not be included in the value of the supply.

“What is the value of taxable supply is subject to the statutory provision which clearly regulates, which provision has to be given its full effect and something which is not required to be excluded in the value of taxable supply cannot be added by judicial interpretation.”

Further, Rule 31A as noted above, sub-rule (2) as amended clearly provides that value of supply shall be deemed to be 100/128 of the face value of ticket or of the prize as notified in the Official Gazette by the Organising State, whichever is higher.

The Court said that the value of taxable supply is a matter of statutory regulation and when the value is to be transaction value which is to be determined as per Section 15 it is not permissible to compute the value of taxable supply by excluding prize which has been contemplated in the statutory scheme. It was hence, held that

“When prize paid by the distributor/agent is not contemplated to be excluded from the value of taxable supply, we are not persuaded to accept the submission of the petitioner that prize money should be excluded for computing the taxable value of supply.”

[Skill Lotto Solutions v. Union of India, 2020 SCC OnLine SC 990, decided on 03.12.2020]


*Justice Ashok Bhushan has penned this judgment

For petitioner: Senior Advocate Ravindra Shrivastava,

For Union of India: Additional Solicitor General Vikramjit Banerjee

For Intervenor: Senior Advocate C.A. Sundaram

Also read: Supreme Court upholds constitutionality of imposition of GST on lotteries, betting and gambling 

Case BriefsSupreme Court

Supreme Court: The 3-judge bench of Ashok Bhushan, R. Subhash Reddy and MR Shah, JJ has upheld the constitutionality of imposition of GST on lotteries, betting and gambling.

Here are the key takeaways from the judgment: 

Whether the inclusion of actionable claim in the definition of goods as given in Section 2(52) of Central Goods and Services Tax Act, 2017 is contrary to the legal meaning of goods and unconstitutional?

The inclusion of actionable claim in definition “goods” as given in Section 2(52) of Central Goods and Services Tax Act, 2017 is not contrary to the legal meaning of goods nor it is in conflict with the definition of goods given under Article 366(12).

“The Constitution framers were well aware of the definition of goods as occurring in the Sale of Goods Act, 1930 when the Constitution was enforced. By providing an inclusive definition of goods in Article 366(12), the Constitution framers never intended to give any restrictive meaning of goods.”

Parliament by the  Constitution (One Hundred and First Amendment) Act, 2016 inserted Article 246A, a special provision with respect to goods and services tax in which special power has to be liberally construed empowering the Parliament to make laws with respect to goods and services tax. Article 246A begins with non obstante clause that is “Notwithstanding anything contained in Articles 246 and 254”, which confers very wide power to make laws. When the Parliament has been conferred power to make law with respect to goods and services, the legislative power of the Parliament is plenary.

“The power to make laws as conferred by Article 246A fully empowers the Parliament to make laws with respect to goods and services tax and expansive definition of goods given in Section 2(52) cannot be said to be not in accord with the constitutional provisions.”

Whether the Constitution Bench’s observation ‘lottery is an actionable claim’ in Sunrise Associates v. Govt. of NCT of Delhi, (2006) 5 SCC 603 a law or obiter dicta?

The definition of goods in Section 2(j) as noticed by the Constitution Bench states that ‘goods’ means all kinds of movable property (other than newspaper, actionable claims, stocks, shares and securities). The exclusion of the actionable claims from the goods as enumerated in the definition is also a part of the definition.

“If a particular item is covered by exclusion it is obvious that it does not fall in the definition of the goods. When the Constitution Bench came to the conclusion that the lottery is an actionable claim it was considering the definition of 2(j) itself and what has been held by the Constitution Bench cannot be held to be obiter dicta.”

The Constitution Bench in Sunrise Associates has categorically held that lottery is actionable claim after due consideration which is ratio of the judgment. The expansion of definition of goods under Section 2(52) of Act, 2017 by including actionable claim is in the line with the Constitution Bench pronouncement in Sunrise Associates and no exception can be taken to the definition of the goods as occurring in Section 2(52).

Whether exclusion of lottery, betting and gambling from Item No.6 Schedule III of Central Goods and Services Tax Act, 2017 is hostile discrimination and violative of Article 14 of the Constitution of India?

The Constitution Bench in State of Bombay Vs. R.M.D. Chamarbaugwala, AIR 1957 SC 699 has clearly stated that Constitution makers who set up an ideal welfare State have never intended to elevate betting and gambling on the level of country’s trade or business or commerce.

Lottery, betting and gambling are well known concepts and have been in practice in this country since before independence and were regulated and taxed by different legislations. When Act, 2017 defined the goods to include actionable claims and included only three categories of actionable claims, i.e., lottery, betting and gambling for purposes of levy of GST, it cannot be said that there was no rationale for including these three actionable claims for tax purposes.

“It is a duty of the State to strive to promote the welfare of the people by securing and protecting, as effectively as it may, a social order in which justice, social, economic and political, shall inform all the institutions of the national life.”

Hence, there is no violation of Article 14 in Item No. 6 of Schedule III of the Act, 2017.

Whether while determining the face value of the lottery tickets for levy of GST, prize money is to be excluded? 

Read here 

[Skill Lotto Solutions v. Union of India, 2020 SCC OnLine SC 990, decided on 03.12.2020]


*Justice Ashok Bhushan has penned this judgment

For petitioner: Senior Advocate Ravindra Shrivastava,

For Union of India: Additional Solicitor General Vikramjit Banerjee

For Intervenor: Senior Advocate C.A. Sundaram

 

Also read: GST on lotteries| Prize money not to be excluded for computing the taxable value of supply, holds SC

Advance RulingsCase Briefs

Himachal Pradesh, Authority for Advance Rulings: The Division Bench of Rakesh Sharma, Additional Commissioner of State Taxes and Excise, Member (State Tax) and Abhay Gupta, Joint Commissioner of Central Tax, Member (Central Tax) held that input tax credit cannot be claimed for GST paid on hiring commercially licensed vehicles for transportation of employees if the service of providing the facility of transportation of employees is not obligatory under any law.

In the instant application, the applicant is a public service broadcaster, taxpayer availed services of hiring taxis for different purposes, such as:

  • To pick up/drop shift duty-staff in odd hours.
  • This facility is being provided in odd hours to lady-employees, handicapped & general employees.
  • Taxis are hired for tour/OB recordings, etc. within the State of Himachal Pradesh on different occasions.
  • Taxis are also hired to drop shift staff at High Power Transmitter during morning/evening & for office work during day time.

Question raised by the applicant was:

Whether input tax credit was available to the applicant on the services availed for the aforementioned items through contractors and what rate of GST will be applicable on the same?

Findings of the Authority

Bench noted that the applicant was a registered taxpayer and entered into an agreement for hiring commercially licensed vehicles for transportation of his employees.

As per Section 16 of the CGST/HPGST Act, 2017, every registered person shall be entitled to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business.

Availability of ITC as per the provision of the second proviso to Section 17(5)b is available only on the condition that such goods or service or both is obligatory for an employer to provide to its employees under any law for the time being in force.

Bench stated that since the applicant had not been able to cite any law under which the service of providing the facility of transportation to his employees was obligatory, hence ITC will not be available to him.

Conclusion

  • As per Notification No. 20/2017 dated 22-08-2017, the applicable tax rate on renting of Cabs is 5% with limited ITC and 12% with full ITC.
  • If the facility provided by a taxpayer for transportation of employees is not obligatory under any law, for the time being in force then no ITC will be available to such a taxpayer. The applicant will, however, be eligible to claim ITC for the service supplied at 12% GST Rate if the conditions laid down in the second proviso to Section 17(5) b are satisfied. [Prasar Bharti Broadcasting Corpn. of India (All India Radio), In Re., decided on 24-02-2020]
Legislation UpdatesNotifications

The Government has been receiving a number of representations regarding the need to extend due date for filing Annual Return (FORM GSTR-9) and Reconciliation Statement (FORM GSTR-9C) for 2018-19 on the grounds that on account of the COVID-19 pandemic related lockdown and restrictions, normal operation of businesses have still not been possible in several parts of the country. It has been requested that the due dates for the same be extended beyond 31st October 2020 to enable the businesses and auditors to comply in this regard.

In view of the same, on the recommendations of the GST Council, it has been decided to extend the due date for filing Annual Return (FORM GSTR-9/GSTR-9A) and Reconciliation Statement (FORM GSTR-9C) for Financial Year 2018-19 from 31st October 2020 to 31st December, 2020. Notifications to give effect to this decision would follow.

It may be noted that filing of Annual Return (FORM GSTR-9/ GSTR-9A) for 2018-19 is optional for taxpayers who had aggregate turnover below Rs. 2 crore. The filing of reconciliation Statement in FORM 9C for 2018-19 is also optional for the taxpayers having aggregate turnover upto Rs. 5 crore.


Ministry of Finance

[Press Release dt. 24-10-2020]

Case BriefsHigh Courts

Madras High Court: G.R. Swaminathan, J., directed the confiscated goods to be released on a provisional basis noting the delay on the part of Authorities in the adjudication of the matter.

Petitioner a dealer registered under the Goods and Services Tax Act who imports toys from China. It also purchases goods from Delhi-based dealers.

Dealer’s Stand

Dealer’s state that the returns till March 2020 have been filed and there are no arrears. Due to the lockdown restrictions amidst the pandemic, the business was shut down since April, 2020.

Following the partial lifting of restrictions, the petitioner reopened the business. Superintendent, CGST conducted a search at the petitioner’s place of business.

After the search operation, mahazar was drawn which was followed by a seizure order.

The said orders of seizure and prohibition issued by respondent 3 have been put to a challenge.

Analysis & Decision

Bench while addressing and analysing the issue, stated that,

Lord Atkin in his celebrated dissent in Liversidge v. Anderson, (1942) AC 206, proclaimed that laws speak the same language in war as in peace and that the words have only one meaning.

Likewise, laws speak the same language during normal as well as in pandemic times.

“…contemporary imperatives demand that courts, whenever possible, ought to adopt that approach which will kick- start the economy.”

Court also referred to Section 67 (1) and (2) of the Central Goods and Services Tax Act, 2017 which talks about the Power of inspection, search and seizure.

Supreme Court in ITO v. Lakhmani Mewal Das, (1976) 3 SCC 757, held that 

“…the existence of the belief can be challenged by the assessee but not the sufficiency of reasons for the belief. The expression “reason to believe” does not mean a purely subjective satisfaction on the part of the officer. It must be held in good faith. It cannot be merely a pretence. It is open to the Court to examine whether the reasons for the formation of the belief have a rational connection with or a relevant bearing on the formation of the belief and are not extraneous or irrelevant for the purpose of the section.”

Evading GST

In the present matter, the impugned proceedings were initiated based on the intelligence developed by CGST (HPU), Madurai that the petitioner is evading GST by mis-declaring the goods while importing.

It has been shown that the stock register was not maintained at the petitioner’s place of business, hence the Court doesn’t want to quash the seizure order, through the order of prohibition has to be necessarily interfered with.

No show-cause notice to date after the lapse of 40 days was issued.

In view of the above, Court stated that the respondent may not be in a hurry, they can afford to wait. Officials who get their salaries in the first week of every month may not be conscious of the cost of delays in such cases.

Further, the Court added that Adjudication proceedings may go on for months. That is why the statute provides for the provisional release of the detained goods.

Therefore, the Court directed the respondents to release the goods on a provisional basis and on taking a personal bond with a payment of Rs 2 lakhs.

While parting with its decision, Bench stated in regard to the Chinese products that,

“…general market is flooded with Chinese goods. The public must make a conscious choice to encourage swadeshi products.”

“The Indian entrepreneur must rise to the occasion. He must ask himself as to why the chinese products are preferred and he must come out with alternatives. There must be no compromise in quality. At the same time, the price factor should also be borne in mind.”

Petition was partly allowed in the above terms. [Tvl.Rising International Co. v. Commr. of Central GST and Central Excise,  2020 SCC OnLine Mad 2951, decided on 06-10-2020]

Advance RulingsCase Briefs

Punjab Authority for Advance Ruling: Navdeep Bhinder (Member, SGST) and Parul Garg (Member, CGST) addressed the following issue:

Whether the parking lot services provided by the Contractor appointed by the Market Committee, which is a Government Authority is exempt under Notification 12 of 2017 as the parking lot activity is covered under Article 243 of the Constitution of India?

Applicant was appointed as a contractor for providing parking lot services at the place of the market committee at Jalandhar.

Further, the applicant stated that,

“Market Committee” is a Government Authority as per the definition of Government Authority provided in the clause (zf) of the notes appended to Notification No. 12/2017 as it is established by the State Government and the services provided by the Governmental Authority by way of any activity in relation to any function entrusted to a municipality under Article 243W of the Constitution is NIL rated service under Notification No. 12/2017-Central Tax (Rate).

Adding to the above, the applicant stated that whenever the market committee provides parking lot services directly the same is exempt and whenever it provides through an agent the same is taxable.

Analysis

Bench at first examined whether the Market Committee is a Government Authority or not and it was observed that the Market Committee (Mandi Board) does not fall under the definition of the local authority.

A definition has to be read in its fulfillment and not in parts or out of context to suit a particular purpose.

Market Committees are service rendering agencies and their main source of income is the market fee. Mandi board is not established by the State Government for providing Parking Lot services to the people.

On perusal of the agreement between the applicant and the Mandi Board, it was established that the applicant had been appointed as a Contractor for providing parking lot services and the applicant would have recovered the said amount by charging the vehicles entering the market committee.

Hence the Market Committee was to earn revenue from the persons entering the parking area.

It has been consistently held that any statutory authority which works on business principles, the fees collected by it cannot be considered as statutory fee.

Only in case where the fee is collected towards sovereign functions and deposited with Government revenue qualify to be outside the levy of any tax.

Parking fees collected by the applicant are not in the nature of statutory fees.

Therefore, the Authority held that the parking lot services provided by the contractor appointed by the Market Committee, are not exempt under Notification No. 12/2017 as the Market Committee is not a Government Authority as per the definition in clause 2(zf) of the notes appended to Notification 12/2017.

The said activity/services of parking provided by the applicant fall under Heading 9967 and attract GST @18% (CGST 95 + SGST 9%).[Pushpa Rani Pabbi, In Re., AAR/GST/PB/011, decided on 06-09-2019]

Advance RulingsCase Briefs

Authority for Advance Ruling, Madhya Pradesh (AAR): A Division Bench of Virendra Kumar Jain Choubey and Manoj Kumar, Members, examined the classification of Fried Fryums of different shapes, sizes and varieties which are ready to eat and in regard to the HSN Code and GST rate applicable on such goods manufactured.

Applicant through the present application sought correct classification of ‘Papad’ and ‘Papad Fryums’ of different shapes, sizes and varieties (commonly known as Fried Fryums). The applicant is involved in the activity of manufacturing and selling of the said ready-to-eat product.

Further, at the time of the hearing, the applicant reframed the question as follows:

What is the correct classification of Fried fryums of different shapes, sizes and varieties which are ready to eat and What is the HSN Code and GST rate applicable on such goods manufactured?

The officer concerned stated that the Fried Fryums will be classified under Tariff 2016 90.

Decision & Analysis

Bench noted that the main issue is with regard to the classification of Fried Fryums and the GST rate applicable to it.

As the applicant tried to equate Fried Fryums with Papad, it is important to know what ‘Papad’ is:

Papad as such has not been defined under Customs Tariff Act, 1975, GST Act or the Notification issued under the CGST Act, 2017/MGGST Act, 2017.

As per the settled principle of interpretation of statute, word not defined in the statute must be construed in its popular sense, the sense which people conversant with the subject matter with which the statute is dealing would attribute to it.

Observation

Fried Fryums are eatable and used as food articles or eatables and such fried, salted Fryums are found to be commonly known and used as ‘Namkin’ ‘papad’ even after roasting or frying are known and used as ‘Papad’ only.

Whereas, in commercial or trade parlance also, the ‘Fried Fryums’ cannot be said to be known as ‘Papad’.

Hence, Fried Fryums cannot be equated with ‘Papad’.

Authority ruled that Fried Fryums will be classified under Tariff Item No. 2106 90 99 and GST Rate of 18% (CGST 9% or IGST 18%) will be applicable to the said product. [Alisha Foods, In Re., 2019 SCC OnLine MP AAR-GST 91, decided on 28-11-2019]

Advance RulingsCase Briefs

West Bengal Authority for Advance Ruling, GST (WB AAR): A Division Bench of Susmita Bhattacharya and Parthasarathi Dey (Members) while addressing the present application with regard to the applicability of GST on “assignment of leasehold right” held that,

The activity of assignment is in the nature of agreeing to transfer one’s leasehold rights. It does not amount to further sub-leasing, as the applicant’s rights as per the Deed of sub-lease stands extinguished after assignment. Neither does it create fresh benefit from the land. It is in the nature of compensation for agreeing to do the transfer of the applicant’s rights in favour of the assignee. It is a service classifiable under “Other miscellaneous service‟ (SAC 999792) and taxable @ 18%.

National Company Law Tribunal, Kolkata Bench admitted the applicant as the corporate debtor and passed an order under Section 33 of the Insolvency and Bankruptcy Code, 2016 to start the process of liquidating the corporate debtor.

One of the assets under liquidation is the leasehold property unit along with care parking space (Demised Premises). West Bengal Industrial Development Corporation Ltd. granted the applicant possession of the Demised Premised for 99 years under a registered deed.

Applicant submitted that according to clause 12.28 of the deed, applicant, after the expiry of at least five years from the date of the Deed coming into force, is entitled to assign to another person the unexpired residual period of the sub-lease after taking written approval of the sub-lessor and on payment of transfer fee, being 10% of the prevailing market value of the property as assessed by the Registering Authority of the State Government.

Question for consideration:

Liquidator raised the question as to whether GST is payable on the consideration receivable on such assignment. If so, what should be the SAC and the rate applicable? He also seeks clarity on whether he can claim input tax credit for the GST paid on the transfer fee.

Officer Concerned from the Revenue submitted that the assigning of the sub-lease is a service classifiable under the heading “Other Miscellaneous Services‟ (SAC 99979) and taxed accordingly.

Observations of the Authority

Scope of supply under Section 7 (1) of the GST Act includes all forms of supply of goods and services, including a sale, transfer, barter, exchange, license, rental, lease or disposal made or agreed to be made.

Bench noted that the benefits arising from land in the forms specified in paragraph 2 of Schedule II are not to be treated as transactions in immovable property but as the supply of service for the purpose of the GST Act.

Deed | Service Contract of Lease

Authority stated that the Deed confers upon the applicant no better title to the Demised Premises other than a service contract of lease.

Applicant can only transfer to the assignee his right to receive the service of the lease for the unexpired period after obtaining prior approval of the Sub-lessor on payment of the transfer fee.

Conditional Possession

Hence, it is clear that the applicant, apart from the conditional possession of the Demised Premises, enjoys no title or ownership, which is central to the sale of any immovable property within the meaning of Section 54 of the Transfer of Property Act, 1882.

Therefore, the assignment does not amount to transfer of any benefit other than leasehold rights in terms of the Deed for the unexpired period of the lease and is no transfer of any immovable property in the context of the GST Act.

Thus, the activity of assignment of leasehold right is a service classifiable under ‘Other miscellaneous service‟ (SAC 999792) and taxable @ 18% under Sl No. 35 of Notification No. 11/2017 – CT (Rate) dated 28/06/2017 (State Notification No. 1135- FT dated 28/06/2017), as amended from time to time.

Further, the transfer fee charged by the Sub-lessor is in the nature of a consideration for tolerating an act that the applicant is otherwise refrained from doing in terms of clause 12.28 of the Deed. It is also a service classifiable under “Other miscellaneous service‟ (SAC 999794) and taxable @ 18% under Sl No. 35 of the Rate Notification.[Enfield Apparels Ltd. In Re., 2020 SCC OnLine WB AAR-GST 7, decided on 10-08-2020]

Advance RulingsCase Briefs

West Bengal Authority for Advance Ruling, GST (WB AAR): A Division Bench of Susmita Bhattacharya, Joint Commissioner, CGST & CX and Parthasarathi Dey, Additional Commissioner, SGST, addressed the question with regard to classification of a three-wheeler battery operated vehicle.

In the present application, the applicant is a manufacturer of “three-wheeled motor vehicles”  commonly known as “Toto”.

Question raised in the present application

Whether the stated three-wheeled vehicle is classifiable as an ‘electronically operated motor vehicle’ under HSN 8703 when supplied with a battery pack?

Another question raised by the applicant is the classification of the stated vehicle if supplied without the battery pack.

Observations of the Advance Authority Ruling:

The goods supplied by the applicant have been described as electronically operated three-wheeled vehicles. It is an e-rickshaw as defined in the Section 2A (2) of the Motor Vehicles Act, 1988.

The Authority notes that, a combined reading of the provisions of Section 2A (2) of the MV Act and Entry No. 242A of Schedule I of the Rate Notification establishes that the battery pack is an essential character of an e-rickshaw.

If the battery pack is withdrawn, it will no longer be a three-wheeled electrically operated vehicle.

Heading 8703 of First Schedule of Customs Tariff Act, 1975

Further, Motor vehicles for carrying less than ten passengers are classified under Heading 8703 of the First Schedule of the Customs Tariff Act, 1975, which is adopted in the GST Act for classification.

Sub-heading 8703 10 covers the vehicles specially designed for travelling on snow, golf cars and similar vehicles.

Adding to the above, it has been stated by the AAR that all other sub-headings except the residual subheading 8703 90, refer to vehicles fitted with an internal combustion engine.

E- rickshaws or electrically operated three-wheeled vehicles are, therefore, classifiable under Tariff heading 8703 90 10 of the Tariff Act.

Hence, a three-wheeled motor vehicle is classifiable under HSN 8703 as an electrically operated vehicle, provided it is fitted with the battery pack. Otherwise, it will be classifiable under HSN 8706. [Hooghly Motors Pvt Ltd., In Re., 2020 SCC OnLine WB AAR-GST 8, decided on 10-08-2020]