Legislation UpdatesRules & Regulations

On October 06, 2021, the Department of Finance, Goa has issued the Goa Goods and Services Tax (Eighth Amendment) Rules, 2021 to further amend the Goa Goods and Services Tax Rules, 2017.

Key amendments:

  • In Rule 10A which specifies “Composition levy”, the following proviso has been inserted, namely: –

“Provided that in case of a proprietorship concern, the Permanent Account Number of the proprietor shall also be linked with the Aadhaar number of the proprietor”.

  • In Rule 10B which specifies “Aadhaar authentication for registered person”, has been inserted.

The registered person, other than a person notified under sub-section (6D) of section 25, who has been issued a certificate of registration under rule 10 shall, undergo authentication of the Aadhaar number of the proprietor, in case of proprietorship firm, or of any partner, in case of any partnership firm, or of the Karta, in case of any undivided family, or of the Karta, in case of any Hindu undivided family, or of the Managing Director or any whole time director  in case of any company, or of any members of Managing Committee of an Association of Persons or body of individuals or a Society or of the Trustees in the Board of Trustees, in case of a Trust and of the authorised signatory in order to eligible.

  • Rule 89(1A) has been inserted.

“Any person, claiming refund under section 77 of the Act of any tax paid by him, in respect of a transaction considered by him to be an intra-State supply, which is subsequently held to be an inter-State supply, may, before the expiry of a period of two years from the date of payment of the tax on the interState supply, file an application electronically in FORM GST RFD-01 through the common portal, either directly or through a Facilitation Centre notified by the Commissioner”.

  • Rule 96(c) has been inserted.

“the applicant has undergone Aadhaar authentication in the manner provided in rule 10B”.

  • In Rule 96C which specifies “Bank Account for credit of refund”, has been inserted.

Bank Account for credit of refund: For the purposes of sub-rule (3)  of rule 91, sub rule (4) of rule 92 and rule 94, “bank account” shall mean such bank account of the applicant which is in the name of applicant and obtained on his Permanent Account Number:

Provided that in case of proprietorship concern, the Permanent Account Number of the proprietor shall also be linked with the Aadhar Number of the proprietor.

Advance RulingsCase Briefs

Rajasthan Authority for Advance Ruling, GST: Bench of J.P. Meena (Member Central Tax) and M.S. Kavia (State Tax)  determined whether supplying of coaching services along with supply of goods/printed material/test papers, uniforms, bags and other goods to students shall be considered a supply of goods or supply of services.

Questions for consideration:

  • Applicant supplied services of coaching to students which also included along with coaching, supply of goods/printed material/test papers, uniform, bags and other goods to students. Such supplies were not charged separately but a consolidated amount was charged. The major component of which was imparting of coaching. In such circumstances, whether such supply shall be considered, a supply goods or a supply of services?
  • If the answer to the aforementioned first question is supply of service, whether such supply shall be considered as composite supply? If yes, what shall be the principal supply?
  • Applicant provides coaching service under a business model through Network Partners as per sample agreement attached, containing obligations of Applicant and Network partners. Accordingly, the network partner provides the services to the students on behalf of Applicant. In such a case, who shall be considered as supplier of service and recipient of service under the agreement?
  • Subject to the above question, what shall be the value of service provided by Applicant to students and by network partner to Applicant?
  • Whether both, Applicant and network partner can avail eligible ITC for their respective supplies?

Findings, Analysis & Conclusion

In the instant case, the applicant was providing coaching service to its enrolled students for consideration which will be a lump sum amount for both goods and services.

Therefore, transaction of supply of coaching service for consideration falls under the ambit of “Supply of Service”.

As the supply involves multiple services and goods, the issue has to be examined whether the said supply is s Composite Supply or a Mixed Supply.

In the present case there is a principal supply of goods or services which constitutes the predominant element of a composite supply. Classification of this composite supply as goods or service would depend on which Supply is the principal supply which is also to be determined on the basis of facts and circumstances of the present case.

Therefore, in the instant case, the applicant along with coaching services provided goods in the form of uniforms, bags, study material etc.

Supply of goods is a part of supply of service shall qualify as composite supply’. The principal supply being the supply of coaching service to the students, tax on such supply shall be levied accordingly.

Further, the AAR also observed that where services are provided by the applicant to the students. students shall be regarded as recipient as consideration is payable for the supply of goods or services or both by the students to the applicant. Similarly. Network partner will be regarded as a provider of service to the applicant

Bench also noted that, the values of goods are part of the value of services provided by the applicant and charged a consolidated amount to the students. Therefore, the consolidated value for which tax invoice is issued shall be the taxable value.

As per Section 16(1) of the CGST Act, Every registered person shall, subject to such conditions and restrictions as may be prescribed and in the manner specified in section 49, been titled 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 and the said amount shall be credited to the electronic credit ledger of such person.

Hence, in the present matter, applicant was a registered person and could avail eligible ITC as per provisions of GST Act.

Ruling

Pointwise conclusion:

  • Supply by the applicant will be considered “Supply of Service”.
  • The ‘supply’ stated above shall be considered as Composite Supply, and Coaching Service shall be principal supply.
  • Applicant will be service provider to the students and Network partner will be service provider to the applicant.
  • Total consolidated amount charged for which Tax invoice generated by the applicant will be the value of service supply by the applicant.
  • Applicant can avail eligible ITC as per provisions of GST Act, 2017.

[Symmetric Infrastructure (P) Ltd., In re.; Raj/AAR/2021-22/09; decided on 2-09-2021]


Advocate before the AAR:

Present for the applicant: Sanjiv Agrawal

Advance RulingsCase Briefs

Gujarat Authority for Advance Ruling, GST: Addressing the matter with regard to purchase of scrap/used vehicles by composition dealer from unregistered dealer, Division Bench of Sanjay Saxena and Arun Richard (Members) held that, in the said circumstance, no Reverse Charge Mechanism liability will be there.

Applicant sought Advance Ruling on the following questions:

  • Can Composition Dealer Purchase Scrap/Used vehicles from Unregistered Dealers? RCM on these purchases applicable or not?
  • Any Reverse Charge Mechanism exemption limit amount from purchase of Scrap and used vehicles from unregistered dealers?

Findings

Bench stated that in view of Section 9(3) of the CGST Act, Government may specify the categories of supply of goods or service or both on which the tax shall be paid on reverse charge mechanism by the recipient.

Vide Section 9(4) of the CGST Act, Government may specify a class of registered persons who shall, in respect of supply of specified categories goods or services or both received from an unregistered supplier, pay the tax on reverse charge basis as the recipient of such supply of goods or services or both.

Notification No.7/2019-Central Tax (Rate) dated 29-3-19 notifies that the specified registered persons shall, in respect of supply of goods or services or both, received from an unregistered supplier shall pay tax on reverse charge basis as recipient of such goods or services or both. However, subject goods are not notified vide said Notification 7/2019-CT(R).

Ruling

Composition Dealer purchasing Scrap/Used vehicles from the following Suppliers, namely: Central Government, State Government, Union Territory or a local authority are liable to pay tax on RCM basis.

No RCM tax liability for purchase of subject goods from unregistered dealers.[Ahmedraza Abdulwahid Munshi (Nadim Scrap), In Re., GUJ/GAAR/R/18/2021, decided on 30-06-2021]


Advocate before the AAR:

For the applicant: Shabbir Motiwala, Consultant

Advance RulingsCase Briefs

Gujarat Authority for Advance Ruling, (GST): Emphasizing that ‘Paratha’ is not ready-to-cook products, the Bench of Sanjay Saxena and Arun Richard (Members) held that GST rate of 18% will be applicable.

Applicant submitted that they were producing ‘Paratha’, a flat and thick piece of unleavened bread eaten like a Roti or Chapati. Several varieties of Paratha were being produced but the principal ingredient was whole wheat flour.

The word ‘Paratha’ is not defined under GST. It is a common eatable used all throughout the country and also in some foreign countries and therefore the dictionary meaning and the common parlance understanding of the product would be relevant for considering the nature of the product and its classification under GST Tariff.

Applicant submitted that Chapter 19 covers ‘Preparations of cereals, flour, starch or milk, pastrycooks’ products’. Though the broad heading of a Chapter is not a determining factor for classification, it is clear from the general description of Chapter 19 that preparations of flour are covered thereunder and Heading 1905 covers various eatables including ‘bread’ and various explanatory notes are given about the scope and coverage of this classification code.

It was also clarified under HSN explanatory notes that heading includes ‘Unleavened bread’; that it is also clarified under part(A) of Explanatory notes that the most common ingredients of the products were cereal flours, leavens and salt, but they may also contain other ingredients.

Therefore, unleavened bread are specifically referred to under Part(A) of the explanatory notes. Prima facie it appears that Heading 1905 is a specific heading for products made from flour and unleavened bread are specifically covered under HSN Code 1905.

Applicant added that unleavened breads like chapatti and paratha fall for classification under HSN Code 1905 and consequently under Tariff item No.1905 of GST Tariff.

Question for Consideration:

i) Whether the product viz. ‘Paratha’ i.e. various varieties of Paratha produced by the applicant merit classification under HSN Code 19059090?

ii) Whether the product, namely, ‘Paratha’ i.e. all varieties of Paratha produced by the applicant are chargeable to 5% GST (i.e. 2.5% SGST and 2.5% CGST) under Sl.No.99A of Schedule-I of Notification No.1/2017- CT(Rate) and Notification No.1/2017-IT(Rate) dated 28-6-17?

Analysis, Law and Decision

Bench stated that the AAR has gone through the samples of ‘packing covers’ submitted by the applicant in respect of their product ‘Paratha’ namely Malabar Paratha, Mixed vegetable Paratha, Onion Paratha, Methi Paratha, Alu Paratha, Laccha paratha and Mooli Paratha and found that they were all sold under the Brand name ‘Vadilal Quick Treat’.

Further, on all the packing covers, cooking instructions were available, hence the parathas supplied by the applicant were not ready to eat preparations or products ready for consumption.

Bench found that applicant’s product was not akin to Khakra and plain chapatti or roti as they did not require any processing before consumption by humans and hence were ready to eat food preparations.

In the instant case, the products of the applicant i.e. ‘parathas’ were to be processed for human consumption i.e. they need to be heated on a pre-heated pan or a griddle for 3-4 minutes as per the cooking instructions in order to make them ready for consumption. 

Therefore, Bench opined that the aforementioned products merit classification at HSN 2106 and as these products are not mentioned in the tariff item they merit classification at HSN 21069099 as “other”.

Adding to the above analysis, AAR stated that GST rate of 5% was applicable subject to:

i) products shall be classified at HSN 1905 or 2106 and

(ii) description shall be khakhra, plain chapatti or roti.

In the issue in hand, AAR found that the first condition of classification is fulfilled as the product ‘paratha’ has been classified under heading 2106.

‘Paratha’ is covered at:

  1. Entry No.453 of Schedule-III of Notification No.01/2017-Central Tax(Rate) dated 28-6-17 for the period from 1-7-17 to 14-11-17 and liable to GST at the rate of 18%(9% SGST + 9% CGST) and
  2. Entry No.23 of Schedule-III of Notification No.01/2017-Central Tax(Rate) dated 28-6-17(as amended by Notification No.41/2017- Central Tax(Rate) dated 14-11-17) with effect from 15-11-17 and liable to GST at the rate of 18%(9% SGST + 9% CGST).

 [Vadilal Industries Ltd., In re., 24AAACV 4887F1Z6, decided on 30-6-2021]

Case BriefsHigh Courts

Andhra Pradesh High Court: The Division Bench of Joymalya Bagchi and K. Suresh Reddy, JJ., held that, SVLDRS Discharge certificate cannot be withheld for transition of disputed credits to GST.

Factual Matrix

Petitioner was in the business of manufacturing ‘cement and clinker’ falling under the Central Excise Tariff Act, 1985. During the period from 2014 to June 2017, the petitioner made sales to customers on ‘for destination basis’ from its factory and depots.

Further, it was stated that, petitioner availed credit on the services of GTA and C&F Agents used for outward transportation of goods from factory to customers’ premises for the said period.

Respondent had issued a show-cause notice proposing recovery of irregularity availed Cenvat Credit of Service Tax along with interest and penalty on the ground that petitioner is not entitled to avail Cenvat Credit of service tax paid on GTA and C&F Agency Services for outward transportation of goods.

In order to resolve and settle pending cases under various laws including Central Excise Act, which were subsumed in the GST regime, the Government floated ‘Sabka Vishwas (Legacy Dispute Resolution) Scheme, 2019.

Adding to the above, it was stated that on 21-08-2019, vide Notification No.05/2019 Central Excise-NT, the SVLDRS Rules [Sabka Vishwas (Legacy Dispute Resolution) Scheme, 2019]   were notified, and the scheme became operational from 1st September, 2019 to 31st December, 2019.

Section 122 of the Scheme enumerated the enactments to which the said Scheme would apply, which, inter alia, included the Central Excise Act, 1944 and the Rules framed thereunder.

As the petitioner was issued show-cause notice proposing to recover irregularly availed Cenvat Credit and did not fall within the exceptions provided under Section 125, he was eligible to avail the said Scheme and, in fact, did so by making a declaration in electronic form under Section 125 of the Finance Act.

Instead of issuing a discharge certificate as per Section 127 (8) respondent had issued the impugned letter refusing to issue the same on the ground that the petitioner had illegally sought transitional credit of the disputed Cenvat credit under GST Act.

Analysis, Law and Decision

Bench opined that once the declarant had made the payment of the estimated amount as per the statement in the form of SVLDRS-3 within the stipulated time, it was beyond the jurisdiction of the respondents to proceed with adjudication of the show-cause notice issued under the Central Excise Act.

Whether availing of Scheme would attach legitimacy to the Cenvat credit on GTA and C&F Agency services to the tune of Rs 17,34,56,893/- and the same would be eligible for the purpose of transition under Section 140 of the GST Act.

The impugned show cause notice with regard to availing of transitional credit under Section 140 of the GST Act in respect of the Cenvat Credit cannot be said to be without jurisdiction.

Court decided not to interfere with the show cause notice and leave it open to the adjudicating authority to take an appropriate decision.

Bench also observed that nothing in the scheme empowers the respondent to refuse issuance of the discharge certificate of the basis of any subsequent event apart from the fact of discovery of false statement relating to any material particular in declaration.

Availing of transitional credit by the petitioner under the GST Act on the Cenvat credit for GTA and C&F Agency services under the Central Excise Act is a subsequent and separate transaction from the declaration made by him under the Scheme and the adjudication of such claim cannot be said to be barred in law or without jurisdiction.

In view of the above, miscellaneous applications were dismissed. [Bharathi Cement Corporation (P) Ltd. v. Additional Commissioner of Centra Tax, WP No. 2 of 2021, decided on 16-08-2021]


Advocates before the Court:

Counsel for the Petitioner Sri Raghava Ramabhadran

Counsel for Respondents: Sri Suresh Kumar Routhu

Case BriefsSupreme Court

Supreme Court: The division bench of Dr. DY Chandrachud and MR Shah, JJ has upheld the validity of Section 54(3) of the Central Goods and Services Tax Act, 2017 (CGST Act) which provides for refund of unutilised input tax credit (ITC) in certain cases.

Provisions in question

Section 54[1] of the CGST Act provides for a refund of tax. Under sub-Section (1) of Section 54, a person claiming a refund of “tax and interest, if any, paid on such tax or any other amount paid” has to make an application within two years of the relevant date.

Parliament envisaged a specific situation where the credit has accumulated due to an inverted duty structure, that is where the accumulation of ITC is because the rate of tax on inputs is higher than the rate of tax on output supplies. Taking legislative note of this situation, a provision for refund was provided for in Section 54(3) which embodies for refund of unutilised input tax credit (ITC) in cases involving:

(i) zero rated supplies made without payment of tax; and

(ii) credit accumulation “on account of rate of tax on inputs being higher than rate of tax on output supplies”.

Further, the Central Goods and Service Tax Rules 2017 were formulated in pursuance of the rule making power conferred by Section 164 of the CGST Act. Rule 89(5) provides a formula for the refund of ITC, in “a case of refund on account of inverted duty structure”. The said formula uses the term “Net ITC”. In defining the expression “Net ITC”, Rule 89(5)[2] speaks of “input tax credit availed on inputs”.

Case Trajectory

The petitioners approached the Gujarat High Court and the Madras High Court and made the following submissions:

(i) Section 54(3) allows for a refund of ITC where the accumulation is due to an inverted duty structure;

(ii) ITC includes the credit of input tax charged on the supply of goods as well as services;

(iii) Section 54(3) does not restrict the entitlement of refund only to unutilised ITC which is accumulated due to the rate of tax on inputs being higher than the rate of tax on output supplies. It also allows for refund of unutilised ITC when the rate of tax on input services is higher than the rate of tax on output supplies;

(iv) While Section 54(3) allows for a refund of ITC originating in inputs as well as input services, Rule 89(5) is ultra vires in so far as it excludes tax on input services from the purview of the formula; and

(v) In the event that Section 54(3) is interpreted as a restriction against a claim for refund of accumulated ITC by confining it only to tax on inputs, it would be unconstitutional as it would lead to discrimination between inputs and input services.

Gujarat High Court’s judgment

By its judgment dated 24 July 2020, the Division Bench of the Gujarat High Court, held that:

“Explanation (a) to Rule 89(5) which denies the refund of “unutilised input tax” paid on “input services” as part of “input tax credit” accumulated on account of inverted duty structure is ultra vires the provision of Section 54(3) of the CGST Act, 2017.”

The High Court therefore directed the Union Government to allow the claim for refund made by the petitioners before it, considering unutilised ITC on input services as part of “Net ITC” for the purpose of calculating refund in terms of Rule 89(5), in furtherance of Section 54(3).

Madras High Court’s judgment

The Division Bench of the Madras High Court came to a contrary conclusion, after having noticed the view of the Gujarat High Court, and held;

 “63…

(1) Section 54(3)(ii) does not infringe Article 14.

(2) Refund is a statutory right and the extension of the benefit of refund only to the unutilised credit that accumulates on account of the rate of tax on input goods being higher than the rate of tax on output supplies by excluding unutilised input tax credit that accumulated on account of input services is a valid classification and a valid exercise of legislative power.”

The divergent views by both the High Courts led to the case before the Supreme Court.

Supreme Court’s verdict

Upholding the constitutional validity of Section 54(3), the Court held that

“A claim to refund is governed by statute. There is no constitutional entitlement to seek a refund.”

The Court explained that Parliament while enacting the provisions of Section 54(3), legislated within the fold of the GST regime to prescribe a refund. While doing so, it has confined the grant of refund in terms of the first proviso to Section 54(3) to the two categories which are governed by clauses (i) and (ii) i.e.

(i) zero rated supplies made without payment of tax; and

(ii) credit accumulation “on account of rate of tax on inputs being higher than rate of tax on output supplies.

Parliament has in clause (i) of the first proviso allowed a refund of the unutilized ITC in the case of zero-rated supplies made without payment of tax. Under clause (ii) of the first proviso, Parliament has envisaged a refund of unutilized ITC, where the credit has accumulated on account of the rate of tax on inputs being higher than the rate of tax on output supplies.

“When there is neither a constitutional guarantee nor a statutory entitlement to refund, the submission that goods and services must necessarily be treated at par on a matter of a refund of unutilized ITC cannot be accepted. Such an interpretation, if carried to its logical conclusion would involve unforeseen consequences, circumscribing the legislative discretion of Parliament to fashion the rate of tax, concessions and exemptions. If the judiciary were to do so, it would run the risk of encroaching upon legislative choices, and on policy decisions which are the prerogative of the executive.”

Stating that courts are averse to entering the area of policy matters on fiscal issues, the Court said,

“Many of the considerations which underlie these choices are based on complex balances drawn between political, economic and social needs and aspirations and are a result of careful analysis of the data and information regarding the levy of taxes and their collection.”

The Court also found it impossible to accept the premise that the guiding principles which impart a measure of flexibility to the legislature in designing appropriate classifications for the purpose of a fiscal regime should be confined only to the revenue harvesting measures of a statute.

“The precedents of this Court provide abundant justification for the fundamental principle that a discriminatory provision under tax legislation is not per se invalid. A cause of invalidity arises where equals are treated as unequally and unequals are treated as equals.”

Noticing that both under the Constitution and the CGST Act, goods and services and input goods and input services are not treated as one and the same and they are distinct species, the Court said,

“Parliament engrafted a provision for refund Section 54(3). In enacting such a provision, Parliament is entitled to make policy choices and adopt appropriate classifications, given the latitude which our constitutional jurisprudence allows it in matters involving tax legislation and to provide for exemptions, concessions and benefits on terms, as it considers appropriate.”

[Union of India v. VKC Footsteps, 2021 SCC OnLine SC 706, decided on 13.09.2021]


*Judgment by: Justice Dr. DY Chandrachud

Know Thy Judge| Justice Dr. DY Chandrachud

For UOI: N Venkataraman and Balbir Singh, ASG

For Assessee: Senior Advocates V Sridharan and Arvind Datar; Advocates Sujit Ghosh and Uchit Sheth

For Respondents: Advocate Arvind Poddar


[1] “Section 54. Refund of tax

(1) Any person claiming refund of any tax and interest, if any, paid on such tax or any other amount paid by him, may make an application before the expiry of two years from the relevant date in such form and manner as may be prescribed:

Provided that a registered person, claiming refund of any balance in the electronic cash ledger in accordance with the provisions of sub-section (6) of Section 49, may claim such refund in the return furnished under section 39 in such manner as may be prescribed.

[…] (3) Subject to the provisions of sub-section (10), a registered person may claim refund of any unutilised input tax credit at the end of any tax period:

Provided that no refund of unutilized input tax credit shall be allowed in cases other than-

(i) zero rated supplies made without payment of tax;

(ii) where the credit has accumulated on account of rate of tax on inputs being higher than the rate of tax on output supplies (other than nil rated or fully exempt supplies), except supplies of goods and services or both as may be notified by the Government on the recommendations of the Council:

Provided further that no refund of unutilized input tax credit shall be allowed in cases where the goods exported out of India are subjected to export duty:

Provided also that no refund of input tax credit shall be allowed, if the supplier of goods or services or both avails of drawback in respect of central tax or claims refund of the integrated tax paid on such supplies.”

*********************************************

[2] “(4) […]

(B) “Net ITC” means input tax credit availed on inputs and input services during the relevant period;

[…]

(E) “Adjusted Total turnover” means the turnover in a State or a Union territory, as defined under sub-section (112) of section 2, excluding the value of exempt supplies other than zero-rated supplies, during the relevant period;

(5) In the case of refund on account of inverted duty structure, refund of input tax credit shall be granted as per the following formula: – Maximum Refund Amount= {(Turnover of inverted rated supply of goods) x Net ITC ÷ Adjusted Total Turnover} − tax payable on such inverted rated supply of goods

Explanation:- For the purposes of this sub rule, the expressions “Net ITC” and “Adjusted Total turnover” shall have the same meanings as assigned to them in sub-rule (4).”

Legislation UpdatesRules & Regulations

The Central Board of Indirect Taxes and Customs has issued Central Goods and Services Tax (Seventh Amendment) Rules, 2021 on August 29, 2021. The Central Goods and Services Tax Rules provide that if any registered person has not furnished the statement in FORM GST CMP-08 for two consecutive years, although the person is holding certificate under FORM GST REG-06, including a consignor, consignee, transporter, an e-commerce operator or a courier agency, shall not be allowed to furnish the information in PART A of FORM GST EWB-01.

 

The amendments are as follows:

  • The amendment has amended Rule 138E proviso and directed that the said restriction shall not be applicable during the period from the May 1, 2021 till the August 18, 2021, in case where the return in FORM GSTR-3B or the statement of outward supplies in FORM GSTR-1 or the statement in FORM GST CMP-08, as the case may be, has not been furnished for the period March, 2021 to May, 2021.
  • In Rule 26, in sub-rule (1), fourth proviso has been amended, namely “For the date August 31, 2021 has been changed to October 31, 2021 has been changed”
  • In Rule 26, which provides Process of Authentication, all the provisos shall be omitted with effect from November 01, 2021.

*Tanvi Singh, Editorial Assistant has reported this brief.

Experts CornerTarun Jain (Tax Practitioner)

  1. Introduction

 

Goods and Services Tax (GST) was introduced in India from July 2017. It is a tax on “supply” of goods and services. In the practical mechanics of GST, identification of the supply (technically known as “classification”) is crucial because it determines the rate of tax, time of tax liability, procedural mechanism such as for invoicing, compliances, etc. The ascertainment of the correct classification is therefore the starting point for complying with the GST law. Business dynamics, however, are not straightforward and therefore it is not correct to expect complete segregation of goods and services being supplied in each transaction.

 

To illustrate, a book seller may also arrange for transportation of the goods up to the destination of the buyer. In this simple example, there is a supply of goods (i.e. books) and also services (i.e. transportation). However, depending upon the parties’ dynamics, there can be multiple shades of this transaction involving a host of other supplies. For illustration, where the book seller is based outside India, there is likely to be an element of other services, such as insurance (to insure the books during transit), clearing and forwarding (to arrange for customs clearance of imported books), international transportation service (through courier, shipping, etc. as the case may be), etc. In such transactions, delineation and segregation of the various supplies and ascertaining their classification becomes challenging, if not impossible.

 

In order to address such eventualities, world over it is recognised that there can be a “bundle” of supplies in a single transaction. This concept is adverted differently under distinct laws. For illustration, under the erstwhile service tax law of India, this concept was explained through the “bundled supply” concept. Under the GST laws, the concepts of “composite supply” and “mixed supply” have been evolved to address such instances of bundle of supplies. This article demystifies these two concepts in the GST context by adverting to their conceptual nuances, application, implication, etc.

 

  1. Differentiating “principal supply” and “ancillary supply”

Before we advert to the concepts and distinction between composite supply and mixed supply, it is important to appreciate the concepts of “principal supply” and “ancillary supply” as these form the bedrock on which the differences between composite supply and mixed supply are set out. Principal supply is defined in Section 2(90) of the Central Goods and Services Tax Act, 2017 (CGST Act). Ancillary supply is not defined in the GST laws. Thus one is to be guided by the meaning of principal supply in order to appreciate the scope and coverage of ancillary supply as well. In other words, the definition of principal supply is the key differentiator between composite supply and mixed supply.

 

Under the CGST Act, principal supply means the supply of goods or services which constitutes the predominant element of a composite supply and to which any other supply forming part of that composite supply is ancillary. If one were to look at this definition in isolation, certain aspects stand out. First, principal supply is also a supply; there are no adverbial qualifications attended to a principal supply and any supply can be a principal supply. Thus, one is not required to look for any special features in order to characterise a supply as a principal supply. Second, there cannot be a standalone principal supply; instead there can be a principal supply only in a composite supply. Thus, the significance of principal supply is limited for the purpose of composite supply, and as we shall examine subsequently, also for the purpose of identifying a mixed supply. Third, there is no objective test prescribed in the statutory definition of principal supply; instead it is a subjective determination because one is required to ascertain as to what constitutes the “predominant element of a composite supply” in order to identify the principal supply. The implication is that a supply which may be a principal supply in a transaction may not be so in another. Thus, the determination of what is the principal supply will fluctuate depending upon the ingredients of the composite supply.

 

Let us take a few illustrations to examine how principal supply has been appreciated in practice. To this end, we fall back upon the judicial delineation of the concept. The decision of the Gujarat High Court in Torrent Power[1] appears to be the only High Court decision addressing the concept,[2] albeit briefly. In this case the High Court declared that power distribution companies were engaged in carrying out a composite supply because supply of electricity meters and services such as meter inspection, testing, etc. were not predominant and transmission and distribution of electricity was the principal supply.

 

Then we have a few decisions of the GST Appellate Authority for Advance Ruling (AAAR) which have examined the concept. The AAAR in Kundan[3] opined that “when the goods such sweets, namkeens, cold drinks and other edible items are supplied to customers in the restaurant or as takeaway from the restaurant counter and which are being billed under restaurant sales head should fall under ‘composite supply’ with restaurant service being the principal supply. Since supply of food in this case, is naturally bundled with the restaurant service”. This conclusion was differentiated by the AAAR to conclude that when the “goods which are supplied to customers through sweetshop counter [they] have no direct or indirect nexus with restaurant service. Anyone can come and purchase any item of any quantity from the counter without visiting the restaurant. The billings of such sales are also done separately. Thus such sales, by no stretch of imagination, can be clubbed with restaurant service. These sales do not satisfy the basic requirement of ‘composite supply’ i.e. ‘being naturally bundled and supplied in conjunction with each other’. These sales are completely independent of restaurant activity and will continue even when the restaurant is closed, either temporarily or permanently. Hence such sales will be treated as supply of goods with applicable GST rates on the items sold”.

 

In Doctors Academy[4] the AAAR was dealing with supply of coaching services where some students also opted for lodging and boarding in the furnished facility. On the premise that “no student can choose only lodging or boarding without coaching”, the AAAR concluded that the principal supply was the coaching service and all other supplies were ancillary.

 

In Vidyasagar Rao Constructions[5] the AAAR considered a “combination of services of excavation of sand including loading with machinery at reach, formation of ramps and maintenance of roads, transportation charges for the tractors/tippers of sand from reach to stockyard and loading cost at sand from stockyard to lorries” to opine that in that fact pattern the principal supply was “transportation of goods” and not “excavation of sand”. This is because, according to the AAAR, “the basic intent and purpose of the tender/contract agreement and the concomitant description of the scope of the work therein is to move/shift the mineral sand from one place to another, by means of transport by roads/ramps; for enabling the further dispatch” instead of the excavation of sand itself.

 

A review of these orders, which are only illustrative and in no sense exhaustive, reveals that the determination of what constitutes a principal supply is a fact-based determination which hinges upon a close examination of the factual attributes of a given transaction and ascertainment of what would be the predominant element in such bundle of supplies.

 

The fact that no statutory definition has been ascribed to “ancillary supply”, coupled with the judicial advertence to this concept while determining disputes relating to principal supply, reveals that the expression “ancillary supply” is more of an appendage in the statutory scheme relating to composite supply and principal supply; there is no independent or significant tenet underlying ancillary supply. In an overall perspective, one could arguably conclude that the concept of ancillary supply exists under the GST law as a residuary space which is an omnibus description of all those supplies which are not principal supply in a composite supply.

 

  1. Appreciating composite supply

Once the concept of principal supply is understood, the concept of composite supply unravels easily. The expression “composite supply” is defined in Section 2(30) of the CGST Act, along with a statutory illustration. The definition states as under:

 

(30) “composite supply” means a supply made by a taxable person to a recipient consisting of two or more taxable supplies of goods or services or both, or any combination thereof, which are naturally bundled and supplied in conjunction with each other in the ordinary course of business, one of which is a principal supply.

Illustration.— Where goods are packed and transported with insurance, the supply of goods, packing materials, transport and insurance is a composite supply and supply of goods is a principal supply.

 

An appraisal of the definition reveals that certain conditions need to be satisfied before a composite supply can be considered to exist. These conditions are: (a) there must only be one supplier and one recipient;[6] (b) the supply must consist of two or more supplies; (c) such supplies should be “naturally bundled” and supplied in conjunction with each other in the ordinary course of business; and (d) there must be a principal supply in those naturally bundled supplies. All these conditions must be cumulatively satisfied.

 

The first condition is easy to test and can be objectively satisfied. The second condition also appears to be objectively ascertainable as it is fairly effortless to determine if there is a single supply or multiple supplies exist in a transaction. The third condition is relatively complex as one is required to ascertain if all the supplies in the transaction are: (a) “naturally bundled”; (b) whether they are “supplied in conjunction with each other”; and (c) whether such supply is “in the ordinary course of business”. This is a subjective inquiry as its response would vary depending upon the fact situation of the transaction concerned. The last condition is fairly easy to appreciate. If there is no principal supply then no further inquiry is warranted and no composite supply exists.

 

The illustration reveals a situation wherein both goods and services are being supplied and it is concluded that the supply of goods is the principal supply whereas services such as packing, transportation and insurance are ancillary supplies. Though it is not apparent, perhaps the legislature was guided by the premise that packing, transportation and insurance services are contingent upon the supply of goods and there would be no occasion to supply such services if there is no supply of goods. Having said that, it must be appreciated that packing, transportation and insurance, etc. are certain services which have an independent identity and therefore the specific contextual setting and how these services satisfy the three conditions [i.e. are (a) “naturally bundled”; (b) “supplied in conjunction with each other”; and (c) supplied “in the ordinary course of business”] is very crucial to determine whether the transaction would qualify as a composite supply. This is because failure to satisfy any of these conditions would translate into rendering the classification of the supply to change from composite to mixed supply. This is evident from the discussion in the subsequent section.

 

With this delineation, let us examine certain instances wherein the application of the concept of composite supply has been called for. The AAAR in Kalani[7] rejected the claim that a consolidated amount per month from students against provision of hostel accommodation for residence purposes which would also include ancillary supply of food with certain other facilities amounted to composite supply. According to the AAAR, the provision of hostel accommodation along with food facility, playroom, gym, housekeeping, room cleaning, washing/dry cleaning of bedsheets and linen of rooms, etc. amounted to an independent service and each of the other services could be supplied separately. The AAAR distinguished the illustration appended to definition of composite supply by highlighting that “it is obvious that the packing material or the insurance cannot be supplied separately if there is no transportation of goods” whereas it was equally “obvious that a person can live in the hostel without availing other services like food, TV, gym, etc.; but to make one’s stay more comfortable, the said ancillary services are availed by him”. For this reason the AAAR concluded that all activities were independent, not ancillary, and in case not were not naturally bundled. Similarly, in Vertiv[8] the AAAR opined that even though there was one contract between the service recipient and service provider; (a) bifurcation of work into supply of goods from supplier’s Maharashtra GST registered premises and supply of services from its New Delhi GST registered office; and (b) the nature of the supplies, revealed that both the supply of goods and the supply of services were equally important and indispensable, thereby concluding that they were not a composite supply.

 

Conversely, the AAAR in KSEDC[9] concluded that furnishing of street lighting services was a composite supply of goods and services while carrying out the following activities; Phase I – Preparatory work for installation of smart feeder panels and LED light fixtures; Phase II – Implementation of energy efficient lighting fixtures, brackets and junction box, underground cables and flexible cables; and Phase III – Operation and maintenance up to the end of the contract period. According to the AAAR, the principal supply in this case was a supply of service as it is the operation, management and maintenance of the street lighting system which is the essence of the contract between the parties. Similarly, in Nikhil Comforts[10] the AAAR concluded that execution of air conditioning works in new building for State Corporation involving supply, installation, testing and commissioning of variable refrigerant flow indoor and outdoor units, refrigerant piping with insulation, drain piping with insulation, MS stands, cabling, additional refrigerant and associated electrical works, etc. amounted to a composite supply wherein supply of air conditioning units was the principal supply.

 

Ascertaining whether a transaction constitute a composite supply is a complex process and requires a deep appreciation of the relevant factual variables has been accepted by the Tax Department at well. For illustration, the Central Board of Indirect Taxes and Customs, in context of classification of software development services, inter alia sought to explain the classification process in the following terms:[11]

 

“In contracts where service provider is involved in a composite supply of software development and design for integrated circuits electronically, testing of software on sample prototype hardware is often an ancillary supply, whereas, chip design/software development is the principal supply of the service provider. The service provider is not involved in software testing alone as a separate service. The testing of software/design is aimed at improving the quality of software/design and is an ancillary activity. The entire activity needs to be viewed as one supply and accordingly treated for the purposes of taxation. Artificial vivisection of the contract of a composite supply is not provided in law. These cases are fact based and each case should be examined for the nature of supply contracted.”

 

It is, therefore, evident that the appreciating composite supply is not a small task and requires a close look at the factual setting and the legal provisions, as the review of AAAR orders reveals. Legislatively, however, two exceptions have been carved out wherein the following have been specified as constituting composite supplies:[12] (a) works contract;[13] and (b) “supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (other than alcoholic liquor for human consumption), where such supply or service is for cash, deferred payment or other valuable consideration”.

 

  1. Appraising mixed supply

 

The expression “mixed supply” is defined in Section 2(74) of the CGST Act in the following terms:

(74) “mixed supply” means two or more individual supplies of goods or services, or any combination thereof, made in conjunction with each other by a taxable person for a single price where such supply does not constitute a composite supply.

Illustration.— A supply of a package consisting of canned foods, sweets, chocolates, cakes, dry fruits, aerated drinks and fruit juices when supplied for a single price is a mixed supply. Each of these items can be supplied separately and is not dependent on any other. It shall not be a mixed supply if these items are supplied separately.

 

In Sarj[14] the AAAR, adverting to this definition, explained that “supply of goods and/or services will be treated as mixed supply if it fulfills the following two criteria: (a) it is a combination of two or more goods or services supplied at a single price; and (b) each of these items can be supplied separately and is not dependent on any other”. On such premise, the AAAR concluded that supply of food, laundry service, housekeeping service, etc. which are not naturally bundled with the lodging service and are independent of each other such that they can be supplied separately, qualify as mixed supply as there is no principal supply in this transaction.

 

The aforesaid reveals the following attributes of mixed supply; the supply must be by one person; it must be for a single price; and it must not be a composite supply. In other words, the multiple ingredients in the transaction must not have a predominant supply which would qualify as a principal supply in order for the transaction to remain within the realm of mixed supply. The illustration appended to the statutory definition of mixed supply also seems to confirm this underlying tenet. It refers to “a package consisting of canned foods, sweets, chocolates, cakes, dry fruits, aerated drinks and fruit juices” which are for a single price. Because each of these supplies are independent and can be made separately, there is no overwhelming element predominating the supply and hence the illustration does not represent a composite supply despite a single price being charged for the transaction and therefore it is an example of mixed supply.

 

In the aforesaid lines, the AAAR in Asahi[15] the AAAR concluded that a bouquet of services relating to corporate accounting, corporate finance, corporate personnel and labour relations, corporate research and development, quality assurance and corporate intellectual property, etc. provided by one entity to another for one consolidated price rendered them classifiable as mixed supply because they lack a predominating principal supply.

 

In Switching Avo[16] the AAAR confirmed that that supply of UPS and battery is to be considered as mixed supply. In this case the AAAR rejected the contention “that UPS cannot function without battery as such it is an integral part of UPS and hence it is naturally bundled and supplied in conjunction with each other and hence the supply of static converter along with external battery should be construed as a composite supply and not a mixed supply”. According to the AAAR, “storage battery has multiple uses and can be put to different uses and when supplied separately with static converter (UPS) it cannot be considered as a composite supply or a naturally bundled supply”, therefore, it is only “when a UPS is supplied with built-in batteries so that supply of the battery is inseparable from supply of the UPS, it should be treated as a composite supply” whereas in all other cases the transaction would constitute a mixed supply.

 

From the aforesaid, it is clear that even in case of mixed supply, one is required to satisfy both objective and subjective tests as in the case of composite supply. Furthermore, whether a principal supply exists in the transaction is a crucial test even for determining whether there is a mixed supply or not. However, the outcome of the classification is rather binary, one with an either/or determination as the transaction can only either be classified as composite supply or mixed supply or neither, but not both.

 

  1. Implications of classifying supplies as composite supply or mixed supply

Having examined the scope and coverage of composite and mixed supplies, one must also appreciate the reason for this distinction. The key rationale highlighting the accentuating importance of composite and mixed supplies is the distinction in the tax incidence. Section 8 of the CGST Act provides a different scheme for levy of tax in such cases. It provides as under:

  1. Tax liability on composite and mixed supplies.— The tax liability on a composite or a mixed supply shall be determined in the following manner, namely:

(a) a composite supply comprising two or more supplies, one of which is a principal supply, shall be treated as a supply of such principal supply; and

(b) a mixed supply comprising two or more supplies shall be treated as a supply of that particular supply which attracts the highest rate of tax.

 

A perusal of the statutory provision reveals that both in case of composite and mixed supplies, GST is not charged on the supplies comprising the individual ingredients of such composite and mixed supplies. To illustrate, if there are four supplies in a transaction and the transaction does not qualify either as composite or mixed supply, then the GST rate applicable against each of the four supplies would be relevant in order to determine the GST liability. However, in case of both composite and mixed supplies, the levy of GST is only on the basis of one of individual ingredients of the four supplies constituting the transaction. The difference between composite and mixed supplies is that in the case of composite supply that individual ingredient is chosen which constitutes the principal supply whereas in the case of mixed supply that individual ingredient is chosen which attracts the highest rate of tax. Thus, classification of supplies and whether these are composite supplies or mixed supplies or none is crucial for the purpose of GST liability of the supplier.

 

  1. Conclusion

Given the tax incidence, it is evident that ordinarily no supplier would prefer for the supply to be categorised as mixed supply[17] because it implies that all components of the transaction suffer the tax rate earmarked for that particular supply which attracts the highest rate of tax. Such inclination may, however, not exist in case of composite supplies where the principal supply determines the classification as also the rate of GST of the entire transaction. Nonetheless, given that it is not anyone’s choice as to the rate of tax, each transaction needs to be closely reviewed to examine the classification of the supply and whether it attracts composite supply or mixed supply characterisation. Even though the determination involves both objective and subjective tests and thus makes the classification exercise onerous, nonetheless, in view of the statutory mandate, it is crucial for the suppliers to appreciate the nuanced concepts underlying composite and mixed supplies and undertake appropriate classification of the supplies.

 


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

[1] Torrent Power Ltd. v. Union of India, (2018 SCC OnLine Guj 4808.

[2] The decision of the Kerala High Court in Abbott Healthcare (P) Ltd. v. CST, 2020 SCC OnLine Ker 24 : (2020) 34     GSTL 579 is another decision wherein a High Court had an occasion to consider the concept of principal supply. However, the High Court did not return any finding on the nuances of this concept.

[3] Kundan Misthan Bhandar, In re, 2018 SCC OnLine Utt AAR-GST 16 : (2019) 24 GSTL 94.

[4] Doctors Academy of Educational Society, In re, (2020) 38 GSTL 186 (AAAR).

[5]  R. Vidyasagar Rao Constructions, In re, 2018 SCC OnLine TS AAAR-GST 2.

[6] This appears to be logical conclusion from the usage of the article “a” in the expression “a supply made by a taxable person to a recipient”. See also, Chennai Metro Ride, In re, 2021 SCC OnLine TN AAAR-GST 1 inter alia concluding that “a composite supply is one in which one or more supplies are bundled naturally and supplied in conjunction by the service provider to the recipient. In the case at hand, land is supplied by the land owner to the appellant and the access to the pathway is granted by the appellant to the land owner. The recipient and the supplier are not the same in these supplies and therefore the same is not a ‘composite supply’ “.

[7] Kalani Infrastructure (P) Ltd., In re, 2020 SCC OnLine Raj AAAR-GST 4 : (2021) 46 GSTL 285.

[8] Vertiv Energy (P) Ltd., In re, 2020 SCC OnLine Mah AAAR-GST 11.

[9] Karnataka State Electronics Development Corpn. Ltd., In re, 2020 SCC OnLine Kar AAAR-GST 13.

[10] Nikhil Comforts, In re, 2019 SCC OnLine Mah AAAR-GST 55.

[11] Circular No. 118/37/2019-GST, dated 11-10-2019 issued vide F. No. 354/136/2019-TRU.

[12] Sch. II(6), CGST Act.

[13] Defined in S. 2(119) of the CGST Act.

[14] Sarj Educational Centre, In re, 2019 SCC OnLine WB AAAR-GST 6 :  (2019) 27 GSTL 131.

[15] Commr., GST v. Asahi Kasei India (P) Ltd., 2019 SCC OnLine Mah AAAR-GST 10  : (2019) 28 GSTL 172.

[16] Switching Avo Electro Power Ltd., In re, 2018 SCC OnLine WB AAAR-GST 10 : (2018) 15 GSTL 636.

[17] Except in an unlikely case of inverted duty structure i.e. a situation wherein the inputs (consumed to make the supply) are taxed at a higher rate than the supply which results into excess input tax credit situation. In such a scenario the supplier may instead prefer a higher rate of tax on the supply in order to be able to absorb the input tax credit.

Legislation UpdatesNotifications

The Central Board of Indirect Taxes has extended FORM GSTR-3B late fee Amnesty Scheme from 31.08.2021 upto 30.11.2021 vide notification no. 33/2021-Central Tax dated August 29, 2021. The GST Amnesty Scheme has been extended till 30th November 2021.

As per the Amnesty Scheme:

  • The late fee waived will be 15 days from the due date of furnishing return in cases where the taxpayers having an aggregate turnover of more than rupees 5 crores in the preceding financial year for the tax period March 2021, April 2021 and May 2021.
  • Taxpayers having an aggregate turnover of up to rupees 5 crores in the preceding financial year who are liable to furnish the return as specified under sub-section (1) of section 39 in case of the tax period of March, 2021 the period for which the late fee waived will be 60 days from the due date of furnishing return; in case of the tax period of April, 2021 the period for which the late fee waived will be 45 days from the due date of furnishing return and in case of the tax period of May, 2021 the period for which the late fee waived will be 30 from the due date of furnishing return.
  • The late fee waived will be for 60 days from the due date of furnishing return in cases where taxpayers having an aggregate turnover of up to rupees 5 crores in the preceding financial year who are liable to furnish the return as specified under proviso to sub-section (1) of section 39 for the quarter January-March, 2021.

*Tanvi Singh, Editorial Assistant has reported this brief.

Advance RulingsCase Briefs

Maharashtra Authority for Advance Ruling (MahaGST): The Bench of Rajiv Magoo Joint Commissioner of Central Tax and T.R. Ramnani, Joint Commissioner of State Tax, decided whether reimbursement by Industry Partner to Third Party aggregator of stipend paid to students would attract GST or not.

Applicant filed the instant application seeking an advance ruling in respect of the following questions:

  1. Whether the reimbursement by Industry Partner to YAS of the stipend paid to students attracts GST?
  2. Whether the reimbursement by Industry Partner to YAS of the insurance premium attracts GST?
  3. Whether the reimbursement by Industry Partner to YAS of the expenses for uniform and safety shoes attracts GST?

Applicant was stated to be registered as a ‘not for profit Company’ under Section 25 of the Companies Act, 1956. The activities of applicant were charitable and hold registration under Section 12 AA of the Income Tax Act, 1961.

Since applicant is a Third Party Aggregator providing support for mobilizing the trainees under the National Apprenticeship promotion Scheme for providing them on-the-job training in industries, it enters into agreements with industry partner who impart actual practical training to the students.

Analysis, Law and Decision 

Firstly, the AAR stated that the two questions for consideration were withdrawn by the applicant, hence the discussions in the present matter will only pertain to: Whether the reimbursement by Industry Partner to the applicant, of the stipend paid to students, attracts GST?

Bench in view of the said issue stated that the industry partner that provides training to the trainees is required to pay stipend to the trainees. The said stipend is not directly paid to the trainees by the companies, rather the same are routed through the applicant. Adding to this, it was stated that the entire amounts received as stipend from the companies are paid to the trainees without any amount being retained. Hence, applicant acts only as the intermediary.

Therefore, AAR held that the applicant is only a conduit for the payment of stipend and the actual service is supplied by the trainees to the trainer companies against which stipend is payable.

Lastly, it was held that the amount of stipend received by the applicant from the industry partners and paid in full to the trainees is not taxable at the hands of the applicant. [Yashaswi Academy for Skills, In Re., GST-ARA-83/2019-20/B-47, decided on 20-08-2021]

Advance RulingsCase Briefs

Maharashtra Authority for Advance Ruling (MahaGST): The Bench of Rajiv Magoo, Joint Commissioner of Central Tax and T.R. Ramnani, Joint Commissioner of State Tax decided that GST is exempted on Hostel Rent of less than Rs 1000 per day per student.

Questions for Consideration:

  • Whether the activity of providing the hostel on the rent to various students by applicant is exempt (where hostel fees charged per student per day is much less than Rs 1000)?
  • If it is exempt it shall be claimed as exempted under Serial Number 12 or Serial Number 14 of Notification 12/2017 – Central Tax (Rate) (as amended time to time) dated 28-06-2017?

Factual Background

Applicant was registered under the CGST Act, 2017 and provided commercial training and coaching service for students appearing for 11th and 12th standards who are desirous of appearing for IIT, etc., specifically in science stream.

Applicant also provided hostel facility to the students on demand basis and charged them additionally. The said service of hostel was optional and not coming in the form of package.

Under GST, exemptions for services were notified vide Notification No. 12/2017 – Central Tax (Rate) dated 28-06-2017, as amended time to time. In the said notification in Serial Number 12 exemption was provided for “Services by way of renting of residential dwelling for use as residence.”

However, ‘Residential Dwelling’ was not defined in the Act and in exemption notification as well. Therefore, the meaning of the expression ‘residential dwelling’ has to be understood in terms of the normal trade parlance. It means any residential accommodation but does not include hotel, motel, inn, guest house, campsite, lodge, house boat, or like places meant for a temporary stay.

Further, as per the applicant, exemption was available under Sr. No. 14 of Notification 12/2017 – C.T. (Rate) dated 28-6-2017 as amended, for Services by a hotel, inn, guest house, club or campsite, by whatever name called, for residential or lodging purposes, having value of supply of a unit of accommodation below one thousand rupees per day or equivalent.

Analysis, Law and Decision

Bench observed that the term “residential dwelling” is not defined under the GST Act. But in common parlance it is to be called as ‘A house or an apartment or other places of residence or a place to live in or building or other places to live in.’

The activity of providing the hostel on rent to various students is covered under ‘services’. The hostels are exclusively meant for temporary residence for students during the time period of training and coaching only.

Applicant was also providing hostel facilities to the students who were not their own institutional students.

In view of the above, Bench opined that the criteria for residential dwelling under the common parlance teste are not satisfied.

In the case of residential dwelling, there is no embargo in respect of visits and stay by friends, relatives, etc. The period of stay in the residential dwelling is specified in the agreement.

Further, it was noted that the Hostel room which is usually allotted on sharing basis to 3 students is for a period which is usually more than 3 months. The rooms in hostel are let out to the students for residential and study purpose only, that too during the training and coaching periods. The said are the basic differences between a residential dwelling and a Hostel.

In view of the above, the subject activity was not covered under Entry 12 of the said notification.

Therefore, hostel accommodation provided by the applicant was not covered under the exemption Notification.

 Furthermore, the subject activity would be exempted from taxes as per Entry No. 14 of said notification. The fees charged per student per day per room was much less than Rs 1000.

Conclusion

  • Whether the activity of providing the hostel on the rent to various students by applicant is exempt (where hostel fees charged per student per day is much less than Rs 1000)?

Answer: Affirmative

  • If it is exempt it shall be claimed as exempted under Serial Number 12 or Serial Number 14 of Notification 12/2017 – Central Tax (Rate) (as amended time to time) dated 28-06-2017?

Answer: Present activity of the applicant is exempted under Serial Number 14 of Notification No. 12/2017 – C.T. (Rate) dated 28-06-2017 as amended from time to time.[Ghodawat Eduserve LLP, In Re; ARA 72/2019-20/     /B-51, decided on 27-8-2021]

Case BriefsHigh Courts

Gujarat High Court: Paresh Upadhyay, J., allowed the petitions which were filed apprehending detention under PASA in connection with the Complaint filed by the State Tax Department in the Court of the Chief Judicial Magistrate, under different sub-sections of Section 132 of the Gujarat Goods and Services Tax Act, 2017 and Central Goods and Services Tax Act, 2017 read with Section 120B of the Penal Code, 1860.

On 15-06-2021 it was informed to the Court that, atleast one of the petitioners could be detained under PASA, and while granting protection in favour of the petitioners, this Court had passed an order.

There was no response from the Finance Department of the State of Gujarat to the above-quoted query of this Court. Instead, affidavit in replies – all dated 22-07-2021 were filed on behalf of the Gujarat Goods and Services Tax Department, wherein, over and above giving details of the allegations against the petitioners, in the concluding part it was stated that, no proposal was made to detain the petitioners under PASA so far, by the State GST Department.

The Court was of the view that not only the query raised by the Court qua the citizen – the trader community, in this case, was not responded by the competent Authority from the Finance Department of the State, the sword kept hanging over the head of the traders, because it was replied by the GST Department that no proposal was made to detain the petitioners under PASA so far. Citizen can not be left in lurch like this.

When the State on the whole and the economy, in particular, is trying to regain the momentum post COVID, such hanging sword situation can not be permitted to continue.

The Court while allowing the petitions found that in the facts like this, the State Authorities can not be permitted to resort to the stringent provisions like detention under the Prevention of Anti Social Activities Act against the petitioners.[Amitkumar Rameshbhai Patel v. State of Gujarat, R/Special Civil Application No. 6465 of 2021, decided on 18-08-2021]


Suchita Shukla, Editorial Assistant has reported this brief.


For the Petitioners: Mr Tejas M Barot

For the Respondent: Mr Hardik Soni

Legislation UpdatesStatutes/Bills/Ordinances

The Department of Law, Justice and Legislative Affairs has passed the Delhi Goods and Services Tax (Amendment) Act, 2021 to amend the Delhi Goods and Services Tax Act, 2017 on August 9, 2021.

 

The key amendments are:

  • Section 7(1)(aa), inserted, Scope of supply : The tax shall also be levied in the ambit of supply, activities or transactions involving supply of goods or services by any person, other than an individual, to its members or constituents or vice-versa, for cash, deferred payment or other valuable consideration, so as to ensure levy of tax on the same.
  • Section 16(2)(aa), inserted, states that the Input tax credit on invoice or debit note may be availed only when the details of such invoice or debit note has been furnished by the supplier in GSTR-1 and is communicated to the recipient.
  • Section 35(5), omitted,Compulsory submission of audited annual accounts and reconciliation statements for the registered taxpayers is removed.
  • Section 44, substituted, Annual Return shall include a self-certified reconciliation statement, reconciling the value of supplies declared in the return furnished for the financial year, with the audited annual financial statement for every financial year electronically, within such time and in such form and in such manner as may be prescribed by the registered persons except those exempted by the Commissioner.
  • Section 50 proviso, substituted which provides interest on delayed payment of tax. The amendment provides to charge interest on net cash liability.
  • Section 75 explanation, inserted, Self-assessed tax, shall include the tax payable in respect of details of outward supplies furnished under section 37, but not included in the return furnished under section 39.
  • Section 83(1), substituted, provides that provisional attachment shall remain valid for the entire period starting from the initiation of any proceeding under Chapter XII, Chapter XIV or Chapter XV till the expiry of a period of 1 year from the date of order.
  • Section 107(6) proviso, substituted, which provides that a sum equal to twenty-five per cent. of the penalty to be paid by the appellant while filing appeal against an order under section 129(3).
  • Section 151, substituted, the jurisdictional commissioner has the power to call for information from any person relating to any matters dealt with in connection with the Act.

 


*Tanvi Singh, Editorial Assistant has reported this brief.

Experts CornerTarun Jain (Tax Practitioner)

  1. Introduction

Determination of proceedings for recovery of tax takes its own time, passing through the adjudication stage, appellate stages and ultimately judicial review of tax administration’s actions. It is vividly possible that, in the interim the taxpayer may engage in activities which frustrate the tax administration’s recovery proceedings. For illustration, the taxpayer may liquidate the business partly or in whole, dispose significant assets, etc. in order to avoid recovery. In order to address such challenges, the tax administration is entrusted with statutory powers to pre-empt such attempts of the taxpayers to forestall recovery. For illustration, Section 281 of the Income Tax Act, 1961 cloths the tax administration with the power to declare “certain transfers to be void”.[1] In the goods and services tax (GST) laws, the tax administration is entrusted with the power to effect “provisional attachment to protect revenue in certain cases” wherein “any property, including bank account” can be attached provisionally by the tax administration during the pendency of certain proceedings.

 

In a short span of four years since the enforcement of GST laws, this power of provisional attachment has been exercised in plenitude by the tax administration which has resulted into judicial challenges and detailed judgments of the High Court. Recently the Supreme Court was seized with a controversy regarding provisional attachment of the properties of a taxpayer by the Himachal Pradesh GST authorities. By way of a detailed judgment in Radha Krishan Industries v. State of H.P.[2], the Supreme Court has culled out the relevant facets of this power of GST authorities, its contours, limitations, etc. as also enunciated the role of the courts in monitoring the exercise of this power by the GST authorities. The decision is expected to streamline the exercise of such powers under the GST laws while also balancing the rights of the taxpayers. This case comment explores the decision in greater detail so as to demystify the legal position and envision its impact on GST laws.

 

  1. Factual Setting before the Supreme Court

The appellant before the Supreme Court was a manufacturer who was issued a notice under Section 78 of the Himachal Pradesh Goods and Services Tax Act, 2017 (H.P. GST). Post a series of hearings, the Joint Commissioner of State Taxes passed orders provisionally attaching the appellant’s receivables from its customers. The provisional attachment was ordered under Section 83 of the H.P. GST read with Rule 159 framed thereunder. This provisional attachment was challenged by the appellant by way of writ petition before the High Court. Instead of adverting to the merits of the challenge, however, the High Court dismissed the writ petition on the ground of maintainability, citing availability of alternate remedies. This refusal by the High Court to examine the correctness of the provisional attachment order was challenged before the Supreme Court.

 

  1. Enunciating the Contours and Limitations on the Power of Provisional Attachment

The relevant provision of the Central Goods and Services Tax Act, 2017 (which has been similarly incorporated under the State GST laws, such as the H.P. GST) states as under:

 

  1. Provisional attachment to protect revenue in certain cases.— (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, 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).

 

The Supreme Court extensively dissected the statutory scheme under the GST laws whereupon the power of provisional attachment was pedestaled. Noting that in the aforesaid scheme the power was no unbridled and instead was circumscribed by various conditions inherent in the statutory scheme, the Supreme Court laid out the following six parts in which sub-section (1) of Section 83 could be divided, observing thus:

 

  1. 42. Sub-section (1) of Section 83 can be bifurcated into several parts. The first part provides an insight on when in point of time or at which stage the power can be exercised. The second part specifies the authority to whom the power to order a provisional attachment is entrusted. The third part defines the conditions which must be fulfilled to validate the power or ordering a provisional attachment. The fourth part indicates the manner in which an attachment is to be levelled. The final and the fifth part defines the nature of the property which can be attached. Each of these special divisions which have been explained above is for convenience of exposition. While they are not watertight compartments, ultimately and together they aid in validating an understanding of the statute. Each of the above five parts is now interpreted and explained below:

(i) The power to order a provisional attachment is entrusted during the pendency of proceedings under any one of six specified provisions: Sections 62, 63, 64, 67, 73 or Section 74. In other words, it is when a proceeding under any of these provisions is pending that a provisional attachment can be ordered.

(ii) The power to order a provisional attachment has been vested by the legislature in the Commissioner.

(iii) Before exercising the power, the Commissioner must be “of the opinion that for the purpose of protecting the interest of the government revenue, it is necessary so to do”.

(iv) The order for attachment must be in writing.

(v) The provisional attachment which is contemplated is of any property including a bank account belonging to the taxable person.

(vi) The manner in which a provisional attachment is levied must be specified in the rules made pursuant to the provisions of the statute.

 

Explaining the practical purport of this scheme, the Supreme Court opined that formation of “opinion” was sine qua non for exercise of this power and thus is its precondition. Enthralling the salient features of this conditionality, the Supreme Court observed the following:

 

  1. 49. Now in this backdrop, it becomes necessary to emphasise that before the Commissioner can levy a provisional attachment, there must be a formation of “the opinion” and that it is necessary “so to do” for the purpose of protecting the interest of the government revenue. The power to levy a provisional attachment is draconian in nature. By the exercise of the power, a property belonging to the taxable person may be attached, including a bank account. The attachment is provisional and the statute has contemplated an attachment during the pendency of the proceedings under the stipulated statutory provisions noticed earlier. An attachment which is contemplated in Section 83 is, in other words, at a stage which is anterior to the finalisation of an assessment or the raising of a demand. Conscious as the legislature was of the draconian nature of the power and the serious consequences which emanate from the attachment of any property including a bank account of the taxable person, it conditioned the exercise of the power by employing specific statutory language which conditions the exercise of the power. The language of the statute indicates first, the necessity of the formation of opinion by the Commissioner; second, the formation of opinion before ordering a provisional attachment; third the existence of opinion that it is necessary so to do for the purpose of protecting the interest of the government revenue; fourth, the issuance of an order in writing for the attachment of any property of the taxable person; and fifth, the observance by the Commissioner of the provisions contained in the rules in regard to the manner of attachment. Each of these components of the statute are integral to a valid exercise of power. In other words, when the exercise of the power is challenged, the validity of its exercise will depend on a strict and punctilious observance of the statutory preconditions by the Commissioner. While conditioning the exercise of the power on the formation of an opinion by the Commissioner that “for the purpose of protecting the interest of the government revenue, it is necessary so to do”, it is evident that the statute has not left the formation of opinion to an unguided subjective discretion of the Commissioner. The formation of the opinion must bear a proximate and live nexus to the purpose of protecting the interest of the government revenue.
  2. 50. By utilising the expression “it is necessary so to do” the legislature has evinced an intent that an attachment is authorised not merely because it is expedient to do so (or profitable or practicable for the revenue to do so) but because it is necessary to do so in order to protect interest of the government revenue. Necessity postulates that the interest of the revenue can be protected only by a provisional attachment without which the interest of the revenue would stand defeated. Necessity in other words postulates a more stringent requirement than a mere expediency. A provisional attachment under Section 83 is contemplated during the pendency of certain proceedings, meaning thereby that a final demand or liability is yet to be crystallised. An anticipatory attachment of this nature must strictly conform to the requirements, both substantive and procedural, embodied in the statute and the rules. The exercise of unguided discretion cannot be permissible because it will leave citizens and their legitimate business activities to the peril of arbitrary power. Each of these ingredients must be strictly applied before a provisional attachment on the property of an assesses can be levied. The Commissioner must be alive to the fact that such provisions are not intended to authorise Commissioners to make pre-emptive strikes on the property of the assessee, merely because property is available for being attached. There must be a valid formation of the opinion that a provisional attachment is necessary for the purpose of protecting the interest of the government revenue.
  3. 51. These expressions in regard to both the purpose and necessity of provisional attachment implicate the doctrine of proportionality. Proportionality mandates the existence of a proximate or live link between the need for the attachment and the purpose which it is intended to secure. It also postulates the maintenance of a proportion between the nature and extent of the attachment and the purpose which is sought to be served by ordering it. Moreover, the words embodied in sub-section (1) of Section 83, as interpreted above, would leave no manner of doubt that while ordering a provisional attachment the Commissioner must in the formation of the opinion act on the basis of tangible material on the basis of which the formation of opinion is based in regard to the existence of the statutory requirement.

 

The aforesaid aspect reveals that the Supreme Court has effectively rewritten the scheme regarding the power of the tax administration of provisional attachment whereby (a) heavy onus has been placed upon the tax administration to demonstrate the necessity for the exercise of such power objectively and judicially; and (b) also ensure its limited application, in view of the doctrine of proportionality.

 

In order to incorporate further safeguards towards protecting the taxpayers against indiscriminate exercise of this power, the Supreme Court culled out the principles prevailing under the income tax laws, namely, the “tangible material” test as the basis for inquiry and exercise of powers. On this point, the Supreme Court observed as under:

  1. 52. We adopt the test of the existence of “tangible material”. In this context, reference may be made to the decision of this Court in CIT Kelvinator of India Ltd.[3] Mr Justice S.H. Kapadia (as the learned Chief Justice then was) while considering the expression “reason to believe” in Section 147 of the Income Tax Act, 1961 that income chargeable to tax has escaped assessment inter alia by the omission or failure of the assessee to disclose fully and truly all material facts necessary for the assessment of that year, held that the power to reopen an assessment must be conditioned on the existence of “tangible material” and that “reasons must have a live link with the formation of the belief”. This principle was followed subsequently in a two-Judge Bench decision in ITO v. Techspan India (P) Ltd.[4] While adverting to these decisions we have noticed that Section 83 of the H.P. GST Act uses the expression “opinion” as distinguished from “reasons to believe”. However for the reasons that we have indicated earlier we are clearly of the view that the formation of the opinion must be based on tangible material which indicates a live link to the necessity to order a provisional attachment to protect the interest of the government revenue.

 

To conclude on the legal position, the Supreme Court decision summarises as under:

  1. 79. …

(iv) The power to order a provisional attachment of the property of the taxable person including a bank account is draconian in nature and the conditions which are prescribed by the statute for a valid exercise of the power must be strictly fulfilled.

(v) The exercise of the power for ordering a provisional attachment must be preceded by the formation of an opinion by the Commissioner that it is necessary so to do for the purpose of protecting the interest of the government revenue. Before ordering a provisional attachment the Commissioner must form an opinion on the basis of tangible material that the assessee is likely to defeat the demand, if any, and that therefore, it is necessary so to do for the purpose of protecting the interest of the government revenue.

(vi) The expression “necessary so to do for protecting the government revenue” implicates that the interests of the government revenue cannot be protected without ordering a provisional attachment.

(vii) The formation of an opinion by the Commissioner under Section 83(1) must be based on tangible material bearing on the necessity of ordering a provisional attachment for the purpose of protecting the interest of the government revenue.

***

(ix) Under the provisions of Rule 159(5), the person whose property is attached is entitled to dual procedural safeguards:

(a) An entitlement to submit objections on the ground that the property was or is not liable to attachment; and

(b) An opportunity of being heard.

(x) The Commissioner is duty-bound to deal with the objections to the attachment by passing a reasoned order which must be communicated to the taxable person whose property is attached.

 

On the facts of the decision, the Supreme Court rejected the tax administration’s reasoning and declared the provisional attachment to be unlawful.

 

  1. Reflections on Role of High Courts in Provisional Attachment Cases

According to the Supreme Court, the Himachal Pradesh High Court[5] erred in refusing to examine on merits the correctness of provisional attachment by dismissing the writ petition as non-maintainable. In the process of addressing the correctness of the High Court decision, the Supreme Court opined that the power of provisional attachment made significant inroads into the property rights of the taxpayers and thus close supervision of the exercise of such powers was necessary. Being of the opinion that under the statutory scheme of GST there was no means to correct errors in the exercise of such powers by the statutory authorities, the Supreme Court declared that it was incumbent upon the High Courts to exercise their extraordinary writ jurisdiction to examine the propriety of the tax administration’s exercise of power of provisional attachment. For such reason, the Supreme Court categorically concluded as maintainable a writ petition challenging an order of provisional attachment. In doing so, the Supreme Court also affirmed the views of various High Courts which had exercise addressed this proposition.[6] Some of the key propositions emanating from the High Court decisions, which were approved by the Supreme Court in Radha Krishan Industries v. State of H.P.[7] are summarised below:

  • Decision of the Delhi High Court, in Proex Fashion[8] holding that there are five conditions for invocation of Section 83 of the CGST, which stand approved in para 41 of the Supreme Court decision.
  • Decision of the Gujarat High Court, in Valerius Industries[9] which laid down principles for construction of Section 83 of the SGST/CGST Act. The High Court held that provisional attachment on the basis of a subjective satisfaction, absent any cogent or credible material, constitutes malice in law; vague, indefinite, distant, remote or far-fetching material would not warrant provisional The High Court further went on to lay down the conditions which would permit provisional attachment: (a) where there exists “reasonable apprehension” that the assessee may default the collection of the demand; (b) where there is sufficient material on record to justify the satisfaction that the assessee is about to dispose of wholly or any part of his/her property with a view to thwarting the ultimate collection of demand and in order to achieve the said objective, the attachment should be of the properties and to that extent, it is required to achieve this objective; and (c) provisional attachment power is to be used only as a last resort measure. The power under Section 83 of the Act should neither be used as a tool to harass the assessee nor should it be used in a manner which may have an irreversible detrimental effect on the business of the assessee.
  • In Jay Ambey Filament[10] the Gujarat High Court further expounded the above reasoning, holding that on his opinion being challenged, the competent officer must be able to show the material on the basis of which the belief is formed.
  • Decision in UFV India Global Education[11] of the Punjab and Haryana High Court which held that pendency of proceedings under the provisions mentioned in Section 83 (viz. Sections 62 or 63 or 64 or 67 or 73 or 74) is the sine qua nonfor an order of provisional attachment to be directed under Section 83.
  • Decision of the Bombay High Court in Kaish Impex[12] which considered a similar question regarding the application of Section 83. In this case the tax authorities traced money trail in tax fraud by an export firm and provisionally attached the bank accounts of the petitioner. The issue before the High Court was whether the petitioner’s assets could be attached considering the fact pattern that the proceedings were against another taxable entity. The High Court noted that the proceedings referred to under Section 83 of the Act must be pending against the taxable entity whose property is being attached. It inter alia observed:

 

  1. 18. … Section 83 does not provide for an automatic extension to any other taxable person from an inquiry specifically launched against a taxable person under these provisions. … The format of the order i.e. Form GST DRC-22 also 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 to be initiated against a taxable person and provisional attachment of bank account of such taxable person.

 

In short, contextualising the observations of the High Courts, the Supreme Court streamlined the legal position regarding the power of provisional attachment available to GST officers seeking to balance the tax recovery objective underlying the power while preserving the legitimate rights of the taxpayers.

 

  1. Conclusion

Any decision of the Supreme Court, given its constitutional authority under Article 141 as being binding on all courts and authorities in India, settled the controversy and lays down the law of the land. However, this decision is relevant on multiple counts not just in the context of the immediate facts but much beyond. Some of the salient aspects are enlisted below:

  • First, as discussed above, the Supreme Court has streamlined the legal position regarding the power of provisional attachment available to GST officers. This is crucial because GST is a relatively new tax and, more critically, cited as a reform. Thus, it is crucial that its provisions are interpreted uniformly across the country and that too in a humane manner such that their indiscriminate application does not derail the underlying objective of the new tax regime.
  • Second, the decision of the Supreme Court is not just based upon interpretation of the statutory provisions. Instead, it seeks to achieve a delicate balance protecting government revenue and allowing genuine businesses to operate, evidently in furtherance of underlying objective of making the GST law workable.
  • Third, the jurisprudential intercourse sought to be embedded in the scheme of provisional attachment related statutory provisions clearly dispels the long-standing tradition of the Supreme Court wherein the principle of natural justice and fair play are sought to be read in the fiscal laws, thereby ensuring that they remain within the constitutional precincts and do not trample upon the fundamental rights of the taxpayers, indulging the right for reasonable and balanced application of fiscal laws. To this effect, inter alia, the Supreme Court rightly dismissed the contention to grant higher sanctity to discretion of the GST Commissioner, thereby ensuring that the rights of the taxpayers are protected by a fair interpretation of the taxing statute.
  • Fourth, on a larger level, by confirming High Court’s supervision of tax officers’ actions under the extraordinary writ jurisdiction even though the statutory provisions do not provide any legal remedy to the aggrieved taxpayer, the Supreme Court has not just ensured that the taxpayer is not left remediless and instead introduced a mechanism to ensure tax officers’ accountability. No executive power can be exercised without effective supervision, much less a wide and potent power to attach assets which cannot only put fetters upon business operations of any entity but can also put strenuous effect on the very survival of business. In such circumstance, it is only appropriate that the exercise of such power is supervised by a constitutional court such that it can ensure balance between the law’s objective and the rights of the affected party.
  • Fifth, by reading into the law twin tests, the doctrine of proportionality and “tangible material”, the Supreme Court has adverted to the conditions necessary to make the law fair and reasonable which is a constitutional Absence of such tenets do not ipso facto make the law unconstitutional but by reading them into the law, the Supreme Court has ensured that arbitrariness and capricious conduct is not perpetrated in the garb of exercising statutory functions. Thereby the Supreme Court has protected genuine persons from unwarranted harassment and obviated the possibility of unguided discretion leading to peril of arbitrary power.

 

In short, this decision of the Supreme Court is a welcome addition to tax jurisprudence and incremental vindication of taxpayers’ rights.

 


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

The author would like to thank Vanaj Vidyan, Fourth Year Student at Ram Manohar Lohia National Law University for his able assistance.

[1] The provision states that “[w]here, during the pendency of any proceeding under this Act or after the completion thereof, but before the service of notice under R. 2 of the Second Schedule, any assessee creates a charge on, or parts with the possession (by way of sale, mortgage, gift, exchange or any other mode of transfer whatsoever) of, any of his assets in favour of any other person, such charge or transfer shall be void as against any claim in respect of any tax or any other sum payable by the assessee as a result of the completion of the said proceeding or otherwise”.

[2] 2021 SCC OnLine SC 334.

[3] (2010) 2 SCC 723.

[4] (2018) 6 SCC 685.

[5] Radha Krishan Industries v. State of H.P., 2021 SCC OnLine HP 4566 : (2021) 48 GSTL 3.

[6] Bindal Smelting (P) Ltd. v.  Directorate General of GST Intelligence, 2019 SCC OnLine P&H 6015 : (2020) 34 GSTL 592; Society for Integrated Development in Urban and Rural Areas v. CIT2001 SCC OnLine AP 1457 : (2001) 252 ITR 642; Vinodkumar Murlidhar Chechani v. State of Gujarat, 2020 SCC OnLine Guj 3010.

[7] 2021 SCC OnLine SC 334.

[8] Proex Fashion (P) Ltd.  v. Govt. of India,  2021 SCC OnLine Del 2082.

[9]Valerius Industries v. Union of India, 2019 SCC OnLine Guj 6866 : (2019) 30 GSTL 15.

[10] Jay Ambey Filament (P) Ltd. v. Union of India, 2020 SCC OnLine Guj 3009 : (2021) 44 GSTL 41.

[11]UFV India Global Education v. Union of India, 2020 SCC OnLine P&H 2796 : (2020) 43 GSTL 472.

[12]Kaish Impex (P) Ltd. v. Union of India, 2020 SCC OnLine Bom 125 : (2020) 6 AIR Bom R 122.

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.