Experts CornerTarun Jain (Tax Practitioner)

   

1. Introduction

The principles governing principal-agent relationship are now firmly established and well known, so much so that the law of agency has unequivocally ingrained itself in the commercial world. The axiomatic principles emanating therefrom are pivotal to ascertain legal consequences in wide-ranging tripartite situations, overwhelmingly extending their influence to entail tax implications as well. A recent decision of the Supreme Court has revisited the consequences of agency relationship qua the transactions between agent and third parties in the context of income tax law. It addresses an interesting issue; whether an agent can claim that the transaction (or a part of it) between it and the third party is an independent transaction even if it is occasioned on account of its agency relationship with the principal? This article dissects this decision to set in context the crucial interlinkage between agency law and tax law.

2. Dispute before the Supreme Court

The dispute before the Supreme Court arose in Singapore Airlines Ltd. v. CIT1. The relationship between travel agents and airlines was the centre-stage of dispute before the Supreme Court. The issue arose in view of the income tax obligation of the airlines to deduct tax at source (TDS) under Section 194-H2 on the commission payable by them to the travel agents towards booking of tickets. In view of the peculiar position of the airline industry, there was two commissions received by the travel agent, which are referred to as “standard commission” and “supplementary commission”.

The occasion for these commissions arose owing to the airline setting up a base price for sale of tickets and permitting the travel agent to sell the tickets at a higher price. The standard commission was paid by the airlines for each ticket sold by the travel agent, calculated at 7% of the ticket base price. The excess of amount collected by the travel agent from the customer (i.e. amount in excess of the base ticket price) was permitted to be retained by the travel agent in terms of the airline policy. This excess amount is referred as the supplementary commission. The transaction flow can be illustrated as under:

Base fare for Singapore — Delhi (set by the IATA)

Rs 1,00,000

This is the upper ceiling price of the ticket fixed by the regulator beyond which price cannot be charged from the customer.

Net fare (set by the airline)

Rs 60,000

This is the amount received by the airline and hence is the income of the airline.

Actual fare (set by the travel agent)

Rs 80,000

This is the amount on which ticket is actually sold by the travel agent. Hence, Rs 20,000 is left with the travel agent after payment of net fare to the airline.

Standard commission (7% of the base fare)

Rs 7,000

(7% of Rs 1,00,000)

This is the standard commission income of the travel agent on which TDS has been applied by the airline.

Supplementary commission (actual fare — net fare)

Rs 20,000

(Rs 80,000-60,000)

This is additional income of the travel agent on which airline is contesting that no TDS is applicable.

The airline was affecting TDS on the standard commission it paid to the travel agents. However, it was argued that supplementary commission was not subject to TDS as inter alia the supplementary commission was not paid by the airline and was the travel agents' own income. There was a cleavage of judicial opinion amongst the High Courts as to supplementary commission being subject to TDS. The Delhi High Court3 and Madras High Court4 had opined against the airlines whereas the Bombay High Court5 concluded in its favour holding that TDS was not applicable on the supplementary commission. In this background, the issue came up for consideration before the Supreme Court.

3. Decision of the Supreme Court

The Supreme Court in its decision in Singapore Airlines6 has extensively examined the industry practice prevailing in the airline industry and the manner in which travel agents earned their remuneration. It is interesting to note that in order to delineate the legal positioning of the travel agents within the airline industry, the decision opined upon the purport of relationship set out in Section 194-H to observe that it is principally concerned with principal-agency relationship. Taking cue from the expression “acting on behalf of” in the provision, the Supreme Court concluded that the nature of the relationship envisaged in Section 194-H was “interlinked” with the law of agency as expounded in the Law of Contract.7 Thus, to address the controversy, it was required to determine “whether the travel agents were ‘acting on behalf of' the airlines during the process of selling flight tickets”, which question would in turn have a substantial bearing on the nature of the supplementary commission.

Dissecting the relationship, at a conceptual level, the Supreme Court found it incongruent that the airlines did “not dispute that a principal-agent relationship existed during the payment of the standard commission” and yet they contended against a principal-agent relationship for the “second part of the transaction i.e. when the tickets were sold to the customer and for which the travel agents earned certain amounts over and above the net fare set by the” airlines. To address the dichotomy, the Supreme Court took recourse to its earlier precedents delineating the distinction between principal-agent versus master-servant relationship8 and contract of agency versus contract of sale9 to declare that the determination of the relationship was hinged upon determining the manner in which the title to the tickets passed from the airline and reached the customers. To this end, the Supreme Court framed the following three mixed questions of law and facts which required advertence;

“From the catena of cases elaborating on the characteristics of a contract of agency, the following indicators can be used to determine whether there is some merit in the (airlines) contentions on the bifurcation of the transaction into two parts:

Firstly, whether title in the tickets, at any point, passed from the (airline) to the travel agents;

Secondly, whether the sale of the flight documents by the latter was done under the pretext of them being the property of the agents themselves, or of the airlines;

Thirdly, whether the airline or the travel agent was liable for any breaches of the terms and conditions in the tickets, and for failure to fulfil the contractual rights that accrued to the consumer who purchased them.”

In effect, therefore, as evident from the aforesaid questions, the Supreme Court applied the test of transfer of title to determine the nature of relationship between the airlines and travel agents. It is evident that the travel agent would have been acting in the capacity of principal if the title in the tickets passed from the airlines to the travel agent and thereafter from travel agent to the customers whereas the travel agent would be acting in agency capacity if the title directly pass from the airline to the customers.

Upon a perusal of the contract between the airlines and the travel agent, the Supreme Court inter alia took note of an undisputed stipulations in the agreement between the airlines and the travel agents that the travel documents “… are and remain the sole property of the carrier … until duly issued and delivered pursuant to a transaction under this agreement”, which unequivocally clinched the matter as it implied that at no stage the title in the tickets, transferred from the airlines to the travel agent and the tickets remained the property of the airline. On this premise, the Supreme Court unhesitatingly concluded that “[n]o contract of sale between two principals was ever in existence” between the airlines and the travel agent. This effectively foreclosed the contention that the travel agent was acting as a principal with the customer qua the supplementary commission.

However, the Supreme Court did not rest it conclusion only on this ground. In its decision it further went on to exemplify from other contractual stipulations that several elements of a contract of agency stood satisfied. It inter alia highlighted the following: (A) “Every action taken by the travel agents is on behalf of the air carriers and the services they provide is with express prior authorisation. The airline also indemnifies the travel agent for any shortcoming in the actual services of transportation, and any connected ancillary services, as it is the former that actually retains title over the travel documents and is responsible for the actual services provided to the final customer.” (B) “Furthermore, the airline has the responsibility to provide full and final compensation to the travel agent for the acts it carries out under the” agreement. Thus, the Supreme Court found enough substance in the agreement that the travel agent acted on behalf of the airlines at all times, rendering the airlines liable for all their acts and thereby firmly establishing the agency relationship between them on all counts without exception of the supplementary commission.

As regards the application of the TDS provisions on the supplementary commission, the following observations of the Supreme Court are pertinent;

  1. Section 194-H “does not distinguish between direct and indirect payments. Both fall under Explanation (i) to the provision in classifying what may be called a ‘commission'”.

  2. In this wake of the statutory scheme, “the factum of the exact source of the payment would be of no consequence to the requirement of deducting TDS. Even on an indirect payment stemming from the consumer, the (airlines) would remain liable under the IT Act. Consequently, the contention of the airlines regarding the point of origination for the amounts does not impair the applicability of Section 194-H of the IT Act”.

  3. How the airline would appraise itself of the exact quantum of supplementary commission earned by the travel agent from the customer, so as to determine the quantum of TDS, is a question of “mechanics” which must be figured out by the airline in order to discharge its TDS obligation.

  4. “Further, the lack of control that the airlines have over the actual fare charged by the travel agents over and above the net fare, cannot form the legal basis for the (airlines) to avoid their liability” because “an agent undoubtedly retains a sizeable level of discretion on how to achieve the desired results”.10

For the aforesaid reasons, the Supreme Court confirmed the decision of the Delhi High Court to the effect that the airlines were obliged to apply TDS even on the supplementary commission earned by the travel agents by way of retaining the amounts directly from the customers.

4. Implications of the decision qua scope of TDS provisions

There is a clear finding by the Supreme Court linking the TDS obligation under Section 194-H to the law of agency.11 This has substantial bearing on large number of pending disputes. It would be interesting to observe the application of this decision wherein it has been inter alia contended that there is no payment by the alleged principal, even if there is payment, it is not in the nature of the commission. An indiscriminate application of the principle12 that Section 194-H is based on agency relationship (and other related observations in this decision) is likely to render academic all such contentions.

From another angle, the implications of the decision are far beyond Section 194-H. From a TDS perspective, the key takeaway from this decision is that it is not necessary for the TDS provisions to apply that the funds flow directly from the pay or to the receiver; the TDS obligation nonetheless continues to exist even if the flow of funds to the receiver is from third parties if the flow can be traced to the transaction which is subjected to TDS. On this account, it would be difficult to restrain the ratio of this decision as being confined to Section 194-H alone and arguably the Tax Department can be expected to stretch the proposition emanating from this case to all TDS situations.

5. Reflections on agent's authority to act independently

Notwithstanding the fact that the decision is the context of tax law, it has wide ramifications even within the realm of the law of agency. One can contend that the decision establishes the proposition that the law of agency does not accommodate dissection of agent's acts so as to classify some of its actions as if on principal-to-principal basis with third parties while continuing to act as an agent of the main principal. The reference by the Supreme Court to the decision in Bhopal Sugar Industries13 and opining that there were no two principals is clearly testament to the fact that the first transaction (i.e. between the airline and the travel agent) qualifying as an agency would, as if by default, rule out the principal-to-principal status of the second transaction and the second transaction would invariably be an extension of the principal-agency relationship under the first transaction. Put differently, this decision of the Supreme Court arguably institutes the proposition that an agent cannot generally be considered as acting on a principal basis himself with third parties once his dealing with such parties are in pursuance of an agency relationship with the principal.

A lot also turns of the following observations of the Supreme Court are instructive;

47. The fact that the travel agent has discretion to set an actual fare which is above the net fare has no effect on the nature of the relationship between the parties. A contract of agency permits an agent to carry out acts on its own volition provided it does not contravene the purpose of the agency contract and the interests of the principal. The accretion of the supplementary commission to the travel agents is an accessory to the actual principal-agent relationship under the PSA. In such a commercial arrangement, the benefit gained by an agent is incidental to and has a reasonably close nexus with the responsibilities that were entrusted to it by the principal air carrier. Such incidental benefits or actions must come under the ambit of the relationship, subject to any express limitations articulated in the contract itself or under the Contract Act.

The aforesaid observations go a long way in establishing the scope of agency itself. The fact that consideration for agency can flow from third parties directly the agent (as the supplementary commission reveals) is now firmly established. The decision also establishes that once the obligation of the principal continues qua third parties, it would be difficult to conclude that agency relationship does not exist notwithstanding the incidental aspects. Indeed, the Supreme Court referred to the provisions of the Contract Act which deal with “right of principal when agent deals, on his own account, in business of agency without principal's consent”14 and “principal's right to benefit gained by agent dealing on his own account in business of agency”15. However, the Supreme Court found these provisions inapplicable in the factual premise as the agreement between the airline and the travel agents “does not explicitly address the issue of supplementary commission at all”. More critically, the Supreme Court observed, “an agent acting of its own account does not, in principle, alter the nature of a contract of agency and only gives rise to the consequences mentioned under Sections 215 and 216 of the Contract Act if the conditions contained within them exist”.

Taken to their logical end, this decision endorses the legal position that the fact that the agent reserves for himself sufficient latitude to determine the terms of engagement with third parties does not transform the nature of its relationship with the principal. The legal difference between the authority of an agent vis-à-vis a servant clearly expounds that agent's dealings with third parties accommodate an agent to carry out “acts on its own volition”. A caveat does exist that such acts should “not contravene the purpose of the agency contract and the interests of the principal”. However, pragmatically, such caveat would play out only where the principal refuses to “condone” the alleged transgressions of the agent. Thus, in practical terms, the following legal position can be considered to arise from the decision:

  • So long as the principal accommodates/ratifies the acts of the agent, it would be difficult to conclude that the transactions of the agent with third parties are beyond the scope of agency notwithstanding that the agent has not been expressly authorised to certain ends or the fact, as in this case, that the agent has negotiated the price with the customer and retained a part of the price for itself;

  • Even if the principal disagrees with the acts of the agents, in view of Sections 215 and 216, at best the principal can sue the agent for share in the additional benefit of the agent (Section 216) or get the agency agreement terminated (Section 215). However, even in wake of such empowerment of the principal, there is nothing in the law which “alter the nature of a contract of agency” in situations of an agent acting of its own account.

The decision, therefore, undoubtedly establishes a wide latitude for agents to act independently within the larger framework of the agency agreement with the principal. Viewed differently, the decision categorically expounds upon the agent's ability to deal with third parties within the larger framework of the agency relationship.

6. Conclusion

There are few contemporary decisions of the Supreme Court addressing the scope of agent's authority qua third parties. On this count, the decision is a welcome addition on the jurisprudence as it fine tunes the legal framework to address the pragmatic commercial realities by declaring that it is wide to subsume almost all acts of the agent and dealings with third parties subject perhaps only to the larger guiding factors of (a) purpose of agency, and (b) interests of the principal, and obviously, the overarching statutory framework. This decision of the Supreme Court, albeit in the context of tax law, thus, effectively delineates the wide empowerment of an agent and the contours of the agency relationship extending to his transactions with third parties.

The aforesaid summation of the decision, in the larger context of agency law, is admittedly in addition to the ratio of the decision which is to the effect that (i) an agent continues to act in the capacity of the agent even if he is empowered to negotiate the price with the customer and retain a portion of it for itself; (ii) and all remuneration received by the agent would be subject to tax deduction by the principal even if part of the remuneration does not directly flow from the principal to the agent and is instead received by the agent by retaining a part of the amount received from the customer.


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

1. 2022 SCC Online SC 1588.

2. S. 194-H, Income Tax Act, 1961. The said provision inter alia obliges TDS by the payer on “any income by way of commission” wherein “commission or brokerage includes any payment received or receivable, directly or indirectly, by a person acting on behalf of another person for services rendered (not being professional services) or for any services in the course of buying or selling of goods or in relation to any transaction relating to any asset, valuable article or thing, not being securities”.

3. CIT v. Singapore Airlines Ltd., 2009 SCC OnLine Del 823.

4. Around the World Travel and Tours (P) Ltd. v. Union of India, 2003 SCC Online Mad 1027.

5. CIT v. Qatar Airways, 2009 SCC Online Bom 2179.

6. 2022 SCC Online SC 1588.

7. Contract Act, 1872, S. 182. It states, “an ‘agent' is a person employed to do any act for another, or to represent another in dealings with third persons. The person for whom such act is done, or who is so represented, is called the ‘principal'.”

8. Lakshminarayan Ram Gopal and Son Ltd. v. Govt. of Hyderabad, AIR 1954 SC 364.

9. Gordon Woodroffe and Co. (Madras) Ltd. v. Shaik M.A. Majid, AIR 1967 SC 181 : 1966 Supp SCR 1; Khedut Sahakari Ginning and Pressing Society Ltd. v. State of Gujarat, (1971) 3 SCC 480; Bhopal Sugar Industries Ltd. v. STO, (1977) 3 SCC 147.

10. Relying upon Lakshminarayan Ram Gopal, AIR 1954 SC 364 and Qamar Shaffi Tyabji v. Commr., Excess Profits Tax, AIR 1960 SC 1269 : (1960) 3 SCR 546.

11. “S. 194-H is to be read with S. 182 of the Contract Act. If a relationship between two parties as culled out from their intentions as manifested in the terms of the contract between them indicate the existence of a principal-agent relationship as defined under S. 182 of the Contract Act, then the definition of “commission” under S. 194-H of the IT Act stands attracted and the requirement to deduct TDS arises.”

12. Read alongside the earlier decision of the Supreme Court in Director, Prasar Bharati v. CIT, (2018) 7 SCC 800 which is cited with approval in this decision.

13. Bhopal Sugar Industries Ltd. v. STO, (1977) 3 SCC 147. It is relevant to note that the Supreme Court in this decision inter alia quoted with approval the following observations in Bhopal Sugar Industries decision; “A contract of agency, however, differs essentially from a contract of sale inasmuch as an agent after taking delivery of the property does not sell it as his own property but sells the same as the property of the principal and under his instructions and directions. Furthermore, since the agent is not the owner of the goods, if any loss is suffered by the agent he is to be indemnified by the principal. This is yet another dominant factor which distinguishes an agent from a buyer pure and simple.”

14. “215. Right of principal when agent deals, on his own account, in business of agency without principal's consent. If an agent deals on his own account in the business of the agency, without first obtaining the consent of his principal and acquainting him with all material circumstances which have come to his own knowledge on the subject, the principal may repudiate the transaction, if the case shows, either that any material fact has been dishonestly concealed from him by the agent, or that the dealings of the agent have been disadvantageous to him.”

15. “216. Principal's right to benefit gained by agent dealing on his own account in business of agency. If an agent, without the knowledge of his principal, deals in the business of the agency on his own account instead of on account of his principal, the principal is entitled to claim from the agent any benefit which may have resulted to him from the transaction.”

Case BriefsSupreme Court

   

Supreme Court: In an appeal filed by Revenue against the judgment passed by Bombay High Court, wherein the Court has dismissed the appeals and has confirmed the orders passed by the Income Tax Appellate Tribunal (‘ITAT’) deleting the short-term capital gains addition made by the assessing officer, the division bench of MR Shah* and M.M Sundresh, JJ held that the assets so revalued and the credit into the capital accounts of the respective partners can be said to be “transfer” and which fall in the category of “otherwise” and therefore, the provision of Section 45(4) inserted by Finance Act, 1987 shall be applicable. Thus, said that the impugned judgment passed by the High Court and that of the ITAT are unsustainable and set aside the same and restored the order passed by the assessing officer.

The question for consideration is the applicability of Section 45(4) of the Income Tax Act as introduced by the Finance Act, 1987?

The Court referred to Section 45 and said that the object and purpose of introduction of Section 45(4) was to pluck the loophole by insertion of Section 45(4) and omission of Section 2(47)(ii). While introduction to Section 45(4), clause (ii) of Section 2(47) came to be omitted. Earlier, omission of clause (ii) of Section 2(47) and Section 47(ii) exempted the transform by way of distribution of capital assets from the ambit of the definition of “transfer”. The same helped the assessee in avoiding the levy of capital gains tax by revaluing the assets and then transferring and distributing the same at the time of dissolution. The said loophole came to be plucked by insertion of Section 45(4) and omission of Section 2(47)(ii). It also noted that the word used “or otherwise” in Section 45(4) is very important.

The assessee submitted that unless there is a dissolution of the partnership firm, and there is only transfer of the amount on revaluation to the capital accounts of the respective partners, Section 45(4) of the Income Tax Act shall not be applicable. The Court said that the amended Section 45(4) of the Income Tax Act inserted vide Finance Act, 1987, by which, “or otherwise” is specifically added, the aforesaid submission on behalf of the assessee has no substance.

In the present case, the assets of the partnership firm were revalued to increase the value by an amount of Rs. 17.34 crores on 01-01-1993 and the revalued amount was credited to the accounts of the partners in their profit-sharing ratio and the credit of the assets’ revaluation amount to the capital accounts of the partners can be said to be in effect distribution of the assets valued at Rs. 17.34 crores to the partners. During the years, some new partners came to be inducted by introduction of small amounts of capital and the said newly inducted partners had huge credits to their capital accounts immediately after joining the partnership, which amount was available to the partners for withdrawal and in fact some of the partners withdrew the amount credited in their capital accounts.

Relying on the ruling in in CIT v. Hind Construction Ltd., (1972) 4 SCC 460, it was argued before the Court that unless there is a dissolution of the partnership firm, and there is only transfer of the amount on revaluation to the capital accounts of the respective partners, Section 45(4) of the Income Tax Act shall not be applicable.

The Court, however, rejected the submission and observed that the word “otherwise” used in Section 45(4) takes into its sweep not only the cases of dissolution but also cases of subsisting partners of a partnership, transferring the assets in favour of a retiring partner.

The Court noted that the decision in CIT v. Hind Construction Ltd., (1972) 4 SCC 460. was a pre-insertion of Section 45(4) of the Income Tax Act inserted by Finance Act, 1987 and in the earlier regime – pre-insertion of Section 45(4), the word “otherwise” was absent. Therefore, in the case of Hind Construction Ltd. (supra), this Court had no occasion to consider the amended inserted Section 45(4) of the Income Tax Act and the word used “otherwise”. Thus, for the purpose of interpretation of newly inserted Section 45(4), the decision in Hind Construction Ltd. (supra) shall not be applicable and/or the same shall not be of any assistance to the assessee. Further, the Court affirmed the view taken by the Bombay High Court in the case of Commissioner of Income Tax v. A.N. Naik Associates, 2003 SCC OnLine Bom 688.

Therefore, it was held that the assets so revalued and the credit into the capital accounts of the respective partners can be said to be “transfer” and which fall in the category of “otherwise” and therefore, the provision of Section 45(4) inserted by Finance Act, 1987 shall be applicable.

[CIT v. Mansukh Dyeing & Printing Mills, 2022 SCC OnLine SC 1618, decided on 24-11-2022]

*Judgment by: Justice M.R Shah.


Advocates who appeared in this case:

For Revenue: Advocate Rupesh Kumar;

For Assessee: Advocate Kaustubh Shukla.


*Apoorva Goel, Editorial Assistant has reported this brief.

Experts CornerTarun Jain (Tax Practitioner)

Introduction

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

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

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

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

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

Privity of consideration under GST laws: Exploring the interplay

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

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

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

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

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

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

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

* * *

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Conclusion

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


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

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

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

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

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

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

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

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

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

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

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

Case BriefsSupreme Court

Supreme Court: Dealing with an important question relating to appellate jurisdiction of the High Courts under Section 260A of the Income Tax Act, 1961 (the Act) against judgments of Income Tax Appellate Tribunals (ITAT), the bench of UU Lalit, S. Ravindra Bhat and PS Narasimha*, JJ has held that appeals against every decision of the ITAT shall lie only before the High Court within whose jurisdiction the Assessing Officer who passed the assessment order is situated.

Interestingly, Section 260A is open-textual and does not specify the High Court before which an appeal would lie in cases where Tribunals operated for plurality of States. Hence, as Benches of the ITAT are constituted to exercise jurisdiction over more than one state, each state having a separate High Court, question arose as to which of the High Court is the appropriate Court for filing appeals under Section 260A. The Supreme Court observed that the decision of the High Court of Delhi in the case of Seth Banarsi Dass Gupta v. Commissioner of Income Tax, 1978 SCC OnLine Del 43, wherein it was held that the appropriate High Court would be the one where the Assessing Authority is situated, continuous to hold the field.

However, due to a difference of opinion between the Punjab and Haryana High Court and the Delhi High Court, a further question arose before the Supreme Court relating to the jurisdiction of the High Court consequent upon administrative order of transfer of a ‘case’ under Section 127 of the Act from one Assessing Authority to another Assessing Officer located in a different State.

The Punjab & Haryana High Court took the view that such a transfer would not change the principle laid down in Seth Banarasi Dass Gupta. However, the Delhi High Court in CIT v. Sahara India Financial Corporation Ltd, 2007 SCC OnLine Del 1762 and CIT v. Aar Bee Industries Ltd, 2013 SCC OnLine Del 2356 has held that an administrative order of transfer of cases will also have the consequence of transferring even the jurisdiction of the High Court.

The Supreme Court, however, reversed the judgments of Delhi High Court on this aspect and held that the appellate jurisdiction of the High Court stands on its own foundation and cannot be subject to the exercise of executive power to transfer a ‘case’ from one Assessing Officer to another Assessing Officer.

“Even if the case or cases of an assessee are transferred in exercise of power under Section 127 of the Act, the High Court within whose jurisdiction the Assessing Officer has passed the order, shall continue to exercise the jurisdiction of appeal. This principle is applicable even if the transfer is under Section 127 for the same assessment year(s).”

The Court further observed that if it is the accepted principle to determine the jurisdiction of a High Court under Section 260A of the Act on the basis of the location of the Assessing Officer who assessed the case, then, by the strength of the very same logic, upon transfer of a case to another Assessing Officer under Section 127, the jurisdiction under Section 260A must be with the High Court in whose jurisdiction the new Assessing Officer is located.

Stressing on the ‘need for order’ and consistency in decision making, the Court noted that a decision of a High Court is binding on subordinate courts as well as tribunals operating within its territorial jurisdiction. It is for this very reason that the Assessing Officer, Commissioner of Appeals and the ITAT operate under the concerned High Court as one unit, for consistency and systematic development of the law.

The Court also explained that the decisions of the High Court in whose jurisdiction the transferee Assessing Officer is situated do not bind the Authorities or the ITAT which had passed orders before the transfer of the case has taken place. This creates an anomalous situation, as the erroneous principle adopted by the authority or the ITAT, even if corrected by the High Court outside its jurisdiction, would not be binding on them.

“The legal structure under the Income Tax Act commencing with Assessing Officer, the Commissioner of Appeals, ITAT and finally the High Court under Section 260A must be seen as a lineal progression of judicial remedies. Culmination of all these proceedings in question of law jurisdiction of the High Court under Section 260A of the Act is of special significance as it depicts the overarching judicial superintendence of the High Court over Tribunals and other Authorities operating within its territorial jurisdiction.”

[Commissioner of Income Tax v. ABC Papers Ltd, 2022 SCC OnLine SC 1036, decided on 18.08.2022]


*Judgment by: Justice PS Narasimha


For Revenue: ASG N. Venkatraman

For Assessee: Advocate Rohit Jain

Case BriefsSupreme Court

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

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

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

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

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

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

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

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

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

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


*Judgment by: Justice KM Joseph


For UOI: ASG N. Venkataraman,

For writ petitioner: Advocate Amar Dave

For Second Respondent: Advocate Girdhar Govind

Case BriefsSupreme Court

Supreme Court: The bench of MR Shah* and BV Nagarathna, JJ has rejected the view taken by the Karnataka High Court and ITAT, Bangalore that the requirement of furnishing a declaration under Section 10B (8) of the Income Tax Act, 1961 (IT Act) is mandatory, but the time limit within which the declaration is to be filed is not mandatory but is directory. The Court held that the assessee shall not be entitled to the benefit under Section 10B (8) of the IT Act on noncompliance of the twin conditions as provided under Section 10B (8) of the IT Act.

In the case at hand, when the assessee submitted its original return of income under Section 139(1) of the IT Act on the due date i.e. 31.10.2001, it specifically stated that it is a company and is a 100% export-oriented unit, entitled to claim exemption under Section 10B of the IT Act and therefore no loss is being carried forward. However, thereafter the assessee filed the revised return of income under Section 139(5) of the IT Act on 23.12.2002 and filed a declaration under Section 10B (8) which admittedly was after the due date of filing of the original return under Section 139(1), i.e., 31.10.2001.

The ITAT as well as the High Court held that for claiming the so-called exemption relief under Section 10B (8) of the IT Act, furnishing the declaration to the assessing officer is mandatory but furnishing the same before the due date of filing the original return of income is directory. Aggrieved by the decision, the Revenue approached the Supreme Court.

The Supreme Court observed that the High Court and ITAT is erroneous and contrary to the unambiguous language contained in Section 10B (8) of the IT Act which provides that  “where the assessee, before the due date for furnishing the return of income under sub-section (1) of section 139, furnishes to the Assessing Officer a declaration in writing that the provisions of Section 10B may not be made applicable to him, the provisions of Section 10B shall not apply to him for any of the relevant assessment years”.

Hence, for claiming the benefit under Section 10B (8), the twin conditions of furnishing the declaration to the assessing officer in writing and that the same must be furnished before the due date of filing the return of income under sub-section (1) of Section 139 of the IT Act are required to be fulfilled and/or satisfied. Both the conditions to be satisfied are mandatory.

It cannot be said that one of the conditions would be mandatory and the other would be directory, where the words used for furnishing the declaration to the assessing officer and to be furnished before the due date of filing the original return of income under subsection (1) of section 139 are same/similar.”

The Court also considered the facts that in the case at hand the assessee filed its original return under Section 139(1) and not under Section 139(3). The revenue submitted that the revised return filed by the assessee under Section 139(5) can only substitute its original return under Section 139(1) and cannot transform it into a return under Section 139(3), in order to avail the benefit of carrying forward or set-off of any loss under Section 80 of the IT Act.

Agreeing with the Revenue’s submission, the Court explained,

“The assessee can file a revised return in a case where there is an omission or a wrong statement. But a revised return of income, under Section 139(5) cannot be filed, to withdraw the claim and subsequently claiming the carried forward or setoff of any loss. Filing a revised return under Section 139(5) of the IT Act and taking a contrary stand and/or claiming the exemption, which was specifically not claimed earlier while filing the original return of income is not permissible. By filing the revised return of income, the assessee cannot be permitted to substitute the original return of income filed under Section 139(1) of the IT Act.”

Therefore, it was held that claiming benefit under Section 10B (8) and furnishing the declaration as required under Section 10B (8) in the revised return of income which was much after the due date of filing the original return of income under Section 139(1) of the IT Act, cannot mean that the assessee has complied with the condition of furnishing the declaration before the due date of filing the original return of income under Section 139(1) of the Act.

Ruling in favour of the Revenue, the Court held that for claiming the benefit under Section 10B (8) of the IT Act, the twin conditions of furnishing a declaration before the assessing officer and that too before the due date of filing the original return of income under Section 139(1) are to be satisfied and both are mandatorily to be complied with.

Setting aside the judgment of High Court and ITAT, the Court held that the assessee shall not be entitled to the benefit under Section 10B (8) of the IT Act on noncompliance of the twin conditions as provided under Section 10B (8) of the IT Act.

[CIT v. Wipro Ltd., 2022 SCC OnLine SC 831, decided on 11.07.2022]


*Judgment by: Justice MR Shah


Counsels

For Revenue: ASG Balbir Singh

For Assessee: Senior Advocate S. Ganesh

AAR GST
Case BriefsTribunals/Commissions/Regulatory Bodies

   

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

The factual background of the case

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

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

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

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

Analysis and Decision

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

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

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

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

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

Case BriefsSupreme Court

Supreme Court: The bench of MR Shah* and Sanjiv Khanna, JJ has reversed the ruling of Customs, Excise & Service Tax Appellate Tribunal, Delhi (CESTAT) wherein it was held that the services rendered by a “Consulting Engineer” were not subjected to service tax.

Background

In the case at hand, a Chinese Government Company Sepco Electric Power Construction Corporation entered into a contract with Bharat Aluminium Co. Ltd. (BALCO) for providing “Design Engineering Services” and “Project Management & Technical Services”. In terms of the said agreement, it rendered “Consulting Engineer Services” to BALCO.

Pursuant to the CESTAT order, the question that fell for consideration before the Supreme Court was regarding the scope of definition of “consulting engineer” under Section 65(31) of the Finance Act, 1994, specifically as to whether a “body corporate” is covered within its sweep prior to the amendment in 2005.

It is important to note that post 2005, the definition of “consulting engineer” under Section 65(31) has been amended and now it specifically includes a “body corporate”. Therefore, as such, with respect to the proceedings post amendment 2005, there will be no difficulty. After the amendment, any “body corporate”, a service provider providing the services as “consulting engineer” is liable to pay the service tax.

Analysis

Under the Finance Act, 1994, the definition of “consulting engineer” in Section 65(31) covers services provided to a client by a professionally qualified engineer or an engineering firm consisting of professionally qualified engineers. The taxable attribute is that the services must be rendered in a professional capacity.

Prior to amendment 2005, by a Circular/Trade Notice dated 4.7.1997, the definition of “consulting engineer” under the Finance Act, 1994 was specifically explained and as per the said Trade Notice, “consulting engineer” means any professionally qualified engineer or engineering firm who, either directly or indirectly, venders any advice, consultancy or technical assistance in any manner to a client in one or more disciplines of engineering. It also further clarified that “consulting engineer” shall include self-employed professionally qualified engineer who may or may not have employed others to assist him or it could an engineering firm – whether organised as a sole proprietorship – partnership, a private or a Public Ltd. company.

Also, in many places under the Finance Act, 1994, the Parliament/Legislature has used the word “person” (Sections 68, 69 and 70). At this stage, Section 3(42) of the General Clauses Act, 1897 is also required to be referred to, considered and applied. The word “person” includes any company or association or body of individuals, whether incorporated or not.

Hence, it could be seen that it was never the intention of the legislation to exclude a “body corporate” from the definition of “consulting engineer” and from the “service tax net”.

Further, if it is held otherwise, in that case, it would remove all companies providing technical services, advice or consultancy to their clients from the service tax net, while any such services rendered by an individual or a partnership firm would continue to remain taxable. That does not seem to be an intention on the part of the legislature to exclude the “body corporate” from the definition of “consulting engineer”. There does not seem to be any logic to exclude “body corporate” from the definition of “consulting engineer”.

If the submission on behalf of the respondent is accepted and the “body corporate” is excluded from the service tax, in that case, it would not only lead to absurdity but also would create two different classes providing the same services. That cannot be the intention of the legislature to create two separate classes providing the same services and to exclude one class.”

Ruling on facts

Applying the aforementioned law to the case at hand, the Court held that the respondent, being a service provider providing consultancy engineering services, was/is liable to pay the service tax for such services being “consulting engineer” within the definition of Section 65(31) of the Finance Act, 1994 and therefore and thereby liable to pay the service tax under Section 66 r/w Section 68 of the Finance Act, 1994.

[Commissioner of Central Excise v. Sepco Electric Power Construction Corporation, 2022 SCC OnLine SC 833, decided on 11.07.2022]


*Judgment by: Justice MR Shah

Counsels

For Revenue: Additional Solicitor General of India Balbir Singh

For Respondent: Advocate P.K. Sahu

AAR GST
Case BriefsTribunals/Commissions/Regulatory Bodies

Maharashtra Authority for Advance Ruling: Rajiv Mangoo, Additional Commissioner of Central Tax & T.R. Ramani, Joint Commissioner of State Tax held that the stipend amount is given to the trainees by the training institutes for the duration of their training is not a part of taxable value.

Factual Background of the case

The applicant is indulged in the business of human resource and skill development and had enrolled as a facilitator under the National Employability Enhancement Mission (NEEM) scheme and provides trainees to various institutes for which service charges were collected in addition to the reimbursement of the stipend payable to trainees.

An application was filed by the applicant, under Section 97 of the Central Goods and Services Tax Act, 2017 (CGST Act) before the Maharashtra Authority for Advance Ruling to seek an Advance Ruling on the following:

  • Whether the applicant, in the capacity of being a NEEM facilitator, acts as a ‘Pure Agent’ while receiving reimbursement of stipend amounts from the various trainer institutes and remitting the same to the trainees?

  • If not, whether such a stipend amount forms a part of the taxable value?

Analysis and Decisions

The bench defined ‘advance ruling’ as a decision given by the authority to an applicant on matters or issues specified in sub-section (2) of Section 97, concerning the supply of goods and services. Therefore, the bench refrained from answering the first issue of the case as the matters specified in clauses (a) to (g) of Section 97 sub-clause (2) of the CGST Act as it was not applicable to the facts of the case.

Further, the bench observed that in regard to payment of stipend to the trainees, the actual service was provided by the trainees for which stipend was payable, the applicant was only acting as an intermediary in collecting the stipend from the training institutes and disbursing the same to the trainees in full without making any deductions.

At this juncture, the bench referred to the case of Yashaswi Academy for Skills 2019 SCC OnLine Mah AAR-GST 78 wherein the bench held that “the reimbursement by industry partner to the applicant, of the stipend paid to the trainees, does not attract tax under the GST Act.”

Hence, the bench applied the same principle as laid down in the aforementioned case and held that the stipend paid by entities/ training institutes to the trainees through the applicant does not attract GST and need not be added to the taxable value.

[Patle Eduskills Foundation, In Re. 2022 SCC OnLine Mah AAR-GST 13, decided on 08-06-2022]

Case BriefsSupreme Court

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

The Court observed that,

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

Issue

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

Discussion

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

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

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

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

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

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

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

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

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

Conclusion

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

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

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

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

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

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

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

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

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


*Judgment by: Justice Dr. DY Chandrachud


Counsels

For UOI: ASG N Venkataraman

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

For intervenors: Advocate Rajesh Kumar Gautam

Case BriefsSupreme Court

Supreme Court: The bench of UU Lalit and S. Ravindra Bhat*, JJ has held that whether corporate death of an entity upon amalgamation per se invalidates a tax assessment order ordinarily cannot be determined on a bare application of Section 481 of the Companies Act, 1956 (and its equivalent in the 2013 Act), but would depend on the terms of the amalgamation and the facts of each case.

Facts Background

The Court was deciding an appeal against the order of the Delhi High Court rejecting the appeal, by the revenue and affirming the order of the Income Tax Appellate Tribunal (ITAT) which quashed the assessment order against the assessee Mahagun Realtors Private Limited (MRPL).

MRPL, a real estate company, amalgamated with Mahagun India Private Limited (MIPL) on 01.04.2006. The Assessing Officer (AO), issued an assessment order on 11.08.2011, assessing the income of ₹ 8,62,85,332/- after making several additions of ₹ 6,47,00,972/- under various heads. The assessment order showed the assessee as “Mahagun Relators Private Ltd, represented by Mahagun India Private Ltd”.

It was argued before the Court that the assessment framed in the name of amalgamating company which was ceased to exist in law, was invalid and untenable in terms of Section 170(2) of the Income Tax Act, 1961.

Analysis

Section 170 of Income Tax Act, inter alia, provides that where a person carries on any business or profession and is succeeded (to such business) by some other person (i.e., the successor), the predecessor shall be assessed to the extent of income accruing in the previous year in which the succession took place, and the successor shall be assessed in respect of income of the previous year in respect of the income of the previous year after the date of succession.

Further, there are not less than 100 instances under the Income Tax Act, wherein the event of amalgamation, the method of treatment of a particular subject matter is expressly indicated in the provisions of the Act. In some instances, amalgamation results in withdrawal of a special benefit (such as an area exemption under Section 80IA) – because it is entity or unit specific. In the case of carry forward of losses and profits, a nuanced approach has been indicated. All these provisions support the idea that the enterprise or the undertaking, and the business of the amalgamated company continues. The beneficial treatment, in the form of set-off, deductions (in proportion to the period the transferee was in existence, vis-à-vis the transfer to the transferee company); carry forward of loss, depreciation, all bear out that under the Act, (a) the business-including the rights, assets and liabilities of the transferor company do not cease, but continue as that of the transferor company; (b) by deeming fiction through several provisions of the Act, the treatment of various issues, is such that the transferee is deemed to carry on the enterprise as that of the transferor.

The amalgamation of two or more entities with an existing company or with a company created anew was provided for, statutorily, under the old Companies Act, 1956, under Section 394 (1) (a). Section 394 empowered the court to approve schemes proposing amalgamation, and oversee the various steps and procedures that had to be undertaken for that purpose, including the apportionment of and devolution of assets and liabilities, etc.

Reading Section 394 (2) of the Companies Act, 1956, Section 2 (1A) and various other provisions of the Income Tax Act together, the Court reached to the conclusion that despite amalgamation, the business, enterprise and undertaking of the transferee or amalgamated company- which ceases to exist, after amalgamation, is treated as a continuing one, and any benefits, by way of carry forward of losses (of the transferor company), depreciation, etc., are allowed to the transferee. Therefore, unlike a winding up, there is no end to the enterprise, with the entity. The enterprise in the case of amalgamation, continues.

The Court observed,

“Amalgamation, thus, is unlike the winding up of a corporate entity. In the case of amalgamation, the outer shell of the corporate entity is undoubtedly destroyed; it ceases to exist. Yet, in every other sense of the term, the corporate venture continues – enfolded within the new or the existing transferee entity. In other words, the business and the adventure lives on but within a new corporate residence, i.e., the transferee company. It is, therefore, essential to look beyond the mere concept of destruction of corporate entity which brings to an end or terminates any assessment proceedings. There are analogies in civil law and procedure where upon amalgamation, the cause of action or the complaint does not per se cease – depending of course, upon the structure and objective of enactment. Broadly, the quest of legal systems and courts has been to locate if a successor or representative exists in relation to the particular cause or action, upon whom the assets might have devolved or upon whom the liability in the event it is adjudicated, would fall.”

Ruling on facts

The Court specifically noticed that, in the present case,

  • The amalgamation was known to the assessee, even at the stage when the search and seizure operations took place, as well as statements were recorded by the revenue of the directors and managing director of the group.
  • A return was filed, pursuant to notice, which suppressed the fact of amalgamation; on the contrary, the return was of MRPL. Though that entity ceased to be in existence, in law, yet, appeals were filed on its behalf before the CIT, and a cross appeal was filed before ITAT.
  • Even the affidavit before the Supreme Court was on behalf of the director of MRPL.
  • The assessment order painstakingly attributed specific amounts surrendered by MRPL, and after considering the special auditor’s report, brought specific amounts to tax, in the search assessment order.

The Court was, hence, of the opinion that all the aforementioned points clearly indicated that the order adopted a particular method of expressing the tax liability. The AO, on the other hand, had the option of making a common order, with MIPL as the assessee, but containing separate parts, relating to the different transferor companies (Mahagun Developers Ltd., Mahagun Realtors Pvt. Ltd., Universal Advertising Pvt. Ltd., ADR Home Décor Pvt. Ltd.).

“The mere choice of the AO in issuing a separate order in respect of MRPL, in these circumstances, cannot nullify it.”

Right from the time it was issued, and at all stages of various proceedings, the parties concerned (i.e., MIPL) treated it to be in respect of the transferee company (MIPL) by virtue of the amalgamation order – and Section 394 (2). Furthermore, it would be anybody’s guess, if any refund were due, as to whether MIPL would then say that it is not entitled to it, because the refund order would be issued in favour of a non-existing company (MRPL).

Having regard to all these reasons, the Court held that the conduct of the assessee, commencing from the date the search took place, and before all forums, reflects that it consistently held itself out as the assessee.

[Principal Commissioner of Income Tax v. Mahagun Realtors (P) Ltd, 2022 SCC OnLine SC 407, decided on 05.04.2022]


*Judgment by: Justice S. Ravindra Bhat


Counsels

For Petitioner: Advocate Raj Bahadur Yadav

For respondents: Advocate Kavita Jha

Case BriefsSupreme Court

Supreme Court: In the instant appeals, the Market Committees located in Rajasthan raised their grievance over the decision of CESTAT that respective Market Committees are liable to pay service tax under the category of ‘renting of immovable property service’ for the period upto 30.06.2012. The Division Bench of M.R. Shah* and B.V. Nagarathna, JJ., while observing that in a taxing statute, it is the plain language of the provision that has to be preferred, where language is plain and is capable of determining defined meaning; dismissed the appeals and held that on and after 01.07.2012, such activities carried out by the Agricultural Produce Market Committees is placed in the Negative List. If the intention was to exempt such activities of the Market Committees from levy of service tax, then there was no necessity to place such activity of the Market Committees in the Negative List. Therefore, it can be safely said that that, the Market Committees were not exempted from payment of service tax on such activities.

Facts: Krishi Upaj Mandi Samitis (Agricultural Produce Market Committees) were established in Rajasthan under the provisions of Rajasthan Agricultural Produce Markets Act, 1961. The committees regulate sale of agricultural produce in the notified markets. They charged “market fee” for issuing license to traders, agents, factory/storage, company or other buyers of other agricultural produce. They also rented out the land and shops to traders and collect allotment fee/lease amount for such land/shop.

The Revenue was of the view that the appellants are liable to pay the service tax on the services rendered by them by renting/leasing the lands/shops. The same was challenged by the appellants. However CESTAT noted that with the introduction of Negative List Regime of taxation w.e.f. 01.07.2012, the services in question were excluded from the tax liability and therefore the appellant(s) being an Agricultural Produce Market Committee was/were excluded from tax liability on and after 01.07.2012; i.e. Market Committees are not liable to service tax for the period after 01.07.2012, however CESTAT held that Market Committees are liable to pay service tax under the category of “renting of immovable property service” for the period upto 30.06.2012.

The grievance of the appellants was centered around Circular No.89/7/2006 dated 18.12.2006. As per the Circular, activities performed by the sovereign / public authorities under the provisions of law being mandatory and statutory functions and the fee collected for performing such activities is in the nature of a compulsory levy as per the provisions of the relevant statute and it is deposited into the Government Treasury, no service tax is leviable on such activities. Paragraph 3 of the Circular, specifically clarifies that if such authority performs a service, which is not in the nature of a statutory activity and the same is undertaken for consideration, then in such cases, service tax would be leviable, if the activity undertaken falls within the ambit of a taxable service.

Contentions: The counsels for the appellants Prakul Khurana and Ms. Divyasha Mathur, submitted before the Court that the activity of allotting shops/premises/spaces to traders and brokers by the respective Market Committees for the purpose of storage and/or marketing of agricultural produce is in the nature of a statutory activity as mandated under S. 9 of Rajasthan Agricultural Produce Markets Act, 1961 and, therefore, the Market Committees are exempted from payment of service tax on such services as per Circular. They further contended that the fees collected by the respective Market Committees on renting/leasing the land/shop will be deposited in the Market Committee Fund and the same shall be ultimately used for the betterment of the market area, thus when the Market Committees are the public authorities under the 1961 Act and when they perform the statutory duty / function of allotment/renting/leasing of land/shop, then such Market Committees are entitled to the exemption provided under the 2006 Circular.

The counsel for the respondent, Nisha Bagchi submitted before the Court that the activities of allotment/renting/leasing of the shop/shed/platform/land cannot be said to be a mandatory statutory activity and therefore, the Market Committees are not exempted from service tax as per 2006 Circular. She further argued that as per the language used in the legislation, S. 9 of the 1961 Act, is an enabling provision and does not cast a mandatory duty over the Market committees to allot/rent/lease the shop/land/platform.  Therefore the activities of renting/leasing by the Market Committees to the traders cannot be said to be a statutory activity, hence the market committees are not entitled to claim any exemption under the 2006 circular. The respondents further contended that exemption notification should be strictly construed and given meaning according to legislative intent and that the statutory provisions providing for exemption have to be interpreted in light of the words employed in them and there cannot be any addition or subtraction from the statutory provisions.

Observation: Perusing the 2006 Circular, the Court noted that language used is clear and unambiguous. Applying the principles of interpretation of statutes, the Court observed that, “It is settled law that the notification has to be read as a whole. If any of the conditions laid down in the notification is not fulfilled, the party is not entitled to the benefit of that notification. An exception and/or an exempting provision in a taxing statute should be construed strictly and it is not open to the court to ignore the conditions prescribed in the relevant policy and the exemption notifications issued in that regard”.

The Court observed that the contention of the appellants stating that the activity of rent/lease/allotment of shop/land/platform/space is a statutory activity and the Market Committees are performing their statutory duties under S. 9 hence the entitlement to exemption, holds no substance.

After carefully perusing the words used in S. 9, the Court stated that the activity cannot be said to be a mandatory statutory activity as contended by appellants since the fee collected is not deposited into the Government Treasury; it will go to the Market Committee Fund and will be used by the market committees. Thus such a fee collected cannot have the characteristics of the statutory levy/statutory fee. Thus, under the1961 Act, it cannot be said to be a mandatory statutory obligation of the Market Committees to provide shop/land/platform on rent/lease. “If the statute mandates that the Market Committees have to provide the land/shop/platform/space on rent/lease then and then only it can be said to be a mandatory statutory obligation otherwise it is only a discretionary function. If it is discretionary function, then, it cannot be said to be a mandatory statutory obligation/statutory activity. Hence, no exemption to pay service tax can be claimed”.

[Krishi Upaj Mandi Samiti v. Commissioner of Central Excise and Service Tax, 2022 SCC OnLine SC 224, decided on 23-02-2022]


*Judgment by: Justice MR Shah


Sucheta Sarkar, Editorial Assistant has put this report together

Case BriefsSupreme Court

Supreme Court: Explaining the scope of jurisdiction of ITAT, the bench of MR Shah* and BV Nagarathna, JJ has held that the powers under Section 254(2) of the Income Tax Act are only to correct and/or rectify the mistake apparent from the record and not beyond that.

In the present case, a detailed order was passed by the ITAT when it passed an order on 06.09.2013, by which the ITAT held in favour of the Revenue. The said order was then recalled on 18.11.2016. It is pertinent to note that the order was recalled while exercising the power under Section 254(2) of the Act as the Assessee had filed miscellaneous application for rectification under Section 254(2) of the Act. While allowing the application under Section 254(2) of the Act and recalling its earlier order dated 06.09.2013, the ITAT had re-heard the entire appeal on merits as if the ITAT was deciding the appeal against the order passed by the C.I.T.

It was argued before the Court that the Revenue itself had in detail gone into merits of the case before the ITAT and the parties filed detailed submissions based on which the ITAT passed its order recalling its earlier order. The Court, however, rejected the said contention and held that,

“Merely because the Revenue might have in detail gone into the merits of the case before the ITAT and merely because the parties might have filed detailed submissions, it does not confer jurisdiction upon the ITAT to pass the order de hors Section 254(2) of the Act.”

In exercise of powers under Section 254(2) of the Act, the Appellate Tribunal may amend any order passed by it under sub-section (1) of Section 254 of the Act with a view to rectifying any mistake apparent from the record only. Therefore, the powers under Section 254(2) of the Act are akin to Order XLVII Rule 1 CPC. While considering the application under Section 254(2) of the Act, the Appellate Tribunal is not required to re-visit its earlier order and to go into detail on merits.

Further, if the Assessee was of the opinion that the order passed by the ITAT was erroneous, either on facts or in law, in that case, the only remedy available to the Assessee was to prefer the appeal before the High Court.

Therefore, it was held that the order passed by the ITAT recalling its earlier order dated 06.09.2013 which has been passed in exercise of powers under Section 254(2) of the Act is beyond the scope and ambit of the powers of the Appellate Tribunal conferred under Section 254 (2) of the Act.

[Commissioner of Income Tax v. Reliance Telecom Ltd., 2021 SCC OnLine SC 1170, decided on 03.12.2021]


Counsels

For Revenue: Additional Solicitor General Balbir Singh

For Respondent: Advocate Anuj Berry


*Judgment by: Justice MR Shah

Know Thy Judge | Justice M. R. Shah

Case BriefsSupreme Court

Supreme Court: In a major setback to Bharti Airtel Ltd., the Division Bench comprising of A.M. Khanwilkar* and Dinesh Maheshwari, JJ., overturned the decision of the Delhi High Court and barred the company from rectifying its form GSTR-3B to claim GST refund of approx  Rs.923 crores. Finding no merit in the grievance raised by the company, the Bench remarked,

The factum of non-operability of Form GSTR-2A, is flimsy plea. Indeed, if the stated form was operational, the same would have come handy to the respondent for self-assessment regarding eligibility of ITC, but it is a feeble excuse given by the respondent to assail the impugned Circular.

Findings of the High Court

The High Court of Delhi, by the impugned judgment had read down paragraph 4 of the Circular No. 26/26/2017GST dated 29-12-2017 issued by the Commissioner (GST), Central Board of Excise and Customs, to the extent it restricted the rectification of Form GSTR-3B in respect of the period in which the error had occurred. The High Court also allowed the company-respondent to rectify Form GSTR-3B for the period in which error had occurred, i.e., from July to September 2017.

Grievance of the Respondent

The respondent contended that due to repeated technical glitches in the electronic common portal introduced by the Department, during the transition phase from the erstwhile regime to the GST regime, he had submitted its monthly Form GSTR-3B based on estimates, for the relevant period of July to September 2017. The respondent submitted that there had been an excess payment of Rs.923 crores in cash for discharging OTL (Outward Tax Liability). In other words, despite the fact that a bona fide error had occurred for reasons beyond the control of respondent, yet he was unable to correct the mistake in Form GSTR3B for the relevant period due to the restriction imposed by paragraph 4 of the Circular dated 29-12-2017.

Factual Analysis

The Bench observed that the Circular in question was issued by the Board after considering various representations received seeking clarifications on various aspects of return filing such as return filing dates, applicability of quantum of late fee, amendment of errors in submitting/filing of Form GSTR3B and other related queries to ensure uniformity in implementation across field formations. Therefore, the said Circular was not the direction issued by the Commissioner (GST) as such, but it was notifying the decision(s) of the Board taken in exercise of its powers conferred under Section 168(1) of the 2017 Act.

Rejecting the contention of the respondent that due to the failure of the Department he had make payment in cash which had resulted in payment of double tax, thereby offered unfair advantage to the tax authorities, the Bench stated that the High Court had failed to enquire into the cardinal question as to whether the respondent was required to be fully or wholly dependent on the auto generated information in the electronic common platform for discharging its obligation to pay OTL for the relevant period between July and September 2017. Answering the aforesaid question in negative, the Bench stated that, the respondent being a registered person was under a legal obligation to maintain books of accounts and records as per the provisions of the 2017 Act and Chapter VII of the 2017 Rules regarding the transactions in respect of which the OTL would occur. The Bench added,

“The common portal is only a facilitator to feed or retrieve such information and need not be the primary source for doing self-assessment. The primary source is in the form of agreements, invoices/challans, receipts of the goods and services and books of accounts which are maintained by the assessee manually/electronically.”

Whether the Impugned Circular was inconsistent with Statutory Mandate?

While ascertaining the legality of the impugned circular, the Bench observed the express provision in the form of Section 39(9) clearly posits that omission or incorrect particulars furnished in the return in Form GSTR3B can be corrected in the return to be furnished in the month or quarter during which such omission or incorrect particulars are noticed. This very position had been restated in the impugned Circular. Therefore, it was held that the impugned circular was not contrary to the statutory dispensation specified in Section 39(9) of the Act and the High Court had noted that there was no such provision in the Act, which restricts such rectification of the return in the period in which the error is noticed.

Findings of the Court

The aspect of statutory obligation fastened upon the registered person to maintain books of accounts and record within the meaning of Chapter VII of the 2017 Rules, are primary documents and source material on the basis of which self-assessment is done by the registered person including about his eligibility and entitlement to get ITC (Input Tax Credit) and of OTL. Form GSTR2A is only a facilitator for taking an informed decision while doing such self-assessment.

Noticing that during the pre-GST regime, the respondent (being registered person/assessee) had been maintaining such books of accounts and records and submitting returns on its own, the Bench stated that non-operability of Form GSTR2A or for that matter, other forms, would be of no avail for the respondent 1 because the dispensation stipulated at the relevant time obliged the registered person to submit returns on the basis of such self-assessment in Form GSTR3B manually on electronic platform. Further, the Bench opined,

“Payment for discharge of OTL by cash or by way of availing of ITC, is a matter of option, which having been exercised by the assessee, cannot be reversed unless the Act and the Rules permit such reversal or swapping of the entries.”

Significantly, the registered person is not denied of the opportunity to rectify omission or incorrect particulars, which he could do in the return to be furnished for the month or quarter in which such omission or incorrect particulars are noticed. Thus, it was not a case of denial of availment of ITC as such, rather it was only a postponement of availment of ITC as the ITC amount remains intact in the electronic credit ledger, which can be availed in the subsequent returns including the next financial year.

Verdict

In the backdrop of above, the Bench held that the assessee-respondent could not be permitted to unilaterally carry out rectification of his returns submitted electronically in Form GSTR3B, which inevitably would affect the obligations and liabilities of other stakeholders, because of the cascading effect in their electronic records.

Further, the challenge to the impugned Circular was declared unsustainable, and the Bench held that stipulations in the Circular including in paragraph 4 were consistent with the provisions of the Act, 2017. The appeal was allowed. The impugned judgment and order was set aside.

[Union of India v. Bharti Airtel Ltd., 2021 SCC OnLine SC 1006, decided on 28-10-2021]


Kamini Sharma, Editorial Assistant has put this report together


*Judgment by: Justice A.M. Khanwilkar

Know Thy Judge| Justice AM Khanwilkar

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).”

Case BriefsSupreme Court

Supreme Court: In an important ruling on taxation law, the bench of Sanjay Kishan Kaul and Hrishikesh Roy*, JJ has held that the proportionate disallowance of interest is not warranted, under Section 14A of Income Tax Act for investments made in tax free bonds/ securities which yield tax free dividend and interest to Assessee Banks in those situations where, interest free own funds available with the Assessee, exceeded their investments.

Issue

Whether Section 14A of the Income Tax Act, 1961, enables the Department to make disallowance on expenditure incurred for earning tax free income in cases where assessees like the present appellant, do not maintain separate accounts for the investments and other expenditures incurred for earning the tax-free income?

What does Section 14A state?

In Section 14, the various incomes are classified under Salaries, Income from house property, Profit & Gains of business or profession, Capital Gains & Income from other sources.

The Section 14A relates to expenditure incurred in relation to income which are not includable in Total Income and which are exempted from tax. No taxes are therefore levied on such exempted income. The Section 14A had been incorporated in the Income Tax Act to ensure that expenditure incurred in generating such tax exempted income is not allowed as a deduction while calculating total income for the concerned assessee.

Legislative history

Section 14A was introduced to the Income Tax Act by the Finance Act, 2001 with retrospective effect from 01.04.1962, in aftermath of judgment in the case of Rajasthan State Warehousing Corporation Vs. CIT, (2000) 3 SCC 126. The said Section provided for disallowance of expenditure incurred by the assessee in relation to income, which does not form part of their total income.

“As such if the assessee incurs any expenditure for earning tax free income such as interest paid for funds borrowed, for investment in any business which earns tax free income, the assessee is disentitled to deduction of such interest or other expenditure.”

Although the provision was introduced retrospectively from 01.04.1962, the retrospective effect was neutralized by a proviso later introduced by the Finance Act, 2002 with effect from 11.05.2001 whereunder, re-assessment, rectification of assessment was prohibited for any assessment year, up-to the assessment year 2000-2001, when the proviso was introduced, without making any disallowance under Section 14A. The earlier assessments were therefore permitted to attain finality. As such the disallowance under Section 14A was intended to cover pending assessments and for the assessment years commencing from 2001-2002.

Facts

  • In the case at hand, the Court was concerned with disallowances made under Section 14A for assessment years commencing from 2001-2002 onwards or for pending assessments.
  • The assessees are scheduled banks and in course of their banking business, they also engage in the business of investments in bonds, securities and shares which earn the assessees, interests from such securities and bonds as also dividend income on investments in shares of companies and from units of UTI etc. which are tax free.
  • None of the assessee banks amongst the appellants, maintained separate accounts for the investments made in bonds, securities and shares wherefrom the tax-free income is earned so that disallowances could be limited to the actual expenditure incurred by the assessee.
  • In absence of separate accounts for investment which earned tax free income, the Assessing Officer made proportionate disallowance of interest attributable to the funds invested to earn tax free income by referring to the average cost of deposit for the relevant year.
  • The CIT (A) had concurred with the view taken by the Assessing Officer.
  • The ITAT in Assessee’s appeal against CIT(A) considered the absence of separate identifiable funds utilized by assessee for making investments in tax free bonds and shares but found that assessee bank is having indivisible business and considering their nature of business, the investments made in tax free bonds and in shares would therefore be in nature of stock in trade. The ITAT then noticed that assessee bank is having surplus funds and reserves from which investments can be made. Accordingly, it accepted the assessee’s case that investments were not made out of interest or cost bearing funds alone and held that disallowance under Section 14A is not warranted, in absence of clear identity of funds.
  • The decision of the ITAT was reversed by the High Court.

Analysis

The Supreme Court took note of the fact that the CIT(A) and the High Court had based their decision on the fact that the assessee had not kept their interest free funds in separate account and as such had purchased the bonds/shares from mixed account. This is how a proportionate amount of the interest paid on the borrowings/deposits, was considered to have been incurred to earn the tax-free income on bonds/shares and such proportionate amount was disallowed applying Section 14A of the Act.

It, however, explained that

“In a situation where the assessee has mixed fund (made up partly of interest free funds and partly of interest-bearing funds) and payment is made out of that mixed fund, the investment must be considered to have been made out of the interest free fund. To put it another way, in respect of payment made out of mixed fund, it is the assessee who has such right of appropriation and also the right to assert from what part of the fund a particular investment is made and it may not be permissible for the Revenue to make an estimation of a proportionate figure.”

The Court, hence, held that if investments in securities is made out of common funds and the assessee has available, non-interest-bearing funds larger than the investments made in tax- free securities then in such cases, disallowance under Section 14A cannot be made.

[South Indian Bank v. CIT,  2021 SCC OnLine SC 692, decided on 09.09.2021]


*Judgment by: Justice Hrishikesh Roy

Know Thy Judge | Justice Hrishikesh Roy

Appearances before the Court by:

For Appellants: Senior Advocates S. Ganesh, S.K. Bagaria, Jehangir Mistri and Joseph Markose,

For Respondent/Revenue: ASG Vikramjit Banerjee and Senior Advocate Arijit Prasad

Kerala High Court
Case BriefsHigh Courts

Kerala High Court: Vinod Chandran J., while answering the law points in favour of the Revenue department, restrained from any recovery of the amounts refunded, “(…)since as of now the levy of service tax on the payment in lieu of foreign agency commission will not be leviable as ‘Business Auxiliary service’ prior to 18-04-2006”

 Background

The appellant is a processor and exporter of seafood. The controversy herein is with respect to the refund of service tax paid by the appellant for services rendered prior to 18-04-2006 when service tax on foreign agency commission was not leviable. The appellant had paid tax without any reluctance or objection. Later, the High Court of Bombay in Indian National Ship Owners Association v. Union of India, 2009 (13) STR 235 (Bom) held that service recipient in India is liable to service tax for payments in lieu of service received from abroad only from 18-04-2006 after Section 66A was incorporated in the Finance Act, 1994. The Supreme Court upheld the judgment of the High Court of Bombay on 14-12-2009, within eight months of which application for refund was filed by the appellant before the original authority. The original authority allowed the claim against which a review was filed, which was rejected. Later, in the first appeal, the refund order was set aside against which the aggrieved party approached CESTAT, which finally ended concurring with the decision of setting aside the order of directing refund.

 Issues

(a) Whether the Appellate Tribunal was right in setting aside the order passed by the Deputy Commissioner in refunding the amount collected illegally by the department?

(b) When service tax on foreign agency commission came into force only on 18-04-2006 by the introduction of Section 66A in the Finance Act, 1994, whether the Tribunal erred in setting aside the order of refund on the ground of limitation in submitting the application for refund?

(c) When the amount collected by the department does not have the colour of legality, whether Section 11B of the Central Excise Act, 1944 is attracted so as to refuse the claim of refund made by the assessee?

(d) Whether the impugned order is against the mandate of Article 265 of the Constitution of India?

 Contentions

Counsel for the Appellant, placed reliance on the decision of the present Court in CE Appeal no. 14 of 2018, decided on 03-09-2018, VP Khader v. The Commissioner for Central Excise, Service Tax and Customs, so to submit that the payments were made by mistake in law and hence the same has to be refunded even if the application is not filed within the time provided.

Standing Counsel, Sri Ramavarma Reghunathan Thamburan for Central Board of Excise and customs relied on the decision of Supreme Court in Mafatlal Industries Ltd. v. Union of India, (1997) 5 SCC 536 and a decision of this Court reported in Southern Surface Finishers v. Assistant Commissioner of Central Excise, 2019 KHC 47.

Observations

The present Court considered the Supreme Court decision in Southern Surface Finishers, wherein it was found that, “(…) the mistake if committed by the assessee, whether it be on law or facts; the remedy would be only under the statute.” The Court elaborating upon the same view, said, “If that be so, the questions of law have to be answered in favour of the Revenue and against the assessee. But, however, we notice that the amounts have been refunded to the assessee as per the order of the original authority. In such circumstances, the Revenue would have to recover the amounts from the assessee, in which event we would be directing recovery of an amount which cannot be treated as tax due under Article 265 of the Constitution of India.”

Further, the Court took notice of the decision in CIT, Madras v. P Firm Muar, AIR 1965 SC 1216, wherein it was held, “If a particular income is not taxable under the Income Tax Act, it cannot be taxed on the basis of estoppel or any other equitable doctrine. Equity is out of place in tax law; a particular income is either exigible to tax under the taxing statute or it is not. If it is not, the Income-tax Officer has no power to impose tax on the said income”.

 Decision

Disposing of the present appeal, the Court said, “In such circumstances, though we answer the question of law in favour of the Revenue, we find the Revenue to be incapable of recovery of the amounts refunded as tax due.” [Uniroyal Marine Exports v. CCE,  2020 SCC OnLine Ker 5175, decided on 17-11-2020]


Sakshi Shukla, Editorial Assistant has put this story together