Case BriefsHigh Courts

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

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

Grounds for Challenge

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

Analysis by the Court

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

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

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

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

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

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

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

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

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

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

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

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

Kamini Sharma, Editorial Assistant has reported this brief

Appearance before the Court by:

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

Experts CornerTarun Jain (Tax Practitioner)


  1. Immediate Context

A tax issue is currently being the subject-matter of strenuous discussion in the mainstream discourse. It relates to levy of goods and services tax (GST) on Covid-related medicines and equipment. Given the havoc created by the pandemic and the impelling need to make life-saving equipment accessible, the levy of GST upon them is being extensively debated. One suggestion is to exempt these supplies, thereby reducing the tax burden. However, the Government does not appear keen on this suggestion. Then there is another suggestion to make these supplies as zero rated, which has its own dimensions. Given the life-saving value of these equipment, the arguments against levy of tax on them are overwhelmingly emotive, and understandably so. However, to put the debate in proper perspective, a conceptual appreciation of the relevant variables is necessary. In this context, this article attempts to enunciate the significance and consequences of exemption and zero rating in the paradigm of GST laws.


  1. Introduction: Appreciating the nuances of a VAT

Conceptually, GST is a value-added tax (VAT). In simplest of terms, when a tax is described a VAT, it implies that the tax is on the value addition. In other words, a person subject to VAT is taxed on the incremental value added by that person. In the context of a manufacturer, the incremental value would be determined by computing the difference between the value of the manufactured output vis-à-vis the value of the inputs used for manufacturing such output. For illustration, where the value of manufactured output is 150 whereas the value of inputs is 100, the value addition is 50 and therefore the VAT would be on 50. In order to ensure that the VAT system remains a tax on value addition, the VAT laws make allowance for taxes on inputs. One of the usual methods to achieve this principle is by allowing “credit” of taxes suffered on inputs. In other words, the VAT paid on the input of 100 would be allowed to the manufacturer as credit towards discharging the VAT on 150. Through this mechanism the manufacturer is kept insulated of the tax liability on inputs.


Another variant of the credit mechanism is the “right to deduct” input VAT. Conceptually, in the context of European VAT, it is illustrated by the “fiscal neutrality” principle. This implies that the manufacturer (or any supplier in the value chain) remains “neutral” to the VAT suffered by the inputs and the supplier is called upon to discharge VAT only on the value addition made by it. This principle, apparently simple, is required to be scrupulously observed in order to maintain the sanctity of VAT system. The reason is, inter alia, because (i) the supplier is neutral as regards the VAT suffered on inputs; and (ii) higher VAT on inputs implies higher credit to discharge the VAT on outputs, there is an encouragement to fully report the business dealings and lesser propensity to engage in off-market transactions. This pragmatic aspect assumes significance given that the VAT is generally implemented by way of self-assessment mechanism instead of an officer-led assessment i.e. the determination of the VAT liability is computed by the supplier itself and therefore the collection of appropriate VAT requires a diligent participation of the supplier in the assessment process.


  1. Issues with VAT exemption and need for zero rating

A logical corollary of the aforesaid discussion is that where the outputs of a supplier are exempt from VAT, the neutrality is affected in the event the inputs continue to be subject to VAT. This disturbs the equilibrium insofar as ensuring the fullest participation of the supplier in the VAT assessment process is concerned. This is because the supplier continues to pay VAT on the inputs but, because the output is exempt from VAT, the supplier is left stranded with the credit of such VAT paid on inputs. In economic terms, the input VAT becomes “dead cost” to the seller. This situation can brood unwarranted scenarios, such as off-market purchase of inputs (i.e. from the grey economy, which would not require GST) by the supplier. In fact, law reports are replete with instances wherein businesses have superimposed artificial corporate structures in order to minimise the loss of input VAT. The decision[1] of the Grand Chamber (i.e. the Full Court) of the European Court of Justice in Halifax is one of the most celebrated decision which addresses this aspect in great detail from a variety of perspectives, in particular the fact that exemption pushes businesses towards tax avoidance manoeuvres.


The essence of the aforesaid discussion is that, for the supplier, exempt supply is an anomaly which increases the cost of the supply. The increase in the cost is equivalent to the VAT suffered on the inputs for making such exempt supply. Let us understand this by way of an illustration. Keeping the numbers same as in earlier example, the value of manufactured output is 150 and the value of inputs is 100. Assuming a consistent 20% VAT rate, the manufacturer would have paid 20 as input VAT (on inputs of 100) and would ordinarily have collected 180 (i.e. 150+20% VAT) from the customer. In this transaction, were VAT payable on the output supply, the manufacturer would have taken credit of 20 and only paid incremental 10 (i.e. 30-20) as VAT to the Government. However, the situation is different as the manufactured output is exempt from VAT. This implies that there is no VAT on 150 to be collected by the manufacturer but simultaneously, the manufacturer is left with a credit of 20 input VAT, which will turn out to be a cost. In other words, the cost of manufacturing increases by 20 in this case. Given that this affects the profitability margin of the manufacturer, pragmatically the manufacturer is likely to increase the price to recover the cost of unutilised input VAT. This implies that the manufactured output may no longer be sold at a price of 150 and instead may be sold at a higher price. Thus, VAT exemption becomes a direct cost for the supplier and an indirect cost to the consumer.


The situation of exemption generally arises in case of such goods and services where the public interest element overwhelms the need for revenue collection. For illustration, products which are human necessities, are generally not subjected to VAT. In such situations, VAT exemption may turn counter-productive given that it may lead to increase in the prices. Thus, the very purpose of granting VAT exemption for such supplies may get defeated owing to the innate consequences of such exemption. Zero rating is one method to obviate such a situation.


Put simply, zero rating implies a situation wherein the output continues to remain VAT exempt without the supplier losing its right to deduct input VAT. In our example, it would mean that the manufacturer would sell the manufactured output at 150 without charging VAT and will also retain the right to claim deduction of 20 as input VAT. Given that there is no practical way of exercising this right of deduction, the 20 can be recouped to the manufacturer by way of refund, etc. By way of zero rating, therefore, there is no prejudice caused to the supplier or the consumer. However, the Government loses in this process because it is deprived of VAT revenues at two levels. Firstly, it does not collect VAT at the output level (which is exempt) and secondly it refunds back the VAT at the input level (owing to zero rating). Thus, which is natural, Government extends zero-rating benefit to limited situations and it is not as frequent as instances of VAT exemption.


  1. Legal framework of zero-rated supplies under GST

With these conceptual dimensions, let us traverse the legal provisions relating to zero rating in India. This is provided for in the Integrated Goods and Services Tax Act, 2017 (IGST Act). Section 16 of the IGST Act provides for “zero-rated supply”.


Declaration of zero rating: Sub-section (2) of Section 16 declares the conceptual foundation of zero rating. It provides that “credit of input tax may be availed for making zero-rated supplies, notwithstanding that such supply may be an exempt supply”. Thus, the declaration of zero rating under the GST laws is in line with the commonly understood concept i.e. allowance for credit of input VAT even though the output is exempt.


Scope of zero-rated supplies: Sub-section (1) of Section 16 lays down that zero rating under GST laws covers only two classes of supplies, namely, “(a) export of goods or services or both; or (b) supply of goods or services or both to a special economic zone developer or a special economic zone unit”. From this provision it is evident that the zero-rating benefit under the GST laws is not vis-à-vis the nature of the goods or services supplied. Instead, it is tied down to the status of the recipient because the zero-rating benefit is available only for those exempt supplies where the supplier is exporting the supply or making the supply to a SEZ developer/unit. It is noteworthy that under the Special Economic Zones Act, 2005 [Section 2(m)], supply of goods or services within India to a SEZ developer/unit is considered as “export”. Thus, the GST laws grant zero-rating benefit to actual exports and deemed exports by way of supply to SEZ.


Effectuating benefit of zero rating: Sub-section (3) of Section 16 gives two options to the supplier to claim benefit of zero rating. In both options, the benefit is granted by way of refund. The difference is only vis-à-vis the stage at which the benefit is availed. In the first option, the supplier can make output supply “without payment of [GST] and claim refund of unutilised input tax credit”. In the second option, the supplier can make the output supply “on payment of [GST] and claim refund of such tax paid on” such output supply. The detailed working of both these options are subject to “conditions, safeguards and procedure as may be prescribed” by way of rules under the GST laws.


  1. Significance and Conclusion


Zero rating of exports appears to be in line with the avowed policy of the Government that at the time of exports from India taxes should not be exported. Thus, by way of zero rating, the suppliers are recouped with the GST paid by them on the inputs and thereby the cost of the exported supplies does not get affected despite the fact that the exports are not subject to GST and the supplier cannot claim credit of input VAT.


At the same time, however, the limited scope of zero rating under GST laws must be realised. Unless the GST laws are amended, no supply made within India (obviously other than one made to SEZ developer/unit) can claim the zero-rating benefit. Thus, lowering GST rates or exemption from GST appear to be the limited option with the policymakers. However, GST exemption presents a vivid possibility that the consumer may face increased prices on account of increase in cost of supplier due to unutilised GST. This becomes a real possibility in most cases except where their inputs are also exempt from GST. In other words, even though the possible permutations and combinations are endless, exemption from GST is invariably not necessarily a good situation for a consumer and instead, in certain cases, a taxable supply may turn out to be a better bargain for a consumer than an exempt supply.


To conclude, it is undeniable that zero rating (or the lack of it) has a significant influence on pricing decisions of suppliers and has a direct bearing on the prices consumers pay. Furthermore, it is notable that the consumer cannot know the situation of the supplier because in neither case (i.e. exemption or zero rating) GST is not charged upon the supply received by the consumer. Nonetheless, even though the consumer cannot directly perceive the effects of zero rating upon the supplier, the indirect impact of zero rating is significant on the consumer as it is very likely that in case of an exemption (unlike zero rating) the impact of unutilised input VAT may be built in the price by the supplier.


Coming back to the immediate context, under the current GST framework, zero rating of domestically sold medicines and equipment is not legally permitted. Thus, exemption versus taxability appear to be the only binary choices. Given that the effect of exemption and the building up of input VAT in the price is each supplier’s decision, conceptually there are relative merits in both policy choices (i.e. exemption or taxability) but the net impact to the consumer would depend upon the decision of the supplier whether (or not) to absorb the cost of unutilised input.


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

[1] Halifax plc v. Customs and Excise Commrs. (C-255/02) ECLI:EU:C:2006:121, 2006 Ch 387 : (2006) 2 WLR 905, available at <HERE>.

Case BriefsHigh Courts

Tripura High Court: A Division Bench of Akil Kureshi, CJ and S.G. Chattopadhyay J., while allowing the present petition, held, “One department of the Government cannot cite the reason of another department not acting promptly enough to deny the benefit declared by the Government under any scheme.”

The petitioner herein challenged a communication dated 25-06-2020 and further prayed for grant of subsidy in terms of Tripura Industrial Investment Promotion Incentive Scheme, 2012 (hereinafter to be referred to as the Incentive Scheme). Petitioner is a private limited company and is engaged in manufacturing different types of UPVC pipe and fittings, HDE coil pipes, etc. for which the petitioner had established a manufacturing unit at Agartala in the year 2013. The State of Tripura had framed the said scheme which envisaged grant of certain incentives in the form of subsidy to the specified industries set up on or after 01-04-2012. Such rebate would be equal to the net amount of Tripura Value Added Tax and Central Sales Tax and other taxes paid by the industry to the State Government on sale of finished goods subject to certain conditions. The petitioner was one of the eligible units and in the past had also claimed and was granted subsidy as per the terms of the said scheme. The issue for determination in the instant case is, a refund of the VAT etc. under the said scheme for the period between 01-01-2016 to 31-12-2016 and thereafter from 01-01-2017 to 30-06-2017. The petitioner first applied under two separate applications for such refund to the District Industries Centre on 23-06-2020 along with all necessary documents. These applications of the petitioner were rejected by the District Industries Centre by two separate orders both dated 25-06-2020. The sole ground cited for rejection of the petitioner’s applications was that the claim was submitted after expiry of two years from the period to which the claim related.

Court observed,

“It is not in dispute that a petitioner is otherwise an eligible unit entitled to the refund of the value-added tax under the said scheme, of course subject to fulfillment of the conditions contained therein. The scheme also envisages time limit for making application for refund. However, if the VAT department of the Government had delayed issuing necessary certificates of payment of tax to the petitioner, the application of the petitioner for refund cannot be rejected only on the ground of delay in making the same.”

While issuing necessary directions, Court held,

“The District Industrial Centre shall consider the petitioner’s further representations both dated 13-07-2020 and the contents thereof. If it is found that the petitioner is correct in contending that the refund applications were delayed on account of non-issuance of certificate of payment of tax by the VAT authorities, its applications for refund shall be entertained and examined on merits and refund to the extent payable be released. If, on the other hand, the authority comes to the conclusion that delay in making the applications could not be attributed to the delay in issuance of the VAT payment certificates by the concerned authority, a speaking order shall be passed and communicated to the petitioner. Entire exercise shall be completed within four months from today.”  [Agartala Plastic Private Ltd. v. State of Tripura, 2021 SCC OnLine Tri 27, decided on 12-01-2021]

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Case BriefsHigh Courts

Jharkhand High Court: A Division Bench of H.C. Mishra and Deepak Roshan, JJ., allowed the present petition against the respondent authorities charging penalty on non payment of TDS, reiterating, “…only because a provision has been made for levy of penalty, the same by itself would not lead to the conclusion that penalty must be levied in all situations.”


Three writ applications bearing common issues were heard together by the present Court, with the facts mentioned as follows;

The petitioner Company was engaged in the production, supply and sale of electricity for which it purchased coal from the Central Coalfields Limited. As provided under Section 45(1) of the Jharkhand Value Added Tax Act, 2005, (hereinafter referred to as the ‘JVAT Act’), the petitioner Company was required to deduct 2% on account of VAT, as tax deducted at source (for short ‘TDS’), from the bills raised by the Central Coalfields Limited and by virtue of Section 45(3) of the JVAT Act, the same was to be deposited to the Government Treasury in the prescribed manner.

By virtue of Section 45(5) of the JVAT Act, if such TDS was not made, the Company was liable to pay by way of penalty a sum not exceeding twice the amount of the tax deductible under sub-Section (1). In all these matters, this obligation of deduction of TDS was not carried out by the petitioner Company, and accordingly, the impugned demand was raised by the Assessing Authority under the JVAT Act, imposing penalty as well as tax upon the petitioner. The assessment orders were passed on 19-03-2015, 05-03-2016 and 21-03-2017. However, by the said orders the liability imposed was not only for the penalty but also for the deductible 2% of the tax amount.


Counsel for the petitioner, submitted that the impugned assessment orders as also the consequent garnishee orders cannot be sustained in the eyes of law, in as much as, the VAT payable on the coal purchased has already been deposited by the petitioner Company to the CCL and the CCL, in turn, has deposited the tax in the State-exchequer. This is an admitted position and there is no revenue loss to the State-exchequer due to the non deduction of TDS by the petitioner at 2%. Further, it was submitted that since there was no revenue loss to the State Government, the petitioner Company was also not liable to any penalty. Reliance was placed on;

Hindustan Steel Ltd. v. State of Orissa, (1969) 2 SCC 627, wherein it was held by the Supreme Court, “An order imposing penalty for failure to carry out a statutory obligation is the result of a quasi-criminal proceeding, and penalty will not ordinarily be imposed unless the party obliged either acted deliberately in defiance of law or was guilty of conduct contumacious or dishonest, or acted in conscious disregard of its obligation. Penalty will not also be imposed merely because it is lawful to do so.

Employees’ State Insurance Corporation v. HMT Ltd., (2008) 3 SCC 35, re-emphasized the need and objective of imposing a penal liability, in the words, “Only because a provision has been made for levy of penalty, the same by itself would not lead to the conclusion that penalty must be levied in all situations.”

Nirlon Ltd. v. Commissioner of Central Excise, (2015) 14 SCC 798, where it was found that the entire exercise was revenue neutral and there was no mala fide intention on the part of the assessee, the penalty imposed was set aside.

Counsel for the State opposed the prayer and submitted that a plain reading of Section 45(5) of the JVAT Act would show that the provision is mandatory in nature and the Revenue Authorities had no way out, but to impose the penalty, once it was found that the TDS was not deducted by the petitioner Company. It was further submitted that Revenue Authorities had only limited discretion in deciding the quantum of penalty but so far as the imposition of penalty is concerned, the provision of the Act is mandatory. Reliance was placed on the following judgments, namely;

Guljag Industries v. Commercial Tax Officer, (2007) 7 SCC 269, wherein it was said, “…The penalty is for statutory offence. Therefore, there is no question of proving of intention or of mens rea as the same is excluded from the category of essential element for imposing penalty”

State of West Bengal v. Kesoram Industries Ltd., (2004) 10 SCC 201, “In interpreting a taxing statute, equitable considerations are entirely out of place. A taxing statute cannot be interpreted on any presumption or assumption. A taxing statute has to be interpreted in the light of what is clearly expressed; it cannot imply anything which is not expressed; it cannot import provisions in the statute so as to supply any deficiency”


Quashing the impugned orders, the Court observed, “…a plain reading of the impugned assessment orders clearly show that the mandate of Proviso to Section 45(5) of the JVAT Act, has not been followed by the Assessing Authority. There is no discussion at all about the defence of the Company and without stating anything about the reasons that might have been shown before the Assessing Authority by the counsel for the Company, the assessment orders/demand notices have been passed…”

With regards to the precedents referred to by the Counsel for the petitioner, the Court said, “…The Assessing Authority shall pass the necessary orders in accordance with law, keeping in view the ratio of the decision in Hindustan Steel Ltd. case, that penalty is not ordinarily to be imposed unless the party obliged either acted deliberately in defiance of law or was guilty of conduct contumacious or dishonest, or acted in conscious disregard of its obligation, and that the penalty is not to be imposed merely because it is lawful to do so. The Assessing Authority shall also take into consideration the ratio of the decision in Employees’ State Insurance Corporation case, that only because a provision has been made for levy of penalty the same by itself would not lead to the conclusion that penalty must be levied in all situations. The Assessing Authority shall also exercise its discretion, in accordance with law, as regards the quantum of penalty, if the penalty is found leviable, and shall not go for the highest amount of penalty in a mechanical manner.”


Allowing the present three writ applications, the Court reiterated the settled legal precedents and further directed, “…in case the Assessing Authority comes to the finding that the penalty was not leviable, the amount already deposited by the petitioner Company pursuant to the garnishee orders shall be refunded back with the statutory interest.”[Tenughat Vidyut Nigam Ltd. v. State of Jharkhand,  2019 SCC OnLine Jhar 2908, decided on 05-12-2019]

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Case BriefsInternational Courts

East African Court of Justice-First Instance Division: The instant taxation ruling arose from a bill of costs filed before Yufnalis Okubo, Taxing Officer arising from application which was dismissed.

Facts of the case were that respondent had earlier filed an application where he prayed to join the suit as intervener under Article 40 of the Treaty for the Establishment of East African Community and Rule 36 of EACJ Rules of Procedure, 2013. The above application was concluded in favour of applicant. The applicant’s bill of cost was for USD 98,503 which covered instruction fees, perusals and other related work.

It was submitted by the applicant that the bill filed for USD 95,040 was drawn based on Rules of Court and should be taxed as drawn. Relying on Rule 9(4) of the schedule of the Rules of Court it was contended that the above value was based on the value of subject matter. Respondent opposed the instruction fees on the ground of it being exorbitant and had been decided only to receive leave for interveners to join the suit. The Taxing Officer allowed instruction fees only for Item 1. Under Rule 7(a) of the scales of charges of the third schedules, court allowed USD 200 on Item 2 for perusals of 40 folios. Like above, Court decided costs for other items. With regard to item 9, like items 6 and 4 had been mixed which made it difficult for the Court to ascertain the costs thus the officer allowed only USD 35 for Item 9. Respondent objected to the taxation on every item.

Therefore, Taxing Officer in his discretion decided USD 9,000 with 18% VAT amounting to USD 1,620 to be a reasonable amount for instruction fees of an application. The bill was taxed at grand total of USD 11, 084. [Union Trade Center Ltd. v. Succession Makuza Desire, Taxation Cause No. 1 of 2017, dated 14-08-2018]

Case BriefsSupreme Court

Supreme Court:  In the matter where the first proviso to Rule 3(2)(c) of the Karnataka Value Added Tax Rules, 2005 was being interpreted to facilitate the determination of taxable turnover as defined in Section 2(34) of the Karnataka Value Added Tax Act, 2003 in interface with Section 30 of the Act and Rule 31 of the Rules, the Court said that the interpretation to be extended to the proviso involved has to be essentially in accord with the legislative intention to sustain realistically the benefit of trade discount as envisaged. Any exposition to probabilise exaction of the levy in excess of the due, being impermissible cannot be thus a conceivable entailment of any law on imperative impost.

The Court further said that to insist on the quantification of trade discount for deduction at the time of sale itself, by incorporating the same in the tax invoice/bill of sale, would be to demand the impossible for all practical purposes and thus would be ill-logical, irrational and absurd. Trade discount though an admitted phenomenon in commerce, the computation thereof may depend on various factors singular to the parties as well as by way of uniform norms in business not necessarily enforceable or implementable at the time of the original sale. To deny the benefit of deduction only on the ground of omission to reflect the trade discount though actually granted in future, in the tax invoice/bill of sale at the time of the original transaction would be to ignore the contemporaneous actuality and be unrealistic, unfair, unjust and deprivatory. While, devious manipulations in trade discount to avoid tax in a given fact situation is not an impossibility, such avoidance can be effectively prevented by insisting on the proof of such discount, if granted.

The bench of Dipak Misra and Amitava Roy, JJ said that the requirement of reference of the discount in the tax invoice or bill of sale to qualify it for deduction has to be construed in relation to the transaction resulting in the final sale/purchase price and not limited to them original sale sans the trade discount. However, the transactions allowing discount have to be proved on the basis of contemporaneous records and the final sale price after deducting the trade discount must mandatorily be reflected in the accounts as stipulated under Rule 3(2)(c) of the Rules. The sale/purchase price has to be adjudged on a combined consideration of the tax invoice or bill of sale as the case may be along with the accounts reflecting the trade discount and the actual price paid. The first proviso has thus to be so read down, as above, to be in consonance with the true intendment of the legislature and to achieve as well the avowed objective of correct determination of the taxable turnover. [Southern Motors v. State of Karnataka, 2017 SCC OnLine SC 42, decided on 18.01.2017]


Case BriefsSupreme Court

Supreme Court: Deciding an important question of law as to whether provisions of Section 5 of the Limitation Act, 1963 are applicable in respect of revision petition filed in the High Court under Section 81 of the Assam Value Added Tax Act, 2003 (VAT Act), the Court held that the court cannot interpret the law in such a manner so as to read into the Act an inherent power of condoning the delay by invoking Section 5 of the Limitation Act so as to supplement the provisions of the VAT Act which excludes the operation of Section 5 of the Limitation Act by necessary implications.

Taking note of the fact that Section 84 of the VAT Act made only Sections 4 and 12 of the Limitation Act applicable to the proceedings under the VAT Act, the Court noticed that the legislative intent behind the same was to exclude other provisions, including Section 5 of the Limitation Act. Section 29(2) stipulates that in the absence of any express provision in a special law, provisions of Sections 4 to 24 of the Limitation Act would apply. If the intention of the legislature was to make Section 5, or for that matter, other provisions of the Limitation Act applicable to the proceedings under the VAT Act, there was no necessity to make specific provision like Section 84 thereby making only Sections 4 and 12 of the Limitation Act applicable to such proceedings, in as much as these two Sections would also have become applicable by virtue of Section 29(2) of the Limitation Act.

The bench of Dr. A.K. Sikri and Abhay Manohar Sapre, JJ said that the VAT Act is a complete code not only laying down the forum but also prescribing the time limit within which each forum would be competent to entertain the appeal or revision. The underlying object of the Act appears to be not only to shorten the length of the proceedings initiated under the different provisions contained therein, but also to ensure finality of the decision made there under. Hence, the application of Section 5 of the Limitation Act, 1963 to a proceeding under Section 81(1) of the VAT Act stands excluded by necessary implication, by virtue of the language employed in section 84. [Patel Brothers v. State of Assam, 2017 SCC OnLine SC 19, decided on 04.01.2017]