We are experiencing
the first signs of evolution of the GST law and who would have imagined that
the beginning would be from a property dispute matter! A recent decision of a
single-member bench of the Hon’ble Bombay High Court in Bai Mamubai Trust
vs. Suchitra 2019 (31) GSTL 193 has set the tone for the upcoming years
of GST. This article is an attempt to decode the decision and examine its
application.
ISSUE AT HAND
The Bombay High
Court was hearing a suit between a landlord (plaintiff) and a tenant (defendant)
under the Maharashtra Rent Control Act, 1999 regarding adverse possession of a
commercial property. In view of the strong prima facie case of the
landlord to obtain possession of the property, the Court granted interim
protection by placing a condition of payment of an ad hoc royalty by the
defendant to be deposited with the Court Receiver under an agency agreement.
The Court Receiver was directed to invest the royalty received as a fixed
deposit with a nationalised bank. This direction raised three questions for the
plaintiff and the Court Receiver:
(a) Whether the royalty paid by the defendant was
liable to GST during the period of dispute?
(b) If yes, who was liable to collect the GST from
the tenant and pay the same to the Government – whether the Court Receiver or
the landlord?
(c) Whether the Court Receiver is separately
taxable for the agency services being rendered under this arrangement?
The primary issue
before the Court was the applicability of GST on the royalty payment by the
defendant to the Court Receiver during the pendency of the dispute. This
required examination of the following entries:
* Provisions of
section 7 defining the scope of supply for the purpose of GST;
* Schedule III –
Entry 2: Services by any Court or Tribunal established under any law for the
time being in force; and
* Applicability of
reverse charge provisions on receipt of services from the Central Government in
terms of Notification 13/2017-CGST(Rate).
Submissions
of amicus curiae: The Court appointed an amicus curiae to assist it in
resolving the issue on legal principles. The submissions made by him were as
follows:
(i) Any amount paid under a Court’s order / decree
or an out-of-Court settlement is taxable only if it is towards an underlying
taxable supply; where the payment is towards restitution of a loss or damage,
i.e. compensatory in nature, such payment would lack the tenets of supply, i.e.
enforceable reciprocity in actions.
(ii) The method adopted for quantifying the
damages, i.e. equating to the commercial rental value should not be confused
with the underlying purport of the payment {Citing Senairam Doongarmall
vs. Commissioner of Income Tax [(1962) SCR 1 257]}.
(iii) Services provided by the Court Receiver were to
be treated as ‘Services by any Court or Tribunal established under any law for
the time being in force’ within the meaning of paragraph 2 of schedule III to
the CGST Act and is, accordingly, not within the ambit of GST.
(iv) Section 92 of the CGST Act provides for
collection and discharge of tax liability by a Court Receiver from the estate
in its control. The Court Receiver would be a convenient point for the Revenue
to collect its tax being the person who is in direct receipt of the
consideration / royalty, where such payment itself is liable to be taxed under
the provisions of the CGST Act. The Court Receiver can discharge the liability
as an agent of the supplier in terms of section 2(105) of the said Act.
Court
Receiver’s submissions: The Court Receiver also
made its submission on the specific question on taxability of the royalty as
follows:
(1) There is a distinction between fees or
remuneration of the Court Receiver under Rule 591 of the Bombay High Court
(Original Side) Rules, 1980 and the moneys paid by a litigant towards the matter
under litigation.
(2) The Court Receiver is an adjunct of the Court
and a permanent department of the Court and its role is to implement interim
protection to litigants. Therefore, the former is clearly covered under
schedule III and not taxable.
(3) Monies paid in the Court of litigation as part
of interim protection are to be examined based on the underlying relationship
between the litigating parties – taxable event of supply cannot be applied on a
notional contract between either of the parties and the Court Receiver.
(4) For example, during the tenure of permissive
use of a property, what is paid by the occupier to the right owner is the
contractual consideration. If such permissive use or occupation is terminated
or comes to an end and the occupation becomes unlawful, the nature of payment
to be paid to the right owner changes from contractual consideration to
damages or mesne profits for unauthorised use and occupation of the
property. GST is payable on the former contractual consideration, but
not on damages payable for unauthorised use and occupation of the property. The
fact that the measure of damages is to be based on market rent should not
influence the nature of the payment being made, i.e. a payment to compensate
the right owner for violation of his legal right. Royalty is towards
compensation and not a contractual consideration.
(5) The Court Receiver may discharge the GST by
including this obligation in the agency agreement. This may obviate the
requirement of the Court Receiver from having to obtain separate CGST
registration for each matter or transaction in respect of which it is appointed
to act by the Court; (though) it is preferable from an audit and administrative
perspective to obtain separate GST registration for each matter, where the same
is paid for by the Court Receiver.
Submissions
of State Government / Union of India
(I) GST may be
recovered from the Court Receiver u/s 92 only if it is conducting a business of
a taxable person. A binding contract has come into existence under the
directions of the Court (i.e. the defendant has to either accept the offer to
retain possession and pay royalty, or vacate the premises).There is an offer,
its acceptance and consideration for forming a valid contract.
(II) The order
permitting the defendant to remain in possession of the suit premises is
essentially a contract and payment of royalty is ‘consideration’ for this
‘supply’ of premises to the defendant pursuant to an order of
the Court. GST will be liable to be paid under the MGST Act. The Learned
Advocate-General relied on a judgment of the Supreme Court in Assistant
Commissioner, Ernakulam vs. Hindustan Urban Infrastructure Ltd. [(2015) 3 SCC
745] (which considers Rule 54 of the Kerala Sales Tax Rules which is in
pari materia with section 92 of the MGST Act) to contend that akin to an
official liquidator who was termed to be a dealer of company assets even though
the express consent of the Company in Liquidation was not present, the Court
Receiver represents the plaintiff and is a supplier of services.
(III) As per the
decision of the Supreme Court in Humayun Dhanrajgir vs. Ezra Aboody
(2008) Bom C.R. 862, royalty is a compensation payable by the occupier
to the right owner in the property towards the use of his rights in his
property. There is a clear supply of service of providing premises (subject, of
course, to the final determination of the rights of the parties to the suit).
Such letting or providing of premises is clearly covered in the scope of
‘supply’ u/s 7 of the CGST Act as also under the definition of ‘services’ u/s
2(102) of the CGST Act.
(IV) The Court
Receiver wears two hats, one as an agent of the Court and another as an agent
of the plaintiff on whose application he is appointed. Tax is only levied
on the services rendered by the Court Receiver as an agent / on behalf of the
plaintiff u/s 92 of the CGST Act.
The findings of the
Court can be segregated into the following sub-headings:
(A) Status of
the Court Receiver and its Court fee: The
Court cited the decision of Shakti International Private Limited vs.
Excel Metal Processors Private Limited 2018 (4) Arb LR 17 (Bom.) which,
in turn, relied on certain Supreme Court decisions and effectively approved the
submission of the amicus curiae that the Court Receiver is a permanent
department of the Court, implements orders of the Court and functions under the
supervision and direction of the Court, hence to be concluded as a ‘Court’1.
Accordingly, the fee of the Court Receiver is clearly excludible in terms of
Entry 2 to Schedule III of the GST enactments.
(B) GST
liability on income from estate under control of Court Receiver: The Court held that ‘supply’ being an essential ingredient of
taxability, has to be identified for each case; the present case being royalty
payments for use of commercial premises.
On the aspect
of supply: The royalty payment was held as not
being towards a taxable supply for the following reasons:
(a) It was being paid towards damages or compensation
or towards securing any future determination of compensation or damages for a violation
of the legal rights of the landlord (plaintiff) in the tenanted
premises;
(b) The basis of payment is illegal
possession or trespass and hence lacked necessary reciprocity to make it a
supply;
(c) The plaintiff is not in agreement with
continuing possession and hence seeking damages for loss and such loss closely
resembles in monetary terms the rental value of the property;
(d) In contrast, had there been a money suit for
recovery of unpaid rent, certainly the tax is liable on the unpaid
consideration as it represented an agreed reciprocal obligation where one of
the litigating parties was seeking relief of its rights in the contract;
(e) Damages represent an award in money for a civil
wrong which is in contrast to ‘consideration’. While damages are towards
restitution for loss caused on account of violation, consideration is towards
an identifiable supply;
(f) The law of damages is not restricted to only
unpaid consideration, i.e. what ought to have been paid, but also expands to
compensating the loss to a party which may not even be privy to the agreement
(e.g. in torts);
(g) The decision of the Supreme Court in Hindustan
Urban Infrastructure (Supra) is distinguishable as the said decision
pertained to an official liquidator being termed as a dealer of goods of the
company it represents in the course of liquidation;
(h) Royalty for the demise of a property itself has
many colours and the true character is to be determined from specific facts –
the ratio of the decision of the Supreme Court in Humayun
Dhanrajgir vs. Ezra Aboody (2008) Bom C.R. 862 clearly distinguishes
the rent paid for a tenancy as being in the nature of (a) consideration during
the tenure of the tenant; (b) compensatory after the tenure as a disputed
occupant; and (c) mesne profits as being towards the occupancy in spite
of being declared as illegal by a Court;
(i) The Court also accepted the submission that
the measure for computation cannot be the litmus test for ascertaining the
character of a supply;
(j) Contractual obligations would dominate over
consideration while deciding the character of a supply. Even though business
and supply definitions are inclusive, a positive act of supply is a necessary
concomitant of a supply transaction;
(k) The Court cited an example of a Court Receiver
being deputed to make an inventory of goods, collect rents with respect to
immovable property in dispute, or where the property has to be sealed, or the Receiver
is appointed to call bids for letting out the premises on leave and license,
the fees or charges of the Court Receiver are exempt. In providing these
services, the office of the Court Receiver is acting as a department of the
Court and therefore no GST is payable.
Interestingly, as
an obiter, the Court specifies some instances where GST may be
applicable – it may be observed that each of them has a positive act with
reciprocity and hence includible as supply:
(i) Where the Court Receiver is appointed to run
the business of a partnership firm in dissolution, the business of the firm
under the control of receivership may generate taxable revenues.
(ii) Where the Court authorises the Court Receiver
to let out the suit property on leave and license, the license fees paid may
attract GST.
(iii) Where the Court Receiver collects rents or
profits from occupants of properties under receivership, the same will be
liable to payment of GST.
(iv) Consideration received for assignment, license
or permitted use of intellectual property.
On the aspect
of representative capacity of Court Receiver:
Curiously, having
decided that the said royalty is not towards a supply, the Court need not have
examined the provisions designating the Court Receiver as a representative
assessee. Yet, the Court specifically stated that section 92 would be
applicable where the Court Receiver was in control of the business of the
taxable person, a taxable event of supply takes place with respect to such
business on account of which the estate of the taxable person would be liable
to tax, interest or penalty under the CGST Act. Therefore, in the event the
supply is taxable, the Court Receiver would have to take registration and
discharge the tax liability as an agent of the supplier [Court directed that a
clause in the standard form of the agency agreement to the effect may be
included] – the agent appointed by the Court Receiver must obtain registration
and make such payment on behalf of the Receiver and indemnify the Receiver for any
liability that may fall upon the Receiver u/s 92 of the GST Act concerned.
Ratio Decidendi
The following are
the key takeaways from this decision:
(1) Reciprocal obligations arising from positive
actions are necessary for an arrangement to be a supply;
(2) Consideration should be examined as a
reciprocal of a positive act and distinguished from compensations for
restituting a loss;
(3) Measure cannot fix the character of the
payment, it has to be ascertained from contractual obligations and substance of
the agreement;
(4) Schedule II was not invoked as a starting point
for deciding supply, and naturally so in view of the retrospective amendment
setting the role of schedule II as being classificatory and not directory, in
deciding the scope of supply u/s 7 of the GST enactment;
(5) In case of representative persons, distinguish
the receipt while acting as a representative and those on its own account. In
the present facts, the Court Receiver acted as a representative while
collecting royalty payments but acted on its own account in respect of the fee
as a Court Receiver. The former was not taxable on account of not falling
within the scope of supply u/s 7 itself, while the latter was held as being
exempt on account of schedule III of the GST law.
CAUTION OVER APPLICATION
However, the
following should not be immediately concluded from this decision:
(I) All court-directed payments are not
compensatory and damages are to be identified in their true sense based on
facts of the case;
(II) Scope of the term ‘business’ and whether Court
Receiver is in ‘business’ – the Court directly invoked schedule III to hold
that it was exempt under GST and has not examined section 7 on this aspect;
(III) GST implications if the Court in this civil
suit ultimately holds that tenant has rightful possession under the tenancy and
the royalty previously deposited as a fixed deposit (even partially) is
appropriated towards the rent to the landlord;
(IV) Whether or not
there is a supply inter se between the Court Receiver and the principal
in case of supply of goods, especially in the context of schedule I entry 3
which deems transactions between principal and agent as supplies even in the
absence of consideration.
The Hon’ble High Court has delivered a
well-reasoned order and even if the same is to be challenged before higher
forums, the principles set out in this decision seem to be on a solid
foundation. The Court has certainly placed some boundaries over the seemingly
unfenced scope of supply u/s 7. This decision would have implications on
matters involving liquidated damages, demurrage / detention charges, notice pay
recovery, etc. and the underlying character of the obligation would have to be
minutely studied prior to taking support of this decision.
