13. The government has also been faced with further challenges but has battled them out quite successfully in courts. Supplies like petroleum crude, High Speed Diesel, Petrol etc. are still not in the ambit of GST. In
V. S. Products vs. Union of India [2022] 134 taxmann.com 126 (Karnataka), the question was whether simultaneous levy of GST, basic excise duty and National Calamity Contingent Duty (NCCD) on tobacco and tobacco products is legally permissible. Answering the question in the affirmative, the court observed:
a. To overcome the argument of the assessees that the object of GST was to avoid cascading effect of taxes, it was held that source of power contained in Article 246 r/w List I of VII Schedule cannot be defeated by resort to argument based on objects of GST.
b. As to legislative competence, it was held that sources of power under Article 246A and Article 246 are mutually exclusive and could be simultaneously exercised. On a purposive and harmonious construction, though Article 246A contains a non-obstante clause, power under Article 246 stands protected and continues to be the source of power even post introduction of Article 246A.
c. Aspect theory was used to overcome the argument of double taxation advanced by the petitioner. It was held that levy on the same taxable event may amount to double taxation and still be accepted. A single subject from different aspects could be a subject matter of different taxes. Thus, levy of surcharge would subsist even if the goods were subjected to levy of GST. Aspect of supply under GST law would be distinct from the aspect of manufacture which is sought to be taxed by levy of excise. Taxable event under GST would be supply while it is manufacture under excise and both are two different legally recognized aspects and would not lead to an overlapping and would result in treating the levy on different aspects.
d. Attack on the basis of Article 14 was supressed by holding that levy of NCCD is for the purpose of discouraging consumption and cannot be described to be a classification without any basis. Choice of the category of goods for the purpose of revenue generation cannot ipso-facto be a ground of judicial review; something more is required such as hostile discrimination and singling out a particular category of goods. Choice of category of goods may also be influenced by the objective of discouraging consumption and cannot be held arbitrary.
e. NCCD was in the nature of a surcharge under Article 271 and could be levied independently. Exemption granted on excise duty cannot prohibit imposition of other additional duties or levy such as NCCD.
f. Legislature has wide latitude to decide on methodology of revenue generation. Courts should not rush and must tread carefully while dealing with legislation based on fiscal policy. Selecting objects to tax, determining the quantum of tax, legislating conditions for the levy and the socio-economic goals which a tax must achieve are matters of legislative policy and these matters have been entrusted to the Legislature and not to the Court. Levy of tax is a product of legislative choice and policy decisions are the prerogative of the executive.
The very object of subsuming most taxes into one tax gets derailed further and we only hope that this derailment does not continue at the end of the States.
RETURNS
14. The recent judgment of the Supreme Court in Union of India vs. Bharti Airtel Ltd [2021] 131 taxmann.com 319 (SC) would be the best mention:
a. The Delhi High Court had, taking note of technical glitches in GST portal during initial period, read down paragraph 4 of Circular No. 26/26/2017-GST, dated 29th December, 2017 to extent it restricted rectification of Form GSTR-3B (issued as stop gap arrangement) in respect of period in which error had occurred. In effect, the High Court allowed assessees to rectify Form GSTR-3B for period in which error had occurred, i.e, from July to September 2017.
b. Whereas the said circular, provided for reporting differential figures and rectification of errors in subsequent period in which error is noticed.
c. Grievance of the assessee was that official mechanism to check data authenticity to claim input tax credit was absent in initial period of GST. At the time, GSTR-2A (which gives assessee access to information regarding ITC available in the electronic credit ledger) was not operationalised. This resulted in payment of huge output tax liability by cash while Input Tax Credit (ITC) was already available to its credit in electronic credit ledger.
d. The Supreme Court reversed the judgment of the High Court.
e. In this regard, it was held that registered person was obliged to do self-assessment of ITC, reckon eligibility to ITC and of output tax liability based on office records and books of account. For submitting periodic return, registered person had to maintain books of account either manually or electronically on basis of which self-assessment could be done for availing of ITC and determining output tax liability.
f. This was what was being done in the pre-GST regime. Assessee was expected to continue same in GST regime and should not be dependent on common electronic portal. Common GST portal was only a facilitator to feed or retrieve information and it needed not be primary source for self-assessment.
g. The factum of inability to access the electronic portal to submit return within the specified time due to technical faults in the portal is entirely different than the assertion to grant adjustment of amount voluntarily paid in cash by the assessee towards output tax liability. Payment for discharge of tax liability by cash or by availing ITC was an option and having exercised such option, same could not be reversed or swapped. No express provision permitted swapping of entries in electronic cash ledger with electronic credit ledger and vice versa.
h. GSTR-3B return was notified as stop-gap arrangement but having basis in section 39 of the CGST Act and Rule 61 of the CGST Rules. Though not comparable to electronically generated GSTR-3, GSTR-3B is a return ‘prescribed’ and required to be furnished by registered persons.
i. Merely because mechanism for furnishing return in terms of sections 37 and 38 was not operationalized during relevant period (July to September 2017) and became operational only later, efficacy of Form GSTR-3B would not stand whittled down in any manner. GSTR-3B is to be considered as a return for all practical purposes.
j. Section 39(9) of Central Goods and Services Tax Act provides for correction of omission or furnishing of incorrect particulars in GSTR-3B return in return to be furnished in month or quarter in which such omission is noticed. This very position has been restated in Circular No. 26/26/2017-GST and therefore, this circular is not contrary to section 39(9). High Court order noting that there is no provision for such rectification is erroneous.
k. Thus, High Court order allowing rectification of GSTR-3B contrary to the circular was not sustainable and same was to be set aside.
15. While so holding, the judgment of the Gujarat High Court in AAP And Co vs. Union of India [2019] 107 taxmann.com 125 (Gujarat) was also reversed, though, it was formally done in a separate order reported in 2021 (55) GSTL 513 (SC). In that case, the petitioner had challenged press release which clarified that input tax credit (ITC) for invoices issued during July 2017 to March 2018 can be availed until last date of filing Form GSTR-3B for September 2018, i.e., until 20th October, 2018 on the ground that the same was ultra vires Section 16(4). It was contended that return prescribed under section 39 is a return required to be furnished in Form GSTR-3 and not Form GSTR-3B. Since GSTR-3 was not operational, Section 16(4) could not be enforced. Accepting the contention, the High Court had held that GSTR-3B was not introduced as a return in lieu of return required to be filed in Form GSTR-3 but was only a temporary stop gap arrangement until due date of filing return in Form GSTR-3 was notified. This was vindicated by the fact that the government, on realising that return in Form GSTR-3B is not intended to be in lieu of Form GSTR-3 omitted such reference retrospectively. The Supreme Court did not notice the amendment made to Rule 61(5) from 1st January, 2021 which was the first time the GSTR 3B alone was mentioned as a return. We cannot blame them as the government keeps amending the law on a daily basis.
REFUND
16. A detailed judgment was rendered by the Supreme Court in case of Union of India vs. VKC Footsteps India Pvt Ltd 2021-TIOL-237-SC-GST:
a. The context of the case revolves around Clause (ii) of the 1st Proviso to Section 54(3) read with Rule 89(5) of GST Rules which provide for refund of unutilized ITC in cases relating to inverted duty structure.
b. Clause (ii) of 1st Proviso to Section 54(3) inter alia specifies that refund of unutilized ITC can be claimed where the credit has accumulated on account of rate of “tax on inputs” being higher than the rate of tax on output supplies. The meaning of “tax on inputs”, i.e, “input tax” is already noted above to include tax charged on supply of ‘any’ goods or services and not only inputs.
c. From 1st July, 2017 to 18th April, 2018, the definition of “net ITC” therein was said to carry the same meaning as contained in Rule 89(4) (supra). However, through an amendment on 18.04.2018, “net ITC” for the purposes of Rule 89(5) was defined to mean ITC availed on inputs only and excluded input services from its ambit. This was the grievance of the assessees in the above case. Again, by 5th Amendment Rules, 2018, the amendment carried out on 18th April, 2018 was given retrospective effect from 1st July, 2017.
d. The Gujarat High Court had observed, in a case reported as VKC Footsteps India Pvt Ltd vs. Union of India 2020 (43) GSTL 336 (Guj), that Section 54(3) allows refund of “any unutilised input tax credit”. The term “Input tax credit” is defined in Section 2(63) to mean the credit of input tax. The phrase “input tax” defined in Section 2(62) means the tax charged on any supply of goods or services or both made to any registered person. Both ‘input’ and “input service” are part of “input tax” and “input tax credit”. Thus, when as per Section 54(3) ‘any’ unutilised ITC (which includes inputs and input services) could be claimed as refund, Rule 89(5) cannot restrict such refund to only inputs. Consequently, Explanation (a) to Rule 89(5) which defined the term ‘Net ITC’ was held to be ultra vires Section 54(3) to the extent it restricts the refund only on ‘inputs’.
e. Per contra, the Madras High Court had observed, in a case reported as Transtonnelstroy Afcons Joint Venture vs. Union of India 2020 (43) GSTL 433 (Mad), that though Section 54(3) allows refund of “any unutilised ITC”, clause (ii) of proviso to Section 54(3) uses the words “accumulated on account of” rate of tax on inputs being higher than rate of tax on output supplies. If the proviso is interpreted merely to be a condition to claim refund of entire unutilised ITC, the words “accumulated on account of” would become redundant. It was held that the proviso, in addition to prescribing a condition also performs the function of limiting the quantity of refund. Further, Rule 89(5) was made and amended on the strength of the rule making power under Section 164 and is in line with Section 54(3). In fact, the un-amended Rule 89(5) wherein refund of both inputs and input services was available exceeded the scope of Section 54(3). Refund claims other than a claim for excessive taxes paid inadvertently on account of the erroneous interpretation of applicable law or the declaration of a provision as unconstitutional is in the nature of a benefit or concession. Right of refund is purely statutory and cannot be availed of except strictly in accordance with the prescribed conditions.
f. The Supreme Court upheld the Madras High Court judgment and set aside the Gujarat High Court judgment.
g. It was held that the Parliament has wide latitude for classification. Thus, the non-conferment of the right of refund to the unutilised input tax credit from the procurement of input services cannot be said to be violative of Article 14 of the Constitution of India. Refund is a matter of a statutory prescription. Parliament was within its legislative authority in determining whether refunds should be allowed of unutilised ITC tracing its origin both to input goods and input services or, as it has legislated, input goods alone.
h. The phrase “no refund of unutilised input tax credit shall be allowed in cases other than” occurring in the 1st proviso to Section 54(3) makes it clear that refund of unutilized ITC can be granted only in two categories of cases, viz zero-rated supplies and cases relating to inverted duty structure.
i. To construe ‘inputs’ occurring in Rule 89(5) so as to include both input goods and input services would do violence to the provisions of Section 54(3) and would run contrary to the terms of Explanation 1 to Section 54. Reading the expression ‘input’ to cover input goods and input services would lead to recognising an entitlement to refund, beyond what was contemplated by Parliament.
j. The 1st proviso to Section 54(3) is not a condition of eligibility but a restriction which must govern the grant of refund under Section 54(3). Therefore, there is no disharmony between Rule 89 on the one hand and the proviso to Section 54(3) on the other.
k. A discriminatory provision under tax legislation is not per se invalid. A cause of invalidity arises where equals are treated as unequally and un-equals are treated as equals. 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.
l. Rule 89(5) would be valid as it can be traced to the general rule making power in Section 164 of the CGST Act. For the purpose of making rules, it is not necessary to use the word ‘prescribes’ at all times in the main Section. The rules may interstitially fill-up gaps which are unattended in the main legislation or introduce provisions for implementing the legislation. So long as the authority which frames the rules has not transgressed a provision of the statute, it cannot be deprived of its authority to exercise the rule making power. It is for this reason that the powers under Section 164 are not restricted to only those sections which grant specific authority to frame rules. If such a construction, were to be acceptable, it would render the provisions of Section 164 otiose.
m. Certain inadequacies might exist in the formula. The use of such formulae is a familiar terrain in fiscal legislation including delegated legislation under parent norms and is neither untoward nor ultra vires. An anomaly per se cannot result in the invalidation of a fiscal rule which has been framed in exercise of the power of delegated legislation.
n. The formula in Rule 89 is not ambiguous in nature or unworkable, nor is it opposed to the intent of the legislature in granting limited refund on accumulation of unutilised ITC. It is merely the case that the practical effect of the formula might result in certain inequities. However, the court cannot read down the formula for doing so would result in judicial recrafting of the formula and walking into the shoes of the executive or the legislature, which is impermissible.
o. It appears that the Supreme Court has interpreted an enabling provision for exports and inverted duty structure into an exception not noticing that such provisions for exports continued under the old regime too.
PROVISIONAL ATTACHMENT
17. At the inception of GST, court cases were rife with issues pertaining to provisional attachment. However, after several judgments that analysed the provisions of law in detail and laid down strict guidelines for the department to adhere to, litigation on this front have dwindled.
18. One case that is worth noticing is that of Radha Krishan Industries vs. State of Himachal Pradesh [2021] 127 taxmann.com 26 (SC). It was held that power to order a provisional attachment of property of taxable person including a bank account is draconian in nature; exercise of power for ordering a provisional attachment must be preceded by formation of an opinion by Commissioner that it is necessary so to do for purpose of protecting interest of government revenue.
a. More specifically, the ingredients of Section 83 was spelt out as: (i) the necessity of the formation of opinion by the Commissioner; (ii) the formation of opinion before ordering a provisional attachment; (iii) the existence of opinion that it is necessary (and not just expedient) so to do for the purpose of protecting the interest of the government revenue; (iv) the issuance of an order in writing for the attachment of any property of the taxable person; and (v) the observance by the Commissioner of the provisions contained in the rules in regard to the manner of attachment.
b. Further, the Court held that Rule 159 of the CGST/HPGST Rules, 2017 provides two safeguards to the person whose property is attached. Firstly, it permits such a person to submit objections to the order of attachment on the ground that the property was or is not liable for attachment. Secondly, Rule 159(5) posits an opportunity of being heard. Hence it was observed that both the requirements are cumulative in nature.
c. The Court further observed that to invoke the powers of provisional attachment, there must be pending proceedings against a person whose property is being attached. The attachment cannot be sought based on the contention that there are pending proceedings against a third party. Allowing such interpretation (allowing attachment of property based on the proceedings against other persons) would be an expansion of a draconian power such as that contained in Section 83, which must necessarily be interpreted restrictively.
PLACE OF SUPPLY OF INTERMEDIARY SERVICES
19. Place of supply which in-turn determines the tax that is supposed to be charged i.e, IGST or CGST/SGST. For various types of situations, the law deems a particular place to be the “place of supply” for levying tax. As a result, tax is sought to be levied when, in effect, no tax ought to be paid. The case in point here is “intermediary services”. The intermediary renders services to a foreign principal and earns money in convertible foreign exchange is liable to pay tax. This is against the general rule wherein place of supply is deemed to be the place of the recipient. Such instances are forcing businesses to relocate abroad to remain cost-effective.
20. Dharmendra M. Jani vs. Union of India [2021] 127 taxmann.com 730 (Bombay) was a case that related to constitutionality of section 13(8)(b) of IGST Act. In this case, a split verdict rendered by the division bench of the High Court and is now still pending. Regarding constitutionality of section 13(8)(b), Justice Ujjal Bhuyan held as follows.
a. 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 does not empower imposition of tax on export of services out of the territory of India by treating the same as a local supply.
b. There is an express bar under Article 286(1) 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.
c. “Intermediary services” is certainly a supply of service from India to outside India by an intermediary. Petitioner fulfils the requirement of an intermediary as defined in Section 2(13) of the IGST Act. That apart, all the conditions stipulated in sub-section (6) of Section 2 for a supply of service to be construed as export of service are complied with. The overseas foreign customer of the petitioner falls 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.
d. Therefore, it is an ‘export of service’ as defined under Section 2(6) of the IGST Act read with Section 13(2) thereof. It would also be an export of service in terms of the expression ‘export’ as is understood in ordinary common parlance. However, 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.
e. 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 respectively. On the other hand, Section 8(2) of the IGST Act provides that where location of the supplier and place of supply of service is in the same state, the said supply shall be treated as intra-state supply. However, 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.
f. The extra-territorial effect given by way of Section 13(8)(b) has no real connection or nexus with taxing regime in India introduced by GST system; rather it runs completely counter to the very fundamental principle on which GST is based i.e, it is a destination-based consumption tax as against principle of origin-based taxation.
g. However, in the dissenting judgement, it was noted that power to stipulate the place of supply as contained in Sections 13(8)(b) of the IGST Act is pursuant to the provisions of Article 269A (5) read with Article 246A and Article 286 of the Constitution. It was further observed that once the parliament has, in its wisdom, stipulated the place of supply in case of Intermediary Services be the location of the supplier of service, no fault can be found with the provision by artificially attempting to link it with another provision to demonstrate constitutional or legislative infraction.
21. On the same issue, the Gujarat High Court delivered a contrary judgment in Material Recycling Association of India vs. Union of India [2020] 118 taxmann.com 75 (Guj):
a. Upon a conjoint reading of section Section 2(6) and 2(13) which defines ‘export of service’ and ‘intermediary service’ respectively, then the person who is intermediary cannot be considered as exporter of services because he is only a broker who arranges and facilitates the supply of goods and services or both.
b. Vide Notification No. 20/2019-IT(R), Entry no. 12AA was inserted to provide Nil rate of tax granting exemption from payment of IGST for service provided by an intermediary when location of both supplier and recipient of goods is outside the taxable territory i.e, India. It, therefore, appears that the basic logic or inception of Section 13(8)(b) of the IGST Act, considering the place of supply in case of intermediary to be the location of supply of service is in order to levy CGST and SGST and such intermediary service, therefore, would be out of the purview of IGST.
c. There is no distinction between the intermediary services provided by a person in India or outside India. Merely because the invoices are raised on the person outside India with regard to the commission and foreign exchange is received in India, it would not qualify to be “export of services”, more particularly when the legislature has thought it fit to consider the place of supply of services as place of person who provides such service in India.
d. There is no deeming provision in Section 13(8) but there is a stipulation by the Act legislated by the Parliament to consider the location of the service provider of the intermediary to be place of supply.
If the services provided by intermediary is not taxed in India, which is a location of supply of service, then, providing such service by the intermediary located in India would be without payment of any tax and such services would not be liable to tax anywhere.
TRAN-1: VALIDITY OF RULE 117 AND DIRECTIONS TO OPEN PORTAL, OR ALLOW MANUAL FILING
22. Five years on, transitional credit still appears to be an area that is intensely litigated in the Courts. Notwithstanding several judgment of various High Courts delineating the scope of transitional provisions, the litigation hasn’t seemed to attain quiescence. Some of the judgments on this aspect may be seen.
23. In Tara Exports vs. Union of India [2018] 98 taxmann.com 363 (Mad), it was held that GST is a new progressive levy. One of the progressive ideals of GST is to avoid cascading taxes. GST Laws contemplate seamless flow of tax credits on all eligible inputs. The input tax credits in TRAN-1 are the credits legitimately accrued in the GST transition. The due date contemplated under the laws to claim the transitional credit is procedural in nature. In view of the GST regime and the IT platform being new, it may not be justifiable to expect the users to back up digital evidences. Even under the old taxation laws, it is a settled legal position that substantive input credits cannot be denied or altered on account of procedural grounds. Accordingly, the court directed to the authorities either to open portal, so as to enable assessee to file the TRAN-1 electronically for claiming transitional credit or accept manually filed TRAN-1 and allow input credits if otherwise eligible in law.
24. In Siddharth Enterprises vs. Nodal Officer [2019] 109 taxmann.com 62 (Guj), the Court held as follows:
a. The right to avail such credit a substantive right and cannot be allowed to be lapsed by application of Rule 117 on failure to file necessary forms within due date prescribed therein. Such prescription in violation of Article 14 of Constitution of India.
b. Denial of credit against doctrine of legitimate expectations.
c. Such action also in violation of Article 19(1)(g) ibid as it would affect working capital of assessees and diminish their ability to continue with business.
d. Cenvat credit earned under erstwhile Central Excise Law being property of assessees cannot be appropriated on mere failure to file declaration in absence of Law in this respect and Government should have provided for it Act and not have taken it away by virtue of merely framing Rules in this regard.
e. Due date contemplated under Rule 117 ibid for purposes of claiming transitional credit procedural in nature and should not be construed as mandatory provision.
25. In Brand Equity Treaties Ltd vs. Union of India [2020] 116 taxmann.com 415 (Delhi):
a. Time limit prescribed under rule 117(1) is directory in nature which also substantiate that the period for filing TRAN-1 is not considered either by the legislature or the executive as sacrosanct (very important) or mandatory. This is mainly because, in exercise of powers vested with the Commissioner under proviso to Rule 117, the 90 day time period to transition credit, as originally envisaged in the Rules, had still not expired for a specific class of persons. These extensions have been largely on account of its inefficient network. It is not as if the Act completely restricts the transition of CENVAT credit in the GST regime by a particular date, and there is no rationale for curtailing the said period, except under the law of limitations.
b. This, however, does not mean that the availing of CENVAT credit can be in perpetuity. Transitory provisions, as the word indicates, have to be given its due meaning. Transition from pre-GST Regime to GST Regime has not been smooth and therefore, what was reasonable in ideal circumstances is not in the current situation. In absence of any specific provisions under the Act, it was held that in terms of the residuary provisions of the Limitation Act, the period of three years should be the guiding principle and thus a period of three years from the appointed date would be the maximum period for availing of such credit.
c. Vested right cannot be taken away merely by way of delegated legislation by framing rules.
d. Relying on A.B. Pal Electricals vs. Union of India [2020] 113 taxmann.com 172 (Delhi), it was further held emphasized that the credit standing in favour of the assessee is a vested property right under Article 300A of the Constitution and cannot be taken away by prescribing a time-limit for availing the same.
e. “Technical difficulty” is too broad a term and cannot have a narrow interpretation, or application. Further, technical difficulties cannot be restricted only to a difficulty faced by or on the part of the respondent. It would include within its purview any such technical difficulties faced by the taxpayers as well, which could also be a result of the respondent’s follies. It cannot be arbitrary or discriminatory, if it has to pass the muster of Article 14 of the Constitution. The government cannot turn a blind eye, as if there were no errors on the GSTN portal. It cannot adopt different yardsticks while evaluating the conduct of the taxpayers, and its own conduct, acts and omissions.
26. In SKH Sheet Metals Components vs. Union of India [2020] 117 taxman.com 94 (Delhi):
a. By this time, vide Section 128 of the Finance Act, 2020, the government had promulgated retrospective amendment to validate the existence and mandatory nature of time limit in Rule 117.
b. Although the legality of the retrospective amendment was not dealt with, it was held that no matter how well conversant the taxpayers may be with the tax provisions, errors are bound to occur, therefore, taxpayer should not be criticized and the solution should be found. Law should provide for a remedial avenue. The stand of Central Government, focusing on condemning the Petitioner for the clerical mistake and not redressing the grievance, is unsavoury and censurable.
c. It was further held that the decision in case of Brand Equity in not merely based on grounds of time limit and therefore continue to apply with full rigour even today, regardless of amendment to Section 140 of the CGST Act.
27. In Adfert Technologies Pvt Ltd vs. Union of India [2019] 111 taxmann.com 27 (Punjab & Haryana), it was held that the introduction of Rule 117(1A) and Rule 120A and absence of any time period prescribed under Section 140 indicate that there is no intention of Government to deny carry forward of unutilized credit of duty/tax already paid on the ground of time limit. Further, GST is an electronic based tax regime, and most people of India are not well conversant with electronic mechanism. Most are not able to load simple forms electronically whereas there were a number of steps and columns in TRAN-1 forms thus possibility of mistake cannot be ruled out. Also, the authorities were having complete record of already registered persons and are free to verify fact and figures of any petitioner. Thus, in spite of being aware of complete facts and figures, the respondent cannot deprive petitioners from their valuable right of credit.
28. In Filco Trade Center Pvt Ltd vs. Union of India 2018 (17) GSTL 3 (Guj), it was held that Section 140(3)(iv) of the CGST Act lays down conditions which limit the eligibility of first stage dealer to claim credit of eligible duties in respect of goods which were purchased from manufacturers prior to twelve months of appointed day. Such condition, though does not make hostile discrimination between similarly situated persons, imposes a burden with retrospective effect without any basis limiting scope of dealer to enjoy existing tax credits. Further, no such restriction existed in prior regime. Thus, Section 140(3)(iv) was held to be unconstitutional and liable to be struck down.
29. In JCB India Ltd vs. Union of India [2018] 92 taxmann.com 131 (Bombay), however, the Bombay High Court took a contrary view on the same question as above. One of the main grounds for arriving at a contrary conclusion was that cenvat credit was a concession and not an accrued right. To buttress this proposition, reliance was placed on Jayam & Company vs. Assistant Commissioner (2016) 15 SCC 125, a decision rendered in the VAT regime (which was based on the “origin-based consumption tax” principle). It was held that protection of existing rights must always be consistent with conditions already imposed under existing (erstwhile) law for their enjoyment. It was further, noted that since period or outer limit for availing Cenvat credit also existed under Rule 4(7) of the Cenvat Credit Rules, 2004 and thus held that even the erstwhile Central Excise/Service Tax laws did not give assessees unrestricted and unfettered right to claim Cenvat credit.
30. Inter alia on the strength of the above judgment, the Bombay High Court, in Nelco Ltd vs. Union of India [2020] 116 taxmann.com 255 (Bombay) took a view that Rule 117 was intra vires. What it held was that where the assessee alleged that authorities did not permit its request of filing TRAN-1 Form as it could not be filed due to problems on common portal, since technical difficulty faced by the assessee could not be evidenced from GST system logs, no direction could be issued to respondents to treat instant case as falling within ambit of rule 117(1A).
31. The above case also drew from the judgment of the Gujarat High Court in Willowood Chemicals Pvt Ltd vs. Union of India [2018] 98 taxmann.com 100 (Gujarat). In this case, it was held that plenary prescription of time limit for declarations was neither without authority nor unreasonable. It was within rule making power available under Sections 164(1) and 164(2) of CGST Act. It was not arbitrary to provide for finality on credits, transfers of such credits and all issues related thereto, when tax structure of country was being shifted to new framework. Doing away with the time limit for making declarations could give rise to multiple largescale claims trickling in for years together, after the new tax structure is put in place. This would, besides making the task of matching of the credits impractical if not impossible, also impact the revenue collection estimates. If the time limit in Rule 117 was held to be directory, it would give rise to unending claims of transfer of credit of tax on inputs and such other claims from old to the new regime.
32. In Assistant Commissioner of CGST and Central Excise vs. Sutherland Global Services Pvt Ltd [2020] 120 taxmann.com 295 (Madras), it was held that assessee was not entitled to carry forward and set-off of unutilized credit of Education Cess, Secondary and Higher Education Cess, and Krishi Kalyan Cess against its output GST liabilities in terms of Explanations 1 and 2 to Section 140.
INPUT TAX CREDIT
33. One of the features of the GST law is the flow of seamless credit across the value-chain. However, there are multiple situations artificially created in the law which deny the credit to the recipient of the goods/service even though the goods/services are utilized for the furtherance of business. One example which comes to mind is ITC in respect of construction and works contract in Section 17(5)(d). In case of Safari Retreats Pvt Ltd vs. Chief Commissioner of CGST (2019) 25 GSTL 341 (Orissa):
a. The petitioners were mainly carrying on business activity of constructing shopping malls for the purpose of letting out of the same to numerous tenants and lessees.
b. Huge quantities of materials and other inputs in the form of cement, sand, steel, aluminium, wires, plywood, paint, lifts, escalators, air-conditioning plant, chillers, electrical equipment, special facade, DG sets, transformers, building automation systems etc. The petitioners had also availed services in the form of consultancy service, architectural service, legal and professional service, engineering service, etc for the purpose of construction of the said malls. Input taxes were paid on all goods and services purchased by the petitioners.
c. In one of the shopping malls, the petitioner had let out different units on rental basis. Such activity of “letting out” is also a “supply of service” under CGST Act and chargeable to tax.
d. The petitioner sought to discharge their tax obligation on provision of renting service through the ITC accumulated on inputs, etc. used for construction of shopping malls. The respondent disallowed utilization of such ITC in view of Section 17(5)(d). Aggrieved, the petitioner approached the High Court seeking utilization of ITC accumulated on inputs, etc. purchased for construction against renting of immovable property.
e. The petitioner inter alia advanced the following arguments:
i. Section 17(5)(d) must apply only in cases of constructions where tax chain is broken. Its purport must be restricted to cases where the intention to construct a building, is to sell it after issuance of completion certificate. In the instant case, the construction was neither “intended for sale” nor “on his own account”. Section 17(5)(d) cannot be applied if construction was not on “his own account”, far less when the construction of the immovable property is intended for letting out.
ii. The sale of a property after issuing of a completion certificate is not taxable in the GST regime as per entry 5 of III Schedule to CGST Act. Therefore, the chain of taxation gets broken and restricting ITC in such cases would be completely valid.
iii. However, in the instant case the tax chain continues as the mall which has been constructed generates rental income which is liable to GST. Hence, the taxation which starts when the petitioner buys goods and services for the construction of the mall, continues till the taxation of rental income arising out of the same construction.
iv. Further, under section 16 of the CGST Act, GST registered persons are entitled to take credit of input tax charged on any supply of goods or services to him which are used or intended to be used in the course or furtherance of his business. It contemplates availment and utilization of ITC by persons who have a uniform tax chain in their transactions from input till output.
v. Therefore, the petitioner cannot be denied the benefit of ITC in the facts and circumstances of the present case.
f. The High Court acceded to the above arguments and read down Section 17(5)(d) by allowing use of ITC on goods and services consumed in construction of shopping mall against paying GST on rentals received from tenants in shopping mall. In general terms, Section 17(5)(d) was read down to allow use of ITC on inputs used in construction in B2B cases and deny ITC only in cases of B2C cases.
34. The rational therefore, for allowing input tax credit accumulated on account of inputs purchased/used for construction of immovable property against renting of immovable property is that supply of input goods for construction of a shopping mall and the same being used for renting out units in the mall constitute a single supply chain and benefit of ITC should be available to the assessee. The investment (including the taxes suffered on inputs) in construction of the mall is now being utilized to generate rent, which is also taxable under the provisions of GST. Therefore, it is part of the same tax-chain and both taxes at stage of input and output are not liable to be taxed independently.
35. The above judgment, however, has been currently stayed by the Supreme Court.
E-WAY BILL, INSPECTION & CONFISCATION
36. In Assistant Commissioner vs. Satyam Shivam Papers Pvt Ltd [2022] 134 taxmann.com 241 (SC), goods were kept in the house of a relative for 16 days by the officer and not in designated place for safe keeping. The goods were confiscated, in the first place, for the reason that the goods in question could not be taken to the destination within time (of expiry of e-way bill) for reasons beyond the control of respondent-taxpayer including traffic blockage due to agitation. Section 129 not at all being attracted, the court imposed a cost of Rs. 59, 000 considering the conduct of GST officer and harassment faced by taxpayer.
37. In Shiv Enterprises vs. State of Punjab [2022] 135 taxmann.com 123 (Punjab & Haryana), confiscation proceeding under Section 130(1) initiated on the ground that sellers/suppliers of the assessee are not having inward supply but only engaged in outward supply without paying any tax. It was held that the confiscation was completely unsustainable for the following reasons: (i) Goods and conveyance in transit were accompanied with invoice and e-way bill as prescribed under Rule 138A; (ii) No discrepancy has been pointed out in invoice and e-way bill and reply filed by respondent-department; (iii) No finding with respect to contravention of any provision by petitioner with intent to evade payment of tax; (iv) Contravention of provision alleged is against supplier of petitioner on the ground of showing outward supply without having inward supply; (v) Invocation of Section 130 must have nexus with action of person against whom proceedings are initiated. Petitioner cannot be held liable for contravention of provision of law by any other person in supply chain.
38. In Synergy Fertichem Pvt Ltd vs. State of Gujarat 2020 (33) GSTL 513 (Gujarat), it was held that while section 129 provides for deduction, seizure and release of goods and conveyances in transit, section 130 provides for their confiscation and, thus, section 130 is not dependent on or subject to section 129. It was further held that for issuing notice of confiscation under section 130, mere suspicion is not sufficient, and authority should make out a very strong case that assessee had definite intent to evade tax. At the stage of detention and seizure of the goods and conveyance, the case has to be of such a nature that on the face of the entire transaction, the authority concerned should be convinced that the contravention was with a definite intent to evade payment of tax. The action, in such circumstances, should be in good faith and not be a mere pretence.
39. The High Courts have quashed proceedings relating to e-way bill initiated on account of minor and clerical errors. For example, typing 470 kms as the distance instead of 1470 kms [See: Tirthamoyee Aluminium Products vs. State of Tripura [2021] 127 taxmann.com 680 (Tripura)]; minor detours enroute [See: R. K. Motors vs. State Tax Officer [2019] 102 taxmann.com 337 (Madras)]; mistake in vehicle no. in part-B of e-way bill when all other documents were in place [See: K.B. Enterprises vs. Assistant Commissioner of State Taxes & Excise [2020] 115 taxmann.com 250 (AA- GST – HP)]; wrong valuation or classification of goods at the time of interception [See: K.P. Sugandh Ltd. vs. State of Chhattisgarh [2020] 122 taxmann.com 291 (Chhattisgarh)], etc.
40. While various High Courts have been proactive in this front, the Supreme Court has not been progressive. For instance, in State of Uttar Pradesh vs. Kay Pan Fragrance Pvt Ltd [2019] 112 taxmann.com 81 (SC), High Court had passed an interim order directing State to release seized goods, subject to deposit of security other than cash or bank guarantee or in alternative, indemnity bond equal to value of tax and penalty to satisfaction of Assessing Authority. The Supreme Court held that the order passed by High Court was contrary to section 67(6) and authorities would process claims of concerned assessee afresh as per express stipulations in section 67, read with relevant rules in that regard. Similarly, in Assistant Commissioner of State Tax vs. Commercial Steel Ltd [2021] 130 taxmann.com 180 (SC), Competent Authority by an order passed under section 129(1) detained goods of assessee under transport and served a notice on person in charge of conveyance and High Court, on writ petition filed by assessee, set aside action of Competent Authority. However, it was held that since assessee had a statutory remedy under section 107 and there was, in fact, no violation of principles of natural justice in instant case, it was not appropriate for High Court to entertain a writ petition and impugned order of High Court deserved to be set aside and assessee was to be permitted to take appropriate remedies which were available in terms of Section 107.
ARREST & PROSECUTION
41. The key issue that has been litigated on this front is as to what must happen first – determination of tax liability or arrest? There is, again, a dichotomy of judicial views in this regard.
42. In PV Ramana Reddy vs. Union of India 2019-TIOL-873-HC-TELANGANA-GST, the following observations were made:
a. Even though Section 69(1) does confer power to arrest in case of non-cognizable and bailable i.e, the four offences listed in Section 132 above, if the amount involved is between Rs. 3 Crore and Rs. 5 Crore, Section 69(3) deals with the grant of bail, remand to custody and the procedure for grant of bail to a person accused of the commission of non-cognizable and bailable offences. It is not known how a person whom the Commissioner believes to have committed an offence specified in clauses (f) to (l) of sub-section (1) of section 132, which are non-cognizable and bailable, could be arrested at all, since section 69(1) does not confer power of arrest in such cases.
b. It was held that offences mentioned in Section 132 have no co-relation to and do not depend on any assessment and adjudication and therefore, prosecution can be launched even prior to the completion of assessment. It is important to note the fact that until a prosecution is launched, by way of a private complaint with the previous sanction of the Commissioner, no criminal proceedings can be taken to commence, was not disputed.
c. Further, persons who are summoned under section 70(1) and persons whose arrest is authorised under section 69(1) are not to be treated as “persons accused of any offence” until a prosecution is launched was also not disputed. It was also acknowledged that officers under various tax laws such as the Central Excise Act etc., are not police officers to whom section 25 of the Indian Evidence Act, 1872 would apply. The power conferred upon the officers appointed under various tax enactments for search and arrest are actually intended to aid and support their main function of levy and collection of taxes and duties. Further, the statements made by persons in the course of enquiries under the tax laws, cannot be equated to statements made by persons accused of an offence. Consequently, there is no protection for such persons under article 20(3) of the Constitution of India, as the persons summoned for enquiry are not persons accused of any offence within the meaning of article 20(3).
d. It was also held that writ proceedings can be converted into proceedings for anticipatory bail if the enquiry by the respondents is not a criminal proceeding and yet the respondents are empowered to arrest a person on the basis of a reason to believe that such a person is guilty of commission of an offence under the CGST Act. However, a writ of mandamus would lie only to compel the performance of a statutory or other duty. No writ of mandamus would lie to prevent an officer from performing his statutory functions or to direct an officer not to effect arrest.
e. Further, it was observed that despite the fact that the enquiry by the officers of the GST Commissionerate is not a criminal proceeding, it is nevertheless a judicial proceeding in terms of Section 70 of the CGST Act.
f. To say a prosecution can be launched only after the completion of the assessment, goes contrary to section 132. The prosecutions for these offences do not depend upon the completion of assessment. Therefore, argument that there cannot be an arrest even before adjudication or assessment, is not appealing.
g. The objects of pre-trial arrest and detention to custody pending trial, are manifold as indicated in section 41 CrPC, i.e, to prevent such person from committing any further offence, proper investigation of the offence, to prevent such person from causing the evidence of the offence to disappear or tampering with such evidence in any manner and to prevent such person from making any inducement, threat or promise to any person acquainted with the facts of the case so as to dissuade him from disclosing such facts to the Court or to the police officer. Therefore, it is not correct to say that the object of arrest is only to proceed with further investigation with the arrested person.
43. Per contra, in Jayachandran Alloys Pvt Ltd vs. Superintendent of GST & Central Excise, Salem [2019] 25 GSTL 245 (Madras), the Madras High Court ruled that:
a. The power to punish set out in section 132 would stand triggered only once it is established that an assessee has ‘committed’ an offence. It has to necessarily be after determination of demand due from an assessee which itself has to necessarily follow process of an assessment.
b. It was observed that Section 132 imposes a punishment upon the assessee that ‘commits’ an offence. The allegation of the revenue in the instant case was that the petitioner had contravened the provisions of section 16(2) and availed excess input tax credit.
c. Further, it was found that there was no movement of the goods and the transactions were bogus and fictitious, created only on paper, solely to avail input tax credit. The offences contained in Section 132 constitute matters of assessment and would form part of an order of assessment, to be passed after the process of adjudication is complete and taking into account the submissions of the assessee and careful weighing of evidence and explanations offered by the assessee in regard to the same.
d. The use of word ‘commits’ make it more than amply clear that the act of committal of the offence is to be fixed first before punishment is imposed. It was thus held that ‘determination’ of the excess credit by way of the procedure set out in section 73 or 74, as the case maybe is a pre-requisite for the recovery.
e. Sections 73 and 74 deal with assessments and as such it is clear and unambiguous that such recovery can only be initiated once the amount of excess credit has been quantified and determined in an assessment. When recovery is made subject to ‘determination’ in an assessment, the argument of the department that punishment for the offence alleged can be imposed even prior to such assessment, is clearly incorrect and amounts to putting the cart before the horse.
f. The exceptions to this rule of assessment are only those cases where the assessee is a habitual offender, that/who has been visited consistently and often with penalties and fines for contraventions of statutory provisions. It is only in such cases that the authorities might be justified in proceedings to pre-empt the assessment and initiate action against the assessee in terms of section 132, for reasons to be recorded in writing. Support in this regard was drawn from the decision of the Division Bench of the Delhi High Court in the case of Make My Trip (India) (P.) Ltd. vs. Union of India [2016] 58 GST 397 (Delhi), as confirmed by the Supreme Court reported in Union of India vs. Make My Trip (India) (P.) Ltd. [2019] 104 taxmann.com 245 (SC), reiterating that such action, would amount to a violation of Constitutional rights of the petitioner that cannot be countenanced.
44. The correctness of both the above cases is pending before a larger bench of the Supreme Court in Union of India vs. Sapna Jain 2019-TIOL-217-SC-GST.
CONCLUSION
45. On weighing all the case laws seen above, what can be said is that the courts have been treaded cautiously while dealing with constitutional issues surrounding GST, in fact, on all occasions so far, upholding validity of the impugned provisions of GST law. Whereas on issues such as confiscation of goods and vehicles, provisional attachment of property, blocking of electronic credit ledger, carrying forward of transitional credit and failure of natural justice, the courts have been pro-active in coming to the rescue of the assessees.
46. On when economic legislation is questioned, the Courts are slow to strike down a provision which may lead to financial complications. Taxation issues are highly sensitive and complex; legislations in economic matters are based on experimentations; Court should decide the constitutionality of such legislation by the generality of its provisions. Trial and error method is inherent in the economic endeavours of the State. In matters of economic policy, the accepted principle is that the Courts should be cautious to interfere as interference by the Courts in a complex taxation regime can have large scale ramifications.
47. During the last 5 years, there have a slew of notifications/circulars/orders that have been issued. While this does complicate the law but it also shows that the Government is listening to the issues raised by the stakeholders. However, the changes in law every time there is an adverse judgement to the government shows lack of grace. Accepting defeat honourably requires a mindset which assesses are used to – what about the government?
