Unreported Decisions – ST – June 2021
By Vinay Kumar Jain & Sachin Mishra, Advocates
1. Whether the State’s action, of imposing IGST on oxygen concentrators, which were directly imported by individuals free of cost, without the aid of a canalizing agency, violative of Article 14 and 21 of the Constitution and unconstitutional?
Facts and Pleading: Mr. Gurucharan Singh (hereinafter “Petitioner”) is an 85-year-old, who approached the High Court of Delhi against the imposition of IGST on the import of oxygen concentrator which has been gifted to him by this nephew, asserting that the same is discriminatory, unfair and unreasonable upon his right to life and health. As per Notification No.30/2021- Customs dated 01.05.2021, IGST on oxygen concentrators imported by individuals for personal use, was scaled down to 12%. Whereas, as per Notification No.4/2021-Customs dated 03.05.2021, the State exempted, completely, oxygen concentrators imported for the purpose of COVID relief from the imposition of IGST, where the importer was the State Government, or, any entity, relief agency or statutory body authorized by the Government.
The Petitioners submitted that a perusal of Mega Exemption notification no.50/2017, would show that several items where BCD is exempted or reduced, the IGST is nil. Therefore, imposition of 12% IGST on oxygen generators, when BCD on them is exempted, is contrary to the prevailing practice. As per Petitioner, a perusal of entry no. 607A of General Exemption no. 190 completely exempts BCD and IGST on life-saving drugs/medicines imported for personal use, which are supplied free of cost by overseas supplier. Therefore, the Petitioner submitted that Oxygen concentrators, would fall within the ambit of entry no. 607A, since the definition of drugs as per the Drugs and Cosmetics Act 1940 would include the same. Further, the Petitioner submitted that there is no discernible rationale as to why the exemption from levy of IGST is not extended to oxygen concentrators imported by individuals for personal use, the distinction drawn between the two classes of importers is clearly unreasonable and hence, violative of Article 14 of the Constitution. The Petitioner also submitted that the CBEC Circular no. 9/2014-Customs, sets forth the guideline to issue exemption notification under section 25(2) of the Customs in respect of goods imported for relief and rehabilitation of people affected by natural disaster and epidemics. Even though there’s no right to claim exemption from taxes, but once the provisions under section 25 of the Customs Act are invoked, such delegated legislation can be judicially reviewed, and the same is arbitrary and violative of Article 14. The Petitioner contended that the right to life encompasses within it, the right to health and the right to affordable treatment, and the State not only has a duty but a positive obligation to ensure that the health of citizens is duly protected. There is a “distinct and noticeable burdensomeness” that is clearly and directly attributable to the impugned tax. Therefore, as per the Petitioner, the impugned notification violates not only right health but also the right to human dignity, which is interwoven in Article 21 of the Constitution.
The Respondents submitted that the GOI has provided considerable relief insofar as oxygen concentrators imported for personal use are concerned, as BCD has been reduced from 38.5% to nil, while IGST has been scaled down from 28% to 12%. This reduction has been brought to bring parity between oxygen concentrators imported for commercial use as against those imported for personal use. The duty incidence has come down from 77% to 12%. The Respondents claimed that it is felt by the State that any person importing oxygen concentrator for personal use as also those finding resources to receive gifts would be in a position to afford payment of IGST at the nominal rate of 12%. The Respondents also submitted that the decision to impose a tax and/or fixation of the rate at which tax is to be imposed cannot be subjected to judicial review. The courts have refrained from exercising the power of judicial review over matters concerning economic issues. As per the Respondents, the imposition of IGST, which are gifted for personal use, does not violate Article 21 of the Constitution, if the same is accepted that would lead to absurd consequences.
Judgment: The Hon’ble High Court held that the conditions prescribed in the notification dated 03.05.2021, exempting the imposition of IGST on only those oxygen concentrators that are imported for Covid relief through a canalizing agency, creates a manifestly arbitrary and an unreasonable distinction between two identically circumstanced users depending on how the oxygen concentrator has been imported. As per the Hon’ble High Court, the exclusion of individuals, from the benefits of the said notification only because they chose to receive the oxygen concentrators as a gift, albeit directly, without going through a canalizing agency is violative of Article 14 of the Constitution. The Hon’ble High Court held that while it is permissible for the State to identify a class of persons, to whom tax exemption would be extended, it is not permissible for the State to exclude a set of persons who would ordinarily fall within the exempted class by creating an artificial, unreasonable and substantially unsustainable distinction. The Courts and State have to adopt a humanistic approach, which in our view, is a facet of Article 21 of the Constitution. The Hon’ble High Court observed that there is a positive obligation on the State to take ameliorative measures so that adequate resources are available to protect and preserve the health of persons residing within its jurisdiction. As per the Hon’ble High Court, the State should relent, or at least lessen the burden of exactions, in times of war, famine, floods, epidemic and pandemics, since such an approach allows a person to live a life of dignity which is a facet of Article 21. The Hon’ble High Court held that persons who are similarly circumstanced as the petitioner, i.e., those who obtain imported oxygen concentrators as gifts, for personal use, cannot also be equated with those who import oxygen concentrators for commercial use. Therefore, the Hon’ble High Court held that notification bearing no. 30/2021-Customs, dated 01.05.2021, will also have to be quashed and levy of IGST is unconstitutional. The Hon’ble High Court observed that the oxygen concentrators would also fall within the ambit of entry no. 607A, since the definition of drugs as per the Drugs and Cosmetics Act 1940 would include the same, therefore also not requiring the State to issue a separate exemption notification. The Hon’ble High Court also directed that to prevent misuse of the oxygen concentrators, by any person, they would have to furnish a letter of undertaking to the officer designated by the State that the same would not be put to commercial use.
Gurcharan Singh vs Ministry of Finance (Department of Revenue), Government of India, High Court of Delhi, decided on 21.05.2021, in W.P.(C) 5149/2021, CM No. 16554/2021
2. Whether service tax is leviable on the trade discount received by the Petitioner from the manufacturers on reaching a certain sales target?
Facts and Pleading: M/s T.V. Sundram Iyengar & Sons Pvt. Ltd. (hereinafter “Petitioner”) is engaged in the business of purchasing motor vehicle parts and chassis from the manufacturers and reselling the same in its own name and on its own account. The Petitioner had entered into dealership agreements with various manufacturing entities. The Petitioner were also eligible for trade discount by way of credit notes from such manufacturers on reaching a certain sales target. The department issued a show cause notice proposing to levy service tax on the trade discounts received by the Petitioner from the manufacturers by way of credit notes. The said demand was confirmed by the adjudicating authority. The Petitioner filed a writ petition challenging the aforesaid order.
The Petitioner relied upon some relevant clauses in the dealership agreements and contended that the core activity of the Petitioner is to engage in sales of the goods sold to them by the respective manufacturers. The Petitioner further submitted that the incidental clauses regarding the attainment of business performance are not relevant for the determination of the issue in hand. The Petitioner also submitted that the relationship between the parties is on a principal to principal basis, and that there was no element of service but only sale.
The department had alleged that the Petitioner’s contention that it was having only principal to principal relationship with manufacturers was not correct, and accordingly the activity of the Petitioner would fall within Section 66E(e) of the Finance Act 1994.
Judgment: The Hon’ble High Court of Madras held that a mere reading of the dealership agreement would indicate that the petitioner purchases the goods from the manufacturers by way of sale. It is only when the Petitioner has reached a certain sales target, the manufacturer on his own disburses trade discount to the petitioner by way of credit notes, in fact the dealership agreement does not contain any clause regarding trade discount. The Hon’ble High Court referred to the reasoning adopted in AAR Ruling No. AAR/ST/11/2016 wherein it was ruled that since there was no agreement or contractual obligation between the applicant and the media owner to give volume discounts, and the same was not fixed and at the discretion of the media owner, the applicant could not be said to be providing declared services to the media owner as per Section 66E(e) of the Finance Act 1994. Further, the Hon’ble High Court also held that the adjudicating authority had only gone by some clauses of the dealership agreement, whereas the document has to be read as a whole, reference was made to Super Poly Fabricks Ltd. vs Commissioner of C.Ex. Punjab, 2008 (10) S.T.R. 545. Therefore, the Hon,ble High Court held that even though the document may be styled as a dealership agreement and the Petitioner may have to be conform to certain business standards, if the agreement is read as a whole, one can come to the safe conclusion that the relationship between the parties was one of seller and buyer on a principal to principal basis. Accordingly, the Hon’ble High Court has held that merely a discount passed by the manufacturer in a sale transaction cannot be subject to service tax.
M/s T.V. Sundram Iyengar & Sons Pvt. Ltd. vs The Commissioner of CGST & Central Excise, Madurai, High Court of Madras, decided on 30.03.2021 in W.P.(MD) No.4252 of 2021 and W.M.P.(MD) No.3448 of 2021.
3. Whether the requirement under section 107 of the CGST/SGST Act 2017 mandating a deposit of 10% of the demand as a pre-deposit for filing appeal, be waived off or reduced?
Facts and Pleading: M/s Utkal Udyog (hereinafter “Petitioner”) aggrieved by the requirement under Section 107 of the Orissa GST Act, 2017 read with Rule 10 of Orrisa GST Rules, 2017 that mandates a deposit of 10% of the demand as a pre-deposit for the appeal to be considered, filed a writ petition before the Hon’ble High Court of Orrisa.
The Petitioner submitted that since he had no financial means at this stage, he was unable to even upload the appeal without pre-deposit. The Petitioner relied on the decision of Punjab and Haryana High Court in Kelmar (India) Exports v State of Punjab (CWP No.17975 of 2020 decided on 02.11.2020), to submit that the Court should exercise its power under Article 226 of the Constitution to either waive or reduce the pre-deposit percentage to enable the Petitioner to file the appeal.
Judgment: : The Hon’ble High Court of Orrisa held that firstly, Section 107 of the OGST Act is a mandatory provision and that there is no discretion with the appellate authority to waive the requirement of pre-deposit, therefore, even the High Court itself cannot direct the appellate forum to do so, contrary to the statute. Further, the Hon’ble High Court also held that the as far as the judgment in Kelmar (India) Exports (supra) is concerned it was in the context of Punjab Value Added Tax Act. Further, the High Court of Punjab and Haryana in the judgment of Kelmar (India) Exports thought it fit to reduce the pre-deposit from 25 % to 10% on the basis of the facts of that case, however, the Hon’ble High Court was not persuaded to adopt the same approach in view of the clear language of the statute applicable here. The Hon’ble High Court also noticed that as per Section 107 of the OGST Act, upon making a pre-deposit of 10% there is an automatic stay on the balance of 90% of the demand, which cannot, under any circumstances, be said to be unfair or unreasonable. Therefore, the writ petition is not to be entertained and accordingly dismissed.
M/s Utkal Udyog vs Commissioner CT & GST and Others, High Court of Orrisa, decided on 30.04.2021, in W.P.(C) No.15190 of 2021
4. Whether the activity of crushing, pulverizing, converting and packing of spices into powder form amount to manufacture or not? If not, whether service tax is payable under the category of ‘Business Auxiliary Service’?
Facts and Pleadings: M/s Nilgiri Oil & Allied Industries (hereinafter referred to as “the appellant”), has contracted with M/s Shalimar Chemical Works Ltd, Kolkata to process whole ‘turmeric’ and ‘chilly’ as well as seeds of ‘coriander’ and ‘cumin’ supplied by the latter into powder which is then packed and returned.
Revenue alleged that the activity of conversion of these spices into powder does not amount to manufacture, therefore, with effect from 1.9.2009, the activity undertaken by the Appellant of job work is covered under ‘Business Auxiliary Services’.
As there were contrary decisions of the CESTAT in Jayakrishna Flour Mills (P) Ltd vs. Commissioner of Central Excise, Madura [2015 (37) STR 1079 (Tri- Chennai)] and in Sara Spices vs. Commissioner of Central Excise, Cochin [2018 (362) ELT 151 (Tri-Bang)], the matter was referred to larger bench of the CESTAT. The Hon’ble CESTAT in the case of Jayakrishna Flour Mills Pvt. Ltd. (supra) relied on the CBEC Circular No. 11/01/2012-CX.1, dated 9-7-2013 to came to the conclusion that the process, in question, would amount to manufacture and no service tax is leviable. Contrary, the Hon’ble CESTAT has held that crushing of chilli to make chilli powder does not amount to manufacture in the case of Sara Spices (supra), relying on the CEBC Circular dated 16-3-2000.
Judgement: The Hon’ble Larger Bench of the CESTAT has held that w.e.f. 01.09.2009, the Section 65(19) of Finance Act, 1994 was amended to restrict taxation to activities involving production or processing of goods that do not amount to manufacture of excisable goods which pass the test of transformation into marketable outputs that have distinct use. As per Hon’ble Larger Bench of the CESTAT, in the present case, whole spices or seeds is subject to processing for production of powder. The transformed product has its own market similar to, and yet independent of, the harvested product that is subjected to processing. It is the particular use to which powdered spice is put to that prompted the establishment of an entire industry and therefore, Hon’ble Larger Bench of the CESTAT has held that every aspect of ‘manufacture’, as settled by judicial determination, is complied with in the present issue. Thus, Hon’ble Larger Bench of the CESTAT further held that the activity of crushing, pulverizing, converting and packing of spices into powder form amounts to manufacture and no service tax is payable. Hon’ble Larger Bench of the CESTAT observed that ‘manufacturing’ as held by the Tribunal in Jayakrishna Flour Rolling Mills (P) Ltd (supra) has relevance to the present dispute rather than the decision in Sara Spices (supra) which resolved an entirely different dispute. Accordingly, the reference was answered in favour of assessee.
M/s Nilgiri Oil & Allied Industries vs CCE, Cus & ST, Larger Bench, CESTAT, Hyderabad, decided on 25.05.2021 in Service Tax Appeal No: 28261 of 2013.