Unreported Decisions – ST – September 2021

By Vinay Kumar Jain & Sachin Mishra, Advocates

1. Whether tax along with interest and penalty be demanded without the issuance of a show cause notice under Section 74(1), while the investigation is still pending?

Facts and Pleading: M/s. Deem Distributors Pvt. Ltd. (hereinafter “Petitioner”) is a partnership firm engaged in the dealing of goods and services related to ferrous waste and scrap, re-melting scrap ingots of iron or steel, etc. The Department vide letter dated 25.04.2019 requested the Petitioners for a reversal of ` 1,52,35,820/- alleging that the Petitioner had fraudulently availed input tax credit on the basis of fake invoices issued by certain fictitious suppliers/ firms. The Department further sent an intimation to the Petitioner ‘advising’ them to pay ` 1,17,35,822 for the period February 2018 to March 2018, on the failure of which a show cause notice under Section 74(1) would be issued. The Petitioners assailed the conduct of the Department and filed a writ petition on 23- 03-2021, in I.A.No. 1 of 2021 in W.P.No.7063 of 2021, wherein the Court had initially granted an interim stay on all further proceedings pursuant to demand dated 25.04.2019 and said order was also extended on 06.04.2021 and 19.07.2021. The present appeal has been filed to vacate the said order.

The Petitioners assailed the conduct of the Respondents in directing them to remit the amount without following due procedure under Section 74(1). The Petitioners argued that the liability cannot be determined before conducting enquiry especially when even the investigation is incomplete, and that any demand or advise can at best be a provisional one. They further argued that when no enquiry has been initiated, they cannot be compelled coercively to pay the amounts as doing so would amount to violation of Article 14 and 300A.

The Respondents admitted that the investigation proceedings were still on-going and had not reached finality, however it was on the basis of the intelligence passed on to them, that they issued the summons and the statement to the Petitioner. They further argued that they had not served or raised any notice under Section 74(1) in view of the investigation being in progress, however, they had only advised the Petitioner to pay the tax along with applicable interest and penalty under Section 74(5) before the issuance of show cause notice.

Judgment: The Hon’ble High Court of Telangana held that the conclusion derived by the Respondents appeared to have been drawn on basis of an incomplete investigation, and therefore no tax demand can be raised without there being a determination of liability of the Petitioner in any enquiry conducted under the Act. The Hon’ble High Court observed that Section 74(5) gives a choice to the tax payer to make any payment, if he is so chooses, but it does not confer any power on the Respondents to make a demand in a manner where there had been a determination of liability of the assessee. The Court also observed that the letter ‘advising’ the Petitioners to pay the tax was without any jurisdiction, and that Respondents cannot be allowed to collect any tax, interest or penalty before the same is determined, in an enquiry, after putting the Petitioner on notice. The Hon’ble Court stated that the Respondent’s action was wholly arbitrary and without jurisdiction, thus restraining them from coercing the Petitioner to make any payment without issuing notice under Section 74(1) of the Act. Therefore, the Hon’ble Court directed a refund of ` 35 Lakhs along with interest to the Petitioner, while also making it clear that the Respondents could proceed with the investigation and enquiry before dismissing the writ petition.

M/s. Deem Distributors Private Ltd. vs. Union of India, High Court of Telangana, decided on 03.08.2021, in I.A.No.2 of 2021 in/and Writ Petition No.7063 of 2021.

2. Whether, under Section 6(2)(b), summons issued by Central Authorities be held in abeyance when an investigation/proceeding has already been initiated by the State Authorities?

Facts and Pleading: Kuppan Gounder P.G. Natarajan (hereinafter “Petitioner”) was issued a notice dated 17.12.2020 by the State Authorities intimating certain discrepancies in the returns filed by the Petitione The proceedings for the same were in progress. While so, the Central Authorities issued summons to the Petitioner stating that, an enquiry was being made in connection with the Petitioner’s company – M/s. KPN Travels India Ltd. The summons directed the Petitioner to give evidence or produce documents of the description mentioned in the summons. Thus, the Petitioners have filed the present writ petition challenging the issuance of the impugned summons.

The Petitioners submitted that as per Section 6(2) (b) the impugned summons issued by the Senior Intelligence Officer be held in abeyance on the ground that a proceeding initiated by the State Authority was already under way. The Petitioner was of the view that the summons issued were without jurisdiction, and the Central authorities were bound to wait till the conclusion of the proceedings initiated by the State officials under the SGST Act. They also submitted that the earlier summon issued by the Respondent had also been kept in abeyance in W.P. No. 2723 of 2021.

The Respondent contended that the Petitioners had already filed four writ petitions stalling the entire investigation process, thereby not co-operating for the continuance and completion of the same in respect of IGST. They further submitted that the State action against the Petitioners was with regards to the scrutiny proceedings of return, whereas the summons issued by the Central Authorities was under Section 70, and therefore, since both the subject matters were unconnected, the proceedings cannot be held in abeyance.

Judgment: The Hon’ble High Court of Madras observed that the object of Section 6(2)(b) was to avoid parallel proceedings, and the benefit of the same can only be claimed when the subjects proposed to be dealt with by the State and Central authorities are one and the same, wherein the burden to the prove the similarity, before the competent authority, is on the Petitioner. The Court observed that the department authorities are best suited for elaborately scrutinizing such an adjudication in detail, since such an adjudication in detail cannot be conducted by the High Court under Article 226, as there is a possibility of error, commission or omission at the instance of either party, and an intervention during the intermittent period by the High Court could paralyze the entire proceedings which is not desirable. The Hon’ble Court further opined that in the instant case the State Authority had issued a notice for intimating discrepancies in the return after scrutiny, and the same was pending adjudication, whereas, the Central Authority had issued the impugned summons under Section 70. Therefore, the Court observed that mere pendency of the proceedings before the State authorities was not a ground to restrain Central authorities from issuing summons and conducting investigation, and that the subject matter is one and the same is to be established. Thus, in light of the above, the Hon’ble High Court of Madras dismissed the writ petition and stated that Petitioner was at liberty to respond to summons by producing all evidence and documents to defend his case, and Respondent was at liberty to proceed with the investigation by following the procedures mentioned in the Statute

Kuppan Gounder P. G. Natarajan vs. Directorate General of GST Intelligence, Madras High Court, decided on 29.07.2021, in W.P.No.15708 of 2021 and W.M.P.Nos.16604 & 16605 of 2021.

3. Whether Rule 86A of the CGST Rules 2017 is a recovery provision? Whether the input tax credit earned in future can be appropriated under the Rule 86A?

Facts and Pleading: M/s. R. M. Dairy Products (hereinafter “Petitioner”) filed a writ petition against an order dated 25.06.2021 passed by the Respondents under Rule 86A(1)(a)(i) of the CGST Rules, 2017.

The Petitioners submitted that the order passed by the Respondents by relying upon Rule 86A(1) was without jurisdiction. They submitted that Rule 86A obliges the Respondents to record a positive ‘reason to believe’ that the credit of input tax had been fraudulently availed. The Petitioners argued that the input tax credit in dispute, arose on account of purchases made from M/s. Darsh Dairy & Food Products Agra, with respect to which, adjudication proceedings under Section 74 of the UP GST Act, 2017 (hereinafter “the Act”) was already underway against the Petitioner. Therefore, the Petitioners submitted that till those proceedings are concluded, no amount would become recoverable and hence the order passed by the Respondents was wholly premature. Furthermore, the Petitioner contented that Act clearly provides for the manner and mode of recovery under Section 78, wherein an amount could only be recovered after the lapse of three months from the date of the adjudication order. Lastly, it was contended that the when the Act clearly provides for the manner in which the amount may be determined and recoverable from the Petitioner, no other procedure may be adopted, as the same would violate the settled principles of law.

The Respondents vehemently opposed the contentions of the Petitione The Respondents submitted that the Petitioner had fraudulently utilised input tax credit, as M/s. Darsh Dairy & Food products, Agra was non-existent at the disclosed place of business. The Respondents alleged that the ‘reason to believe’ was contained in the impugned order, as the same was based on the material available, demonstrating that the seller M/s Darsh Dairy was a non-existent dealer.

Judgment: The Hon’ble High Court of Allahabad held that Rule 86-A did not contemplate any recovery of tax due from an assessee, and that it only provided for the creation of a lien without actual recovery being made. The Hon’ble High Court observed that the words “input tax available” in Rule 86A(1), cannot be read as actual input tax available as on the date of the order passed. The Court stated that the said phrase was relevant for laying down the first condition for exercise of power by the Commissioner/Authorised Officer – who must have “reason to believe” that any “input tax available” had been fraudulently availed or assessee was not eligible for the same. The Court further stated that the word “available” relates to the time when the assessee allegedly availed input tax credit either fraudulently or availment dehors eligibility and does not relate to input tax credit available on date when Rule 86-A was invoked. It was further observed that Rule 86-A was not a recovery provision and was at the most a provision to secure the interest of the Revenue to be exercised in the presence of relevant ‘reason to believe’, wherein the Rule only enables the authorised officer to not allow debit of an amount equivalent to ‘such credit’. The Court further stated that Legislature has purposely chosen the words “not allow debit”, wherein to ‘not allow debit’ and ‘to appropriate the same’ were two different things. The former only created a lien by blocking utilization of the amount, and the latter would necessarily involve transfer of title over the money, which cannot be contemplated as a consequence from the Rule. Thus, the Court held that if the Petitioner were to earn any further input tax credit to the tune of ` 7,06,66,700/- the same would be retained by way of lien, however the Revenue may not appropriate it. The Court stated that adjustment of appropriation may arise only on order attaining finality or on the lapse of three months from the date of passing, and that too as a consequence of recovery provisions but not under Rule 86-A. Therefore, the Hon’ble High Court dismissed the writ petition of the Petitioner and stated that any further credit above that amount could be allowed to be utilized without objection by the Revenue.

M/s. R. M. Dairy Products vs State of Uttar Pradesh & Ors, High Court of Allahabad, decided on 15.07.2021, in Writ Tax No. 434 of 2021.

4. Whether the supply of electricity and water is a sale of goods and whether the same will be included in the taxable value for evaluating the service tax applicable?

Facts and Pleadings: Electronics Technology Parks (hereinafter “Assessee”), a State Government Company, is the first Electronic Software Technology Park(‘ETP’) promoted and funded by the Government of Kerala The Assessee had acquired land and developed ETP by constructing buildings, roads, continuous power and water supply, security service, housekeeping, medical attention, etc., wherein a number of services were provided by independent vendors like restaurants, clubs guest house, etc. Subsequently, a show-cause notice was issued by the Department alleging that services provided by the Assessee to the units functioning in their campus were ‘composite’ in nature and were therefore classifiable under the head of ‘Support Services of Business or Commerce’ as defined under Section 65(104C) r/w Section 65(105) (zzzq) of the Finance Act 1994, instead of ‘Renting of Immovable Property’ as classified by the Assessee. There were several issues dealt upon in the said appeal, however, only the important ones are discussed herein.

The Assessee pleaded that the demand of service tax under ‘Support Services of Business or Commerce’ was not sustainable and that the department had misconstrued the meaning and scope of the service covered in this category. The Assessee submitted that the supply of electricity, water and air-conditioning are obligatory and incidental for the use of rented or leased premises, and that they were not charging any service tax on the sale of water, electricity, airconditioning and supply of electricity by operating DG sets, since them being goods are transactions of ‘sale of goods’. The Assessee further contended that the charges for the same are collected separately, wherein the charges for supply of standby power through DG set are also share of an expenditure on the cost of diesel and other consumables used for generation and supply of electricity. The Assessee also submitted that value of goods used for the operations of the AC and the supply of conditioned air is a transaction of sale of conditioned air exempt under Notification No.12/2003-ST dt. 20.06.2003 and that the diesel generator charges are apportionment of the price of electricity generated and sold to the tenants/ lessees. Therefore, the Assessee stated that no support was being provided by the Assessee to any businesses of the lessees, and that service tax was only payable on the collection of rentals, covered under ‘renting of immovable property’.

Judgement: The CESTAT, Bangalore observed that the supply of electricity and water is incidental for the use of the rented or leased premises. The Tribunal stated that the sale of water and electricity is a transaction of sale of goods and the Assessee is not charging any service tax on the sale of water, electricity, air-conditioning and supply of electricity by operating DG sets. The Tribunal observed that the charges for the same were collected separately, and on the examination of the sample invoices it can be ascertained that these charges are apportioned as per the area occupied by each tenant or lessee and are charged under separate invoices. The Tribunal stated that the rental or lease rental of the building takes into consideration the common facilities and the maintenance of the building and the supply of electricity and water is the transaction of sale of goods. Thus, the Tribunal observed that reasoning adopted by the department is completely misplaced and contrary to law and beyond the plain language of the statutory definition of ‘Renting of Immovable Property’. It was further observed that the reliance placed by Department on Rule 5(1) of the Service Tax (Determination of Value) Rules, 2006 to consider such expenses or costs as consideration and to be included in value of services, was contrary to the law laid down in UOI vs. Intercontinental Consultants & Technocrats Ltd. [2018(10) GSTL 401 (SC). Thus, the Tribunal held that the services rendered by the Assessee are covered under the category of ‘Renting of Immovable Property’ under Section 65(105)(zzzz) and not under ‘Support Services of Business or Commerce’ during the relevant period.

Electronics Technology Parks vs C.C.,C.E.& S.T -Trivandrum & Ors, CESTAT Bangalore, decided on 26.07.2021, vide Final Order No. 20645-20646/2021.