Category: Uncategorized

Unreported Decisions – November 2021

By Ajay R. Singh, Advocate and CA Rohit Shah

1. S. 54EC: The tax-payer cannot be asked to do impossible- Investment within 6 months of receipt of consideration after date of transfer :

Assessee had sold TDR for an amount of Rs. 1,45,92,750/- vide agreement dated 06-08-2008 and long term capital gains to the tune of Rs. 47,35,420/- were computed by the assessee as per provisions of the Act. It was observed by the AO that capital gain of Rs. 24,85,420/- was claimed to be invested in NHAI/REC Bonds on 26-03-2009 and exemption u/s 54EC of 1961 Act was claimed by the assessee. The AO observed that the last date of making investment in REC/NHAI Bonds for claiming exemption u/s 54EC should have been on or before 06-02-2009 hence claim of the assessee for exemption u/s 54EC of the Act was rejected. Before Ld. CIT(A), it was submitted by the assessee that last payment towards sale consideration on transfer of TDR was received on 15-11-2008 and period of 6 months should be reckoned from this date. The assessee relied upon circular no 791 dated 02-06-2000 issued by CBDT. The Ld. CIT(A) held that the CBDT circular covers the situation of conversion of capital asset into stock-in-trade and the time is allowed till when the stock-in-trade is actually sold or otherwise transferred by the assessee which is not the issue in the present case and, hence, this circular is not applicable to the facts of the assessee’s case and thus upheld action of the AO.

The Hon’ble ITAT held that, the second installment of Rs. 35,00,000/- was received on 26-09-2008 and if the period of six month is reckoned from this date of second installment, the assessee has made the investment within time stipulated u/s 54EC of Act of six months as investment in REC/NHAI Bonds of Rs. 43,51,000/- was made on 26-03-2009. The section encourages making investments in REC/NHAI bonds out of long-term capital gains on transfer of original asset earned by tax-payer and is to be construed reasonably to give full effect to the beneficial provisions and it cannot be interpreted in a manner to frustrate the intent of legislature. The tax-payer cannot be asked to do impossible, as in cases if the consideration is not received by the tax-payer on sale / transfer of long-term capital assets but is received subsequently as provided in an agreement to sale, the tax-payer cannot be expected to invest in REC/NHAI Bonds out of his own other sources or to make borrowings to invest in NHAI/REC Bonds to claim exemption u/s 54EC of Act and thus, allowed the appeal.

Lemes E. D’ Souza Vs. ITO Ward- 21(3)(3)
[ITA No. 5802/MUM/2013 ; Bench : A ; dated : 10/4/17 ; A.Y. 2009-10]

Lemes E. D’ Souza

2. Condonation of delay in filing the appeal before Ld. CIT(A) – by making delay in filing appeal before the ld.CIT(A), the assessee would not achieve anything – Delay condone:

Assessment order under section 144 rws 147 of the Act was passed by the AO on 21.12.2017. Against this order assessee preferred a belated appeal before the Ld. CIT (A), there was a delay of 66 days. The reason explained that Assessee was not aware about the passing of the assessment order, and the proceedings which were going on before the AO. The Ld. CIT (A) observed that there was no reasonable and sufficient cause which prevented the assessee to file the appeal within the stipulated time. He accordingly rejected the delay condonation and dismissed the appeal. Assessee filed appeal against the order of the Ld. CIT (A), before the Tribunal. Assessee reiterated submission made before Ld. CIT (A). It was prayed that small delay of 66 days in filing the appeal be condoned and matter be remitted to the Ld. CIT (A) for adjudication on merit, because the assessee has good case on hand and hope to succeed the same.

The Hon’ble Tribunal while directing Ld. CIT(A) to condone the delay held that the expression “sufficient cause” employed in the section has also been used identically in sub-section 3 of section 249 of the Act, which provides powers to the ld. CIT(A) to condone the delay in filing the appeal before him. Similarly, wordings has been used in section 5 of Indian Limitation Act, 1963. Whenever interpretation and construction of this expression has fallen for consideration before Hon’ble High Court as well as before the Hon’ble Supreme Court, then, Hon’ble Court were unanimous in their conclusion that this expression is to be used liberally. Reference to the following observations of the Hon’ble Supreme court from the decision in the case of Collector Land Acquisition Vs. Mst. Katiji & Others, 1987 AIR 1353 was also taken:

1. Ordinarily a litigant does not stand to benefit by lodging an appeal late.

2. Refusing to condone delay can result in a meritorious matter being thrown out at the very threshold and cause of justice being defeated. As against this when delay is condoned the highest that can happen is that a cause would be decided on merits after hearing the parties.

3. "Every day’s delay must be explained" does not mean that a pedantic approach should be made. Why not every hour’s delay, every second’s delay? The doctrine must be applied in a rational common sense pragmatic manner.

4. When substantial justice and technical considerations are pitted against each other, cause of substantial justice deserves to be preferred for the other side cannot claim to have vested right in injustice being done because of a non-deliberate delay.

5. There is no presumption that delay is occasioned deliberately, or on account of culpable negligence, or on account of mala fides. A litigant does not stand to benefit by resorting to delay. In fact, he runs a serious risk.

6. It must be grasped that judiciary is respected not on account of its power to legalize injustice on technical grounds but because it is capable of removing injustice and is expected to do so.”

The Tribunal held that the assessee was not aware about the assessment order or about the proceedings at the level of the assessment officer. Immediately, when she came into the knowledge about the order, she e-filed the appeal, and in the process delay of 66 days was occurred. It is pertinent to take note that by making delay in filing appeal before the ld.CIT(A), the assessee would not achieve anything. Thus, such delay cannot be adopted as a strategy. The ITAT condoned the impugned delay, and set aside order of the ld.CIT(A).

Smt.Rupa Maheshbhai Gandhi vs ITO, Ward-3(2)(10) Ahmedabad
[ITA No.2224/Ahd/2018 ; Bench SMC ; dated : 1/6/2021 ; AY: 2010-11 ]

Smt.Rupa Maheshbhai Gandhi

Unreported Decisions – ST – November 2021

By Vinay Kumar Jain & Sachin Mishra, Advocates

1. Whether amount paid during investigation due to fear of arrest could be considered as “amount paid under coercion”? Whether such payment can be considered as payment in furtherance of “Self-ascertainment” under Section 74(5) of CGST Act? Whether assessee has a right to seek refund of such amount?

Facts and Pleading: M/s Bundl Technologies Private Limited (hereafter referred to as “Petitioner”) operates an e-commerce platform under the name ‘Swiggy’. During holidays and festive season owing to spike in food orders Petitioner engaged third party service providers for delivery of food. The third-party service providers charge consideration for delivery and supply of food along with GST and the GST paid by the Petitioner to third party service providers is availed as Input Tax Credit by the Petitioner. An investigation was initiated by Directorate General of Goods and Services Tax Intelligence (DGGI) claiming third party service providers, i.e. ‘Greenfinch’ was a non-existent entity and accordingly, the ITC availed by the Petitioner and the GST component paid by it to ‘Greenfinch’ were fraudulent. During investigation, the Petitioner was forced to make payment of Rs.27,51,44,157/- under the threat of arrest of its Directors. As no show cause notice was issued by the Department even after about ten months of initiation of investigation, the Petitioner sought refund of the said amount of Rs.27,51,44,157/-. Department having declined to refund the amount collected illegally, the Petitioner filed a refund application before jurisdictional GST Office. However, the department is of the view that the deposit made by the Petitioner was voluntary and the power of investigation has been exercised legitimately while issuing summons to the Petitioner and its Directors and the allegation of coercion is incorrect. Hence, this writ petition was filed by the Petitioner.

The Petitioner submitted that the aforesaid sum of Rs.27,51,44,157/- was illegally collected from the Petitioner during the investigation proceedings under threat and coercion. The Petitioner also submitted that the said payments were ‘under protest’ as can be gathered from the communication made by the Petitioner to the Department after such payments were made. Further, it was submitted that as no show cause notice under Section 74 of CGST Act has been issued and payments of the Petitioner has remained with the Department, that the investigation is still not concluded and in light of prolonged investigation, the Petitioner has a legitimate right to seek for refund of tax, which would not in any way come in the way of their obligation to honour the demand made after adjudication.

Judgment: The Hon’ble High Court has held that power of the High Court to issue appropriate direction directing refund either where assessment was without jurisdiction or where tax was collected without authority of law is vested in the High Court. The Hon’ble High Court also observed that the question of alternate remedy is of no significance, when the eventual direction in the present writ is only for consideration of the refund application. Further, Hon’ble High Court has held that the manner in which investigation was carried out in late hours of the night and the early hours of the morning with physical closing of the gates during the investigation would reasonably create an apprehension in the mind of any person including the persons of the standing of Directors of the Assessee Company and its officers. The Hon’ble High Court also observed that it must be noted that even under Section 132(1)(b) and (c)(i) to (iii) of the GST Act, 2017, the wrongful availment of I.T.C. is an offence and is punishable with imprisonment. Accordingly, the Hon’ble High Court held that the payment cannot be stated to have been made voluntarily. The Hon’ble High Court also observed that the lapse of time and lack of conclusion of investigation has only exacerbated the situation conferring upon the Petitioners a right to seek for refund of the amount. The Hon’ble High Court also observed that though there is payment of tax and even if it is accepted that payment of tax is also followed by requisite Challan DRC-03, the mere payment of tax cannot be construed to be a payment towards self-ascertainment as contemplated under Section 74 (5) of CGST Act. The Hon’ble High Court has held that that the aforesaid payment during investigation and letter of the Petitioner about payment under protest show that it has been made involuntarily. The Hon’ble High Court also observed that there is no doubt that the power of investigation cannot be interfered with nor can the court direct investigation be made in a particular manner, however, during all such investigation, it cannot be held that the Fundamental Rights including the right of a bona fide tax payer to be treated with appropriate dignity as enshrined under Article 21 of the Constitution of India would be kept in abeyance. Accordingly, the Hon’ble High Court directed the department for consideration of the refund application filed by the Petitioner in light of the observations made by the court

M/s Bundl Technologies Private Limited Vs UOI, High Court of Karnataka at Bengaluru, decided on 14.09.2021, Writ Petition No. 4467/2021 (T-RES).

M/s Bundl Technologies Private Limited.

2. Whether pre-deposit can be equated with ‘output tax’ as defined under Section 2(82) of the CGST Act, 2017 so as to allow payment of pre-deposit through debiting electronic credit ledger?

Facts and Pleading: M/s Jyoti Construction (hereafter referred to as “The Petitioner”) is a partnership firm engaged in the business of execution of works contract including civil, electrical and mechanical. In terms of Section 107 (6) of the OGST Act, the Petitioner was required to make payment equivalent to 10% of the disputed amount of tax arising from the order against which the appeal is filed. The Petitioner deposited the said amount from its electronic credit ledger. However, the said appeals were rejected by the Appellate Authority holding the appeals as defective on the count that this payment was required to be made by the Petitioner by debiting its electronic cash ledger as provided under Section 49(3) read with Rule 85 (4) of the OGST Rules. Hence, the present writ.

The contentions of the Petitioner were that under Section 49 (4) of the OGST Act, the amount available in the electronic credit ledger could be used for making "any payment towards output tax” under the OGST Act or the IGST Act “in such manner and subject to such conditions and within such time as may be prescribed”. The Petitioner contended that since what in effect be the Petitioner was paying was a percentage of the output tax as defined under Section 2(82) of the OGST Act, the amount could well be paid by debiting the electronic credit ledger.

Department submitted that that the pre-deposit cannot be equated to the output tax. The proviso to Section 41 (2) of the OGST Act sets out the purposes for which the input tax credit (ITC) can be utilized. It can be utilized for payment of “self assessed output tax as per the return”. It was pointed out by the department that self-assessment is defined under Section 59 of the OGST Act i.e. when the tax payer files a return under Section 39 of the OGST Act and the Form GSTR-3B, the taxpayer is deemed to be self-assessed. In no other cases, can ITC be utilized to discharge any liability.

Judgment: According to Hon’ble High Court, “Output Tax”, as defined under Section 2(82) of the CGST/OGST Act could not be equated to the pre-deposit required to be made in terms of Section 107(6) of the CGST/OGST Act. Further, the proviso to Section 41(2) of the CGST/OGST Act sets out the purposes for which the input tax credit can be utilized and the electronic credit ledger cannot be debited for making payment of pre-deposit at the time of filing of the appeal in terms of Section 107(6) of the CGST/OGST Act. The Hon’ble High Court also held that it is not possible to accept the Petitioner’s plea that Section 107(6) of the Act is merely a “machinery provision”. Hence, writ petitions were dismissed.

M/s Jyoti Construction Vs DC CT & GST, High Court of Orissa at Cuttack, decided on 07.10.2021, in W.P.(C) Nos.23508, 23511, 23513, 23514 and 23521 of 2021

M/s Jyoti Construction

3. Whether Cenvat credit on inputs and capital goods / services used in fabrication, erection, installation of towers and shelters is admissible to the appellants?

Facts and Pleading: M/s Vodafone Cellular Limited (hereinafter “Appellants”) are providers of cellular mobile telephone services to their subscribers, taxable under category “Telecommunication services”. The disputed credit was mainly pertaining to capital goods and input services used in the fabrication, erection and commissioning of towers and shelters for base units and credit availed on other services.

The issue relating to the admissibility of credit of inputs/capital goods and services used in the fabrication, erection and installation of towers and shelters has been long in dispute. Bombay High Court in Bharti Airtel Ltd. Vs CCE, 2014 (35) STR 865 (Bom,) & Vodafone India Ltd. VS CCE, 2015 (40) STR 422 (Bom.) held that to produce telecommunication service, Cenvat credit on towers, prefabricated shelters and their accessories cannot be availed as the towers are fixed to the earth and became immovable property and ipso facto, non-marketable and non-excisable. Whereas, Delhi High Court in Vodafone Mobile Services Ltd. & others Vs CST, 2018 (11) TMI 713-Delhi High Court have taken a contrary view after examining and distinguishing the judgment of Bombay High Court.

In this case, the department had alleged that the erection of towers and shelters and the services utilized in the erection, commissioning or installation of towers and shelters is not in or in relation to the services rendered by the Appellants.

The Appellants had submitted that the scope of Rule 2(l) is vast especially for the period up until 01.04.2011. As per Appellants, the input service credit was admissible for all ‘activities relating to businesses’ and hence the Appellants are eligible for credit of inputs/capital goods and services used in the fabrication, erection and installation of towers. The Appellants had also relied on Hon’ble Delhi High Court Decision in Vodafone (supra) to submit that this judgement had considered Hon’ble Bombay High Court’s decision in Bharti Airtel (supra) and disagreed with the ratio thereof. The Appellant further submitted that the decision of Larger Bench of Hon’ble Tribunal in Tower Vision India Pvt Ltd Vs CST 2016 (3) TMI 165 – CESTAT New Delhi (LB) must be considered overruled as it had followed the aforesaid decision of the Hon’ble Bombay High Court in Bharti Airtel (supra). The Appellants also relied on decision of Chandigarh Bench of the Hon’ble Tribunal in CCE Vs Bharti Infratel, 2019 (2) TMI 1736 – CESTAT Chandigarh which had considered all the above decisions and held that credit of duty paid on inputs used in towers and shelters is eligible.

Judgment: The Hon’ble Tribunal also referred to the decision of Hon’ble Delhi High Court in Vodafone (supra) and decision of Chandigarh Bench of the Hon’ble Tribunal in CCE Vs Bharti Infratel (supra) to held that credit, of inputs / capital goods and services utilized in fabrication, erection, installation of towers and shelters by the Appellants, is admissible to the Appellants. The Hon’ble Tribunal has also observed that it is required to follow the decision of Hon’ble Delhi High Court as the jurisdictional High Court has not passed any orders on this issue as on date and the decision of the Delhi High Court being subsequent to that of Bombay High Court. 

M/s Vodafone Cellular Limited vs CGST & CE, CESTAT, Chennai decided on 1.10.2021, Service Tax Appeal No. 42404 of 2013.

M/s Vodafone Cellular Limited

4. Whether the entire cost recovered by the Appellant as reimbursement/cost charged to the Joint Account by the Appellant namely, salaries of employees working for the joint venture should be subjected to service tax recoverable from the Appellant with interest and penalty.

Facts and Pleadings: B.G. Exploration & Production India Ltd. (hereinafter referred to as “Appellant”) is primarily engaged in the business of developing, exploring and producing oil and gas from the contracted areas in Mid and South Tapti Fields and Panna & Mukta Fields (Offshore areas of Western India). The Appellant had entered into a Joint Operating Agreement with Reliance Industries Ltd. and ONGC for the discovery and exploitation of petroleum resources in ‘Panna and Mukta’ and ‘Mid and South Tapti’ fields for Government of India. The said agreement defined their respective rights, duties and obligations with respect to their operations under the Contracts. In terms of the Agreement, liabilities incurred by any Holder were required to be borne by all the Holders in accordance with the ratio for performing their obligations. These expenses were required to debited in the joint account and cash calls raised and reimbursement taken from the Joint Account, basis the participating interest of each of the parties to the Contract. There was to be no profit margin on the reimbursement/cost charged to the joint account; in fact, such a profit was strictly prohibited under the Agreement and the same was to be charged on actual.

The department alleged that Appellant, RIL and ONGC jointly i.e. PMT-JV are unincorporated association of persons/joint venture. The department also alleged that the Appellant, RIL and ONGC as an unincorporated association of persons and the Appellant individually are distinct persons, in accordance with Explanation 3(a) of Section 65B (44) of the Finance Act, 1994. The department further alleged that the Appellant is providing its employee i.e. Manpower service to said unincorporated association of persons and are charging salary expenses in relation to those manpower service to their account by way of book adjustment, thus constituting consideration within the meaning of Section 67 for the provision of the said service.

The Appellant submitted that it had not rendered any service to the PMT-JV, nor did it receive any consideration from PMT-JV for the supposed service rendered by it. It was also submitted that Employing manpower for undertaking the operations of PMT-JV was Appellant’s share of capital contribution to the venture. The Appellant also argued that PMT-JV, not being a juridical person, had employed the Appellant and consequently no service was rendered by the Appellant to the unincorporated joint venture. The Appellant was only acting on behalf of the unincorporated joint venture by executing the employment contract. Further, in the absence of any service having been rendered, the said Explanation (3) to the definition of ‘service’ in section 65B (44) of the Finance Act, 1994 has no application.

Judgement: The Hon’ble CESTAT has observed that in the contract in question, the Central Government was to bring in its rights over the resources, while ONGC was to handle contracts and documentation, RIL was to manage financial and commercial requirements and the Appellant was vested with the responsibility of undertaking the technical operations. The Hon’ble CESTAT held that the man power deployed by the Appellant was in furtherance of its own interest as also that of the joint venture and not by way of any service to unincorporated joint venture. Also, the cost incurred by the Appellant for this purpose was its capital contribution to the joint venture and it cannot be said that consideration was received by the Appellant for arranging man power. The Hon’ble CESTAT held that the equity brought in by the co-venturer, in this case by making available man power, cannot be considered as a service rendered to the unincorporated joint venture. It is this capital contribution along with the capital contribution made by others which forms the hotchpotch of the unincorporated joint venture. The Hon’ble CESTAT relied upon Mormugao Port Trust vs. Commissioner of Central Excise [2017 (48) STR 69 (Tri-Mum) in this regard. The Hon’ble CESTAT also held that there is no contractor-contractee or principal-agent relationship between the co-venturer and the joint-venture, which is a pre-requisite for a service to be liable to tax under the Finance Act.

B.G. Exploration & Production India Ltd Vs CCE, CESTAT, Mumbai decided on 06.10.2021 in Service Tax Appeal No. 85028 of 2021. 

Unreported Decisions – ST – October 2021

By Vinay Kumar Jain & Sachin Mishra, Advocates

1. Whether the electronic credit ledger of a person can be validly blocked beyond the expiry of a period of one year from the date of imposing such restrictions under Rule 86A of the CGST Rules, 2017?

Facts and Pleading: M/s. Sahil Enterprises (hereinafter “Petitioner”) is a trading company, that had paid the applicable GST to the seller on the purchases made by them. However, the provisional attachment of the Petitioner’s ledger account, under Rule 86A was ordered on 21-05-20, as the seller had not deposited the tax collected to the Government. Subsequently, vide a show cause notice dated 07-01-2021, the Commissioner of CGST, invoked the powers under Rule 86A of the CGST Rules, 2017 by disallowing the debit of an amount equivalent to ` 1,11,60,830/- from the electronic credit ledger of the Petitioner. Therefore, the Petitioner has filed the present writ petition challenging the vires of Section 16(2)(c) of the CGST Act 2017, and the validity of the blocking of credit beyond the expiry of a period of one year from imposing such restrictions.

The Petitioners submitted that Section 16(2)(c) of the CGST Act is violative of Article 14, 19(1)(g), and 300A of the Constitution of India. They argued that having paid CGST on the purchases made form a registered dealer, the Petitioner thereafter has no control over the seller to ensure that such tax is deposited with the Government, as the same is statutorily his obligation. It was submitted that denying the Petitioner ITC on such purchases on which they have already paid tax on such grounds would amount to double taxation. The Petitioners relied upon various High Court rulings furthering their position. The Petitioner also argued that provisional attachment under Rule 86A can be made only for a period of one year and not more than that, and since a year has passed, such attachment ought to be lifted.

The Respondent argued that the Petitioner has claimed tax credit without the tax being deposited with the Government revenue, and that in order to safeguard the interest of the revenue, the Commissioner had exercised powers under Rule 86A of the CGST Rules, 2017.

Judgment: The Hon’ble High Court of Tripura observed that as per Rule 86A of the CGST Rules, 2017, it can be established that the restrictions that can be imposed on use of an amount available in electronic credit ledger of a person can be by way of a temporary measure for a period not exceeding one year. The Court observed that the same is an interim measure and, therefore, cannot take shape of a permanent arrangement, and that if the department wants to permanently disallow credit of accumulated amount in the ledger of a dealer, it must adjudicate the issue and pass an order after bi-parte hearing. Further, it was stated that sub-rule (3) of Rule 86A clearly brings about this legislative intent while it provides that such restrictions shall cease to have effect after the expiry of a period of one year. The Court also stated that the two things significant in this sub-rule are that firstly, there is no scope of extension of this time and secondly, upon expiry of a period of one year the effect of the restriction seizing to take effect would be automatic. Therefore, in the present case the Court held that the department cannot continue to subject the Petitioner’s electronic credit ledger to the restrictions imposed by the Commissioner, on 21.05.2020, and the same shall be released. However, the Court did not grant any further relief and stayed the further proceedings, until the Respondents filed a full reply to the main petition.

M/s. Sahil Enterprises vs Union of India, High Court of Tripura, decided on 14.09.2021, in IA No. 1/2021 with WP(C) No. 531/2021.

2. Whether the Appellant was eligible for the refund of the Cenvat Credit of CVD and SAD paid by them on imported inputs in terms of Rule 3 of the Cenvat Credit Rules, 2004 and Section 142 of the CGST Act 2017?

Facts and Pleading: Facts and Pleadings: M/s. Flexi Caps and Ploymers Pvt. Ltd. (hereinafter “Appellants”) are engaged in the manufacture of excisable goods, and were paying Central Excise Duty, and also availing Cenvat Credit of duty paid on inputs, capital goods and input services. Accordingly, on 09-07-2018, the Appellants had in terms of sub-section 8(b) of Section 142 of the CGST Act, 2017 filed an application for the refund of Countervailing Duty (CVD) and Special Additional Duty (SAD) paid, on the ground that though they had obtained the advance license for import of duty-free imports but could not actually fulfil the conditions of the said license. However, the same was rejected and a SCN was served upon the Appellants proposing the rejection of the said refund on the ground that there was no assessment/adjudication order issued, and the letter issued by DGFT asking the Appellants to pay Customs Duty cannot be construed as assessment or adjudication. Subsequently, vide an order, the refund was sanctioned to the Appellants. However, the Department reviewed the said order and filed an appeal before the Commissioner (Appeals), who subsequently, allowed the same. Therefore, being aggrieved thereto, the Appellants have filed the present appeal before the CESTAT.

The Appellant submitted that the inputs were imported by the Appellants without making the complete payment of duty, since they were already granted the advance license. However, since they could not fulfil certain conditions of the license, they approached the office of DGFT for redemption of Export Obligations, which was extended, and the assessed amount of duty was duly paid by the Appellant along with the interest as well as the penalty. The Appellants argued that as per Rule 3 of the CCR 2004, they were entitled to take Cenvat Credit on the CVD paid, and therefore they had filed the refund application in question. The Appellants also submitted that the since before the credit thereof could be taken, the new GST Act 2017 became effective, however, the refund was still available in terms of Section 142 of GST Act for such amount for which it was otherwise available under erstwhile law Section 11B thereof.

The Respondents submitted that there is no denial for the impugned duty to be of the previous period, and that the request of refund thereof under the new law is otherwise not sustainable. The Respondents also impressed upon the findings of the Ld. Commissioner (Appeals), wherein it was stated that a letter of DGFT cannot be considered as the assessment. The Respondents lastly, objected the jurisdiction of the Tribunal on the ground that the refund application has been filed under GST Act, and that the said Tribunal is not the competent authority.

Judgment: The Hon’ble CESTAT, Principal Bench, New Delhi, observed that it was nowhere denied that the Appellant could not fulfil the export obligation arising out of the said license, and therefore the only course of action with the Appellant in the said circumstances was to seek redemption which has also not been denied. The Tribunal stated that the entire customs duty with respect to the inputs imported by the Appellants stands fully deposited by the Appellants as was directed by the DGFT while seeking redemption, and in light of such admitted facts, it was sufficient to hold that the Appellants are entitled to avail Cenvat Credit of CVD/SAD on the imported inputs in terms of Rule 3 of the CCR, 2004. The Tribunal also observed that in view of Section 142 and its sub-section 8(b), denying the said entitlement, on the ground that the letter of DGFT cannot be considered as the assessment order is not appropriate, and therefore, the order of the Commissioner (Appeals) is also not appropriate. Lastly, on the question of Jurisdiction the Tribunal observed that the appeal before the Commissioner (Appeals) itself was not maintainable under GST Act for a refund application which was filed under the erstwhile law, thus the said order cannot sustain, and was liable to be set aside.

Flexi Caps and Polymers Pvt. Ltd. vs. Commissioner, CGST & Central Excise-Indore, CESTAT, Principal Bench, New Delhi, decided on 15-09-2021, in Excise Appeal No. 50114 of 2020.

3. Whether parallel proceedings can be initiated by the State and Central Authorities, and what are the implications of Section 6(2)(b) and Section 70 of the CGST Act on the same?

Facts and Pleading: Kuppan Gounder (hereinafter “Appellant”) is the MD of M/s. KPN Travels India Ltd engaged in the business of transportation. The Appellant received a notice dated 17.12.2020 from the Assistant Commissioner, Salem stating that there are discrepancies in the GST returns in GSTR-3B filed by the Appellant for FY 2081-19 and 2019-20, while compared with the online service providers returns of the Appellant i.e. GSTR-8. Subsequently, the Appellant were also issued the summons by the DGGI New Delhi (Respondents) dated 08.07.2021 under Section 70 of the CGST Act, 2017. Thus, the Appellants had filed a writ petition challenging the summons issued by the Respondents dated 08-07- 21, however, the same was dismissed. Aggrieved by the same, the Appellants have filed the present appeal.

The Appellants submitted that the Appellant’s company falls within the State jurisdiction under the SGST Act 2017, whereas the Respondent is an authority with central jurisdiction, therefore they have no jurisdiction to initiate any proceedings under CGST/SGST Act, especially when the State authority has already initiated action and the matter is pending at different stages. Further, it was submitted that there is no notification or order empowering the respondent to initiate assessment proceedings or raise a demand against the appellant, as they fall within the jurisdiction of the State authority under the SGST Act. As per the Appellants, the writ court had erred in rejecting the contention advanced by the Appellant by referring to Section 6(2)(b) of the CGST Act. The Appellants submitted that parallel investigation cannot be done by the State as well as the Central authority, and that the summons issued by the Respondents is liable to be quashed on the ground of lack of jurisdiction.

The Respondents submitted that a writ petition challenging a summons is not maintainable, and that the Ld. Writ Court had rightly dismissed the writ petition directing the Appellants to submit to its jurisdiction. As per the Respondents, they had sufficient jurisdiction to invoke Section 70 of the CGST Act. The Respondents referred to the clarification issued by the CBEC dated 05-10-2018, to submit that that the Central Board has clarified that the officers of both the Central tax and the State tax are authorised to initiate intelligence-based enforcement action on the entire taxpayer’s base irrespective of the administrative assignment of the taxpayer to any authority. The Respondents have also placed reliance upon a plethora of judgments, wherein the Courts have considered the challenge to summons with regards to the effect of Section 6(2) (b) and Section 70.

Judgment:  The Hon’ble High Court of Madras observed that the State tax authorities and the Central tax authorities enjoy concurrent jurisdiction, and that as per the clarification dated 05-10-2018, it is clear that if an intelligence-based enforcement action is taken against a taxpayer, which is assigned to the State tax authority, the Central tax authority is entitled to proceed with the matter and take it to the logical conclusions, and vice versa. Reliance was placed upon Siddhi Vinayak Trading Company vs UOI (Writ Tax No. 822 of 2020 dated 23-02-21). The Court further observed that the bar contained under Section 6(2)(b) is with regards to any proceedings initiated by a proper officer on a subject matter, on the same subject matter, the proper officer under the Central Act cannot initiate any action referred. However, the Court stated that the scope of Section 6(2)(b) and Section 70 is different and distinct, since the former deals with any ‘proceedings on a subject matter/same subject matter’ whereas, Section 70 deals with power to summon in an inquiry and therefore, the words ‘proceedings’ and ‘inquiry’ cannot be mixed up to read as if there is a bar for the Respondents to invoke the power under Section 70 of the CGST Act. The Hon’ble Court also placed reliance upon the case of G. K. Trading Company vs. UOI, to observe that the key words occurring in both the provisions viz. ‘in any inquiry’ and ‘proceedings on the same subject matter’ indicate the crucial difference between the two provisions. Thus, the writ appeal was dismissed.

Kuppan Gounder P. G. Natarajan, MD, M/s. KPN Travels India Ltd. vs. DGGI New Delhi, High Court of Madras, decided on 01-09-2021, in W.A.No. 2003 of 2021 and C.M.P No. 12863 of 2021.

4. Whether it is necessary to interpret Rule 89(5) of the CGST Rules, 2017 so as to include the words ‘input services’ within the definition of Net ITC? Whether Section 54(3)(ii) is violative of Article 14 of the Constitution? Whether Rule 89(5) is in conformity with Section 54 of the CGST Act 2017?

Facts and Pleadings: The Division Bench of the Gujarat High Court, in VKC Footsteps India Pvt. Ltd. vs. UOI held that the explanation (a) to Rule 89(5) which defines the refund of ‘unutilised input tax’ paid on “input services” as part of “input tax credit accumulated on account of inverted duty structure is ultra vires the provision of Section 54(3) of the CGST Act, 2017. Therefore, the High Court directed the Union Government to allow claim for refund made by the petitioners before it, considering unutilised ITC on input services as part of “Net ITC” for the purpose of calculating refund in terms of Ruel 89(5), on furtherance of Section 54(3). However, the Division Bench of the Madras High Court in Tvl. Transtonnelstroy Afcons Joint Venture v UOI, held contrary to the Gujarat High Court, and concluded that Section 54(3)(ii) does not infringe Article 14. Therefore, the divergence in views of both the courts, forms the subject matter of this batch of appeals.

Judgement: The Hon’ble Supreme Court observed that to construe ‘inputs’ 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-I. The Court stated that whether one construes the first proviso as an exception or in the nature of a fresh enactment, the clear intent of Parliament was to confine the grant of refund to the two categories spelt out in clauses (i) and (ii) of the first proviso, and the same is evident by the use of a double – negative format by employing the expression "no refund" as well as the expression "in cases other than". Therefore, Court stated that with the clear language which has been adopted by Parliament while enacting the provisions of Section 54(3), the acceptance of the submission which has been urged on behalf of the assessee would involve a judicial re-writing of the provision which is impermissible in law. 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. It was further observed the 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). The Court also observed that when there is neither a constitutional guarantee nor a statutory entitlement to refund, and such an interpretation, if carried to its logical conclusion would involve unforeseen consequences, circumscribing the legislative discretion of Parliament to fashion the rate of tax, concessions and exemptions. Thus, the Court held that the Bench is unable to accept the challenge to the constitutional validity of s.54(3) of the Act, 2017. It was also observed that Clause (ii) of the first proviso is not merely a condition of eligibility for availing of a refund but a substantive restriction under which a refund of unutilized ITC can be availed of only when the accumulation is relatable to an inverted duty structure, namely the tax on input goods being higher than the rate of tax on output supplies. There is, therefore, no disharmony between Rule 89(5) on the one hand and Section 54(3) particularly Clause (ii) of its first proviso on the other hand. Explanation (a) to Rule 89(5) in defining ‘Net ITC’ to mean ITC availed on inputs (goods) is, as a matter of fact, entirely in line with the main provision, Section 54(3). The Court stated that the formula 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. The reading down of the formula as proposed by prescribing an order of utilisation would take this Court down the path of recrafting the formula and walk into the shoes of the executive or the legislature, which is impermissible. However, given the anomalies pointed out by the assessees, Bench strongly urges the GST Council to reconsider the formula and take a policy decision regarding the same. Thus, the Court affirmed the judgment of Madras High Court, and allowed the appeals against the judgment of the Gujarat High Court.

UOI & Ors. vs. VKC Footsteps India Pvt. Ltd., Supreme Court of India, decided on 13-09-2021, in Civil Appeal No. 4810 of 2021 and others, with Writ Petition (C) 489 of 2021. 

Unreported Decisions – October 2021

By Ajay R. Singh, Advocate and CA Rohit Shah

1. Cash Investment in House Property out of savings and streedhan

Assessee had e-filed its return of income for A.Y. 2011- 12, declaring a total income of ` 5,08,190/-. Original assessment was framed by the A.O. u/s. 143(3) after making addition of ` 7,15,000/- (being ` 3,60,000/- against investment out of current years income and ` 3,55,000/- out of Savings of earlier years). On Appeal before Ld. CIT (A), a partial relief was given and disallowance was restricted to ` 2,15,000/-. Assessee preferred appeal before Hon’ble ITAT against the same. Before both the appellate authorities and Assessing Officer, assessee demonstrated the source of these savings, the assessee has given break up of personal drawings of the cash as well as break up taken out by the husband and two unmarried sons which were, in turn, invested in House Property and hence contended that no addition was required to be made.

The Hon’ble ITAT held that: Assessee has given the reason that Indian women generally keep some savings with them to meet contingency expenses and urgent needs. The explanation given by the assessee appears to be tenableas she has demonstrated through her written submissions that the cash of ` 2,15,000/- has an element of savings for the contingencies of the family of four which also includes her “Streedhan”. Though the CIT(A) has raised the doubt that these “Streedhan” cannot be in cash, it is in fact in Indian tradition certain amount in cash is given by the relatives to the women in the family especially from the woman’s father side. Further, the assessee is also a self employer/entrepreneur who derives certain income from sale and purchase of spices and therefore, has to keep certain amount of cash in hand for purchase of the items/necessary goods for preparing spices in case of emergency/contingencies and thus, allowed the appeal.

Smt. Anu Agarwal vs. ITO Ward-1(1) [ITA No. 68/ DDN/2019; dated 24-3-2021; A.Y. 2016-17 Dehradun Circuit Bench]

2. Voluntary Contribution Received by a trust not registered u/s. 12A with a Specific Direction

Assessee, a public charitable and religious trust registered under the Indian Trust Act, 1882, filed its return of income for AY: 2014-15 declaring total income of ` Nil. The return of income filed by the assessee has been processed u/s. 143(1) of the Act, by CPC, Bengaluru and determined total income of ` 55,82,600/- by making additions towards disallowance of donations received. Before Ld. CIT(Appeals), the assessee contended that corpus donations received by any trust or institution is excluded from the income derived from property held under the trust u/s. 11(1)(d) of the Act and hence, even though trust is not registered u/s. 12AA of the Act, corpus donations cannot be included in the income of the trust. The learned CIT(A) rejected contention of the assessee and held that conditions precedent for claiming exemption u/s. 11 of the Act is registration of trust u/s. 12A of the Act. The learned CIT(A) relied on the decision of Hon’ble Supreme Court in the case of M/s. U. P. Forest Corporation & Another vs. DCIT in Civil appeal No. 9432 of 2003 dated 27-11-2007. Aggrieved by the learned CIT(A) order, the assessee preferred appeal before Hon’ble ITAT.

The submitted that donations have been received for specific purpose and such donations have been utilized for the purpose it was received. In support of the contention, assessee relied on various judicial precedents including the decision of ITAT, in the case of ITO vs. Serum Institute of India Research Foundation (2018) 169 ITD 271(Pune), Bank of India Retired Employees Medical Assistance Trust vs. ITO(Exemption) 2018 172 ITD 78(Mum) which supported Assessee’s view that this is a capital receipt and hence, it is outside scope of income. Referring to financial statement of the assessee submitted that the assessee has received donations to the specific purpose of construction of building and said donation has been used for construction of building, therefore, same is outside the scope of income of the trust.

The Hon’ble ITAT dismissing Appeal of Assessee held that:-The definition of income as defined u/s. 2 of sub-section (24) includes voluntary contribution received by any trust created wholly or partly for charitable or religious purpose. This means, for any assessee, including trust or institution voluntary contribution is income. The provisions of section 11, 12A & 12AA, deals with taxation of trust or institution. The provisions of section 11(1)(d) of the Act excludes voluntary contributions received by trust, with a specific direction that they shall form part of corpus of trust or institution. Provisions of section 12A states that provisions of section 11 & 12 shall not apply in relation to income of any trust or institution, unless such trust or institution fulfill certain conditions. As per said section one of the conditions for claiming benefit of exemption u/s. 11 & 12 of the Act is registration of trust under sub-section (aa) of the Act. From conjoint reading of the above provisions, it is very clear that income of any trust including voluntary contributions received with a specific direction is not includable in the total income of the trust, if such trust is registered u/s. 12A / 12AA of the Income Tax Act, 1961. This principle is supported by the decision of the Hon’ble Supreme Court in the case of M/s. U. P. Forest Corporation & Another vs. DCIT (supra). In view of above ITAT held that voluntary contribution received by the trust with a specific direction that they form part of corpus of the trust is income of the trust within the meaning of section 11 & 12 of the Income Tax Act, 1961. Therefore, confirmed additions made by the Assessing Officer towards disallowance of corpus donations.

Veeravel Trust vs. ITO, Exemption, Salem [ITA No. 2064/Chny/2019; dated 22-7-2021; AY 2014-15; Bench : C Chennai ITAT]

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.

Unreported Decisions – September 2021

By Ajay R. Singh, Advocate and CA Rohit Shah

1. S. 50C: Applicability in case of Transfer of Reversionary Rights

Assessee company had e-filed its return of income for A.Y. 2011-12, declaring a total income of ` 2,02,57,520/-. Original assessment was framed by the A.O u/s 143(3) at an income of ` 8,35,36,800/- after inter alia assessing the Long-Term Capital Gain (LTCG) on sale of property u/s. 50C at ` 7,71,09,287/- (as against LTCG shown by the assessee in its return of income at ` 1,38,30,005/-). The property in question was originally leased by Rustomji Bymmjee Jeejeebhoy & Others i.e the lessors to Cursetjee Dinshaw Bolton i.e the lessee. Thereafter, the assessee company terminated the lease on the ground of breach of the terms and conditions of the lease and agreed to sell its reversionary rights in the aforesaid property for a lump sum price to Yash &Yashika Mercantile Pvt. Ltd. Accordingly, in the backdrop of the aforesaid facts, it was the claim of the assessee that as it had only transferred its reversionary rights qua the aforesaid property in question, thus, its market value could not be considered for the purpose of computing the income under the head capital gains.

CIT(A) accepted the assessee’s claim that in a case of mere transfer of reversionary rights the market value could not be considered for the purpose of computing the income under the head capital gain. Accordingly, the CIT(A) after perusing the agreement, qua the aforesaid transfer transaction observed, that as the assessee had only transferred its reversionary rights in the property in question, therefore, the provisions of Sec.50C would not stand triggered. Accordingly, the CIT(A) directed the A.O to take the sale consideration in respect of the transaction entered by the assessee with M/s. Yash & Yashika Mercantile Pvt. Ltd. as was reflected by the assessee in its return of income.

The Hon’ble ITAT, held that, it is not necessary that consideration paid by the buyer of a property, at the time of buying the property, must only relate to ownership rights. In the case of tenanted property, as is the case before us, while the buyer of property pays the owner of property for ownership rights, he may also have to pay, when he wants to have possession of the property and to remove the fetters of tenancy rights on the property so purchased, the tenants towards their surrendering the tenancy rights. Merely because he pays the tenants, for their surrendering the tenancy rights, at the time of purchase of property, will not alter the character of receipt in the hands of the tenant receiving such payment. What is paid for the tenancy rights cannot, merely because of the timing of the payment, cannot be treated as receipt for ownership rights in the hands of the assessee. This distinction between the receipt for ownership rights in respect of a property and receipt for tenancy rights in respect of a property, even though both these receipts are capital receipts leading to taxable capital gains, is very important for two reasons – first, that the cost of acquisition for tenancy rights, under section 55(2)(a), is, unless purchased from a previous owner – which is admittedly not the case here, treated as Nil; and, – second, since the provisions of Section 50C can only be applied in respect of ‘transfer by an assessee of a capital asset, being land or building or both’, the provisions of Section 50C will apply on receipt of consideration on transfer of a property, being land or building or both, these provisions will not come into play in a case where only tenancy rights are transferred or surrendered. Sale deed unambiguously shows, the assessee has given up all the rights and interests in the said property, which he had acquired by the virtue of lease agreements with owner and which were, therefore, in the nature of lessee’s rights; these rights could not have been, by any stretch of logic, could be treated as ownership rights. It has been specifically stated in the sale deed that the lessee, which included this assessee, had proceeded to, inter alia, ‘grant, convey, transfer and assign their leasehold rights, title and interest in the said premises’. There is nothing on the record to even remotely suggest that the assessee was owner of the property in question. The monies received by the assessee, under the said agreement, were thus clearly in the nature of receipts for transfer of tenancy rights, and, accordingly, as the Ld CIT(A) rightly held that, section 50C could not have been invoked on the facts of this case.

ACIT – 3(1)(1) vs. M/s. Byramjee Jeejeebhoy Pvt. Ltd.

[ITA No. 813/Mum/2020; dated : 05/08/2021; Bench : B; A.Y. 2011-12]

2. S. 69C: Addition on the basis of Sale of Flats at differential rates to different persons:

Assessee is a builder and developer, filed its return of income for the assessment year 2010-11 declaring total income at ` 57,19,810/-.Assessment order was passed u/s. 143(3) of the Act. The AO while passing the assessment order besides other additions/disallowances made addition of ` 2,74,66,992/- on account of undisclosed sales receipt u/s. 69C . On appeal before the CIT(A), both the additions/disallowances were deleted.

Before Hon’ble ITAT, dept contended that during the assessment the Assessing Officer noted that the assessee had sold flats to different persons at different rates. On comparison of the minimum and maximum booking rates it was found that the minimum booking rate was ` 2,191/- per sq ft and maximum booking rate was ` 3,518/- per sq ft. The assessee could not substantiate the difference in variation in rates and could not give details of any extra facilities provided to the buyers. Therefore, the undisclosed sales receipt was added to the income of the assessee.AR of the assessee submitted that there was a difference in rate of bookings and payments, depending upon the prevailing market condition, business necessities and financial needs. All sales of flats are supported by registered sale deeds.

The Hon’ble ITAT dismissed the ground and concluded that , there is no allegation against the assessee for selling the flat less than the market rate. There is no evidence on record to suggest that assessee received over and above the cheques amount. No enquiries were carried out from the buyers for paying any excess amount by them above the cheques. The contention of the assessee that lowest sale price of the flats is more than the fair market value notified by Govt. under Stamp Act has not been controverted.

ACIT Circle 3 vs. Ashapura Builders & Developers

[ITA No. 5146/Mum/2016; ITA No.5146/ Mum/2016; Bench H; dated : 10/8/2018; Assessment Year 2011-12]

 

Unreported Decisions – August 2021

By Ajay R. Singh, Advocate and CA Rohit Shah

1. S. 50C: Capital Gains-Full value of consideration-Applicability of section 50C-Stamp value as on date of agreement or date of registration :

The case of the assessee was that he had entered into an agreement to sell the land. This agreement was executed on 30-12-2010 and consideration was settled at ₹ 46,54,000/- . On 31-12-2010 the value of the land for the purpose of stamp duty was fixed at ₹ 140 per sq.meter by the stamp valuation authority. The assessee has agreed to sell at the rate of ₹ 200 per sq.meter. According to the assessee, he received ₹ 5.00 lakhs as token consideration and ₹ 41,54,000 on 26-4-2011. The sale deed was registered on 23-11-2011. The State of Gujarat for the purpose of charging stamp duty has re-determined the value of the property in this year, and new rates were notified on 18-4-2011. Since the assessee presented the sale deed on 24-5-2011 for registration before the sub-Registrar, Sanand, but was not registered on account of insufficiency of stamps put on it. The purchaser has paid stamp duty at ₹ 200 per sq.meter whereas according to the stamp duty valuation officer rates have been revised to ₹ 1670 per sq.meter. This rate was erroneously fixed, and it was revised subsequently by reducing it to ₹ 618 per sq.meter. In other words, on the date when sale deed was presented for registration, i.e., 24-5-2011, Jantri rate for the purpose of payment of stamp duty was ₹ 618 per sq.meter. The dispute between the assessee and the Revenue was, for the purpose of section 50C, which rate is to be deemed as full consideration for the sale of this property for purpose of section 48 of the Act.

Hon’ble ITAT allowing appeal of the assessee held that Agreement was dated 31-12-2010 and sale deed was presented for registration on 24- 5-2011. Section 50C was amended and second proviso was brought on the statute book, which authorized an assessee to argue that where amount of consideration or part thereof was received by way of account payee cheque, then the appointing day for the purpose of valuation of the property for the purpose of section 50C was to be taken as the date of agreement. Assessee had placed copies of the sale deed before Revenue authorities, but in spite of that, even under section 50C(2), this aspect was not appreciated. Thus, purpose of computation of long-term capital gain on sale of land, value shown by assessee at rate of ₹ 200 per sq.meter was to be adopted and accordingly AO was directed to take value disclosed at the rate of ₹ 200 per sq.meter, and thereafter calculate the long-term/short-term capital gain.

Ashok Vadilal Patel v. ITO 3(3)(1), Ahmedabad [ITA NO.: 427/AHD/2018, A.Y. 2012-13, Bench A; Dated: 29/1/2021]

Unreported Decisions – ST – August 2021

By Vinay Kumar Jain & Sachin Mishra, Advocates

1. Whether GST would be payable on the whole amount collected by the societies or associations from its members or only on the amount in excess of ₹ 7500/- in view of exemption granted under Entry 77 of Notification 12/2017-CT(Rate) Dated 28.06.2017?

Facts and Pleading: M/s. Greenwood Owners Association and others (hereinafter “Petitioners”) are all Resident Welfare Associations (“RWA”), whereas one Petitioner is a resident in an apartment. With the onset of GST, vide Notification 12/17-CT(Rate) dated 28.06.2017 an exemption was granted under Entry 77 to the contributions made to RWAs upto an amount of ₹ 7500/- per month per member. However, questions arose in cases where the contribution exceeded ₹ 7500/-. Subsequently, the GST Department issued a clarification, categorically clarifying that GST would be applicable only on the amount in excess of ₹ 7500/-. One of the Petitioners approached the AAR seeking clarification regarding this issue. The AAR, in turn, held adverse to the clarification, stating that the grant of exemption was conditional upon the contribution being an amount of ₹ 7500/- or less, and that if the same exceeded the sum of ₹ 7500/-, then the entirety of the amount collected would be brought to tax. Subsequently, the department also issued a Circular No.109/28/2019 dated 22.07.2019 in lines of the aforesaid observations. The Petitioners have challenged the said circular along with the AARs before Hon’ble High Court by way of these writ petitions.

The Petitioners argued that the interpretation adopted by the Department is contrary to the express language as well as the intendment of the exemption granted. The Petitioners laid emphasis on the use of the phrase ‘upto’ in the relevant Entry stating that the grant of exemption was for contribution upto ₹ 7500/-, which remained constant notwithstanding any change in the amount of contribution. The Petitioners also argued that as per Article 13(3) of the Constitution of India, ‘law’ would include any Ordinance or Bye law, Rule, Regulation, Notification, custom or usage, excluding Circulars. Therefore, they argued that the withdrawal of a statutory exemption by way of a Circular is contrary to the provisions of the Constitution.

The Respondents submitted that as per the provisions of Section 15 of the CGST Act, the transaction value in the present case is the contribution made to the RWAs and it should, in entirety, be taken into account for the purpose of levying tax. The Respondents compared the provisions of the Tamil Nadu Additional Sales Tax Act, 1970 to state that where the Legislature intended beneficial tax treatment by insisting upon a slab rate, such slab is usually indicated in the Stature itself. Therefore, the Respondents submitted that, since there is no slab rate prescribed in the instant case, but only a range which entitles the assessee to exemption, any variation in that amount thus leads to automatic disentitlement. The Respondents also relied upon the Constitutional Bench Supreme Court decision in the case of Commissioner of Customs Import, Mumbai vs Dilip Kumar & Company (2019-VIL-23-SC-CU-CB), to argue that the exemption provision must be construed strictly, and therefore the Petitioners are not entitled to seek beneficial treatment.

Judgment: The Hon’ble High Court while placing reliance upon the Dilip Kumar Case (supra) held that an Exemption Notification must be interpreted strictly, and that the plain words employed in Entry 77 being, ‘upto’ an amount of ₹ 7,500/- can thus only be interpreted to state that any contribution in excess of the same would be liable to tax. The Hon’ble High Court stated that the term ‘upto’ hardly needs to be defined and connotes an upper limit, and that the same is interchangeable with the term ‘till’ and means that any amount till the ceiling of ₹ 7500/- would be exempted for the purposes of GST. Therefore, the Hon’ble High Court quashed the impugned order of the AAR and the impugned Circular finding the same as contrary to the express language of the Entry in question.

M/s. Greenwood Owners Association & Ors vs The Union of India & Ors, High Court of Madras, decided on 01.07.2021 in W.P. Nos 5518 & 1555 of 2020 and others.

2. Whether a reversal of Input Tax Credit (ITC) is contemplated in relation to loss arising from manufacturing process under Section 17(5)(h) of the CGST Act 2017?

Facts and Pleading: M/s ARS Steels & Alloy International Private Ltd. (hereinafter “Petitioner”) is engaged in the manufacturing of MS Billets and Ingots. MS scrap is an input in the manufacture of MS Billets and the latter, in turn, constitutes an input for manufacture of TMT/CTD Bars. There is a loss of a small portion of the inputs, inherent to the manufacturing process. The Department vide the impugned orders is seeking to reverse a portion of ITC claimed by the Petitioners, proportionate to the loss of the input, referring to the provisions of Section 17(5)(h) of the CGST Act. Thus, the Petitioners have filed a writ petition against the assessment orders passed against them.

Judgment: The Hon’ble High Court observed that Section 17(5)(h) of the CGST Act relates to goods lost, stolen, destroyed, written off or disposed by way of gift or free samples. The Hon’ble High Court held that the loss that is occasioned by the process of manufacture cannot be equated to any of the instances set out in clause (h) of the Section 17(5) of the CGST Act 2017. The Hon’ble High Court stated that the situations as set out in clause (h) of section 17(5) indicate loss of inputs that are quantifiable and involve external factors or compulsions, whereas a loss that is occasioned by consumption in the process of manufacture is one which is inherent to the process of manufacture itself. The Hon’ble High Court further placed reliance upon the Rupa & Co. Ltd v CESTAT, Chennai (2015 (324) ELT 295), wherein a division bench of the High Court of Madras held that some amount of consumption of the input was inevitable in the manufacturing process, and therefore the CENVAT credit should be granted on the original amount of input used notwithstanding that the entire amount of input would not figure in the finished product. Thus, the Hon’ble High Court set aside the impugned orders and allowed the writ petition.

M/s Ars Steels & alloy International Pvt Ltd v The State Tax Officer, Group – I & Anr., High Court of Madras, decided on 24.06.21, in W.P. No. 2885 of 2021.

3. Whether the doctrine of mutuality of interest exists between the Trust and the Contributors/ Beneficiaries? Whether the services rendered by the Trusts are classifiable under ‘banking and other financial services’ category as per section 65(12) of the Finance Act 1994?

Facts and Pleading: M/s. ICICI Econet Internet and Technology Fund (hereinafter “Appellant”) are venture capital funds established as a trust under the Indian Trusts Act, 1882 and registered with SEBI as a Venture Capital Fund. The Appellants are represented and managed by a Trustee and the terms and conditions pertaining to the formation of the Appellants-Trust are contained in the Indenture of Trust (IOT). The Appellant’s properties are held in the trust by the Trustee for the benefit of beneficiaries, who are contributors to the Funds. The Trustee receives a remuneration in the form of Trusteeship fees for services rendered by it to the Appellants, and to ensure that the Appellants receive professional and experienced advice, the Trustee appoints an Investment Manager or Asset Manager to manage the assets of the Appellants, the terms of which are contained in the ‘Investment Management Agreement’. The Investment Manager is responsible for managing the assets of the Appellants and receives remuneration in the form of management fees for the services rendered by it.

The department demanded service tax on the Appellants on account of expenses incurred by the Trust; return of income earned by a specific class of unit holders and Provision for losses and impairment of investment debited to financials as service incomes earned by the Trusts. On the issue of mutuality, the department has relied upon Hon’ble Supreme Court decision in M/s Bangalore Club Vs. Commissioner of Income Tax, Civil Appeal No. 124,125 of 2007, 272-278 of 2013 arising out of S.L.P.(Civil) No. 16880 – 16884 of 2010 and16879 of 2010 dated 14.1.2013 to say that Supreme Court has laid down three conditions under the principle of mutuality (i) there must be a complete identity between the contributors and participators (ii). the actions of the participators and contributors must be in furtherance of the mandate of the association and (iii). there must be no scope of profiteering by the contributors from a fund made by them which could only be expended or returned to themselves. However, as per department during the course of their investment management business, the Trust/ Funds used contributions to advance loans to their portfolio companies/buy equity/quasi equity etc. as per Trust Deed; hence, in the present case, the Funds being engaged in commercial operations with third parties (investee portfolio companies/body corporate), ruptures the principle of ‘privity of mutuality’, and consequently, violates the one-to-one identity between the investor and Fund; thus, the first condition of mutuality is not satisfied.

Judgment: The Hon’ble CESTAT held that these Trusts are essentially mutual funds that are engaged in Portfolio management, etc. The Hon’ble CESTAT observed that though these mutual funds are named as Trusts, the essential function of such Trust was of commercial concerns i.e. maximising the profits, and the same is clearly stated in the objectives of the Trust. The Hon’ble CESTAT further observed that it is also mentioned clearly in various places that the Trust fund shall be managed by the Trust, with the object of carrying on the activity of a Venture Capital Fund, thus the profit motive of the Trust was evident. The Hon’ble CESTAT held that when these Trusts are treated as juridical persons for the purposes of SEBI regulations, there are no reasons to not treat them in a similar manner for the purpose of taxation. Thus, the Hon’ble CESTAT stated that the Appellants have violated the principles of mutuality by concerning themselves in commercial activities and by using the discretionary powers to benefit a certain class of investors or nominees or employees or subsidiaries. Therefore, the Hon’ble CESTAT held that the Appellants can no longer be treated as trusts for the purposes of taxation statutes. Thus, as per Hon’ble CESTAT, the Appellants have failed the test laid down by the Supreme Court in the case of Bangalore Club v CIT (supra). The Hon’ble CESTAT also observed that there exists a basic difference between funds and clubs. Trusts/funds are initiated with a profit motive, and the activities are akin to those of a Bank or a financial institution, whereas clubs have no or minimal commercial interest and are normally formed to share facilities, which would otherwise be inaccessible or unaffordable at an individual level. Therefore, the Hon’ble CESTAT held that Appellants are a ‘commercial concern’, since they are managing the money invested by Subscribers/Contributors/Investors and thereby rendering a service to the contributors under the category of Banking and Other Financial Services, wherein the consideration is in the form of withholding the dividends/profits distributable, thus, as long as they are performing taxable services, they are liable to pay service tax. The Hon’ble CESTAT also stated that activities of the trusts should also be considered in common parlance and not only in terms of the definition, and in common parlance these funds are understood to be Venture Capital Funds. Thus, the Hon’ble CESTAT held that there was nothing illegal in holding that the trusts do exists and function as juridical persons as far as they are rendering service leviable to service tax as per the provisions of the Finance Act 1994.

M/s ICICI Econet Internet and Technology Fund & Anr. V Commissioner of Central Tax, Bangalore North, CESTAT Regional Bench, Bangalore, decided on 01.07.21, in Service Tax Appeal No. 2900 of 2012.

4. Whether the term ‘business’ as defined under Section 2(17) of the Central Goods & Services Act, 2017 (hereinafter referred to as “CGST Act 2017”) includes a medical store run by a Charitable Trust to sell medicines at a lower rate, without any pecuniary benefit?

Facts and Pleadings: M/s. Nagri Eye Research Foundation (hereinafter “Petitioner”) is a registered charitable Trust which is inter alia running a medical store where the medicines to the indoor and outdoor patients of the Petitioner Hospital are sold at a lower rate. Further, whatever marginal income is earned is used only for the purpose of mitigating any unforeseen eventualities and/or administrative expenses. Accordingly, the Petitioners filed an application for advance ruling on the question as to whether GST Registration was required for the medial store run by the Petitioner, and whether the medical store providing medicines at a lower rate amounts to supply of goods. The AAR held that the Petitioner was required to obtain GST Registration for the medical store and that the medical store providing medicines at a lower rate amounted to supply of goods. The said order was upheld by AAAR as well. The Petitioners challenged the said observation before the Hon’ble High Court by way of a writ petition.

The Petitioners argued that both the authorities failed to appreciate the fact that the activities carried out by the Petitioner by running a medical store could not be termed as a ‘business’ within the meaning of Section 2(17) of the CGST Act, inasmuch as such activities can neither be said to be a trade or commerce nor for any pecuniary benefit. The Petitioners further argued that, considering the objectives of the Trust, the Petitioner trust cannot be said to be running a medical store for profit by any stretch of imagination. The Petitioners also submitted that the Petitioners give benefits to patients under various schemes floated by the Central/ State Government and therefore, in such a situation too, the activity could not be said to be a business activity.

Judgement: The Hon’ble High Court held that every supplier who falls within the ambit of Section 22(1) of the CGST Act, 2017 has to get themselves registered. The Hon’ble High Court observed that as per Section 7(1) of the CGST Act, 2017 the expression ‘supply’ includes all forms of supply of goods and services or both such as sale, transfer, barter etc. made or agreed to be made for consideration by a person in the course or furtherance of business. Since the Petitioners are selling the medicines, may be at a cheaper rate but for consideration in the course of their business, the Hon’ble High Court observed that the submission of the Petitioners that such a sale could not said to be a “business” in view of the definition contained in Section 2(17) of the said Act cannot be accepted. The Hon’ble High Court stated that as per the definition of the term ‘business’, it clearly emerges that any trade or commerce whether or not for a pecuniary benefit, would be included in the term ‘business’ as defined under Section 2(17) of the Act. Therefore, the Court dismissed the petition being devoid of merits.

M/s. Nagri Eye Research Foundation vs Union of India, High Court of Gujarat at Ahmedabad, decided on 09.07.21, in R/Special Civil Application No. 7822 of 2021.

Unreported Decisions – July 2021

By Ajay R. Singh, Advocate

1. S. 40A(2)(b): Disallowance of Interest paid to related Parties – Unsecured loans vis a vis bank loan :

The assessee is an individual, carrying on the business in a proprietorship firm. He had taken unsecured loans in the proprietorship firm from his relatives and paid interest@ 24% totaling to ` 17,81,293/-. A deduction of the above expenditure was claimed by the assessee in the return of income. The Assessing Officer has restricted the rate of interest payment to 15% and disallowed an amount of ` 6,67,990/- on account of excessive interest payment under section 40A(2)(b) of the Act.

The CIT-Appeal, upheld the action of the Assessing Officer thus the assessment order was upheld.

Before Hon’ble ITAT, appellant submitted that on bare perusal of section 40A(2)(a) of the Act would contemplate that if an assessee incurs any expenditure in respect of which payment has been or is to be made to any person referred to in clause (b) of this sub-section, and the Assessing Officer is of opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities availed from the persons to whom such payment was made, then he can disallow the excess payment. Assessing Officer failed to bring any evidence on record which can show that the interest paid at 25% by the assessee is not inconsonance with the market rate. If since some service or goods availed at a legitimate rate from the open market then difference between the rate at which facilities would be availed vis-a-vis actually availed should be disallowed to the assessee. According to the Assessing Officer the loan which have been availed by the assessee from the persons falling in clause (b) of section 40A(2) would be availed at the rate of 15%, hence the interest paid over and above the rate of 15% was considered as excessive. These are unsecured loans for which assessee was not required to pledge anything or give any security. He was not required to fulfil other formalities which is to be fulfilled if loans were availed from the Banks. These aspects have not been looked into by the Assessing Officer while considering market rate of interest payment on the loans at 15%. Thus, it was held that interest payment @24% on unsecured loans is not excessive.

Anurag Goel vs. ITO Ward 5(3)(1), Ahmedabad [I.T.A. No. 2906/Ahd/2015 AY: 2012-13 “SMC”, DOH: 29/08/2017]

2. S. 68: Penny stock- Assessee discharged the primary onus – cross examination not allowed- addition cannot be made :

The assessee being resident HUF was assessed u/s. 143(3) wherein the assessee was denied exemption u/s. 10(38) on certain Long-term capital gains (LTCG) earned on sale of shares and the said gains were added to the assessee’s income as unexplained cash credit u/s. 68 of the Act. ` 38.47 Lacs were also added on account of estimated commission income which was consequential to the main addition. The aforesaid gains arose on sale of shares of an entity namely M/s. Moryo Industries Ltd. (MIL).In support of purchase transactions, the assessee furnished share allotment advice as well as its bank statements evidencing payment though banking channels. In support of sale transactions, the assessee furnished contract notes issued by the brokers, Account statements issued by the broker, bank statement evidencing inflow of funds through banking channels were also submitted. The shares were sold by the assessee at stock exchange in online mode of transaction. On the basis of these documentary evidences, the assessee substantiated the stated transaction. Subsequently, in the background of investigation carried out by Kolkata investigation wing in the matter of penny stocks, it was alleged by ld. AO that gains were arranged, premeditated and bogus. During the investigation, statements of various operators, entry providers and stock brokers were recorded wherein the said facts of their engagement in providing accommodation entries in the form of Long-Term Capital Gains (LTCG) / Short-Term Capital Losses (STCL)were admitted. In the above background, the gains earned by the assessee were alleged to be pre-arranged in connivance with the operators of the scrip. Notices issued u/s 133(6) to all the buyers did not elicit any satisfactory response. Upon analysis of financials of M/s MIL, it was observed by the AO that its net worth was negligible and it was alleged that the share prices were artificially rigged by operators to accommodate desirous beneficiaries. During survey u/s 133A by investigation wing on directors of the stock-broking entities, they admitted to have helped various persons to obtain accommodation entries in various scrips including the scrip of M/s MIL. The assessee submitted that in the absence of such crossexamination, those statements could not be used against the assessee, the findings of investigation wing were general in nature without implicating the assessee specifically, the price of the scrip would be totally dependent upon market perception and sentiment in which the assessee would have no role to play and allegations of Ld. AO were termed as based on mere presumption and surmises.

Hon’ble ITAT while allowing Assessee’s Appeal, held that the assessee had furnished all the requisite documentary evidences to substantiate the transactions and discharged the primary onus as required under law to establish the genuineness of the gains so earned during the year. No defect has been pointed out by the revenue in documentary evidences furnished by the assessee. Therefore, the onus had, thus, shifted on revenue to disprove assessee’s claim and establish with cogent evidences that the transactions were non-genuine transactions through which assessee’s unaccounted money has flown back to assessee in the garb of bogus capital gains. However, except for general findings of investigation wing and thirdparty statements on the basis of which it has been alleged that the scrip of M/s MIL was penny stock, there is nothing in the kitty of the revenue to prove the assessee’s involvement in manipulating the prices of the scrip. No exchange of cash between the assessee and the various exit providers could be proved. Therefore, the onus as casted upon revenue to dislodge the assessee’s claim could not be discharged. Also, the prices would be guided more by the market forces rather than the financials or other parameters. When both the parties would agree upon a price, the trade is matched and that price would become new market quotation. Therefore, the financials of underlying entities, in such cases, would lose much relevance in so far as the price movement of scrip is concerned. No additions could be made merely on the basis of suspicion, conjectures or surmise. The addition thus made purely on the basis of third-party statement recorded at the back of the assessee could not be sustained in the eyes of law unless the same are confronted to the assessee and the same are backed by any corroborative material.

Jagdish B. Prajapati HUF v. ACIT-24(2) [ITA NO.: 548/MUM/2019, A.Y. 2014-15, Date of Hearing: 03/05/2021]

Unreported Decisions – ST – July 2021

By Vinay Kumar Jain & Sachin Mishra, Advocates

1. Whether Section 13(8)(b) and Section 8(2) of the Integrated Goods and Services Tax Act, 2017 are ultra vires Articles 14, 19, 245, 246, 246A, 269A and 286 of the Constitution of India and Section 9 of the Central Goods and Services Tax Act, 2017?

Facts and Pleading: Dharmendra M. Jani (hereinafter “Petitioner”) was engaged in providing marketing and promotion services to customers located outside India (‘principal’) and received consideration towards such services in foreign currency. The customers located in India directly placed purchase order on the principal, and upon receipt of payment from such customers, the principal paid commission to the Petitioner. The Petitioner was an ‘intermediary’ of the principal as per Section 2(13) of the IGST Act, and consequently as per Section 13(8)(b) of the IGST Act, the place of supply was the location of the Petitioner, thus qualifying as an intra-state supply as per Section 8(2) of the IGST Act. In this background, the Petitioner challenged the validity of Section 13(8)(b) and Section 8(2) of the IGST Act on various grounds.

The Petitioner argued that the levy of tax on export of services is ultra vires Article 246A read with Article 269A and Article 286 of the Constitution of India. The Petitioner further submitted that, Section 8(2) and Section 13(8)(b) of the IGST Act are ultra vires the charging section in Section 5 of the IGST Act as also Section 9 of the CGST Act. The Petitioner argued that since GST is a destination-based tax on consumption, the services provided by a service provider in India to a service receiver located outside India which is treated as export of service, cannot be taxed. The Petitioner submitted that other similarly placed services are all treated as an export of service, therefore, Section 13(8)(b) is violative of Article 14. The Petitioner also submitted that right of the petitioner to carry on trade and business under Article 19(1)(g) of the Constitution of India is jeopardized inasmuch as it incentivizes the principal to set up liaison office in India at the cost of intermediaries like the Petitioner. The Petitioner argued that an indirect tax must be capable of being passed on to the end receiver of the service, therefore, it is trite that an agent cannot be burdened with GST. Lastly, it was submitted that levy of GST on an ‘intermediary services’ would lead to double taxation on the same service by imposition of IGST on commission received by the Petitioner and simultaneous taxation of the same in the hands of the principal in the importing country.

The Respondents submitted that even under the pre-GST regime, the place of supply in case of ‘intermediary services’, has been the location of the intermediary. They argued that since the services are actually performed and enjoyed at the place where the intermediary is located, therefore, Section 13(8) (b) is constitutionally valid. The Respondents further submitted that if place of supply for all intermediary services were to be the location of the recipient, such supplies would go outside the tax net. Taxing services provided by intermediaries would incentivize FDI, and hence, such taxation is in consonance with Make in India programme. They submitted that intermediary services are not export of services within the meaning of Section 2(6) of the IGST Act as all the five conditions are not satisfied. The Respondents also submitted that the principal would be eligible to claim deduction in respect of services received from the Petitioner, hence, there is no question of double taxation. Lastly, the Respondents stated that an identical challenge was decided by the Gujarat High Court in Material Recycling Association of India v. Union of India [2020-VIL-341-GUJ], and therefore the same should be uniformly followed throughout the territory of India.

Judgment: The matter was to be decided by a Division Bench of the Court. However, there was divergence in opinion between the two judges. The findings contained in each of these opinions are captured hereinafter:

Justice Ujjal Bhuyan: Hon’ble Justice Bhuyan held Section 13(8)(b) as ultra vires the Constitution. Justice Bhuyan stated that the Constitution does not empower imposition of tax on export of services out of territory of India by treating the same as a local supply. He further held that a law may have extra-territorial operation to subserve an object which is related to something in India, and that it is inconceivable that a law should be made by Parliament in India which has no relationship with anything in India. Justice Bhuyan observed that by artificially creating a deeming fiction in the form of Section 13(8)(b) of the IGST Act, the place of supply has been treated as the location of the supplier in India. This runs contrary to the scheme of the CGST Act as well as the IGST Act besides going beyond the charging sections of both the Acts. Justice Bhuyan held that the extra-territorial effect given by way of Section 13(8)(b) has no real connection or nexus with the taxing regime in India, and the same runs completely counter to the very fundamental principle on which GST is based i.e., it is a destination-based consumption tax as against the principle of originbased taxation. Justice Bhuyan further held that insofar as the decision of the Gujarat High Court in Material Recycling Association of India which decided an identical challenge, is concerned, the judgment of one High Court is not a binding precedent on other High Courts. Justice Bhuyan also stated that not challenging the Place of Provision of Service Rules, 2012 can be no valid ground for non-suiting the Petitioner from instituting the present challenge.

Justice Abhay Ahuja: Hon’ble Justice Ahuja held Section 13(8)(b) as intra vires the Constitution. Justice Ahuja held that firstly the legislature has enacted a specific provision defining ‘intermediary’ in Section 2(13) and to govern intermediary services in Section 13(8)(b), therefore the question of application of general provision of Section 2(6) of export of services would not arise. Secondly, a conjoint reading of Article 269A(1) with Article 269A(5) and Article 246A exclusively empowers the Parliament to make law on what is inter-state supply and what is not, and once the Parliament has in its wisdom stipulated the place of supply in case of intermediary services, no fault can be found with the provision by artificially attempting to link it with another provision to demonstrate constitutional or legislative infraction. Justice Ahuja held that all that Section 13(8)(b) does is to provide for place of supply in respect of intermediary service, therefore, there is no question of extra territorial legislation here. Justice Ahuja observed that the Petitioner who is providing intermediary service to a recipient outside India is on a different footing, and that there is a reasonable classification founded on intelligible differentia which has a rational relation / nexus to the object sought to be achieved. Therefore, whether a foreign exporter would set up a liaison office in India is a matter which is in the individual freedom of such an exporter. It has no bearing on deciding the constitutionality of Section 13(8)(b). Justice Ahuja also stated that when the Constitution has empowered the Parliament to formulate principles determining the place of supply, Section 13(8)(b) cannot be said to be ultra vires the charging section. Lastly, Justice Ahuja held the commission paid by the recipient would generally be entitled to deduction in the foreign country and therefore, it would not be a case of double taxation. Owing to divergence in opinion, the Registry has been directed to place the matter before the Chief Justice of the Bombay High Court for determining further course of action

Dharmendra M. Jani v. Union of India & Ors. High Court of Bombay, Judgment dated 09.06.21 by Justice Ujjal Bhuyan and Judgment dated 16.06.21 by Justice Abhay Ahuja, in Writ Petition No. 2031 of 201

2. Whether Rule 31A(3) of the CGST Rules is ultra vires the CGST Act? Whether the Petitioners are liable to pay GST on the commission set apart or on the total amount collected in the totalisator?

Facts and Pleading: Bangalore Turf Club Limited (hereinafter “Petitioners”) are carrying on the business of a race club. The Petitioners particularly conducts horse racing and facilitates betting by the punters. The Petitioners by themselves do not bet, but only facilitates punters in their betting activity, it is the punter who places the bet either with a totalisator run by the Petitioners or a book-maker licensed by the Petitioners. The price money is then distributed by the Petitioner to the winning punter, and out of this amount a commission is set apart to be taken by the Petitioner. Till the onset of GST, the Petitioner were treated as service providers under the Finance Act, and the service tax was levied only on the Petitioner’s commission alone. However, after the GST regime began, an amendment was brought into Rule 31A by insertion of Rule 31A(3) to the CGST Rules, which made GST payable by the Petitioners on the entire amount of the bet that gets into the totalisator. It is this amendment that Petitioners have challenged as being beyond the powers conferred under the CGST Act.

The Petitioners submitted that Rule 31A violates Article 246A read with Article 366 (12A), and exceeds the constitutional mandate given to the Parliament and the Legislature to levy tax only on the supply of goods and services on the principle that if there is no supply there is no tax. The Petitioner further submitted that Rule 31A(3) in effect imposes tax on the Petitioners on the entire bet value without the Petitioners supplying any bet, thus violating the mandate of Article 246A. The Petitioners also submitted that without assessment of all the four components of every tax i.e. taxable event, taxable person, rate and measure of tax, the imposition of tax is contrary to law. It was also submitted that the impugned Rule 31A(3) is ultra vires Section 7 of the CGST Act, since the supply of bets is not in the course or furtherance of the Petitioner’s business, and even then the Petitioner is made liable to pay tax, therefore the impugned rule exceeds the mandate under Section 7 by levying GST on the amount that is not received by the Petitioners as consideration.

The Respondents submitted that the Act itself has mandated levying of tax on an actionable claim, and as per the definition of actionable claim, ‘betting’ is also an actionable claim in terms of the Rules, and therefore, the Petitioners cannot contend that for the first time under Rule 31A the Petitioners were liable for payment of GST on the amount received through totalisator. The Respondents further submitted, that since actionable claim is and was existing in the Act from the beginning, the amendment has only clarified the role of the Petitioners in the field of betting, thus the contention of the Petitioners that Rule 31A is ultra vires the Act and the amendment is to be rejected, is a figment of imagination and cannot be construed to be legally sound and thus the writ petition is to be dismissed.

Judgment: The Hon’ble High Court of Karnataka held that as per the case of Dr. K. R. Lakshman v State of T.N. (1996) 2 SCC 226, the activities carried out by a race club is not gambling but is gaming and a game of skill. The Court observed that ‘totalisator’ has been interpreted by the English Courts and the Supreme Court to mean a fixed commission which is earned irrespective of the outcome of the race and cannot be seen to be indulging in a betting activity. Therefore, the Court stated that betting is neither in the course of business or in furtherance of business of a race club for the purposes of the CGST Act. The Court observed that the Petitioners hold the amount received in the totalisator for a brief period in its fiduciary capacity, and once the race is over they distribute the same to the winners. It is for this brief period that they hold the money in its fiduciary capacity, that the Petitioners receive commission as the consideration. The Court observed that Rule 31A(3) completely wipes out the distinction between the bookmakers and a totalisator by making the Petitioners liable to pay tax on 100% of the bet value. The Court stated that the by making the entire bet amount that is received by the totalisator liable for payment of GST would take away the principle that a tax can be only on the basis of consideration, even under the CGST Act. The Court observed that the consideration that the Petitioners receive, is by way of commission for planting a totalisator, and the same can be nothing different from that of a stock broker or a travel agent, both of whom are liable to pay GST only on the commission that they earn and not on all the monies that pass through them. Thus, the Court held that Rule 31A(3) insofar as it declares that the value of actionable claim in the form of chance to win in a horse race of a race club to be 100% of the face value of the bet is beyond the scope of the Act. The Court observed that Rule 31A(3) travels beyond what is conferred upon the rule making authority under Section 9, which is the charging section, by way of an amendment. The Court further observed that the totalisator is brought under a taxable event without it being so defined under the Act nor power being conferred in terms of the charging section which renders the Rule being made beyond the provisions of the Act. Therefore, the Court held Rule 31A(3), which does not conform to the provisions of the Act, as ultra vires the enabling Act and consequently the Court struck down Rule 31A(3) of the CGST Rules and Rule 31A of the KSGST Rules as being contrary to the CGST Act. The Court also held that the Petitioners are liable for payment of GST only on the commission that they receive for the service that they render through the totalisator and not on the total amount collected in the totalisator.

Bangalore Turf Club Limited v State of Karnataka, UOI & Ors, High Court of Karnataka, decided on 02.06.21, in W.P. No. 11168 of 2018.

3. Whether an appeal application filed by a Petitioner be dismissed under the OGST Act, 2017 due to a delay in furnishing a certified copy of the order appealed against, on the grounds that the appeal was not presented within the prescribed time limit?

Facts and Pleading: M/s. Shree Jagannath Traders (hereinafter “Petitioners”) had filed an appeal against an impugned order dated 18.08.2020. The last date for filing the appeal against the said order was 17.11.2020, 16 whereas the Petitioner had filed an appeal on 13.11.20 electronically, accompanied by a downloaded copy of the order appealed against. As per Rule 108(3) of the OGST Rules 2017, the appeal had to be accompanied by a certified copy of the order appealed against, and the same had to submitted within seven days of the filing of the appeal. Further, as per the proviso to Rule 108(3), if the certified copy is submitted within seven days of the filing of the appeal, then the date of filing of the appeal would be the date of the issue of the provisional acknowledgement, otherwise the date of appeal would be the date of submission of such certified copy.

However, in the present case, the Petitioner could furnish a certified copy of the order appealed against, only on 09.03.2021, because of which, the Appellate Authority dismissed the appeal as not having been preferred in time, since the delay could not be condoned. Aggrieved by the said decision the Petitioner has filed the present writ petition.

The Petitioners submitted that while the appeal was accompanied the downloaded printed copy of the order appealed against at the time of filing the appeal, it was not accompanied by the certified copy thereof at that stage since the lawyer who had filed the appeal was in self quarantine as he had come into contact with a client who had tested positive for Covid-19.

Judgment:  The Hon’ble High Court of Orissa held that, in the present case, it is not in dispute that the Petitioner in fact had filed the appeal within a period of three months from the date of the impugned order, and that it was only on the account of the appeal not being accompanied by the certified copy of the order appealed against, within a period of seven days, that the appeal has been rejected on the ground of delay. The High Court observed that the difficulties faced by lawyers in applying for and obtaining certified copies of orders is generally known, and that the explanation offered for the delay ought to have been accepted by the Appellate Authority, even the wording of Section 107(4) is such that the authority is not precluded from condoning a delay of a longer period. Further, the High Court held that the explanation offered by the Petitioner is a plausible and not an unreasonable one, especially in these Covid times, and further considering that a downloaded copy thereof was in fact submitted along with the appeal which was otherwise filed within time, the mere delay in enclosing a certified copy of order appealed against should not come in the way of the Petitioner’s appeal for being considered on merits. The Court observed that the present case is a case of substantial compliance and the interests of justice ought not be constrained by a hyper technical view. The Court stated that a more liberal approach is warranted in matters of condonation of delay, which cannot be said to be extraordinary. The Court also stated that as long as the appeal is accompanied by an ordinary downloaded copy of the order appeal against, verified as a true copy by the Advocate for the Appellant, the delay in filing such certified copy, subject to it not being extraordinary, be condoned. Therefore, the Court set aside the impugned order rejecting the Petitioner’s appeal on the ground of delay.

M/s. Shree Jagannath Traders v Commissioner of State Tax Odisha, Cuttack and Ors, High Court of Orissa, decided on 07.06.21, in W.P.(C) No. 15058 of 2021.

4. Whether reversal of Cenvat credit (which was carried forward in the TRAN1 under GST) in GSTR-3B amounts to credit not been taken for claiming refund under the provisions of Cenvat Credit Rules, 2004?

Facts and Pleadings:

Chariot International Pvt. Ltd. (hereinafter “Appellants”) are engaged in the manufacture and export of granite slabs and tiles classifiable under Chapter sub-heading 68022390 of CETA, 1985 and were availing the Cenvat credit of service tax paid on input services used in the manufacture of their finished goods under the provisions of Cenvat Credit Rules, 2004(CCR). Therefore, the Appellants had filed three refund applications for refund of Cenvat credit under Rule 5 of CCR, 2004 read with Notification No.27/2012- CE(NT) dated 18.06.2012. However, the Appellant received a show cause notice proposing to reject claims on the ground that the Appellant had not debited the amount on the Cenvat register as required under para 2(h) of the aforesaid Notification. Thereafter, the Appellants filed a reply to the SCN and submitted that the Cenvat Credit balance they had, was carried forward in the TRAN1 under GST, and that the amount claimed as refund had been debited in the GSTR3B for the period December 2017. Subsequently, the original authority sanctioned the refund by holding that non-reversal of the credit at the time of filing refund claims is only a minor procedural lapse and reversal is ensured before sanctioning of refund, hence delay is condoned. Aggrieved by the said order, the Department then filed three appeals before the Commissioner (Appeals), who set aside the Order-inOriginal and disallowed the refunds on the ground that credit reversal in GSTR-3B pertains to GST credit and not Cenvat credit and therefore, by invoking section 142(3) and Section 142(4), he disallowed the Refunds. Aggrieved by the said decisions, the Appellant filed the present appeal.

Judgement: The Hon’ble CESTAT Bangalore, firstly observed that neither the eligibility of the Appellant to claim refund nor the fact that the Appellant has debited the amount claimed in GSTR-3B was disputed. Secondly, the Tribunal observed that the it has been consistently held that credit reversed without being utilized is considered as if credit has not been taken, therefore the credit reversed in GSTR-3B tantamounts to not been taken credit. Further, the Tribunal placed reliance upon the case of Hello Minerals Water (P) Ltd. v UOI 2004-(7)-TMI-98, wherein it was held that since the Cenvat credit initially taken was reversed without being utilized, it is to be treated as if the assessee has not taken the same and hence he would be eligible for exemption benefits under the exemption notification. The Tribunal also placed reliance upon the Sandoz Pvt. Ltd 2015-VIL-841-CESTAT-MUM-ST case, wherein it was held that the conditions prescribed in the notification having met although on a later date, is not such a lapse that it would debar the appellants from the refund. Therefore, the Tribunal in the present case, held that the Appellants had reversed the credit in the GSTR-3B, but there was only a delay in debiting the same, and that this delay was just a procedural delay and not a technical lapse in nature, thus the same will not disentitle the appellant from claiming the refund.

Chariot International Pvt Ltd v Commissioner of Central Tax, Bengaluru East, CESTAT Regional Bench, Bangalore, decided on 17.06.21, in Central Excise Appeal No. 20158 of 2020.