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.