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.