In this ruling, the Hon’ble Supreme Court, decided the question of validity of availment of CENVAT credit on mobile tower and prefabricated buildings (PFB). There was conflicting views of two High Courts: (i) Bombay High Court in Bharti Airtel Ltd. vs. CCE [2014 (9) TMI 38] held that mobile service providers (MSPs) are not entitled to such credit; and (ii) Delhi High Court in Vodafone Mobile Services Limited v. CST, Delhi 2019 [(27) G.S.T.L. 481 (Del.)] held that MSPs are entitled to such credit. The primary point was contention was the nature of mobile towers: immovable property or movable property.
Explaining the working of the mobile towers it was stated that the mobile towers are brought to the site of installation in completely knocked down condition (CKD) or semi-knocked down condition (SKD) by the service provider. The tower is installed at an appropriate site based on technological viability. On this mobile tower the antenna is hoisted and fixed at an appropriate height. The mobile tower, in turn, is fixed to the ground or on the top of a building to provide stability and make it wobble free, for effective functioning of the antenna as it requires a particular height and stability. Excise duty paid on such towers has been claimed as credit by the MSPs.
Analysing the relevant legal provisions, the Court observed that Rule 3(1) of the CENVAT Credit Rules, 2004 (‘Rules’) enables a provider of taxable service to claim CENVAT credit paid on any “capital goods” or “input” received. The terms “capital goods” and “input” have been defined under Rule 2(a)(A) and the Rule 2(k) of the Rules. The Court observed that if mobile towers qualify as either “capital goods” or as “inputs” then credit will be available.
Based on such factual and legal position, the Court framed two major issues:
(i) Whether, for the purposes of availment of CENVAT Credit, mobile tower is an immovable property or movable property (‘goods’)?
To interpret the various terms, the Court relied upon the definition of relevant terms from various statues:
“goods” means every kind of movable property other than actionable claim and money; and includes stocks, shares, growing crops, grass, and things attached to forming part of the land which are agreed to be severed before sale or under contract of sale.
“movable property” shall mean property of every description except immovable property.
“immovable property” shall include land, benefits to arise out of land and things attached to the earth, or permanently fastened to anything attached to the earth.
“attached to the earth” means—
(a) rooted in the earth, as in the case of trees and shrubs;
(b) imbedded in the earth, as in the case of walls or buildings; or
(c) attached to what is so imbedded for the permanent beneficial enjoyment of that to which it is attached:
After going though, a catena of case laws on characteristics of an immovable property and movable property, the Court summarised the tests which have to be applied in such case and made following observations:
| Tests | Explanation | Application of test to Mobile Tower |
| Nature of annexation | If the property is so attached that it cannot be removed or relocated without causing damage to it, it is an indication that it is immovable. | The mobile tower is bought and brought in the CKD or SKD form from the manufacturers and same is installed at the site by assembling and fixing to the earth. The tower can be dismantled by unbolting of the nuts and bolts and without any damage to the nature of the tower. |
| Object of annexation | If the attachment is for the permanent beneficial enjoyment of the land, the property is to be classified as immovable. Conversely, if the attachment is merely to facilitate the use of the item itself, it is to be treated as movable. | Attachment of the plant to the foundation is not meant for permanent beneficial enjoyment of either the foundation or the land in which the same is imbedded. [Relying upon CCE, Ahmedabad v. Solid and Correct Engineering Works & Ors (2010) 5 SCC 122] |
| Intendment of the parties | If the parties intend that the property in issue is for permanent addition to the immovable property, it will be treated as immovable. If the attachment is not meant to be permanent, it indicates that it is movable. | The intention was to permanently attach it to the earth but a foundation was necessary to provide a wobble free operation to the machine. |
| Functionality Test | If the article is fixed to the ground to enhance the operational efficacy of the article and for making it stable and wobble free, then such property is movable. | Mobile tower is affixed only for the purpose of maintaining stability of the tower and keep it wobble free so that the antenna which is hoisted on it can receive and transmit the electromagnetic signals effectively and without any disturbance. |
| Permanency Test | If the property can be dismantled and relocated without any damage, the attachment cannot be said to be permanent but temporary and it can be considered to be movable. | Dismantling the tower may entail some damages, but such damages will be on the cables which may be required to be stripped of but no damage is caused to the tower. There may also be some damage to the antenna. But there is no damage to the tower per se. |
| Marketability Test | If the property, can be removed from the immovable property and sold in the market, it can be said to be movable. | Removing and dismantling the tower which is affixed to the earth from the existing site can be re-assembled without causing any change in its character. It can be moved to any other place and sold in the market. |
Based on the above observations the Court held that mobile towers are movable property.
W&B Comments: The question whether mobile towers are movable property or immovable property has been a long standing issue for the purposes of taxation. This question is also relevant for GST because under Section 17(5) of the CGST Act, 2017, ITC of goods and services received for construction of an immovable property (except plant and machinery) is blocked. Further, the Explanation to Section 17(5) excludes ‘telecommunication towers’ from the expression ‘plant and machinery’. However now that the telecommunication tower has been held to be movable property such exclusion shall not result in disallowance of credit.
In this decision Hon’ble Bombay High Court ruled on the eligibility for refund of tax paid in excess, voluntarily by way of self-assessment. The petitioner is in the business of manufacturing textile machinery and equipment and for such business imported various inputs, raw materials and capital goods during the period May 2019 to March 2020. The imports were made on the clearance of bills of entry on payment of import duties and IGST, which was admissible as ITC.
Such IGST credit was availed by the petitioner. However, due to mismatch in the figures of import IGST credit in GSTR 2A and the monthly returns filed in form GSTR 3B, petitioner got into a mistaken belief that he had availed excess ITC of Rs. 40,00,00/-. Under such mistaken belief he paid such amount by way of DRC 03 on 13.11.2020. Further, the department did not take any action on such DRC 03 and till the date of hearing of the writ petition, GST portal showed status of “pending for action by Tax officer” on the GST portal, against such DRC 03.
In 2024, during the audit conducted by the range Superintendent, it came to be light that there was no tax liability against the petitioner of such amount. ASMT 10 was issued to the petitioner to clarify about the payment of Rs. 40,00,000/-. The petitioner replied that he had made excess payment by mistake. ASMT 12 was issued to the petitioner dropping the proceedings and the petitioner filed a refund application for such amount.
The refund application was rejected on the ground that it was filed after the expiry of limitation period of 2 years as per Section 54 of the CGST Act.
The Court relying upon its earlier judgment held that amount paid by mistake or through ignorance as self-assessment cannot be retained by the revenue. Such a payment is hit by Article 265 of the Constitution which mandates that no tax shall be levied or collected except by authority of law.
The Court held that such amount is not covered by Section 54 of the CGST Act and quashed the impugned refund rejection order. The court also held that since the amount was deposited by mistake, the petitioner shall not be entitled to interest on such refund amount.
W&B Comments: It is a well settled principle of tax law that any amount paid to the Revenue which is in not a part of the tax liability is not governed by the regular statutory refund provisions and the taxpayer shall always be entitled to get its refund.
In this judgment, the Hon’ble Bombay High Court held that the appellate authority cannot reject appeal when there is sufficient proof of payment of pre-deposit.
The petitioner filed an appeal and his appeal was rejected by the appellate authority, inter alia, on the grounds that pre-deposit has not been made by the petitioner and that lack of any proof that the authorised person has been given such authority.
In the petition, the petitioner exhibited the Form APL-01, showing at Sr. No. the amount of thereof that pre-deposit paid has been paid, screenshots of the Electronic Credit Ledger, and the Electronic Cash Ledger from the GSTN portal and system generated provisional acknowledgement of the appeal, which is generated automatically by the Respondents’ portal once an assessee files an appeal.
The Court held that such system generated acknowledgment is itself proof of payment of pre-deposit and of compliance with condition of Section 107(6) of the CGST Act.
The second ground on which the appeal is dismissed is that the Appellant has not submitted any valid documents, such as a Board resolution appointing the said person as an authorised signatory to sign the appeals. The Court noted that the concerned person is already registered on the GST portal as the authorised signatory.
The Court order the quashing of the impugned order and remand it to the department for de novo consideration.
W&B Comments: This case highlights a continuous problem in the GST regime where the department frequently either ignores the data already available on the GST portal or ignores the proof submitted by the taxpayer. To be on the cautious side, the taxpayer should always save the provisional acknowledgment generated after the appeal has been filed. The acknowledgment in form APL 02 is often delayed even after submission of physical copies of appeal and holding of personal hearing, and in such situations provisional acknowledgment can help the courts in clearly determining the date of filing appeal, pre-deposit amounts etc.
In this ruling, the Authority has held that the canteen service provided by the entity to whom it is outsourced by the hospital shall not be exempt from levy of GST.
The hospital outsourced the provision of canteen service to the applicant. The applicant supplies meals to the indoor patient as per the diet chart provided by the medical officers of the hospital. The applicant raised the question that whether the service provided by the applicant is exempt under Sr. No. 74 of Notification No. 12/2017-CT(R) dated 28.06.2017 read with Circular No. 32/06/2018-GST dated 12.02.2018.
The applicant, in particular, highlighted point no. 5 of Circular No. 32/06/2018-GST, stating: “Food supplied to the in-patient as advised by the doctor/nutritionist is a part of composite supply of healthcare and not separately taxable”. The applicant submitted that the services provided by it are part of such composite supply and ‘Health care services by a clinical establishment’ are exempt under Notification No. 12/2017, and hence, the services provided by it are also exempt.
The Authority rejected the contentions of the applicant on the grounds that the hospital itself, directly is not providing service to the in-patients but is rather providing such service in an outsourced manner. The service provided by the applicant is a stand-alone service and cannot form part of the ‘composite supply’ made by the hospital / clinical establishment. The applicant does not provide any health care services. The authority also took reliance of the words written in column labelled ‘Issue’ (Serial No. 5) in the circular. Here the circular states that when the canteens are not run by the hospitals by are outsourced to outdoor caterers, then supplier shall charge tax as applicable. The Authority observed that the food supplied by the hospital shall form part of the composite supply made by such hospital.
W&B Comments: The question the sub-contracting forms a separate supply has already been decided, and hence, in view of such a legal position, the services by the outsourced caterer and the hospital could not been clubbed to form a composite supply under Section 8 of CGST Act, 2017. However, the confusion may have been borne out of the way in which the particular circular has been drafted. The clarification part of the circular does not specifically deal with the situation when canteen service is outsourced. It only states that food supplied to the in-patients as advised by the doctor/nutritionists is not separately taxable.
To increase the share of industrial sector in the country’s economy, from the current 27.6%, the government had adopted the policies of ‘Atmanirbhar Bharat’ and ‘Make in India’ and in line with such policies launched the Production Linked Incentive Scheme (“PLI” or “PLI Scheme”) in 2020. Currently expanded to 14 sectors, the purpose of PLI is to attract investments in key priority sectors and, ensure efficiency in the manufacturing and make Indian manufacturing globally competitive.
Simultaneously, Goods and Services Tax (GST) was going through its nascent stage, being touted as One Nation One Tax, by reducing the compliance burden and removing the cascading effect of multiple taxes.
Now that both GST and PLI have reached certain maturity, the time is right to analyse how changes in the GST regime can enhance the effectiveness of the PLI Scheme.
To boost manufacturing, the government seeks to create an ecosystem which, firstly facilitates swift setting up of new manufacturing units and secondly makes the business of such manufacturing units economically viable.
For the first step, the setting up of new units can be encouraged with efficiencies in the government regulatory processes, for instance, single window for essential regulatory licences, availability of industrial plots, state incentives and availability of multi-modal logistics.
For the next stage, the focus should be on improving the demand-supply factors and the mechanism of levy of taxes and duties. The supply and demand should be made conducive to domestic production, to the extent of imposing trade barriers like anti-dumping duty or other quantitative barriers, if necessary. GST being a transaction-based tax can create much more hiccups for the businesses and require immediate attention but if used effectively, the meticulous GST regime can facilitate PLI schemes. Additionally, the plans of the present government to overhaul the Income-tax Act, 1961 also provides a unique opportunity to consider PLI while framing the direct tax provisions.
In this article, we will focus on identifying the friction points in the current GST regime that can be tweaked or reshaped to create synergies with the PLI Schemes.
A manufacturing unit constructs structures to carry out its operations: production, warehousing etc. Hence, a common but necessary expense, whether in a green field project or a brown field project, is land acquisition and subsequent construction on it. While there is no levy of GST on sale of land, the credit of such inward works contract service or any other goods or services for construction of a building is blocked under Section 17(5) of the Central Goods and Services Act, 2017 (“the CGST Act”). In its recent judgment, the Hon’ble Supreme Court has provided a small window for an assessee to avail the credit if the building can be proved to be “plant”, based on the functionality test. This creates a huge financial burden on the manufacturers at the initial stage of investment itself. Additionally, the PLI scheme does not take into consideration the expenditure on land and building and taxes paid thereon to calculate the ‘investment’ or incentive. As a result, the cash flow of the manufacturing unit is affected and even the PLI scheme does not provide any relief.
The figure of blocked ITC is already filled in GSTR 3B on the GST portal. The GST portal and PLI claim can be synchronised for the data to be available directly for PLI application/claim. Based on that the PLI applicant should get benefit either to meet threshold investment limits or addition to the incremental sales for incentive. The reason for non-inclusion might be to prevent the abuse of money speculated in land / non-productive asset for PLI benefit. However, once it is established that the manufacturing unit is using the building and land for production then ignoring this huge liability will go contrary to the desired goals of PLI scheme.
Under the PLI scheme, the applicants have to first submit an ‘application for eligibility’ and then periodically submit ‘disbursement claims’, both to the Project Monitoring Agency (“PMA”). The disbursement claims are primarily based on the statutory audited balance sheets and returns filed under various laws but are also based on other documents like CA certificate, CS Certificate etc., wherever required. The disbursements claim brings out the ‘incremental sales of manufactured goods’.
Here the hands of the PMA are however not tied to accept the claims mechanically. To verify the claim amount it may examine other documents. Except two sectors, the respective ministries have appointed IFCI Limited as the PMA. IFCI, being a Systematically Important Non-Deposit Taking Non-Banking Finance Company, established in 1948, can be expected to have expertise to exercise such function satisfactorily.
It is worth noting that, GST also contains valuation provisions, and the proper officer may issue show cause notice to dispute the valuation of the supply. In case of a PLI beneficiary/applicant, the GST officers should avoid raising valuation dispute. Firstly, it will be frustrating for a manufacturer to justify his valuation on two fronts for the same goods. Secondly, dispute on identical issue by GST department should not become the basis to seek refund of any PLI claim disbursed. Thirdly, in case of confiscation of goods, the GST department may impose fine upto the extent of market value of the goods. Seven years of experience has shown that orders under GST are often passed with impunity, disregarding the detailed submissions of the assessee. It is suggested that the CBIC may issue instructions/circular to the department to exercise restraint and application of mind before raising a valuation dispute against a PLI beneficiary. Prior consideration should have to be made to the valuation settled and accepted at the PLI desk. Otherwise, it would amount to tax terrorism and would derail the PLI Scheme.
Though GST was enacted with the object of removing multiple taxation systems in the country and to avoid cascading effect, there are still a lot of levies and duties which have not been aligned with such objects.
Petroleum crude, high speed diesel, motor spirit (petrol), natural gas and aviation turbine fuel have been kept out of the purview of GST and VAT is levied on sale of these products.. Such fuels are used for transportation as well as in operation of machinery. Additionally, there is also levy of state excise duty on liquor/alcohol which has industrial application. These are major day-to-day expenses for any manufacturing plant and no set off is allowed of such taxes and duties and hence become part of the cost of business. The PLI schemes consider such non-creditable taxes and duties paid on plant and machinery as part of the “investment” for verifying the eligibility, but these are not factored in during the disbursement of claims. To stay competitive, all these non-creditable levies incurred on operations may not always be added to the cost of goods. PLI scheme should also allow addition of such levies to the claim amount, otherwise such mounting expenses can affect the cash flow of manufacturers. One way to implement this could be the reflection of the amount paid as duties, VAT etc. on the GST portal. Both centre and states are already connected on the nationwide portal of GST and often the same department, at state level, levies GST and VAT/Sales tax.
Most of the plant and machinery required for manufacturing are classified under Chapter 85 and 98 of the HSN. Classification under GST is also based on the same system of classification. Most of the goods belonging to such chapters are taxed at a high rate of 18%.
While the credit of the ITC on such capital goods may be available under GST, this will further add up to the initial costs of the manufacturer, in addition to the costs associated with land and building. PLI scheme counts non-creditable levies in ‘investment’ but GST paid will not be added to prove eligibility. The Government may issue a notification that new or expanding manufacturing units under the PLI scheme shall be eligible to purchase such machinery at a lower rate of 5% or 12%. This will be in line with the long-standing need of rationalisation of GST rates. In such cases, the suppliers will also be eligible for refund, if faced with an inverted duty payment.
Before starting operations, a business has to obtain various approvals ranging from labour laws, environmental law, shops and establishment law, registration under GST, obtaining PAN card, industrial laws, etc. These laws are at different levels of our federal structure: national, state and municipal. The issues faced here are (i) registration on multiple government department portals/offices; and (ii) lack of time limit on the department to approve or reject the application.
Getting GST registration is an absolute necessity for any business. Along the lines of cooperative federalism, governments should develop GST portal into a single window for obtaining all the relevant approvals. GST registration already records the core business of the person: ‘Manufacturer’, ‘Trader’ or ‘Service Provider and Others’. It also contains annual turnover data in Table 5 of GSTR 9C. So, the option to apply for PLI scheme can be enabled on the GST portal. Such a system would be far more effective if there was a single point of interaction with the government: from application to issuance of approval. The Central Government has already launched the National Single Window System (NSWS) in September 2021 however this platform has some shortcomings: (i) it is an advisory tool to identify approvals based on user input and is to be used for guidance purpose only; (ii) the applications for which it does accept approvals are forwarded to the respective ministries/departments.
Directorate General of GST Intelligence (“DGGI”) has been demanding GST on based on reverse charge mechanism (RCM) from the businesses who have obtained a statutory approval from government / governmental authorities / government bodies. The government also omitted a slew of exemptions under the Notification No. 12/2017-CT(R) to enable this. Additionally, GST considers activity of the Central Government, State Government or any local authority in which they are engaged as public authorities to be “business”.
Calculating the taxable value in such transactions and the time and method to discharge such liability is itself a complex exercise. There are no guidelines for the department in this regard. Even though the payment of GST under RCM on such services may be revenue neutral, this will heavily impact the cash flow of the business as on date.
The government may allow exemption on governmental approvals for manufacturers who have received acknowledgment of receipt of application from the PMA. The GST may become payable if the application is not finally accepted.
When a foreign company invests in India, it often relies upon its parent company for technical know-how, seconded employees and other intellectual property like brand name. The DGGI frequently raises demand of RCM liability on such Indian entities alleging import of services. Recently such demands have been raised on Infosys and domestic arm of various airlines.
This issue in particular highlights the disconnect within the department itself because CBIC has already issued Circular No. 210/4/2024-GST dated 26.06.2024 which provided that under Rule 28 of the CGST Rules when the foreign affiliate provided certain services to the related domestic entity, then the value of such services may be deemed to be Nil.
However, despite such circular, the DGGI continues to issue notices on this point on the ground that one of the two conditions to avail this circular is not fulfilled: full ITC is not available to the related domestic entity to whom notice has been issue. Further, the ad hoc style adopted by CBIC, specially to solve the issue of invoices reflects poorly on the domestic tax regime. GST Council had the opportunity to conclusively clarify the meaning of ‘full credit’ in Circular 210. The GST Council rather limited itself to exempting the import of certain services by the airlines from foreign related parties and then the CBIC issued two circulars on the same issue.
As a result, the disputed issue still stands open for action by the department creating apprehensions in the minds of PLI investors who are expected to invest millions in manufacturing.
In January 2022, the Prime Minister in his speech at the World Economic Forum, Davos Summit, announced that India is moving ahead with the spirit of Make in India, Make for the world. Full realisation of this dream would involve not just capacity building but also competitive pricing. Delay or denial of refund increases the tax burden on the exporter-manufacturer. If the value of the export goods increases and are not sold as a result, the purpose of reimbursing the cost of eligible products under PLI schemes would be defeated.
For refund, CGST Rules contains two provisions: Rules 89 (refund of unutilised credit when exports made ‘under Letter of Undertaking’) and Rule 96 (rebate of on exports are made ‘with payment of IGST’).
Both Rule 96(10) and Rule 89(4A)/(4B) contained restricts as to refund for beneficiaries of schemes like advance authorisation. These provisions were amended multiple times and were bitterly contested by the government even upto the Supreme Court. Due to this, legitimate refund claims were withheld and sometimes even adjusted against arbitrarily tax demand without any notice. Finally based on the recommendation of the 54th GST Council Meeting, these provisions were finally deleted from the CGST Rules on 08.10.2024. However, the issue still stands alive for the period prior to such omission. Further, Rule 89 limits the turnover of zero-rated supply of goods to be maximum of 1.5 times the value of like goods domestically supplied by the same or, similarly placed supplier. While this provision has already been held to be unconstitutional by a High Court, it continues to be in the statute creating a legal uncertainty.
If a PLI beneficiary relies upon this decision and later it is overruled by the Supreme Court, it may be vulnerable to demand of refund of incentives disbursed to it.
To get the desired results from the PLI schemes it is imperative that the government broadens their vision and PLI should not be limited to incentives but should create an incentive ecosystem, ultimately reducing the costs and increasing the production. Taxes paid by businesses are a massive cost to the business. Tax mechanisms should be intertwined with the PLI in such a way that frictions like cascading, non-availability of credit, multiple compliance windows etc. reduce the tax burden. Unpredictable tax position and compliances discourage investors, and the capital flees to other jurisdictions. It is apposite that compliances in PLI and GST are aligned and at the earliest PMA considers adopting the turnover / valuation, registration, forms etc. as per the GST framework.
To increase the share of industrial sector in the country’s economy, from the current 27.6%[1], the government had adopted the policies of ‘Atmanirbhar Bharat’ and ‘Make in India’ and in line with such policies launched the Production Linked Incentive Scheme (“PLI” or “PLI Scheme”) in 2020. Currently expanded to 14 sectors, the purpose of PLI is to attract investments in key priority sectors and, ensure efficiency in the manufacturing and make Indian manufacturing globally competitive[2].
Simultaneously, Goods and Services Tax (GST) was going through its nascent stage, being touted as One Nation One Tax, by reducing the compliance burden and removing the cascading effect of multiple taxes.
Now that both GST and PLI have reached certain maturity, the time is right to analyse how changes in the GST regime can enhance the effectiveness of the PLI Scheme.
To boost manufacturing, the government seeks to create an ecosystem which, firstly facilitates swift setting up of new manufacturing units and secondly makes the business of such manufacturing units economically viable.
For the first step, the setting up of new units can be encouraged with efficiencies in the government regulatory processes, for instance, single window for essential regulatory licences, availability of industrial plots, state incentives and availability of multi-modal logistics.
For the next stage, the focus should be on improving the demand-supply factors and the mechanism of levy of taxes and duties. The supply and demand should be made conducive to domestic production, to the extent of imposing trade barriers like anti-dumping duty or other quantitative barriers, if necessary. GST being a transaction-based tax can create much more hiccups for the businesses and require immediate attention but if used effectively, the meticulous GST regime can facilitate PLI schemes. Additionally, the plans of the present government to overhaul the Income-tax Act, 1961 also provides a unique opportunity to consider PLI while framing the direct tax provisions.
In this article, we will focus on identifying the friction points in the current GST regime that can be tweaked or reshaped to create synergies with the PLI Schemes.
A manufacturing unit constructs structures to carry out its operations: production, warehousing etc. Hence, a common but necessary expense, whether in a green field project or a brown field project, is land acquisition and subsequent construction on it. While there is no levy of GST on sale of land[3], the credit of such inward works contract service or any other goods or services for construction of a building is blocked under Section 17(5) of the Central Goods and Services Act, 2017 (“the CGST Act”). In its recent judgment, the Hon’ble Supreme Court[4]has provided a small window for an assessee to avail the credit if the building can be proved to be “plant”, based on the functionality test[5]. This creates a huge financial burden on the manufacturers at the initial stage of investment itself. Additionally, the PLI scheme does not take into consideration the expenditure on land and building and taxes paid thereon to calculate the ‘investment’ or incentive. As a result, the cash flow of the manufacturing unit is affected and even the PLI scheme does not provide any relief.
The figure of blocked ITC is already filled in GSTR 3B on the GST portal. The GST portal and PLI claim can be synchronised for the data to be available directly for PLI application/claim. Based on that the PLI applicant should get benefit either to meet threshold investment limits or addition to the incremental sales for incentive. The reason for non-inclusion might be to prevent the abuse of money speculated in land / non-productive asset for PLI benefit. However, once it is established that the manufacturing unit is using the building and land for production then ignoring this huge liability will go contrary to the desired goals of PLI scheme.
Under the PLI scheme, the applicants have to first submit an ‘application for eligibility’ and then periodically submit ‘disbursement claims’, both to the Project Monitoring Agency (“PMA”). The disbursement claims are primarily based on the statutory audited balance sheets and returns filed under various laws but are also based on other documents like CA certificate, CS Certificate etc., wherever required. The disbursements claim brings out the ‘incremental sales of manufactured goods’.
Here the hands of the PMA are however not tied to accept the claims mechanically. To verify the claim amount it may examine other documents. Except two sectors, the respective ministries have appointed IFCI Limited as the PMA. IFCI, being a Systematically Important Non-Deposit Taking Non-Banking Finance Company, established in 1948, can be expected to have expertise to exercise such function satisfactorily.
It is worth noting that, GST also contains valuation provisions, and the proper officer may issue show cause notice[6] to dispute the valuation of the supply. In case of a PLI beneficiary/applicant, the GST officers should avoid raising valuation dispute. Firstly, it will be frustrating for a manufacturer to justify his valuation on two fronts for the same goods. Secondly, dispute on identical issue by GST department should not become the basis to seek refund of any PLI claim disbursed. Thirdly, in case of confiscation of goods[7], the GST department may impose fine upto the extent of market value of the goods. Seven years of experience has shown that orders under GST are often passed with impunity, disregarding the detailed submissions of the assessee. It is suggested that the CBIC[8] may issue instructions/circular to the department to exercise restraint and application of mind before raising a valuation dispute against a PLI beneficiary. Prior consideration should have to be made to the valuation settled and accepted at the PLI desk. Otherwise, it would amount to tax terrorism and would derail the PLI Scheme.
Though GST was enacted with the object of removing multiple taxation systems in the country and to avoid cascading effect[9], there are still a lot of levies and duties which have not been aligned with such objects.
Petroleum crude, high speed diesel, motor spirit (petrol), natural gas and aviation turbine fuel have been kept out of the purview of GST[10] and VAT is levied on sale of these products.. Such fuels are used for transportation as well as in operation of machinery. Additionally, there is also levy of state excise duty on liquor/alcohol which has industrial application. These are major day-to-day expenses for any manufacturing plant and no set off is allowed of such taxes and duties and hence become part of the cost of business. The PLI schemes consider such non-creditable taxes and duties paid on plant and machinery as part of the “investment” for verifying the eligibility, but these are not factored in during the disbursement of claims. To stay competitive, all these non-creditable levies incurred on operations may not always be added to the cost of goods. PLI scheme should also allow addition of such levies to the claim amount, otherwise such mounting expenses can affect the cash flow of manufacturers. One way to implement this could be the reflection of the amount paid as duties, VAT etc. on the GST portal. Both centre and states are already connected on the nationwide portal of GST and often the same department, at state level, levies GST and VAT/Sales tax.
Most of the plant and machinery required for manufacturing are classified under Chapter 85 and 98 of the HSN. Classification under GST is also based on the same system of classification. Most of the goods belonging to such chapters are taxed at a high rate of 18%[11].
While the credit of the ITC on such capital goods may be available under GST, this will further add up to the initial costs of the manufacturer, in addition to the costs associated with land and building. PLI scheme counts non-creditable levies in ‘investment’ but GST paid will not be added to prove eligibility. The Government may issue a notification that new or expanding manufacturing units under the PLI scheme shall be eligible to purchase such machinery at a lower rate of 5% or 12%. This will be in line with the long-standing need of rationalisation of GST rates. In such cases, the suppliers will also be eligible for refund, if faced with an inverted duty payment[12].
Before starting operations, a business has to obtain various approvals ranging from labour laws, environmental law, shops and establishment law, registration under GST, obtaining PAN card, industrial laws, etc. These laws are at different levels of our federal structure: national, state and municipal. The issues faced here are (i) registration on multiple government department portals/offices; and (ii) lack of time limit on the department to approve or reject the application.
Getting GST registration is an absolute necessity for any business. Along the lines of cooperative federalism, governments should develop GST portal into a single window for obtaining all the relevant approvals. GST registration already records the core business of the person: ‘Manufacturer’, ‘Trader’ or ‘Service Provider and Others’. It also contains annual turnover data in Table 5 of GSTR 9C. So, the option to apply for PLI scheme can be enabled on the GST portal. Such a system would be far more effective if there was a single point of interaction with the government: from application to issuance of approval. The Central Government has already launched the National Single Window System (NSWS) in September 2021 however this platform has some shortcomings: (i) it is an advisory tool to identify approvals based on user input and is to be used for guidance purpose only[13]; (ii) the applications for which it does accept approvals are forwarded to the respective ministries/departments[14].
Directorate General of GST Intelligence (“DGGI”) has been demanding GST on based on reverse charge mechanism (RCM) from the businesses who have obtained a statutory approval from government / governmental authorities / government bodies. The government also omitted a slew of exemptions under the Notification No. 12/2017-CT(R)[15] to enable this. Additionally, GST considers activity of the Central Government, State Government or any local authority in which they are engaged as public authorities to be “business”[16].
Calculating the taxable value in such transactions and the time and method to discharge such liability is itself a complex exercise. There are no guidelines for the department in this regard. Even though the payment of GST under RCM on such services may be revenue neutral, this will heavily impact the cash flow of the business as on date.
The government may allow exemption on governmental approvals for manufacturers who have received acknowledgment of receipt of application from the PMA. The GST may become payable if the application is not finally accepted.
When a foreign company invests in India, it often relies upon its parent company for technical know-how, seconded employees and other intellectual property like brand name. The DGGI frequently raises demand of RCM liability on such Indian entities alleging import of services. Recently such demands have been raised on Infosys and domestic arm of various airlines.
This issue in particular highlights the disconnect within the department itself because CBIC has already issued Circular No. 210/4/2024-GST dated 26.06.2024 which provided that under Rule 28 of the CGST Rules when the foreign affiliate provided certain services to the related domestic entity, then the value of such services may be deemed to be Nil.
However, despite such circular, the DGGI continues to issue notices on this point on the ground that one of the two conditions to avail this circular is not fulfilled: full ITC is not available to the related domestic entity to whom notice has been issue. Further, the ad hoc style adopted by CBIC, specially to solve the issue of invoices reflects poorly on the domestic tax regime. GST Council had the opportunity to conclusively clarify the meaning of ‘full credit’ in Circular 210. The GST Council rather limited itself to exempting the import of certain services by the airlines from foreign related parties[17] and then the CBIC issued two circulars[18] on the same issue.
As a result, the disputed issue still stands open for action by the department creating apprehensions in the minds of PLI investors who are expected to invest millions in manufacturing.
In January 2022, the Prime Minister in his speech at the World Economic Forum, Davos Summit, announced that India is moving ahead with the spirit of Make in India, Make for the world[19]. Full realisation of this dream would involve not just capacity building but also competitive pricing. Delay or denial of refund increases the tax burden on the exporter-manufacturer. If the value of the export goods increases and are not sold as a result, the purpose of reimbursing the cost of eligible products under PLI schemes would be defeated.
For refund, CGST Rules contains two provisions: Rules 89 (refund of unutilised credit when exports made ‘under Letter of Undertaking’) and Rule 96 (rebate of on exports are made ‘with payment of IGST’).
Both Rule 96(10) and Rule 89(4A)/(4B) contained restricts as to refund for beneficiaries of schemes like advance authorisation. These provisions were amended multiple times and were bitterly contested by the government even upto the Supreme Court. Due to this, legitimate refund claims were withheld and sometimes even adjusted against arbitrarily tax demand without any notice. Finally based on the recommendation of the 54th GST Council Meeting, these provisions were finally deleted from the CGST Rules on 08.10.2024. However, the issue still stands alive for the period prior to such omission. Further, Rule 89 limits the turnover of zero-rated supply of goods to be maximum of 1.5 times the value of like goods domestically supplied by the same or, similarly placed supplier. While this provision has already been held to be unconstitutional by a High Court,[20] it continues to be in the statute creating a legal uncertainty.
If a PLI beneficiary relies upon this decision and later it is overruled by the Supreme Court, it may be vulnerable to demand of refund of incentives disbursed to it.
To get the desired results from the PLI schemes it is imperative that the government broadens their vision and PLI should not be limited to incentives but should create an incentive ecosystem, ultimately reducing the costs and increasing the production. Taxes paid by businesses are a massive cost to the business. Tax mechanisms should be intertwined with the PLI in such a way that frictions like cascading, non-availability of credit, multiple compliance windows etc. reduce the tax burden. Unpredictable tax position and compliances discourage investors, and the capital flees to other jurisdictions. It is apposite that compliances in PLI and GST are aligned and at the earliest PMA considers adopting the turnover / valuation, registration, forms etc. as per the GST framework.
[1] As share of overall GVA at current prices as per Economic Survey 2023-24
[2] Press Note dated 02.08.2023 of Ministry of Commerce & Industry
[3] Sr. No. 5 of Schedule III of the CGST Act, 2017
[4] Chief Commissioner Of Central Goods and Service Tax vs. M/s Safari Retreats Private Limited [TS-622-SC-2024-GST]
[5] Para 52 of Safari Retreats (supra): “This Court held that if it is found on facts that a building has been so planned and constructed as to serve an assessee’s special technical requirements, it will qualify to be treated as a plant for the purposes of investment allowance.”
[6] Section 73/74 of the CGST Act or Section 74A for supply pertaining to FY 2024-25 or later.
[7] Section 130 of the CGST Act.
[8] Central Board of Indirect Taxes & Customs.
[9] Statement of Objects and Reasons (CGST Bill, 2017).
[10] Section 9(2) of the CGST Act.
[11] Schedule III of Notification No. 1/2017-Central Tax (Rate) dated 28.06.2017
[12] Circular No. 173/05/2022-GST
[13] https://www.nsws.gov.in/about-us
[14] https://www.nsws.gov.in/faqs
[15] Partial omissions from Sr. No. 6 and complete omission of Sr. Nos. 26, 32, 33, 47A and 51
[16] Section 2(17)(i) of the CGST Act.
[17] Sr. No. 10L – Notification No. 08/2024-Integrated Tax (Rate) dated 08.10.2024
[18] Circular No.234/28/2024-GST and Circular No.236/30/2024-GST both dated 11.10.2024
[19] Press Information Bureau, Delhi, ‘English translation of PM's 'State of the World' address at World Economic Forum's Davos Summit’ dated 17.01.2022.
[20] Tonbo Imaging India vs. Union of India 2023 (4) TMI 46 – Karnataka High Court.
CBIC vide an instruction dated 05.11.2024 has amended the Instruction F. No. 390/Misc/3/2019-JC dated 21.08.2020. The amendment has deleted the paragraph which allowed personal hearing through virtual mode only at the request of the assessee.
The effect of such amendment is that personal hearing of all adjudication and appellate matters will now be done only though virtual mode. Physical hearing to be granted only on request of the assessee in rare cases and after recording the reason for it. It may be noted that this has been issued by the CBIC and may not be applicable to the SGST departments, unless a corresponding instruction is issued by them. The process to be followed will be as under:
GSTN has issued an advisory on the waiver/amnesty scheme under Section 128 of the CGST Act. The advisory states that forms GST SPL-01 and GST SPL-02 are under development and will be available on the portal in January 2025.
It advises that, in the meanwhile, the taxpayers may pay the amount of tax demanded under Section 73 on or before 31.03.2025. Inc case of notices, such tax may be paid under the “payment towards demand” facility through DRC-03. In case of demand orders, payment may be made through DRC-03 and then such DRC-03 may be linked with the demand order though form DRC-03A. Payment and linking facility is already available on the portal.
It may be noted that Table 4 of form SPL-01 requires details of the DRC-03 though which tax demand has been paid by the beneficiary of the waiver scheme.
The Hon’ble Madras High Court has held that an assessee, while filing appeal against a demand order, can used the Electronic Credit Ledger to make the statutorily requisite pre-deposit.
The petitioner is a manufacturer and was issued a show cause notice on the grounds of tx liability difference between GSTR-1 and GSTR-3B filed for the period 2017-18. After an adverse order was passed against him, he filed an appeal against it under Section 107 of the CGST Act. While making the pre-deposit as required under sub-section (6), the petitioner chose to make it through his Electronic Credit Ledger and subsequently also filed the physical copies of the appeal.
The filing of the appeal was, however, not accepted by the department and a deficiency mem was issued to him stating that pre-deposit has to be made by debiting the Electronic Cash Ledger only within 7 days of the receipt of the deficiency memo. The petitioner challenged this memo and also prayed for upholding the validity of pre-deposit already made by him.
The High Court rejected the contentions of the department on the grounds that Electronic Credit Ledger and the amount available in the Electronic Credit Ledger can be utilized only for the purpose of payment towards output tax in terms of Section 49(4) of TNGST Act and in terms of Section 107(6) of TNGST Act, if 10% of the disputed tax has to be paid, it means that such deposit is made only towards discharging liability of output tax.
The Court also observed that under Section 49B of the CGST Act, government has the power to prescribe the order and manner of utilisation of the ITC on account of IGST, CGST, SGST or UTGST, towards payment of any such tax. In line with such provision, CBIC has issued Circular No. 172/04/2022-GST dated 06.07.2022, wherein it has been clarified that any payment towards output tax, can be made by utilization of the amount available in the electronic credit ledger. This payment can be made whether in terms of self-assessment in the return or as a consequence of any proceeding instituted under the provisions of GST Laws. Further, filing of APL-01 provides for the mechanism to pay pre-deposit by utilizing Electronic Credit Ledger as well.
W&B Comments: This question has already been decided by the Hon’ble Bombay High Court [Oasis Realty Vs. Union of India reported in 2023 (71) GSTL 158] and Hon’ble Patna High Court [Raiyan Traders Vs. State of Bihar reported in 2024-VIL-978 (Patna High Court)]. However, Hon’ble Orissa High Court [Jyoti Construction Vs. Dy. Commissioner of Central Tax & GST, Jaipur reported in 2021 (54) GSTL 279] has ruled that pre-deposit cannot be considered ‘output tax’ under Section 2(82). Since, GST is a country-wide law, the precedence value of judgments is pan India. Now that 3 High Courts have ruled in favour of the assessee and there is also a department circular, the issue should no longer be raised by the GST authorities.
In this case, the High Court has highlighted the importance of following the proper statutory process.
Notice was issued to the assessee under Section 61 of Punjab GST/CGST Act, 2017 was issued for scrutiny of the return to explain and prove the genuineness of the ITC claimed on the purchases, alleging that during the period 2017-18, the firm had claimed ITC from four different firms, whose registration had already been cancelled.
The petitioner replied to the notice and his reply was found to be satisfactory and such satisfaction was communicated by the department vide form ASMT-12 dated 28.02.2023. Simultaneously and prior to it, the petitioner was also served with a pre-show cause intimation under Rule 142 (1) (A) in Form GST DRC 01A dated 23.02.2023, stating that demand is payable as reply to the notice under Section 61 in Form ASMT-10 of GST Act, 2017 was not found to be satisfactory.
Following the pre-show intimation, show cause notice was issued under Section 74 of the CGST Act on the very same ground of genuineness of ITC availed from registration cancelled suppliers. Petitioner replied to the SCN and submitted that proceedings had already been dropped vide ASMT-12. However, order confirming the demand, interest and penalty was passed.
The petitioner submitted that once the notice under Section 61 stood dropped, the Proper Officer could not have proceeded further under Section 74. The respondents countered on the ground that no documentary evidence has been submitted by the petitioner in response to proceedings under Section 74(5).
The Court, ruling in favour of the petitioner, observed that initiating proceedings under Section 74 are that the concerned officer should reach to a conclusion that the ITC has been wrongly availed or utilized by reason of fraud or any wilful mis-statement or suppression of facts to evade tax. The Court observed that two different views have been expressed by the same Proper Officer, one while intimating the liability under Section 74(5) on 23.02.2023 and the other by subsequently dropping the proceedings under Section 61(2) on 28.02.2023. Therefore, it can be presumed that after the notice was given under Section 74(5) of the Act, the Authority has reached to the conclusion that no additional demand is payable/chargeable and therefore, the proceedings stand dropped.
W&B Comments: Under the GST regime, the assessees have faced several absurd actions from the department and the reply and clarifications submitted by the assessees as to any patent defect and error has little effect on the department which proceeds to confirm the demand. This judgment clarifies that once the department has formed a view and such view has been communicated vide a statutory process, the department cannot again initiate action based on a divergent view. This also demonstrates lack of robust IT system wherein a second proceeding qua the same FY and for the same issue cannot be initiated where any previous proceeding in respect of the same subject matter is pending for adjudication.
In this ruling, the Hon’ble Delhi High Court addressed the validity of the show cause notices issued to various companies demanding GST liability on supply of manpower service by the overseas group company to the Indian subsidiaries (petitioners).
While the contest was initially on the issue of whether of not there is secondment of employees during the pendency of the matter before the Court, the CBIC issued Circular No.210/4/2024-GST dated 26.06.2024 on this point. The petitioners later, sought to rely upon this clarification.
The main petitioner is registered in three states, under the CGST Act and entered into individual employment agreements with the employees of its parent entity in Japan, making such people the employees of the petitioner.
The respondents submitted that secondment of employees is a common global practice and the total consideration given to the persons on temporary deputation in India will be considered for valuation of taxable value. They submitted that the show cause notices and demand therein are valid because such persons are not in an employee-employer relationship. Hence GST shall be levied, along with interest and penalty under Section 73 of the CGST Act.
The petitioners submitted that this transaction does not attract levy of GST, replying upon the landmark judgment of the Hon’ble Supreme Court in CCE & Service Tax vs. Northern Operating Systems (P) Ltd.(2022) 17 SCC 90. As per the petitioners, the Supreme Court had held that transactions in which an overseas entity had seconded employees to an Indian entity and then charged the employees’ salaries borne by the Indian company in the form of reimbursement, then the same would qualify as manpower supply by the overseas group company and only then will be subject to levy of GST.
The petitioners further submitted that the show cause notices would not sustain based on the provisions of second proviso to Rule 28 read with para 3.7 of Circular No.210/4/2024-GST. The effect of this combined reading will be that value of import of services will be deemed to be ‘Nil’ when services have been received from a foreign related entity but no invoice has been raised by the domestic recipient entity.
The Court observed that while the payments have been made by the petitioners, as alleged in the counter affidavit of the respondents, the petitioners did not raise any invoices on such payments. Considering this, it cannot be argued that any tax is payable once the value of a supply has been deemed to be ‘Nil’. The Court touched upon the correctness of the Circular in respect of the intent of the Second Proviso to Rule 28, but observed that the Court has to deliver the judgment as per the Circular. The Court held the show cause notices to be futile and quashed the notices and also orders, if any, consequently passed. One of the petitioners, Sony India, had paid the tax but the department order imposed penalty and interest on Sony. The Court held that Sony India shall stand absolved of all tax liabilities, in light of such circular.
power of officers of the Directorate General of Intelligence (‘DRI’) to issue show cause notice under Customs Act, 1962.
W&B Comments: This judgment shall be a relief for those parties which are being relentlessly pursued by the DGGI for payment of GST by RCM on import of services. In this judgment, the Court did not go into the merits of the matter and the ruling of the Supreme Court in Northern Operating Systems was not relied upon by the Court. The Supreme Court judgment had ruled that taxability would depend upon the reading of the agreements to establish whether there is an employer-employee relationship or principal to principal relation between overseas company and the Indian company. The Delhi High Court rather than going into this question or the terms of the agreement, allowed the writ petition simply based upon the Circular coupled with the fact of non-issue of invoice by Indian entity, even while doubting its validity in relation to Rule 28.
’Commissioner of Customs vs. Canon India Pvt. Ltd.
[Order dated 07.11.2024 in Review Petition No. 400 of 2021 in Civil Appeal No. 1827 of 2018]
Review Petition: The Central Government issued various notifications to appoint and designate the officers of Directorate General of Intelligence (“DRI”) as “officers of customs”. In exercise of such purported powers the DRI offices issued show cause notices under the Customs Act, 1962 (“the Act”) and possession of such power by the DRI officers was also clarified by the Central Board of Excise and Customs (“CBEC”) vide its Circular No. 4/99-Cus dated 15.02.1999. A three-judge bench of the Hon’ble Supreme Court in Canon India [2021 (376) E.L.T. 3], had held that the DRI officers do not have power to issue show cause notice as such notices can only be issued by “proper officers” who had assessed and cleared goods during clearance and not by any other officers. This judgment relied upon an earlier judgment of the Supreme Court in Sayed Ali [(2011) SCC 537], in which the Court linked Sections 17 and 28 of the Act and had held that Commissioner of Customs (Preventive) is not a “proper officer” as defined in Section 2(34) of the Customs Act, 1962 (“the Act, 1962”) and therefore did not have the jurisdiction to issue a show cause notice. The department filed review petition against Canon India on the grounds that there is an error apparent on the face of record.
Amendment: Following the judgments in Sayed Ali and to nullify its effect, the Central Government had issued Notification No. 44/2011-Cus (NT) dated 06.07.2011 and amended Section 28 of the Act vide Customs (Amendment & Validation ) Act, 2011 (“Validation Act, 2011”). Similarly, after Canon India, Finance Act, 2022 inserted Section 110 and amended sections 2,3 and 5 of the Act. Section 97 of the Finance Act, 2022 retrospectively validated the show cause notices with effect from 01.04.2022.
Challenge to the Amendment: Subsequently, Section 28(11) of the Act was challenged before the Hon’ble Bombay High Court and Hon’ble Delhi High Court in Sunil Gupta [2015 (315) E.L.T. 167] and Mangali Impex [2016 (335) E.L.T. 605], respectively. While the Bombay High Court upheld the validity of the provision, the Delhi High Cout declared it to have not given the power. The department filed appeal against the judgment of Mangali Impex.
Now, in its judgment dated 07.11.2024, the Hon’ble Supreme Court dealt with three clusters of matters:
It was contended by the department that since the issue in Canon India and Mangali Impex are same, the review petition and the appeals be heard together.
With the insertion of Section 110AA in the Act, the legal position w.e.f. 01.04.2022 is that a show cause notice under Section 28 of the Act, 1962 can only be issued by that "proper officer" who has been conferred with the jurisdiction, by an assignment of functions under Section 5 of the Act, 1962, to conduct assessment under Section 17 of the Act in respect of such duty. Hence the dispute in the present judgment relates to period prior to 01.04.2022.
Rule 96(10) of the CGST Rules places restriction on the exporters from availing dual benefits by simultaneously claiming IGST exemption on imports made under Notification Nos. 78/2017 and 79/2017- Cus both dated 13.10.2017 (“Notification No. 78/79”) and paying IGST on exports through Input Tax Credit with the intention of claiming a refund of the said IGST amount under Section 54 of the CGST Act read with Rule 89 of the CGST Rules.
Vide Notification No. 20/2024-Central Tax dated 08.10.2024, Rule 96(10) has been omitted with effect from 08.10.2024.
The Court observed that when a review petition is filed under Order XLVII of the Supreme Court Rules, 2013, it will be entertained only when it fits in one of the grounds mentioned in Order 47 Rule of the Code of Civil Procedure (CPC). The three grounds so available are: (i) discovery of new and important matter or evidence which was not within the knowledge of the petitioner or could not be produced by him at the time when the decree was passed or order made; (ii) mistake or error apparent on the face of the record; or (iii) any other sufficient reason. Of the three grounds, the Court held that the present case would fall under “any other sufficient reason”. Such sufficient reason should be something analogous to other grounds specified in the rules.
Relying upon, a catena of judgments the Court observed that when a court disposes of a case without due regard to a provision of law or when its attention was not invited to a provision of law, it may amount to an error analogous to one apparent on the face of record sufficient to bring the case within the purview of Order 47, rule 1 of the CPC.
As per the Court, the following legal provisions were not brought to the attention of the Court in the Canon India judgment:
Issue -wise analysis of the judgment is as follows:
(1) Whether the DRI has power to issue show cause notice under Section 28 of the Act?
(2) Whether the introduction of Section 28(11) which retrospectively validates the show cause notices issued under Section 28 with effect from 06.07.2011, is discriminatory and arbitrary for not curing the defect highlighted in Sayed Ali? Whether the judgment delivered by the High Court of Delhi in the case of Mangali Impex expounds the correct interpretation of Section 28(11)?
(3)Whether Section 97 of the Finance Act, 2022, which retrospectively validates the show cause notices with effect from 01.04.2023, is manifestly arbitrary and therefore, violative of Article 14 of the Constitution of India?
The respondents challenged the validity of Section 97 of the Finance Act, 2022 on three grounds:
The Supreme Court made the following observations on challenge to Section 97 of Finance Act, 2002:
(4) The Court also held that the findings of the Court in Canon India in respect of the show cause notices having been issued beyond the limitation period remain undisturbed.
In light of the judgment of the Court, it was ordered that the matters be disposed of in the following manner:
| Sr. No. | Conditions | Manner of disposal |
| 1. | Show cause notice issued u/s 28 and challenged before the High Court by a writ petition | High Court to dispose the writ petition as per observations of the present judgment and restore such notices for adjudication by the proper officer under Section 28. |
| 2. | Writ petition, challenging the show cause notice has been disposed of by the High Court and appeal has been preferred before the Supreme Court against order of the High Court | Supreme Court to dispose the writ petition as per observations of the present judgment and restore the impugned notice for adjudication by the proper officer under Section 28. |
| 3. | OIO passed by the adjudicating authority u/s 28 has been challenged before the High Court on the ground of lack of jurisdiction of the proper officer to issue show cause notice | High Court shall grant eight weeks’ time to the respective assessee to prefer appropriate appeal before the CESTAT. |
| 4. | Writ petition impugning order has been disposed of by the High Court and appeal has been preferred against it before the Supreme Court | Supreme Court to dispose the writ petition as per observations of the present judgment and grant eight weeks’ time to the respective assessee to prefer appropriate appeal before the CESTAT. |
| 5. | Order of CESTAT challenged before Supreme Court or the High Court on the ground of lack of jurisdiction of the proper officer to issue show cause notices | Supreme Court or the High Court shall dispose of such appeal or writ petition in accordance with the present judgment and restore such notices to the CESTAT for hearing the matter on merits |
| 6. | Appeals against the OIO involving issues pertaining to the jurisdiction of the proper officer to issue show cause notices are pending before the CESTAT | Shall now be decided in accordance with the observations made in the present judgment. |
The jurisdiction of DRI officers to issue show cause notices is a long standing issue and show cause notices issued many years back have been in a suspended mode for a prolonged period due to the lack of clarity. While the judgment in Canon India (2021) appeared to have given the assesses a well-deserved relief, the issue of notice by the Supreme Court vide order dated 19.05.2022 [2022 (380) E.L.T. 529] in a review petition filed by the department, had a ripple effect across the country.
Based on such notice, the Hon’ble Bombay High Court, for instance, vide order dated 06.06.2023 in Idea Cellular, put a stay on the order based on show cause notice issued by the DRI. Following this, all the aggrieved assesses rushed to the High Court and sought identical relief. However, now that the issue has been so exhaustively dealt with and decided in favour of the department, there are two possibilities going forward. First, the assessee fights the case on merits and takes the statutory appellate route, which may be difficult for the assessee as well as the department due to the long interregnum. Second route could be to challenge the order on the grounds of long delay after issuance of show cause notice or that the show cause notice was issued after the expiry of period of limitation from the relevant date. Not all cases may fit such conditions.
It is also noteworthy that the submission of the respondents, that challenge to Section 97 of the Finance Act, 2022 should be separately dealt with and not in a review petition, has not been categorically answered in the judgment. In this context, it will be interesting to see if a review petition is preferred by the assesses against the order upholding the vires of the validating act.
We hope you have found this information useful. For any queries/clarifications please write to:
Prateek Bansal, Partner, Email – prateek.bansal@whiteandbrief.com
Disclaimer: The information contained in this document is intended for informational purposes only and does not constitute legal opinion or advice. This document is not intended to address the circumstances of any individual or corporate body. Readers should not act on the information provided herein without appropriate professional advice after a thorough examination of the facts and circumstances of a situation. There can be no assurance that the judicial/quasi-judicial authorities may not take a position contrary to the views mentioned herein.
Rule 96(10) of the CGST Rules places restriction on the exporters from availing dual benefits by simultaneously claiming IGST exemption on imports made under Notification Nos. 78/2017 and 79/2017- Cus both dated 13.10.2017 (“Notification No. 78/79”) and paying IGST on exports through Input Tax Credit with the intention of claiming a refund of the said IGST amount under Section 54 of the CGST Act read with Rule 89 of the CGST Rules.
Vide Notification No. 20/2024-Central Tax dated 08.10.2024, Rule 96(10) has been omitted with effect from 08.10.2024.
The validity and legality of the restriction under Rule 96(10) has been challenged before various High Courts on the basis that:
The Hon’ble Kerala High Court vide its Order dated 10.10.2024 in Sance Laboratories Ltd. has held Rule 96(10) of the CGST Rules to be ultra vires Section 16 of the IGST Act and violative of Article 14 of the Constitution of India. The observations made by the Court, in brief, are as follows:
In writ petitions contending similar grounds, the Hon’ble Punjab & Haryana High Court vide its Order dated 08.04.2024 in Arjan Impex Pvt. Ltd. and Order dated 24.02.2023 in Glassco Laboratory
Equipments has granted an interim stay qua recovery proceedings in the Writ Petition challenging the restriction under Rule 96(10) of CGST Rules. Further, the Court has also granted stay vide a series of orders dated 28.04.2023, 28.07.203 and 07.08.2024 in Electronic Instrumentation, Punjab Chemicals and Crop Protection Ltd., and Avanti Overseas Pvt Ltd. respectively.
The Hon’ble Bombay High Court vide its Order dated 27.01.2021 in Prashi Pharma Private Limited, where the vires of the restriction under Rule 96(10) have been challenged, has granted interim relief qua recovery of IGST refund till the next date of hearing. The Writ Petition challenging legality of Rule 96(10) as being violative of Article 14, is also pending consideration before the Hon’ble Bombay High Court in Watson Pharma Private Limited.
Similarly, the Hon’ble Gujarat High Court vide its Order dated 08.09.2021 in Mayur Woven Pvt. Ltd. and Order dated 15.09.2021 in Parikh Enterprises has stayed the recovery and coercive actions in the Writ Petitions challenging the vires of Rule 96(10).
The Hon’ble Madras High Court in Comstar Automotive Technologies Pvt. Ltd. has also admitted the Writ challenging the arbitrary restriction as ultra vires Section 16 of the IGST Act.
While various notifications were issued / rescinded in respect of Rule 96(10), the last Notification No. 54/2018-Central Tax dated 09.10.2018 finally imposed the restriction, which is applicable as on date. It is pertinent to note that this amendment was not given retrospective effect, rather the said Notification was made effective from the date of its publication in the Official Gazette i.e. 09.10.2018. This position was further clarified vide Circular No. 125/44/2019-GST dated 18.11.2019 (“Circular No. 125”) issued by the Central Board of Indirect Taxes and Customs (“CBIC”) wherein it was stated that restriction under Rule 96(10) would be applicable prospectively w.e.f. 09.10.2018.
There has been a continuous dispute with respect to the date from which the restriction under Rule 96(10) is applicable. The GST Department has issued slew of demand notices seeking to enforce Rule 96(10) from 23.10.2017, i.e. the date on which first amendment notification was issued. These demand notices are chiefly premised on the Hon’ble Gujarat High Court’s order dated 20.10.2020 in Cosmo Films Pvt. Ltd. wherein it was observed that Notification No. 54 would become applicable retrospectively from 23.10.2017.
The order in Cosmo Films Pvt. Ltd. has now been reviewed by the Gujarat High Court vide its order dated 19.09.2024, wherein the mistake apparent on record has been rectified and it has been correctly held that Notification No. 54/2018 is not applicable retrospectively from 23.10.2017 but instead from 09.10.2018. Further, the Writ Petition in Zaveri and Co. Pvt. Ltd. had previously been disposed by the same High Court as being infructuous on the basis that Notification No. 54 has been made applicable prospectively, and therefore, the grievance qua retrospective application of the said provision does not survive. Therefore, it is clear that the restriction prescribed under Rule 96(10) of the CGST Rules is applicable prospectively from 09.10.2018 to 08.10.2024.
The GST authorities have launched investigations in respect of the refunds received by the exporters upon payment of IGST. Upon summons / search / seizure, the said proceedings have been culminated into show cause cum demand notices thereby seeking recovery of the allegedly erroneous refunds. Thereafter adverse orders have been passed by the Adjudication Authority and the First Appellate Authority. Filing of second appeal before the GST Appellate Tribunal will require additional 10% pre-deposit through cash. However, the Tribunal is not yet functional.
The demand orders are chiefly based on the order of the Gujarat High Court dated 20.10.2020. However, the said order has now been reviewed vide another order dated 19.09.2024 of the same High Court, holding that Notification 54/2018 is applicable prospectively from 08.10.2018. Now, that the Hon’ble Kerala High Court has held Rule 96(10) to be invalid, a Writ Petition may be preferred before the jurisdictional High Court, challenging the said demand as being legally untenable on the basis that Rule 96(10) [as was applicable during the relevant period] was ultra vires the CGST Act and the Constitution of India. In the event, the demand pertains to the period prior to 09.10.2018, an additional plea may be taken to challenge the said demand as being without jurisdiction.
We hope you have found this information useful. For any queries/clarifications please write to
Prateek Bansal, Partner, Email – prateek.bansal@whiteandbrief.com
Disclaimer: The information contained in this document is intended for informational purposes only and does not constitute legal opinion or advice. This document is not intended to address the circumstances of any individual or corporate body. Readers should not act on the information provided herein without appropriate professional advice after a thorough examination of the facts and circumstances of a situation. There can be no assurance that the judicial/quasi-judicial authorities may not take a position contrary to the views mentioned herein.
In the present case, the Hon’ble Bombay High Court dealt with a case whereby such a gross violation of natural justice of the taxpayer has happened that the court observed that the assessment order is vitiated by legal mala fides and imposed a cost of Rs. 50,000/- on the respondents (department).
Petitioners No. 1 and No. 2 (‘P1’ & ‘P2’) (both foreign companies) had entered into an agreement with Petitioner No. 3 (‘P3’) for the right to use of their IPR in India, with effect form 01.01.2013. All three companies are group companies. On 05.05.2023, for the first time ever, notice was issued to P1 & P2 regarding this agreement from the MVAT department, seeking to levy VAT on the value of ‘royalty’ payments made to them by the P3 against the license to use IPRs and technical know-how. Representative of P1 & P2 appeared before the concerned officer and sought extension of time, which was orally granted, informing the Representative that next date will be notified.
Without any such notification, on 01.07.2023, P3 was served with three assessment orders, for FY 2013-14, 2014-2015 and 2015-2016. For FY 2013-14 and 2014-2015, no notice ever served on any of the petitioners. One of the orders also appeared to be back dated to the Court since the time limit to pass order had expired.
The Court observed that normally in cases of violation of natural justice, the matters are remanded, but the present case involves such flagrant breach of statutory provisions of Section 23(4) of the MVAT Act and legal mala fides that the orders will have to be quashed. It was observed that though the interest of revenue is vital, such interest cannot override considerations of probity and fairness in tax governance. The Court observed that remanding the present case and to allow department a further period of 24 months, under Section 24(7), to pass the order would not be inappropriate. The Court also imposed a cost of Rs. 50,000/- to be paid by the Respondents to the Petitioners within 2 months.
W&B Comments: Under the present GST regime, almost every taxpayer has faced some form of natural justice violation primarily due to notices/orders served in blank notified form or lack of reason due to haste to meet the limitation deadline. Usually, in such cases it was the taxpayer who has to be cautious not to approach the High Court prematurely. However the present case, makes it clear that actions of the department which flagrantly violate principles of natural justice cannot be ignored on the pretext of “interest of revenue” and the statutory provisions cannot be bent to recover tax, once the limitation has expired and the appropriate provisions have not been invoked.
The Hon’ble Telangana High Court in this matter examined a GST dispute arising under the Integrated Goods and Services Tax Act, 2017 (hereinafter referred to as the “IGST Act”) and the Central Goods and Services Tax Act, 2017 (hereinafter referred to as the “CGST Act”) along with the Telangana State Goods and Services Tax Act, 2017 (hereinafter referred to as the “TSGST Act”).
The petitioner challenged the show cause notice issued under the CGST/TSGST Act despite having paid GST under the IGST Act. The petitioner claimed to have paid INR 93 crores as GST under the IGST Act. However, the GST Department issued a show cause notice dated 16.03.2024 under the CGST/TSGST Act, demanding the tax to be paid on the same transaction, under the latter. The petitioner contended that similar payments under the IGST Act had been accepted in other cases and that he was being subjected to discriminatory treatment. Moreover, the petitioner sought exemption from the statutory requirement of depositing 10% of the disputed tax before filing of the appeal.
The Hon’ble Court’s ruling addressed two critical aspects:
The petitioner submitted documentary evidence showing that the tax authorities had accepted payments under the IGST Act in comparable circumstances. The Court observed that points raised in the petitioner’s reply to the show cause notice, including the claim of discriminatory treatment, had not been fully addressed by the department. This formed the basis for the Court’s direction to allow the petitioner to file an appeal.
The Hon’ble Court granted the petitioner relief from the 10% deposit requirement, directing the competent appellate authority to consider the appeal on merits even in the absence of such deposit.
The Court also directed the GST authorities not to take any coercive steps against the petitioner pending the appeal. The Court ruled that the final outcome of the appeal would determine whether the tax liability falls under the IGST Act or the CGST/TSGST Act.
W&B Comments: The Hon’ble Telangana High Court’s decision sets an important precedent for businesses where tax has been paid in respect of one transaction but the department is seeking to levy another tax in respect of the very same transaction by recharacterizing the said transaction. Reference in this regard may be made to Section 19 of the IGST Act r.w. Section 77 of the CGST Act by virtue of which refund of the tax earlier paid be granted post which the assessee would become liable to pay another tax in respect of the same transaction.
As regards the requirement of mandatory pre-deposit is concerned, this judgment underscores the extraordinary writ jurisdiction of the high court under Article 226 of the Constitution, so as to make way for the extraordinary circumstances despite the clear letter of law. Given that the payment of pre-deposit is a mandatory pre-condition for lodging appeal on the GST portal, pursuant to this judgment it is likely that the said appeal would be required to be filed physically with the appellate authority.
The Authority for Advance Ruling, Rajasthan in its order dated 258.06.2024 in RAJ/AAR/2024-25/10, examined the time of supply and the correct manner of payment of GST in case where corporate guarantee has been given by a foreign related company to the banks and financial institutions in respect of loans taken by the India company.
The loans of the Applicant (Indian company), in this case were guaranteed by its related foreign company. The guarantee is valid from the effective date of Deed of Guarantee and the final settlement date. The Applicant relied upon Section 2(33) of the CGST Act r.w. Section129 of the Indian Contract Act, 1872 and the judgment of Hasan Ali vs. Waliullah AIR 1930 All 730, to argue that “supply” occurs only once when the deed of guarantee is entered into and since there is no actual payment nor periodic payment by the applicant, there is no continuous supply and the Applicant is only required to make the payment only once. The Applicant drew parallels with other sectors like insurance and transfer of know-how. The payment of 1% GST has to be paid either at once or as an average over a period of time with the total GST never increasing beyond 1% of the guaranteed value.
The Ld. AAR relied upon 2nd proviso to Section 13(3) and held that the time of supply of service would be the date when the transaction is entered in the books of accounts. In respect of valuation, it was held that if the contract is executed prior to 26.10.2023, GST will be payable as per Rule 28(1) of CGST Rules. But if the contract is executed after 26.10.2023, GST will be payable as per Rule 28(2), under RCM on 1% of the deemed value of loan.
W&B Comments: The ruling of the AAR is in accordance with clarification at Sr. No. 1 of Circular No. 225/19/2024-GST dated 11.07.2024 issued by the CBIC.
In a significant ruling, the Hon’ble Supreme Court of India addressed the constitutional validity of exceptions under clauses (c) and (d) of Section 17(5) of the CGST Act.
The appeal resulted from the construction of a shopping mall by Safari Retreats, which claimed ITC on the goods and services used for the construction. It was argued that since the mall was let out for commercial purposes, they should be allowed to claim ITC against the rent received.
The Court addressed the issue whether the denial of ITC in such cases was constitutionally valid and whether the definition of “plant and machinery” in Section 17 will also apply to “plant or machinery” in Section 17(5)(d).
The Hon’ble Supreme Court made the following observations:
Section 17(5)(d) does not exclude all immovable properties from ITC eligibility. ITC is available for the construction of “plant or machinery.” Whether a building is a “plant”, is a question of fact.
The term "plant" is not defined under the GST laws. The Supreme Court applied the functional test to determine whether a building can be considered a "plant." If a building is constructed for technical requirements, it can qualify as a “plant”. If the building is used for personal use or as a site of business, ITC will not be available.
Section 17(5)(c) and (d) of the CGST Act does not violate the Constitution. Restrictions on ITC imposed under Section 17(5) are based on reasonable classification and have a rational nexus to the objectives of the CGST Act. Section 16(4) has also been held to be constitutional.
Under clause (c), the chain of credit breaks at the dividing line of ‘issuance of completion certificate or after its first occupation’. Ther is no such line in Clause 2 of Schedule II and hence in case of renting or leasing, the building may qualify to be a “plant”.
The expression ‘own account’ means: (i) construction is made for personal use and not for providing service, or (ii) construction is to be used as a setting in which business is carried out.
Matter has been remanded to the High Court to determine whether the shopping mall in question qualifies as a “plant” based on the functionality test.
W&B Comments: By recognizing that a building integral to business operations may qualify as a “plant,” the Court has opened the door for claiming ITC on GST paid during the construction of such buildings, where the construction directly contributes to service provision, such as leasing or renting.
Despite the Court recognizing that constructing immovable property for leasing or licensing falls under the first exception, it still proceeded to examine the second exception related to "plant or machinery" and remanded the matter to the High Court. This creates a grey area. The exception of "Other than own account" is broad enough to exclude all constructions intended for leasing or licensing, which should allow ITC for supplies used in such construction without requiring further tests.
The functional test adopted by the Supreme Court also appears subjective. The distinction between a building being a "mere setting" for business and a "means" of carrying out business is subtle. In our opinion, if a building is constructed with the intention of leasing, it should be viewed as the primary asset for the leasing business, making it a "means" for conducting that business and qualifying for ITC. If such functionality exists, ITC should not be blocked.
While the Supreme Court has upheld the constitutional validity of Section 17(5)(c) and 17(5)(d), its acceptance of the argument on the interpretation of “plant or machinery” is a positive development. But it requires case-by-case analysis using the functional test to determine ITC eligibility.
The GST enforcement authorities have been issuing multiple notices to several IT companies regarding remittances made by the Indian head offices to their foreign branches for services received from these branches. These transfers are being treated as ‘import of services’ for which authorities are demanding payment of IGST under RCM (Reverse Charge Mechanism). This has led to a wave of avoidable litigation and concerns for IT businesses with international operations regarding cross-border financial transactions within the same company.
Infosys SCN of Rs. 32,000 crores
Last month’s buzzing issue was when DGGI (Directorate General of Goods and Service Tax Intelligence) issued the show cause notice dated 30.07.2024, demanding ₹32,400 crore tax dues for five years, from FY 2017-18 to FY 2021-22, for services that Infosys received from its overseas branches. The notice stated that the adjudication proceedings are being initiated against Infosys due to non-payment of IGST for services that it has received from its overseas branches between July 2017 to FY 2021-22. As the company creates overseas branches to service clients as part of its agreements, those branches and the company are treated as ‘distinct persons’ under the IGST Act. Further it was stated in the notice that in lieu of receipt of supplies from overseas branch offices, the company has paid consideration to the branch offices in the form of overseas branch expenses. Hence, as per DGGI, Infosys was liable to pay GST under the RCM on supplies received from branches located outside India.
Later, after the representations made by Infosys to the department, the tax demand amounting to Rs. 3,898 crores for FY 2017-18 was dropped by the department. It was a clear case of mechanical issuance of show cause notice without application of mind. Ultimately, this back-and-forth by the department led to significant reputational damage to the company. Presently, the demand of Rs. 28,502 crores for FY 2018-19 to FY 2021-22 still looms over the company. The industry was expecting to receive some sort of clarification or relief from the GST Council in its 54th Meeting; however, no such relief was provided by the Council.
Mechanical issuance of notices by the Department
Interestingly, the IT companies have frequently been targeted by the department for issue of non-compliance with the GST provisions. The issuance of show cause notices has become quite prevalent in the IT industry, with the department issuing summon or initiating adjudication proceedings against the companies in even the smaller state jurisdiction offices across the country. For example, prior to the DGGI notice, in April this year only, Infosys faced a penalty amounting to Rs 1.46 lakh for the availment of ineligible input tax credit.
It's not just Infosys that has been targeted. In March, a show cause notice amounting to Rs. 387 crores was issued against LTIMindtree, the country’s sixth largest IT major, by the department for alleged non-payment of IGST on export turnover towards services provided to clients abroad. The company received a similar notice for another GST registration from the same authority. Over the past six to seven weeks, top IT companies, such as Tata Consultancy Services, Infosys, Tech Mahindra and LTIMindtree, have faced numerous penalties and tax orders from the GST departments across the country. These companies and their subsidiaries have got at least 21 penalty notices from GST offices in Punjab, Uttar Pradesh, Delhi, Visakhapatnam, Rajasthan, Bhubaneswar, Chennai, Bengaluru, and Mumbai. While the penalties and tax amount might not be significant – ranging from few thousands to some crores of rupees, which are very small amounts for these cash-rich firms – in almost all these cases, IT firms have declared the intent to contest the notices.
It can be observed that this surge in notices is also a fallout of the expansion of Indian IT services firms into smaller cities. For instance, between July and September so far, TCS has received six notices from five of its locations; Chennai, Goa, Visakhapatnam, Uttar Pradesh, Bengaluru. The highest order is from Visakhapatnam for Rs. 1.17 crore. Similarly, Infosys has also received six notices from Odisha, Chennai, Punjab, Bengaluru. While TechM has got seven notices, LTIMindtree has got two in the same time period.
The domestic entity and foreign affiliate of a same company are treated as separate persons under the GST laws and are thus separate legal entities. Therefore, as per Entry 4 of Schedule 1 of CGST Act, “the import of services by a personfrom a related person or from any of his other establishments outside India, in the course or furtherance of business.” is a supply under GST. The levy comes from the concept of deemed supply between related parties, invoking valuation method under Rule 28(1) of CGST Rules. The department has time and again questioned the invoice values, alleging it to be incorrect open market value, leading to violation of valuation rules and consequential issuance of demand notices.
The IT industry representatives sought clarification from the government on the valuation mechanism issue for this import of services, which led to the 53rd GST Council Meeting recommending clarification regarding the valuation of supply of import of services from the foreign affiliate to its domestic entity (related parties) where recipient is eligible to full input tax credit.
Consequently, the clarificatory Circular No.210/4/2024-GST dated 26.06.2024 (“Circular”) was issued to clarify that in cases where the foreign affiliate is providing certain services to the related domestic entity, for which full input tax credit is available to the said related domestic entity, the value of such supply of services declared in the invoice by the said related domestic entity may be deemed as open market value in terms of second proviso to Rule 28(1) of CGST Rules. Further, in cases where full input tax credit is available to the recipient, if the invoice is not issued by the related domestic entity with respect to any service provided by the foreign affiliate to it, the value of such services may be deemed to be declared as Nil, and may be deemed as open market value in terms of second proviso to Rule 28(1) of CGST Rules.
If we go into the merits of the proposed GST demands, there is a clear violation of the Circular by the department literally within the next week after its issuance. It is a settled position in law that the circulars issued by CBIC are binding on the department, hence the non-compliance of the Circular can also be contested by the companies. It can also be argued by the IT industry that as situation is completely revenue neutral – given that the ITC is fully eligible against the self-invoice issued by the domestic entity and payment of tax under RCM – the mechanical issuance of the demand notices appears to be just an extension of the legal proceedings to harass taxpayers.
GST authorities have deadlines for issuing notices, during which they must scrutinize companies’ returns. As the timelines for adjudication approaches, the department issues demand notices without adequately checking the nature of the services involved. Most notices in the case of IT Companies also originate from State tax offices, which, stemming from the previous VAT regime, have a different - or ‘flawed’—understanding of the GST provisions. All these factors have led to a surge of notices issued before the due date.
The due date for passing orders related to notices issued under Section 73 for FY 2019-20 was 31.08.2024. Consequently, the number of GST orders increased significantly towards the end of the period. This pattern is likely to continue for IT companies, as the deadline for show cause notices under Section 73 of the CGST Act for FY 2020-21 is 30.11.2024. Section 73 provides the adjudication process for the bonafide taxpayer, while Section 74 is invoked in case of fraud, willfull misrepresentation and/or suppression of facts, offering an extended limitation period to the department. The due date for issuance of show cause notices under Section 74 for the FY 2017-18 expired on 05.08.2024. However, for the FY 2018-19 & FY 2019-20, the department has time till 30.06.2025 and 30.09.2025 respectively to issue show cause under Section 74. Therefore, the companies can anticipate receiving further notices from the GST department under Section 73 for FY 2020-21 onwards and under Section 74 for FY 2018-19 onwards. It is also a possibility that the IT companies may be audited in smaller locations (state registration) where fewer large firms are present. The simple logic behind it is that if the number of assessees in a particular state is low, the likelihood of large firms being audited in that state increases.
During the same period, various foreign airlines received notices amounting to Rs. 10,000 crores approx., including British Airways, Emirates, Lufthansa, Singapore Airlines operating in India, for non-payment of GST under RCM on the import of services. However, during the 54th GST Council Meeting, it has been recommended by the GST Council to exempt import of services by an establishment of a foreign airlines company from a related person or any of its establishment outside India, when made without consideration. The notification effecting this exemption is yet to be implemented.
It's interesting how the GST Council has created two classes of services: one for the import of service in the foreign airlines industry, which will be exempt under GST and the second for all the other industries importing services from their foreign entity, which will be under constant scrutiny and dispute by the department even after the issuance of the Circular. Such differentiation classification lacks nexus and reasonable justification and hence, is violative of Article 14 of the Constitution of India.
In such a situation, it may not be a smart move for the companies to subject themselves to the adjudication process as the industry has a strong case on merits. The proposed demands are completely without jurisdiction and authority of law, thus, challenging these demands in Writ Petitions would be a more strategic move. It will be appropriate to invoke the Writ jurisdiction of High Court under Article 226, without any hinderance qua the alternate remedy, as these demands are in violation of the fundamental rights provided under Article 14, 19(1)(g) and Article 265 & 300A of the Constitution of India.
If the companies decide to engage in the long drawn adjudication under Section 73/74 and the subsequent appellate process under Section 107 of the CGST Act, they will have to be cautious that these demands might become contingent liability in their books of accounts. Over that, the mandatory requirement to pay 10% of tax demand as pre-deposit for filing the first appeal, along with additional the pre-deposit payment for the stay in case of second appeal, will also hamper the working capital of the companies. The declared contingent liability may also create a deterrence for foreign investors from investing, leading to difficulty in receiving fundings. This will particularly be challenging in the current economy, where the Indian IT ecosystem is facing a setback. While the established IT giants will be able to handle these finical burdens, but for the Start-ups, these demand notices may heavily impact their pockets if they decided to navigate through the adjudication and appellate processes.
To protect the working capital impact from adverse effects adjudication and appellate process, seeking an interim stay from High Courts would be advisable, more so in light of the recent precedents. Therefore, filing a Writ Petition to contest the legality and validity of the notices is the appropriate course of action for the companies at this time.
Apart from that, companies may also explore the option of making representations before the CBIC and the GST Council, in the hopes that they will consider industry practices and may receive similar relief qua exemptions provided to the airline industry.
In the present case, the Hon’ble Karnataka High Court addressed the critical issue of granting a personal hearing under Sections 74 and 122(2)(b) of the CGST and KGST Acts. The petitioner, a registered partnership firm, filed a writ petition challenging an order issued after an inspection, claiming that the authorities failed to provide a personal hearing, thus breaching the principles of natural justice.
The Hon’ble High Court emphasized that, as per Section 75(4) of the CGST Act, the respondents are obliged to provide an opportunity for a personal hearing before passing any adverse order, irrespective of whether the taxpayer explicitly requests such an opportunity. The Hon’ble Court determined that the failure to offer a personal hearing violated natural justice principles, leading to the quashing of the orders dated 29.06.2019 and 04.08.2020. Additionally, the Hon’ble Court instructed the second respondent to grant the petitioner a personal hearing and to issue a new order within four weeks, considering all relevant arguments.
W&B Comments: This ruling underscores the judiciary’s emphasis on the principles of natural justice in tax proceedings. It’s unfortunate that such lapses happen repeatedly, despite the law being crystal clear. By reinforcing the obligation for tax authorities to provide a personal hearing, regardless of a request, the High Courts have multiple times ensured that taxpayers’ rights are upheld.
The Hon’ble Gauhati High Court in the present case addressed the validity of Notification No. 56/2023-CT dated 28.11.2023 (“Notification No. 56/2023”) issued under Section 168A of the Central Goods and Services Tax Act, 2017 (“CGST Act”). The Hon’ble High Court held that the Notification No. 56/2023 extending the time limits prescribed under Section 73(10) of the CGST Act for passing orders under Section 73(9) of the CGST Act was ultra vires in the absence of recommendation by the GST Council, which was a pre-requisite under Section 168A of the Act and also in the absence of force majeure.
The Hon’ble High Court held that the Notification No. 56/2023 is ultra vires provisions of Section 168A of the CGST Act and not legally sustainable, while making the following observations:
The Hon’ble Court held that a recommendation from the GST Council is essential for any action taken under Section 168A of the CGST Act. It highlighted that wherever the provisions of the CGST Act stipulates that an act is required to be done on the recommendation of the GST Council, the act can be done only when there is a recommendation. The 49th GST Council Meeting recommended that the time limit prescribed under Section 73(10) of the CGST Act to issue orders for FY 2017–2018, 2018–2019 and 2019-20 may be extended by three months only. Accordingly, the time limit for FY 2018-19 and 2019-20 was extended to 31.03.2024 and 30.06.2024, respectively. This time limit was further extended to 30.04.2024 and 31.08.2024, respectively, by issuing the challenged Notification No. 56/2023. The Notification No. 56/2023 mentioned that the extension was ‘on recommendation by the GST Council’, which was not so.
The Hon’ble Court held the fact that recommendations of the GST Council are not binding cannot be construed to mean that the government can act without a GST Council recommendation if the CGST Act or the SGST Act stipulates that the government can exercise on the GST Council recommendation. The Central Government knew that there was no recommendation from the GST Council and this aspect is clearly admitted. Yet the Notification No. 56/2023 mentioned that this was issued ‘on the recommendation of the GST Council’.
It was observed by the Hon’ble High Court that in order to exercise the power under Section 168A of the CGST Act, the government is required to show that, on account of the force majeure, it was beyond the control of the authorities to complete or comply within the time limit prescribed under the CGST Act. The GST Council had no occasion to consider existence of force majeure in as much as the same was never placed before the GST Council before issuance of the same. Accordingly, the Notification No. 56/2023 was issued without assessing the existence of a force majeure. Accordingly the High Court set aside the orders issued. Moreover, the Hon’ble High Court observed that the government has the powers under Section 168A(2) of the CGST Act to issue retrospective notifications and that this judgment by the High Court does not prejudice such right.
W&B Comments: This significant judgment by the Hon’ble Gauhati High Court highlights an overreach by the government, which may have far-reaching implications for all orders issued during the extended time period under Notification No. 56/2023. The show cause notices and orders for the financial years 2018-19 and 2019-20 issued after the respective due dates may now be considered time-barred. The cases where the adjudication proceedings under Section 73 are pending at the adjudication stage or appellate stage, the taxpayers may raise the said grounds by the way or additional submission to the reply or appeal, as the case may be. In the cases where only SCN or Order has been issued, such taxpayers may explore the option of challenging the respective SCN or Order before the jurisdictional High Courts.
Even though the Hon’ble Gauhati High Court’s observations come as relief to the taxpayer, the Allahabad High Court[1] and the Kerala High Court[2] in separate judgments have held the similar notifications – Notification No. 09/2023-CT dated 31.03.2023, issued before Notification No. 56/2023, to be valid. In view of the divergent views by various High Courts, this issue is expected to be raised before the Supreme Court. A challenge to this judgement of Hon’ble Gauhati High Court by the GST Department before the Hon’ble Supreme Court is also expected.
[1] Graziano Trasmissioni vs. Union of India reported in [2024] (6) TMI 233
[2] Faizal Traders v. Deputy commissioner reported in [2024] (5) TMI 1183