’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]

Brief background

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:

Review Petitions filed by the government against the judgment in Canon India;
Appeals against the judgment in Mangali Impex in the issue of whether DRI is a proper officer; and
Writ Petitions challenging the constitutional validity of Finance Act, 2022.

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.

Maintainability of Review Petition

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:

Attention of the Court was not brought to the change in the scheme of Section 17 w.e.f. 08.04.2011. Before the amendment of Section 17 by Finance Act, 2011, there was assessment and re-assessment of Bill of Entry, but post-amendment, scheme of self-assessment was introduced. In view of such amendment, the Court could not have relied upon judgment in Sayed Ali which was passed before amendment. [Relied upon judgment dated 09.06.2022 of Madras High Court in M/s.N.C. Alexander v. Commissioner of Customs in W.P. Nos. 33099 of 2015]
Circular No. 4/99-Cus dated 15.02.1999 issued by the CBEC which empowered the officers of DRI to issue show cause notices under Section 28 of the Act, 1962 as well as Notification No. 44/2011 dated 06.07.2011 which assigned the functions of the proper officer for the purposes of Sections 17 and 28 of the Act, 1962 respectively to the officers of DRI were not brought to the notice of the Court
The Court in Canon India had observed that “Board” CBEC) does not have power to appoint proper officer, and power of CBEC under Section 4(1) of the Act to actually make such appointment was not brought to the notice of the Court. Prior to 11.05.2002, appointing authority was Central Government and post that date it was CBEC.

Supreme Court observations

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?

DRI officers came to be appointed as the “officers of customs” vide Notification No. 19/90-Cus (N.T.) dated 26.04.1990 [under Section 4(1)] issued by the Ministry of Finance, Government of India and Circular No. 4/99-Cus dated 15.02.1999 issued by the CBEC empowered the officers of DRI to issue show cause notices and finally Notification No. 44/2011 dated 06.07.2011 [under Section 2(34)] which assigned the functions of the proper officer for the purposes of Sections 17 and 28 of the Act, 1962.
The decision in Canon India that notification for appointment should have been appointed under Section 6 is erroneous. Section 2(34) read with Section 4 and 5 of the Act contained the scheme of “assignment of functions” which is applicable to “officers of customs”, whereas Section 6 contains the scheme of “entrustment of functions” which applies to persons other than “officers of customs”. Since the DRI officers are officers of customs, they can issue show cause notice.
The literal interpretation of the Act, prior to insertion of Section 110AA, there was no requirement in the law that the proper officer who issues show cause notice under Section 28. This scheme does not flow from the scheme of the statute and was judicially read in. Section 28 cannot be reduced to an administrative review of assessment/re-assessment done under Section 17. In this regard, the interpretation of this Court in the cases of Sayed Ali (supra) and Canon India (supra) is patently erroneous.
The definite article “the” in Section 28 refers to a “proper officer” who has been conferred with the powers to discharge functions under Section 28 by virtue of a notification issued by the competent authority under Section 5. In other words, the use of article “the” in Section 28 has no apparent relation with the proper officer referred to under Section 17.

(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)?

The High Court in Mangali Impex could not have applied the doctrine of harmonious construction to harmonise Section 28(11) with Explanation 2 because Section 28(11) and Explanation 2 operate in two distinct fields and no inherent contradiction can be said to exist between the two. Section 28(11) and Explanation 2 to Section 28 operate in two distinct fields.
Section 28(11) validates the show cause notices issued by the DRI officers before 06.07.2011. Such officers, having been entrusted and assigned the functions of proper officer, are deemed to always have authority under Section 17, whether in terms of section 28 unamended or amended. Explanation 2 clarifies that case prior to amendment shall be governed by the unamended section. Setting aside the judgment in Mangali Impex, the Court held that a provision cannot be held unconstitutional merely on the apprehension that multiple proper officers will exercise jurisdiction under Section 28, especially when there is no substantial empirical evidence of the misuse of Section 28(11) which was enacted over a decade ago. The Court upheld the judgment in Sunil Gupta.
The policy being followed by the Customs department since 1999 of excluding jurisdiction of all other proper officers once a show cause notice by a particular proper officer is issued could be said to be a sufficient safeguard against the apprehension of the issuance of multiple show cause notices to the same assessee.

(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:

Validation of past actions by Section 97(i) violates the principles of Canon India judgment since it will lead to a very anarchical and unruly operation of a statute which was sought to be avoided in Canon India.
Section 97 of the Finance Act, 2022 is liable to be struck down as manifestly arbitrary and thus violative of Article 14
Section 97 (iii) gives retrospective effect to the amendments made in Section 5 thereby making previous show cause notices subject to the new provision i.e., sub-sections (4) of Section 5 and the previous notifications empowering DRI officers to issue show cause notices do not fulfil the mandate of sub-section (4).

The Supreme Court made the following observations on challenge to Section 97 of Finance Act, 2002:

As explained in the review of Canon India, there was no real defect which was pointed out as such judgment because it proceeded on an erroneous assumption and hence Section 97 was not clearing any defect but is merely a surplusage to the valid provisions already present in the statute.
In matters of economic policy, it is a well settled principle of law that courts should leave it to the wisdom of legislature. The Court also relied upon Shri Prithvi Cotton Mills Ltd. [(1969) 2 SCC 283] to lay out different conditions in which legislature may pass a law to validate the tax collection which has been declared illegal. Also, Section 110AA does not create a class of assessees to whom the law would apply differentially to, at the same point in time.
Sub-section (4) contains the word “may” which is indicative of the fact that CBEC has to mandatorily consider one of the criteria specified therein.

(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.

Supreme Court directions

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.

W&B Comments

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.

What is Rule 96(10)?

Vide Notification No. 20/2024-Central Tax dated 08.10.2024, Rule 96(10) has been omitted with effect from 08.10.2024.

Challenge regarding the vires & legality of the restriction under Rule96(10)

The validity and legality of the restriction under Rule 96(10) has been challenged before various High Courts on the basis that:

Rule 96(10) violates the provisions in the parent statute because the only prescription in Section 16 of IGST Act and Section 54 of CGST Act was to the extent of outlining the form and manner for claiming refund, but not for restricting refund.
Rule 96(10) creates fetter on an exporter’s right to claim refund of IGST paid on exports & does not stand the test of legality because the Statute empowers rules to be made for enabling the refund mechanism, but not to restrict refund claims for legitimate exporters.
Rule 96(10) is also violative of Article 14 of Constitution of India as an arbitrary and unreasonable differential treatment is meted out to EOUs, Advance Authorization license holders and similar assessees.

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:

Rule 96(10) puts a restriction on exporters which completely take away the right under the parent provision of Section 16(3)(b) of IGST Act. The words “subject to such conditions, safeguards procedure as may be prescribed” in Section 16(3) (a) & (b) of the IGST Act and Section 20 of the IGST Act and Section 54 of the CGST Act do not authorise the imposition of such blanket restrictions; and
Literal interpretation of Rule 96(10) leads to a manifestly absurd result which leads to hostile discrimination against those who apply for refund under Section 16(3)(b) [Rule 96], unlike in case of exporters who seek refund under Rule 89. Such unjust result is violative of Article 14 of the Constitution of India and could never have been intended by the legislature.

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.

Dispute regarding the date of applicability of restriction under Rule96(10)

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.

W&B Comments

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

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:

Discrimination and Similar Treatment Under the IGST Act

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.

Statutory Pre-deposit Requirement: Relief Granted

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 2^nd 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:

Distinction between “Plant or Machinery” and “Plant and Machinery” made consciously

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.

Functionality or essentiality tests must be applied to decide “plant”

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) & (d) and Section 16(4) of CGST Act does not violate Article 14 of the Constitution.

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.

There are hardly any similarities between clauses (c) and (d).

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”.

Meaning of ‘own account’

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.

Basis for issuance of the demand notices

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 54^th 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.

Merits and demerits of the alleged GST demand

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 53^rd 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.

Limitation period for issuance and adjudication of demand notices

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.

Differential treatment between two industries qua the import of service

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 54^thGST 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.

Way forwards

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:

GST Council recommendation is sine qua non

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 49^th 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’.

Absence of force majeure

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

The Hon’ble Karnataka High Court in the present case decided on the question of law whether the Electronic Credit Ledger (“ECL”) can be blocked by revenue authorities under Rule 86A of the CGST Rules, 2017 (“CGST Rules”), without granting a pre-decisional hearing and without the fulfillment of necessary conditions under the provision. The Hon’ble High Court set aside the earlier judgment of the Learned Single Judge that had upheld the revenue authorities decision to block the ECL, noting several procedural lapses, including the failure to grant a hearing and the improper reliance on findings from another authority without independent inquiry.

The appellant, engaged in the business of lead and lead scrap, had their ECL blocked under Rule 86A of the CGST Rules, on the basis of a field report issued by the investigation wing. This field report alleged that some suppliers were non-existent or not conducting business. Based on this internal report, the adjudication officer mechanically blocked the appellant’s ECL without conducting any independent verification or inquiry into the appellant’s specific transactions. The Learned Single Judge upheld this blocking of the ECL, leading to the present Writ Appeal.

The Hon’ble High Court set aside the earlier order of the Learned Single Judge on essentially two points as follow:

Compliance with principles of natural justice for granting a personal hearing to the taxpayer before blocking of the ITC in ECL

As per the judgment of the Gujarat High Court in Samay Alloys India (P) Ltd., even though Rule 86A of the CGST Rules does not specifically provide for a pre-decisional hearing, such a requirement must be inferred due to the serious civil consequences involved. A post-decisional hearing would not be sufficient. The High Court emphasized that compliance with the principles of natural justice is a sine qua non, and while Rule 86A does not explicitly provide for or prohibit it, there is a need to read this requirement into the rules.

The Hon’ble Court pointed out that providing a pre-decisional hearing would not have resulted in immediate or instantaneous utilization of the ITC by the appellants, unlike bank accounts from which money can be withdrawn quickly. The process of utilizing ITC takes time, allowing the revenue authorities to supervise and monitor the proceedings, including the ECL, even during the pre-decisional hearing process.

Independent application of mind by the proper officer

Rule 86A requires the officer to have “reasons to believe” that fraudulent or ineligible Input Tax Credit (ITC) has been availed. Such “reasons to believe” must be formed through the proper officer’s own independent inquiry and not based on borrowed satisfaction from another authority’s findings. The ECL was blocked by the proper officer due to the fact that he felt compelled to obey the command of another officer. The Hon’ble High Court observed that it was not the manner in which the law expects the power under rule 86A to be exercised. The Hon’ble Court held that when a thing is directed to be done in a particular manner, it must be done in that manner or not at all is the well-established principle of administrative law.

Even Circular No. CBEC-20/16/05/2021-GST/1552, dated 02.11.2021 (“Circular”) outlines the process and requirements for blocking the ECL. The Circular mandates that before disallowing the use of credit, the concerned officer must apply their mind and consider all the facts, including the nature of the fraud or ineligible ITC.

Blocking an ECL restricts the assessee’s ability to utilize the ITC for up to one year. Such action directly impacts the liquidity of businesses and can cripple operations, especially in sectors like scrap dealing, where cash flow and credit utilization are critical. Hence, such a measure must be taken with extreme caution and only when there is concrete evidence of fraudulent transactions. In this case, the absence of such evidence warranted setting aside the blocking of the ECL.

The onus lies on the revenue to show that the appellants had deliberately availed fraudulent or ineligible ITC however, in the instant case, the ECL of the appellants had been blocked by the respondents without verifying the genuineness of the transaction and a bonafide purchaser cannot be denied ITC on account of a supplier’s default and the recipient cannot be made to suffer denial of ITC for the wrong doings of the supplier.

In this case, the blocking of the ECL was mechanical and lacked the required independent inquiry and fulfillment of conditions for invoking Rule 86A of CGST Rules, rendering the action illegal. The Hon’ble Court noted that the ECL was blocked solely based on communication from another officer (from the investigation wing), without any tangible material to form a belief that the ITC in the appellant's ECL was on account of any fake invoice.

The Hon’ble High Court emphasized that the power of disallowing debit of amount from the electronic credit ledger must not be exercised in a mechanical manner. Careful examination of all the facts of the case is important to determine cases fit for exercising power under Rule 86A. The remedy of disallowing debit of amount from electronic credit ledger, being extraordinary by nature, has to be resorted to with utmost circumspection and with maximum care and caution.

The Hon’ble Karnataka High Court directed the revenue authorities to reconsider the matter, ensuring compliance with the principles of natural justice and conducting an independent inquiry before taking any further action under Rule 86A

W&B Comments: The ruling highlights the original intent behind the use of Rule 86A of the CGST Rules, which allows the blocking of ITC and provides the department a manner in which the power under the rule should be utilized. While the rule is intended to curb fraudulent practices, the power must be exercised with caution and grounded in independent inquiry. Various High Courts across the country, have consistently ruled that there is no legal basis for blocking future credits under Rule 86A where the conditions under the rule have not been meet. The present ruling reinstates the necessity of principles of natural justice, even though they are not mentioned in the language of the rule itself. The Hon’ble Karnataka High Court has stated that the department’s usual practice of mechanically blocking the ECL based on departmental orders should not be followed. This decision will be helpful for all assessees where the department has invoked Rule 86A without adhering to the proper procedure and law.

In the present case, the Hon’ble Calcutta High Court addressed the issue that whether the GSTR-9 annual return for the FY 2017-18 could be completely disregarded by the adjudicating authority and demand could be passed thereon without considering the GSTR-9 filed by the assessee.

The appellant, Ankit Kumar Aggarwal, made errors in GSTR-3B filings from October 2017 to March 2018 by omitting input and output cess. These discrepancies were later corrected in the GSTR-9 annual return. The Hon’ble Calcutta High Court ruled that the adjudicating authority must consider GSTR-9 and not dismiss such errors if they are subsequently corrected.

The Hon'ble High Court observed that two crucial aspects warranted sending the matter back to the adjudicating authority:

1. The Hon’ble Court recognized that GSTR-9, filed within the extended deadline due to COVID-19 notifications, holds importance and should be reviewed to reflect the true tax liability.

2. The appellant's claim that the error was revenue-neutral (i.e., no loss to the tax authorities) was also acknowledged by the court, supporting the need for a reassessment.

The Hon’ble High Court directed the Assistant Commissioner of State Tax to reconsider the submissions, provide a personal hearing, and make a fresh decision.

W&B Comments: This ruling highlight the growing judicial recognition of rectifiable GST filing errors. It reinforces the importance of accurate reconciliation between GSTR-1, GSTR-3B, and GSTR-9. Courts have consistently allowed taxpayers to correct mistakes in initial filings, focusing on substantive justice over procedural lapses. This trend reinforces the need for businesses to properly reconcile their monthly returns and file the GSTR-9 appropriately. In recent cases, courts have emphasized the importance of allowing corrections in GST filings when discrepancies arise between GSTR-1, GSTR-3B, and GSTR-9. Hon’ble Madras High Court in Abhi Technologies[1] directed the refund of IGST despite errors in GSTR-3B, stressing that procedural mistakes should not deny legitimate export incentives. In the Amarjyothi Carrying Corporation,[2] the Hon’ble High Court emphasized that errors in GSTR-1, which were correctly reported in GSTR-3B and GSTR-9 (annual return), should be reconsidered by the authorities.

In line with this approach, the Hon’ble Calcutta High Court’s observation in the present case may offer relief to businesses that have made genuine errors but corrected them in their annual filings, aligning with a broader trend in GST litigation.

[1] 2022 (5) TMI 1136

[2] 2024 (3) TMI 1030

In this present case the petitioner was served with a notice for conducting audit after cancellation of registration. It filed writ petition to challenge the audit notice issued after cancellation of GST registration & subsequent assessment order and submitted that Section 65 of CGST Act, 2017, applies only to registered persons. It was also contended that since the foundation of the proceedings was contrary to the mandate of the CGST Act, any assessment order passed in pursuance thereof, deserves to be quashed.

The petitioner argued that since they had cancelled their GST registration, they were no longer liable to undergo an audit under Section 65 of the CGST Act, which applies only to registered persons. The petitioners also placed reliance on Tvl. Raja Stores v. The Assistant Commissioner (ST).[1] However, the respondents contended that the cancellation of registration does not absolve the petitioner from their tax liabilities accrued during the registration period.

The Hon'ble High Court examined Section 65(1) of the CGST Act, which empowers authorities to audit any registered person for a specified period. It also considered Section 29(3), which clarifies that cancellation of registration does not discharge liabilities incurred before cancellation to deny the applicability of the Tvl Raja Stores case relied upon by the petitioners. The respondents asserted that the audit was valid as it pertained to the period when the petitioner was registered. The judgment highlighted that despite cancellation, liabilities for the period of registration persist under the CGST Act. It was noted that the audit process was duly followed, including issuing a show cause notice and considering the petitioner’s objections. It cited precedents and legislative intent to affirm that audit rights extend to periods when the entity was registered, regardless of subsequent registration cancellation.

W&B Comments: This instant case provides much needed clarity on whether an audit can be initiated against an entity whose registration has now been cancelled. The Hon'ble Rajasthan High Court has expressly clarified the interpretation of Section 29 of the CGST Act and has concluded that regardless of the present status of the registration of the taxpayer, it does not absolve or eliminate the requirements to remit the existing tax dues. And since the audit is pertaining to a period when the petitioner did indeed hold a valid registration, conducting an audit for that period is well within the rights of the department.

[1] MANU/TN/6752/2023

In the present matter the petitioner filed a writ petition before the Hon’ble Allahabad High Court against a show-cause notice and subsequently an order under section 74 of the Goods and Services Tax (GST) Act, 2017 (GST Act), for the months of June, July, August and September 2020–21 for availing wrong ITC. The Revenue authorities contended that the taxpayer has wrongly claimed the ITC by using forged tax invoices, without proving actual physical movement of goods or genuineness of the transaction. In addition, the taxpayer has failed to discharge the burden of proof. The taxpayer was required to give details, i.e., number of the vehicle used for transportation of goods, payment of freight charged, acknowledgement of taking delivery of goods and payment, etc.

The petitioner argued that the tax payer is entitled to ITC as the conditions prescribed under Section 16 have been complied with and that the tax has been charged by the selling dealer. The petitioner is no way in control over the actions of the selling dealer and ITC cannot be denied on the grounds that the selling dealer has not shown the purchases in his returns or deposited the tax.

The Hon’ble High Court dismissed the writ petition filed by the taxpayer on the basis that the petitioner has failed to prove and establish the actual physical movement of goods and genuineness of transactions between the selling dealer and thereby has opened himself to litigation and scrutiny. The Hon’ble High Court relied on the Hon’ble Supreme Court’s judgment in the case of M/s Ecom Gill Coffee Trading Private Limited[1] where the Hon’ble Supreme Court held that the onus lied upon the petitioner to prove the validity of a transaction beyond reasonable doubt in order to be eligible to claim ITC. The Hon’ble High Court also relied upon its own ruling in a similar case of M/s Shiv Trading v State of Uttar Pradesh[2] to strengthen its stance. It laid down the view that mere payments or invoices are not sufficient to discharge the burden of proof.

W&B Comments: The Court reiterated that claiming ITC under Section 16 of the U.P. GST Act requires strict adherence to statutory conditions, similar to previous rulings like State of Karnataka v. M/s Ecom Gill Coffee Trading Pvt. Ltd. However, this judgment further clarifies that merely presenting tax invoices and e-way bills is insufficient; dealers must also provide comprehensive proof of the physical movement of goods. The decision underscores that the burden of proof remains firmly on the dealer, highlighting both the continuity in legal principles and the increasing emphasis on thorough documentation for ITC claims.

This ruling serves as a critical reminder to dealers of the importance of maintaining detailed and complete records to substantiate ITC claims, as the failure to do so can lead to the disallowance of ITC and potential legal hurdles. The High Court’s decision to dismiss the writ petition reinforces the principle that ITC is a statutory concession, not an inherent right, and must be claimed in full compliance with the law.

[1] 2023 (3) TMI 533

[2] Writ Tax No.1421/2022

In the present matter, the Indian Medical Association filed a Writ Petition before the Hon’ble High Court of Kerala, seeking a declaration that the retrospective amendment to Section 7(1)(aa) is unconstitutional and violative of Articles 14, 19(1)(g), 265, and 300A of the Constitution of India.

The petitioner, an association of medical professionals, argued that its members pool resources, and the common funds are utilized for various schemes for the benefit of the members. It was contended that the doctrine of mutuality should apply in this case, as the association merely constitutes a group of individuals serving themselves, and under the doctrine of mutuality, there is no service rendered by one person to another. Consequently, the petitioner asserted that the activities conducted by the association do not constitute a supply of goods or services, and therefore, no GST is payable on the activities of the petitioner association.

The Hon’ble High Court, placing reliance on Karnataka Bank Ltd v. State of Andhra Pradesh[1], observed that amending the definition of the term ‘person’ to include any Society, Club, or Association falls squarely within the legislative competence and does not necessitate a constitutional amendment. The Court dismissed the petitioner’s reliance on State of West Bengal v. Calcutta Club[2], noting that while Article 366(29A) does not expressly provide for the levy of service tax on incorporated associations, the legislature is empowered to alter or remove the basis of a judicial decision by appropriate amendments. Thus, the Court held that the impugned insertion of Section 7(1) (aa) is within the legislative authority of the State.

However, the High Court further noted that the doctrine of mutuality was a well-established principle in the context of taxation on the supply of goods and services by clubs or associations to their members prior to the amendment to Section 7. The Court held that the amendment could not have been given retrospective effect and that its application is limited to the date it was notified, i.e.,01.01.2022.

W&B Comments: In the Calcutta Club judgment, the Hon’ble Supreme Court held that transactions between a club and its members are essentially transactions with oneself, thereby not constituting a “service” as contemplated under the law. Consequently, it was held that an incorporated club rendering services to its members was not liable for service tax. Furthermore, a plain reading of Article 366(29A) indicates that the provision does not extend the scope of taxation to include an incorporated association or body of persons. However, the present case underscores that the amendment to the statute, redefining the term ‘person’ to include societies, clubs, or associations, falls within the legislative competence of the State and is not ultra vires the Constitution. This represents a novel approach to interpreting the provision of services rendered by an association to its members. Nonetheless, the Hon’ble High Court has emphasized that the supply of services by an association or club has traditionally been governed by the doctrine of mutuality. Accordingly, the Court held that it is impermissible to apply the amendment to Section 7(1)(aa) retrospectively, and that such an amendment should only have prospective effect from the date of its notification.

[1] (2008) 2 SCC 254

[2]2019 (29) GSTL 545 (SC)

In the present matter, a Writ Petition was instituted before the Hon’ble Gauhati High Court, raising the issue of whether Input Tax Credit (ITC) can be denied to purchasing dealers when the selling dealer fails to remit the collected tax to the authorities.

The Hon’ble High Court observed that the facts of the instant case were analogous to those in the case of On Quest Merchandising India Private Limited v. Government of NCT of Delhi & Ors.[1] as decided by the Delhi High Court. The provisions under scrutiny in the current petition were found to be substantially similar to those challenged in the aforementioned Delhi High Court case, wherein it was unequivocally held that a purchasing dealer cannot be penalized for the default of the selling dealer, particularly when the selling dealer has failed to deposit the tax collected.

The Hon’ble Gauhati High Court relied heavily on the precedent set by the Delhi High Court, which held that Section 9(2)(g) of the Delhi Value Added Tax Act, 2004, could be read down, and that demands raised against purchasing dealers involved in bona fide transactions could not be sustained unless there was evidence of collusion. It was determined that actions against purchasing dealers should be contingent on proof of such collusion.

W&B Comments: The subject of ITC in instances of non-remittance by the selling dealer remains contentious. The provisions of Section 9(2)(g) of the Delhi VAT Act bear a significant resemblance to those of Section 16(2)(c) of the GST Act. In light of multiple judgments affirming the constitutional validity of provisions that restrict ITC claims, this judgment offers substantial relief to bona fide purchasers. Notably, this is one of the first judgments to acknowledge and apply the principles established in the On Quest Merchandising case, which provided significant protection to bona fide purchasers under the Delhi VAT regime. This precedent is likely to be beneficial in addressing similar issues under the GST framework in the future.

[1] 2017 SCC OnLine Del 11286

In the present case, the Petitioner’s bank account was provisionally attached vide order dated 19.05.2023. The singular submission of the Petitioner was that according to the provisions of Section 83(2) the validity of attachment of property is only up to 1 year from the date of the order. And since that period has hence expired, the order may be directed to be set aside on completion of one year from said date.

The respondents submitted that there were internal discussions on the extension of the period of provisional attachment. However, there was no finality to such discussions and there was no passing of fresh orders of extension. The Hon’ble Telangana High Court thus held that an order for provisional attachment ceases to have validity upon expiry of the period of 1 year from the date of issuance of order.

W&B Comments: The Court’s decision underscores the importance of adhering to the statutory time limits imposed under Section 83(2) of the CGST Act, 2017, which restricts the validity of a provisional attachment order to one year. The ruling emphasizes that, despite internal discussions on the extension, the failure to pass a fresh order within the stipulated timeframe results in the automatic cessation of the attachment's validity. This judgment aligns with prior decisions that aim to prevent the potential abuse of the provisional attachment power, reinforcing that such measures must strictly comply with the procedural safeguards outlined in the law to protect taxpayers' rights.

In the favourable ruling of K-9 Enterprises vs. State of Karnataka [TS-573-HC(KAR)-2024-GST], on the GST Department’s power to blocking of Electronic Credit Ledger (ECL) under Rule 86A of the CGST Rules, the Division Bench of the Hon’ble Karnataka High Court held that the same requires “reasons to believe” and strict compliance with the provision. The Hon’ble Court emphasized that pre-decisional hearings are mandatory for blocking the ECL and the ITC cannot be blocked solely based on communications from other officers.

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I. Basis for issuance of the demand notices

Infosys SCN of Rs. 32,000 crores

Mechanical issuance of notices by the Department

II. Merits and demerits of the alleged GST demand

III. Limitation period for issuance and adjudication of demand notices

IV. Differential treatment between two industries qua the import of service

V. Way forwards

Published in ET Legal World :- https://legal.economictimes.indiatimes.com/news/opinions/analysis-of-gst-demands-against-it-industry-and-way-forward/113625254

In an effort to simplify and harmonize the Goods and Services Tax (GST) framework, the 53rd GST Council meeting proposed significant amendments to Sections 73 and 74 of the Central Goods and Services Tax (CGST) Act, 2017. These amendments, including the insertion of a new Section 74A, aim to standardize the time limits for issuing demand notices and orders, regardless of whether fraud or willful misstatement is involved. Additionally, the Council recommended extending the time limit for taxpayers to avail of reduced penalty benefits.

Background

The different time limits for issuance of show cause notices and adjudication of demands have led to confusion and legal disputes. There have been instances where notices issued under Section 74 (fraud cases) beyond the three years but within the five-year limit have been challenged. If the charges of fraud or suppression were not sustained, these notices had to be dropped as time-barred, resulting in legal uncertainty and numerous court cases. Garg Rice Mills v. State of Punjab [2024] challenged the legality of extending the due date for issuing notices under Section 73, arguing it was time-barred. In Titan Company Ltd. v. Joint Commissioner of GST & Central Excise [2024] where the department has issued show cause notices by bunching up notices for multiple assessment years, for a period for the time limit is already exhausted, the Hon’ble Madras High Court emphasized that the limitation period is applicable separately for each assessment year. The challenge in K. R. Pulp Papers Ltd. v. Goods and Services Tax Council [2024] regarding the extension of time for issuing notices reflects issues similar to those addressed by the proposed amendment.

Current Framework: Sections 73 and 74 of the CGST Act

Under the current provisions, Sections 73 and 74 of the CGST Act govern the issuance of demand notices and orders for tax, interest, and penalties:

Section 73 deals with cases where there is no fraud, suppression of facts, or willful misstatement. The time limit for issuance of an order under the provision is three years from the due date for filing the annual return for the relevant financial year. Therefore, the show cause notice has to be issued at least three months prior to the expiry of time limit of passing of the adjudication order.
Section 74 addresses cases involving fraud, suppression of facts, or willful misstatement. The time limit for issuance of an order under the provision is five years from the due date for filing the annual return for the relevant financial year. Therefore, the show cause notice has to be issued at least six months prior to the expiry of time limit of passing of the adjudication order.

Proposed Amendments: A Common Time Limit

The GST Council has recommended the following key changes:

Common Time Limit for Demand Notices and Orders: The proposed amendments seek to provide a common time limit for the issuance of demand notices and orders, irrespective of whether the case involves fraud, suppression, willful misstatement, or not. This change will apply to demands for the financial year 2024-25 onwards.

Extended Time Limit for Reduced Penalty: Currently, taxpayers must pay the tax demanded along with interest within 30 days to benefit from a reduced penalty. The proposed amendment extends this period to 60 days.
Insertion of New Section 74A: A new Section 74A will be introduced to streamline the implementation further, encapsulating the common time limit provisions

Implications of the Amendments

Clarity and Consistency: Introducing a common time limit simplifies the GST compliance framework, making it easier for taxpayers to understand and adhere to the timelines for demand notices and orders.
Ease of Compliance: The extended period for availing of reduced penalty benefits offers taxpayers additional time to settle their dues, easing the compliance burden and potentially reducing litigation.
Administrative Efficiency: A uniform timeline streamlines the process of issuing demand notices and orders for tax authorities, enhancing administrative efficiency and resource management.
Legal Certainty: Clear and consistent timelines help establish legal certainty and foster a more predictable tax environment. This can encourage better compliance and reduce the scope for disputes and litigations.

Conclusion

The proposed amendments to Sections 73 and 74 of the CGST Act, along with the introduction of Section 74A, represent a significant step towards simplifying the GST framework. With the amended provisions, the proper officer can determine fraudulent intent during proceedings. The recommendation is only to align the time limit of both provisions, however, it will bring a genuine taxpayer and a fraudulent one at par which is inconsistent with the legislative intent. A similar provision is also included in the Central Excise Bill, 2024. The time limit for taxpayers to avail reduced penalties is proposed to increase from 30 to 60 days, providing more time for compliance. It must be noted that Taxpayers with cases from financial years before 2024-25 will not benefit from the new common timeline and will be subject to the existing time limits. Taxpayers with notices already time-barred under the current law will not gain retroactive benefits from the new provisions. Taxpayers against whom fraud, suppression, or willful misstatement is proven will still face the prescribed penalties and consequences.

53rd GST Council meeting recommended an amendment to Rule 142 of the Central Goods and Services Tax (CGST) Rules. This amendment introduces a mechanism for adjusting amounts paid towards a demand through Form GST DRC-03 against the pre-deposit amount required for filing an appeal.

Background: The Appeals Process Under GST

Under GST, appellants must pay 100% of admitted tax and a percentage of disputed tax as pre-deposit when filing appeals. This is typically done at the time of filing of Form GST APL-01 on the GST portal. Issues arise when taxpayers make payments during audits or face technical problems with APL-01 hence making them resort to Form GST DRC-03. Earlier the CBIC has clarified in CBIC-240137/14/2022-Service Tax Section-CBIC, dated 28.10.2022 that pre-deposits are neither duty nor arrears, and that DRC-03 is not a valid form for making pre-deposits. Later, vide CBIC-240137/14/2022-Service Tax Section-CBEC dated 18.04.2023 it was clarified that aforementioned restriction was exclusively intended for the cases of appeals belonging to the Central Excise/Service Tax only and not for appeals under GST. The Courts have also been addressing cases where appeals were rejected due to payment of pre-deposit made through Form GST DRC-03 in the case of technical error on the portal (Manjunatha Oil Mill v. Assistant Commissioner (ST) (FAC) [2024] 159 taxmann.com 514). These situations underscored the need for clearer guidelines and flexibility in the appeal process to address genuine technical challenges.

Rule 142 and Form GST DRC-03: Current Framework

Rule 142 of the CGST Rules outlines the process for issuing demand notices and recovering dues from taxpayers. Form GST DRC-03 is used by taxpayers to voluntarily make payments towards tax, interest, penalty, and other amounts before or after the issuance of a show-cause notice. There is no provision for adjusting amounts paid through Form GST DRC-03 against the pre-deposit required for filing an appeal. This often leads to duplication of payments and financial strain on taxpayers.

The Amendment: A New Adjustment Mechanism

The recommended amendment to Rule 142 and the issuance of a circular aim to address this issue by prescribing a mechanism for such adjustments. Accordingly, vide the Circular No. 224/18/2024 - GST dated 11.07.2024, a new mechanism is provided. Notification No. 12/2024- CT dated 10.07.2024, vide which sub-rule (2B) of Rule 142 and Form GST DRC-03A have been inserted to the CGST Rules, provides mechanism for cases where an assessee to pay tax, interest and penalty under relevant provisions (Section 52, 73, 74, 76, 122, 123, 124, 125, 127, 129, 130 of CGST Act) inadvertently through Form GST DRC-03 under sub-rule (2) of Rule 142.

Such assessee will have to file an application in Form GST DRC-03A, electronically on the GST portal, and the amount so paid and intimated through the Form GST DRC-03 will be adjusted as if the said payment was made towards the said demand on the date of such intimation through Form GST DRC-03. The amount so paid shall also be liable to be adjusted towards the amount required to be paid as pre-deposit under Section 107 and Section 112 of the CGST Act, if and when the taxpayer files an appeal against the said demand, before the appellate authority or the appellate tribunal, and the remaining amount of confirmed demand as per the order of the adjudicating authority or the appellate authority, as the case may be, will stand stayed as per Section 107 (6) and Section 112 (9) of CGST Act.

As the abovementioned functionality for filing of an application in Form GST DRC-03A, is currently unavailable on the GST portal, the assesses will have to intimate the proper officer about the same, and on such intimation, the proper officer shall not pursue any recovery till the time the said functionality of Form GST DRC-03A is made available on the GST portal.

Once the functionality of Form GST DRC-03A is made available on the GST portal, the assessee will have to file the application in Form GST DRC-03A, on the portal at the earliest, and on doing so, the amount paid vide Form GST DRC-03 will be adjusted against the pre-deposit under section 107 or section 112 of the CGST Act.

Benefits of the Amendment

Financial Relief for Taxpayers: This change prevents the need for double payments for the same tax demand, easing the financial burden on businesses.
Encouragement for Genuine Appeals: The simplified process encourages taxpayers to pursue genuine appeals without the deterrent of additional financial strain.
Administrative Efficiency: For tax authorities, the amendment reduces redundancy and simplifies the process of tracking and managing payments.
Legal Clarity: The circular providing detailed guidelines on the adjustment mechanism will help eliminate ambiguities and ensure consistent application of the rules.
Under protest payment to arrest the interest meter: The mechanism also benefits where taxpayer voluntary paid the demand in full or in part under protest during the investigation stage to stop the interest meter. Through this new mechanism, such aggrieved taxpayers will now be able to seek by adjusting their voluntary under-protest payments against the mandatory pre-deposit while challenging the demand in appeal.

Conclusion

The recommendation to amend Rule 142 of the CGST Rules and introduce a mechanism for adjusting payments made through Form GST DRC-03 against pre-deposit amounts for appeals is a progressive step towards refining the GST framework. The amendment specifically addresses and provides a mechanism for adjusting amounts paid through Form GST DRC-03 against the pre-deposit required for filing an appeal. Therefore, taxpayers who have not utilized Form GST DRC-03 to make such payments will not benefit from this adjustment mechanism. They will need to follow the standard procedures and use the prescribed forms, such as Form GST APL-01, for making pre-deposits.

Brief background

Maintainability of Review Petition

Supreme Court observations

Supreme Court directions

W&B Comments

What is Rule 96(10)?

Challenge regarding the vires & legality of the restriction under Rule96(10)

Dispute regarding the date of applicability of restriction under Rule96(10)

W&B Comments

Basis for issuance of the demand notices

Merits and demerits of the alleged GST demand

Limitation period for issuance and adjudication of demand notices

Differential treatment between two industries qua the import of service

Way forwards

I. Basis for issuance of the demand notices

II. Merits and demerits of the alleged GST demand

III. Limitation period for issuance and adjudication of demand notices

IV. Differential treatment between two industries qua the import of service

V. Way forwards

Background

Current Framework: Sections 73 and 74 of the CGST Act

Proposed Amendments: A Common Time Limit

Implications of the Amendments

Conclusion

Background: The Appeals Process Under GST

Rule 142 and Form GST DRC-03: Current Framework

The Amendment: A New Adjustment Mechanism

Benefits of the Amendment

Conclusion

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