In this judgment, the Hon’ble Kerala High Court held that the authorities under the CGST and the SGST Act are already cross empowered under Section 6 of both the Acts and there is no requirement of a separate notification / circular.
The petitioner filed a writ petition for the quashing of the show cause notices issued under Section 74 of the CGST Act by the officers of the State GST Department, challenging thereby their jurisdiction to issue such notice until and unless conditions for exercise of such cross empowerment have been first specified by the government on the recommendations of the GST Council through a notification issued for such purpose. The petitioners relied upon the judgment of the Madras High Court in Tvl. Vardhan Infrastructure v. Special Secretary MANU/TN/2310/2024 in which has been held that in the absence of such an enabling notification, the proceedings initiated by the State GST Authority are to be seen as without jurisdiction.
The matter was first head by a single judge who considered he submissions of the petitioners and the judgment of the Madras High Court in the above case and referred the matter to a larger bench. The division bench in the present case held that the cross empowerment of the of the GST officers of the SGST/UGST Department is through the legislative mandate under Section 6(1) of the CGST Act. Such mandate, without any notification is unqualified and the government has power to qualify such powers by notification passed on recommendations of the GST Council.
The Court relied upon the case of the Delhi High Court in Indo International Tobacco Ltd. and Ors. v. Additional Director General, DGGI and Ors. (2022) 97 GSTR 414 (Delhi) holding that Section 6 is meant to give effect of harmonious convergence of the State and the Union for the same event of taxation.
W&B Comments: This issue of cross empowerment and multiple proceedings is quite common in GST. Multiple notices/letters are issued on the same issue by officers of CGST and SGST or CGST and DGGI, two officers of same department and even SCN by one officer and Audit Notice for same tax period by another officer. The taxpayer is forced to represent his case on identical facts before multiple officers. In such a scenario while the judgment of the Kerala High Court clarifies the matter, it is also important at the level of execution, i.e. GST portal the issues of cross empowerment do not create hassle.
In this ruling, the Karnataka High Court quashed a show cause notice on the grounds that the investigation underlying the issue of such notice under Section 74 of the CGST Act was not conducted by the proper officer.
The investigation in the case of the petitioner was conducted by Commissioner (CGST), without being the proper officer. Once the Commissioner conducted almost all of the investigation he transferred the case to Principal Commissioner (CGST),, who was actually the proper officer to conduct such proceedings. Relying upon the records built by the Commissioner / Improper Officer the Principal Commissioner issued the impugned show cause notice without himself investigating the case.
The Court analysed the provisions of Chapter 14 (Inspection, Search, Seizure and Arrest) of the CGST Act and observed that such powers can only be exercised by the proper officer. It held hat when the investigation, inspection, search and seizure is substantially completed by an improper Officer, is the show cause notice issued by a proper Officer under Section 74 of the CGST Act and KGST Act liable to be set aside. When the investigation itself is ab initio void, then notice under Section 74 based upon such investigation has to be considered illegal as there is no satisfaction on the part of proper officer – he cannot issue SCN based on ‘borrowed satisfaction’.
W&B Comments: This judgment should make it clear that the Department has to strictly follow the letter of the law and cannot forgo the procedures and casually treat them as inconsequential formality. The Court by stressing upon the need to have ‘satisfaction’ before issuing notice under Section 74 has highlighted the central role of proper officer in GST procedures.
In this order, the Hon’ble Supreme Court upheld the order passed by the Hon’ble Bombay High Court in Shantanu Sanjay Hundekari vs. Union of India 2024 (3) TMI 1277. In the case before the Bombay High Court, employees of a shipping company, were issued a show cause notice under Section 74 of the CGST Act, 2017 whereupon a demand of Rs. 3731,00,38,326/- towards penalty was demanded from them, being the tax amount stated to be defaulted by their employer.
These employees where not in charge of the day-to-day business of their employer but held a power of attorney to represent them before the tax authorities. The tax authorities had invoked Section 122(1A) and Section 137 of the CGST Act, which provides that any person who retains the benefit of a transactions listed in Section 122(1) shall be liable to penalty of an amount equivalent to the tax evaded or input tax credit availed of or passed on. Section 137 provides that when the offence has been committed by a company with the consent or connivance of or is attributable to any negligence on the part of, any director, manager, secretary or other officer of such company, such person shall also be deemed to be guilty of that offence.
These employers were foreign companies which did not have any employee or fixed establishment in India and solely for the purpose of representing and acting on behalf of them, in tax matters before the Indian tax authorities, the petitioners were given the power of attorney. Throughout the proceedings the petitioners had cooperated with the GST authorities for investigation and taken a stand that they were not personally availing the benefit of any ITC, nor does the show cause notice alleged that any personal benefit is achieved by the petitioners. They also submitted that they were neither legal experts nor had any in-depth legal understanding of GST laws or its interpretation and their role was essentially to assist and cooperate with the investigation authorities and had given clarifications relating to distribution of ITC, legitimately taken by their employer on payments made to third party vendors on procurement of services. The crux of their submission was that Section 122(1A) and Section 137 of the CGST Act do not apply to them if there is no suggestion that any personal benefit was availed by them.
The Bombay High Court had held that Section 122(1A) applies only to a taxable person, defined under section 2(107), as it specifically speaks about the applicability of the provisions of clauses (i), (ii), (vii) or clause (ix) of sub-section (1) of Section 122. The Court observed that it is difficult to accept the case of the revenue that the petitioners as employees were in any legal position under the CGST Act to retain the benefit of a transaction. Further there was no material to show that it is at the instance of petitioners, that the transactions are conducted, so as to make them liable for such a penalty. With respect to Section 137, the court observed that that proceedings under Section 137 cannot be initiated under Section 74 of the CGST Act. The Court observed that principle of vicarious liability cannot be attracted in case of these provisions. The court quashed the show cause notices issued to the employees.
Now the Supreme Court has rejected the SLP filed by the department and after taking note of the cogent reasons adopted by the Bombay High Court, observed that there are no reasons to interfere with such judgment. However, the Apex Court allowed the question of law in respect of Section 122(1A) and Section 137 to be kept open.
W&B Comments: This upholding of the judgment of the Bombay High Court by the Hon’ble Supreme Court will come as a breath of relief for many tax professionals working for the numerous businesses across the country. The sword of penalty under GST merely for being an employee of a business will neither improve the GST collections as such employee do not have the large amounts of demand raised by the revenue neither improve any intended GST compliance as the employee are powerless and do not take the business or transactional decisions of their employer. The focus of the department should rather be on making their investigation process more evidence based, as the Bombay High Court observed that department failed to place anything on record to show that the employees personally received the benefit of any alleged tax evasion.
In this ruling, the Hon’ble Andhra Pradesh High Court, decided the question that for the purposes of levy of GST, whether the installation of solar panels would amount to ‘works contract’ subject to 18% GST or will it be composite supply simpliciter subject to 5% GST. The court on a previous occasion vide its order dated 25.11.2022 had remanded the matter back to the Appellate Authority directing that order shall be passed as per Circular No.163/19/2021-GST, dated 06.10.2021. However, the petitioner submitted that the circular has not been notified and was not available for adjudication, to which the Government Pleader also agreed and hence by way of review application, the matter was once again brought before the Court.
The petitioner was in the business of setting up solar power plants, paying GST at the rate of 5% on such supply, and as the inputs were taxed at a higher rate, he filed refund application to claim refund of Rs. 8,65,63,538, under inverted duty structure. This application was rejected and department issued show cause notice proposing to levy GST at the rate of 18%. The petitioner submitted that the transaction should be treated as ‘composite supply; the two constituent taxable supplies falling under Sl.No.234 of Notification No.01/2017-CT(Rate) dated 28.06.2017 and Sl.No.38 of Notification No.11/2017-CT(Rate) and applying Section 8, the same would result in tax being levied @ 5%. He submitted that installation of solar plant resulted in movable property.
On the other hand, department submitted that, the installation of solar plant resulted in immovable property and hence it is supply of ‘works contract’ service, taxable at 18%.
The Court analysed the legal provisions in respect of ‘composite supply’ and ‘works contract’. The Court notes that composite supply has been defined under Section 2(30) and its taxability is determined based on Section 8. In respect of works contract it was noted that the supply of works contract is defined in Section (119) and it is also composite supply on combined reading of Section 7 and Note 6 of Schedule II to the CGST Act. The Court explained that while all ‘works contracts’ are ‘composite supply’, there may be ‘composite supply’ which are not ‘works contract’. The Court observed that only those composite supplies which result in construction etc. of immovable property would be works contract.
The Court relied upon the judgments of Commissioner of Central Excise, Ahmedabad v. Solid and Correct Engineering Works (2010) 1 SCC 122 and the sample copy of the agreement between the petitioner and one of its clients and held that the solar plant is an immovable property. The Court observed that the property, which is attached to a structure embedded in the earth, would also become immoveable property only when such attachment is for the permanent beneficial enjoyment of the structure, which is embedded in the earth. In this case, the civil foundation is embedded in the Earth, but the solar modules and the Solar Power Generating System have been attached to the civil structure for better permanent and beneficial enjoyment of the Solar Power Generating Station. The Court rejected the reliance placed by the department on the decision of Duncans Industries Limited vs. State of Uttar Pradesh (2000) 1 SCC 633, on the ground that in that case the finding of fact by High Court that the plant and machinery was embedded to earth was accepted by the Supreme Court and the Apex Court proceeded to decide the question on the basis of ‘permanent purpose’. In the present case however, the goods are not embedded in the earth.
W&B Comments: This judgment has given a major relief to the businesses involved in the proliferation of renewable energy as the stand taken by the department would have caused a major unreasonable tax burden on such businesses country-wide. However the confusion over this issue still prevails, which was further complicated by Circular 163/19/2021-GST which states that GST on such specified Renewable Energy Projects can be paid in terms of the 70:30 ratio for goods and services, respectively, for the period of 1st July, 2017 to 31st December, 2018. This circular is in clear violation of concept of ‘composite supply’ under Section 8 and further has been stayed by the Hon’ble Allahabad High Court its judgment of Dharampal Satyapal Limited Versus Union of India 2023 (8) TMI 1218. This issue should attract immediate attention of the GST Council and should be dealt with comprehensively.
Post-2014, India has witnessed a significant push towards digitalization, self-reliance, and export-driven growth. Key reforms like the introduction of the Goods and Services Tax (GST) in July 2017 and the Production-Linked Incentive (PLI) scheme in 2020 have played a pivotal role in India’s economic prowess. While GST unified India’s indirect tax structure, the PLI scheme incentivizes manufacturers to boost domestic production, thereby reducing import dependency and enhancing export competitiveness.
The PLI scheme aims to bolster domestic manufacturing with an outlay of INR 1.97 lakh crore for 14 key sectors, including electronics, pharmaceuticals, textiles, and electric vehicles. Incentives range from 4% to 6% on incremental sales over a base year. The scheme’s compatibility with WTO guidelines ensures the incentives are tied to production rather than exports, maintaining compliance with global trade norms.
Each sector under the PLI scheme benefits from targeted incentives. State-specific schemes complement the PLI initiative, offering GST refunds and subsidies based on projected production and sales volumes.
GST has streamlined the indirect tax regime by subsuming multiple taxes and creating a uniform tax structure. For PLI beneficiaries, maintaining GST compliance is crucial as production and sales records directly influence incentive eligibility. Benefits like Input Tax Credit (ITC) further reduce production costs, enhance competitiveness, and prevent tax burdens from cascading to consumers. However, non-compliance risks delays in PLI disbursements, underscoring the need for meticulous adherence to tax regulations.
Additionally, GST’s role in facilitating smooth operations for industries under the PLI scheme cannot be overstated. The government’s focus on reducing the compliance burden through measures like e-invoicing and GST audits further underscores the importance of this tax regime in driving efficiency.
To maximize the PLI scheme’s impact and address sector-specific challenges, the following measures are essential:
Additionally, regular engagement between industry stakeholders and policymakers can ensure that evolving challenges are addressed promptly. Leveraging technology to streamline tax compliance and incentivizing innovation through tax credits for R&D are further steps that could drive growth.
The nexus between GST and the PLI scheme highlights the need for a balanced approach to tax policies and incentives. By addressing sector-specific barriers, refining tax structures, and expanding infrastructure, India can strengthen its manufacturing base. This will not only fulfill the vision of “Atmanirbhar Bharat” but also enhance export competitiveness, foster innovation, and drive sustainable economic growth. A robust alignment of tax and production policies is pivotal for positioning India as a global manufacturing hub, ensuring long-term economic resilience and prosperity.
The petitioners, including Udumalpet Sarvodaya Sangham, challenged the validity of notices and orders issued by the GST authorities. The petitioners contended that the authorities uploaded these notices/orders only on the GST portal without adhering to other statutory modes of
service prescribed under Section 169 of the TNGST Act, such as personal delivery, registered post, or email. Many petitioners argued that they were unaware of these notices due to reliance on tax practitioners for portal management, leading to a breach of natural justice. The Department contended that service through the portal constituted valid service, citing earlier judgments and
arguing that Section 169(1) (a) to (f) should be read disjunctively, meaning compliance with any one mode would suffice.
(a) Interpretation of Section 169 of the TNGST Act
The Court held that Section 169 provides six alternative modes of service (including personal delivery, registered post, email, and portal uploads). However, the modes specified in Clauses (a) to (c) of Section 169(1) are alternative modes of primary service (in-person delivery, registered post, or email), which must be attempted first. Only upon failure or impracticability of these modes can the Department resort to Clauses (d) to (f) (portal publication, newspaper publication, or affixture).
(b) Rules Cannot Override Statutory Requirements
The Court rejected the Department's reliance on Rule 149 of the GST Rules (which only provides for electronic service), emphasizing that Rules cannot circumscribe the modes of service prescribed under the parent statute ie TNGST Act. When the Statute had also mandated issuance of notice in person/ registered post/ e-mail, etc., the Rules cannot be limited to only serving it through electronic modes.
(c) Adherence to Natural Justice
The Court clarified that the statutory provisions for notice service aim to ensure fairness and procedural compliance. The authorities' reliance solely on portal uploads without exploring alternative methods violated the principles of natural justice. Notices were required to be served effectively in compliance with statutory requirements.
The Hon’ble Court set aside the impugned assessment orders and directed the petitioners to file their replies to the show cause notices on or before 31.01.2025. The department was instructed to provide the petitioners with a hearing and issue fresh orders in compliance with the principles of natural justice and statutory requirements.
Pursuant to this judgment dated 06.01.2025, the Hon'ble Madras High Court further clarified on 10.01.2025 that non-compliance with multiple service modes under Section 169 results in procedural irregularity, thereby rendering the notices invalid. The court directed that in cases of procedural failure, the timeline for the petitioners to respond would be extended by 15 days from the date of proper service as per the prescribed modes. This supplementary order emphasizes stricter adherence to procedural safeguards, reinforcing that technological convenience cannot supersede statutory mandates.
The Hon’ble Madurai Bench’s decision underscores the critical importance of adhering to statutory procedures for serving notices under the Tamil Nadu Goods and Services Tax Act, 2017 (TNGST Act). The ruling strengthens procedural safeguards and emphasizes the duty of the State to follow statutory modes of service to uphold natural justice. The judgment has significant implications for various stakeholders. Taxpayers and businesses, especially those relying on tax practitioners, benefit from the clarity that
notices must be served through all prescribed methods to ensure fair communication. Tax authorities are now obliged to integrate traditional modes of service, such as registered post and personal delivery, with electronic communications, thereby increasing administrative responsibilities and ensuring procedural compliance. Tax practitioners and legal advisors must remain vigilant in monitoring all statutory communication channels to keep their clients informed. The mode of
communication for notices has been a concern for a long time. The instant issue parallels the issue of automated notices under GST, where a growing dependency on technology-driven communications has created compliance challenges for taxpayers. There are concerns about the proliferation of automated notices under GST, which have led to increased disputes and litigation. Such automated notices have significantly increased the compliance burden on taxpayers, leading to higher transaction costs and resource allocation for dispute resolution. Furthermore, the Delhi High Court has also recently emphasized that uploading information by the investigation wing of the Income Tax department would not be a substitute for recording a satisfaction note by the Assessing Officer for the purpose of initiation of proceedings under Section 153C of the IT Act affirming that statutory procedures cannot be overridden by convenience or technological reliance. Moving forward, policy makers could consider revisiting Section 169 of the TNGST Act to harmonize technological advancements with procedural fairness, possibly by establishing clear guidelines on the hierarchy of service methods.
[Order dated 06.01.2025 in W.P.(MD).Nos.26481 of 2024 & batch matters]
The Hon'ble Madras High Court (Madurai Bench) examined multiple writ petitions challenging the validity of notices/orders issued under Section 169 of the Tamil Nadu Goods and Services Tax Act, 2017 (hereinafter referred to as "TNGST Act").
The petitioners, including Udumalpet Sarvodaya Sangham, challenged the validity of notices and orders issued by the GST authorities. The petitioners contended that the authorities uploaded these notices/orders only on the GST portal without adhering to other statutory modes of service prescribed under Section 169 of the TNGST Act, such as personal delivery, registered post, or email. Many petitioners argued that they were unaware of these notices due to reliance on tax practitioners for portal management, leading to a breach of natural justice. The Department contended that service through the portal constituted valid service, citing earlier judgments and arguing that Section 169(1)(a) to (f) should be read disjunctively, meaning compliance with any one mode would suffice.
The Hon'ble Court's ruling addressed two critical aspects:
The Court held that Section 169 provides six alternative modes of service (including personal delivery, registered post, email, and portal uploads). However, the modes specified in Clauses (a) to (c) of Section 169(1) are alternative modes of primary service (in-person delivery, registered post, or email), which must be attempted first. Only upon failure or impracticability of these modes can the Department resort to Clauses (d) to (f) (portal publication, newspaper publication, or affixture).
The Court rejected the Department's reliance on Rule 149 of the GST Rules (which only provides for electronic service), emphasizing that Rules cannot circumscribe the modes of service prescribed under the parent statute ie TNGST Act. When the Statute had also mandated issuance of notice in person/ registered post/ e-mail, etc., the Rules cannot be limited to only serving it through electronic modes.
The Court clarified that the statutory provisions for notice service aim to ensure fairness and procedural compliance. The authorities' reliance solely on portal uploads without exploring alternative methods violated the principles of natural justice. Notices were required to be served effectively in compliance with statutory requirements.
The Hon’ble Court set aside the impugned assessment orders and directed the petitioners to file their replies to the show cause notices on or before 31.01.2025. The department was instructed to provide the petitioners with a hearing and issue fresh orders in compliance with the principles of natural justice and statutory requirements.
Pursuant to this judgment dated 06.01.2025, the Hon'ble Madras High Court further clarified on 10.01.2025 that non-compliance with multiple service modes under Section 169 results in procedural irregularity, thereby rendering the notices invalid. The court directed that in cases of procedural failure, the timeline for the petitioners to respond would be extended by 15 days from the date of proper service as per the prescribed modes. This supplementary order emphasizes stricter adherence to procedural safeguards, reinforcing that technological convenience cannot supersede statutory mandates.
The Hon’ble Madurai Bench’s decision underscores the critical importance of adhering to statutory procedures for serving notices under the Tamil Nadu Goods and Services Tax Act, 2017 (TNGST Act). The ruling strengthens procedural safeguards and emphasizes the duty of the State to follow statutory modes of service to uphold natural justice. The judgment has significant implications for various stakeholders. Taxpayers and businesses, especially those relying on tax practitioners, benefit from the clarity that notices must be served through all prescribed methods to ensure fair communication.
Tax authorities are now obliged to integrate traditional modes of service, such as registered post and personal delivery, with electronic communications, thereby increasing administrative responsibilities and ensuring procedural compliance. Tax practitioners and legal advisors must remain vigilant in monitoring all statutory communication channels to keep their clients informed. The mode of communication for notices has been a concern for a long time.
The instant issue parallels the issue of automated notices under GST, where a growing dependency on technology-driven communications has created compliance challenges for taxpayers. There are concerns about the proliferation of automated notices under GST, which have led to increased disputes and litigation. Such automated notices have significantly increased the compliance burden on taxpayers, leading to higher transaction costs and resource allocation for dispute resolution.
Furthermore, the Delhi High Court has also recently emphasized that uploading information by the investigation wing of the Income Tax department would not be a substitute for recording a satisfaction note by the Assessing Officer for the purpose of initiation of proceedings under Section 153C of the IT Act affirming that statutory procedures cannot be overridden by convenience or technological reliance. Moving forward, policymakers could consider revisiting Section 169 of the TNGST Act to harmonize technological advancements with procedural fairness, possibly by establishing clear guidelines on the hierarchy of service methods.
The Goods and Services Tax Appellate Tribunal (GSTAT) has been one of the much-needed adjudicatory mechanisms ever since the Goods and Services Tax (GST) regime came into existence. It is important because it holds significant potential in transforming the landscape of GST-related tax litigation in India. When the GST regime was introduced in 2017 via the Constitution (101st Amendment) Act, 2016, it was envisioned as a unified, simplified taxation system under the broader commitment of ‘One Nation, One Tax, One Market’. It subsumed multiple taxes like VAT, Service Tax, Excise Duty, and others and consolidated them into a single system. On the other hand, the GST act has been successful in fulfilling most of its promises like the Creation of a Common National Marke t[63.9 lakh taxpayers transitioned from service tax, VAT, and Central Excise frameworks and currently, there are 1.4 crore registered taxpayers under GST law], Boost to Revenue Collection of the government [GST collections hit a record high in April 2024 at ₹2.10 lakh crore marking a significant 12.4% year-on-year growth, driven by a strong increase in domestic transactions (up 13.4%) and imports (up 8.3%). After accounting for refunds, the net GST revenue stood at ₹1.92 lakh crore, which is 15.5% growth compared to the same period last year], Promotion of Exports [Zero Rating of Exports], Reduction in Tax Evasion [From 65 lakh suppliers registered with the government in pre-GST regime to 1.4 crore in GST 2023], it failed to fulfill its promise of establishing an Appellate Tribunal, aimed at providing swift justice and reducing litigation costs. Although the Tribunal was legislatively mandated, it remains unconstituted even after 7 years of the GST Act, leaving taxpayers without a common appellate body to resolve disputes. A ray of hope emerged in 2024 wherein the government not only received the notification for establishing the Appellate Tribunal but also released a roadmap providing information regarding cities where the benches will be set up and the possible deadline for their establishment. However, before understanding the provision related to the establishment of the Tribunal, it is pertinent to delve into the challenges faced for the 7 years due to the delay of GSTAT and the possible outcomes post its establishment.
The proposal for setting up the GST Appellate Tribunal across the country was approved in its 49th meeting of the GST Council and the Council recommended the rules governing the appointment and conditions of the President and Members of the proposed GST Appellate Tribunal in its 50th meeting. Ultimately, the Finance Ministry via a fresh notification dated 31.07.2024 notified 31 benches of GSTAT to be set up in all states and Union Territories. The GST Council had cleared the way in its meeting on July 11, 2024, and the first set of tribunals might be operational sometime between November 2023 and January 2024. GSTAT will be operational with its principal bench in Delhi and 31 regional benches comprising of 63 judicial members and 33 Technical Members for the Centre and States together.. It will be a successor to the Customs Excise Service Tax Appellate Tribunal (CESTAT) and State VAT tribunals. The new notification will supersede all previous notifications and has added a new column ‘sitting/circuit’. Uttar Pradesh and Maharashtra (along with Goa) will have three Benches each, while other larger States, like Gujarat, Karnataka, Rajasthan, and Tamil Nadu will have two benches each. 'Circuit' locations will be operational in such manner as the President may order, depending upon the number of appeals filed by suppliers in the respective States/jurisdiction while the additional ‘sitting’ will function with one Judicial Member and one Technical Member. Panaji, Puducherry, Aizawl, Agartala and Kohima, Mumbai, Chennai, Kolkata etc have been designated as circuits while Visakhapatnam, Rajkot, Hissar, Srinagar, Thiruvananthapuram, Thane, Chhatrapati Sambhajinagar, Chandigarh, Coimbatore, Prayagraj, Agra etc will have sittings. The Principal Bench will take up matters related to inter-state disputes and the Benches in States will take up other issues. The aggrieved parties have the option to move to the High Courts and Supreme Court. With GSTAT coming into force, the country will have specialized bodies to handle disputes related to GST in a timely and efficient manner.
The absence of GSTAT has led to a surge in litigation and ambiguity in tax matters. As per data provided by Minister of State for Finance Pankaj Chaudhary in Lok Sabha during the Monsoon Session of 2024, the number of appeals relating to Central GST authorities has more than doubled since 2020-21 with 5,499 cases pending. This increased further to 9,759 cases by the end of fiscal 2021-22, 11,899 in 2022-23, and 14,227 in 2023-24 (up to June 2023) with cases increasing since then. The lack of a single appellate authority forced taxpayers dissatisfied with decisions by lower authorities to approach High Courts, which not only led to overburdening the judiciary and delaying justice but also other complex trends of divergent High Court decisions and accessibility. Seeking justice through High Courts made it affordable only to the ones who could afford it. This made justice expensive for small businesses like MSMES who might not always be able to afford the same thus leading to differential treatment. This further widens the gap between big businesses with strong roots and small enterprises already surviving on Government aid like Priority Sector Lending, Pradhan Mantri MUDRA Yojana (PMMY), etc. The need for aid is not only important for them to compete but is also important for their survival and hence when justice becomes expensive, they are either forced to divert funds otherwise required for the functioning of their business to resolving disputes via High Courts or are simply forced to not seek resolution at all. This violates the objective of Article 14 of the Constitution of India which prohibits discrimination and promotes the right to equality. Some other issues such as pending refunds, increased interest liabilities, and cash flow challenges have compounded the difficulties for businesses, which face repeated show-cause notices without a resolution mechanism in place since High Courts which lack expertise, qualifications, and experience of the sector-specific challenges faced by various businesses cannot be accepted as a replacement of an expert appellate authority mandated for the purpose specific to GST. Hence, the constitution of GSTAT is attributed to positive factors such as the required qualification of members, balancing judicial and technical expertise, and the central and state government's participation. Although the Government has released the notification, the tribunal is yet to become functional, exacerbating the backlog of cases.
There has been a renewed push for the formation of GSTAT, with a Group of Ministers (GoM) recently proposing amendments to address the lingering challenges. Stakeholders hope that once operational, the tribunal will enhance efficiency in dispute resolution, reducing both costs and delays. However, GSTAT will likely face an immediate backlog upon its establishment, as several years of pending cases await adjudication. In such a situation, it will be pertinent for the tribunal to bunch the appeals with common issues together and start hearing matters.
The appellate will adjudicate anti-profiteering cases with a “sunset date” of April 1, 2025, after which filing of such complaints will not be allowed. This is based on the recommendation of the law committee under the GST Council taking into consideration the view expressed by the Competition Commission of India (CCI) which stated it is unable to handle such matters. This is in line with the recommendation of the law committee under the GST Council after the Competition Commission of India (CCI) expressed its inability to handle such matters, saying that it was not its core function. CCI has disposed of almost 27 cases since December 1, 2022, while almost 140 cases are still pending for adjudication. Additionally, almost 184 matters are pending in various high courts challenging orders of previous authority.
The anti-profiteering provisions under the GST law mandate suppliers of goods and services to pass on the benefit of any lenient tax provisions to recipients by way of commensurate reduction in prices. National Anti-Profiteering Authority which was set up in November 2017 under Section 171 of the Central Goods and Services Tax Act, 2017 to deal with unfair profiteering activities by registered suppliers was subsumed with CCI on December 1, 2022, as per Notification No. 23/22-C.T. When NAA was in charge, it had issued penalties to over 100 companies, including Hindustan Unilever, Patanjali, Jubilant Foodworks, Reckitt Benckiser, Phillips, Gillette India, and several others, who had moved the High Court against the anti-profiteering provisions. These parties have moved to the Supreme Court after the High Court upheld the constitutional validity of the provision. Some leniency will be provided with regard to the sunset clause and the mandate will be given to the principal bench of GSTAT to specify the said date from which the authority will not accept any request of anti-profiteering issues. Later, if required, the matter will be transferred to the benches across the country. The creation of GSTAT is essential not only to fulfill the original promise of a streamlined GST regime but also to alleviate the burden on the judiciary and provide timely justice to taxpayers. Moving forward, it is imperative for the government to expedite the tribunal’s formation and ensure that it functions efficiently from day one to meet the rising demand for GST dispute resolution. Under the GST Law, there is no concept of amicable settlement for disputes. Appeals are resolved based on the legal provisions and regulations in place. This will lead to a higher volume of cases being brought before appellate authorities, tribunals, and courts, leading to increased costs and time delays. A purely legal approach to dispute resolution can foster an adversarial relationship between the parties leading to discouragement for voluntary compliance and fostering mistrust in the system. The government can consider introducing a settlement commission or a dispute resolution mechanisms under the GST regime. Periodic amnesty schemes or settlement windows can be introduced to encourage taxpayers to come forward voluntarily and resolve disputes by paying the tax or penalty, thereby avoiding litigation. The government must also consider implementing a Taxpayer Facilitation Scheme to allow for early resolution of disputes through communication and clarification of issues between tax officers and taxpayers. This could help minimize disputes.
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.