I. Introduction
The term “proceeding” is nowhere defined in the CGST Act. In layman’s terms the term “proceeding” simply means “steps or measures taken in course of an action for enforcing rights, law or regulation”. However, the term “proceedings” has been used in different contexts under different provisions in the GST law. The question whether the term “proceeding” includes “investigation”, “inquiry”, “audit” or any other steps prior to adjudication within its ambit remains unclear which has created a dispute between the interests of the taxpayers on one side and the revenue department on the other side.
Before determining the scope and ambit of the term “proceedings”, the author first tries to highlight the provisions under the CGST Act where a conflict of interest has emerged between taxpayers and the revenue department due to a lack of clarity on the term “proceeding”.
II. Section 83 of the CGST Act: Issue of provisional attachment of property during the “pendency of proceedings”:
Section 83[1] (as it stood before the amendment effective from 1st January 2022) of the Central Goods and Services Act (CGST Act) provided for provisional attachment of property of the taxpayer by the Commissioner. It is an extraordinary power that hampers the normal business activities of the taxpayers. However, according to the language of the section, such powers could be used only during the “pendency of the proceeding”. Section 83 of the CGST Act brought a lot of litigation to the courts as the scope of the term “pendency of proceedings” was not clear. There was no clarity on when the proceeding commences and when exactly the commenced proceeding ends.
In the case of Kaish Impex (P.) Ltd. v. Union of India the issue came before the court to determine when exactly the proceeding commences. In this case, the petitioner was issued a summon by the Directorate General of GST Intelligence under section 70 of the CGST Act to give evidence and produce documents in relation to fraudulently availing Input Tax Credit. During the same day, the Directorate General provisionally attached the bank account of the petitioner stating that since summon has been issued therefore, “proceedings” has been initiated against the petitioner which is pending.
The petitioner contended that mere issuance of summons does not amount to “pendency of proceeding” neither it stipulates that “proceeding have been initiated. The High Court ruled that “mere issuance of summon” under section 70 of the CGST Act does not mean that proceedings have been launched and are pending against the petitioner. Therefore, the provisional attachment of the bank accounts of the petitioner was not in accordance with the law.
In another case of Fine Exime (P.) Ltd v. Union of India the issue came before the court to determine at what point does the initiated proceeding ends? In this case, proceeding was initiated against the petitioner under section 74 of the CGST Act for fraudulently availing Input Tax Credit. During the pendency of the proceeding, the bank accounts of the petitioner were provisionally attached. After considering the representation, final order was passed under section 74(9) CGST Act. However, even after passing the final order the provisional attachment of the bank accounts was not withdrawn. The petitioner contented that the initiated proceedings has attained finality after passing of an order under section 74(9) of the CGST Act and therefore the provisional attachment of bank account must be withdrawn.
The Bombay High Court ruled that provisional attachment issued under Section 83 of the CGST Act cannot remain in operation after passing the order under section 74(9) of CGST Act as, proceedings no longer remained pending. However, the High Court did not give a clear test or formulae to determine at what point does the “initiated proceeding actually ends”.
Section 83 of the CGST Act gives strong powers to the revenue department, such lack of clarity on the term “pendency of proceedings” can have huge consequences for tax payers which could hamper their normal business activities.
III. Section 98 of the CGST Act: Issue of Advance Ruling
Section 98 of the CGST Act[2] provides the procedure for advance ruling. An advance ruling is issued by the tax authority to individuals or corporates for clarifying certain tax matters. Proviso to section 98(2) creates a bar on admission of an application for advance ruling if the question raised or put forth is pending or has already been decided in a “proceeding” under any provision of the CGST Act. Now the question which arose and lacked clarity was what all will be included in the term “proceedings”? Whether mere initiation of “inquiry” or “investigation” will bar the taxpayer to obtain a ruling from Authority for Advance Ruling?
In the case of Srico Projects (P.) Ltd. v. Telangana State Authority for Advance Ruling the Telangana High Court ruled that the term “proceeding” would not include any “investigation” or “inquiry” within its ambit. Unlike the term “proceeding”, “investigation” and “inquiry” does not lead to a conclusion as such and therefore mere initiation of “investigation” or “inquiry” cannot be a bar for obtaining a ruling from the Authority for Advance Ruling under section 98(2) of the CGST Act.
Contrary to the Telangana High Court’s decision, The Appellate Authority for Advance Ruling (AAAR) in the case of re: Shalby Ltd held that for the purpose of section 98(2), the term “proceeding” would include “investigation” and issuance of “DRC-01A” in its ambit. In other words, the Appellate Authority for Advance Ruling held that mere initiation of “investigation” would amount to “pendency of proceedings” and therefore it would bar the applicant from obtaining any ruling from the Authority for Advance Ruling under section 98(2) of the CGST Act.
Such a contrary interpretation of the term “proceeding” only fuels disputes and creates inconvenience for taxpayers at a time when the country is still adapting to the new indirect tax regime.
IV. Section 6(2)(b) of the CGST Act: Issue of Concurrent Jurisdiction
Section 6(2)(b)[3] provides that when any “proceeding” has been initiated by a proper officer authorized by the State Goods and Services Tax Act or the Union Territory Goods and Services Tax Act on a subject matter, then no proceeding can be initiated on the same subject matter by the proper officer under CGST Act. Thus, section 6(2)(b) imposes restrictions upon the proper officers under CGST act from initiating any parallel proceedings on the same subject matter if proceedings have already been initiated by State Tax law officers. Here again, the restriction can be imposed only if “proceedings” have been initiated by officers under State Tax laws.
In G.K. Trading Company v. Union of India, an issue arose before the Allahabad High Court to determine whether the term “proceeding” would also include inquiry in its ambit? In this case, proceeding was initiated against the petitioner under UP GST Act for wrongfully availing input tax credit two times. While the investigation was pending against the petitioner, an inquiry was also launched simultaneously against the petitioner under section 70 of the CGST Act.
The petitioner contended that once a “proceeding” has been initiated against him under the UP GST Act, any inquiry launched simultaneously under section 70 of the CGST Act would be barred by section 6(2)(b) of the CGST Act. The Allahabad High Court held that the term “proceeding” and “inquiry” are two different terms and they cannot be intermixed. Thus, the “inquiry” launched under section 70 of the CGST Act against the petitioner simultaneously with the “proceedings” launched under UP GST law is not barred by the limitations of section 6(2)(b).
Since section 6(2)(b) of the CGST Act prevents simultaneous proceedings, the question whether “inquiry” or “investigation” would be included in the scope of the term “proceeding” is of great importance.
V. Determining the Scope of the Term “Proceeding”.
It is not easy to determine the scope of the term “proceeding” under the CGST Act. Attempts have been made by different courts to determine its ambit resulting in different jurisprudence. Despite the efforts, the scope of the term “proceeding” still remains unclear. In the absence of any statutory definition, the term “proceeding” shall be accorded a literal interpretation. The fact that the term “proceeding”, “adjudication proceedings”, and “investigation” has been used separately and not interchangeably in the CGST Act suggests that the term “proceeding” does not include “investigation” and “inquiry” within its ambit. Unlike “proceeding” which has a destined result, the term “inquiry” or “investigation” may or may not have a destined result (it may or may not convert into a demand notice).
The Supreme Court in Liberty Union Mills v. Union of India held that the term “investigation” means the process of collection of evidence or the gathering of material. It can be said that the term “proceeding” has a larger scope than the term “investigation”. It is not merely a process of collection of evidence, it includes only those actions that may result in a decision i.e., in nature of show cause notice or order. All other interim steps leading to such event are merely inquiries, investigations, etc., and are therefore not covered under the ambit of the term ‘proceeding’.
As regards the question of “when does the proceeding commences and when exactly does it end?” The Supreme Court in Radha Krishna Industries v. State of Himachal Pradesh and Ors clarified that the proceeding commences from the issuance of a Show Cause Notice (SCN) and concludes upon the passing of an adjudication order. Without issuing a show cause notice proceeding cannot be deemed to be started and once an adjudication order is passed, the proceeding is deemed to be concluded.
VI. Conclusion
Since the inception of the CGST Act, a host of issues has been left unattended. The issue regarding the scope and definition of the term “proceeding” remains one of them. As seen above, construing different interpretations of the term “proceeding” brings different consequences for the taxpayers. Lack of clarity on such an important subject only creates hardship for honest taxpayers who are doing their businesses ethically. Therefore, the issue of determining the scope of the term “proceeding” begets instant clarification in line with the spirit of the law from the CBIC. Till the issue remains unclear, a conflict of interest is bound to follow between the taxpayers and the revenue department.
[1] S. 83, The Central Goods and Services Tax Act, 2017.
[2] S. 98, The Central Goods and Services Tax Act, 2017.
[3] S. 6(2) (b), The Central Goods and Services Tax Act, 2017.
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