The Goods & Services Tax (GST) has completed 3 years in operation on 1st July 2020; being introduced as the biggest tax reform with a tagline ‘One Nation One Tax’, the journey so far has been not less than a roller-coaster ride not only for the taxpayers but for the Government as well. It is surely in work-in-progress mode with features such as back to back returns; confusing and complicated law procedures with continuous amendments in form of more 500 notifications and circulars; incompetent and inefficient IT infrastructure; lack of clarity and understanding in law on vital points and clarity if required is provided by amateur and confusing Advance rulings and last but not the least GST Tribunal is still not operational. Such features need immediate attention to make GST a “Good and Simple Tax” and no longer be referred as “Galat Salat Tax” or “Gabbar Singh Tax” in the trade and commerce.

Moreover, the biggest failure feature continues to be that CBIC has not been able to train its GST officers who are still lacking appropriate knowledge and understanding of GST law and therefore are passing adjudication notices/orders on petty and illogical issues leading to continuous harassment of taxpayers. This has thus resulted in series of Writ petitions being filed before various High Courts in order to seek justice. There have been a few judicial pronouncements which have issued in the favour of taxpayers, while handful of ones have been delivered in favor of revenue also. The author has made an attempt to compile such landmark judgments. The judgments have been categorized into different GST chapter headings for convenience in reference for readers.

Also Read- 3 Years of GST- A recap on 30 relevant Landmark Judgments – Part II

two green one black pencil with text GST GOODS AND SERVICES TAX in the notebook on the white background

A. Scope of Supply & Levy

1. IGST cannot be imposed on deemed ocean freights in the case of imports on CIF contracts.

Mohit Minerals Pvt Ltd vs UOI (Gujarat High Court)

  • The Gujarat HC held that chargeable section must be given a strict interpretation. The Importers of goods cannot be deemed to be covered within the scope of the term “recipient” as stipulated in Section 5 (3) of the IGST Act, therefore entry 10 of Notification No. 10/2017 fastening tax liability on the importer is ultra vires.
  • Article 265 does not entitle delegated legislation to impose the tax in the absence of express legislative provision. Thus, it is unconstitutional.
  • The Revenue has erred in treating importers as recipient of services as the services are actually received by the foreign exporter. The Indian importers were not even liable to pay consideration to the foreign shipping lines and hence, cannot be held liable to pay tax on such services. A beneficiary of services cannot be said as a recipient of service.
  • The claim that payment of IGST is revenue neutral on account of ITC eligibility with the importer is not valid in as much as the importer does not qualify as recipient of services and therefore cannot avail ITC of the IGST so paid
  • The mere fact that the transportation of goods terminates in India, will not make such supply of transportation of goods as taking place in India.
  • The place of supply rules are proxies to determine inter-state or inter-state nature of the supply and can make a supply taxable which is not in the taxable territory

Author comments: The above decision is significant, since the High Court has held that the Notification is not merely ultra vires the provisions of the IGST Act, but also contrary to the Constitution of India. Further, by applying the ratio of the decision of the Supreme Court in the case of Kusum Ingots & Alloys Limited v Union of India [(2004) 6 SCC 254], a law declared by the High Court to be unconstitutional has effect throughout the territory of India and not just within the jurisdiction of the particular High Court, hence taxpayer across the nation can use this judgment to advantage, and also apply for refund of taxes already paid.

2. Damages received for illegal occupation/usage of property or right is not to be construed as ‘supply’

Bai Mamubai Trust vs Suchitra (Bombay High Court)

  • The requirement of a ‘supply’ is essential. It is the taxable event under the CGST Act. If there is no supply, there can be no liability for payment of tax.
  • Payment of royalty towards damages or compensation for violation of plaintiff’s legal right in the suit premises, is not ‘consideration’ for supply. Such payment lacks the necessary quality of reciprocity to make it a ‘supply’. Where no reciprocal relationship exists, it cannot be said that a supply has taken place.
  • The supply doctrine does not contemplate or encompass a wrongful unilateral act or any resulting in payment of damages.
  • The method of computation of the mesne profits basis the usual rent is irrelevant. It is the quality of the payment and not the method used to determine its measure that determines its character namely whether its ‘consideration’ or ‘damages’.

Author Comments: This case gives a clear direction as to the parameters which should be considered while determining taxability under GST law and how the expression ‘supply’ needs to be understood. This judgment gives clear insight on the issue of taxability of liquidated damages. The element of ‘reciprocity’ is essential to trigger the definition of ‘supply’ under the GST law.

3. Incorporated clubs/societies not liable to VAT/service tax when services provided or goods sold to its members.

State of West Bengal vs Calcutta Club Limited (Supreme Court)

  • The doctrine of mutuality continues to be applicable to incorporated and unincorporated members’ clubs after the 46th Amendment adding Article 366(29-A) to the Constitution of India. The ratio of Young Men’s Indian Association did not overcome by clause of (f) of Article 366(29-A).
  • Service tax/ VAT is not liable on the clubs/associations for the amounts received from its members. The deeming fictions created in the Service Tax law does not accommodate levy of service tax in the case of incorporated clubs/ associations/ societies.

Author comments: In light of the above-cited decision, Service tax/VAT is not liable on the clubs or associations, and the issue is settled now. The clubs/association who are contesting the Service tax/VAT demands raised can rely on this and get the relief. Refund of the taxes paid under protest can be claimed as refund now citing the above decision.

The same rationale can be applied under GST law as well in as much as the fault pointed by the Hon’ble Court that members and association must be deemed as different persons appears to not overcome in the definitions given under the GST Law also. Although, the advance ruling authority in some cases has refused to given accord to the above ruling under GST.

4. Reimbursements of electricity expenses from occupants chargeable to Service Tax

Srijan Realty (P) Ltd. vs CST (Kolkata High Court)

  • The High Court held that the petitioner is not a GENCOM, does not trade in electricity and does not have license to undertake trading in electricity as per the Electricity Act, 2003.
  • Sale, trading, and distribution being taken out of the contention, the only other thing that remains to describe the activity undertaken by the petitioner, is service. Any other interpretation will render the steps taken by the petitioner in receiving high-tension electric supply and making over low-tension electric supply to the occupants, violative of the provisions of the Electricity Act, 2003.
  • The transaction of the petitioner obtaining high-tension electric supply converting it to low-tension supply, and supplying it to the occupants, raising bills on such occupants and realizing the electricity consumption charges from such occupants, is a service which the petitioner renders, and such an activity is exigible to Service Tax under the Finance Act.

Author comments: The ratio decidendi of the judgment appears to be flawed given that the illegality under the Electricity Act has been taken as a ground to impose tax under the service tax. In the decision of Connaught Plaza Restaurant (P) Ltd., the Hon’ble Supreme Court had held that ramifications of the governing statute do not affect the treatment under the tax statute.

Further, the commodity “electricity” has been held as “goods” by various forums, including in celebrated judgment of NTPC, wherein the Apex Court had categorically held electricity as goods based on the features of goods. The form of electricity cannot be said to be changed merely because the same is supplied by a person not licensed under the electricity act. Therefore, the judgment may not succeed in the judicial scrutiny before a larger forum.

5. No GST on incidental charges recovered from customers along with electricity charges

Torrent Power Ltd. vs UOI (Gujarat high Court)

  • The meaning of “transmission and distribution of electricity” does not change either for the negative list regime (i.e. after 01.07.2012) or the GST regime (i.e. after 01.07.2017).
  • Charges such an application fee, meter rent, testing fee, etc collected by the Petitioners are part of composite supply of which principal supply is the actual supply of electricity and therefore the entire composite supply is exempt from tax under Entry 25 of Notification No.12/2017 dated 28.6.2017.
  • The Paragraph 4(1) of the impugned Circular No.34/8/2018-GST dated 1.3.2018 is hereby struck down as being ultra vires the provisions of section 8 of the CGST Act, 2017 as well as Notification No.12/2017-CT(R) serial No.25.

Author Comments: This decision will be of great relief for the electricity distribution companies as well as to the consumers, who were facing the adverse comments from the revenue biased advance ruling authorities.

6. Exemption Notification to be interpreted strictly

Commissioner of Customs. vs Dilip Kumar & Company (Supreme Court)

  • In the matter of interpretation of the charging section of a taxation statute, strict rule of interpretation is mandatory.
  • Exemption notification should be interpreted strictly; the burden of proving applicability would be on the assessee to show that his case comes within the parameters of the exemption clause or exemption notification. Benefit of ambiguity cannot be claimed by the assessee and it should go in favor of revenue.
  • Truly speaking liberal and strict construction of an exemption provision are to be invoked at different stages of interpreting it. When the question is whether a subject falls in the notification or in the exemption clause then it being in nature of exception is to be construed strictly and against the subject, but once ambiguity or doubt about applicability is lifted and the subject falls in the notification then full play should be given to it and it calls for a wider and liberal construction

Author comments: The judgment sets straight the rules of interpretation of exemption as well as the charging section. The diluted principle of strict interpretation of substantial conditions of exemption and liberal construction of procedural conditions is clearly brought out in the judgment. However, at the same time it may open floodgates of unceremonious disputes from the end of lower authorities in as much as they are less likely to distinguish between the substantial conditions of an exemption and the procedural ones.

7. No pre-import condition on advance authorization

Maxim Tubes Company Pvt Ltd vs UOI (Gujarat High Court)

  • The High Court held that the condition of physical export and pre-import put forth by the DRI, it is more or less impossible to make any exports under an Advance Authorisation without violating the condition of pre-import.
  • High Court held that the impugned conditions do not meet with the test of reasonableness and are also not in consonance with the scheme of Advance Authorisation.
  • Accordingly, High Court struck down the “pre-import condition” contained in paragraph 4.14 of FTP 2015-2020 inserted vide Notification No. 33/2015-2020 dated 13.10.2017 and inserted vide clause (xii) in Notification No. 18/2015-Cus vide Notification No. 79/2017-Cus dated 13.10.2017, as being ultra vires the Advance Authorisation Scheme of FTP, 2015-2020.

Author comments: The pre-import condition in practical term denied benefits to exporters who import input goods after their finished products are exported which was causing enormous hardships to exporters. This ruling brings major relief for such exporters.

The exporters who have received summons/notices for payment of IGST exemption availed along with interest and penalties in violation of the pre-import condition can use this decision to defend the case. Although n adverse ruling by the Madras High Court in the case of Vedanta Limited, wherein the pre-import condition, has led the government to issue an instruction to the field formations to not go on the basis of Gujarat High Court decision and contest the same.

With effect from January 2019, the pre-import condition has been lifted by the government from advance authorization.

8. Section 13 (8) (b) of the IGST Act prescribing place of supply of intermediary is constitutional

Material Recycling Association of India vs UOI (Gujarat High Court)

  • The principles of determining ‘export of services’ under Article 286 are formulated by the parliament vide Section 13 of the IGST Act
  • The expression export of services under Section 2 (6) of the IGST Act when it says that place of supply should be outside India is well within the legislative competence of the parliament and so does the power to prescribe for place of supply
  • It is the policy of the government to provide the location of the supplier as place of supply is more indicative of the place where services of intermediary services are provided and such policy cannot be said as violative of Article 14 or Article 286

Author Comments: It appears that the challenge was on weak footings. The government’s policy is pretty much clear in not granting export status to intermediary services. The challenge, if any should be built upon Article 19 of the COI in as much as not granting export status to intermediary services infringe the right to do business of the citizens. On a side note it appears that the court incorrectly held on the aspect of no double taxation of the intermediary services.

9. Services provided to parent company (separate legal entity) is export of services

Linde Engineering India Pvt Ltd. vs UOI (Gujarat High Court)

  • The High Court holds that export condition of service provider and service recipient not being merely establishment of same entity cannot be applied when both service provider and service recipient are separate legal entities, despite being in the same group.
  • What the law stipulates establishment is ‘branch’ or ‘agency’ or ‘representational office’ in as much as fundamental principle of exclusion of services is that one cannot provide service to oneself.

Author Comments: It is highly depressing to note that such clear provision of law requires interference of the High Courts. It also proves the revenue zeal of treating the taxpayers as tools. The judgment clearly settles the objective of why the exclusion condition is there in the export of service rules. And it would very unpleasant for the government to further appeal it further or any other government machinery to not to accept the decision.

B. Input Tax Credit

10. ITC on goods/services used in the construction of mall can be used against GST payable on rental income

Safari Retreats Pvt Ltd vs Chief Commissioner of CGST (Orissa High Court)

  • The very purpose of the CGST Act is to make uniform provisions for levy and collection of tax and to prevent multi-taxation.
  • Input tax credit accumulated on account of inputs purchased/used for the construction of immovable property against renting of immovable property is that supply of input goods for construction of a shopping mall and the same being used for renting out units in the mall constitute a single supply chain and benefit of ITC should be available to the assessee.
  • Section 17(5)(d) of the CGST Act was read down by allowing the use of ITC on goods and services consumed in the construction of shopping mall against paying GST on rentals received from tenants in shopping mall as the very purpose of credit is to give benefit to the assessee.

Author comments: The revenue appeal against the above judgment is admitted before the Hon’ble Supreme court. The final decision shall have long-reaching implications in respect of various businesses which are getting/ have got civil construction done and are using such civil structures for further provisioning of taxable outward supplies with no breakage in tax credit chain. This judgment re-establishes the principle of seamless credit in the supply chain as the backbone of GST regime.

11. CGST Act does not provide for Lapse of ITC for inverted rate structure

Shabnam Petrofils Pvt Ltd vs UOI (Gujarat High Court)

  • Credit must enure as soon as duty is paid on inputs and input services and used for making outward supplies: Relying on the case of Dai Ichi Karkaria Ltd 1999 (112) ELT 353 (SC) and Eicher Motors Ltd Vs UOI 1999 (106) ELT 3 (SC) held that when credit has been validly taken, it is available to manufacturer without any time limit. The credit is indefeasible
  • The only power conferred u/s 54(3) is to notify the goods and services not entitled for refund of ITC accumulated on account of inverted rates. It does not provide for lapsing of accumulated credit.
  • The impugned Notification being made thereunder providing for lapsing of accumulated ITC would be ultra vires Section 54(3). Therefore, High Court held that Notification No 20/2018-CT(R) dt 26.07.2018 is ex-facie invalid and liable to be struck down.

Author Comments: Although the dispute pertains to initial period of GST, when drawback was permitted, however it settles the principle that unless plenary legislation debars the taxpayer from any benefit, any revenue interpretation cannot go and impose conditions on its own.

12. Benefit of ITC cannot be denied on account of non-payment by supplier

M/s Onyx Designs vs ACCT (Karnataka High Court)

  • The benefit of input tax could not be deprived to the purchaser dealer if the purchaser dealer satisfactorily demonstrated that while purchasing goods, he had paid the amount of tax to the selling dealer.
  • If the selling dealer had not deposited the amount in full or a part thereof, it would be for the revenue to proceed against the selling dealer.
  • In view of admission of the genuine transaction as well as bonafide claim and in the absence of any other allegations made against the purchasing dealer in the assessment orders, merely for the reason that selling dealers had not deposited the collected tax amount or some of the selling dealers had been subsequently deregistered could not be a ground to deny the input tax credit.

Author comments: Section 16 of the CGST Act cast onus on the purchasing dealer to ensure that selling dealer makes the payment wherein a purchaser is expected to do the impossible of ensuring that seller makes the payment. Without any proper too or mechanism available, such expectation from the purchaser is quite unreasonable.

The High Courts in various other judicial decisions has held the similar provisions in erstwhile laws to be arbitrarily and unconstitutional. Similar views were taken in in case of Arise India Limited (TS-314-HC-2017)- Delhi High Court and in case of Geru Lal Bal Chand V. State of Haryana (2011 (9) TMI 492)-Punjab & Haryana High Court.

C. Returns

13. Rectification of the errors in returns of the tax period in which such error pertains to has been allowed.

Bharti Airtel Limited vs UOI & Ors. (Delhi High Court)

  • GSTR-3B is filled in manually by each registered person and has no inbuilt checks and balances. Hence, if the statutorily prescribed form i.e. GSTR-2 & 3 had been operationalized the Petitioner with reasonable certainty would have known the correct ITC available to it in the relevant period, and could have discharged its liability through ITC, instead of cash.
  • There is no reason or logic why rectification/adjustment is being allowed in the month subsequent to when such errors relate and restrict rectification in the tax period to which the data relates. Therefore, Circular No. 26/26/2017-GST dated 29.12.2017 is not in consonance with the provisions of CGST Act, 2017. There is no provision under the Act that would restrict such rectification.
  • It is trite proposition of law that circular issued by the Board cannot be contrary to the Act and the Government cannot impose conditions which go against the scheme of the statutory provisions contained in the Act. The subordinate legislation must conform to the statute under which it is made, and they cannot whittle down the benefits granted under statutory provision.
  • Petitioner has a substantive right to rectify/adjust the ITC for the period to which it relates. The rectification/ adjustment mechanism for the months subsequent to when the errors are noticed is contrary to the scheme of the Act.
  • The refund of excess cash balance in terms of Section 49 (6) read with Section 54 of the CGST Act does not effectively redress Petitioner’s grievance.

Author comments: The landmark judgments under erstwhile law said that the circular is binding only on the revenue, not court/the assessee [refer Ratan Melting Wires case 2008 (231) E.L.T. 22 (SC)]. Thus, circular which is contrary to the statutory provisions has really no existence in law (i.e. circular 26/26/2017-GST).

It is pertinent to note that the aforesaid judgment may unlock floodgates of opportunities for the innumerable taxpayers across the country with respect to the revision of past returns.

14. GSTR 3B is not a return u/s 39 of CGST Act

AAP and Co. vs UOI (Gujarat High Court)

  • Initially, it was decided to have three returns i.e. return for outward supplies in GSTR-1, return for inward supplies in GSTR-2, and a combined return in Form GSTR-3. However, due to the technical difficulties in the portal and the difficulty faced by the taxpayer, the return in form GSTR-2 & 3 are in abeyance. Accordingly, in order to ease the burden of the taxpayer, shorter return in form GSTR-3B was introduced but it was not in lieu of Form GSTR-3.
  • Therefore, it was observed that the return in Form GSTR-3B is only a temporary stop-gap arrangement till due date of filing the return in Form GSTR-3 is notified. However, notifications were issued from time to time extending due date for filing Form GSTR-3 and which shall be subsequently notified in the Official Gazette.

Author comments: Subsequent to the aforesaid decision, Notification No. 49/2019 – CT dated 9th October, 2019 was issued which amended Rule 61(5) of the CGST Rules providing that GSTR 3B shall be a return u/s 39 of CGST Act, 2017 and such rule is amended retrospectively with effect from 1st July 2017.

This decision was appealed by Govt to the Supreme court where it has been stayed for time being. It would be interesting to see how the Apex Court deals with the flip flop nature of legislation and the continuous retrospective amendments approach of the government.

D. Payment of tax

15. Interest cannot be levied on Gross liability before adjusting ITC

Refex Industries Ltd vs ACCGST & CE (Madras High Court)

  • Section 50 is specifically intended to apply to a state of deprival & cannot apply in a situation where the State is possessed of sufficient funds to the credit of the assessee. The proper application of Section 50 is one where interest is levied on belated cash payment but not on ITC available with the Department to the credit of the assessee since the latter being available with the Department is neither belated nor delayed.
  • The Hon’ble HC, inter alia, relied on the newly inserted proviso to Section 50(1) of the CGST Act to opine that this recently inserted proviso, as per which interest shall be levied only on the ‘cash’ part of the tax inserted w.e.f. August 01, 2019, clearly seeks to correct an anomaly in the provision as it existed prior to such insertion, hence should thus, be read as clarificatory and operative retrospectively.

Author Comments: Section 100 of Finance act, 2019 provided for amendment in section 50 of CGST Act, 2017 and introduced proviso to section 50 which provides that interest shall be charged on that portion of tax that is paid by debiting the electronic cash ledger. However, no notification has been issued to make this amendment effective. Further, in 39th GST council meeting it was proposed that Interest for delay in payment of GST is to be charged on the net cash tax liability retrospectively w.e.f. 01.07.2017.

16. Mere availment of ITC without utilization not liable for interest

Commercial Steel Engineering Corporation vs State of Bihar (Patna High Court)

  • Reflection of transitional credit in an electronic ledger is not sufficient to draw penal proceedings until the same or any portion thereof, is put to use so as to become recoverable.
  • Order passed by the Assistant Commissioner of State Taxes in purported exercise of power vested in him under section 73 of ‘the BGST Act’ is held per se illegal and an abuse of the statutory jurisdiction and is accordingly quashed and set aside.

Author comments: This judgment seeks to reiterate that mere entry in electronic credit ledger does not call for any recovery or penal proceedings. It is only when such credit amount is set off against tax liability as per returns, proceedings can commence. In the interpretation of Section 73, the High Court in this case has interpreted the word ‘availed’ as a positive act which will reduce tax liability and thus appears to have read ‘availed’ and ‘utilized’ more or less synonymously.

The decision also does not correctly distinguish the position of law laid down in UOI v. Ind-Swift Laboratories of Apex Court which is consistently used by the department in order to recover interest liability on wrongful availment of ITC. Therefore, one should be careful in applying the ratio of aforesaid decisions in similar cases.

continued in Part II- Landmark Judgments from Sl.17 to 30.

(Article is co-authored by CA Mannu Kashliwal and CA Manish Sachdeva. The authors could be reached at [email protected] and [email protected] for any queries /feedback)

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May 2021