Case Law Details
Baba Lokenath Flour Mills Private Limited Vs Director General of Goods and Services Tax Intelligence (DGGI) & Ors. (Calcutta High Court)
The recent judgment in Baba Lokenath Flour Mills Pvt. Ltd. v. Director General of Goods and Services Tax Intelligence (DGGI) addresses critical aspects of GST exemption eligibility and procedural fairness in the issuance of show cause notices under the Central Goods and Services Tax (CGST) Act, 2017.
Background
Baba Lokenath Flour Mills Pvt. Ltd., the petitioner, operates in the flour milling sector and entered into a contract with the State Government for the conversion of wheat into fortified atta (flour). Under this agreement, wheat is supplied by the State Government, retaining ownership throughout, while the petitioner mills, fortifies, and packs the wheat into atta for distribution through the Public Distribution System (PDS). Additionally, by-products generated during the milling process are retained and later sold by the petitioner in the open market at rates set by the government. The petitioner receives cash and non-monetary consideration (Rs. 136.48 per quintal minus Rs. 43 for gunny bags) for these services.
The petitioner sought a ruling from the Advance Ruling Authority (AAR) to clarify the value of the supply and applicable tax rate, specifically regarding the status of milling services as a composite supply potentially exempt from GST under Notification No. 12/2017. The AAR ruled that the milling service, as a composite supply, qualifies for exemption because the value of the goods involved does not exceed 25% of the total value, meeting the exemption criteria under serial No. 3A of Notification No. 12/2017.
Issue of Show Cause Notice
Despite the AAR’s favorable ruling, the DGGI issued a show cause notice under Section 74 of the CGST Act, alleging suppression of transaction value by the petitioner. The show cause notice referenced Explanation 2 of Section 74, indicating that the petitioner’s declaration of a transaction value of Rs. 136.48 per quintal, instead of Rs. 260.48 (including Rs. 124 of non-cash consideration), constituted “suppression.” The DGGI contended that this alleged suppression warranted the invocation of an extended period for reassessment.
Arguments Presented
1. Petitioner’s Argument: Counsel for Baba Lokenath Flour Mills argued that the issuance of the show cause notice under Section 74 is unwarranted, given the binding nature of the AAR ruling on the respondents. Section 103 of the CGST Act stipulates that AAR decisions are binding unless appealed. Since the DGGI did not appeal the AAR’s ruling, the petitioner contended that the ruling remains enforceable, and the show cause notice is without basis.
2. Respondent’s Argument: Representing the DGGI, the respondents argued that despite the binding nature of AAR rulings, they retain the authority to issue a show cause notice under specific circumstances, as outlined in Section 97(2). They argued that procedural safeguards are maintained since the petitioner is provided an opportunity to respond to the notice.
Court’s Observations and Judgment
After reviewing the arguments, Justice Raja Basu Chowdhury emphasized that the petitioner had established a prima facie case, particularly given the AAR ruling in their favor. The court also acknowledged the procedural correctness of the petitioner’s objection to the show cause notice on the grounds of an unchallenged, binding AAR decision.
Considering the circumstances, the court concluded that the petitioner should be allowed to respond to the show cause notice with interim protection. Accordingly, the court granted the petitioner an additional thirty days to file a response to the notice. Furthermore, the court directed the DGGI to provide a fair opportunity for the petitioner to present their case before any final order is issued. Importantly, the court stipulated that any decision by the proper officer on the matter would not be implemented without the court’s explicit permission.
Key Takeaways
1. AAR Rulings as Binding Decisions: This judgment underscores the binding nature of AAR rulings on both the taxpayer and the tax authorities. According to Section 103 of the CGST Act, unless an AAR ruling is challenged through an appeal, it remains legally enforceable, limiting the scope for the issuance of further show cause notices that contradict such rulings.
2. Scope of Section 74 in GST Proceedings: Section 74 of the CGST Act deals with situations involving suppression of facts, willful misrepresentation, or fraud in tax matters. The court’s interim protection indicates a need for prudence when invoking Section 74, particularly when the facts and taxability have been clarified by a prior ruling. This decision thus signals the judiciary’s commitment to procedural fairness by ensuring that taxpayers are not subjected to repeated scrutiny absent new, material evidence.
3. Reinforcement of Procedural Fairness: By granting interim protection and directing that a final order cannot be implemented without the court’s leave, the judgment protects the petitioner from potentially prejudicial administrative actions. It underscores the judiciary’s role in balancing regulatory enforcement with fairness and due process for taxpayers.
4. Implications for Composite Supply and GST Exemptions: The judgment also highlights essential criteria for GST exemptions related to composite supply. Here, the court and the AAR both acknowledged that milling services performed on behalf of the government, where the value of goods does not exceed 25% of the total supply value, qualify for exemption. This interpretation aligns with the government’s intent to exempt specific essential service providers under the GST framework.
Conclusion
The Calcutta High Court’s ruling in Baba Lokenath Flour Mills Pvt. Ltd. v. DGGI reaffirms the binding nature of AAR decisions and emphasizes the need for procedural fairness in GST-related matters. By granting the petitioner the opportunity to respond with interim protection, the judgment provides clarity on the treatment of composite supplies under GST exemption notifications and establishes boundaries for the issuance of show cause notices under Section 74. This case underscores the importance of respecting prior rulings and ensuring administrative actions adhere to principles of justice and fair play.
FULL TEXT OF THE JUDGMENT/ORDER OF CALCUTTA HIGH COURT
1. Challenging a show cause notice dated 1st/3rd August, 2024 passed under Section 74 of the Central Goods and Services Tax Act, 2017(hereinafter referred to as the “said Act’) in DRC 01, for the tax period 2017-18 to 2020-21, the instant petition has been filed.
2. The petitioner claims to be engaged in the business of flour milling industry. It provides services of milling, fortification and packing of wheat and converting the same into fortified atta and packing thereof. In usual course, the petitioner claims to have entered into a contract with the Governor to the State of West Bengal represented by the District Controller of Food and supplies for conversion of wheat into atta. As per the contractual terms, the wheat shall be provided by the State Government to the petitioner for distribution through public distribution system which is a function entrusted to a panchayat. The petitioner claims that the ownership of wheat and atta always remains with the State Government and is never transferred to the flour miller. The flour miller is only required to convert the same into atta. The process of conversion, according to the petitioner, involves mixing of certain vitamins, crushing of wheat by premixing micro nutrients to the same and ultimately packing the same. In the process as aforesaid, the by-products that is generated is retained by the petitioner and subsequently further processed to make them saleable in the market and are eventually sold in the open market at the rates notified by the State of West Bengal, Department of Food and Supplies. According to the petitioner, the cash consideration for each quintal is Rs.136.48 after deduction of Rs.43 for the two gunny bags for each quintal which is the non-monetary consideration.
3. The petitioner would submit that under the circumstances, morefully indicated in the writ petition, the petitioner had applied before the Advance Ruling Authority as provided in Section 97(1) of the said Act by raising the following questions:-
a. “What is the value of supply of services provided by the petitioner company to the state government?
b. What is the rate of tax applicable on the value of supply? What components are to be included in calculation of the percentage of value of goods in the total value of composite supply for the purpose of Notification No.2/2018 – Central Tax (Rate)?”
4. He submits that the said Advance Ruling Authority by taking into consideration the relevant notifications and the milling fortification, packing and other related process in relation to the contract being executed by the petitioner had observed that the non cash consideration for by-products and gunny bags allowed to the flour miller is Rs.124 for each 100 Kg of wheat. Following the above, it had concluded that the total value of supply to be Rs.260.48 per quintal, out of which Rs.136.48 is the cash consideration and Rs.124 is the non cash consideration. Accordingly, the amount of Rs.124 for each quintal of wheat was considered equivalent, to the consideration not in money for the purpose of determination of the value of supply under Clause (b) of Rule 27 of the WBGST Rules, 2017, which figure was within the applicant’s knowledge at the time of supply. The advance ruling authority also noted that the value of the goods stands at Rs.60 against the total value of supply of Rs.260.48, thereby the value of goods involved in the composite supply stands at 23.03 % of the total value of supply as such does not exceed 25 % of the value of the composite supply. Thus, by noting that value of supply shall be the consideration in money as well as non cash consideration and accordingly held that the composite supply of services by way of milling of food grains into flour to Food & Supplies Department, Government of West Bengal for distribution under public distribution system is eligible for exemption under entry serial no. 3A of the Notification No.12/2017 Central Tax (Rate) dated 28th June, 2017 as amended since, the value of goods involved in such composite supply does not exceed 25 % of the value of supply.
5. Having regard thereto, Mr. Mazumder, learned advocate appearing on behalf of the petitioner would submit that there is no justification for the respondents to issue the show cause, that too under Section 74 of the said Act. By drawing attention of this Court to page 150, paragraph 13.1, of the show cause he would submit that the authority had proceeded to invoke Section 74 of the said Act by observing as follows:-
“13.1. In terms of explanation 2 of Section 74, the expression “suppression” shall mean non-declaration of facts or information which a taxable person is required to declare in GSTR returns under GST Act. But in the insant case the taxpayer has declared transaction vlue of the said composite supply as Rs.136.48 per quintal of wheat instead of established (as above) transaction value of Rs.260.48 per quintal of wheat by way of suppressing the transaction value of Rs.124/- per quintal of wheat”.
6. Since the aforesaid, according to the petitioner could not constitute suppression, having regard to the Advance Ruling issued under Section 97 of the said Act, there was no justification in invoking the extended period. He submits that in the facts as noted above, this Hon’ble Court may be pleased to stay the show cause.
7. Mr. Mazumder would also submit that although, the said Act provides for an appellate remedy, the respondents chose not to prefer an appeal against the Advance Ruling order dated 26th June, 2023. As such the same in terms of Section 103 of the said Act is binding on the respondents.
8. Mr. Banerjee, learned advocate appearing on behalf of the DGGI authorities on the other hand by placing before this Court the provisions of Section 97(2) of the said Act would submit that the advance ruling though binding on the department yet the circumstances under which the same can be avoided has clearly been spelt out in the statute. Admittedly in this case, the aforesaid aspect has been taken into consideration by the proper officer while issuing the show cause. He would submit that by reasons of the subsequent events and the circumstances more particularly noted in the show cause, the aforesaid ruling can no longer bind the department. In any event, he would submit that the present matter is only at the show cause stage and this Hon’ble Court, at this stage, ought not to interfere especially, having regard to the fact that the petitioner is yet to respond to the show cause.
9. Having heard the learned advocates appearing for the respective parties and taking note of the jurisdictional issue raised, I am of the view that the writ petition is required to be heard.
10. Considering the prima facie case made out by the petitioner, especially considering the advance ruling, however, at the same time noting that a show cause has been issued, I am of the view that the petitioner is entitled to a limited interim protection.
11. In view thereof, I grant liberty to the petitioner to respond to the aforesaid show cause dated 1st/3rd August, 2024. Taking into consideration the fact that the writ petition has been affirmed on 30th August, 2024, and since, the time to file response has already expired, the petitioner shall be at liberty to file its response within a period of thirty days from date.
12. In the event, the petitioner responds to the aforesaid show cause within the aforesaid period or in the alternative the petitioner not responding to the same, the proper officer upon giving an opportunity of hearing to the petitioner shall hear out and decide the same in accordance with law.
13. It is made clear that the order to be passed by the proper officer shall not be given effect without leave of this Court.
14. Let affidavit-in-opposition to the present writ petition be filed within a period of eight weeks after the annual vacation. Reply thereto, if any, be filed within four weeks thereafter.
15. Liberty to mention for inclusion in the list after expiry of the period of exchange of affidavits.
16. Parties shall act on the basis of the server copy of this order duly downloaded from the official website of this Court.
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