Case Law Details
Office of Principal Commissioner Vs R. Chandrashekar (Karnataka High Court)
The Karnataka High Court decided appeals challenging a common order of a Single Judge in a batch of writ petitions concerning the applicability of GST to works contracts that were entered into before 01.07.2017 but continued after the introduction of the GST regime.
The writ petitioners were contractors registered under the Karnataka Value Added Tax Act (KVAT) who subsequently obtained GST registration after GST came into force. They had executed works contracts awarded by various Government departments and agencies, with most contracts entered into before 01.07.2017 under the then-prevailing Schedule of Rates. Many had opted for the KVAT Composition Scheme, while others were assessed under the regular VAT scheme. Although part of the work was executed before GST, some work, invoicing, or payments occurred after 01.07.2017.
The agreements provided that the quoted rates were inclusive of applicable sales and other taxes. The contractors contended that these rates did not account for GST, which became applicable at 18% from 01.07.2017 to 21.08.2017 and 12% thereafter, increasing their tax burden. After receiving notices from tax authorities requiring payment of GST and filing of returns, with cancellation of GST registration proposed for non-compliance, the contractors sought reimbursement of the additional tax burden from the employers and requested that no coercive action be taken. Their representations were not accepted, leading to the writ petitions.
The Single Judge disposed of the petitions by directing Government departments and agencies to determine the portion of work executed before and after GST, calculate the differential tax, consider supplementary agreements wherever required, and reimburse the differential GST amount where applicable. The order also permitted the contractors to file GST returns or amended returns without interest, penalty, or limitation, and directed GST authorities not to take precipitative action for six months.
In appeal, the challenge was confined to the directions issued against the tax authorities. The appellants argued that the waiver of interest, penalty, and limitation, as well as permission to file or amend returns in the manner directed, was contrary to the statutory scheme. They submitted that interest under Section 50 of the Central Goods and Services Tax Act, 2017 is automatic and mandatory, with no discretion to waive it.
The High Court held that the dispute regarding reimbursement of the incremental GST burden was strictly between the contractors and the employers under their contracts. Such contractual disputes could not alter the statutory provisions governing GST liability, assessment, recovery, and enforcement. Liability under the GST laws must be determined strictly in accordance with the applicable statutes.
The Court further held that no directions could be issued permitting revised returns contrary to the statute or waiving statutory interest, penalty, or limitation. Since the dispute concerned the contractual allocation of the additional tax burden, no directions could be issued to tax authorities regarding levy, assessment, collection, interest, or penalty. Accordingly, the Court construed the direction regarding reimbursement of differential tax as applicable only to the concerned employers and not to the tax authorities. The Single Judge’s order was set aside to the extent it issued directions to the tax authorities, and the appeals were disposed of accordingly.
FULL TEXT OF THE JUDGMENT/ORDER OF KARNATAKA HIGH COURT
1. The appellants have filed the present appeals impugning the judgment dated 11.04.2023 passed by the learned Single Judge of this Court in W.P.No.19067/2019; W.P.No.30107-118/2019; W.P.No.9721/2019; W.P.No.15086/2019 and W.P.No.50889/2019 [impugned order]. The prayers in the writ petitions were substantially similar and the writ petitioners in the main writ petition, inter alia, prayed as under:
“(a) Declare that the provisions of the GST Act are inapplicable in respect of works contracts where provisions of service are made prior to 01.07.2017 in so far as the petitioners are concerned and consequently that the respondent Nos. 4 to 8 have no jurisdiction to either issue notice or to take any coercive steps against the petitioners under the provisions of the GST Act dated 01.07.2017 produced as Annexure-H2;
(b) Declare that the provisions of Section 7(3) read with clause 6 of Schedule II of the GST Act is ultra vires Article 366 (12A), (26A), (29A)(b) & (f) of the Constitution in view of the settled principles of law laid down by the Hon’ble Supreme Court regarding “works contract” and consequently that the respondent Nos. 4 to 8 have no jurisdiction to either issue notice or to take any coercive steps against the petitioners under the provisions of the GST Act for “works contract” entered into post 01.07.2017 i.e. after the GST Act came into effect, which is produced as Annexure-H2; and
(c) Direct the respondent No. 1 to consider the representations as per Annexure-C-1, Annexure-C-2 and Annexure-C-3 all dated 24.11.2018 in tandem with Annexures-D, E1 to E6; and
(d) Pass such other orders as may be deemed appropriate under the circumstances of the case, in the ends of justice.”
2. The writ petitioners state that they were registered under the Karnataka Value Added Tax Act, 2003 [the KVAT Act] and had obtained GST registration after the rollout of the Goods and Services Tax [GST] regime with effect from 01.07.2017.
3. The writ petitioners are contractors who, being the successful bidders in tenders invited by various Government Departments, agencies and instrumentalities [the Employers], had entered into works contracts for the execution of works. The tenders were invited and the agreements were entered into largely prior to 01.07.2017, at the Schedule of Rates [SR] then prevailing under the VAT regime. Most of the writ petitioners having opted for the Composition Scheme under Section 15 of the KVAT Act, discharged tax at 4% of the turnover, which was deducted at source by the respective Employers, while some were assessed under the regular VAT scheme under the KVAT Act. Part of the works was executed, and in some cases invoices were raised or payments received, after 01.07.2017.
4. Although copies of the contracts were not produced in their entirety, the writ petitioners had produced extracts of the agreements. The agreements expressly provided that the rates quoted by the contractor shall be deemed to be “inclusive of the sales and other taxes” that the contractor would have to pay for the performance of the contract.
5. The writ petitioners claimed that since the rates quoted were on the basis of the SR prevailing prior to 01.07.2017, the same did not include the element of GST – Central GST, SGST and IGST – payable under the relevant GST Acts. With the Goods and Services Tax Acts coming into force on 01.07.2017, the works contracts came to be subjected to GST at the rate of 18% (for the period from 01.07.2017 to 21.08.2017) and at 12% thereafter. This increased the tax burden of the writ petitioners. The tax authorities issued notices calling upon the writ petitioners to discharge GST on the works contracts at the applicable rates and to file returns, failing which their GST registration was proposed to be cancelled. The writ petitioners submitted representations dated 24.11.2018 seeking that the incremental tax burden be borne by the Employers and that no coercive action be taken. The representations were not favourably considered and this led the writ petitioners to approach this Court.
6. The writ petitions filed by the writ petitioners were allowed by the learned Single Judge. The impugned order is a common order passed in a batch of writ petitions [Sri. Chandrashekaraiah and others v. The State of Karnataka (W.P.No.9721/2019 and connected matters, including W.P.No.19067/2019, W.P.No.30107-118/2019; W.P.No.15086/2019 and W.P.No.50889/2019), decided on 11.04.2023]. The operative part of the impugned order reads as under:
“20. In the result, I pass the following:-
ORDER
i. Petitions are hereby disposed of.
ii. The Respondents-State and other Govt agencies / Respondents who have entered into works contract with the Petitioners are issued the following directions / guidelines:-
a. Calculate the works executed pre-GST (prior to 01.07.2017) under KVAT regime and payments received by the Petitioners.
b. The payments received by the Petitioners pre-GST for such of the works executed before 01.07.2017 are to be assessed under KVAT tax regime – either under COT or VAT scheme as applicable.
c. Calculate the balance works to be completed or completed after 01.07.2017, in the original contract.
d. Derive the rate of materials, KVAT items required or used to complete the balance works.
e. Deduct the “KVAT” amount from those materials and the service tax, if applicable.
f. Add the applicable “GST” on those items.
g. Input Credit on the materials is to be arrived at and be set off as against the output GST, for those assessed under regular VAT.
h. Further, the “tax difference” should be calculated on such balance works executed or to be executed after 01.07.2017 separately.
i. Based on the result obtained on calculation of the tax difference on the contract value, concerned department/authority has to decide whether agreement needs to be changed or not.
j. A supplementary agreement may be signed with the Petitioners for the revised GST-inclusive work value for the Balance Work completed or to be completed as determined above and in case the revised GST-inclusive work value for the Balance Work, completed or to be completed after 01.07.2017, is more than the original agreement work value, the Petitioners are to be paid /reimbursed, as the case may be, the differential tax amount by the concerned employer; so also, in case payments for works completed pre-GST are made post-GST, the concerned employer has to pay or reimburse, as the case may be, the differential tax amount, to the Petitioners.
iii. Petitioners are directed to submit comprehensive representations to the respective employers/Respondents within a period of 4 weeks from the date of receipt of a copy of this order, irrespective of whether they have completed the works pre-GST or post-GST or payments were received or yet to be received post-GST.
iv. If such representations are submitted, the respective employers/Respondents are directed to consider and dispose of the same in the light of the aforesaid directions / guidelines as expeditiously as possible and at any rate within a period of 8 weeks from the date of submission of the representations.
v. In view of the interim orders passed by this Court in the present petitions, such of the petitioners who had not filed their GST returns during the period after 01.07.2017 are permitted to file their returns / amended returns, pursuant to the calculation of the differential tax as per procedure above under GST regime, without insisting on interest or penalty or limitation.
vi. The GST authorities are also directed not to take precipitative action against the Petitioners for a period of 6 months from the date of receipt of a copy of this order.
vii. Liberty is reserved in favour of the petitioners to challenge any order / decision passed / taken by the respondents or the authorities, subsequent to this order and also take recourse to such remedies as available in law.”
7. The learned counsel appearing for the appellants has confined the challenge to the impugned order to the directions issued to the tax authorities. It is submitted that the operative part of the impugned order – insofar as it permits the writ petitioners to file returns / amended returns for the period after 01.07.2017 by calculating the differential tax in the manner set out therein, waives the interest, penalty and the period of limitation under the GST Acts, and directed the GST authorities not to take precipitative action against the writ petitioners – is contrary to the statutory scheme. It is submitted that the levy of interest under Section 50 of the Central Goods and Services Tax Act, 2017 is automatic and mandatory and admits of no discretion to waive or reduce it, and that there is no provision enabling the filing or amendment of returns in the manner directed.
8. The dispute as to whether the writ petitioners would be entitled to reimbursement of the incremental tax paid or payable by them on account of the levy of GST is strictly a matter between the writ petitioners and the Employers with whom they had entered into the contracts. The contracts between the writ petitioners and the Employers would not alter the statutory scheme for the levy of GST. Thus, the liability of the writ petitioners to pay Goods and Services Tax (whether under the Central Goods and Services Tax Act, 2017, the State Goods and Services Tax Act, 2017 or the Integrated Goods and Services Tax Act, 2017) is required to be determined strictly in accordance with the provisions of the relevant statute. The question of the levy of GST, assessment, recovery, and enforcement is a matter of statutory prescription.
9. In view of the above, no directions could be issued permitting
the filing of any revised returns contrary to the provisions of the statute. The plenary directions to waive the penalty, interest under the GST Acts or the limitation for filing returns/revised returns are also unsustainable.
10. The controversy as to the incremental tax burden arising on account of the change in the tax regime is, in essence, one between the writ petitioners and the Employers. In the context of such a dispute, no directions could be issued to the tax authorities regarding the levy, assessment, and collection of tax, penalty, or interest.
11. In the aforesaid view, the direction issued to the respondents to reimburse the differential tax is required to be construed as a direction only to the concerned Employers and not to the tax authorities.
12. Accordingly, the impugned order, to the extent it issues directions to the tax authorities, is set aside. The appeal is disposed of in the aforesaid terms.
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