IMPORTANT JUDGMENT, RULING OF MAY 2023
1. Show Cause Notice (SCN) of Rs.21,000 crores issued by the Revenue department to Gameskraft Technologies (P.) Ltd is quashed being illegal, arbitrary, and without jurisdiction.
The Honorable High Court of Karnataka has quashed the biggest-ever SCN issued by the revenue department is illegal, arbitrary, and without jurisdiction in the case of M/s Games kraft Technologies (P.) Ltd. V. Directorate General of Goods Services Tax Intelligence (WRIT PETITION No. 19570 OF 2022 C/W WRIT PETITION Nos. 22010 OF 2021, 18304 OF 2022, 19561 OF 2022, 20119 OF 2022 AND 20120 OF 2022) dated May 11, 2023. The Court ruled that the games like rummy, whether played online or physically, with or without stakes, are considered as games of skill, and wagering contracts are recognized as part of the business under Section 2(17) of the CGST Act, 2017. However, this does not mean that lottery, betting, and gambling are synonymous with games of skill. Games of skill are not considered taxable under Entry 6 of Schedule III, which applies to games of chance such as lottery, betting, and gambling. Taxation of games of skill falls outside the scope of the term “supply” according to Section 7(2) of the CGST Act, 2017 read with Schedule III.
This has been a major blow to the revenue department and once again the Honorable Karnataka High Court has delivered a welcome judgment against the illegal, arbitrary, and without jurisdiction attempt to bye-pass the law laid down by the parliament of the country.
This has been the most celebrated case in recent times, and both sides took interesting defenses and arguments and high profile senior counsels presented this case in the lights of Dr. Abhishek Manu Singhvi advocate for the petitioner and Sh. Mukul Rohtgi for the respondent.
2. Can a vague show cause notice be issued to the taxpayer without communicating the relevant information and material?
No, the Honorable High Court of Madhya Pradesh in the case of M/s Durge Metals V. Appellate Authority and Joint Commissioner State Tax (WRIT PETITION NO. 6124 OF 2020) dated May 10,2023 has ruled that Since the show cause notice issued to the taxpayer was vague to extent of not communicating relevant information and material, same was to be quashed with liberty to the competent authority to proceed in the matter in accordance with the law.
This is a welcome decision by the Honorable High Court of Madhya Pradesh and it comes to the rescue of the taxpayer once again the Rule of Land stands tall against the over-passionate administration.
The Revenue Department has to understand that this kind of approach renders the “due process” laid down in the statute “Superfluous, unnecessary and nugatory”, which is impermissible in the law.
3. Is it necessary to issue a notice under Section 61 of the CGST Act, 2017, before initiating the proceedings under Section 74 of the CGST Act, 2017?
No, the Honorable High Court of Allahabad in the case of Nagarjuna Agro Chemicals (P.) Ltd. V. State of U.P. (WRIT TAX NO. 336 OF 2023)dated May 15, 2023, has held that the non-issuance of notice under Section 61 of Central Goods and Services Tax Act does not affect the validity of proceedings initiated under Section 74, therefore, proceedings of revenue were considered valid and the assessee was permitted to avail remedy of appeal.
Very rightly the honorable High Court of Allahabad has dismissed the writ petition of the assesses in this case. As per the law, there is no requirement of issuing notice under section 61 of the CGST Act, 2017 before proceeding U/s 74 of the Act.
The taxpayers must not file writ petitions morally because it is statutorily permitted, rather adjudication process/ order must be tested for “grounds of maintainability” of appeal/ Writ.
4. Can the transported goods which were intercepted and detained, be released on furnishing of the bank guarantee or payment in cash of 200% of tax?
Yes, the Honorable High Court of Madras in the case of Haresh Kumar V. Assistant Commissioner(ST) (W.P.NO. 14628 OF 2023) dated May 05, 2023, has held that Where assessee transported a consignment of goods that was intercepted and detained on ground that supplier, from whom assessee purchased goods had wrongly passed on Input Tax Credit and assessee filed a statutory appeal before Appellate Authority after payment of 25 percent of disputed penalty, goods were to be released on furnishing Bank Guarantee or payment in cash of 200 percent of tax.
Immediately after the discrepancy is noted in the inspection report in Form GST MOV 04 and an update in Part-B of Form GST EWB-03 is filed on the Portal, the provisional release must be requested in plain-paper application, which will be permitted on furnishing a bond in GST MOV-08 vide provisional release order also in Form GST MOV 05.
Very often it is noted that the proper officer rejects the application for provisional release of detained articles under section 129(1)(c) and insists on payment of the penalty imposed notwithstanding section 129(5). The first Appellate Authority admits appeals against the order in Form GST MOV-09, considering the amount paid under section 129(1)(a) or (b) to be a ‘deposit’ when it is urged and noted that option the furnish security was not entertained by the proper officer.
5. Whether the order for provisional attachment of bank account would cease to be operative after the expiry of the statutory period of one year?
Yes, the Honorable High Court of Delhi in the case of M/s Merlin Facilities (P.) Ltd. V. Union of India (W.P.(C) NO. 5931 OF 2023, CM APPL. NOS. 23273-23274 OF 2023) dated May 08, 2023, has ruled that the Operation of an order provisionally attaching bank account would cease to be operative after the expiry of the statutory period of one year as per Section 83(2) of the CGST Act,2017.
Section 83(2) of the CGST Act, 2017 expressly provides that such provisional attachment of any property, including a bank account to protect the interest of the revenue, after the initiation of proceedings under Chapter XII, XIV or Chapter XV shall cease to have effect after the expiry of the period of one year from the date of the order made.
These are preemptive and emergency powers and must be exercised strictly in accordance with the law. Post expiry of one year period, this turns out to be institutionalized theft, and passion to protect the revenue does not authorize by passing the law.
6. Can the assessee be deprived of the statutory benefit of stay under Section 112(9) of CGST Act, 2017 due to non-constitution of the GST Appellate tribunal?
No, the Honorable High Court of Patna in the case of Ritesh Infratech (P) Ltd. V. Union of India (CIVIL WRIT JURISDICTION CASE NO. 5316 OF 2023) Dated April 24, 2023, has held that assessee could not be deprived of the statutory benefit of stay under section 112(9) of CGST Act, 2017 due to non-constitution of GST Appellate Tribunal and recovery of balance amount was to stay subject to deposit of 20 percent of the remaining amount of tax in dispute in addition to the amount earlier deposited under section 107(6) of the Act.
7. Is the recipient of service allowed to seek the Advance Ruling?
Yes, the Honorable High Court of Calcutta in the case of Anmol Industries Ltd.V. West Bengal Authority for Advance Ruling, Goods and Services Tax (M.A.T. NO. 630 OF 2023I.A. NO. CAN 1 OF 2023) Dated April 21, 2023, has held that the appellants/assessee being registered under GST were entitled to maintain an application for advance ruling, even though they were recipients of services, as ruling sought on the applicability of an exemption notification fell within the scope of section 97(2)(b).
8. Is the taxpayer allowed a refund of IGST on ocean freight, since theNotification No. 8/2017-IT (Rate) dated 28.06.2017 and Notification No. 10/2017-IT (Rate) dated 28.6.2017 have already been declared ultra-vires?
Yes, the Honorable High Court of Gujarat in the case of Etc Agro Processing (India) (P.) Ltd. V. Union of India(R/SPECIAL CIVIL APPLICATION NO. 1204 OF 2021) dated April 26, 2023, has held that the Assessee-company has paid IGST on ocean freight charged by foreign vessel provider to overseas supplier for transportation of goods upto customs clearance destination in India on basis of Notification No. 8/2017-IT (Rate) dated 28.06.2017 and Notification No. 10/2017-IT (Rate) dated 28.6.2017 since the impugned notifications have already been declared ultra vires, competent authority was directed to refund IGST collected on ocean freight.
9. Can the refund application filed u/s 77 of CGST Act,2017 be rejected on the grounds of limitation?
No, the Honorable High Court of Jharkhand in the case of Gajraj Vahan (P.) Ltd. V. State of Jharkhand (W.P.(T) NO. 1801 OF 2021) Dated May 10, 2023, has held that the application for a refund under section 77 for the payment made in the wrong head cannot be rejected on the grounds of limitation because circular bearing no. 162/18/2021 read with notification no. 35/2021-Central Tax, dated 24.09.2021 provide for the extension of limitation of refund in case of wrong deposit.
10. Can the application for the refund of accumulated ITC be rejected without giving the opportunity for a hearing?
No, The Bombay High Court in the case of M/s. Knowledge Capital Services V. Union of India (WRIT PETITION NO. 61 OF 2023) dated March 29, 2023, has held that refund of accumulated credit under Section 54(3) of the CGST Act cannot be rejected when the Petitioner was neither given the opportunity to clear deficiencies in its application for the refund nor given any hearing. The Court also held that format for issuance of Deficiency Memo as well as SCN is already prescribed by the CGST Rules and by attaching a file in a non-prescribed format, the revenue did not adhere to the procedure envisaged under the Rules. Further, the objections raised by the revenue were in nature of deficiencies in the application and did not warrant issuance of SCN. Accordingly, the Court quashed the refund rejection Order and restored the refund application to be processed as per the procedure laid down in Rule 92 of the CGST Rules.
Even if a refund is to be denied, a speaking order must be passed rejecting the refund for good and sufficient reasons and properly founded in the law.
Unlike other notices for demand, a refund is a very crisp proceeding because the taxpayer is fully seized of the facts and needs to be “put at notice” on certain specific matters that need a response to consider the application to sanction or reject the said refund.
11. Whether ITC can be claimed during the revocation of canceled GST registration?
Yes, the Honorable Rajasthan High Court in the case of M/s R.K. Jewelers v. Union of India (D.B. CWP No. 4236 of 2023 dated April 26, 2023) has held that the cancellation of the registration effected on the ground of non-filing-of GST return, could be revoked and the assessee can claim Input Tax Credit (“ITC”) when the department considers the issue of revocation of such canceled GST registration.
Further held that the assessee shall be entitled to lodge its claim for availing of ITC in respect of the period from the cancellation of the GST registration till the GST registration is restored.
12. Is the opinion formed by the Commissioner under Section 83 of CGST Act, 2017 based on credible material having a live link with the formation of opinion?
Yes, the Honorable High Court of Delhi in the case of Sidhivinayak Chemtech (P.) Ltd. V. Principal Commissioner, CGST (W.P.(C) NO. 17547 OF 2022) Dated April 21, 2023, has held that the Formation of opinion by the Commissioner under Section 83 of CGST Act, 2017 should be based on credible material having live link with the formation of opinion. Bank accounts could not be attached on mere suspicion. Moreover, the Assets of a person falling under Sub-section (1A) of Section 122 of CGST Act, 2017 can be attached only by a Commissioner who exercises jurisdiction in respect of said taxable person. The term ‘Commissioner’ as used in Section 83 of CGST Act, 2017 would necessarily refer to the Commissioner who exercises jurisdiction under the CGST Act in respect of ‘the taxable person’.
13. Employee services from branch office to head office, and vice versa to attract 18 pc GST: AAR
The Authority for Advance Ruling (AAR), Karnataka in the case of Profisolutions Pvt Ltd has held that the services provided by employees of a company’s branch office to its head office and vice versa located in different states would be liable to 18 percent GST.
The AAR observed that under GST law supply of services between two registrations of the same person in the same state or in different states attracts tax.
“Services, including services of common employees of a person, provided by the branch office to head office and vice versa, each having separate GST registration, will attract GST liability”.
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14. Can the Refund application be rejected due to the absence of physical signatures on documents?
No, the Honorable Rajasthan High Court in the case of M/s Medicamen Biotech Ltd. v. Union of India (D.B. CIVIL WRIT PETITION NO. 2604 OF 2023) dated April 10, 2023, has held that where the requisite declarations/undertakings under Rules 89(2)(d) and 89(2)(e) of Central Goods and Services Tax Rules, 2017 were digitally authenticated by authorized signatory of assessee in manner prescribed under Rule 26 ibid, refund of GST paid on supplies made to SEZ unit/developer could not be denied merely on ground that such declarations/undertakings were not physically signed by assessee due to oversight before scanning and attaching them with refund application.
The High Court observed that Rule 26 provides e-signature as a valid method for authentication. GST law nowhere mandates the physical signing of documents. Hence, the Revenue cannot insist on the same basis as administrative instructions. The Court held that administrative instruction cannot bar the claim of refund when statutory requirements are fulfilled.
The Honorable Rajasthan High Court has rightly ordered that administrative instruction cannot bar the claim of refund when statutory requirements are fulfilled. Important to note that master Circular No. 125/44/2019-GST dated November 18, 2019, nowhere specify for the physical signing of declarations. However, the Circular enlists certain other conditions over and above statutory requirements. Taxpayers can rely on this judgment if revenue rejects a refund claim due to non-fulfillment of additional conditions specified in the Circular.
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15. Whether there is any liability to pay Service Tax on liquidated damages collected from vendors?
No, The CESTAT, Chennai in the case of M/s. Bharat Heavy Electricals Limited v. The Commissioner of G.S.T and Central Excise [Service Tax Appeal No. 41500 of 2019 dated April 26, 2023] held that recovery of liquidated damages from the defaulting party cannot be said to be towards any service since the purpose of imposing damages is to ensure that the defaulting act is not undertaken or repeated.
Relying on the case of, South Eastern Coalfields Ltd. v. Commissioner of Central Excise and Service Tax, Raipur [2020 (12) TMI 912 –CESTAT, New Delhi] wherein the Hon’ble bench has analysed the scope and ambit of sections 65B (44), 66E (e) and 67 (1) of the Finance Act, 1994 and also analysed various decisions of the Hon’ble Supreme Court and thereafter, concluded that the view of the Principal Commissioner therein that the penalty amount, forfeiture of earnest money deposit and liquidated damages received by the Appellant therein towards “consideration” for “tolerating an act” as being amenable to Service Tax under Section 66E (e) of the Finance Act, was not sustainable.
Held that the recovery of liquidated damages or penalties from another party cannot be considered as payment for any specific service. The imposition of compensation or penalty is intended to prevent or deter the defaulting party from repeating the same offense, and it cannot be regarded as payment for tolerating the defaulting party’s conduct.
It is to be noted that, in this regard circular no. 178/10/2022-GST dated August 03, 2022 has been issued to state that no GST leviable on liquidated damages, compensation and penalty arising out of breach of contract pertaining to ‘agreeing to the obligation to refrain from an act or to tolerate an act or a situation, or to do an act’ unless there is supply of services with reciprocity in this regard.
16. When there is no mens rea, can the extended period of limitation be invoked?
No, The CESTAT, Kolkata in M/s. Bhootpurva Sainik Kalyan Sangh v. Commissioner of Central Excise & Service Tax (Service Tax Appeal No. 566 of 2011 dated May 11, 2023) held that there should be a misread to evade payment of service tax for the demand of service tax and penalty beyond the period of limitation. Held that there is no evidence brought on record to substantiate the claim that the Appellant has suppressed the taxable value from the department as there should be misread to evade payment of service tax, therefore, the SCN issued for an extended period is not valid.
Hence, the demand for service tax and interest is confirmed, and the penalty imposed under section 78 of the Finance Act 1994, in the impugned order cannot be upheld due to ground of limitation
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17. Whether the development fees collected by the airport on behalf of the airport authority is chargeable to service tax?
No, the Honorable Supreme Court in the case of Central GST Delhi – III v. Delhi International Airport Ltd (Civil Appeal No. 8996 of 2019 dated May 19, 2023) held that neither is there any compulsion to levy development fee nor is the collection conditional upon its deposit in the government treasury. Observed that development fees, collected under Section 22A of the AAI Act are statutory exactions and not fees or tariffs, as was contended by the Union of India and there is a distinction between the charges, fees, and rent etc., collected under Section 22 of the AAI Act and the User Development Fee (“UDF”) levied and collected under Section 22A of the AAI Act.
Noted that, The UDF collected by the Respondent is to bridge the funding gap of project cost for the development of future establishment at the airports, there is nothing on record to show that any additional benefit has accrued to passengers, visitors, traders, airlines, etc., upon levy of the UDF during the period in question.
Held that there is neither any compulsion to levy development fee nor is the collection conditional upon its deposit in the government treasury. However, the absence of these features, in this court opinion, does not render UDF any less a statutory levy. Held no Service tax leviable on the UDF, being a statutory levy.
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18. Whether the Writ Petition is maintainable before the High Court, considering the availability of the appellate remedy under Section 107 of the CGST Act?
No, The Hon’ble Orissa High Court in the case of Twisha Educational Private Limited v. Addl. CT & GST Officer (W.P (C) No.11358 of 2023 dated May 01, 2023) directed the assessee to file an appeal before the appropriate authority under Section 107 of the Central Goods and Services Tax Act, 2017 (“the CGST Act”), as assessee claims that the GST authorities attached their bank account without issuing any prior notice. The Court has advised the assessee to pursue their remedy through the established appellate process rather than seeking relief through a writ petition. Further, the Court dismissed the writ petition on the basis that the petitioner has an alternative remedy available through the appellate process.
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19. Whether the demand of interest and penalty is liable to stay in the absence of the GSTAT?
Yes, the Honorable Orissa High Court in Prafulla Kumar Sahoo v. Commissioner of CT & GST Odisha, Banijyakar Bhavan & Ors. (W.P.(C) No. 15842 of 2023 & I.A. No. 7254 of 2023 dated May 17, 2023) had stayed the demand of penalty and interest raised by the Revenue Department, during the pendency of writ petition, subject to the condition that the assessee deposits the entire amount of tax demanded within a period of 15 days since the assessee wanted to avail the remedy under the provisions of law by approaching GST Appellate Tribunal (“GSTAT”).
Noted that, in case the Petitioner wants to avail the remedy by preferring to appeal before the GSTAT, the Petitioner would be liable to pay 20% of the disputed tax for consideration of its appeal. If the Petitioner wants to avail the remedy under the provisions of law by approaching GSTAT, which has not yet been constituted, the amount of penalty and interest demanded shall remain stayed during the pendency of the petition, subject to the condition that the Petitioner deposits the entire amount of tax demanded within a period of 15 days.
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20. Whether Revenue Department can continue the attachment of bank accounts for several years under Section 83 of the CGST Act?
No, the Honorable Madras High Court in the case of Nitesh Jain Mangal Chand v. The Senior Intelligence Officer (W.P. No. 18776 of 2022 dated April 3, 2023) held that, delay in issuing the Show Cause Notice (“SCN”) cannot justify the continuation of the attachment under Section 83 of the Central Goods and Services Tax Act, 2017 (“the CGST Act”), which is itself provisional in nature. Observed that Section 83 of the CGST Acct cannot be deployed continuously for several years to protect revenue and it must be resorted only to ensure that the Revenue Department is issuing notice and finalizing proceedings in a time-bound fashion. Held that the delay of nearly four years in issuing the SCN cannot be a reason to continue attachment under Section 83 of the CGST Act, which itself is provisional in nature.
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21. Rent on Accommodation buildings located outside the boundaries of religious places are chargeable to GST
The AAR, Gujarat, in the matter of M/s. Nandini Ashram Trust [Advance Ruling no. GUJ/GAAR/R/2023/18 dated April 26, 2023] ruled that since the assessee was providing accommodation to pilgrims outside the boundary of the temple and the rooms rent charged was INR 1000 thus, the exemption sought was not available.
Stated that, as in terms of Sr. no. 13(b) of Notification No. 12/2017-Central Tax (Rate) dated June 28, 2017 (“the Services Exemption Notification”), the exemption is for the activity of renting of precincts of a religious place meant for the general public, which is owned or managed by an entity registered as a charitable or religious trust under section 12AA of the IT Act or a trust or an institution registered under sub-clause (v) of clause (23c) of section 10 of the IT Act or body or an authority covered under clause (23BBA) of section 10 of the IT Act.
Ruled that the Applicant is liable to pay GST at the rate of 12%. Since, the premise is not owned by the Ambaji Temple Trust but by the Applicant, which was rented to pilgrims and is located outside the boundary of the temple.
Accordingly, the Applicant will be liable to be registered if the aggregate turnover in a financial year exceeds INR 20 Lakhs.
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22. Traders of second-hand gold in the form of lumps or irregular shapes cannot avail GST chargeable under the margin scheme
The AAR, Karnataka, in the matter of M/s. White Gold Bullion Pvt. Ltd. [Advance Ruling no. KAR ADRG 20/2023 dated May 15, 2023] ruled that purchasing second-hand gold in the form of jewelry/parts of jewelry, from unregistered individuals and selling to registered / unregistered dealers, after melting in the form of lumps / irregular shapes of gold will not get the benefit of the changeability of GST on the margin difference between the sale price and purchase price as stipulated in Rule 32(5) of the Central Goods and Services Tax Rules, 2017 (“the CGST Rules”).
Held that gold jewelry is a distinct category of an article having distinct characteristics and is not the same as gold lumps, as the melting of gold jewelry into gold lumps changes the characteristics of the articles and thus results in a change in the classification of the article. Since the processing done by the Applicant changes the nature of goods, they are not eligible to avail of the benefits of Rule 32(5) of the CGST Rules.
Further held that the Applicant purchasing second-hand gold in the form of jewelry/parts of jewelry, from unregistered individuals and selling to registered / unregistered dealers, after melting the same, in the form of lumps / irregular shapes of gold cannot pay GST on the margin difference between the sale price and purchase price as stipulated in Rule 32(5) of the CGST Rules and the HSN Code for Old Gold Jewelry is 7113 and after melting into gold lumps or irregular shapes of gold, the HSN Code is 7108.
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CA Ritesh Arora is a Partner at Ritesh Arora & Associates and a highly experienced practicing Chartered Accountant specializing in indirect taxation. With over a decade of expertise, he provides comprehensive solutions to clients, catering to their diverse financial and regulatory needs. Ritesh Arora offers services including GST compliance, tax consultancy, and litigation support, assisting businesses in navigating the complex realm of indirect taxes and optimizing their tax positions. With his practical insights and commitment to delivering high-quality service, Ritesh Arora is a trusted partner in effectively managing clients’ tax affairs.