Madras High Court Stays further proceedings in challenge to residual entry at Serial No. 453 of Schedule III of Rate Notification

Polyspin Private Limited Vs State of Tamil Nadu & others (Madras High Court)

Madras High Court Stays further proceedings in challenge to residual entry at Serial No. 453 of Schedule III of the Rate Notification

The Hon’ble Madras High Court, vide it’s order dated 06.03.2024, in the case of M/s Polyspin Private Limited Vs. State of Tamil Nadu & others (W.P. No. 6041 of 2024), on a prima facie case being made out, has stayed further proceedings pursuant to the appellate order issued by the GST appellate authority. The department had confirmed the demand against the petitioner by classifying the paper bags under the residual entry at Serial No. 453 of Schedule III of the Rate Notification (Notification No. 1/2017 – Central Tax (Rate), dated 28.06.2017, as amended), making them taxable at the rate of 18%, whereas the petitioner had classified the paper bags under chapter heading 4819 30 000, making them taxable at the rate of 12%.

The petitioner argued as under:-

Article 279A of the Constitution of India provides that the GST Council shall make recommendations to the Union and the States on ‘the rates including floor rates with bands of goods and services tax’.

A committee of officers of the Central Government and the State Governments (i.e., the ‘Fitment Committee’) was constituted, which met on 18-19 April 2017, 4-6 May 2017 and 10 May 2017 inter alia in order to fit the goods in the bands of rate of GST approved by the GST Council in its 3rd Meeting and on the basis of guidelines prescribed by the GST Council in its 4th Meeting. Resultantly, the Fitment Committee put together a GST Rate Schedule for Goods containing five (5) Annexures being Annexure I, II, III, IV and V giving a list of goods recommended to be kept at GST Rates of Nil, 5%, 12%, 18% and 28%. These Annexures were circulated by the Fitment Committee before the GST Council for its consideration in Agenda Notes of 14th Council Meeting to be held on 18-19 May 2017 and are contained in Volume 3 of the said Agenda Notes as Agenda Item No.9.

GST Rate Schedule recommended by the Fitment Committee was discussed by the GST Council at its 14th Meeting held from 18.05.2017 to 19.05.2017 under Agenda Item 9: Approval of the Fitment of Goods and services into the various rate slabs, details of which are contained in paragraphs 15 to 29 of the Minutes of the 14th Council Meeting held on 18-19 May 2017.

After discussions, the GST Council approved the GST rate on supply of goods as presented in Volume 3 of the Agenda Notes to the 14th Council Meeting containing aforesaid GST Rate Schedule consisting of Annexures I to V and the Addendum thereto, with the modifications with respect to 25 items. (Paragraph 18 of the Minutes of the 14th Council Meeting held on 18-19 May 2017).

The GST Council agreed to the proposal that GST rates would be generally prescribed at the 4-digit HS Classification, unless a carve out was specifically required to specify the rate for a good at 6-or-8-digit level and that for GST purposes, the classification of goods and the Rules of Interpretation thereof as given in the First Schedule to the Customs Tariff Act, 1965 be relied upon (Paragraph 29.1 of the Minutes of the 14th Council Meeting held on 18-19 May 2017)

The GST Council did not recommend a residuary entry to be included in the GST Rate Schedule to include goods not specified anywhere else.

Section 9(1) provides that the Central Government is to inter alia notify the rate of tax on supply of goods ‘on recommendations of the Council’. As per the judgement of the Hon’ble Supreme Court in the case Mohit Minerals (cited supra), the recommendations of the GST Council for the purposes of Section 9 are binding on the Government. Therefore, it was incumbent upon Central Government to issue the Rate Notification in alignment with the recommendations of the GST Council. Consequently, anything in the Rate Notification which travels beyond the scope of the recommendations of the GST would tantamount of exercise of powers by the Government in excess of that conferred upon it by Section 9 and to that extent the Rate Notification ultra vires and invalid.

GST Rate Schedule, as proposed by the Fitment Committee, for consideration of the GST Council, and subsequently, approved by the GST Council post detailed discussions did not contain a residual entry like the one contained at Serial No. 453 of Schedule III of the Rate Notification. Thus, the GST Council, while making recommendations to the Government as regards the prescription of rates, did not recommend inclusion of such a residual entry.

As a result, the Rate Notification is ultra vires Section 9(1) of the CGST Act and deserves to be quashed as invalid to the extent its suo-moto introduces the concept of a residual entry.

It was further submitted that paragraph 15.4 of the 14th GST Council meeting states that five annexures indicating GST rates for goods cover approximately 1211 items at the 4-digit HSN classification level, whereas the total number of items at the 8-digit level is about 11,000. Consequently, it is evident that roughly 89% of the items would fall under the residuary category. Thus, the absence of specified rates for such a large quantity of items grants arbitrary and unreasonable authority to GST officers to classify even specifically notified items under the residuary entry on the slightest pretext, according to their own discretion, rendering the rules of interpretation of the Customs Tariff adopted for GST rate notification redundant. Further, A Tariff Rate is fixed considering various issues of socio economic condition, consumer surplus, income level, consumption level, nature of product like essential, merit or demerit items, rates prevailing in the region, inflation etc. Residual Rate is arbitrary since the rate is fixed without considering any of the factors and its continuance for an indefinite period is against basic parameters of GST Legislation.

FULL TEXT OF THE JUDGMENT/ORDER OF MADRAS HIGH COURT

The notification No.1/2017-Central Tax (Rate) dated 28.06.2017 issued by the first respondent and the Notification No.II(2)/CTR-532 (d-4)/2017 dated 29.06.2017 issued by the second respondent are under challenge as is the appellate order dated18.08.2023.

2. The primary basis of challenge is that rate fixation is a function assigned to the GST Council under the Central Goods and Services Tax Act, 2017 and that the GST Council meetings did not recommend the inclusion of residuary entry 453.

3. Learned counsel for the petitioner referred to the impugned order and pointed out that the petitioner had remitted a total sum of Rs.12,11,97,175/- towards the disputed tax amount of Rs.12,23,79,681/-. In these circumstances, since a prima facie case is made out, there shall be an order of interim stay of all further proceedings pursuant to the appellate order under challenge until the matter is heard next.

4. Mr.Sai Srujan Tayi, learned senior standing counsel, accepts notice on behalf of respondents 1,4 and 5; Mr. P.Balathandayutham, learned Special Government Pleader, accepts notice on behalf of the second respondent; and Mr.T.N.C.Kaushik, learned Additional Government Pleader (Taxes), accepts notice on behalf of the third respondent.

List the matter on 04.04.2024.