Solatium paid for land acquisition for Metro construction not exigible to GST: Karnataka HC

Smt. Asha R Vs Assistant Commissioner of Commercial Taxes (Enforcement-17) (Karnataka High Court)

Facts of the case:

1. The petitioners received compensation in respect of the land acquired for construction of metro rail project in accordance with the provisions of Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013 and Karnataka Industrial Area Development Act, 1966.

2. The respondent Department issued Show Cause Notice and thereafter passed the impugned orders alleging the same to be consideration for “an obligation to do an act, or an obligation to tolerate an act or an obligation to refrain from an act” and hence a declared service as per entry 5(e) of Schedule – II to the Central Goods and Services Tax (‘CGST’) Act.

3. The Hon’ble Court discussed the relevant provision of the CGST Act in detail along with discussions of the GST Council at the time of implementation of law along with jurisprudence settled by Hon’ble Apex court in various cases and held that Solatium is part and parcel of the compensation payable for the acquisition of land and hence the same falls within the ambit of entry 5 of Schedule III of CGST Act and hence don’t fall within the ambit of supply as per the provisions of CGST Act.

4. Therefore, Solatium received by the petitioner towards compulsory acquisition of land is not exigible to GST.

FULL TEXT OF THE JUDGMENT/ORDER OF KARNATAKA HIGH COURT

In W.P.No.2552/2024, petitioner seeks for the following reliefs:-

“a) Issue a writ of certiorari or any other writ or direction or order to quash Form GST DRC-01 No.  ADCOM/ENF/SZ/ACCT-17/SUM-01/2023-24 dated
30.10.2023 for the period 2019-20 issued by the Respondent No.1 is enclosed as Annexure-A.

b) Issue a writ of certiorari or any other writ or direction or order to quash impugned show cause notice dated 30.10.2023 bearing no. ADCOM/ENF/SZ/ACCT-17/SUM-01/2023-24 for the period of 2019-20 issued by the Respondent No.1, enclosed as Annexure-A1 for the reasons stated in the grounds.

And

c) Grant such other consequential reliefs as this Honourable High Court may think fit including refund of amounts paid with interest, If any and the cost of this writ petition.”

In W.P.No.17524/2024, petitioner seeks for the following reliefs:-

“a) Issue a writ of certiorari or any other writ or direction or order to quash summary of order in Form GST DRC-07 bearing No. ZD290324053076F dated 20/03/2024 issued by the Respondent No.2, is enclosed as Annexure-A.

b) Issue a writ of certiorari or any other writ or direction or order to quash order in original bearing No. ACCT(A)-5.6/DGSTO-05/ADJ/DRC-7/FILES 87/2023-24 dated 20/03/2024 for the period 2020-21 issued by the Respondent No.2, is enclosed as Annexure-A1.

c) Issue a writ of certiorari or any other writ or direction or order to quash summary of show cause notice in Form DRC-01 bearing No. ADCOM/ENF/SZ/DCCT-08/SUM-23/2023-24 dated 09/10/2023 for the period 2020-21 issued by Respondent No.1, is enclosed as Annexure-B.

d) Issue a writ of certiorari or any other writ or direction or order to quash show cause notice bearing no. ADCOM/ENF/SZ/DCCT-08/SUM-231/2023-24 dated 09/10/2023 for the period 2020-21 issued by Respondent No.1, is enclosed as Annexure-B1.and

e) Grant such other consequential reliefs as this Honourable High Court may think fit including refund of amounts paid with interest, if any and the cost of this writ petition.”

In W.P.No.10838/2024, petitioner seeks for the following reliefs:-

“a) Issue a writ of certiorari quashing the Order No. ACCT(Audit)-5.3/ORD-U/s.73/2023-24 and Summary of the Order in FORM GST DRC – 07 Reference No.ZD291223099737S both dated 30.12.2023 passed by Respondent No.3 vide Annexure-A to the Writ Petition;

b) Grant such other order or direction as deemed fit by this Hon’ble Court in the facts and circumstances of the case.”

In W.P.No.4571/2024, petitioner seeks for the following reliefs:-

“a) Issue a Writ of Certiorari or any direction to quash and strike down the impugned Order bearing ADCOM/ENF/SZ/CTO-19/U-73/ADJ-08/2023-24 dated 04.12.2023 for F.Y.2017-18; under Section 73(9) of the KGST Act, 2017 r/w CGST Act, 2017, IGST Act, 2017 and GST (Compensation) Act, 2017 vide Annexure-A as being void, illegal, beyond authority and hence unconstitutional.

b) Declare the act of Respondent of issuing the impugned order vide Annexure-A is bad in law.

c) Any other relief/s as this Hon’ble Court deems fit in the interest of justice and equity.”

In W.P.No.5858/2024, petitioner seeks for the following reliefs:-

“a) Issue a Writ of Certiorari or any direction to quash and strike down the impugned Order bearing CTO(Audit)-4.2/GST/U-73/2023-24 dated 20.12.2023 for F.Y.2017-18; under Section 73(9) of the KGST Act, 2017 r/w CGST Act, 2017, IGST Act, 2017 and GST (Compensation) Act, 2017 vide Annexure-A as being void, illegal, beyond authority and hence unconstitutional.

b) Declare the act of Respondent of issuing the impugned order vide Annexure-A is bad in law.

c) Any other relief/s as this Hon’ble Court deems fit in the interest of justice and equity.”

2. Since common questions of law and fact arise for consideration in all the petitions, they are taken up together and disposed of by this common order.

3. Briefly stated the facts in these petitions are as under:-

The petitioners were owners of immovable properties which were acquired by the KIADB for the benefit of the BMRCL for the purpose of construction of Bangalore Metro Rail Project under the provisions contained in Section 28 of the KIAD Act. In pursuance of the same, the BMRCL offered package compensation to the petitioners, who accepted the same and entered into Agreements with the KIADB under Section 29(2) of the KIAD Act and received compensation towards acquisition of the lands. Subsequently, the respondents –revenue issued the impugned show cause notices calling upon the petitioners to pay GST towards the solatium component of the package compensation received by the petitioners. The petitioners having issued replies to the impugned show cause notices, the respondents proceeded to pass the impugned orders in original upholding and confirming the demands as per the impugned show cause notices in all the writ petitions except W.P.No.2552/2024, in which the respondents did not pass any order except issuing the show cause notices to the petitioner in the said petition. Aggrieved by the impugned show cause notices and the impugned orders, petitioners are before this Court by way of the present petition.

4. Heard Sri. V. Raghuraman, learned Senior counsel for the petitioners along with other counsel on record and Sri. K. Hema Kumar, learned AGA for the respondents – Revenue and perused the material on record.

5. Learned Senior counsel for the petitioners would reiterate the various contentions urged in the petition and referred to the material on record and the relevant provisions of the Central Goods and Services Act, 2017(for short ‘the CGST Act’), Karnataka Goods and Services Act, 2017(for short ‘the KGST Act’), Land Acquisition Act, 1894( for short ‘the L.A. Act’ ), Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013 (for short ‘ the RFCTLARR Act) and Karnataka Industrial Area Development Act, 1966 (for short ‘ the KIAD Act) in order to contend that the act of the petitioners receiving compensation containing / including the solatium component cannot be construed or treated as the petitioners agreeing to the obligation to refrain from an act, or to tolerate an act or a situation or to do an act as contemplated in Entry 5(e) of Schedule – II to the CGST / KGST Act as explained in the Circular No.177/09/2022-GST dated 03.08.2022, Circular No.178/10/2022-GST dated 03.08.2022, Circular No.214/1/2023 – Service Tax dated 28.02.2023 and other Circulars issued by the respondents. It is submitted that the receipt of compensation including solatium component from the respondents for the purpose of the petitioners transferring and relinquishing their right over the lands acquired by the State / KIADB for the benefit of BMRCL would amount to transfer/sale of land within the meaning of Entry No.5 of Schedule – III to the CGST / KGST Act, which exempts levy of GST and consequently, the respondents did not have jurisdiction or authority of law to demand payment of GST on solatium from the petitioners who are not liable to pay the same and consequently, the impugned show cause notices and orders deserve to be quashed. In support of his submissions, learned Senior counsel placed reliance on the following judgments:

(i) Panna Lal Ghosh vs. Land Acquisition Collector – (2004) 1 SCC 467;

(ii) Sunder vs. Union of India – (2001) 7 SCC 211;

(iii) Union of India vs. Tarsem Singh –(2019) 9 SCC 304;

(iv) CST vs. Bhayana Builders Pvt. Ltd., – 2018 (10) GSTL 118 (SC);

(v) Munjaal Manishbhai Bhatt vs. Union of India – 2022 (62) GSTL 262;

(vi) GE T & D India Ltd., vs. Deputy Commissioner of Central Excise, Chennai – 2020 (35) GSTL 89 (Mad);

(vii) Societe Thermale d’Eugenie-les-Bains vs. Ministere de I’Economie, des Finances et de I’Industries C-277/05;

(viii) Jurgen Mohr vs. Finanzamt Bad Segeberg C­215/94;

(ix) Landboden Agrardienste GmBH & Co. vs. Finanzamt Calau C- 384/95;

(x) CST, Chennai vs. Repco Home Finance Ltd., – 2020 (42) GSTL 104 (Tri-LB);

(xi) Southeastern Coalfields Ltd. Vs. Commr of C.Ex. & ST Raipur – 2021 (55) GSTL 549 (Tri-Del);

(xii) Western Coalfields Ltd., vs. Commissioner of CGST & Central Excise, Nagpur – 2023 (4) Centax 271 (Tri-Mum);

(xiii) GM Finance, Bhel vs. Commissioner of CGST & Central Excise – 2022 (62) GSTL 186 (Tri-Kol);

(xiv) Paradip Port Trust vs. Commissioner of CGST & Central Excise – 2022 (62) GSTL 186 (Tri-Kol);

(xv) Neyvelli Lignite Corporation Ltd., vs. Commissioner of Customs, Central Excise & ST, Chennai – 2021 (53) GSTL 401 (Tri-Chennai);

(xvi) RJ Tolsma vs. Inspecteur der Omzetbelasting Leeuwarden, decided by ECJ in Case 6/93;

(xvii) Appeal and Pear Development Council vs. Commissioners of Customs and Excise, decided by ECJ in Case 102/86;

6. Per contra, learned AGA for the respondents would reiterate the various contentions urged in the statement of objections and submit that there is no merit in the petitions and the same are liable to be dismissed.

7. I have given my anxious consideration to the rival submissions and perused the material on record.

8. The following points arise for consideration in the present petitions;

(i) Whether the compensation paid in favour of the petitioners towards acquisition of their lands by the State/KIADB under the Head ‘Solatium’ is exigible / amenable to levy of GST under the provisions of CGST/KGST Act, 2017?

(ii) Whether the impugned show cause notices, orders etc., issued / passed by the respondents deserve to be quashed?

9. Since both the issues are interlinked, they are taken up together for consideration. In my considered opinion, compensation paid in favour of the petitioners by the KIADB under the Head “Solatium” is not exigible / amenable to levy of GST under the provisions of CGST / KGST Act and the impugned notices, orders etc., issued / passed by the respondents are illegal, arbitrary and without jurisdiction or authority of law and the same deserve to be quashed for the following reasons:-

(i) The material on record discloses that the BMRCL offered package compensation to the petitioners which was accepted by them, pursuant to which, agreements under Section 29(2) of the KIAD Act were entered into between the petitioners and KIADB resulting in disbursement of compensation in favour of the petitioners. In this context, it is significant to note that neither the agreements nor other documents entered into between the petitioners and KIADB indicate that the petitioners have been paid solatium towards compensation received by them from the KIADB. In fact, it is only in the package compensation offered by the BMRCL that it chose to split up the compensation offered to the petitioners under various heads by designating solatium under one head amongst several heads of compensation; merely because the package compensation offered by the BMRCL is split into various heads, the compensation offered by the BMRCL under the designated head “Solatium” cannot be construed or treated or understood as solatium in the real sense of the term / expression “solatium” either under the L.A. Act or under RFCTLARR Act; in other words, the package compensation offered by the BMRCL by categorising / describing various amounts out of the total package offered under various heads including solatium was for the limited / restricted purpose of offering package compensation and in reality / substance, the said amount cannot be treated as solatium in true / strict / real sense as wrongly contended by the respondents whose contention cannot be accepted on this ground also.

(ii) It is an undisputed fact borne out from the material on record that pursuant to the package compensation offered by the BMRCL which was accepted by the petitioners, various documents including agreement, affidavit, indemnity bond, receipt etc., were executed by the petitioners in favour of the KIADB whereby the petitioners transferred, relinquished / abandoned and gave up their claim, right, title, interest, possession etc., in the lands in favour of KIADB for consideration offered by the BMRCL; it follows there from that though the BMRCL categorised a particular component of the consideration offered by them to the petitioners as solatium, in reality, the transaction essentially entered into between petitioners and KIADB under Section 29(2) of the KIAD Act was in the nature of a sale / transfer of all rights in land of the petitioners which was directly and squarely exempted from levy of GST under Entry 5 of the Schedule – III of the CGST / KGST Act, since compulsory acquisitions of land where the owners lose their entire right on the property is akin to sale and ought to be treated as such and on this score also, the impugned orders, notices etc., deserve to be quashed.

(iii) There is no gainsaying the fact that ordinarily, when compensation is awarded by the State / acquiring authority in favour of the land losers under any enactment, one of the components of compensation would necessarily be solatium paid by the State / acquiring authority; a land loser who is not satisfied with any component of compensation including the quantum of solatium awarded / granted in his favour would be entitled to challenge the same in accordance with law; however, in the instant cases, petitioners having entered into various documents with the KIADB agreeing to an undertaking that they would not seek enhancement of compensation under any of the heads designated / described / categorised in the package compensation offered by the BMRCL and would not be entitled to challenge the quantum of solatium which is yet another circumstance to indicate that though the BMRCL described / designated / categorised a particular portion of the amount offered by them as solatium, the said amount was not solatium in its real / true / strict sense of the term so as to make it exigible / amenable to levy of GST and as such, the contentions urged by the respondents cannot be accepted.

(iv) It is pertinent to note that as stated supra, the primary / main ground for levying GST on solatium by the respondents is by contending that the act of the petitioners in receiving the solatium component tantamounts to agreeing to an obligation to tolerate the act of acquisition within the meaning of Entry 5(e) of the CGST / KGST Act; in this regard, it is relevant to state that the entire compensation including the solatium component having been received by the petitioners pursuant to various documents executed by them in favour of the KIADB would clearly not amount to agreeing to an obligation to tolerate acquisition; in fact, rather than tolerating acquisition of their lands, petitioners have undisputedly executed various documents in favour of KIADB relinquishing / transferring / selling their right over the lands after receiving monetary compensation and neither these transactions nor any act, deed or thing done by the petitioners in this regard would amount to agreeing to the obligation to tolerate an act by the petitioners so as to attract Entry 5(e) of Schedule – II and consequently, on this ground also, the contention of the respondents cannot be accepted.

(v) Section 11(2) of the L.A.Act contemplated passing of a consent award pursuant to an agreement entered into between the land losers and the Government / acquiring authority; it is well settled that compensation paid under a consent award in terms of Section 11(2) of the L.A.Act was / is not amenable to levy of service tax / GST in respect of any of the various components of compensation including solatium. Similarly, certain States viz., Gurajat, Andhra Pradesh, Maharastra etc., amended Section 23 by inserting / incorporating Section 23-A of the RFCTLARR Act, thereby providing for passing of consent award pursuant to agreement entered into between the land losers and the Government / acquiring authority. In the instant cases, a perusal of the package compensation offered by the BMRCL as well as subsequent documents executed between the petitioners and KIADB will indicate that the compensation is paid with the consent of the petitioners, thereby indicating that no portion of the compensation including solatium would be exigible / amenable as wrongly contented by the respondents and viewed from this angle also, the contention of the respondents cannot be accepted.

(vi) Even assuming that the component / head described / designated / categorised as solatium in the package compensation offered by the BMRCL is to be treated or construed or understood as solatium, the said amount paid to the petitioners towards acquisition of their lands cannot be said to be exigible/amenable to GST for more than one reason; in this context, it is relevant to refer to the relevant statutory provisions of the CGST/KGST Act.

Section 7 of the CGST Act, reads as under:

Scope of supply.

7. (1) For the purposes of this Act, the expression “supply” includes––

(a) all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business;

(b) import of services for a consideration whether or not in the course or furtherance of business;[and]

(c) the activities specified in Schedule I, made or agreed to be made without a consideration;[****]

(d) [*****].

[(1A) where certain activities or transactions constitute a supply in accordance with the provisions of sub-section (1), they shall be treated either as supply of goods or supply of services as referred to in Schedule II.]

Entry 5(e) of Schedule II – Activities [or transactions] to be treated as supply of goods or supply of services, reads as under;

5. Supply of services.

The following shall be treated as supply of services, namely:-

(a) xxx

(b) xxx

(c) xxx

(d) xxx

(e) agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act; and

Entry 5(b) of the aforesaid Schedule II, reads as under:-5. Supply of services.

The following shall be treated as supply of services, namely:—

(a) renting of immovable property;

(b) construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, except where the entire consideration has been received after issuance of completion certificate, where required, by the competent authority or after its first occupation, whichever is earlier.

Explanation.—For the purposes of this clause—

(1) the expression “competent authority” means the Government or any authority authorised to issue completion certificate under any law for the time being in force and in case of non-requirement of such certificate from such authority, from any of the following, namely:—

(i) an architect registered with the Council of Architecture constituted under the Architects Act, 1972;or

(ii) a chartered engineer registered with the Institution of Engineers (India); or

(iii) a licensed surveyor of the respective local body of the city or town or village or development or planning authority;

(2) the expression “construction” includes additions, alterations, replacements or remodelling of any existing civil structure;

Entry 5 of Schedule III (Activities or transactions which shall be treated neither as a supply of goods nor a supply of services) reads as under:

5. Sale of land and, subject to clause (b) of paragraph 5 of Schedule II, sale of building.

(vii) Section 7(1) of the CGST/KGST Act provides for the scope of supply; it includes all forms of supply of goods and services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business.

(viii) Clause (d) of sub-section (1) of Section 7 states that the activities referred to in Schedule II shall be treated as “supply of goods” or “supply of services”. This clause was omitted vide CGST Amendment Act, 2018 w.e.f. 01.07.2017.

(ix) Simultaneously, Section 7(1A) was inserted vide CGST Amendment Act, 2018 w.e.f. 1.07.2017. It postulates that only when activities or transactions constitute a supply in accordance with Section 7(1), then they shall be treated as supply of goods or services as referred to in Schedule II. The effect of this would be that Schedule II will be merely a classification schedule and will not automatically lead to being considered a supply of goods or services or both.

(x) Entry No. 5(e) of Schedule II treats agreeing to the obligation to refrain from an act or to tolerate an act or a situation or to do an act as supply of service.

(xi) Section 7(2)(a) postulates that notwithstanding anything contained in Section 7(1), activities or transactions specified in Schedule III shall neither be treated as supply of goods nor supply of services.

(xii) Entry 5 of the III Schedule treats sale of land and subject to clause (b) of paragraph 5 of Schedule II, sale of building as neither supply of goods nor as supply of services.

(xiii) The nature of GST and its brief history was dealt with by this Court in the case of Tonbo Imaging India Pvt.Ltd vs. Union of India – (2023) 4 Centax 443, wherein it was held as under:

7. Before adverting to the rival contentions and the relevant statutory provisions, a brief overview of the GST scheme is required ; in this context, it is relevant to state that the entire scheme of indirect taxes in India has undergone transformation upon introduction of GST with effect from July 1, 2017. This tax is being levied with concurrent jurisdiction of the Centre and the States on the supply of goods or services. For this purpose, the Constitution of India has been amended vide Constitution (101st Amendment) Act, 2016 with effect from September 16, 2016. The Constitutional Amendment Bill specifically mentions that the objective of introducing GST is to avoid cascading effect of taxes.

8. The Central Government enacted the CGST Act to provide for levy and collection of tax on supply of goods or services or both where the supply is intra-State supply ; so also, the CGST Rules were also framed including the impugned rule 89(4)(C).

9. The Central Government enacted the IGST Act for the purpose of levy and collection of GST on the supply of goods or services or both where the supply is inter-State supply.

10. The State of Karnataka enacted the KGST Act to levy and collect tax on intra-State supply of goods or services or both within the state of Karnataka.

11. GST is a multi-stage tax, as each point in a supply chain is taxed (unless specifically exempted by law) till the goods and services reach the final consumer. This can be demonstrated by the following :

• A manufacturer procures “input goods” and “input services” to manufacturer his goods and would make “outward supply” to a wholesale supplier. Here, the levy of GST would be on the manufacturer/seller. However, the incidence of GST would be on the wholesale supplier.
• For the wholesale supplier, the goods procured from the manufacturer/seller becomes “input goods”. The wholesale supplier would make value additions thereon and make an “outward supply” of the same to the retailer. In doing so, GST is levied on the wholesale supplier, but the incidence of GST, which was earlier on the wholesale supplier, is further passed on to the retailer.
• The goods procured from the wholesale supplier becomes “input goods” for the retail seller. The retail seller would make value additions thereon and make an “outward supply” of the same to the final consumer. In doing the same, GST is levied on the retail seller, but the incidence of GST, which was earlier on the retail seller, is further passed on to the final consumer.
• The supply chain having been terminated, the final consumer will not be able to pass the incidence of tax any further and thus bears the final burden of tax.
• GST is therefore a destination-based tax on consumption of goods and services. It is levied at all stages right from manufacture up to final consumption with “credit” of taxes paid at previous stages of supply chain available as set-off. In a nutshell, only value addition will be taxed, and burden of tax is to be borne by the final consumer.

12. In the case of All India Federation of Tax Practitioners v. Union of India [2007] 9 VST 126 (SC) ; (2007) 7 SCC 527, the apex court held as under (page 153 in 9 VST) :

“6. At this stage, we may refer to the concept of ‘Value Added Tax’ (VAT), which is a general tax that applies, in principle, to all commercial activities involving production of goods and provision of services. VAT is a consumption tax as it is borne by the consumer.

7. In the light of what is stated above, it is clear that service tax is a VAT which in turn is destination based consumption tax in the sense that it is on commercial activities and is not a charge on the business but on the consumer and it would, logically, be leviable only on services provided within the country. The service tax is a value added tax.”

13. In the case of Union of India v. VKC Footsteps India Pvt. Ltd. [2021] 93GSTR 160 (SC) ; (2022) 2 SCC 603, the apex court held as under (para 23, page 202 in 93 GSTR) :

“44. The idea which permeates GST legislation globally is to impose a multi-stage tax under which each point in a supply chain is potentially taxed. Suppliers are entitled to avail credit of tax paid at an anterior stage. As a result, GST fulfils the description of a tax which is based on value addition. Value addition is intended to achieve fiscal neutrality and to obviate a cascading effect of taxation which traditional tax regimes were liable to perpetuate. In a sense therefore, the purpose of a tax on value addition is not dependent on the distribution or manufacturing model. The tax which is paid at an anterior stage of the supply chain is adjusted. The fundamental object is to achieve both neutrality and equivalence by the grant of seamless credit of the duties paid at an anterior stage of the supply chain.”

Section 16 of the IGST Act, 2017 reads as under :

“Zero rated supply.—(1) ‘zero rated supply’ means any of the following supplies of goods or services or both, namely :

(a) export of goods or services or both ; or

(b) supply of goods or services or both to a special economic zone developer or a special economic zone unit.

(2) Subject to the provisions of sub-section (5) of section 17 of the Central Goods and Services tax Act, credit of input tax may be availed for making zero rated supplies, notwithstanding that such supply may be an exempt supply.

(3) A registered person making zero rated supply shall be eligible to claim refund under either of the following options, namely :

(a) he may supply goods or services or both under bond or Letter of Undertaking, subject to such conditions, safeguards and procedure as may be prescribed, without payment of integrated tax and claim refund of unutilised input-tax credit ; or

(b) he may supply goods or services or both, subject to such conditions, safeguards and procedure as may be prescribed, on payment of integrated tax and claim refund of such tax paid on goods or services or both supplied, in accordance with the provisions of section 54 of the Central Goods and Services tax Act or the rules made there under.”

Section 54(3) of the CGST Act, 2017 reads as under :

54. Refund of tax.—(1) Any person claiming refund of any tax. ..

(2). ..

(3) Subject to the provisions of sub-section (10), a registered person may claim refund of any unutilised input-tax credit at the end of any tax period:

Provided that no refund of unutilised input-tax credit shall be allowed in cases other than—

(i) zero rated supplies made without payment of tax ;

(ii) where the credit has accumulated on account of rate of tax on inputs being higher than the rate of tax on output supplies (other than nil rated or fully exempt supplies), except supplies of goods or services or both as may be notified by the Government on the recommendations of the Council :

Provided further that no refund of unutilised input-tax credit shall be allowed in cases where the goods exported out of India are subjected to export duty :

Provided also that no refund of input tax credit shall be allowed, if the supplier of goods or services or both avails of drawback in respect of Central tax or claims refund of the integrated tax paid on such supplies.

(4). ..

Rule 89(4) of the CGST Rules, 2017 reads as under :

“89. Application for refund of tax, interest, penalty, fees or any other amount.—(1) – (3). ..

(4) In the case of zero-rated supply of goods or services or both without payment of tax under bond or letter of undertaking in accordance with the provisions of sub­section (3) of section 16 of the Integrated Goods and Services tax Act, 2017 (13 of 2017), refund of input tax credit shall be granted as per the following formula-Refund Amount = (Turnover of zero-rated supply of goods + Turnover of zero-rated supply of services) x Net ITC ÷· Adjusted Total Turnover Where,—

(A) ‘Refund amount’ means the maximum refund that is admissible ;

(B) ‘Net ITC’ means input tax credit availed on inputs and input services during the relevant period other than the input tax credit availed for which refund is claimed under sub-rules (4A) or (4B) or both ;

(C) ‘Turnover of zero-rated supply of goods’ means the value of zero-rated supply of goods made during the relevant period without payment of tax under bond or letter of undertaking or the value which is 1.5 times the value of like goods domestically supplied by the same or, similarly placed supplier, as declared by the supplier, whichever is less, other than the turnover of supplies in respect of which refund is claimed under sub-rules (4A) or (4B) or both

(D) ‘Turnover of zero-rated supply of services’ means the value of zero-rated supply of services made without payment of tax under bond or letter of undertaking, calculated in the following manner, namely :

Zero-rated supply of services is the aggregate of the payments received during the relevant period for zero- rated supply of services and zero-rated supply of services where supply has been completed for which payment had been received in advance in any period prior to the relevant period reduced by advances received for zero-rated supply of services for which the supply of services has not been completed during the relevant period ;”

(xiv) It would be relevant to note that the levy of GST is on goods or services or both and the same is defined in the CGST/KGST Act under Section 2(52) and Section 2(102) as under:

2. Definitions.- In this Act, unless the context otherwise requires,

(52) “goods”means every kind of movable property other than money and securities but includes actionable claim, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply; It is quite clear from the above that since goods is defined as movable property, it obviously does not include immovable property. It is also seen that though the definition of services is wide enough to cover anything other than goods, money and securities, it will have to be read in its context and cannot be given such a wide meaning as to include immovable property.

(102) “services” means anything other than goods, money and securities but includes activities relating to the use of money or its conversion by cash or by any other mode, from one form, currency or denomination, to another form, currency or denomination for which a separate consideration is charged;

(xv) In VKC Footsteps case supra, the Apex Court held that stamp duties and taxes on alcohol for human consumption provide a significant part of revenues of the states and that hence, the Parliament has consciously excluded them from the scope of GST so as to protect the revenues of States i.e., collecting stamp duties on land acquisition or sale or transfer as under:

“The jurisprudential basis furnishes a depiction of an ideal State of existence of GST legislation within the purview of a modern economy, as a destination-based tax. But there can be no gain saying the fact that fiscal legislation around the world, India being no exception, makes complex balances founded upon socio-economic complexities and diversities which permeate each society. The form which a GST legislation in a unitary State may take will vary considerably from its avatar in a nation such as India where a dual system of GST law operates within the context of a federal structure. The ideal of a GST framework which Article 279A(6) embodies has to be progressively realized. The doctrines which have been emphasized by Counsel during the course of the arguments furnish the underlying rationale for the enactment of the law but cannot furnish either a valid basis for judicial review of the legislation or make out a ground for invalidating a validly enacted law unless it infringes constitutional parameters. While adopting the constitutional framework of a GST regime, Parliament in the exercise of its constituent power has had to make and draw balances to accommodate the interests of the States. Taxes on alcohol for human consumption and stamp duties provide a significant part of the revenues of the States. Complex balances have had to be drawn so as to accommodate the concerns of the States before bringing them within the umbrella of GST. These aspects must be borne in mind while assessing the jurisprudential vision and the economic rationale for GST legislation. But abstract doctrine cannot be a ground for the Court to undertake the task of redrawing the text or context of a statutory provision. This is clearly an area of law where judicial interpretation cannot be ahead of policy making. Fiscal policy ought not be dictated through the judgments of the High Courts or this Court. For it is not the function of the Court in the fiscal arena to compel Parliament to go further and to do more by, for instance, expanding the coverage of the legislation (to liquor, stamp duty and petroleum) or to bring in uniformity of rates. This would constitute an impermissible judicial encroachment on legislative power. Likewise, when the first proviso to Section 54(3) has provided for a restriction on the entitlement to refund it would be impermissible for the Court to redraw the boundaries or to expand the provision for refund beyond what the legislature has provided. If the legislature has intended that the equivalence between goods and services should be progressively realized and that for the purpose of determining whether refund should be provided, a restriction of the kind which has been imposed in clause (ii) of the proviso should be enacted, it lies within the realm of policy.”

(xvi) As held by the Apex Court in the aforesaid judgment, though stamp duty transactions are on the instrument, given the fact that it is a major source of revenue, the GST Council deliberated on subsuming the same under GST so that real estate transactions of sale, acquisition, etc., could also be taxed under the GST regime; however, since the same could not be agreed upon, the GST regime was introduced without subsuming the said transactions and the same was left to the domain of the States.

(xvii) The Agenda Item 2A to the GST council minutes before the legislation was introduced would be of some relevance to our discussion;

Agenda Item 2A – GST TREATMENT OF LAND & BUILDING (REAL ESTATE)

1.1 Presently, under service tax law, the following services relating to real estate (land and building) are subjected to service tax: –

(1) Any lease, tenancy, easement, license to occupy land;

(2) Any lease or letting out of the building including a commercial, industrial, or residential complex for business or commerce. Both are covered under renting of immovable property, which has been declared a service under the Finance Act, 1994.

1.2 Further, construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly except where the entire consideration has been received after issuance of completion certificate, is chargeable to service tax.

It is proposed to treat the aforesaid activities under GST as supply of service (Model GST Law).

2.1 Under the Service Tax law, an activity which constitutes merely transfer of title in goods or immovable property is excluded from the definition of service [section 65B (44) of Finance Act].

2.2 Under the GST regime, it is proposed to subject supply of goods or services to GST. Goods have been defined under the Constitution to include “all materials, commodities and articles”. Likewise, services have been defined under the Constitution “as anything other than goods”. Goods and services tax have been defined in the Constitution to mean “any tax on supply of goods, or services or both except taxes on the supply of the alcoholic liquor for human consumption”. Supply has been defined in the model GST law in the broadest possible sense and includes sale.

2.3 What is presently being taxed under service tax law is provision of service in relation to land and buildings. Under the proposed GST, the taxable event is supply of goods or services [Articles 246A & 286 of the Constitution].

However, immovable property has not been included in the definition of goods in the model GST law. As mentioned in paras 1.1 and 1.2, only supply of services in relation to land and building has been proposed to be subjected to GST.

2.4 Thus, supply of immovable property (land and buildings) has been kept outside the purview of GST. It is felt, that this would distort the GST particularly when there is no constitutional or legal impediment to levy GST on supply of land and building to GST due to the following reasons: –

(i) Stamp duty, which is levied under Article 268, is with reference to documents and is collected by the Centre on documents listed in Entry 91 of the Union List while by the States on documents listed in Entry 63 of the State List. Therefore, the argument that because legal conveyance of title of land and buildings attracts stamp duty, they cannot be subjected to GST is facile because stamp duty is levied on documents while GST would be levied on the supply of land and buildings, whether as goods or services (“aspect theory” upheld by the Supreme Court in a host of judgements). Renting/leasing are subjected to service tax presently. Documents pertaining to such renting/leasing are subjected to stamp duty.

(ii) Entry 49 of the State List reads thus: –

“Taxes on lands and buildings”

It is felt that this entry is not an impediment to levy of GST on supply of lands and buildings because of the “aspect theory” upheld by the Supreme Court: while the stock of lands and buildings is subjected to tax by the States on the aspect of possessing land and buildings, the supply aspect can be subjected to GST.

(iii) Most international jurisdictions subject supply of land and building to GST/VAT (Australia, Canada, New Zealand, Malaysia, Singapore, South Africa, EU & UK).

(iv) Presently, because both VAT and service tax are leviable on under construction property and not on flats sold after completion of construction, buying an under construction flat is more taxing for a buyer.

(v) Further, though service tax and VAT are charged generally @ 4.5% and 1% of the value of the flat (which includes the value of the undivided share of land) respectively, there are embedded taxes in the flat. The total tax incidence in respect of flats in non metros is more than that in metros. In fact, where the value of land is less, the incidence of service tax and VAT is more (embedded taxes). GST on supply of land and building will equalize the tax incidence in respect of houses in metros and non-metros.

(vi) Without levying GST on supply of land and building, it would be very difficult to complete the input tax credit chain (ITC) and allow ITC in respect of construction services and construction material used in creation of immovable property which is further used for carrying out taxable activities. This is highly distortionary. While at the behest of business and industry, the ITC chain would get liberalized, the tax administration would forever be saddled with non-completion of ITC chain thereby resulting in disincentives to obtain taxable invoices for availing input tax credit. Non inclusion of land and building in GST results in cascading of taxes.

(vii) Gains from GST arising out of a comprehensive tax base, would be negated owing to a large hole in the tax base [As per MOSPI data, construction sector constitutes almost 9% of the total gross value added (GVA) in the country]. This is for the reason that levy of GST on supply of land and buildings would be an impediment to the generation, flow and parking of black money.

(viii) Land and building are not on the same footing as alcoholic liquor for human consumption as the latter is constitutionally outside the definition of goods and services tax (para 2.2 above).

3. In view of the discussion in the forgoing paras, it is imperative that supply of land and building is subjected to GST. However, certain categories of such supplies may be exempted in public interest. These are listed below: –

(I) Supply of vacant land for the purposes of agriculture.

(II) Supply of land for construction of, –

(a) a civil structure or any other original works pertaining to a scheme under Jawaharlal Nehru National Urban Renewal Mission or Rajiv Awas Yojana;

(b) a civil structure or any other original works pertaining to the ‘In –situ rehabilitation of existing slum dwellers using land as a resource through private participation’ under the Housing for All (Urban) Mission/Pradhan Mantri Awas Yojana, only for existing slum dwellers;

(c) a civil structure or any other original works pertaining to the Beneficiary-led individual house construction /enhancement under the Housing for All (Urban) Mission/Pradhan Mantri Awas Yojana;

(d) a structure meant for funeral, burial or cremation of deceased;

(e) a single residential unit, on land admeasuring not more than 100 square metres;

(f) low-cost houses up to carpet area of 60 square meters per house in a housing project approved by competent authority empowered under the ‘Scheme of Affordable Housing in Partnership’ framed by the Ministry of Housing and Urban Poverty Alleviation, Government of India;

(g) low cost houses up to a carpet area of 60 square meters per house in a housing project approved by the competent authority under:

1) the “Affordable Housing in Partnership” component of the Housing for all (Urban) Mission/ Pradhan Mantri Awas Yojana;

2) any housing scheme of a State Government.

(h) Post-harvest storage infrastructure for agriculture produce including cold storage for such purposes.

(III) Sale of:

a) houses constructed under Rajiv Awas Yojana;

b) houses constructed under ‘In –situ rehabilitation of existing slum dwellers using land as a resource through private participation’ under the Housing for All (Urban) Mission/Pradhan Mantri Awas Yojana, only for existing slum dwellers.

c) low-cost houses up to carpet area of 60 square meters per house in a housing project approved by competent authority empowered under the ‘Scheme of Affordable Housing in Partnership’ framed by the Ministry of Housing and Urban Poverty Alleviation, Government of India;

d) low cost houses up to a carpet area of 60 square meters per house in a housing project approved by the competent authority under:

 i. the “Affordable Housing in Partnership” component of the Housing for all (Urban) Mission/ Pradhan Mantri Awas Yojana;

ii. any housing scheme of a State Government.

(IV) Sale of residential premises other than new residential premises.

Note: – 1) A residential premise is new when any of the following apply:

1. it has not previously been sold as residential premises

2. a new building replaces a demolished building on the same land.

4.1 We may prescribe a different rate of GST for supply of land vis-à-vis supply of buildings, with full ITC of both.

4.2 Further, the amount of stamp duty paid on land or buildings, may be allowed to be excluded from the value of land or buildings, for levy of GST on their respective supply.

4.3 Alternatively, the amount of GST payable may be reduced by the amount of stamp duty paid on the land or buildings, subject to the condition that no refund of ITC would be availed under the duty inversion clause of GST law.

(xviii) As rightly contended by the learned Senior counsel for the petitioners, this Agenda Item to tax immovable property transactions was not agreed upon and at the GST council meeting held on 22^nd and 23^rd of December 2016, which is broadly set out hereunder:

Agenda Item 2A – CST Treatment of Land and Building (Real Estate)

10. The Secretary to the Council introduced this agenda and explained that in Section2(49), the definition of ‘goods’ included only movable property. He pointed out that under the Constitution, States had power to charge stamp duty on transactions in land and building and that the rate of this duty ranged between 5% and 6%. He emphasized that under this agenda item, no change in the scheme of stamp duty was proposed as entry 63 of the State List of Schedule 7 of the Constitution empowering States to charge stamp duty remained intact. He pointed out that today, there existed a dichotomy in rates of Service Tax on property depending upon the fact whether it was bought as an under construction property (which attracted Service Tax) or as a ready-built property after obtaining completion certificate (which did not attract Service Tax). He explained that this created a cost arbitrage of about 6% in favour of buying ready-built property. He stated that, in addition, there were embedded taxes as no ITC was available on inputs like steel, cement, floor tiles, sanitary fittings, etc. used in the construction of the property. Shri Arvind Subramanian, Chief Economic Advisor to the Government of India stated that the cost arbitrage between ready-built and under-construction property could range between 6% to18% due to embedded taxes. In view of this, the Secretary to the Council proposed that GST could be imposed on supply of land and building and the rate could be 12% or 18% with a provision to block refund if there was an incidence of duty inversion between input tax and the output tax on the final supply. He stated that such a measure would take care of the present anomaly of taxation between constructed and under-construction property.

Starting the discussion on this agenda item, the Hon’ble Minister from Uttar Pradesh raised the question as to what percentage of sale of property was fully-constructed vis-à-vis those under construction. The Secretary to the Council stated that such data was not readily available. The Hon’ble Minister from Uttar Pradesh observed that most property sales would be of under-construction property as it would be difficult for developers to fully fund by themselves the development of a property. The Hon’ble Minister from Uttarakhand stated that the hill States should have special exemption. The Hon’ble Chairperson observed that this would be decided once the main issue was settled. The Hon’ble Minister from Punjab observed that if a developer constructed the property on his own, then the completed project’s cost would be higher as the developer would also recover the cost of capital investment. The Hon’ble Deputy Chief Minister of Gujarat did not support the proposal under this agenda item. He observed that in almost 90% cases, an under-construction flat was booked by customers and money was paid by them for construction. He stated that stamp duty was on value addition and the proposal made now would lead to double taxation. The Secretary to the Council stated that another important consideration for introducing this agenda item was that if sale of property was considered as a supply and tax was charged at the rate of 18%, it would complete the ITC chain and there would be greater incentive to buy tax paid inputs like cement, steel, sanitary fittings,tiles, etc. The Hon’ble Deputy Chief Minister of Gujarat stated that levying GST on Land and Building would put additional duty burden on the small house-owners. The Hon’ble Minister from Telangana observed that after demonetization, the real estate business had suffered and introduction of GST on it would further worsen the situation. The Hon’ble Minister from Bihar suggested to form a small committee to further examine this proposal.

The Commissioner (GST) CBEC stated that if tax was imposed on re-sale of property, say, a hotel, this would help in claiming ITC and lowering the cost of business for the buyer of the hotel. He also stated that charging GST on re-sale of property would also capture the value addition over a period of time. The Hon’ble Deputy Chief Minister of Gujarat pointed out that there was stamp duty on re-sale. The Hon’ble Minister from West Bengal stated that he supported the views expressed by the Hon’ble Deputy Chief Minister of Gujarat and the Hon’ble Ministers from Uttar Pradesh and Telangana. He observed that all fittings and raw materials used in buildings would largely be tax-paid and this was presently an additional tax gain for the State as no ITC was available on them. He expressed that the proportion of evaded inputs like steel, cement, etc. might not be very high. He further stated that there were much larger transactions in smaller and medium houses and these should not be taxed in addition to the levy of stamp duty. He cautioned that this would also be a bad political message. The Chief Economic Advisor observed that low-cost housing could remain exempt from GST. He further observed that the final, effective rate of tax on the consumer would not change but there would be greater flow of ITC and a self-policing mechanism would come into play. The Hon’ble Minister from Punjab stated that for residential property, ITC could not be availed. The Hon’ble Minister from Kerala stated that he did not support the proposal under this agenda item. He observed that the Transfer of Property Act gave power to States to levy stamp duty on the transfer of property after completing the paper work. He informed that in Kerala, rebate of stamp duty was given against payment of VAT. He further stated that cement, etc. were not obtained from the grey market as this could risk collapse of the building. He emphasised that stamp duty was a source of revenue for the State government and that it should be left with the States. The Hon’ble Minister from Tamil Nadu stated that the proposal under this agenda item appeared to be unconstitutional as stamp duty was constitutionally retained. He also added that the definition of goods in the Constitution did not include land and building. The Hon’ble Chairperson summed up the two broad view points namely that incidence of tax was likely to go up and the other that the tax amount would remain the same due to availability of ITC on inputs used as construction material.

The Hon’ble Minister from Punjab observed that if GST was imposed on land and building, the cost for the customer would go up. The Chief Economic Advisor stated that if GST was extended to land and building, it would be a transformational GST and would also have a strong anti­corruption, anti-black money signalling. He reminded the House that internationally, GST was charged on supply of property. The Hon’ble Chairperson observed that this idea was transformational but instead of introducing it at this stage, this suggestion could be revisited after a year or so of the GST implementation.

The Hon’ble Deputy Chief Minister of Delhi suggested that instead of closing the issue at this stage, it could be further examined by a group of officers or Ministers constituted for this purpose. However, taking into view the general sense of the House, the Council agreed that this issue could be revisited after a year or so of the implementation of GST.

11. In view of the discussion above for agenda item 2A, the Council decided not to introduce GST on land and building at this stage and agreed that this issue could be revisited after a year or so of the implementation of GST.

(xix) Having regard to the judgment of the Apex Court in VKC Footsteps case supra and the discussion of the GST Council, it can be concluded that transactions such as, acquisition and transfer of immovable property were not sought to be subsumed under the GST regime.

(xx) At this stage, it would be relevant to understand that immovable property in its traditional sense always meant the tangible property but as there were developments and changes in the practices of society, it came to be recognized as a bundle of rights in immovable property. As rightly contended by the learned Senior counsel, rights in immovable property is different from the usage to which it could be put and the latter may or may not amount to services depending on the statute but the former would certainly not be a service in the light of the discussions held above.

(xxi) It is relevant to note that a perusal of the definition of ‘immovable property’ in various statutory enactments including General Clauses Act, Transfer of Property Act, Registration Act etc., would clearly show that not only the physical property but also the rights and benefits arising out of such property are recognised as immovable property.

(xxii) The Apex Court in the case of Jilubhai Nanbhai Khachar and others v. State of Gujarat and another – 1995 Supp (10) SCC 596, analysed the definition of ‘land’ given in Black’s Law dictionary and Law Lexicon as under:

“11. In Black’s Law Dictionary (Sixth Edition) at page 877, land is defined to mean-“in the most general sense, comprehends any ground, soil or earth whatsoever, including…… rocks. “Land” may include any estate or interest in lands, either legal or equitable, as well as easements and incorporeal hereditaments. Technically, land signifies everything comprehending all things of a permanent nature, and even of an unsubstantial provided they be permanent. Ordinarily, the term is used as descriptive of the subject of ownership and not the ownership. Land is the material of the earth, whatever may be the ingredients of which it is composed, weather, soil, rock, or other substance, and includes free or occupied space for an indefinite distance upwards as well as downwards, subject to limitations upon the use of airspace imposed, and rights in the use of airspace granted by law.

12. According to the Law Lexicon (Reprint edn. 1987) by Ramanatha Iyer p. 701, the word ‘land” in the ordinary legal sense comprehends everything of a fixed or permanent nature and, therefore, growing trees, land includes the benefit arise out of the land and things attached to the earth or permanently means everything attached to the earth and also the share in or charges on, the revenue or rent of villages or other defined portions of territory. Land includes the bed of the sea below high water mark. Land shall extend to messuages, and all other hereditaments, whether corporal or incorporeal and whether freehold or of any other tenure and to money to be paid out in the purchase of land. Land in its widest signification would therefore include not only the surface of the ground, cultivable, uncultivable or waste lands but also everything on or under it. In Jagannath Singh v. State of U.P., AIR (1960) SC 1563 p. 1568, this Court held that the word “land” is wide enough to include all lands whether agricultural or non-agricultural land. In State of U.P. v. Sarju Devi, [1978] 1 SCF 18, this court held that the definition of the land in Section 3 (14) shows that it is not necessary for the land to fall within its purview that it must be actually under cultivation or occupied for purposes connected with agriculture. The requirement is amply satisfied even if the land is either held or occupied for the purposes connected with agriculture. The word “held” only means possession of legal title and does not require actual connected occupation. In State of Gujarat v. Kamla Ben Jivan Bhai, [1979] Supp. 2 SCC 440, this Court held that actual cultivation is not necessary to constitute an estate and the right to collect grass is a right annexed to land which was held to be an estate and abolition of the right to pay annual amount was an agrarian reform. In Sri Ram Ram Narain Medhi v. State of Bombay, [1959] Supp. 1 SCR 489, this Court held that the Code is a law relating to land tenures. The right in relation to an estate used in Article 31A has been noted in a very com-prehensive sense. In Digvijay Singh Hamirsinhji v. Manji Savda, [1969] 1 SCR 405, this Court interpreting Section 18 of Saurashtra Land Re-forms Act, 1951 held that the Girasdar to whom the ruler made the grant was bound by the provisions of that Act and that he was not entitled to have his tenant evicted except in accordance with the provisions of the Act.”

(xxiii) As rightly contended by learned Senior Counsel for the petitioners, compulsory acquisition of land would fall under Entry 5 of Schedule III r/w Section 7(2) of the CGST/KGST Act and that this Entry is only by way of ‘ex abundanti cautela’ to show the Legislative intent not to tax sale of land and completed building, i.e., excess of caution does no harm; in the case of Gokaraju Rangaraju vs. State of Andhra Pradesh -1981 (3) SCC 132, the Apex Court held as under:

18. We do not agree with the submission of the learned Counsel that the de facto doctrine is subject to the limitation that the defect in the title of the judge to the office should not be one traceable to the violation of a constitutional provision. The contravention of a constitutional provision may invalidate an appointment but we are not concerned with that. We are concerned with the effect of the invalidation upon the acts done by the judge whose appointment has been invalidated. The de facto doctrine saves such acts. The de facto doctrine is not a stranger to the Constitution or to the Parliament and the legislatures of the States. Article 71(2) of the Constitution provides that acts done by the President or Vice-President of India in the exercise and performance of the powers and duties of his office shall not be invalidated by reason of the election of a person as President or Vice-President being declared void. So also Section 107(2) of the Representation of the People Act, 1951 (43 of 1951) provides that acts and proceedings in which a person has participated as a member of Parliament or a member of the legislature of a State shall not be invalidated by reason of the election of such person being declared to be void. There are innumerable other Parliamentary and State legislative enactments which are replete with such provisions. The twentieth amendment of the Constitution is an instance where the de facto doctrine was applied by the constituent body to remove any suspicion or taint of illegality or invalidity that may be argued to have attached itself to judgments, decrees, sentences or orders passed or made by certain District Judges appointed before 1966, otherwise than in accordance with the provision of Article 233 and Article 235 of the Constitution. The twentieth amendment was the consequence of the decision of the Supreme Court in Chandra Mohan v. State of U.P. [AIR 1966 SC 1987 : (1967) 1 SCR 77 : (1967) 1 LLJ 412] that appointments of District Judges made otherwise than in accordance with the provisions of Articles 233 and 235 were invalid. As such appointments had been made in many States, in order to pre-empt mushroom litigation springing up all over the country, it was apparently thought desirable that the precise position should be stated by the constituent body by amending the Constitution. Shri Phadke, learned Counsel for the appellants, argued that the constituent body could not be imputed with the intention of making superfluous amendments to the Constitution. Shri Phadke invited us to say that it was a necessary inference from the twentieth amendment of the Constitution that, but for the amendment, the judgments, decrees etc. of the District Judges appointed otherwise than in accordance with the provisions of Article 233 would be void. We do not think that the inference suggested by Shri Phadke is a necessary inference. It is true that as a general rule the Parliament may be presumed not to make superfluous legislation. The presumption is not a strong presumption and statutes are full of provisions introduced because abundans cautela non nocet (there is no harm in being cautious). When judicial pronouncements have already declared the law on the subject, the statutory reiteration of the law with reference to particular case does not lead to the necessary inference that the law declared by the judicial pronouncements was not thought to apply to the particular cases but may also lead to the inference that the statute-making body was mindful of the real state of the law but was acting under the influence of excessive caution and so to silence the voices of doubting Thomases by declaring the law declared by judicial pronouncements to be applicable also to the particular cases. In Chandra Mohan case [AIR 1966 SC 1987 : (1967) 1 SCR 77 : (1967) 1 LLJ 412] this Court had held that appointments of District Judges made otherwise than in accordance with Article 233 of the Constitution were invalid. Such appointments had been made in Uttar Pradesh and a few other States. Doubts had been cast upon the validity of the judgments, decrees etc. pronounced by those District Judges and large litigation had cropped up. It was to clear those doubts and not to alter the law that the twentieth amendment of the Constitution was made. This is clear from the Statement of Objects and Reasons appended to the Bill which was passed as Constitution (20th Amendment) Act, 1966. The statement said:

“Appointments of District Judges in Uttar Pradesh and a few other States have been rendered invalid and illegal by a recent judgment of the Supreme Court on the ground that such appointments were not made in accordance with the provisions of Article 233 of the Constitution…. As a result of these judgments, a serious situation has arisen because doubt has been thrown on the validity of the judgments, decrees, orders and sentences passed or made by these District Judges and a number of writ petitions and other cases have already been filed challenging their validity. The functioning of the District Courts in Uttar Pradesh has practically come to a standstill. It is, therefore, urgently necessary to validate the judgments, decrees, orders, and sentences passed or made heretofore by all such District Judges in those States….”

(xxiv) In the case of Chotanagpur Banking Association Ltd vs. Govt. of India – 1957 SCC Online Patna 81, the Patna High Court held as under:

46. The use of the word “absolutely” in Sections 16 and 17 of the Land Acquisition Act, and the absence of this word in R. 75A(3) will not make any difference, in that, the word “absolutely” only makes the intention of the Legislature more emphatic, and nothing more. It has been used only as abundans cautela as an abundant caution, in that Abundans Cautela Non Nocet, that is, excess of caution does no harm. The words “the property shall vest in Government free from any mortgage, pledge, lien, or other similar encumbrance” alone are clear manifestations of the intention of the Legislature that the vesting of the property is not for any limited purpose or limited duration.

(xxv) It is therefore clear that even if Entry 5 of Schedule III were not there, sale of land and building cannot be brought under GST as they are covered under the State List II and there is no intention to tax sale/ acquisition immovable property per se under the GST legislations. It is also significant to note that this position is clarified by the aforesaid Circular No. 177/09/2022-TRU dated 03.08.2022 which clearly states that Sale of land either as it is or after some development is covered by Entry No.5 of Schedule III of the CGST/KGST Act and accordingly, does not attract GST; in other words, even if the said entries were not present in the said schedule, there was still no intention to tax stamp duty transactions of the nature which could be subsumed under the GST and consequently, not only sale of land or completed building, even compulsory acquisitions of such land cannot be the subject matter of a GST levy.

(xxvi) Learned Senior Counsel is also right in contending that after the retrospective amendment in Section 7 to exclude 7(1)(d) and include Section 7(1A), Schedule II is merely a classification schedule; Entry 5(e) of Schedule treats “agreeing to the obligation to refrain from an act or to tolerate an act or a situation, or to do an act” as a supply of service and would only be a classification entry and the need to prove that an activity or transaction is a supply stems from Section 7(1).

(xxvii) Circular No. 178/10/2022-GST dated 03.08.2022 issued by the respondents explains the three expressions as under (para 2):

(i) Agreeing to the obligation to refrain from an act – Example of activities that would be covered by this part of the expression would include non-compete agreements, where one party agrees not to compete with the other party in a product, service or geographical area against a consideration paid by the other party. Another example of such activities would be a builder refraining from constructing more than a certain number of floors, even though permitted to do so by the municipal authorities, against a compensation paid by the neighbouring housing project, which wants to protect its sunlight, or an industrial unit refraining from manufacturing activity during certain hours against an agreed compensation paid by a neighbouring school, which wants to avoid noise during those hours.

(ii) Agreeing to the obligation to tolerate an act or a situation – This would include activities such a shopkeeper allowing a hawker to operate from the common pavement in front of his shop against a monthly payment by the hawker, or an RWA tolerating the use of loudspeakers for early morning prayers by a school located in the colony subject to the school paying an agreed sum to the RWA as compensation

(iii) Agreeing to the obligation to do an act – This would include the case where an industrial unit agrees to install equipment for zero emission/discharge at the behest of the RWA of a neighbouring residential complex against a consideration paid by such RWA, even though the emission/discharge from the industrial unit was within permissible limits and there was no legal obligation upon the individual unit to do so.

(xxviii) From the above, it becomes clear that the said entry 5(e) of Schedule III would be attracted only if it can meet the following criteria:

(a) There should be two parties.

(b) They should agree on a subject matter.

(c) The subject matter should be an obligation.

(d) The said obligation should be to tolerate an act, or to do an act or to refrain from an act;

(e) The said obligation should be compensated with a consideration which can be linked to such obligations.

(xxix) A perusal of the various documents executed between the petitioners and KIADB will clearly indicate that the parties have mutually agreed to the compulsory acquisition in order to otherwise avoid the protracted procedure of the Deputy Commissioner doing the acquisition, thereby indicating that it is a transfer of the property simplicter and there is no agreement to tolerate an act or refrain from an act or to do an act; the illustrations given in the said Circular clearly point out to an agreement, where an obligation is undertaken for a compensation and no such obligation is present in the instant agreements.

(xxx) It is also difficult to comprehend how a compulsory acquisition would amount to tolerating an act when actually the party is agreeing to an amount for acquisition of the land and as set out in the Circular is not actually tolerating the act. The subject matter of the agreement is not an obligation to do or tolerate an act; it is simply an acquisition of land by the Government. In fact, the learned Senior counsel is right in stating that the Apex Court in Tarsem Singh’s case supra would show that solatium is paid for not parting with the land and is therefore, an amount paid for not tolerating an act and what is sought to be taxed is obligation for tolerating an act. This fine distinction also should be kept in mind. The conditions are incidental to the acquisition of land and is to ensure that there is finality to the same as regards both the parties. It is not an agreement for an obligation to do or refrain from any act, etc., coupled with consideration for the same. In paragraph-7 of the said Circular No.178/10/2022-ST dated 03.08.2022, it is clearly stated that liquidated damages, penalty for cheque dishonour, etc.. are amounts for not tolerating the act and cannot be classified as amounts for tolerating an act.

(xxxi) It is also relevant to state that Agreement to do or refrain from an act should not be presumed to exist; there has to be an express or implied agreement; oral or written, to do or abstain from doing something against payment of consideration for doing or abstaining from such act for a taxable supply to exist. An agreement to do an act or abstain from doing an act or to tolerate an act or a situation cannot be imagined or presumed to exist just because there is a flow of money from one party to another. Unless there is an express or implied promise by the recipient of money to agree to do or abstain from doing something in return for the money paid to him, it cannot be assumed that such payment was for doing an act or for refraining from an act or for tolerating an act or situation. Payments such as liquidated damages for breach of contract, penalties under the mining act for excess stock found with the mining company, forfeiture of salary or payment of amount as per the employment bond for leaving the employment before the minimum agreed period, penalty for cheque dishonour etc. are not a consideration for tolerating an act or situation. They are rather amounts recovered for not tolerating an act or situation and to deter such acts; such amounts are for preventing breach of contract or non-performance and are thus mere ‘events’ in a contract. Further, such amounts do not constitute payment (or consideration) for tolerating an act, because there cannot be any contract: (a) for breach thereof, or (b) for holding more stock than permitted under the mining contract, or (c) for leaving the employment before the agreed minimum period or (d) for doing something leading to the dishonour of a cheque. As has already been stated, unless payment has been made for an independent activity of tolerating an act under an independent arrangement entered into for such activity of tolerating an act, such payments will not constitute ‘consideration’ and hence, such activities will not constitute “supply” within the meaning of the Act.

(xxxii) It is well settled that Solatium is part of the compensation paid to the landowner on account of the fact that a landowner, who may not be willing to part with his land has now to do so; solatium is part and parcel of compensation that is payable for compulsory acquisition of land as held by the Apex Court in the case of Union of India Vs. Tarsem Singh – (2019) 9 SCC 304, wherein it was held as under:

11. Before embarking on a discussion as to the constitutional validity of the Amendment Act, it is important to first understand what is meant by the expression “solatium”. In Sunder v. Union of India [Sunder v. Union of India, (2001) 7 SCC 211] , a Bench of five Judges of this Court laid down the nature of solatium as follows : (SCC p. 229, paras 21 and 22)

“21. It is apposite in this context to point out that during the enquiry contemplated under Section 11 of the Act the Collector has to consider the objections which any person interested has stated pursuant to the notice given to him. It may be possible that a person so interested would advance objections for highlighting his disinclination to part with the land acquired on account of a variety of grounds, such as sentimental or religious or psychological or traditional, etc. Section 24 emphasises that no amount on account of any disinclination of the person interested to part with the land shall be granted as compensation. That aspect is qualitatively different from the solatium which the legislature wanted to provide ‘in consideration of the compulsory nature of the acquisition’.

22. Compulsory nature of acquisition is to be distinguished from voluntary sale or transfer. In the latter, the landowner has the widest advantage in finding out a would-be buyer and in negotiating with him regarding the sale price. Even in such negotiations or haggling, normally no landowner would bargain for any amount in consideration of his disinclination to part with the land. The mere fact that he is negotiating for sale of the land would show that he is willing to part with the land. The owner is free to settle terms of transfer and choose the buyer as also to appoint the point of time when he would be receiving consideration and parting with his title and possession over the land. But in the compulsory acquisition the landowner is deprived of the right and opportunity to negotiate and bargain for the sale price. It depends on what the Collector or the court fixes as per the provisions of the Act. The solatium envisaged in sub­section (2) “in consideration of the compulsory nature of the acquisition” is thus not the same as damages on account of the disinclination to part with the land acquired.”

(emphasis supplied)

Thus, the solatium that is paid to a landowner is on account of the fact that a landowner, who may not be willing to part with his land, has now to do so, and that too at a value fixed legislatively and not through negotiation, by which, arguably, such landowner would get the best price for the property to be sold. Once this is understood in its correct perspective, it is clear that “solatium” is part and parcel of compensation that is payable for compulsory acquisition of land.

(xxxiii) Solatium is “money comfort” quantified by the statute and given as a conciliatory measure for the compulsory acquisition of land of the citizen, by a welfare State such as India. It is intended to compensate the owner for his disinclination to part with his property as held by the Apex Court in the case of Panna Lal Ghosh Vs Land Acquisition Collector – (2004) 1 SCC 467 as under:

8. The second issue relates to the payment of solatium @ 30% under Section 23(2) of the Act.

Solatium is “money comfort” quantified by the statute and given as a conciliatory measure for the compulsory acquisition of land of the citizen, by a welfare State such as India. [Narain Das Jain v. Agra Nagar Mahapalika, (1991) 4 SCC 212]

Thus the statutory amount of solatium is intended to compensate the owner for his disinclination to part with his property.

(xxxiv) It is pertinent to state that the relevant portion of the CBIC Circular No.178/10/2022-GST dated 03.08.2022 is as under:

6. This goes to show that the service of agreeing to the obligation to refrain from an act or to tolerate an act or a situation, or to do an act is nothing but a contractual agreement. A contract to do something or to abstain from doing something cannot be said to have taken place unless there are two parties, one of which expressly or impliedly agrees to do or abstain from doing something and the other agrees to pay consideration to the first party for doing or abstaining from such an act. There must be a necessary and sufficient nexus between the supply (i.e. agreement to do or to abstain from doing something) and the consideration.

6.1 A perusal of the entry at serial 5(e) of Schedule II would reveal that it comprises the aforementioned three different sets of activities viz. (a) the obligation to refrain from an act, (b) obligation to tolerate an act or a situation and (c) obligation to do an act. All the three activities must be under an “agreement” or a “contract” (whether express or implied) to fall within the ambit of the said entry. In other words, one of the parties to such agreement/contract (the first party) must be under a contractual obligation to either

(a) refrain from an act, or (b) to tolerate an act or a situation or (c) to do an act. Further some “consideration” must flow in return from the other party to this contract/agreement (the second party) to the first party for such (a) refraining or

(b) tolerating or (c) doing. Such contractual arrangement must be an independent arrangement in its own right. Such arrangement or agreement can take the form of an independent stand- alone contract or may form part of another contract. Thus, a person (the first person) can be said to be making a supply by way of refraining from doing something or tolerating some act or situation to another person (the second person) if the first person was under an obligation to do so and then performed accordingly.

(xxxv) So also, the CBIC Circular No. 214/1/2023-ST dated, 28.02.2023 reads as under:

Circular No. 214/1/2023-Service Tax

F.NO. CBIC-110267/14/2023-CX-VIII SECTION-CBEC
Government of India
Ministry of Finance
Department of Revenue Central Board of Indirect Tax &
Customs
(CX & ST Wing)

New Delhi, dated: 28th February, 2023

To,

1. The Principal Chief Commissioner ! Chief Commissioner, CGST & CX (All)

2. The Principal Director General! Director General (All)

3. The Principal Commissioner ! Commissioner, CGST & CX (All)

4. cbic@icegate.gov.in for uploading the Circular on CBIC’s website Madam!Sir,

Subject: Leviability of Service Tax on the declared service “Agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act” under clause (e) of section 66E of the Finance Act, 1994 – reg.

An issue has arisen on the levy of service tax on liquidated damages arising out of breach of contract, forfeiture of salary or payment of bond amount in the event of the employee leaving the employment before the minimum agreed period and similar other issues arising out of clause (e) of section 66E of the Finance Act, 1994. Reference has also been invited to Circular No. 178!10!2022-GST dated 3 rdAugust, 2022 regarding applicability of GST on liquidated damages, compensation and penalty arising out of breach of contract or other provisions of law, and its applicability to service tax related issues.

2. It may be seen that “Agreeing to the obligation to refrain from an a or to tolerate an act or a situation, or to do an act” is a Declared Service as per clause (e) of section 66E of the Finance Act, 1994. A service conceived in an agreement where one person agrees to an obligation to refrain from an act or to tolerate an act or to do an act, would be a ‘declared service’ under section 66E(e) read with section 65B(44) and would be leviable to service tax.

3. The description of the declared service in question, namely, agreeing to the obligation to refrain from an act or to tolerate an act or a situation, or to do an act is similar in GST. “Agreeing to the obligation to refrain from an act or to tolerate an act or a situation, or to do an act” has been specifically declared to be a supply of service in para 5 (e) of Schedule II of the CGST Act, 2017.

4. As can be seen, the said expression has three limbs: – i) Agreeing to the obligation to refrain from an act, ii) Agreeing to the obligation to tolerate an act or a situation, iii) Agreeing to the obligation to do an act. Service of agreeing to the obligation to refrain from an act or to tolerate an act or a situation, or to do an act is nothing but a contractual agreement. A contract to do something or to abstain from doing something cannot be said to have taken place unless there are two parties, one of which expressly or impliedly agrees to do or abstain from doing something and the other agrees to pay consideration to the first party for doing or abstaining from such an act. Such contractual arrangement must be an independent arrangement in its own right. There must be a necessary and sufficient nexus between the supply (i.e. agreement to do or to abstain from doing something) and the consideration.

5. The issue also came up in the CESTAT in Appeal No. ST/ 50080 of 2019 in the case of M/s Dy. GM (Finance) Bharat Heavy Electricals Ltd in which the hon’ble Tribunal relied on the judgment of divisional bench in case of M/s South Eastern Coal Fields Ltd Vs. CCE Raipur {2021(55) G.S.T.L 549(Tri-Del)}. Board has decided not to file appeal against the CESTAT order ST/A/50879/2022-CU[DB] dated 20.09.2022 in this case and also against Order A/85713/2022 dated 12.8.2022 in case of M/s Western Coalfields Ltd. Further, Board has decided not to pursue the Civil Appeals filed before the Apex Court in M/s South Eastern Coalfields Ltd. supra (CA No. 2372/2021), M/s Paradip Port Trust (Dy. No. 24419/2022 dated 08-08-2022), and M/s Neyveli Lignite Corporation Ltd (CA No. 0051-0053/2022) on this ground.

6. In view of above, it is clarified that the activities contemplated under section 66E(e), i.e. when one party agrees to refrain from an act, or to tolerate an act or a situation, or to do an act, are the activities where the agreement specifically refers to such an activity and there is a flow of consideration for this activity. Field formations are advised that while taxability in each case shall depend on facts of the case, the guidelines discussed above and jurisprudence that has evolved over time, may be followed in determining whether service tax on an activity or transaction needs to be levied treating it as service by way of agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act. Contents of Circular No. 178/10/2022-GST dated 3rd August, 2022, may also be referred to in this regard.

7. Difficulty experienced, if any, in implementing the circular should be brought to the notice of the Board. Hindi version will follow.

(xxxvi) The aforesaid circulars make it clear that service of agreeing to the obligation to refrain from an act or to tolerate an act or a situation, or to do an act is nothing but a contractual agreement; a contract to do something or to abstain from doing something cannot be said to have taken place unless there are two parties, one of which expressly or impliedly agrees to do or abstain from doing something and the other agrees to pay consideration to the first party for doing or abstaining from such an act; such contractual arrangement must be an independent arrangement in its own right and there should be necessary and sufficient nexus between the supply (i.e., agreement to do or to abstain from doing something) and the consideration; it follows there from that it is only when an amount is paid for an obligation to do an act, or an obligation to tolerate an act or an obligation to refrain from an act, that Entry 5(e) of Schedule II is attracted; in the instant case, there is no obligation to tolerate an act or to an obligation to do an act and by way of an agreement between petitioners and KIADB, it has been agreed to acquire the lands at a compensation mutually agreed and consequently, Entry 5(e) of Schedule II is not attracted especially when compensation including solatium is paid for acquisition of land and there is no link of such compensation with any obligation to do an act or tolerate an act and on this score also, the contention of the respondents cannot be accepted and solatium would not be exigible/amenable to levy of GST.

(xxxvii) A perusal of the various documents executed between the petitioners and the KIADB viz., agreements, receipts, affidavits, indemnity bonds etc., will clearly indicate that the same puts certain conditions viz., the compensation including solatium was paid by way of full and final settlement, petitioners shall not be entitled to any enhancement of compensation etc.,; in this context, it is significant to note that the terms and conditions of the agreements, documents executed between the petitioners and KIADB are merely conditions to a contract and do not reflect an obligation coupled with consideration and the same cannot be construed or treated as an obligation to do an act, or an obligation to tolerate an act or an obligation to refrain from an act so as to attract Entry 5(e) of Schedule II of the CGST/KGST Act.

(xxxviii) It is relevant to state that “conditions to a contract” are different from “consideration to a contract”; so also, “conditions” contained in the contract cannot be seen in the light of “consideration” for the contract and merely because the service recipient has to fulfill such conditions would not mean that this value would form part of the value of the taxable services that are provided; to put it differently, when amount is paid for an obligation to do an act, it is only then Entry 5(e) of Schedule II is attracted and not otherwise, thereby indicating that the terms and conditions of the agreements, documents etc., executed between the petitioners and KIADB are merely conditions to the contract and not obligations undertaken for a consideration as required under Entry 5(e) of Schedule II which will have no application nor cover the solatium received by the petitioners.

(xxxix) The Larger Bench of the CESTAT in the case of Commissioner of Service Tax, Chennai vs. Repco Home Finance Ltd., – 2020 (42) GSTL 104, while considering whether foreclosure charges could be brought within the ambit of agreeing to an obligation to do or refrain from an act, made a distinction between conditions to the contract and obligations and held as under:

23. The Supreme Court in Commissioner of Service Tax v. M/s. Bhayana Builders [2018 (2) TMI 1325 = 2018 (10) G.S.T.L. 118 (S.C.)], while deciding the appeal filed by the Department against the aforesaid decision of the Tribunal, also explained the scope of Section 67 of the Act, both before and after the amendment, in the following words :

“The amount charged should be for “for such service provided” : Section 67 clearly indicates that the gross amount charged by the service provider has to be for the service provided. Therefore, it is not any amount charged which can become the basis of value on which service tax becomes payable but the amount charged has to be necessarily a consideration for the service provided which is taxable under the Act. By using the words “for such service provided” the Act has provided for a nexus between the amount charged and the service provided. Therefore, any amount charged which has no nexus with the taxable service and is not a consideration for the service provided does not become part of the value which is taxable under Section 67. The cost of free supply goods provided by the service recipient to the service provider is neither an amount “charged” by the service provider nor can it be regarded as a consideration for the service provided by the service provider. In fact, it has no nexus whatsoever with the taxable services for which value is sought to be determined.”(emphasis supplied)

24. The aforesaid view was reiterated by the Supreme Court in Union of India v. Intercontinental Consultants and Technocrafts [2018 (10) G.S.T.L. 401 (S.C.)] and it was observed :

“23. Obviously, this Section refers to service tax, i.e., in respect of those services which are taxable and specifically referred to in various sub-clauses of Section 65. Further, it also specifically mentions that the service tax will be @ 12% of the “value of taxable services”. Thus, service tax is reference to the value of service. As a necessary corollary, it is the value of the services which are actually rendered, the value whereof is to be ascertained for the purpose of calculating the service tax payable thereupon.

24. In this hue, the expression “such” occurring in Section 67 of the Act assumes importance. In other words, valuation of taxable services for charging service tax, the authorities are to find what is the gross amount charged for providing “such” taxable services. As a fortiori, any other amount which is calculated not for providing such taxable service cannot a part of that valuation as that amount is not calculated for providing such “taxable service”. That according to us is the plain meaning which is to be attached to Section 67 (unamended, i.e., prior to May 1, 2006) or after its amendment, with effect from, May 1, 2006. Once this interpretation is to be given to Section 67, it hardly needs to be emphasised that Rule 5 of the Rules went much beyond the mandate of Section 67. We, therefore, find that High Court was right in interpreting Sections 66 and 67 to say that in the valuation of taxable service, the value of taxable service shall be the gross amount charged by the service provider “for such service” and the valuation of tax service cannot be anything more or less than the consideration paid as quid pro qua for rendering such a service.

25. This position did not change even in the amended Section 67 which was inserted on May 1, 2006. Sub-section (4) of Section 67 empowers the rule making authority to lay down the manner in which value of taxable service is to be determined. However, Section 67(4) is expressly made subject to the provisions of sub-section (1). Mandate of sub­section (1) of Section 67 is manifest, as noted above, viz., the service tax is to be paid only on the services actually provided by the service provider.”

25. It would also be pertinent to refer to the judgment of the European Court of Justice (First Chamber) in Case C- 277/2005, in Societe Thermaled’ Eugenic-les- Bains v. Ministere de I’Economie, des Finances et de I’Industrie. Under Article 2(1) of the Sixth Directive, ‘the supply of goods or services effected for consideration within the territory of the country by a taxable person acting as such’ is subjected to VAT. Article 6(1) of the Sixth Directive provides that “Supply of services” shall mean any transaction which does not constitute a supply of goods within the meaning of Article 5 and that such transactions may include inter alia an obligation to refrain from an act or to tolerate an act or situation. Under Article 11A(1)(a) of the Sixth Directive, the taxable amount in respect of supplies of services is to be ‘everything which constituted the consideration which has been or is to be obtained by the supplier from the customer or a third party for such supplies… ’

26. The question referred for preliminary hearing, in essence, was whether a sum paid as a deposit by a client to a hotelier, where the client exercises the cancellation option available to him and that sum is retained by the hotelier, can be regarded as consideration for the supply of a reservation service, which is subject to VAT, or as a fixed compensation for cancellation, which is not subject to VAT. The Court found that there has to be a direct link between the service rendered and the consideration received. The same paid must constitute a genuine consideration for an identifiable service supplied in the context of a legal relationship for which performance is reciprocal. It is in this context that Court observed :

“26. Since the obligation to make a reservation arises from the contract for accommodation itself and not from the payment of a deposit, there is no direct connection between the service rendered and the consideration received (Apple and Pear Development Council, paragraphs 11 and 12; Tolsma, paragraph 13; and Kennemer Golf, paragraph 39). The fact that the amount of the deposit is applied towards the price of the reserved room, if the client takes up occupancy, confirms that the deposit cannot constitute the consideration for the supply of an independent and identifiable service.

27. Since the deposit does not constitute the consideration for the supply of an independent and identifiable service, it must be examined, in order to reply to the referring Court, whether the deposit constitutes a cancellation charge paid as compensation for the loss suffered as a result of the client’s cancellation.

28. In that regard, it should be noted that the contracting parties are at liberty – subject to the mandatory rules of public policy – to define the terms of their legal relationship, including the consequences of a cancellation or breach of their obligations. Instead of defining their obligations in detail, they may nevertheless refer to the various instruments of civil law.

29. Thus the parties may make contractual provision – applicable in the event of non-performance – for compensation or a penalty for delay, for the lodging of security or a deposit. Although such mechanisms are all intended to strengthen the contractual obligations of the parties and although some of their functions are identical, they each have their own particular characteristics.

xxxxxxx xxxxxxx xxxxxxx

32. Whereas, in situations where performance of the contract follows its normal course, the deposit is applied towards the price of the services supplied by the hotelier and is therefore subject to VAT, the retention of the deposit at issue in the main proceedings is, by contrast, triggered by the client’s exercise of the cancellation option made available to him and serves to compensate the hotelier following the cancellation. Such compensation does not constitute the fee for a service and forms no part of the taxable amount for VAT purposes (see, to that effect, as regards interest applied on account of late payment, Case 222/81 BAZ Bausystem [1982] ECR 2527, paragraphs 8 to 11).”

27. What follows from the aforesaid decisions is that “consideration” must flow from the service recipient to the service provider and should accrue to the benefit of the service provider and that the amount charged has necessarily to be a consideration for the taxable service provided under the Act. It should also be remembered that there is marked distinction between “conditions to a contract” and “considerations for the contract”. A service recipient may be required to fulfil certain conditions contained in the contract but that would not necessarily mean that this value would form part of the value of taxable services that are provided.

28. It is also necessary to remind ourselves that the word “include” is generally used in interpretation clauses to enlarge the meaning of the words or phrases occurring in the body of the statute and when it is so used, such words or phrases must be construed to comprehend, not only such things as they signify according to their natural import, but also those things which the interpretation clause declares that they shall include. This is what was stated in Dilworth v. Commissioner of Stamps [1899 AC 99].

29. Justice G.P. Singh in “Principles of Statutory Interpretation” (Thirteenth Edition) has also remarked that where a word is defined to “include” such and such, the definition is prima facie not exhaustive and so the natural meaning of the word cannot be narrowed down by the “includes” part.

30. In this connection it would also be pertinent to refer to TRU Circular dated 20 June, 2012 issued by the Central Board of Excise and Customs as an Education Guide when the Negative List based taxation regime was introduced to clarify various aspects of the levy of service tax. The Board dealt with “consideration” in paragraph 2.2 of this Circular and pointed out that since the definition was inclusive, it will not be out of place to refer to the definition of “consideration” as given in Section 2(d) of the Indian Contract Act, 1872 [the Contract Act]. The relevant portion of the aforesaid Circular is reproduced below :

“2.2 Consideration

2.2.1 The phrase “consideration” has not been defined in the Act. What is, therefore, the meaning of “consideration”?

As per Explanation (a) to section 67 of the Act “consideration” includes any amount that is payable for the taxable services provided or to be provided.

Since this definition is inclusive it will not be out of place to refer to the definition of “consideration” as given in section 2(d) of the Indian Contract Act, 1872 as follows –

xxxxx xxxxx xxxxx

In simple terms, “consideration” means everything received or recoverable in return for a provision of service which includes monetary payment and any consideration of non-monetary nature or deferred consideration as well as recharges between establishments located in a non-taxable territory on one hand and taxable territory on the other hand.”(emphasis supplied)

31. It would, therefore, be appropriate to examine the definition of “consideration” in Section 2(d) of the Contract Act, as the Contract Act deals with all kinds of contracts and pre-dates the Finance Act. The definition of “consideration” is as follows :-

“2(d) When, at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing, something, such act or abstinence or promise is called a consideration for the promise.”

32. What needs to be noted from the aforesaid definition of consideration under Section 2(d) of the Contract Act is that consideration should flow at the desire of the promisor. Thus, if the consideration is not at the desire of the promisor, it ceases to be a consideration. The banks and non-banking financial companies are promisors and the promisees are the borrowers. The contractual relationship between the banks and non-banking financial companies and the customers is repayment of the loan amount over an agreed period. The banks and non-banking financial companies would not desire premature termination of the loan advanced by them as it is in their interest that the loan runs the entire agreed tenure for the banks thrive on interest earned from lending activities. As premature termination of a loan results in loss of future interest income, the banks charge an amount for foreclosure of loan to compensate for the loss in interest income. It is the customer who has taken the loan, who moves for foreclosure of the loan by making the payment of the loan amount before the stipulated period and thereby breaching the promise to service the loan for the agreed period of time. This results in a unilateral act of the borrower in repudiating the contract and consequently breach of one of the essential terms of the loan agreement. A breach of contract may give rise to a claim for damages.

33. Breach of contract has been defined in Black’s Law Dictionary (Eighth Edition) as follows :

“Breach of contract. Violation of a contractual obligation by failing to perform one’s own promise, by repudiating it, or by interfering with another party’s performance.

“A breach may be one by non-performance, or by repudiation, or by both. Every breach gives rise to a claim for damages, and may give rise to other remedies. Even if the injured party sustains no pecuniary loss or is unable to show such loss with sufficient certainty, he has at least a claim for nominal damages. If a court chooses to ignore a trifling departure, there is no breach and no claim arises.” Restatement (Second) of Contracts § 236 cmt. a (1979).”

34. Sir Guenter Treitel has, in his book “The Law of Contract”, described the manner in which a breach of contract can be remedied. The injured party can be placed in the same position in which he would have been if the contract was not made or the injured party can be placed in a position in which he would have been if the contract had been performed. The former protects “restitution” or “reliance interest”, while the latter protects “expectation interest”. The paragraphs dealing with the aspect are reproduced :

“Remedies for breach of contract are discussed in Chapter 21; but one fundamental point relating to them must be made at this stage. Such remedies might attempt to do one of two things. First, they might attempt to put the injured party into the position in which he would have been if the contract had never been made. This would require the party in breach to restore anything that he had received under the contract, and also to compensate the injured party for any loss that he had suffered by acting in reliance on the contract. Such remedies are said to protect the injured party’s restitution and reliance interest. But remedies for breach of contract go beyond the pursuit of these objectives. Their distinguishing feature is that they seek to put the injured party into the position in which he would have been if the contract had been performed. If, for example a seller agrees to sell goods for less than they are worth, and then fails to deliver them, he must compensate the buyer for not having received goods which are worth more than he had agreed to pay for them. Conversely, if a buyer contracts to buy goods for more than they are worth, and then fails to pay for them, he is liable for the agreed price. It is quite immaterial that the value of the goods with which the seller has parted was lower than that price. What the law does in these cases is to protect the injured party’s expectation interest. Sometimes it does so directly, by actually ordering the party in breach to perform his part of the contract. Sometimes it does so indirectly by ordering him to pay the injured party damages for loss of his bargain.

The result of awarding damages on this basis is to compensate the injured party, not because he is worse off than he was before the contract was made, but because the other party has failed to make him better off. The law of contract takes this position in response to the needs of commercial certainty. It is probably going too far to say that business could not be carried on at all if the law did not protect the injured party’s expectation interest. Some industries (such as the credit betting industry) are carried on without this, or indeed any other legally recognised, sanction. But in relation to other sphere of commercial activity, such as share and commodity markets and the insurance industry (to take a few random examples) the protection of expectations is of crucial importance. In these cases, that protection promotes stability and furthers one of the central purposes of the law of contract in providing the legal framework required  for commercial
relations.”

(emphasis supplied)

35. The “expectation interest” is a popular measure for damages arising out of breach of contract. The foreclosure charges, therefore, are not a consideration for performance of lending services but are imposed as a condition of the contract to compensate for the loss of “expectations interest” when the loan agreement is terminated prematurely. In fact, foreclosure charges seek to deter the borrowers from switching over to cheaper available sources of loan, as has been so clearly stated in the Circular dated 26 June, 2012 issued by the Reserve Bank of India.

36. The basis for charging foreclosure amount has also been explained by the Karnataka High Court in M/s. Hotel Vrinda Prakash and Another v. KSFC and Another [ILR 2008 KAR 1311]. The writ petitioner had borrowed a loan from the Karnataka State Financial Corporation but before the period of loan could expire made an application for foreclosure of the loan. The Corporation, however, demanded premium on the advance payment/foreclosure amount which demand was challenged in the writ petition. The High Court, after noticing that the contract contained a clause giving discretion to the Corporation to impose premium on the balance amount of loan, observed that granting of loans is a business of the Corporation and if the loan is prepaid, the Corporation may have to suffer loss. It is to overcome this situation that premium is charged. The observations are as follows;

“13……………………… Therefore, the granting of loans or advances is one of the business of the Corporation. As stated above, the Corporation borrows funds from the financial institution at the prevailing rate of interest. If an account is prepaid/foreclosure when the interest rates are falling, the Corporation may have to suffer loss. To overcome this situation, if a premium is charged on the outstanding loan being prepaid, the same cannot be found fault with. I am of the considered view that the Corporation has the power and authority to levy prepayment/foreclosure premium.”

37. The foreclosure of loan is, therefore, a material breach of contract as it curtails the loan service period unilaterally, which can prompt the promisor to claim damages. Damages can be determined by Courts or they can also be incorporated in the loan agreements and other commercial contracts so as to ensure certainty in dealings and also serve as a deterrent measure. This aspect of damage is known as liquidated damages.

38. Liquidated damages have been dealt with by Pollock & Mulla in the book titled “The Indian Contract and Specific Relief Acts” (Fourteenth Edition) and the relevant portion is reproduced below :

“Liquidated Damages

‘Liquidated damages’ means that it shall be taken as the sum which the parties have by the contract assessed as damages to be paid whatever may be the actual damage. A fixed figure of damages, which is not assessed for all circumstances, but is graduated to correspond with passage of time between the making of contract and of its breach, is a proper estimate of the damages to be anticipated from the breach, and is liquidated damages.”

39. It would thus be seen that clauses relating to damages for foreclosure of loan are usually incorporated in contracts as an agreed measure of damages which can be enforced in the event there is a breach of contract with a view to bring about certainty in contracts. These clauses do not and cannot give rise to any “consideration”. These clauses also come into effect only after the contract comes to end.

(XL) In the instant cases, as stated earlier, the agreements entered into between the petitioners and KIADB may contain several conditions, but the same do not amount to an obligation coupled with consideration and payment of solatium to the petitioners cannot be construed or treated as supply of services under Entry 5(e) of Schedule II; the subject matter of the agreements is not an obligation to do or tolerate an act; rather, it is simply acquisition of lands by the Government and the conditions are incidental to the acquisition of land and to ensure that there is finality to the same as regards both the parties and in the absence of an agreement for an obligation to do or refrain from any act coupled with consideration for the same, it cannot be said that solatium received by the petitioners is exigible/amenable to levy of GST as contended by the respondents whose contentions cannot be accepted on this ground also.

10. In view of the aforesaid discussion, point Nos.1 and 2 formulated above are answered in favour of the petitioners by holding that the compensation paid in favour of the petitioners towards acquisition of their lands by the State/KIADB under the Head ‘Solatium’ is not exigible/ amenable to levy of GST under the provisions of CGST/KGST Act, 2017 and that the impugned Notices, Orders etc., issued / passed by the respondents in all these petitions deserve to be quashed.

11. In the result, I pass the following:-

ORDER

(i) W.P.No.2552/2024, W.P.No.17524/2024, W.P.No.10838/2024, W.P.No.4571/2024 and W.P.No.5858/2024 are hereby allowed.

(ii) It is hereby declared that the compensation paid in favour of the petitioners towards acquisition of their lands by the State/KIADB under the Head ‘Solatium’ is not exigible/ amenable to levy of GST under the provisions of CGST/KGST Act, 2017.

(iii) The impugned Notices at Annexures-A and A1 both dated 30.10.2023 issued in W.P.No.2552/2024 and all consequential proceedings are hereby quashed.

(iv) The impugned Orders at Annexures-A and A1 both dated 20.03.2024 and impugned Notices at Annexures-B and B1 both dated 09.10.2023 issued in W.P.No.17524/2024 and all consequential proceedings are hereby quashed.

(v) The impugned Order at Annexure-A dated 30.12.2023 and Notice at Annexure-C dated 26.09.2023 issued in W.P.No.10838/2024 and all consequential proceedings are hereby quashed.

(vi) The impugned Order at Annexure-A dated 04.12.2023 and Notice at Annexure-F dated 26.09.2023 issued in W.P.No.4571/2024 and all consequential proceedings are hereby quashed.

(vii) The impugned Order at Annexure-A dated 20.12.2023 and show cause Notice at Annexure-F dated 26.09.2023 issued in W.P.No.5858/2024 and all consequential proceedings are hereby quashed.