1. Banner Printing

Facts : The Applicant is in business of flex banner printing. The applicant gets image done on computer software from customers for different sizes and print the same on flex (HSN 3921) as flex banners and deliver the same to its customers. At times, the applicant is required to provide design and charge the customer for consolidate value of design and print; and bill them for composite supply value. These flex banners are used for both commercial and non- commercial purposes such as birthday, marriage and political purpose.

The applicant purchases flex material, inks etc., for delivery of flex banners. Certain customers provide design to be printed on the flex banner. On customer requirement, the applicant provides design services also and Print the same on flex banner and charge as consolidate supply of flex banner. The applicant charges customer on per sq., feet basis on size of flex banner printed by them. The customer does provide design, size and specification of matter to be printed and does not provide any material. All the material i.e., flex, ink, etc., are procured by applicant only. In pre-GST regime the applicant paid tax under works contract on value of material only.

The applicant had filed an application in form GST ARA-01, Dated 4-6-2019, by paying required amount of fee for seeking Advance Ruling on the following issues’, as mentioned below.

The applicant has raised the following Questions raised before the Authority: Whether supply of print on flex is classifiable as supply of goods or services? If yes, whether falls under HSN 4911 under entry no 132 of Schedule II of Notification No. 1/2017- CTR? If answer to question 2 is yes, whether supply of print on flex noncommercial purpose is also classifiable under HSN 4911 under entry no. 132 of Schedule II of Notification No. 1/2017-CTR?

Observations & Findings : The applicant in the instant case is engaged in supply of printed flex material and the raw materials of the goods in questions are completely procured by the applicant himself. Immaterial of the fact that whether the content is supplied by the customer or it is designed by the applicant himself basing on the requirement of the customer, the applicant transfers the title in the goods i.e., printed material on flex to the customer as defined under Section 7 of CGST Act, 2017 read with Schedule -II Sl.No.1 (a) of CGST Act, 2017.

Further, the supply of print on flex is classifiable vide Notification No. 1/2017 – Central Tax (Rate) dated 28-6-2017 under Sl. No.132 under HSN code 4911 and attracts tax rate of 12%. Further, the same has been clarified in detail vide the clarification issued under F.No.354/263/2017 -TRU, Dated 20th October, 2017 in Circular No. 1l-11-2017-GST.

Ruling : The supply of print on flex is classified under Goods only as per Section 7 of CGST Act, 2017 read with Schedule -II Sl. No.1 (a) of CGST Act, 2017. It is classifiable vide Notification No. 1/2017 – Central Tax (Rate) dated 28-6- 2017 under Sl. No.132 Chapter/Heading/ Sub-Heading/Tariff item 4911 and attracts tax rate of 12%. Supply of print on flex used for non-commercial purpose does not change the classification per se and attracts same rate of tax as mentioned above.

[[2020] 117 taxmann.com 919 (AAR – ANDHRA PRADESH) – Sree & Co.]

2. Government Contracts :

Facts : The applicant entered in to contract with APEPDCL relating to “Supply and erection of 11No.s 33/11KV Indoor Sub stations and their connected lines in Z2 Division of Visakhapatnam circle on turkey basis.” The applicant entered in to contract with APEPDCL relating to Supply and Erection of 33KV Inter linking lines in Srikakulam, Vizag and Vizianagaram District Turnkey Basis. The applicant entered in to contract with APSPDCL, relating to “System improvement project works for erection of 2 nos 33/11kv GIS indoor sub stations at Vijayawada and 1 no. at 33/11kv GIS Indoor Sub-station at Guntur and their connected lines on semi turkey basis under IPDS Scheme”.

The applicant seeks advance ruling, whether APSPDCL & APEPDCL is a Government authority/ Government Entity or not? What is the applicable rate of GST on work agreement entered into with the APSPDCL & APEPDCL?

Observations & Findings : The Government of India vide Notification Number 12/2017 – Central Tax (Rate), dated: 28th June 2017 notified the rate of GST applicable on supply of services. Under this notification for heading 9954 the applicable rate of GST is 9%. The said Notification was amended through Rate Notification Numbers, 20/2017, 24/2017, 31/2017, 46/2017 and 01/2018.

The Applicant Contractees i.e. APSPDCL and AEPDCL are Government Companies i.e. wholly owned by the Government of Andhra Pradesh. When a copy of Audited Annual Accounts of M/s APSPDCL and APEPDCL are examined, it is evident from the schedule of Equity Share Capital of the Annual Statement that 100% share capital is held by the Government of Andhra Pradesh in the name of Honourable Governor of Andhra Pradesh. Thus, based on the above facts, it is concluded that the Government of Andhra Pradesh is having full control over the APSPDCL and APEPDCL and they are covered under the definition of Government Entities.

For all the civil works, where materials such as sand, metal, gravel etc., are involved, the rates are inclusive of seigniorage charges as fixed by the Competent Authority of Government of AP and the same will be recovered from the contract bills for remittance to the Government. Materials such as Power Transformers, 100 Sqmm Conductor & Station Transformer will be supplied by department. In some agreements all the materials are in Contractor’s scope. Now the works under discussion have been undertaken to execute/Implement various schemes for constructing sub stations, providing bore wells, erection of lines and required conductors etc. Moreover, the above works undertaken by APSPDCL and APEPDCL are for business purpose and the benefit of concessional Rate of 12% (6% under Central tax and 6% State tax) as per notification is NOT available to the applicant.

Ruling : The applicable rate of tax is 18% for the services referred by the Applicant as per entry no. (ii) of S.No.3 of the table of Notification No. 11/2017 -Central Tax (Rate), Dated: 28th June 2017.

The value of materials recovered on cost recovery basis by the Contractees from the R.A. bills issued by the applicant is includible in the taxable value of supply in terms of Section 15(2) (b) of the CGST Act, 2017.

[2020 (7) TMI 405 – AAR, Andhra Pradesh – M/S. GVS Projects P Ltd.]

3. Taxable supply

Facts : The applicant is a company engaged in conducting chit auctions. They register the members and conduct auction in respect of each chit each month. The company will be collecting subscriptions from members by dividing the prize money with number of members. The applicant is collecting the foreman commission @5% from the amount to be distributed to the member taking the prize money. The GST is paid on the foreman commission @12%. The applicant is responsible to pay the prize money by due date to the winner of auction. However, many a time, the subscribers fail to deposit subscriptions by the specified date. The applicant charges interest/penalty by whatever name called, from the members paying the subscriptions belatedly. The interest /penalty has no element of services except that it is in an auction in money inasmuch as it is collected as a part of subscription for delay.

The applicant raised the questions, whether the interest/penalty collected for delay in payment of monthly subscription by the members forms a supply under GST? IIf the said interest/penalty is a supply, what is the classification and rate of duty applicable on the said supply?

Observations & Findings : The GST Act 2017 mentioned the value of supply, vide Section 15 (2).

“shall include-(d)- interest or late fee or penalty for delayed payment of any consideration for any supply”;

It is clear from the simple reading of 15(2)(d) that the interest, late fee or penalty charged from customer shall be added to the transaction value and hence shall be taxable at the rate at which such goods/ services are taxable or in other words the classification of interest, late fee or penalty cannot be different from the classification of goods or services.

Ruling : The additional amount being charged in delay of payment by whatever name called should be classified as principal supply and the classification of the same cannot differ from the original supply. Hence the additional amount charged on delayed payment shall be taxed as per original supply i.e. supply of financial and related services. It is classified under SI. No 15 of Heading 9971 Financial and related services, GST @12% as per Notification No. 8/2017-Integrated Tax (Rate) dated, the 28th June, 2017 as amended from time to time.

[2020 (7) TMI 447 – AAR, Andhra Pradesh – Ushabala Chits P Ltd.]

4. Place of Supply :

Facts : The applicant is a registered proprietorship firm deals in supply of goods as well as provides services. The applicant received order for Fixing of Air conditioner & VRV system in Goa for a client (Recipient) registered outside Goa but not registered in Goa. Although the applicant sought ruling on many issues, only one issue could be dealt by this authority for issuing Ruling and that is whether supply made by applicant from Goa on behalf of third person who is not in the taxable territory of Goa to a place in Goa is to be taxed as Interstate Supply or Intra State Supply.

Observations & Findings : To determine the classification of any supply as Interstate Supply or Intra State Supply, two ingredients are relied upon and these are location of the supplier and place of supply. In the instant case, as said by the applicant, location of the supplier is Goa, place of supply will be outside Goa as per section 10(1)(b) of the IGST Act since, goods are supplied on behalf of a registered person outside Goa to a place in Goa.

Section 10(1)(b) of IGST Act is reproduced as “where the goods are delivered by the supplier to a recipient or any other person on the direction of a third person, whether acting as an agent or otherwise, before or during movement of goods, either by way of transfer of documents of title to the goods or otherwise, it shall be deemed that the said third person has received the goods and the place of supply of such goods shall be the principal place of business of such person.”

Ruling : The nature of supply made by the applicant is to be treated as a supply of goods in the course of interstate trade or commerce and tax is to be charged accordingly.

[2020 (7) TMI 311 – AAR, Goa – High Tech Refrigeration and Air Conditioning Industries]

5. Exempted supply :

Facts : The Applicant, is providing Mapping Services to various Municipal Corporation & Councils. The main aim behind doing the map making activity is to identify unpermitted construction areas. The Applicant has submitted that the services provided by them are Pure Labour Services, provided to Government or Local authority or a Governmental authority by way of an activity in relation to any function entrusted to a Panchayat under Article 243G of the Constitution or in relation to any function entrusted to a Municipality under article 243W of the Constitution.

Observations & Findings : We find that the applicant’s main query is whether in view of the submissions made, the services supplied by them would be covered under clauses (1) & (2) of Twelfth Schedule of Article 243W? and thus exempt under Entry No. 3 of Notification no. 12/2017-Central Tax (Rate) dated 28-6-2018. We find that the Services are provided by the applicant are in relation to Urban planning including town planning and Planning of land- use and construction of buildings in as much as all the said activities help the local authorities to do Town Planning, Urban Planning & Control the Land use by the general public. We find that the Services supplied by them are covered under Article 243W of the Constitution, as functions entrusted to Municipality. Hence the provisions as per SI. No. 3 of the Notification No. 12/2017 – Central Tax (Rate) dated 28-6-2017 as amended applies in their case and therefore, the Subject Services being Pure Services, provided by the applicant to the various Municipal Corporations and Councils are in relation to aforesaid functions entrusted to the said local authority and exempt from GST.

Ruling : Mapping services provided to Municipal Corporation for planning of land use are ‘pure services’, exempt from GST.

[[2020] 117 taxmann.com 749 (AAR – MAHARASHTRA) – Core Project Engineers & Consultants (P.) Ltd.]

6. Long Term Lease :

Facts : That the Rail land Development authority (RLDA), a statutory authority under Ministry of Railway, Government of India -I, issued a request for which was publicized by RLDA for grant of lease for residential & commercial development along with development of financial infrastructure for 99 years.

The Applicant company has entered into a long term Lease Agreement of 99 years with RLDA for undertaking residential & commercial development along with development of financial infrastructure. The Applicant Company paid a sum in parts as Security deposit which, in case of breach is refundable after forfeiting the bid security deposited separately for both the Plots as per the terms of the lease agreement. The issue to be examined in the present case is whether the amount paid prior to 29-3- 2019 in pursuance to the lease agreement of 99 years executed on 8-11-2019 are exempt from levy of GST in view of the Notification No. 04/2019-Central tax(rate) dated 29-3-2019 or Notification No. 12/2017-Central Tax(rate) dated 28-6-2017? or not;

Observations & Findings : While examining the functions of RLDA, we find that it is a statutory authority constituted under the Railways Act, 2005 with obligation, inter alia of development on Railway land for commercial use, entrusted to it by the Central Government for the purpose of generating revenue by non- tariff measures. We observe that in background of its function, especially of generating revenue, RLDA is leasing the parcels of land and thus it is a rental or leasing service of land for commercial function. In a way, it is clear from facts that RLDA is supplying rental or leasing service involving own land. The said service is classifiable under HSN 997212 ‘rental or leasing services involving own or leased non-residential property’.

Serial No. 5A of Notification 13/2017- Central Tax (Rate) dated 28-6-2017 (as amended) provides that ‘supply of renting of immovable property’ made by Central Government to a registered entity is taxable under RCM i.e. the recipient of service is liable to pay GST.

Ruling : Land given on lease for 99 years for residential development by statutory body is leviable to GST under RCM.

[[2020] 117 taxmann.com 797 (AAR- RAJASTHAN) – Hazari Bagh Builders (P.) Ltd.]

7. Composite supply :

Facts : The Applicant has received work orders from Ajmer Vidyut Vitran Nigam Ltd. (AVVNL) through tender process. AVVNL is a company incorporated by Govt. of Rajasthan for distribution of electricity in various parts of Ajmer district. Work undertaken by applicant as per contract along with two work orders involves (a) supply of materials/equipments and (b) erection, testing and commissioning of materials/equipments supplied in building of rural electricity infrastructure.

The applicant sought ruling on whether the contract entered into with AVVNL as per the work orders combine of supply, erection, testing and commissioning of materials/equipments for providing rural electricity infrastructure qualifies as a supply for work contract under section 2(119) of the CGST Act? If Yes, whether such

supply, erection, testing and commissioning of materials/equipments for providing rural electricity infrastructure made to AVVNL would be taxable at the rate of 12% in terms of Sr. No. 3(vi)(a) of the Notification No. 11/2017- Central Tax (Rate) dated 28-6-2017 as amended w.e.f. 25-1-2018?

Observations & Findings : It is observed that all the five conditions prescribed implicitly by Entry No. 3(vi)(a) of the Notification No. 11/2017 – Central Tax (Rate) dated 28-6-2017 are satisfied by the applicant except one, viz. that the activity is meant predominantly to be used other than commerce, industry, or any other business or profession. Thus, work undertaken by the applicant as per Contract RGGW/TN-13 for AVVNL, Ajmer by way of supply of material/equipment and erection, testing & commissioning of supplied material/ equipment is though a Composite Supply of Works Contract but the same is not covered under the Entry No. 3(vi)(a) of the Notification No. 11/2017 – Central Tax (Rate) dated 28-6-2017 (as amended).

Ruling : The work undertaken by the applicant as per Contract RGGVY/TN- 13 (encompassing both work orders) is a Composite supply of Works Contract and is not covered under Entry No. 3(vi)(a) of the Notification No. 11/2017- Central Tax (Rate) dated 28-6-2017 (as amended) as consequentially are not eligible to be taxed at lower rate of 12% and hence are liable to be taxed @18%.

[[2020] 117 taxmann.com 702 (AAR- RAJASTHAN) – ARG Electricals (P.) Ltd.]

8. Supply of food to hospitals :

Facts : The Applicant is engaged in supplying food and beverages at the canteen of their customers. The Applicant himself does not get paid for by the consumers of the food and beverages. The Recipient of the services are hospitals who enter into contract with the applicant. The charges are received from the hospitals on monthly basis on the coupons collected. In short, it is deciphered that the Applicant is vested with management of the canteen facilities.

The applicant sought the ruling, whether Food supplied to Hospitals i.e. Government Hospital, Private Hospitals and Autonomous Bodies on outsourcing basis, GST is chargeable? If GST is chargeable what is the tax rate? If no GST is chargeable on the Supply of food, the GST already paid by the Hospitals and remitted to Government is recoverable from their future bills?

Observations & Findings : The Notification No. 13/2018 – State Tax (Rate), issued in G.O.Ms No. 171, Revenue (CT-II) Department, Dt. 20-08-2018 was amended vide Notification No. 27/2018. In terms of the above amendment, from 01.10.2019, the supply of food by the applicant to hospitals fall under entry no. (ii) of S. No. 7 of Not. No. 11/2017 – State Tax (Rate), issued in G.O.Ms No. 110, Revenue (CT-II) Department, Dt. 29-06-2017 and is subject to 5% GST with the condition of non-availability of input tax credit.

Ruling : For the period from 01.07.2017 to 26- 07-2018 – 18%. For the period from 27.07.2018 onwards – 5%. Provided that credit of input tax charged on goods and services used in supplying the service has not been taken.

[2020 (8) TMI 104 – AAR, Telangana – Navneeth Kumar Talla]

HIGH COURTS GUJARAT HIGH COURT

VKC Footsteps India (P) Ltd. v.

Union of India & Ors.

[J.B. Pardiwala & Bhargav D. Karia, JJ]

Special Civil Application No.2792 of 2019 Date of Decision: July 24, 2020

Refund—Inverted duty Structure—Vires of Rule 89(5) of CGST Rules,2017— Refund of ITC on ‘input services’ denied by respondent in view of Rule 89(5) of the Rules—Said rule excludes ITC on input services as apart from Inputs used—Rule held to be contrary to section 54(3) of the Act as the said provision permits ITC on ‘any’ unutilised ITC—Rule held to be ultra vires the section 54(3) of the Act—Respondent directed to refund the accumulated ITC on input services also.

A writ has been filed for declaring Rule-89(5) of CGST Rule, 2017 as ultra vires to the extent it denies refund of ITC related to Input Service in case of inverted duty structure.

The petitioner receives input services on payment of GST in course of its business and avails ITC of GST paid thereon. The input and input services attract GST rate of about 18% which is higher than rate of tax paid on outward supply of goods. Thus the unutilized credit is accumulated which is not being refunded

fully by the respondent in view of the aforesaid amended rule. Section 54(3) of CGST Act provides for refund of any unutilized input tax credit and the said provision specifies the quantum of refund which includes credit availed on input services apart from inputs. A circular No.79/53/2018 dated 31.12.2018 was issued by the Govt. revising the formula to calculate refund on account of inverted duty structure. This formula excluded input services from the scope of net ITC for computation of refund which violates the provision Section 54(3) of the Act.

By prescribing the formula in Rule 89(5) of the rules, exclusion of tax paid on ‘input service’ as part of the refund of unutilized input tax credit is contrary to provisions of subsection 3 of section 54 of the CGST Act. Analyzing the provisions of the Act and Rules, keeping in mind the scheme and object of the Act, the intent of the government by framing the rule restricting the statutory provision cannot be the intent of law as interpreted in the circular dated 31.12.2018 so as to deny refund on input services as part of refund of unutilized ITC. Therefore, explanation (a) to Rule-89(5) which denies the refund of unutilized ITC paid on Input Services as part of ITC accumulated is ultra vires the provision of Sec.54 of the CGST Act. Therefore, respondents are directed to allow the claim of refund made by petitioners considering unutilized ITC of input services for claiming refund under Sub-section 3 of 54 of the Act.

HIGH COURT FOR THE STATE OF CHHATTISGARH

Dhamtari Krishi Kendra v.

Union of India & Ors.

[P. SAM KOSHY, J]

WRIT PETITION NO.70 of 2019

Date of Decision: July 17, 2020

Technical Glitch—TRAN 1 & TRAN 2— Inability to submit the forms due to technical glitch—Direction sought from High court to respondents for considering the same— Rejection on grounds that no evidence given showing submission within time and facing technical glitch—Writ filed— Held—Contentions raised in earlier round of litigation ought to have been considered by department—Complaint regarding failure to submit lodged at petitioner’s end well within time—Manual returns and registered post sent in this regard—Absence of reasoned order by department—matter remitted back for reconsideration keeping in mind documents proving the contentions of petitioner on record Submission of TRAN-1 and TRAN-2 was done a day before the last date of filing but failed due to technical glitch. Though a direction was sought from High Court to the authorities to consider the records and documents of the petitioner for filing of returns, the Commissioner refused the grant of permission to submit TRAN-1 and TRAN-2 on the ground that the petitioner had failed to produce any evidence to show that he tried to submit the forms within the stipulated period and that he faced technical glitch. The petitioner thus approached the High Court. It is held that the respondents should have considered the contentions of the petitioner earlier. Considering the timely complaint filed by the petitioner i.e. a day before the last date of filing , manual filing done shortly within a period of one month in addition to sending returns through

registered post; the Commissioner should have given reasons of rejection. Hence, the matter is remitted back to the Commissioner for passing a fresh order, keeping in mind that the petitioner has produced certain documents of his being unable to submit forms electronically. The Commissioner may refer the matter to GST Council for its recommendations. The Commissioner shall take a decision at the earliest.

KERELA HIGH COURT

Devices Distributors v.

The Assistant State Tax Officer [A.K. Jayasankaran Nambiar, J] WP No 14969 of 2020

Date of Decision: July 23, 2020

Detention of goods—Goods in transit covered with proper documents—Detention on grounds that invoices furnished not consecutively numbered—Transportation of other goods under the invoices falling in between those invoices suspected—Held goods in question covered with proper documents—Suspicion of other goods being transported without information no ground for detaining the goods in question u/s 129 of the GST Act—writ allowed—

The goods in transit were detained for the reason that the invoices furnished were not consecutively numbered for three invoices. It was suspected that the invoices in between the sets of invoices might have been used for transportation of other goods that were not brought to the notice of department. A writ is filed in this regard

Held that such a doubt cannot be a justification for detention u/s 129 of the GST Act, especially when the goods were covered with an e- way bill and invoice. In any case the doubt here was about the goods that could have been transported and not about the goods that are detained actually. Allowing the writ, the goods are ordered to be released.

TRIPURA HIGH COURT

Kalpana Stores v.

State of Tripura & Ors.

[CJ Akil Kureshi and Arindam Lodh, JJ] WP No 729/2019

Date of Decision: December 17, 2019

Natural Justice—Detention of goods—Goods in transit seized—Tax and penalty imposed by passing mere ‘order of demand of tax and penalty’ instead of assessment order—No opportunity of hearing given before confirming the demand—Writ entertained since impugned order was in breach of provisions of law— Impugned order quashed—

The goods in transit were detained and tax and penalty was imposed by the officer. The goods were released upon payment. A writ is filed on the ground that the said tax with penalty was imposed without affording an opportunity of hearing to the petitioner.

Disapproving the action of authorities, it is held that the impugned order is not an assessment order of petitioner’s tax liability but a mere order of demand of tax and penalty. Such order has to be confirmed after giving an opportunity of hearing to the petitioner. The order is in breach of subsections 3 and 4 of section 129 of the GST Act, 2017. Therefore, despite there being an appellate remedy, present petition is entertained and the impugned order is quashed.

GUJARAT HIGH COURT

Sawariya Traders v.

State of Gujarat

[J.B. Pardiwala and Bhargav D. Karia, JJ]

R/ Special Civil Application No. 22211 of 2019 Date of Decision: February 26, 2020

Detention of goods—Show cause notice issued u/s 130 of CGST Act, 2017 silent about discrepancy of goods and conveyance— Notice served to driver of conveyance—Writ applications filed for quashing of notice and release of goods—Permission to file application before concerned authority for provisional release of goods and conveyance granted— Also, applicants to file reply for discharge of the said notice—writ disposed of

A detention notice in form GST MOV-10 was issued u/s 130 of CGST Act thereby detaining both goods and the vehicle. The show cause notice was silent about the discrepancy noticed on physical verification of goods and conveyance. Moreover, the said notice was issued to the driver of the vehicle instead of owner of goods. Disposing off the Writ- applications filed for quashing of notice and for release of goods, the Hon’ble court has permitted the writ applicants to prefer an application addressed to the authority concerned u/s 67(6) of the Act for provisional release of goods and conveyance. Regarding challenge to the show cause notice, it is held that the applicants shall file a reply and make good his case that the impugned notice deserves to be discharged.

GUJARAT HIGH COURT

Cera Sanitaryware Limited v.

State of Gujarat & Anr.

[J.B. Pardiwala,J]

Civil Application No. 8050 of 2020

Date of Decision: July 14, 2020

Writ—Maintainability of—notice of intimation issued u/s 74(5) of GST Act, 2017—writ filed for quashing of—writ not maintainable against such notice of intimation—applicant entitled to ignore it till further issuance of show cause notice

Where the writ applicant seeks issuance of writ against the notice of intimation issued in form GST DRC-01A u/s 74(5) of the Act by the respondent, the Hon’ble High court has held that such a challenge is not maintainable in law. It may be ignored by the applicant till further show cause notice is served u/s 74(1) of the Act. When further notice is served under section 74(1), the applicant would be given opportunity of hearing before his actual liability is determined.

IN THE HIGH COURT OF DELHI

Jian International v.

Commissioner of Delhi Goods and Service Tax

[Manmohan and Sanjeev Narula, JJ.] WP NO.4205 OF 2020

Date of Decision: July 22, 2020

Refund—Zero rated supply—Application filed for refund u/s 54 of Delhi GST Act, 2017 alongwith interest on zero rated supply of goods—Application neither acknowledged nor deficiencies pointed out within the stipulated period as required u/r 90 of GST Rules— Held—Application to be presumed as complete—Permitting rectification after statutory timelines period would mean fresh filing thereby sabotaging petitioner’s right to claim interest from the relevant date of filing— A writ is filed seeking direction to the respondent to grant refund claimed under Section 54 of the Delhi GST Act, 2017 alongwith interest. It is contended by the petitioner that it had filed an application for refund claimed on account of zero rated supply of goods and services which was neither acknowledged by the respondent within the stipulated time period nor any deficiency was pointed out within a period of 15 days from date of filing, as required under Rule 90 of the DGST Rules.

It is held that in such a case the refund application would be presumed to be complete in all respects in accordance with Rule 89 of CGST/DGST Rules. Permitting the respondent to process the refund application beyond the statutory time limes as provided under Rule 90 of CGST Rules shall mean rejection of petitioner’s initial application for refund and that would require filing of fresh application after rectifying the alleged deficiencies. In such an eventuality the petitioner’s right to seek refund would be delayed and its right to claim interest from the relevant date of filing of original application for refund would also be impaired.

The respondent has lost right to point out any deficiency at this stage. Therefore, refund alongwith the interest shall be payable within 2 weeks as per law.

HIGH COURT OF ORISSA AMIT BERIWAL

v.

STATE OF ODISHA [S.K. PANIGRAHI, J.] BLAP NO. 2217 OF 2020

Date of Decision: July 27, 2020

Bail—Bogus ITC—Arrest against offence punishable u/s 132 of GST act, 2017—Bail application filed—Threat of tampering evidence—Two accused still at large—Huge amount of fake ITC involved involving many fake identities—Court cannot lose sight of impact of such activity on economy—Efforts of government to collect tax cannot be permitted to be sabotaged by such criminals—bail denied A bail application is filed against the arrest made being accused of an offence punishable under Section 132 of OGST Act, 2017. The petitioner is accused of engaging in fabricating fake invoices without supply of physical goods to other existing and non-existing firms thereby enabling the recipients to avail and utilize the ITC while discharging tax liabilities. On search and inspection by the State authorities it was found that no business is being conducted at the declared place of business, no transport documents to show actual supply of goods, no warehouses to stock such goods, no equipments to measure were available in the premises.

Out of the four accused, two are still evading arrest. The GST fraud committed is having huge ramification on the revenue collected by State and there is a possibility that the accused may tamper the evidence.

These complications created by the unscrupulous fraudsters could lead to arrest of innocent traders. The Government officials are doing their best to ensure tax collection. Their efforts cannot be permitted to be sabotaged by such criminals who prey on public exchequer. The increasing numbers of fraud in respect of ITC are alarming and a system needs to be devised to ensure that ITC is not misused. Hence, the court is not inclined to release the petitioner on bail at this stage. The bail application is dismissed.

MADHYA PRADESH HIGH COURT AMIT BOTHRA

v.

STATE OF MP

[Virender Singh, J] MCRC No.21628/2020

Date of Decision: July 27, 2020

Bail—Clandestine manufacturing—evasion of GST—search conducted—confessional statement alleged to have been taken under threat—nature and allegation and specific evidence collected considered—facts put forth by applicant taken into account—bail granted As per revenue the petitioner was indulging in clandestine clearance of Pan Masala without payment of GST and that they had confessed to evasion of GST payment to the tune of

Rs.225 Cr. The revenue is contesting against the grant of bail to the petitioner. The petitioner has alleged that no clandestine purchase is possible as purchases are done from government companies or from traders registered under GST Act, 2017. It is contended that their statements were recorded under threat and pressure. The tax evasion was presumed by the Department due to delay in paper work and submissions of invoices on account of COVID-19 and complete lock down pursuant thereto.

Considering nature and gravity of the allegations made and the specific evidence collected in respect of these allegations, elaborate discussion of which would not be apt as it may adversely affect the interest of either party, specific facts put forth by appellant, the Court is granting bail subject to furnishing of bond with separate sureties.

TELANGANA HIGH COURT

Mallemaala Entertainments (P) Ltd. v.

Deputy Commercial Tax Officer

[M.S. Ramachandra Rao, J] Writ Petition No.10862 of 2020 Date of Decision: 30:07.2020

Assessment—Amalgamation of X and Y— Assessment proceedings to be dropped against X for the period when X and Y stood amalgamated—

Natural Justice—show cause notice served without mentioning date is against the rules of natural justice

After the two companies MAPL and MEPL were amalgamated a show cause notice was issued by first respondent proposing to levy tax for inter-State sales effected by MAPL for the period subsequent to the period when amalgamation was brought into effect. The petitioner stated not having received it.

No date of the show cause notice given to MAPL nor did the petitioner receive it. This leads to violation of Natural Justice. The amalgamated companies ought to be assessed in the name of the petitioner with whom it is merged. Thirdly it is observed that the assessment is alive before the 2nd respondent. Hence writ petition is allowed with permission to the 2nd respondent to issue a show cause notice to the petitioner for the period concerned and the petitioner may file objections to the said notice including plea of bar of limitation.

KERALA HIGH COURT

State Tax Officer, The Commissioner of Commercial Taxes

v.

Village International School, K.K.S.

Reekumar

[K. Vinod Chandran & T.R. Ravi, JJ]

W.A. NO.573 OF 2020 Date of Decision: July 21, 2020

Rejection of application—Amnesty scheme— Whether application can be rejected on grounds of appeal intended by state from the order of first appellate authority—Held—No requirement of a specific provision for the state to withdraw the appeal filed as settlement based on statutory provision binding on the department—cases where revenue proceedings already initiated, proceedings have to be withdrawn on settlement under section 31 A of KGST Act as it would be render them infructuous on deposits made by assessee— No power to state to reject the application and requirement under subsection 7—circular stating where appeal already filed by state, settlement would be based on original assessment order is regarded to be issued in absence of any such provision in the scheme In this case the petitioner had filed an application under the Amnesty scheme introduced by Sec.31A of Kerala VAT Act, 2003

providing the assessee to absolve itself from the arrears. The question that arose was that if such application could be rejected on the ground that an appeal was intended by the State from the order of the 1st Appellate Authority.

The rejection was based on a circular of the Tax Department which was held to traverse beyond the statutory provisions by the single Ld. Judge. An appeal is filed by the State against the said order.

It is held there is no requirement of a specific provision that requires the State to withdraw the appeal filed since the settlement arrived at on the basis of statutory provision is binding on the department. If revenue proceedings are already initiated, they have to be withdrawn when the matter is settled under 31 A. The State appeals would be rendered infructuous on a settlement arrived at under Sec.31A as it is an inevitable consequence of deposits of amount determined under Sub-section of the amnesty scheme. There is no power given to the State to reject an application.

The circular was issued in contemplation of cases where appeals have been filed by the State wherein the requirement is to make settlement on basis of demand raised on the original assessment order. Such a provision is absent in the scheme. The appeals are thus rejected.

MADRAS HIGH COURT

P.R. Mani Electronics v.

Union of India & Others

[A.P. Sahi, C.J. & Senthil Kumar Rama Moorthy, JJ]

W.P. No.8890 of 2020 Date of Decision: July 13, 2020

Vires—Rule 117 of CGST Rules, 2017—Govt is empowered to make rules u/s 164 of the Act— Insertion of words ’within such time’ in S 140 of CGST Act, 2017 after amendment prescribes the time limit without relying on generic of s 164—therefore, rule 117 is intra vires Sec 140 of CGST Act—

Scope of Rule 117—ITC is not a property but a concession given to assessee which can be availed only with prescribed conditions— Extending time limit of the said Rule does not mean there is no time limit for availing ITC—

Section 16 of CGST Act is indicative of the legislative intent of prescribing the time limit for availing ITC—Against the statutory backdrop , the time limit for availing ITC is compelling which otherwise would make it unworkable—Meaning of word ‘shall’ in section 16 of CGST Act is peremptory which makes the provision mandatory—

Rule 117 makes it obligatory for the GST TRAN 1 to be filed electronically and not through hard copy—thus writ is dismissed 

The validity of Rule 117 of the CGST Rules, 2017 is challenged on the ground that it is ultra vires Sec.140 of the CGST Act, 2017. The petitioner had submitted its returns in form of hard copy of Form GST TRAN-1 two days later after the last date of electronic filing due to inability to log into the portal. No response was received with regard to entitlement to transactional ITC. The petitioner has contended that the ITC is in the nature of property and it cannot be deprived of it. It is also contended that Rule 117 is directory and not mandatory.

U/s 164 the Govt. has the power to makes rules to give effect to the provisions of the Act and also confer retrospective effect to the rules.

Rule 117 was framed whereby a time limit was fixed for submitting the said form. By inserting words, “within such time” in Sec.140 with retrospective effect the time limit is prescribed without relying entirely on the generic section 164, therefore, Rule 117 is intra vires Sec.140 of the CGST Act.

The ITC is not a property of the petitioner but has to be construed as a concession and cannot be availed without complying with the conditions prescribed. The fact that the time limit may be extended under certain circumstances specified in Rule 117 including Rule 117A does not mean that there is no time limit for transitioning credit.

Keeping the statutory backdrop in mind in reference to section 16 of CGST Act and section 19 of TNVAT Act, in the context of transactional ITC, the case for time limit is compelling and disregarding the time limit and permitting a party to avail transactional ITC in perpetuity would render the provision unworkable.

In Sec.16(4) of the CGST Act , the word “Shall” used is peremptory. Thus the object and purpose of Sec.140 warrants the necessity to be finite. The time limit is therefore, mandatory and not directory.

Lastly the Form GST TRAN-1 is required to be filed electronically and not manually as specified in Rule-117, therefore, the respondents cannot be directed to permit the petitioner to file to Form GST TRAN-1 and claim the transactional ITC, unless any dispensation are granted by the Tax Authorities.

The outbreak of COVID-19 has resulted a surge in the demand for relevant medical supplies and prevention material/services, such as sanitizers, disinfectants, PPE kits, protective masks, protective spectacles, rubbing alcohol, gloves, infrared thermometers, ventilators, fumigation services etc. Goods and Services Tax (hereinafter referred to as ‘GST’) on masks, sanitizers, gloves, PPE kits and some other key COVID-19 medical supplies may fall either under the 5% or 12% or 18% GST slabs due to some valid controversies about their classification based on their contents and usage in accordance to the accepted principles of classification of goods and services. The present pandemic has also led to a trail of amendments, relief measures and other changes directed at regulating the foreign trade and associated matters. The analysis of such measures and changes in brief as well as some controversies shall provide the reader an insight on the possible widespread effects needing reconsideration of earlier understanding.

1. TRADE FACILITATION CUSTOMS LAW

The following are the major amendments which have been introduced in effect to the outbreak of COVID-19 intending at regulating & providing relief to the business keeping into consideration the requirement of the current situation.

  1. PROCEDURE FOR EXPORT OF PPE MEDICAL COVERALLS NOTIFIED

Trade Notice No. 17/2020-21 dated 29.06.20201 issued by the Directorate General of Foreign Trade (hereinafter referred to as ‘DGFT’) restricts the export of PPE medical coveralls for COVID-19 (hereinafter referred to as ‘the Product’) and fixes the export quota of 50 lakh Product Units per month. It notifies the online application procedure through DGFT’s ECOM system for Export authorizations and criteria for export of the aforementioned commodity. This is as follows:

  • Export of only 50 lakh units of the Product shall be allowed monthly.

  • Exporters to apply online through DGFT’s ECOM system for Export authorizations

  • Only applications for export of the Product filed from 1st to 3rd day of each month to be considered for monthly quota.

  • Approvals/allocations to be done by 10th of every month in accordance with Handbook of Procedures.

  • Validity of Export License will be for 3 months only.

Further, the requirements/eligibility criteria for issuance of Export license for exporting the products along with documents to be submitted along with online application have been laid as follows:

  • The applicant shall be a manufacturer of the Product.

  • Applicant is to submit copy of Testing/ Accreditation of the Product issued to him from laboratories notified/recognized by the Ministry of Textiles.

  • Applicant to either submit copy of importing country’s PPEs medical coveralls Standards Certificate obtained by it or copy of Bureau of Indian Standards Certificate obtained by it, if importing country does not insist in a Standard Certificate.

  • Applicant to submit a Chartered Engineer’s certificate certifying that fabrics used in the Product were manufactured in India.

  • Copy of Applicant firm’s IEC.

  • Only one application per IEC will be considered during a month

  • Copy of Purchase Order/Invoice

  • All documents to be duly self-attested by

authorized person of the firm.

  1. DUTY EXEMPTIONS

The Department has exempted the levy of customs duty and health cess on medical equipment to combat COVID-19 pandemic by virtue of Notification No. 20/2020-Cus dated April 9, 2020 upto 30.09.2020.2 The following goods are covered by the exemption notification:

S.

No.

HSN

DESCRIPTION OF GOODS

1.

9018 or 9019

Artificial respiration or other therapeutic respiration apparatus (Ventilators)

2.

63 or any Chapter

Face masks and surgical masks

3.

62 or any Chapter

Personal protection equipment (PPE)

4.

30, 38 or any chapter

COVID-19 testing kits

5.

Any chapter

Inputs for the manufacture of above items

The importer however should follow the procedure set out in the Customs (Import of Goods at Concessional Rate of Duty) Rules, 2017

  1. OTHER EXEMPTIONS

The DGFT in another relief measure by way of Trade Notice No. 62/2012-2020 dated 06.04.20203 directed that where imports taking place under a Free Trade Agreement, have claimed preferential treatment but original hard copy of Certificate of Origin on account of disruptions caused by COVID-19 pandemic cannot be produced or only a digitally signed copy or unsigned copy of the certificate may be accessed and cleared provisionally.

The final assessment may however be done subsequently on submission of the original certificate by the importer. Also, the revenue may be secured through undertaking and appropriate security.

2. CONTROVERSIAL ISSUES AS PER HSN Code vis-à-vis GST RATE ON SOME ITEMS OF EXTENSIVE USE AGAINST COVID-19

GOODS AND SERVICES TAX LAW

  1. ISSUES RELATED TO CLASSIFICATION

The pandemic has led to introduction of new products and services in the market. Additional facilities for manufacture of such products have also been resorted to by several ventures as their new business lines. After detailed research and analysis of Harmonized System Nomenclature (hereinafter referred to as ‘HSN’) as updated till 2017 by World Customs Organization, we have prepared and enclosed the table providing various important products, their description, HSN Code, relevant rate notification and its item number as well as the GST tax rate in accordance to the prescribed Schedule under the GST law. The possible notifications and relevant entries have been incorporated with our brief comments for easier understanding and brief analysis of the most appropriate applicable classification and GST rate on the specifically described product. The difference of opinion regarding the categorization of some items has emerged due to very complicated structure of the classification entry which is really difficult to comprehend. The issues of classification have already started surfacing as being raised by the investigating agencies of the GST Departments.

There have been contrasting views regarding the classification of N95 Mask whether would be suitable under Heading 9018 or 9020 of the Harmonized System of Nomenclature.

  1. Masks used for medical purposes and for other than medical purposes

In India, masks can be broadly divided into 4 types, on the basis of their physical features. These are:

  1. Masks with detachable filters or with a mechanical part;

  2. Masks without a detachable filter or a mechanical part;

  3. Masks made of cellulose paper or felt or non woven fabric; and

  4. Textile masks including designer masks which have now formed a part of the suit sets.

Further, the World Health Organisation in its 2016 Guidelines on Personal Protective Equipment (hereinafter referred as ‘PPE’) recommended technical specifications for surgical mask.4 Guidance Flyer issued by WHO recommends Advanced masks (Surgical masks for single use only & N95 masks) for health workers or those in contact with COVID 19 patients or COVID patients themselves5. While, homemade masks of cloth have been recommended for people not suffering from medical conditions or having breathing difficulties. Guidelines prescribing the use of PPE in different settings have also been issued by the Ministry of Health and Family Welfare.6

There has however, emerged another category of face masks with replaceable filters. The following columns (I) and (II) state the competing entries for classification of the aforementioned Mask:

 

I

II

HSN

9018

9020

Rate

12%

12%

Text

Instruments and Appliances used in Medical, Surgical, Dental or Veterinary Sciences, Including Scientigraphic Apparatus, Other Electromedical Apparatus and Sight -Testing Instruments

Other breathing appliances and gas masks, Excluding Protective Masks having neither Mechanical Parts nor Replaceable Filters

Our View:

Heading 9020 constitutes of two major categories of ‘Other Breathing Appliances’ and ‘Gas Masks’ but at the same time excludes the protective masks which do not have mechanical parts or replaceable filters. Hence a protective mask of the category having replaceable filters shall be classified within the Heading 9020 and shall attract a GST rate of 12%.

The second part of the heading containing exclusion of protective masks having neither mechanical parts nor replaceable filters creates a complexity and needs a clearer consideration of the facts of each case in order to classify a mask under the heading 9020 or 9018.

Further, the third category of ‘textile mask’ is classifiable under Heading 6307.90 depending upon the ‘sale value’ of the mask as a textile article. A textile mask with a sale value below ₹ 1000/- piece shall attract a rate of 5%. On the other hand, a textile mask with a sale value exceeding ₹ 1000/- piece shall attract a rate of 12%.

  1. Face Shields majorly used for medical purposes

A constituent of the ‘Personal Protective Equipment’ is a plastic face shield with headgear providing good visibility to both the wearer and the patient with an adjustable band attached firmly around the head. It aims to protect the facial area from exposure to airborne particles containing virus that may be expelled by another person.

The following are the competing entries:

 

I

II

HSN

9018

3926.90

Rate

12%

18%

Text

Instruments and Appliances used in Medical, Surgical, Dental or Veterinary Sciences, Including Scientigraphic Apparatus, Other Electromedical Apparatus and Sight -Testing Instruments

Other articles of plastics and articles of other materials of headings 3901 to 3914 [other than bangles of plastic, plastic beads and feeding bottles]

Our View:

Face Shields as have been described above, are being majorly used for ‘medical’ purposes and the same shall qualify as an ‘instrument and appliance’ classifiable under Heading 9018, sub-heading ‘Other’ with HSN 9018 99 with applicable rate of 12%.

The possible contrary view has emerged based on the two rulings rendered by the United States CROSS Rulings7 where under both the rulings, it has been held that such face shields brought into U.S. shall have a classification under Heading 3926.90 attracting a rate of 18% holding that they “would be considered articles of plastic, and as they are not more specifically provided for elsewhere.” The said view makes the impugned product susceptible to challenge and leviable to a higher rate.

The latter entry is however expansive and according to the general rules of interpretation, a specific entry over a general entry shall prevail. The entry for classification of a specially designed item based on its specific use is a better categorization being a nearer entry.

  1. Mechanical Sprayer including battery/ power operated used in fumigation

A battery/power operated mechanical sprayer usually works when user slides the locking button to the unlocked position, which enables the trigger button. When the user presses the trigger button, the motor is activated, which bring the water, water-based sanitizers or disinfectants up the suction hose via the pump to the spray chamber.

 

I

II

III

HSN

8424

8424.89

84131910

Rate

12%

18%

5%

Text

Sprinklers; drip irrigation system including laterals; mechanical sprayers

Mechanical appliances (whether or not hand-operated) for projecting, dispersing or spraying liquids or powders; fire extinguishers, whether or not charged; spray guns and similar appliances; steam or sand blasting machines and similar jet projecting machines

[other than sprinklers; drip irrigation systems including laterals; mechanical sprayer; Nozzles for drip irrigation equipment or nozzles for sprinklers]

Pumps for Liquids, whether or not fitted with a measuring device, Liquid Elevators

— Other

— Hand Pumps

Our View:

The article ‘battery/power operated mechanical sprayer’ clearly falls within the Heading of ‘Mechanical Sprayers’ under 8424 subjecting the same to a rate of 12%. A specific entry reading ‘mechanical sprayers’ has been listed thereunder.

However, a contrary view might be taken claiming a classification under the heading 8424.89 attracting a higher rate of 18% under the heading ‘Mechanical Appliances’. A careful consideration of the physical characteristics of the impugned product is required as to whether the product shall constitute a ‘sprayer’ or ‘gun’ or ‘appliance’.

A pump or a liquid elevator on the other hand shall be classifiable under Heading 8413.19.10 attracting a rate of 5%. Similarly, gun sprayer has been specifically stated under Heading 8424.89.

  1. Hand Sanitizers

Most controversial item concerning the classification issue is ‘sanitizer’. The specification as per WHO note on Handrub Formulations mentions the ingredients: Ethanol, Isopropyl Alcohol, Hydrogen Peroxide and Glycerol. The majority of the formulation contains either Ethanol or Isopropyl Alcohol.8

The Director General of Goods and Services Tax vide its (internal) communication dated June 16, 2020 relating to evasion of GST in respect to Alcohol based – Hand Sanitizers (as used in ‘WCO Classification’) has stated that some manufacturers of the product are classifying product under wrong tariff heading 3004 attracting a rate of 12% while the product shall attract a rate of 18% under Heading 3808.

The most competitive entries under which a sanitizers or disinfectants could fall are as follows:

 

I

II

III

IV

V

HSN

3004

3401

3402

3808

3824

Rate

12%

18%

28%

18%

18%

Text

Medicaments for therapeutic or prophylactic uses, put up in measured doses or in forms or packings for retail sale, including Ayurvedic, Unani, homoeopathic siddha or Bio-chemic systems medicaments, put up for retail sale

Soap, Organic surface-active products and preparations for washing the skin, in the form of liquid or cream and put up for retail sale, whether or not containing soap

Organic surface- active agents (other than soap); surface-active preparations, washing preparations (including auxiliary washing preparations) and cleaning preparations, whether or not containing soap, other than those of heading 3401

Insecticides, rodenticides, fungicides, herbicides, antisprouting products and plant-growth regulators, disinfectants and similar product

Prepared binders for foundry moulds or cores; chemical products and preparations of the chemical or allied industries (including those consisting of mixtures of natural products), not elsewhere specified or included

Notes to HSN Code Chapter 34

Note 2 of Chapter Note while defining ‘soap’ for 3401 states that Products containing abrasive powders remain classified in heading 3401 only if in the form of bars, cakes or moulded pieces or shapes. In other forms they are to be classified in heading 3405 as “scouring powders and similar preparations”.

Note 3 defining ‘organic surface-active agents” are products which when mixed with water at a concentration of 0.5% at 20oC and left to stand for one hour at the same temperature: give a transparent or translucent liquid or stable emulsion without separation of insoluble matter; and reduce the surface tension of water 4.5 X 10-2 N/m (45 dyne/Cm) or less.

Our View:

  1. Heading 3004

    The Heading 3004 primarily deals with ‘Medicaments’ and states its properties thereafter. The present commodity does not largely fulfill the basic criteria as has been set by the heading 3004, probably the classification adopted by some of the manufacturers needs serious reconsideration.

    The HSN classification 3004 could only be attracted for sanitizer because of its characteristic being “prophylactic” which means measures designed to prevent the occurrence of an adverse event, a disease or its dissemination. For the purpose of the correct classification of the product, many other accepted principles of classification needs to be examined in depth.

  2. Heading 3824

    The classification HSN 3824 is a general category for chemical products which do not fall in any other classification.

    A view has been taken by the US CROSS Rulings in NY N3110379 where it has been held that the sanitizer made of Alcohol from Rum Distillated 70 % v/v, to be used in antimicrobial applications such as hand sanitizing and also containing distilled water, hydrogen peroxide, glycerin and isopropyl myristate shall be classified under Heading 3824 i.e. “Prepared binders for foundry molds or cores; chemical products and preparations of the chemical or allied industries (including those consisting of mixtures of natural products), not elsewhere specified or included: Other: Other: Other: Other: Other: Other.”

    A similar view has been taken by NY N30436510

    wherein the product constituted of a liquid

    sanitizer comprising of the active ingredient, ethyl alcohol (62% of the total product), the remainder of the hand sanitizer comprising of water, isopropyl alcohol, glycerin, fragrance, propylene glycol, and aloe barbadensis leaf juice.

    If we go by the view as supported by US CROSS Rulings NY N311037 and NY N304365 wherein a similar issue relating to classification of hand sanitizer was raised before the authority then unfortunately the appropriate Heading for classification of hand Sanitizers is 3824 attracting a rate of 18%.

    However, the analysis of the same is to be made taking into consideration the chemical constitution, intended use and by applying other relevant tests for determination of appropriate classification of the product. The products falling under same family is an important consideration for attracting the particular classification, by this criteria the questioned product must fall in 3808 covering “Insecticides, rodenticides, fungicides, herbicides, antisprouting products and plant- growth regulators, disinfectants and similar product”.

  3. Heading 3402

    Heading 3402 concerns “Organic surface- active agents (other than soap); surface-active preparations, washing preparations (including auxiliary washing preparations) and cleaning preparations, whether or not containing soap, other than those of heading 3401.”

    If the product sanitizer could be characterized as per its contents as an organic substance then such sanitizer may fall in 3402, but in accordance to the principle of use of the product, the nearest entry is 3808 which could appropriately be used for deciding the applicable rate of tax under GST being a consumption based tax collection system.

    The appropriate Heading for classification of hand Sanitizers is 3808 attracting GST rate of 18%. Hand sanitizers fall under the category: ‘Insecticides, rodenticides, fungicides, herbicides, antisprouting products and plant-growth regulators, disinfectants’ and shall qualify as ‘similar product’ as per the same family of consumable products as well as for the reason that they possess similar properties to the genus of products covered in the category.

  4. Disinfectant

Disinfectants with constitutions of alcohol, benzalkonium chloride solution or peroxyacids, or other disinfectants are common in use in present times.

Our View:

‘Disinfectant’ is specifically mentioned under Chapter Heading 3808 attracting a rate of 18%, so there is not much to debate on its classification for the present purposes.

The classification of the good is dependent upon the chemical properties of the product. The rules of classification have relied on chemical composition and reactions and hence, a reference to chemical composition is also a prerequisite to the classification of the product.

  1. Protective Garments generally known as the Personal Protective Equipment (PPE) WCO Classification provides for the following Headings which may be perused for classification of the said product:

    1. 3926.20: Protective unisex garments made of plastic sheeting, textile reinforced plastics or textile backed plastics

    2. 4015.90: Protective unisex garments made of rubber sheeting…

    3. 4818.50: Paper or cellulose garments

    4. Other Sub headings of Chapter 62, which can be discussed as follows:

 

I

II

III

HSN C

6210.10

6210.50

6210.50

Rate

5% or 12%

5% or 12%

5% or 12%

Text

Protective garments for surgical/medical use made up of felt or nonwovens whether or not impregnated, coated, covered or laminated (fabrics of heading 56.02 or 56.03).This includes spun- bonded garments.

Other protective garments of textiles and rubberised textile fabrics or woven fabrics that are impregnated, coated, covered or laminated (fabrics of headings 59.03, 59.06 or

59.07).

Unisex protective garments made of rubberized textile fabrics

Our View:

While a distinction on the basis of the broad heads may be done depending on the properties of the protective garment, the most closely related heading under Chapter 62 is the Heading 6210.10 i.e. Protective garments for surgical/medical use made up of felt or nonwovens whether or not impregnated, coated, covered or laminated (fabrics of heading 56.02 or 56.03).This includes spun- bonded garments.

As per Wikipedia, Felt has been defined as “Felt is a non-woven textile. It is made by compressing and matting fibres together until they connect to form a sturdy fabric. Felt has a long history and is the oldest form of cloth known. Felt has been used in many cultures as a material for clothing, footwear, rugs and even tents.”

The reason for the above conclusion is that in major cases, the use of the commodity is ‘surgical’ or ‘medical’ and that the material used for making the protective garment is made of ‘felt or nonwovens whether or not impregnated, coated, covered or laminated’.

PPE made from plastic sheeting other than felts impregnated, coated, covered or laminated with plastics or embedded in plastics will be classifiable under the Heading 3926.20 with an applicable rate of 18%.

  1. Gloves including surgical rubber gloves and others

Gloves, full fingered are being commonly used for prevention from the spread of the disease. They are made by using varied materials ranging from plastic, rubber, textile, etc. A differentiation on the basis of material used to manufacture the product and the purpose of manufacturing them has been made.

The following are the competing Headings for undertaking the process of classification of the product:

 

I

II

III

IV

V

HSN

3926.20

4015.11

4015.19

6116.10

6216

Rate

18%

12%

18%

5% or 12%

5% or 12%

Text

Other articles of plastics and articles of other materials of headings 3901

to 3914 [other than bangles of plastic, plastic beads and feeding bottles]

Surgical rubber gloves or medical examination rubber gloves

Articles of apparel and clothing accessories (including gloves, mittens and mitts), for all purposes, of vulcanised rubber other than hard rubber [other than Surgical gloves]

Knitted or crocheted gloves which have been impregnated or covered with plastics or rubber

Textile Gloves that are not knitted or crocheted

Our View:

An intricate analysis of the properties of the material used to manufacture the product and those specified in the description of the product is required to ascertain the correct classification of the product. The intended use of the product in light of the destination based tax collection system read with the principles used in the classification process are needed to be relied upon.

The most commonly used type: Rubber gloves shall be classifiable as ‘Surgical rubber gloves’ attracting a lower rate of 12% or shall constitute an ‘article of apparel and clothing accessories’ attracting a rate of 18% shall depends upon the very facts of each case.

  1. UV Disinfectant Boxes

UV Disinfectant boxes and similar appliances usually contain a component emitting ultraviolet (UV) rays/light to disinfect documents, medical instruments, articles, etc. and are in common use in work places and hospitals to sanitize the inputs.

Our View:

The most closely related Heading to the impugned product is Heading 8543.70.99 i.e. “Electrical machines and apparatus, having individual functions, not specified or included elsewhere in this Chapter.” The present Entry is of a residuary and general nature attracting a rate of 18% under the rate notification.

It is hence iterated herein that UV disinfectant process is also commonly used in medical establishments for disinfecting of medical instruments, etc. but UV Disinfectant boxes does not find any specific mention in Chapter 90 which contains Medical or Surgical Instruments and Apparatus.

  1. AVAILABILITY OF INPUT TAX CREDIT

    1. Handwash, sanitizer, masks etc. provided to the employees by the employer

In the series of inadvertent event of spreading of corona virus turning into pandemic, the Prime Minister under Sections 6 and 10 of the Disaster Management Act, 2005 declared the pandemic as a ‘national disaster’, followed by the national lockdown as per Order dated 24.03.2020 under the Act. The Ministry of Home Affairs thereafter issued guidelines11 which have been updated from time to time to prescribe National Directives for COVID-19 Management. These include special directions for Work Places, which are as follows:

  1. Provision for thermal scanning, handwash, sanitizer will be made available at all entry and exit points and common areas

  2. Frequent sanitisation of entire office, common facilities and all points which come into human contact.

  3. Wearing of face cover is compulsory in all work places and adequate provision of the same should be made

  4. Employees showing any symptoms of COVID 19 should be immediately sent for checkup in nearby medical hospitals/ clinics.

  5. Arrangement for transport facilities to be ensured with social distancing wherever public/private transport is not feasible

  6. Intensive communication and training on good hygiene practices shall be taken up

Standard Operating Procedures12 for offices, factories, workplaces and establishments has been prescribed to be as follows:

  1. All workplaces to have adequate measures for temperature screening and provide sanitizers at convenient places

  2. All organisations to sanitise their workplaces between shifts.

  3. All areas in the premises to be disinfected

  4. For workers coming- from outside, special transportation facility to be arranged without any dependency on public transport

  5. Medical insurance for workers to be made mandatory

Hence, in light of the above laws, the ‘work places’ are required to fulfill the above mentioned conditions. A failure to comply with any of the above shall on the other hand attract penal measures as imposed by State laws. Hence, a compliance of the above provisions is necessary for carrying on the business i.e. such activities by virtue of the above laws is in course or furtherance of business. Moreover, to instil confidence in the employee’s to work together at workplace all these products are necessary otherwise the work cannot be possible adhering the social distancing norm to fight COVID-19.

Section 16 of the Central Goods and Services Tax Act, 2017, prescribes the eligibility for taking credit. Section 17(5) however specifies a list of supplies in respect of which such credit shall not be available. The list blocks credit in respect of the following:

  1. Under clause (b), Food and beverages

  2. Under clause (b), life insurance and health insurance.

  3. Under clause (h), goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples.

In addition to the above, the following cases shall also be referred in order to determine the correct position in relation to the availability of credit on the supplies on which such credit on input has been blocked.

  • In Re: Caltech Polymers Pvt. Ltd. 2018 (10) TMI 1313 –AAR Kerala

The present application was filed with the issue of whether the food expenses for canteen services recovered from the employee without any profit margin would be liable to GST. The Appellate Authority held that the activity would constitute a ‘supply’ and would
constitute a taxable service. It was observed before the Advance Ruling
Authority that there is an involvement of ‘consideration’ as has been defined under Section 2(31) of the CGST Act, 2017 and that such provision of food shall fall within the meaning of ‘business’ as has been defined under Section 2(17)(b) of the CGST Act, 2017.

  • CCE v. Brakes India Ltd. 2018 (11) TMI 1748

The issue before the Madras High Court was whether an activity carries out in compliance of statutory requirement under a particular Act alone would make the said activity/ service as input service under Rule 2(l) of the CENVAT Credit Rules, 2004 especially when such service/activity has no nexus in or integral connection to the manufacture of final product. It was held that when the employer spends money to maintain factory premises in an eco-friendly manner based upon the directives issued by the Statutory Authorities, the tax paid on such services would form part of the costs of the final product, that the same would fall within the ambit of ‘input services’ and that the assessee is entitled to claim the benefit.

  • CCE v. Stanzen Toyotetsu India (P.) Ltd. 2011 (4) TMI 201

It was held that credit on Outdoor catering services, transportation charges, rent-a- cab scheme and Group Health Insurance shall be available. It was held that it is clear from the definition any service used by the manufacturer whether directly or indirectly in or in relation to the manufacture of final products constitutes input service. If the credit is availed by the manufacturer, then the said service should have been utilized by the manufacturer directly or indirectly in or in relation to the manufacture of final products or used in relation to activities relating to business – merely because these services are not expressly mentioned in the definition of input service it cannot be said that they do not constitute input service and the assessee is not entitled to the benefit of CENVAT credit.

Our View:

Considering the unique and challenging circumstances to protect human beings from the virus by introduction of the new law to fight the COVID pandemic, the business are entitled to undertake certain compulsory activities which were not prevalent before the COVID scenario. The circumstances however have found a mention in the previous excise regime wherein the credit was available in cases an activity which was compulsory to be undertaken by a law. The same has been asserted by the Appellate Authority for Advance Rulings under the New GST regime as well. So, the direct expenses for such fight to protect the business interests including all stakeholders are legitimate expenses in furtherance of business and thus the ITC would be eligible on all such inward supplies, as mandated by the law.

  1. CSR Expenditure

    • The Mumbai Bench of CESTAT in the case of Essel Propack v. Commissioner [2018-TIOL-3257-CESTAT-Mumbai] held that Corporate Social Responsibility (hereinafter referred to as CSR) is not in the nature of charity and is directly connected with the principal manufacturing activity of the company which is largely dependent on smooth supply of raw materials. The Bench held that contribution towards Social Responsibility is a mandatory requirement for public sector undertakings and has also been made obligatory for the private sector. CENVAT credit was allowed to the appellant for the reason that the production and sustainability of the company would be at stake if such activity is not treated as ‘business’ activity.

    • The Kerala Authority for Advance Rulings in an application filed by Polycab Wires Pvt. Ltd. 2019-VIL-100- AAR, the applicant had distributed electrical goods to people affected by the flood in Kerala in discharge of the applicant’s CSR obligations. It was hence adjudicated that the goods were distributed on free basis without collecting any money. Such distribution shall amount to ‘disposal by way of gift’ and no ITC shall be available as per Section 17(5)(h).

In a similar context to that of the mandatory CSR activities by law, while the erstwhile regime provides for credit, the AAR denies the same by invoking the specific provision of Section 17(5) concerning blocked credit.

The tussle on whether an obligation imposed by introduction of a law to the effect amounts to a supply in the course or furtherance of business is yet to reach the Courts. It points at the blatant denial of the right available to the taxpayer to avail ITC.

3. CONCLUDING REMARKS

The present circumstances of pandemic are once a lifetime challenge, so the situation needs to be tackled with exceptional thinking and innovative actions. The issues of classification or categorization of products and services needs to be re-invented considering the distinctive facts and circumstances. The GST law needs to be uniquely interpreted considering the crucial need to protect the human race both from the ill-effects of deteriorating health and economy.

CLASSIFICATION OF GOODS & SERVICES USED MAJORLY IN COVID ERA

Compiled & Presented by Mukul Gupta – Senior Partner & Counsel, Prateek Gupta – Partner & Counsel and Akshi Narula – Associate Lawyer At Sharnam Legal

S.

No.

NOTIFICATION NUMBER

HSN/ SAC NO.

Entry

DESCRIPTION OF GOODS/ SERVICES

RATE OF TAX

GST Schedule- Rate

1

PERSONAL PROTECTIVE EQUIPMENT (PPE) KIT

Protective garments for surgical/medical use made up of felt or nonwovens whether or not impregnated, coated, covered or laminated (fabrics of heading 56.02-felt, whether or not impregnated, coated, covered or laminated as well as 56.03-non-wovens, whether or not impregnated, coated, covered or laminated). This includes spun-bonded garments. As per Wikipedia, Felt has been defined “Felt is a non woven textile. It is made by compressing and matting fibres together until they connect to form a sturdy fabric. Felt has a long history and is the oldest form of cloth known. Felt has been used in many cultures as a material for clothing, footwear, rugs and even tents.”

1.1

Notification No.1/2017- Central Tax (Rate) dated 28th June, 2017

 

6210.10

223

Articles of apparel and clothing accessories, not knitted or crocheted, of sale value not exceeding Rs. 1000 per piece

5%

Schedule I – 2.5%

1.2

Notification No.1/2017- Central Tax (Rate) dated 28th June, 2017

170

Articles of apparel and clothing accessories, not knitted or crocheted, of sale value exceeding ₹ 1000 per piece

12%

Schedule II – 6%

2

OTHER PROTECTIVE GARMENTS OF TEXTILES AND RUBBERISED TEXTILE FABRICS OR WOVEN FABRICS THAT ARE IMPREGNATED, COATED, COVERED OR LAMINATED (FABRICS OF HEADINGS 59.03, 59.06 or 59.07).

Example: a unisex full body woven suit impregnated with plastics would be classified under 6210.50 – Other

women’s or girls’ garments”

2.1

Notification No.1/2017- Central Tax (Rate) dated 28th June, 2017 dated 28th June, 2017

 

6210.20

6210.30

6210.40

6210.50

223

Articles of apparel and clothing accessories, not knitted or crocheted, of sale value not exceeding Rs. 1000 per piece

5%

Schedule I – 2.5%

2.2

Notification No.1/2017- Central Tax (Rate) dated 28th June, 2017

170

Articles of apparel and clothing accessories, not knitted or crocheted, of sale value exceeding Rs. 1000 per piece

12%

Schedule II – 6%

3

PROTECTIVE GARMENTS MADE FROM PLASTIC SHEETING OTHER THAN FELTS IMPREGNATED, COATED, COVERED OR LAMINATED WITH PLASTICS OR EMBEDDED IN PLASTICS

3.1

Notification No.1/2017- Central Tax (Rate) dated 28th June, 2017

3926.20

111

Other articles of plastics and articles of other materials of headings 3901 to 3914 [other than bangles of plastic, plastic beads and feeding bottles]

18%

Schedule III – 9%

4

N95 MASKS:

Available in variety of categories/models with or without detachable filters or mechanical parts as per the

requirement of the situation under which the mask should be scientifically used.

4.1

Notification No.1/2017- Central Tax (Rate) dated 28th June, 2017

9018.00

218

Instruments And Appliances Used In Medical, Surgical, Dental Or Veterinary Sciences , Including Scientigraphic Apparatus, Other Electromedical Apparatus And Sight -Testing Instruments

12%

Schedule II – 6%

4.2

Notification No.1/2017- Central Tax (Rate) dated 28th June, 2017

9020.00

220

Other Breathing Appliances And Gas Masks , Excluding Protective Masks Having Neither Mechanical Parts Nor Replaceable Filters

12%

Schedule II – 6%

5

TEXTILE MASKS INCLUDING DESIGNER MASKS :

Textile face masks,without a replaceable filter or mechanical parts, including surgical masks and disposable face-masks made of non-woven textiles.

5.1

Notification No.1/2017- Central Tax (Rate) Substituted vide

Notification No. 14/2019-Central Tax (Rate) dated 30-09-2019 w.e.f. 01-

10-2019

 

6307.90

224

Other made up textile articles, sets, of sale value not exceeding Rs. 1000 per piece

5%

Schedule I – 2.5%

5.2

Notification No.1/2017- Central Tax (Rate) Substituted vide Notification No. 41/2017 dated 14-11-2017, w.e.f. 15-

11-2017

171

Other made up textile articles, sets of sale value exceeding Rs. 1000 per piece [ other than Worn clothing and other worn articles; rags]

12%

Schedule II – 6%

6

CELLULOSE/PAPER MASKS

6.1

Notification No.1/2017- Central Tax (Rate) dated 28th June, 2017

4818.50

153

Toilet paper and similar paper, cellulose wadding or webs of cellulose fibres, of a kind used for household or sanitary purposes, in rolls of a width not exceeding 36 cm, or cut to size or shape; handkerchiefs, cleansing tissues, towels, table cloths, serviettes, napkins for babies, tampons, bed sheets and similar household, sanitary or hospital articles, articles of apparel and clothing accessories, or paper pulp, paper, cellulose wadding or webs of cellulose fibres

18%

Schedule III – 9%

7

PLASTIC FACE SHIELD (covering more than the eye area)

7.1

Notification No.1/2017- Central Tax (Rate) vide Notification No. 41/2017 dated 14-11-2017, w.e.f. 15- 11-2017 Rate of tax reduced from 28% to 18%

3926.20

111

Other articles of plastics and articles of other materials of headings 3901 to 3914 [other than bangles of plastic, plastic beads and feeding bottles]

18%

Schedule III – 9%

8

PROTECTIVE SPECTACLES

8.1

Notification No.1/2017- Central Tax (Rate) dated 28th June, 2017

9004.90

178

Spectacles, corrective [other than goggles for correcting vision]

12%

Schedule II – 6%

9

MEDICAL VENTILATORS (artificial respiration apparatus)

Provides mechanical ventilation by moving breathable air into and out of the lungs.

9.1

Notification No.1/2017- Central Tax (Rate) dated 28th June, 2017

9019.20

219

Mechano-therapy appliances; massage apparatus; psychological aptitude-testing apparatus; ozone therapy, oxygen therapy, aerosol therapy, artificial respiration or other therapeutic respiration apparatus

12%

Schedule II – 6%

10

SOAP, PAPER SOAP

10.1

Notification No.1/2017- Central Tax (Rate) dated 28th June, 2017

3401.00

61

Soap; organic surface-active products and preparations for use as soap, in the form of bars, cakes, moulded pieces or shapes, whether or not containing soap; organic surface active products and preparations for washing the skin, in the form of liquid or cream and put up for retail sale, whether or not containing soap; paper, wadding, felt and nonwovens, impregnated, coated or covered with soap or detergent

18%

Schedule III – 9%

11

HAND SANITIZER

11.1

Notification No.1/2017- Central Tax (Rate) dated 28th June, 2017

3808.00

87

Insecticides, rodenticides, fungicides, herbicides, anti- sprouting products and plant- growth regulators, disinfectants and similar products [other than bio-pesticides mentioned against S. No. 78A of schedule -II]

18%

Schedule III – 9%

12

TRIGGER SPRAYER used for Fumigation/sterlisation of the surface and area.

12.1

Notification No.1/2017- Central Tax (Rate) Substituted vide Notification No. 06/2018 dated 25.01.2018

8424.89

325

Mechanical appliances (whether or not hand-operated) for projecting, dispersing or spraying liquids or powders; fire extinguishers, whether or not charged; spray guns and similar appliances; steam or sand blasting machines and similar jet projecting machines [other than sprinklers; drip irrigation systems including laterals; mechanical sprayer; Nozzles for drip irrigation equipment or nozzles for sprinklers]

18%

Schedule III – 9%

13

PUMP DISPENSER used for Fumigation/sterlisation of the surface and area.

13.1

Notification No.1/2017- Central Tax (Rate) Substituted vide Notification No. 06/2018 dated 25.01.2018

8424.89

325

Mechanical appliances (whether or not hand-operated) for projecting, dispersing or spraying liquids or powders; fire extinguishers, whether or not charged; spray guns and similar appliances; steam or sand blasting machines and similar jet projecting machines [other than sprinklers; drip irrigation systems including laterals; mechanical sprayer; Nozzles for drip irrigation equipment or nozzles for sprinklers]

18%

Schedule III – 9%

14

MECHANICAL SPRAYER

including battery/power operated and those used in fumigation/sterlisation of the surface and area.

14.1

Inserted vide Notification No. 6/2018 Dated 25-01- 2018

8424.00

195B

Mechanical Sprayer

12%

Schedule II – 6%

15

STEAM SANITIZER: Medical, surgical or laboratory sterlizers, function by steam or boiling water

15.1

Notification No.1/2017- Central Tax (Rate) dated 28th June, 2017 substituted vide Notification No. 41/2017 Dated 14-11-2017

8419.20

320

Machinery, plant or laboratory equipment, whether or not electrically heated (excluding furnaces, ovens and other equipment of heading 8514), for the treatment of materials by a process involving a change of temperature such as heating, cooking, roasting, distilling, rectifying, sterilising, pasteurising, steaming, drying, evaporating, vaporising, condensing or cooling, other than machinery or plant of a kind used for domestic purposes; instantaneous or storage water heaters,non-electric other than Solar water heater and system

18%

Schedule III – 9%

16

OTHER DISINFECTANT PREPARATIONS

put up in forms or packings for retail sale such as rubs and wipes impregnated with alcohol or other disinfectants

16.1

Notification No.1/2017- Central Tax (Rate) dated 28th June, 2017

3808.94

87

Insecticides, rodenticides, fungicides, herbicides, anti- sprouting products and plant- growth regulators, disinfectants and similar products [other than bio-pesticides mentioned against S. No. 78A of schedule -II]

18%

Schedule III – 9%

17

HYDROGEN PEROXIDE in bulk, Bulk H202 whether or not with solidified with urea

17.1

Notification No.1/2017- Central Tax (Rate) dated 28th June, 2017

2847.00

58

Medicinal grade hydrogen peroxide

12%

Schedule II – 6%

18

HYDROGEN PEROXIDE presented as a medicament H2O2 put up for internal or external use as a medicine, including as an antiseptic for the skin. Only covered here if in measured doses or in forms or packings for retail sale (including directly to hospitals) for such use

18.1

Notification No.1/2017- Central Tax (Rate) dated 28th June, 2017

3004.90

63

Medicaments (excluding goods of heading 30.02, 30.05 or 30.06) consisting of mixed or unmixed products for therapeutic or prophylactic uses, put up in measured doses (including those in the form of transdermal administration systems) or in forms or packings for retail sale, including Ayurvaedic, Unani, homoeopathic siddha or Bio-chemic systems medicaments, put up for retail saleadministration systems) or in forms or packings for retail sale, including Ayurvaedic, Unani, homoeopathic siddha or Bio-chemic systems medicaments, put up for retail sale

12%

Schedule II – 6%

19

HYDROGEN PEROXIDE put up in disinfectant preparations for cleaning surfaces H2o2 put up as cleaning solutions for surfaces or apparatus.

19.1

Notification No.1/2017- Central Tax (Rate) dated 28th June, 2017

3808.94

87

Insecticides, rodenticides, fungicides, herbicides, anti- sprouting products and plant- growth regulators, disinfectants and similar products [other than bio-pesticides mentioned against S. No. 78A of schedule -II]

18%

Schedule III – 9%

20

OTHER CHEMICAL DISINFECTANTS put up in forms of packings for retail sale as disinfectants or as disinfectant preparations, containing alcohol, benzalkonium chloride solution or peroxyacids, or other disinfectants

20.1

Notification No.1/2017- Central Tax (Rate) dated 28th June, 2017

3808.94

87

Insecticides, rodenticides, fungicides, herbicides, anti- sprouting products and plant- growth regulators, disinfectants and similar products [other than bio-pesticides mentioned against S. No. 78A of schedule -II]

18%

Schedule III – 9%

21

PLASTIC GLOVES

21.1

Notification No.1/2017- Central Tax (Rate) dated 28th June, 2017

3926.20

111

Other articles of plastics and articles of other materials of headings 3901 to 3914 [other than bangles of plastic, plastic beads and feeding bottles]

18%

Schedule III – 9%

22

SURGICAL RUBBER GLOVES

22.1

Notification No.1/2017- Central Tax (Rate) dated 28th June, 2017

4015.11

85

Surgical rubber gloves or medical examination rubber gloves

12%

Schedule II – 6%

23

OTHER THAN SURGICAL RUBBER GLOVES

23.1

Notification No.1/2017- Central Tax (Rate) dated 28th June, 2017

4015.19

85

Articles of apparel and clothing accessories (including gloves, mittens and mitts), for all purposes, of vulcanised rubber other than hard rubber [other than Surgical gloves]

18%

Schedule III – 9%

24

KNITTED OR CROCHETED GLOVES WHICH HAVE BEEN IMPREGNATED OR COVERED WITH PLASTICS OR RUBBER

24.1

Notification No.1/2017- Central Tax (Rate) dated 28th June, 2017

6116.10

222

Article of apparel and clothing accessories or cap/topi, knitted or crocheted, of sale value not exceeding Rs 1000 per piece

5%

Schedule I – 2.5%

24.2

Notification No.1/2017- Central Tax (Rate) dated 28th June, 2017

6116.10

169

Articles of apparel and clothing accessories, knitted or crocheted, of sale value exceeding Rs. 1000 per piece

12%

Schedule II – 6%

25

TEXTILE GLOVES THAT ARE NOT KNITTED OR CROCHETED

25.1

Notification No.1/2017- Central Tax (Rate) dated 28th June, 2017

6216.00

222

Article of apparel and clothing accessories or cap/topi, knitted or crocheted, of sale value not exceeding Rs 1000 per piece

5%

Schedule I – 2.5%

25.2

Notification No.1/2017- Central Tax (Rate) dated 28th June, 2017

6216.00

169

Articles of apparel and clothing accessories, knitted or crocheted, of sale value exceeding Rs. 1000 per piece

12%

Schedule II – 6%

26

DISPOSABLE HEAD NET

26.1

Notification No.1/2017- Central Tax (Rate) dated 28th June, 2017

6505.00

171B

Other headgear, knitted or crocheted, or made up from lace, felt or other textile fabric, in the piece (but not in strips), whether or not lined or trimmed; hair-nets of any material, whether or not lined or trimmed

18%

Schedule III – 9%

27

SHOE COVERS

27.1

Notification No.1/2017- Central Tax (Rate) dated 28th June, 2017

6307.90

224

Other made up textile articles, sets, of sale value not exceeding Rs. 1000 per piece

5%

Schedule I – 2.5%

27.2

Notification No.1/2017- Central Tax (Rate) dated 28th June, 2017

 

171

Other made up textile articles, sets of sale value exceeding Rs. 1000 per piece [ other than Worn clothing and other worn articles; rags]

12%

Schedule II – 6%

28

UV DISINFECTANT BOXES

28.1

Notification No.1/2017- Central Tax (Rate) dated 28th June, 2017

8543.70.

99

394

Electrical machines and apparatus, having individual functions, not specified or included elsewhere in this Chapter

18%

Schedule III – 9%

 

Comment: UV disinfectant process is also used in medical establishments for disinfecting of medical instruments, etc. but UV Disinfectant boxes does not find any specific mention in Chapter 90 which contains medical or surgical instruments and apparatus.

29

TEST KITS/Instruments and Apparatus used in Diagnostic Test – Diagnostic reagents based on polymerase chain reaction (PCR) nucleic acid test.

29.1

Notification No.1/2017- Central Tax (Rate) dated 28th June, 2017

3822.00

80

All diagnostic kits and reagents

12%

Schedule II – 6%

30

SWAB & VIRAL TRANSPORT MEDIUM SET

30.1

Notification No. 11/2017-Central Tax (Rate) dated 28th June, 2017

3006.10

65

Pharmaceutical goods specified in Note 4 to this Chapter [i.e. Sterile surgical catgut, similar sterile suture materials (including sterile absorbable surgical or dental yarns) and sterile tissue adhesives for surgical wound closure; sterile laminaria and sterile laminaria tents; sterile absorbable surgical or dental haemostatics; sterile surgical or denatal adhesion barriers, whether or not absorbable; Waste pharmaceuticals] [other than contraceptives]

12%

Schedule II – 6%

31

FUMIGATION SERVICES

31.1

Notification No. 11/2017-Central Tax (Rate) dated 28th June, 2017

9983.00

21

(ii) Other professional, technical and business services other than (i) and (ia) above and serial number 38 below.

18%

Schedule III – 9%

Comment: The physical/chemical features, use of the product/service i.e. the actual facts and circumstances of the case shall be the ultimate determinants of the correct classification of the product. The appropriate classification of a product/service might differ from the list provided.

 

  1. http://dgft.gov.in/sites/default/files/TradeNotice17_0.pdf
  2. https://cbic.gov.in/resources//htdocs-cbec/customs/cs-act/notifications/notfns-2020/cs-tarr2020/cs20-2020.pdf.
  3. https://www.cbic.gov.in/resources//htdocs-cbec/customs/cs-circulars/cs-circulars-2020/Circular-No-18-2020.pdf
  4. https://apps.who.int/iris/bitstream/handle/10665/251426/9789241549721-eng.pdf?sequence=1&ua=1
  5. https://www.who.int/docs/default-source/searo/bangladesh/2019-ncov/home-made-maskiv.pdf?sfvrsn=a5f05f58_8
  6. https://www.mohfw.gov.in/pdf/GuidelinesonrationaluseofPersonalProtectiveEquipment.pdf
  7. Number N311621 concerning classification of face shields imported from the United Kingdom dated May 13, 2020 and Number G89437 concerning classification of face shields imported from South Korea dated April 11, 2001.
  8. https://www.who.int/publications/i/item/guide-to-local-production-who-recommended-handrub-formulations
  9. Concerning the tariff classification of Hand Sanitizer from Netherlands dated April 7, 2020.
  10. Concerning the tariff classification of Hand Sanitizer from China dated May 21, 2019.
  11. https://www.mha.gov.in/sites/default/files/MHAOrderextension_1752020_0.pdf; https://mha.gov.in/sites/ default/files/MHA%20Order%20Dt.%201.5.2020%20to%20extend%20Lockdown%20period%20for%202%20weeks%20 w.e.f.%204.5.2020%20with%20new%20guidelines.pdf
  12. https://www.mha.gov.in/sites/default/files/MHA%20order%20dt%2015.04.2020%2C%20with%20Revised%20Consolidated%20Guidelines_compressed%20%283%29.pdf

As per Section 9 of CGST Act, GST shall be payable on supply of goods or supply or both. Section 2(52) defines goods to mean as “every kind of moveable property”. Section 2(102) define “service” mean anything other than “goods”. Therefore, it is necessary to understand the meaning of words “moveable property”. The moveble property has been defined in Section 2(11) of Sales of Goods Act, 1930.

2: The term immoveable property has not been defined under CGST Act, 2017. Hence, we have to fall back upon the definition as given in various enactments namely – Section 3(26) of General Clauses Act define “immoveable property”:-

(26) “immovable property” shall include land, benefits to arise out of land, and things attached to the earth, or permanently fastened to anything attached to the earth;

3: Section 2(z) of Real Estate (Regulation & Development) Act, 2016 (hereinafter called RERA) define “immoveable property” includes land, buildings, rights of ways, lights or any other benefits arising out of land and things attached to the earth or permanently fastned to anything, which is attached to the earth, but not standing timber, standing crops or grass”

4: Section 2(6) of Registration Act also define “immoveable property”

“immovable property” includes land, buildilngs, hereditary allowances, rights to ways, lights, ferries, fisheries or any other benefits to arise out of land, and things attached to the earth, or permanently fastened to anything which is attached to the earth, but not standing timber, growing crops nor grass.

5: The Hon’ble Supreme court in C.I.T. Andhra Pradesh v. Taj Mahal Hotel, MANU/SC/0239/1971 has observed that “considering the scope of meaning of the word ‘plant’, held, “where a word is not defined in a statute, it must be construed in its popular sense. Therefore, the word “land” as appearing in Clause 5 of Schedule III has to be understood in popular sense – and interpretational solace could be drawn from Land Acquisition Act as well.

6: The Clause 5 of Schedule III attached to CGST Act reads as under:-

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

7: In view of the fact that in Clause 5 of Schedule III, the word appearing is “Land” and not “immoveable property” and, therefore, we have to understand the meaning and scope of the word “Land”. Unfortunately, the land has not been defined in CGST Act and consequently we have to look to (i) either popular meaning as has been held in CIT v. Taj Mahal Hotel (Supra) or as defined under other laws viz
(i) Land Acquisition Act, 1894 (ii) Bombay Land Revenue Act, 1879.

8: Section 3(a) of Land Acquisition Act,1894, the expression “land” include benefits that arise out of land and things attached to earth or permanently fastened to anything which is attached to the earth. Likewise, Section 3(4) of Bombay Land Revenue Code, 1879 define “land” includes benefits to arise out of land and things attached to the earth or permanently fastened to anything attached to the earth.

9: The Supreme Court, while interpreting the word “land” as appearing in Land Acquisition Act, in Municipal Corporation of Greater Bombay vs. The Indian Oil Corporation Ltd: MANU/SC/0171/1991 has held as under:-

The question then is whether it is a land? Indisputably the definition of ‘land’ also is of an inclusive definition. Its accompaniments are land which is being built upon or is built upon or covered with water; benefits to arise out of land; things attached to the earth or permanently fastened to anything attached to the earth and rights created by legislative enactment over any street.

10: The Hon’ble Supreme Court in the case of State of Maharashtra Vs. Reliance Industries Ltd.: MANU/SC/1186/2017, has noted the following definitions of land given in various legal dictionaries.

The Dictionary of English Law [1959 edn., Vol. 2, p. 1053 by Earl Jowitt] LAND, in its restrained sense, means soil, but in its legal acceptation it is a generic term, comprehending every species of ground, soil or earth, whatsoever, as meadows, pastures, woods, moors, waters, marshes, furze, and heath; it includes also houses, mills, castles, and other buildings; for with the conveyance of the land, the structures upon it pass also. And besides an indefinite extent upwards, it extends downwards to the globe’s centre, hence the maxim, Cujus est solum ejus est usque ad caelum et ad inferos; or, more curtly expressed, Cujus est solum ejus est altum (Co. Litt. 4-a).

Words and Phrases Judicially Defined (By Roland Burrows-Vol. III, 1944 edn., p. 206)

The word “land” would be variously understood by different persons. To a farmer the word “land” would not mean his farm buildings; to a lawyer the word would include everything that was upon the land fixed immovable upon it. Smith
v. Richmond per Lord Halsbury, L.C., at p. 448.

The Law Lexicon   

The word “land” is a comprehensive term, including standing trees, buildings, fences, stones, and waters, as well as the earth we stand on. Standing trees must be regarded as part and parcel of the land in which they are rooted and from which they draw their support.

11: It would also be beneficial to understand the meaning and scope of “immoveable property” as interpreted in various judgments of Hon’ble Supreme Court.

12: While interpreting the word “immoveable property” in Ananda Behra Vs. State of Orissa: MANU/SC/0018/1955, the Supreme Court has held that a “profit a prendre” is a benefit arising out land and that in view of Clause (26) of Section 3 of the General Clauses Act, it is immovable property within the meaning of the Transfer of Property Act. Now question arises what is the meaning of words “profit a prendre”.

13 The Supreme Court in State of Orissa Vs. Titaghur Paper Mills Company Limited : MANU/SC/0325/1985, while, relying upon Halsbury”s Law of England, defined “profit a prendre” in the following words:-

  1. The meaning and nature of a “profit a prendre” have been thus described in Halsbury’s Laws of England, Fourth Edition, Volume 14, paragraphs 240 to 242 at pages 115 to 117: 240. Meaning of ‘profit a prendre’

A profit a prendre is a right to take something off another person’s land. It may be more fully defined as a right to enter another’s land to take some profit of the soil, or a portion of the soil itself, for the use of the owner of the right. The term ‘profit a prendre’ is used in contradistinction to the term ‘profit a prendre’, which signified a benefit which had’ to be rendered by the possessor of land after it had come into his possession. A profit a prendre is a servitude.

  1. Profit a prendre as an interest in land.

A profit a prendre is an interest in land and for this reason any disposition of it must be in writing. A profit a prendre which gives a right to participate in a portion only of some specified produce of the land is just as much an interest in the land as a right to take the whole of that produce. 242. What may be taken as a rofit a prendre.

The subject matter of a profit a prendre, namely the substance which the owner of the right is by virtue of the right entitled to take, may consist of animals, including fish and fowl, which are on the land, or of vegetable matter growing or deposited on the land by some agency other than that of man, or of any part of the soil itself, including mineral accretions to the soil by natural forces. The right may extend to the taking of the whole of such animal or vegetable matters or merely a part of them. Rights have been established as profits a prendre to take acorns and beech mast, brakes, fern, heather and litter, thorns, turf and peat, boughs and branches of growing trees, rushes, freshwater fish, stone, sand and shingle from the seashore and ice from a canal; also the right of pasture and of shooting pheasants. There is, however, no right to take seacoal from the foreshore. The right to take animals ferae naturae while they are upon the soil belongs to the owner of the soil, who may grant to others as a profit a prendre a right to come and take them by a grant of hunting, shooting, fowling and so forth.

116: A profit a prendre is a servitude for it burdens the land or rather a person’s ownership of land by separating from the rest certain portions or fragments of the right of ownership to be enjoyed by persons other than the owner of the thing itself (see Jowitt’s Dictionary of English Law, Second Edition, Volume 2, page 1640. under the heading “Servitude”). “Servitude” is a wider term and includes both easements and profits a prendre (see Halsbury’s Laws of England, Fourth Edition, Volume 14, paragraph 3, page 4).

14: In view of the above discussions, various activities such as laying down (i) water pipe lines (ii) storm water pipelines (iii) sewer lines (iv) electric poles permanently fastned to the earth (iv) development of parks; (v) play ground (vi) installation of underground pipes for gas, oil and water, in my view, would fall within the realm of “ profit a prendre”

15: The Supreme Court in State of Orissa Vs. Titaghur Paper Mills Company Limited MANU/SC/0325/1985, defined “immoveable property” as appearing in General Clauses Act:-

Clause (26) of Section 3 of the General Clauses Act, 1897, defines “immovable property” as including inter alia “benefit to arise out of land”. The definition of “immovable property” in Clause (f) of Section 2 of the Registration Act 1908, illustrates a benefit to arise out of land.

16: Further, in Titaghar Papers Mills Ltd (supra), the court has held that what constitutes benefits arising out of land have been summarized in Mulla on “The Transfer of Property Act, 1882″, and it would be pertinent to reproduce the whole of passage. The passage (at pages 16-17 of the Fifth Edition) is as follows:

A ‘benefit to arise out of land’ is an interest in land and therefore immovable property. The Registration Act, however, expressly includes as immovable property benefits to arise out of land, here diary allowances, rights of way lights, ferries and fisheries’. The definition of immovable property in the General Clauses Act applies to this Act. The following have been held to be immovable property: varashasan or annual allowance charged on land; a right to collect dues at a fair held on a plot of land; a hat or market; a right to possession and management of a saranjam; a malikana; a right to collect rent or jana: a life interest in the income of immovable property; a right of way; a ferry; and a fishery; a lease of land.

17: The Constitution Bench of Hon’ble Supreme Court in Ananda Behera and Ors. vs. The State of Orissa: MANU/SC/0018/1955 has defined “immoveable property” in the following words:-

Section 3(26) of the General Clauses Act defines “immovable property” as including benefits that arise out of the land. The Transfer of Property Act does not define the term except to say that immovable property does not include standing timber, growing crops or grass. As fish do not come under that category the definition in the General Clauses Act applies and as a profit a prendre is regarded as a benefit arising out of land it follows that it is Immovable property within the meaning of the Transfer of Property Act.

18: The Supreme Court in State of Orissa and Ors. vs. Titaghur Paper Mills Company Limited: MANU/SC/0325/1985, has observed as under:-

Thus, while trees rooted in the earth are immovable property as being things attached to the earth by reason of the definition of the term “immovable property” given in the General Clauses Act, the Orissa General Clauses Act and the Registration Act, read with the definition of the expression “attached to the earth” given in the Transfer of Property Act.

19: The Supreme Court in Sunil Siddharth vs. CIT MANU/SC/0164/1985, while considering the expression “Transfer of Property”, has observed as follows:

“In its general sense, the expression “Transfer of Property” connotes the passing of rights in the property from one person to another. In one case there may be a passing of the entire bundle of rights from the transferor to the transferee. (emphasis supplied).

20: We may also see as to whether grant of development right would fall in Clause 2(a) of Schedule II of CGST Act or not? Schedule II deems certain specified transaction as supply of goods or services. Entry No.2(a) deems any lease, tenancy, easement, license to occupy land as supply of services.

21: Clause 2(a) of Schedule-II speaks of mere permission to occupy land and enjoy the same as supply of services – without ownership rights. However, when there is complete and full transfer, alienation or divesting of all ownership rights, title and interest in the immoveable property by way of execution of Registered Sale Deed or Registered Conveyance Deed or Title Deeds, this transaction, in my firm view, shall not fall under Entry No.2(a) of Schedule II, as there would a permanent transfer, alienation and/or disposal of immoveable property.

22: The Hon’ble Supreme Court in a landmark judgment in the case of Suraj Lamp and Industries Pvt. Ltd. vs. State of Haryana MANU/SC/1222/2011 has held that the land, building or civil structure and other immoveable property could be transferred by way of execution of Registered Sale Deed/Conveyance Deed. The following observations were made.

12: Any contract of sale (agreement to sell) which is not a registered deed of conveyance (deed of sale) would fall short of the requirements of Sections 54 and 55 of Transfer of Property Act and will not confer any title nor transfer any interest in an immovable property (except to the limited right granted under Section 53A of Transfer of Property Act). Section 54 of Transfer of Property Act enacts that sale of immoveable property can be made only by a registered instrument and an agreement of sale does not create any interest or charge on its subject matter.

16: We therefore reiterate that immovable property can be legally and lawfully transferred/conveyed only by a registered deed of conveyance. Transactions of the nature of ‘GPA sales’ or ‘SA/GPA/ WILL transfers’ do not convey title and do not amount to transfer, nor can they be recognized or valid mode of transfer of immoveable property.

23: The Hon’ble Bombay High Court in Sadoday Builders Private Ltd. and Ors. v. The Jt. Charity Comm.: MANU/MH/0791/2011, has observed as under:-

From these judgments, what appears is that a benefit arising from the land is immovable property. FSI/ TDR being a benefit arising from the land, consequently must be held to be immovable property and an Agreement for use of TDR consequently can be specifically enforced, unless it is established that compensation in money would be an adequate relief.”

24: The Hon’ble Tribunal in DLF Commercial Projects Corporations v. Commissioner of Service Tax, Gurugram (22.05.2019 – CESTAT – Chandigarh) : MANU/ CJ/0032/2019, has observed as under:-

As the Hon’ble High Court observed in the case of Sadoday Builders Private Ltd. and Ors. (supra) that transferable development right is immovable property, therefore, the transfer of development rights in the case in hand is termed as immovable property in terms of Section 3
(26) of General Clauses Act, 1897 and no service tax is payable as per the exclusion in terms of Section 65B(44) of the Finance Act, 1994.

25: In view of the above discussions, the various activities partake the character of “development rights” in view of the judgment of Hon’ble Bombay High Court and Hon’ble Tribunal, held to be benefits arising out of land. It would be noticed that even the definition of land, as given in Section 3(a) of Land Acquisition Act, inter-alia, says that the land would include the benefits arising out of land. The various activities such as laying down
(i) pipe lines (ii) storm water pipelines (iii) sewer lines (iv) electric poles permanently fastned to the earth (iv) development of parks; (v) play ground (vi) installation of underground pipes for gas, oil and water would fall in the realm of land. Hence, all developmental activities are, in my humble view, benefits arising out of land and consequently fall in Clause 5 of Schedule III and hence NO supply and resultantly not taxable. On the lighter side, girl with or without jewellery would still be bride at the time of marriage – land be it raw land or developed land, would still be land only and its character would not change.

26 In my view, sale of plot is akin to sale of land and activities like road laying, drainage works, electricity supply facilities are incidental to development and does not change character of land. The utilities, road and parks are not supplied to the purchaser of plot but surrendered to the Public Authority/ Municipal Corporation and rights therein are vested in the public authority.

27: By vitue of aforesaid judgments, all other facilities which had been installed, erected and commissioned over the open un-developed land, so as to make it “developed plot” and title to those facilities would also be convyed to the plot-holder, a registered deed of documents would be necessary and hence, the value addition is required to form part of total consideration shown in the Sale Deed or Conveyance Deed or Title Deed which is registered under Section 17 of Indian Registration Act.

28: Can we perceive a situation whether Clause 5 Schedule III would cover or encompass only raw land and not developed plot of land ?.

29: The AAA of Karnataka, Gujarat, Madhya Pradesh have held that development of land and selling it as plots is essentially a supply of service and hence these transactions are taxable.

  1. M/s Satyaja Infratech (AAA Guj. 20.9.2019)

  2. M/s Maarq Spaces (P) Ltd (AAA Kar 30.9.2019)

  3. M/s Vidit Builders (AAA MP 6.1.2020)

  4. Sh Dipesh Anil Kumar Naik(AAR Guj 19.5.2020)

30: How, Ld AAA decided the cases in totally biased and prejudiced mannter. The classic case is AAA Gujarat in M/s Satyaja Infratech dated 20.9.2019 2020-TIOL-80-AAR GST wherein it has been held that the entire sale consideration i.e. 100% of the plot value would be taxable. Can 100% consideration which is inclusive of value of land would be subject to tax – answer is BIG NO.

31: The Clause 5 of Schedule III to CGST Act “ Sale of land and, subject to Clause (b) of paragraph 5 of Schedule II, sale of building” shall neither be treated as supply of good nor supply of services. The development rights are akin to the benefits arising out of land and hence outside the purview of taxation by virtue of Schedule-III to CGST Act. In my view, the Clause 5 of Schedule III would cover all activities that are directly and closely connected to the purchase and sale of land including all activities in connection with the development of plots. Therefore, all other connected activities (which are part of developmental activities) which are incidental or ancillary to the main activities connected with the development of land would be outside the purview of supply of either goods and services.

32: Notwithstanding the above, yet as a bundant caution, if it is decided to pay tax, the following route could be followed:-

  1. The Developer to carry out all developmental activities himself and develop the plots out of land and sell the developed plots upon execution of registered Sale Deed/Conveyance Deed etc upon receipt of sale consideration. Since, it is self service, no GST would be payable.

  2. To appoint either one or more than one contractors to undertake various developmental activities. The contractors would be raising taxable invoices.

  3. The Developer can avail ITC of tax so paid on the taxable invoices of contractors.

  4. After development, the Developer will have to raise (i) Bill towards sale of developed land/plot (ii) Taxable Invoice for proportionate development charges which were incurred in the whole project and charge GST and pay to the Government after claiming ITC of tax so paid on the invoices of contractors.

 

*Advocate Past Central Council Member, the ICSI

 

  1. The Gujarat High Court in the case of VKC footsteps India Pvt. Ltd. v. Union Of India, Judgment dated 24.07.2020 has declared Explanation (a) to the Rule 89 (5) of the CGST Rules, which denied the refund of “un-utilized input tax” paid on “input services “ as part of “input tax credit” accumulated on account of inverted duty structure, as ultra vires the provision of Section 54 (3) of the CG ST Act, 2017. The said Explanation (a) to the Rule 89 (5) has been read down to the extent that Explanation (a) which defined “Net input tax credit” to mean “input tax credit” only.

  2. A view is being expressed that the judgment of the Gujarat High Court, declaring the parliamentary law unconstitutional, is a binding precedent all over India and all the State Governments, Tribunals and High Courts should follow the same. The author of this article, with due respect, begs to differ from this view for the reasons stated below.

  3. Late Dr. B.P. Saraf , Hon’ble Judge of the Bombay High Court, as he then was, had lucidly explained the law of binding precedents in the case of The Commissioner of Income Tax v. Thana Electricity Supply Limited, (1994) 206 ITR 727. The Court’s observations are reproduced below :

    Para 20 –

    1. ‘(a) the law declared by the Supreme Court being binding on all courts in India, the decisions of the Supreme Court are binding on all courts, except, however, the Supreme Court itself which is free to review the same and depart from its earlier opinion if the situation so warrants. What is a binding is, of course, the ratio of the decision and not every expression found therein.

    2. The decisions of the High Court are binding on the subordinate Courts and authorities or Tribunal’s under its superintendence throughout the territories in relation to which it exercises jurisdiction. It does not extend beyond its territorial jurisdiction.

    3. The position in regard to the binding nature of the decisions of a High Court on different Benches of the same court may be summed up as follows:

      1. a single judge of High Court is bound by the decision of another single judge or a Division Bench of the same High Court. It would be judicial impropriety to ignore that decision. Judicial comity demands that a binding decision to which his attention had been drawn should neither be ignored nor overlooked. If he does not find himself in agreement with the same, the proper procedure is to refer the binding decision and direct the papers to be placed before the Chief Justice to enable him to constitute a larger Bench to examine the question (see Food Corporation of India v. Yadav Engineer and Contractor, (1982) 2SCC499;

      2. A Division Bench of a High Court should follow the decision of another Division Bench of equal strength or a full Bench of the same High Court. If one Division Bench differs from another Division Bench of the same High Court, it should refer the case to a larger Bench.

      3. Where there are conflicting decisions of courts of coordinate jurisdiction, the later decision is to be preferred if reached after full consideration of the earlier decisions.

    4. The decision of one High Court is neither binding precedent for another High Court nor for courts or Tribunals outside its own territorial jurisdiction. It is well settled that the decision of a High Court will have the force of binding precedent only in the State or territories on which the court has jurisdiction. In other States or outside the territorial jurisdiction of that High Court it may, at best, have only persuasive effect.

    By no amount of stretching of the doctrine of stare decisis, can judgements of one High Court be given the status of a binding precedent so far as other High Courts or Courts or Tribunals within their territorial jurisdiction are concerned. Any such attempt will go counter to the very doctrine of stare decisis and also the various decisions of the Supreme Court which have interpreted the scope and ambit thereof. The fact that there is only one decision of any one High Court on a particular point or that a number of different High Courts have taken identical views in that regard is not at all relevant for that purpose. Whatsoever maybe the conclusion, the decisions cannot have the force of binding precedent on other High Courts or on any subordinate courts or Tribunals within their jurisdiction. That status is reserved only for the decisions of the Supreme Court which are binding on all courts in the country by virtue of Article 141 of the Constitution.

  4. The law of Stare Decisis thus explained in Thana Electricity has not yet been overruled by the Supreme Court or contradicted by any judgment of our own High Court. However, the holders of other view say that the Supreme Court in their lordships’ judgment in Kusum Ingots & Alloys Ltd. v. Union of India (2004) 6 SCC254 in clear terms stated that an order passed on a writ petition questioning the constitutionality of a parliamentary Act, whether interim or final, keeping in view the provisions contained in Article 226 (2) of the Constitution would have effect throughout the territory of India. In other words, a support is being drawn from the judgment of the apex court in Kusum Ingots for the proposition that judgment of the Gujarat High Court in VKC Footsteps declaring the Explanation (a) to Rule 89(5) as ultra vires the Section 54(3) of the CGST Act is binding on State of Maharashtra and also on Bombay High Court.

  5. To examine the correctness of this proposition, we will have to see whether the observations of the Supreme Court really convey that the declaration of provision of Union law by one High Court as unconstitutional binds the other High Court. For that purpose, we will have to read para 21 and 22 of the said judgement together:

    ‘21. A parliamentary legislation when it receives the assent of the President of India and is published in the Official Gazette, unless specifically excluded, will apply to the entire territory of India. If passing of legislation gives rise to a cause of action, a writ petition questioning the constitutionality thereof can be filed in any High Court of the country. It is not so done because a cause of action will arise only when the provisions of the Act or some of them which were implemented shall give rise to civil or evil consequences to the petitioner. A writ court, it is well settled, would not determine a constitutional question in a vacuum.

    22. The court must have the requisite territorial jurisdiction. An order passed on a writ petition questioning the constitutionality of a parliamentary Act, whether interim or final keeping in view the provisions contained in clause (2) of Article 226 of the Constitution of India, will have effect throughout the territory of India subject of course to the applicability of the Act.’ (Highlight by us).

  6. Thus so read, both the paragraphs only convey that the parliamentary legislation has applicability all over India and consequently the writ petition challenging the constitutionality thereof can be filed in any High Court in India. The High Court in which the petition is so filed must have the requisite territorial jurisdiction and the order passed by it will have effect all over India. However, such effect would be subject to the power granted to the High Court under article 226 (2) of the Constitution of India.

  7. Article 226 (1) of the Constitution empowers the High Court to issue directions, orders or writs to any person including government within it’s territorial jurisdiction. Article 226 (2) says that such power can be exercised even if the seat of the government or the residence of the person against whom the writ is issued is not in the territorial jurisdiction of the said High Court. However, the cause of action ( right to sue ) for the exercise of such power should arise within the territorial jurisdiction of such High Court. Article 226 (2) does not say anything further. Neither the observations of the Supreme Court in Kusum Ingots say that the order passed by the High Court has binding effect on the High Courts in other parts of the country nor article 226 (2) of the Constitution can be construed to mean so.

  8. Article 141 of the Constitution specifically states that the law declared by the Supreme Court shall be binding on all Courts within the territory of India. If the makers of the Constitution wanted the law declared by any High Court to be binding on other High Courts then they would have provided for the same in similar manner. They have not said so and therefore the judgment of High Court having binding effect on other High Courts is out of question.

  9. Even otherwise, these observations of the Supreme Court in Kusum Ingots are neither Ratio decidendi of that judgment nor Obiter dicta. These are only casual observations of the Supreme Court. In Kusum Ingots, the question that arose for consideration before the Supreme Court was whether the seat of the parliament or the legislature of a State would be relevant factor for determining the territorial jurisdiction of High Court to entertain a writ petition under article 226 of the Constitution. In that case, the appellant had a registered office at Mumbai. It obtained a loan from the Bhopal branch of State bank of India. The bank issued a notice for repayment of the said loan from Bhopal purported to be in terms of the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. Questioning the vires of the said Act, a writ petition was filed before the Delhi High Court by the appellant which was dismissed on the ground of lack of territorial jurisdiction. The only submission made on behalf of the appellant before the High Court as also before the Supreme Court was that as the constitutionality of a parliamentary Act was in question, the High Court of Delhi had the requisite jurisdiction to entertain the writ petition. The Supreme Court held that a writ petition questioning the constitutionality of a parliamentary Act shall not be maintainable in the High Court of Delhi only because the seat of the union of India is in Delhi. It was so held because the Court in that case found that there was no cause of action at Delhi. While delivering the judgment the Court made observations on the effect of an order passed by the High Court on writ petition wherein the constitutionality of the Union law was challenged, however whether such effect is persuasive or binding for other High Courts was never for determination.

  10. In fact, the Supreme Court later on in the case of Ambica Industries (2007) 6 SCC 769 observed that the decision of High Court shall be binding only on the authorities which are within it’s jurisdiction and it will only be of persuasive value on the authorities functioning under a different jurisdiction. This decision was also rendered considering Article 226(2) of the Constitution and the location of cause of action, though partial.

  11. Hon’ble Bombay High Court in Thana Electricity has reproduced the observations of Justice Chagla C.J. in the case of Mohandas Issardas v. A.N. Sattanathan, AIR 1955 113. The Court in that judgment explained the distinction between Ratio decidendi , Obiter dicta and casual observations in the following manner:

    (Para 31 & 32)

“ an obiter dictum is an expression of opinion on a point which is not necessary for the decision of a case. This very definition draws a clear distinction between a point which is necessary for the determination of the case and a point which is not necessary for the determination of the case. But in both cases points must arise for the determination of the Tribunal. Two questions may arise before a court for its determination. The court may determine both although only one of them may be necessary for the ultimate decision of the case. The question which was necessary for the determination of the case would be the ‘ratio decidendi’ ; the opinion of the Tribunal on the question which was not necessary to decide the case would be only an obit dictum.———

It cannot be suggested that the doctrine of obiter dicta was so far extended as to make the courts bound by any and every expression of opinion either of the Privy Council or of the Supreme Court, whether the question did or did not arise for the determination of the higher judicial authority. –.

  1. The observations of the Supreme Court in the case of The Commissioner of Income Tax v. Sun Engineering Works (P) Ltd. (1992) 4 SCC 363 may also be seen: (Para 39)

    ‘It is neither desirable nor permissible to pick out a word or a sentence from the judgement of this Court, divorced from the context of the question under consideration and treat it to be the complete ‘law’ declared by this Court. The judgement must be read as a whole and the observations from the judgement had to be considered in the light of the questions which were before this Court. A decision of this Court takes it’s colour from the questions involved in the case in which it is rendered and while applying the decision to a later case, the courts must carefully try to ascertain the true principle laid down by the decision of this court and not to pick out words or sentences from the judgement, divorced from the context of the questions under consideration by this Court, to support their reasoning. In Madhav Rao Scindia v. Union of India (1971) 1 SCC 85 this Court cautioned :

    ‘it is not proper to regard a word, a clause or a sentence occurring in the judgement of the Supreme Court, divorced from its content as containing a full exposition of the law on a question when the question did not even fall to be answered in that judgement.’

  2. The Full Bench of the Bombay High Court in the case of Kamlesh Kumar Ishwardas Patel v. Union of India and Others, W.P. No.284 of 1994 dated 26.08.1994 has explained the law relating to ratio decidendi and Obiter dicta in the following manner :

‘ — what is binding under the provisions of article 141 of the Constitution of India, is the law declared by the Supreme Court. If there is clear enunciation or declaration of law, the same would be binding even though such a declaration of law was not strictly necessary for disposal of the case or the declaration of law is not followed by actual application thereof in the case in question. The law declared as well as applied in a particular decision becomes ratio decidendi of the case while a mere declaration of law, even though solemn and thoroughly reasoned, without application thereof is branded as obiter dictum.’

  1. Hon’ble Bombay High Court has followed the above referred Full Bench decision in Kamlesh Kumar in another matter, namely, H.A.D.A. v. P.V. Anturkar, 2009  (3) L.J. and held that the observations of the Supreme Court in the case of Devraju Pillai v. Sellayya Pillai (1987) 1 SCC 61 were only casual observations.

  2. As aforesaid, in Kusum Ingots, the question of the judgment of one High Court on the constitutionality of the provision of parliamentary Act, whether has binding effect or persuasive effect was never before the Supreme Court and therefore any observations made by the Court on the effect are neither ratio decidendi nor obiter dicta and are only casual observations having no precedential value.

With profound regret to lack of a better alternative to Simon Beaufoy of the 2017 classic between Bobby Riggs and Billie Jean King for titular adaptation, in the current context, it impresses on the impost vigilant mind that the revenues of jurisdictions at large are now engaged in what can be effectively termed as a prelude to of no less than the Star Wars classic “The Empire Strikes Back”.

From the middle 1990’s academics (a particular mention to Prof Arvid Aage Skaar and his classic “Permanent Establishment: Erosion of a Tax Treaty Principle” ) and forward thinking practitioners alike had been propagating the advent of the e-commerce juggernaut and in particular the impact of the same on its capacity to hit ability of source countries to tax transactions within their jurisdictions.

The essential paradigm that followed was that companies based physically in a totally different legal and residential jurisdiction could bypass the taxation system of source countries and still provide goods and services in those countries. The common critical question arising out of such flow of business was to “how bring such cross border transactions within the ambit of taxes?”.

The Westminster Principle (Inland Revenue Commissioners v. Duke of Westminster, http://www.bailii.org/uk/cases/ UKHL/1935/4.html) elicited by Lord Tomlin of the High Court of Justice in England, notwithstanding, it was clear that there was an attempt to bring a systemic change in the way commerce was being and was to be conducted globally.

From the processes arising, about the “fin de siècle” jurisdictions started reconfiguration of the base framework of the OECD:OCDE and after much deliberation, subsequent to the OECD:OCDE conference in Turku in 1997, came up with the Ottawa Taxation Framework 1998, which emphasised more particularly on the application of traditional income tax laws and guiding principles to tax cross border ecommerce transactions as well as traditional transactions.

2008, brought to fore events that would cause a seismic cataclysm to the propositions in the Ottawa Taxation Framework 1998. Sovereigns ran huge fiscal deficits trying to shore up their respective economies. Governments lost revenue steadily owing to contagion caused by the financial sector seeping into traditional business and individual incomes alike, with witness of a gradual but exponential increase in e-commerce activity picking up. Despite substantial co-ordinated efforts by the G20 and OECD:OCDE nations it became clear by 2013 that there had to be a paradigm shift in the ways tax policies were designed. The problem was more exacerbated by the fact that the existing framework was not only woefully inadequate to address the aggressive tax planning of digital and semi digital MNE but also fell short at addressing concerns of source countries to which goods and services were supplied via digital platforms. It follows that the most glamourous of the lot, the FAANG (Facebook, Amazon, Apple, Netflix, Google) were found to be the forerunners in matters of aggressive tax planning. Your attention is invited to the following video of Public Accounts Committee Hearing (12/11/2012) on Taxation of Multinational Corporations, witnesses: Matt Brittin (CEO, Google UK), Troy Alstead (Global CFO, Starbucks), Andrew Cecil (Director Public Policy, Amazon) (http://www.parliamentlive.tv/main/ player.aspx?meetingId=11764) p a r t i c u l a r l y intriguing as well as raising some important issues camouflaged within the parameters of morality. Chairperson British MP Margaret Hodge very clearly outlines “We are not accusing you of being illegal, we are accusing you of being immoral.” It could be gauged therefore that it was only a matter of time before “morality” was translated into “legality”.

At this point the author would invite a reading of Millar, Historical View of the English Government (1789) bk. ii, chap. 7, and of the North Caorlina Law Review Vol 23 Number 3, of a perspective of circumstances in which morality translates effectively into legality. (https:// scholarship.law.unc.edu/cgi/viewcontent.cg i?article=1651&context=nclr&hx0 03E;). The underlying intentions being very clear, and as famously attributed to Denis Healey, former UK Chancellor of the Exchequer who once said “The difference between tax avoidance and tax evasion is the thickness of a prison wall.”, the dimensions of the wall getting blurry with MNE tax avoidance schemes.

Authors Riley Carpenter and Shaun Parsons (Wilson, Amy & Carpenter, Riley & Parsons, Shaun. (2016) in The effect of electronic commerce on the erosion of tax bases – Developing appropriate taxation laws in South Africa) have argued that there needs to be an overhaul of taxing systems around the globe in order to meet the taxation challenges in particular caused by the ecosystem around and parallel to the FAANG, and while not radically different the structure of the South African Taxation system needs to be in sync with proposed legislation in counterparts.

For the Indian scenario, India has advocated the its own strategy to counter the reduction of the resulting tax base on account of digitalisation by incorporating changes in the Finance Act 2018. In the G20 meeting at Osaka in June 2019, India advocated that its approach (equalisation levy and proposed Tax Collected at Source) be adopted by the OECD:OCDE as a possible resolution of the digitisation quagmire (https://pib.gov.in/PressReleasePage.aspx?PRID=1573765).

Ukraine has as of June 2020 amended its tax laws via the Tax Bill 1210 to bring into alignment with the BEPS project and has introduced CFC aspects into its domestic legislation.

Events such as outlined above have led to a knock-on effect by sovereign governments to act in order to protect their own interests in revenue by means of either significant economic presence tests, withholding taxes, transaction taxes (e.g., equalization levies and digital services taxes), and minimum taxes (e.g., diverted profits taxes) (Walter Hellerstein, Jurisdiction to Tax Income and Consumption in the New Economy: A Theoretical and Comparative Perspective, Georgia Law Review (2003)). Imperatively, sovereigns now under significant financial and political pressure are finding it a compulsion under nationalism to go it alone and adopt means to protect their revenue. (Desperate times, desperate measures)

Discussing a few of the measures becomes imperative

  1. Economic Presence Tests: Significant economic presence tests either qualitative or quantitative offer as of the date of publication a good view of taxation of revenue on source. Academics like Arvid Aage Skaar, Luc Hinnekens, etc argue in favour of the economic presence tests. Stimulatingly, in 2013 there was an attempt by the French authorities to tax revenue attributed to social media platforms even though none of them had any presence in any territorial jurisdiction governed by France(https://convention-s. fr/wp-content/uploads/2014/06/ Taxation_Digital_Economy_Jan2013_ France.pdf). In a characteristically amusing case in the Tax Tribunals in India it was held that social media profiles of employees could be a trigger for determination of a permanent establishment (GE Energy Parts v. Addl Director of Income Tax). In a way it might be argued there is a general trend towards dilution/modification of the permanent establishment principle (Article 5 of the OECD/UN Model convention). Whether MLI alone would be sufficient to dilute the said, is a fact that would unravel in the coming times. There are some other Quantitative Economic Presence tests being proposed like GAAR and SAAR rules being automatically applicable on above a certain threshold.

    The OECD:OCDE came up with a report titled OECD:OCDE/G20 Base Erosion and Profit Shifting Project, Tax Challenges Arising from Digitalisation – Interim Report 2018 (https://www.oecd.org/ctp/ tax-challenges-arising-from-digitalisation- interim-report- 9789264293083-en.htm), in which it has taken into account the significant dilution proposed by sovereign jurisdictions of Article 5 of the OECD:OCDE model convention (The PE principle) (Similar to the UN model convention) . In particular mention has been made in pages of the significant modification of the PE principle with respect to Israel (Significant Economic Presence), Slovak Republic(fixed place of business or digital platforms) and India(Significant Economic Presence).

    Effectiveness of the afore is again subject to private international law interpretations. The US-Canada tax treaty automates the application of a services PE with the 183 days rule. (However, see Tech Mahindra vs Commissioner of Taxation 20 ITLR 70(Australia) and Satyam Computer Services Ltd vs Commisioner of Taxation 21 ITLR 274 (Australia) and some conflict in Mistubishi Corporation India Pvt Ltd vs Deputy Commissioner of Income Tax Circle 6(1), New Delhi ITA 5042/DEL/11(India))

    The author is of the opinion that Quantitative Significant Economic Presence tests might be a possible solution to the quagmire considering that private international law has generally been in favour of “there is no equity about tax”.

  2. Withholding Taxes: Yariv Brauner and Andres Baez in their research paper argue in favour of a globally standardized withholding tax rate of 10% on all transactions impacted by base erosion movements in favour of source jurisdictions. The alternatives to nexus based and election are left open, in opposition to the IBFD position of nexus based solution being superior to the withholding tax regimen. (https://www.ibfd.org/sites/ibfd.org/ files/content/WithholdingTaxesintheSer viceofBEPSAction1-whitepaper.pdf ). For the uninitiated reader a reading (Richard Doernberg, Electronic Commerce and International Tax Sharing, 16 TAX NOTES INT’L 1013) is also recommended on Doernberg’s arguments on imposition of withholding taxes on electronic commerce resulting transactions. Some countries have actually incorporated a broadened definition of their parameters of SAAS, (Software As A Service), sharing of music and content (http://www.ifa-luxembourg.lu/download/237/withholding-tax-in-the-era-of-beps-civs-and- digital- economy-presentation-report-30112017. pdf ) for example Greece and Malaysia. Withholding taxation on Collective Investment Vehicles(CIV) is again a controversial topic and Luxembourg wherein most of these vehicles are situated has implemented withholding tax treaties with many counterparts. The problem is exacerbated further by the fact that some of the CIV’s are treated as fiscally transparent entities in Luxembourg and not so in other jurisdictions.

  3. Transaction Taxes: Although we are not anymore living in the era of infamy of the “bit” tax, transactional taxes have become very important especially in jurisdictions where FAANG and “clone” business models have significant presence. And in thus current Covid -19, scenario the impact of FAANG on supply chain has been undoubtedly universal. France and Hungary take the pole as far as imposition of transaction taxes are concerned, for example in France the turnover tax governs the delivery of online content in accordance with its proposal to tax online content. In Hungary the online delivery of advertisements is taxes according to its targeted demographic. India and Italy have very recently introduced their own versions of the equalisation levy for bring under the tax fold transactions by MNE who do not have a permanent establishment (with a baseline threshold). The author although admits it would be interesting to see how the economics of operation work out in cases of UBER and “clones”. The United Kingdom has the Digital Services Tax which came into operation on 1st of April 2020.

  4. Threshold Taxes: Jurisdictions over the world are attempting to make models similar to the GILTI (Global Intangible Low Taxed Income) and the Tax Cuts and Jobs Act in the United States for Outbound Foreign Investment and other versions of diverted profits taxes for Inbound Foreign Investment. Australia has imposed the Multinational Anti Avoidance Law; India has very recently imposed a TCS on outbound ODI transactions. CFC rules in many jurisdictions have been made to identify the ultimate beneficiary and hence tax passive foreign income on the ultimate beneficiary. The case of the GILTI and the TCJA in the United States deserve a mention since FAANG are situated in the United States and its brings into its fold the CFC regime and applies corporate tax on the excess of shareholders CFC income over and above the returned Income.

  5. Measures for countering “gig economy”: A recent paradigm is now witnessed whereby focus of jurisdictions is now targeted at “gig” operations rather than the long term employment market. In fact, countries are slowly opening up to the “gig” labour market in which there is a demand based employment rather than long term contractual obligations of employment of labour. OECD:OCDE has of very recent in the month of July 2020 come up with model rules with respect to the “gig” economy (https://www.oecd. org/ctp/exchange-of-tax-information/ model- rules-for-reporting-by-platform- operators-with-respect-to-sellers-in- the- sharing-and-gig-economy.pdf). For instance, the Baltic states(Lithuania, Latvia, Estonia) have been at the forefront of pushing for the nomadic gig economy for expats, and the Nordic countries are evaluating a similar proposition. How and where does the PE and the value addition principle for taxation apply in such a case.? In such cases its relatively easy for a person to have a nomadic jurisdiction less approach, while in particular cases the person still might be liable depending on his nationality. India for its part has as of this year introduced a hybrid residence- nationality based taxation system wherein a “stateless” person would be taxed as an Indian citizen and would be liable for taxes in India(Finance Bill 2020, Insertion of Section 6(1A) into the Income Tax Act 1961.). The United States has a citizenship based approach to taxing worldwide income of Citizens (Cook v. Tait, 265 U.S. 47 (1924)) and doesn’t apply the residence notion IRC 1. Norway applies the quantitative test method for determination of residence status.

Undoubtedly the afore five considerations of taxes denigrate basic principles of both Capital Import Neutrality and Capital Export Neutrality (on which most jurisdictions are supposed to be based), and are rather tending towards National Neutrality as a matter of International Tax Policy. As a consequence, it seems that the market for cross border trade and transactions would be leading to a blurring of tax treatments and also distorting an already set paradigm of income classification. Tax planning would engage in a far more complicated scenario and countries would be vying for their “fair” share of revenue and MNE’s would have to re-align their tax strategies including that of Hybrid Mismatches. This could also potentially lead to a scenario where tax offsets are relegated to such a level that this in itself leads to a trade barrier (see discussion on gig economy supra) to sharing of resources. International double taxation avoidance is the result of almost a century of hard work and negotiations since the days of 1920’s compromise, and any disruption would likely have a spiralling effect, which could be totally unwarranted.

Governments developing their own taxation frameworks and presenting them on an international arena unilaterally would lead to an unfair playing field at the cost of MNE’s

who are providing benefits of economies of scale while not engaging in aggressive tax planning. The paradigm to make a jurisdiction more lucrative by providing for tax benefits is overtaken by attempts to garner a bigger chunk of the pie. An indirect implication of this entire scenario is the additional burden of statutory compliance put on firms both MNE’s and alike.

Another challenge posed despite the stated objectives of the OECD:OCDE 2015 BEPS report, is that the current system of taxation is geared towards taxation of value addition and not as at source. So will it involve a complete overhaul? Also pertinently, even in the current system where there is a limited “gig” economy, there is no homogenous definition of value addition.

The Indian construct is defined u/s 9 of the Income Tax Act 1961 and has to be read in conjunction with Bilateral treaties more particularly with reference to Articles 5 & 7 in the general form and also reference to BEPS article 7 with particular emphasis on artificial avoidance of PE status. Courts in India have generally leaned towards interpretation of Articles on the Bilateral framework. Guiding principles being provided by the Vienna Convention on the Law of Treaties subsequent to the landmark in Ram Jethmalani v. Union Of India (Writ Petition (Civil) No. 176 Of 2009). It might be noted that India although has not ratified the convention, adjudicative law in India has nonetheless used the guiding principles therefrom. Courts have also on occasion had the instance to go beyond the define treaty and the Act to render adjudicative law. (ABB FZ, LLC v. Deputy Commissioner of Income Tax I.T (TP)

http://www.kluwertaxblog.com/wp-content/ uploads/sites/59/2017/08/Bangalore-Tribunal- Ruling.pdf).

Private International Law assumes significance as countries might be prone to adopt a particular manner of interpretation of principles of international taxation to suit their own needs and hence might create a no win scenario for the business as such (see ABB FZ LLC supra). The apparent conflicts in the Dell Products cases, wherein in one jurisdiction since Dell Products Norway was accorded not a PE since did not have authority to bind the principle and in the other case it was deemed a PE on totally different grounds. (See Spain vs. Dell, June 2016, Supreme Court, Case No. 1475/2016 and Dell Products v. Staten v/Skatt ost, Case HR- 2011-02245-A, See also France vs Zimmer Ltd CE 31/03/2020 304715)

Academics like Cockfield (Reforming the Permanent Establishment Principle through a Quantitative Economic Presence Test, 38 CAN. BUS. L. J. 400 (2003)) argue in favour of Quantitative Economic Presence Permanent Establishment test for MNE’s on a worldwide basis, so that the hitherto sacrosanct principles of Capital Export and Capital Import Neutrality be kept sacrosanct. Although there are some arguments in favour of Qualitative tests (See South Dakota vs Wayfair Inc 138 S.Ct. 2080 (2018) which overturned the ruling in Quill Corp. v. North Dakota (1992), See also Direct Marketing Ass’n v. Brohl particularly the commentary by Justice Kennedy) , by and large the administration of such a test could lead to a administrative nightmare and overhauling the established frameworks under the Convention on Mutual Administrative Assistance in Tax Matters.

There has to be made a fine distinction between MNE’s operating on a bigger scale who are actually able to hurt revenue jurisdictions materially and MNE’s operating on a much smaller scale who don’t have a material impact on revenue. Primarily owing to the fact that significant exercise on the latter might not be in favour of smaller business and start-ups who would anyway be constrained by resources for application. And secondarily conducting such a costly exercise might not provide a favourable cost benefit exercise for Revenue.

An incremental change in fiscal as well as international tax policy of the comity of nations is possibly the only way forward in the interest of business as well as growth of revenue of jurisdictions. The way forward from value addition to source would pave the way to reducing harmful tax conflict and also juridical double taxation, which would be undoubtedly harmful to business in the short run and revenue in the long run as competition intensifies all around the globe. The OECD/ UN model double taxation convention and the BEPS 2.0 framework particularly that on Pillar 1 (Although the United State posed some objections on Pillar 1 especially with reference to GILTI and TCJA) although have a consensus of almost 129 countries (excepting notably the United States), the way forward into multilateralism and nationalism in taxes at least is challenging and fraught with interesting negotiations and trade deals.

This article endeavours to the interpret compulsory issue of notice under section 143(2) in case of “Section 153A- Assessment in case of search and requisition”/“Section 153C Assessment of income of other person” or where assessment is framed “under section-147 Income escaping assessment” of the Income Tax Act, 1961. It has forever been a conflict as to how the section must be interpreted, in order to decide whether the procedure of regular assessment i.e. issuing notice under section 143(2) has to be followed in the proceeding under section 153A or under section 147. This article tries to decode the mixed opinions of the court with regard to whether it is the compulsory to issue notice u/s 143(2) before completing an assessment under section 153A or under section 147. The author, based on thorough analysis of Section 153A and Section 147 and keeping in view the language of the both the section and the interpretations attached to it by the Judiciary, have tried to resolve the conflict.

I. Introduction

This research paper mainly discusses the various interpretations given by the Courts with respect to issue of notice under section 143(2) in case where assessment is completed under section 153A or under section 147 of the Income Tax Act, 1961 (hereinafter referred to as Act). Further, it talks about the importance of a notice being issued to the assessee when any assessments are to be made, with the purpose of finalizing the assessment or otherwise. Thus, the provisions should be read as a “whole” and as such they exist, and there is no necessity of reading them down or providing casus omissus. Where the search is conducted, there is a mandate on the Assessing Officer (A.O) to issue notice calling for return of all six/ extended period commencing from assessment years preceding the current assessment year in which search was executed. Thereafter, the first proviso casts a duty on him to assess or reassess the total income in respect of each assessment year. Whereas, Reassessment under section 147 is another distinguished weapon which empowers the Assessing Officer to assess, reassess or recompute income which has escaped assessment.

II Issue of notice under section 143(2) is not compulsory where assessment is completed under section 153A/153C

  1. Every clause of a section should be construed with reference to the context and other clauses thereof, so that, the construction to be put on a particular provision makes a consistent enactment of the whole statue. The section 153A starts with non obstante clause and it pertinent to mention that section 139 is one of the sections which is covered in the notwithstanding clause. The notice under section 143(2) is required to be issued when return has been furnished under section 139 or in response to notice under section 142(1). In the case of section 153A, the section 139 has specifically been kept aside. The words “so far as may be” in clause (a) of sub section (1) of Section 153A could not be interpreted that the issue of notice under Section 143(2) was mandatory in case of assessment under Section 153A. The use of the words, “so far as may be” cannot be stretched to the extent of mandatory issue of notice under Section 143(2). It is noted, a specific notice is required to be issued under Clause
    (a) of sub-section (1) of Section 153A calling upon the persons searched or requisitioned to file return. That being so, notice under Section 143(2) could not be contemplated compulsory for assessment under Section 153A. The same view has been affirmed by various court1

    1. However in view of the decision of the Honourable Supreme Court in case of Hotel Blue moon in 321 ITR 362 has held that omission on the part of the assessing authority to issue notice under section 143(2) cannot be a procedural irregularity and the same is not curable and, therefore, the requirement of notice under section 143(2) cannot be dispensed with. It is to be noted that the above said judgment was in the context of Section 158BC. Clause (b) of Section 158BC expressly provides that “the AO shall proceed to determine the undisclosed income of the block period in the manner laid down in section 158BB and the provisions of Section 142, sub sections (2) and (3) of Section 143, Section 144 and Section 145 shall, so far as may be, apply. The law laid down in Hotel Blue Moon, is thus not applicable to the facts of the present situation of 153A and 153C. This decision has been followed by various tribunals and courts and has decided the matter in the favour of assessee. But the decision as given by the Apex courts only applicable in the context of section 158BC and not in the context of section 153A and 153CTherefore, the said issue is highly debatable, and it is not correct to rely straightway upon the decisions as given by some courts that the notice u/s 143(2) is necessary for proceedings u/s 153A/153C.2

    2. The provisions of section 143(2) of the Act did not give option to make an assessment under Section 143(3) but make it obligatory to comply with these provisions before making assessment under section 143(3) or section 144 as the case may be. However, the assessment of the “search year” has to be completed u/s 143(3) or u/s 144, and issue of notice u/s 143(2) is mandatory for that year. The same view has been purported by many courts.3 It is important to note that non issuance of notice is not a curable defect by following the provisions of section 292BB4

  1. The provisions of section 143(2) are not applicable in case of assessment under section 153A or 153C and the same gets clear by the language as referred in section 153C (2). The section 153C comes into play where a search is carried out u/s. 132 of the IT Act on person, various assets and documents may be found and seized or requisition is made u/s. 132A. It is possible that several of “assets/documents” may not actually belong/relates to the “person searched” but may belong to such “other person”. In that case, provisions of section 153C gets attracted which clearly provides that proceedings as prescribed in section 153A will be initiated against such “other person” if conditions as laid down in section 153C are satisfied. That such “assets/documents” belongs to or relates to the person other than ” searched person”. The same shall be handed over to the AO having jurisdiction of such“other person”. Now, AO (having jurisdiction) has to be satisfied that “assets/documents” seized or requisitioned have a bearing on the determination of the total income of such “other person”. Then only the AO (having jurisdiction) can proceed under section 153C against such “other person” in the manner provided u/s. 153A. The legislative has designed section 153C(2) (a) to (c) to cover possible situation related to “search year”, where no notice in terms of Section 143(2) has been issued to the “other person”, and the time as provided in law u/s 143(2) has expired by the time AO of “other person ‘receives the papers from the AO of “searched party”. In that case assessment for that year can be done in the manner provided in section 153A. The assessment of that particular year will be completed without issuing notice u/s 143(2). The simple notice will be enough to complete the assessment.

  2. For instance, the search took place on 24.05.2017 and the documents related to F.Y 2017-18 has been handed over to the AO of “other person” on 10.10.2019.

    The AO of “other person” will frame assessment U/s 153C for Assessment year 12-13 to A.Y 2017-18. However, the assessment for A.Y. 2018-19 will be made under section 143(3). The “other Person” has furnished return for A.Y. 2018-19 on 20.09.2018. The practical problem in this case is that time period for service of notice under section 143(2) has been expired (i.e. 30.09.2019) whereas the books were handed over to the AO on 10.10.2019. The legislature has covered this possible situation by introducing 153C (2). The relevant extract of section 153C(2) is as under: –

    (2) Where books of account or documents or assets seized or requisitioned as referred to in sub-section (1) has or have been received by the Assessing Officer having jurisdiction over such other person after the due date for furnishing the return of income for the assessment year relevant to the previous year in which search is conducted under section 132 or requisition is made under section 132A and in respect of such assessment year—

    1. no return of income has been furnished by such other person and no notice under sub-section
      (1) of section 142 has been issued to him, or

    2. a return of income has been furnished by such other person but no notice under sub-section
      (2) of section 143 has been served and limitation of serving the notice under sub-section (2) of section 143 has expired, or

    3. assessment or reassessment, if any, has been made before the date of receiving the books of account or documents or assets seized or requisitioned by the Assessing Officer having jurisdiction over such other person, such Assessing Officer shall issue the notice and assess or reassess total income of such other person of such assessment year in in the manner provided in section 153A.]

    In the given case as far as the pending assessment year is concerned, the return was filed on 20.09.2018. No notice in terms of Section 143(2) can be issued to the assessee, as the time provided by law (i.e. 30.09.2019) has been expired by the time its AO received the papers (i.e. on 10.10.2019) from the AO of the “searched party”. Notice issued, necessarily, in terms of Section 153C (2) had to be in the light of the satisfaction that the books of account or materials seized relates to “other person”. The assessment for such assessment year shall be made in the manner as provided in section 153A. Therefore, the said assessment shall be valid even if no notice under section 143(2) was served. This section makes it clear that notice under section 143(2) is not compulsory to be issued for framing assessment under section 153A. It is pertinent to mention here that the language used in section 153C(2) is “assess or reassess total income of such other person of such assessment year in the manner provided in section 153A.”. By using such language it has been cleared that there is no need for issue of notice u/s 143(2) in case of search proceedings.

  3. Conclusion

    The issue whether notice u/s 143(2) is mandatory in case of six years or extended period as per section 153A/153C is highly debatable. But as per the author opinion and keeping in view the above analysis, it can be concluded that issuing of notice under section 143(2) is not mandatory requirement for the years for which notice under section 153A/153C was issued and even in case of situation covered u/s 153C(2). The use of the words, “so far as may be” cannot be stretched to the extent of mandatory issue of notice under Section 143(2). Therefore, notice under Section 143(2) could be not be contemplated compulsory for assessments to be made under Section 153A/153C.

III. Whether Issue of notice under section 143(2) is compulsory where assessment is made under section 147 ?

  1. There has been always litigation on the

    issue that whether the notice u/s 143(2) is compulsory where the assessment has been framed u/s 147 in response to the return filed u/s 148. The notice u/s 148 requires an assessee to file the return within the stipulated period as mentioned in the notice. It is evident that section 148 specifically provides that all the provisions of Act shall be applicable in respect of return of income u/s 148 as if the same was return furnished u/s
    139. But by only taking this argument, the litigation will not stop. It is therefore necessary to go to the roots of the section to decide this issue. In this regard, kind attention is required to be drawn towards first and second provisos to section 148 that provides the time limit for issuance of notice u/s 143(2) on the basis of date of filing return of income u/s 148. The said amendment was made as many courts have held that assessment under section 147 is invalid5 if the notice under section 143(2) is not served within 12 months from the end of the month in which return under section 148 was filed. To cure such defect, the law has been amended retrospectively. Two new provisos to sub-section (1) have been inserted retrospectively with effect from 1-10-1991. As per the said amendment, all the notices which were issued after the period as mentioned in section 143(2) shall be deemed to be valid notice. Further, an explanation has been inserted, with effect from 1-10-2005 in section 148(1) so as to clarify that the provisions of the aforesaid provisos shall not apply in relation to any return which has been furnished on or after 1-10-2005 in response to a notice served under section 148(1).

    1. Thus, so far as returns furnished on or after 1-10-2005 are concerned, the pre-amendment law will apply and the notices will have to be served within a period of 12/6 months specified in section 143(2). Thus, it is not discretionary rather mandatory for an assessing officer to issue notice u/s 143(2) once the return of income is filed by assessee. The only relaxation in the case of re assessment is that notice u/s 143(2) can be issued at any time before the expiry of time limit for completing assessment/ re assessment and the same would be deemed as valid notice.

    2. Therefore, the completion of the assessment/reassessment proceedings without issue of notice u/s 143(2) will make the whole assessment without jurisdiction. The department cannot take shelter by applying provisions of section 292BB that the assessee has participated in the proceedings and therefore assessment/reassessment made u/s 147 without issue of notice u/s 143(2) will be valid. The same position has been cleared by recent judgement by the Apex Court in the case of [2019] 108 taxmann.com 183 (SC) CIT v. Laxman Das Khandelwal that complete absence of notice under section 143(2) is not a curable defect by under section 292BB. The notice u/s 143(2) must have emanated from department and it is only infirmities in manner of service of notice that section seeks to cure and it is not intended to cure complete absence of notice itself.

    3. Conclusion

      Keeping in view the above analysis, it can be concluded that issue of notice under section 143(2) is mandatory requirement before completion of assessment u/s
      147. Thus, it is not discretionary rather mandatory for an assessing officer to issue notice u/s 143(2) once the return of income is filed by assessee in response to the notice u/s 148. The failure to issue notice is not a curable defect and will make whole assessment/reassessment invalid. Therefore, requirement of issue notice u/s 143(2) cannot be dispensed with in case of assessment/reassessment framed under section 147. The same gets support from the decisions of various courts.6

    (Disclaimer: Views of Author are personal, and can be reached at [email protected])

  1. Ashok Chaddha v. ITO [2011] 337 ITR 399/[2012] 20 taxmann.com 387 (Delhi) (Para No.7). Tarsem Singla v. DCIT, Central Circle-III, Ludhiana [2017] 81 taxmann.com 347 (P & H) (par 9). Roshan Lal Verma v. DCIT, Central Circle-II, Faridabad [2018] (6) TMI 1462 – ITAT DELHI (par 9).

  2. [2010] 188 Taxman 113 (SC)-Supreme Court of India – ACIT v. Hotel Blue Moon [2010](1) TMI 1184 – ITAT Indore M/S. S. K. Jain, Smt. Rekha Jain and others [2010] (2) TMI 690 – ITAT, Indore DCIT, Circle 1 (1), Ujjain v. Sushil Kumar Jain Yogeshwar Goel (ITAT Delhi)

  3. 2017 (8) TMI 80 – Allahabad High Court- CIT (Central) Kanpur v. Sri Moins Iqbal 2012 (8) TMI 1053 – ITAT Pune – Akbani Salim Abdul Gaffar v. DCIT, Central Circle, Kolhapur

  4. [2019] 108 taxmann.com 183 (SC) CIT v. Laxman Das Khandelwal.

  5. Raj Kumar Chawla v. ITO [2005] 94 ITD 1 (Delhi)(SB)]

  6. [2016] 74 taxmann.com 239 (Kerala)- High Court of Kerala – Travancore Diagnostics (P.) Ltd
    [2015] 64 taxmann.com 22- Delhi High Court – PCIT-08 v. Shri Jai Shiv Shankar Traders Pvt. Ltd.
    [2010] 192 Taxman 197 (Allahabad)- High Court of Allahabad – CIT v. Rajeev Sharma
    [2012] 25 taxmann.com 341- Madras High Court – Sapthagiri Finance & Investments v. ITO, Kandhipuram
    [2019] (7) TMI 751 – Gujarat High Court – PCIT v. Jignesh Bhagwandas Patel
    [2018] (11) TMI 874 – Rajasthan Hgh Court – PCIT, Jaipur-III, Jaipur v. Kamla Devi Sharma

1. Relevant sections in brief

  1. Voluntary contributions are made taxable vide the definition of income under Section 2(24) (iia) which reads as under-

    2(24)(iia) Voluntary contributions received by a trust created wholly or partly for charitable or religious purposes or by an institution established wholly or partly for such purposes or by an association or institution referred to in clause (21) or clause (23), or by a fund or trust or institution referred to in sub-clause (iv) or sub-clause (v) or by any university or other educational institution referred to in sub-clause (iiiad) or sub-clause (vi) or by any hospital or other institution referred to in sub-clause (iiiae) or sub-clause (via) of clause (23C) of section 10 or by an electoral trust.

    Explanation — For the purposes of this sub-clause, “trust” includes any other legal obligation.

    Apparently this covers the donations to the corpus fund also.

  2. However, exceptions are carved out for donations to corpus fund which are as follows-

    1. Section 2(24)(xviii) refers to assistance from Govt. but excludes the same towards corpus 2(24)(xviii) assistance in the form of a subsidy or grant or cash incentive or duty drawback or waiver or concession or reimbursement (by whatever name called) by the Central Government or a State Government or any authority or body or agency in cash or kind to the assessee other than,—

      1. the subsidy or grant or reimbursement which is taken into account for determination of the actual cost of the asset in accordance with the provisions of Explanation 10 to clause (1) of section 43; or

      2. the subsidy or grant by the Central Government for the purpose of the corpus of a trust or institutionestablished by the Central Government or a State Government, as the case may be;

    2. Section 11(1)(d) contains a specific provision as follows- [inserted by Finance Act 1989 w. e. f. 1-4-1989]

      Income from property held for charitable or religious purposes.

      11. (1) Subject to the provisions of sections 60 to 63, the following income shall not     be included in the total income of the previous year of the person in receipt of the income—

      (d) income in the form of voluntary contributions made with a specific direction that they shall form part of the corpus of the trust or institution.

    3. Section 12 (1) [Originally Sec.12 only which was numbered sub section (1) by Finance Act 2000 w.e.f.1-4-2001] reads along with its heading as follows –

      Income of trusts or institutions from contributions.

      12. (1) Any voluntary contributions received by a trust created wholly for charitable or religious purposes or by an institution established wholly for such purposes (not being contributions made with a specific direction that they shall form part of the corpus of the trust or institution) shall for the purposes of section 11 be deemed to be income derived from property held under trust wholly for charitable or religious purposes and the provisions of that section and section 13 shall apply accordingly.

    4. There is an old clarificatory Circular No. F. NO. 20/10/67-IT(AI) DT. 1st MAY, 1967 as follows-

      1. There appears to be certain amount of misconception in minds of some ITOs regarding the provision against the accumulation of income in excess of 25%, contained in s. 11(1) of the IT Act. It may be clarified that the provisions in s. 11(1), prohibiting accumulation of income in excess of 25% apply only to the income derived from property held under trust, but such restrictions are not applicable to capital receipts. The donations received by a charitable trust from the members of the public, being capital receipts, cannot be regarded as income of the trust. Accordingly, the donations received by the trust should be excluded from the income of the trust for the purpose of calculating the accumulation limit of 25% except in cases covered by s. 12(2) of the Act.

      2. The above position will also be clear from s. 12(2) of the IT Act, which specifically provides that contributions made to a charitable trust by another trust, to which the provisions of s. 11 apply, should in the hands of the trustee, be deemed to be income derived from property for the purposes of s. 11. Such contributions should, of course, be included in the total income of the receiving trust for the purpose of applying the limit of 25% under s. 11(1) of the IT Act.

2. The issue

Although the law and the clarificatory circular provides that the donations to the corpus of a trust is a capital receipt and hence not taxable, the Dept. tries to tax the voluntary contributions or donations to the corpus of a trust especially the donations to the trusts which are not registered under section 12A/AA.

The donations to the corpus fund have been held as exempt being a capital receipt and hence not taxable.

There are practically umpteen number of cases reported in this matter with many facets covered in each one in the matter right from what is voluntary contribution deciding even when it is not expressly conveyed by written direction by the donor, and going to the extent of treating even the income earned on the corpus fund also exempt treating it as part of the corpus. But, the matter of trusts not registered under the Act remained controversial at least for the Dept.

There is an old judgment of Hon. Supreme Court in the case of R. B. Shreeram Religeous and Charitable Trust (1988) 233 ITR 53. A detailed discussion is made on the issue of corpus donations and various High Court decisions are considered. However, while dismissing the appeal it did not specifically address the issue of corpus donations and has not made any categorical statement to deviate from those High Court decisions and thus left the issue open.

3. The case of Mata Amrithanandamayi Math

First case is of a trust called Mata Amrithanandamayi Math, for the assessment years 2007-08 to 2009-10 and 2012-13. The trust received donations of ₹ 6,99,89,712 over a period and earned interest of ₹ 37.76 crores and both were claimed exempt. The letters from donors were submitted with details like total number

of donors who have given specific direction to accumulate interest on corpus fund donated by them in respect of interest added to the corpus during the relevant year, period specified by them etc. and evidences supporting the same. The AO added the same to income and taxed.

  1. The first appeal before CIT(A)

The CIT(A) gave consolidated order dt. 02/02/2016 in favour of the trust and allowed both the items as exempt. In the well-reasoned order passed by learned CIT(A), crux of the reason given was –

I carefully examined the captioned issue. On a plain reading of section 12 of the Act, it is obvious that any voluntary contribution which is made with a specific direction that it shall form part of the corpus of the trust would not be deemed to be income derived from the property held by the trust and it cannot be treated as income of the receiving trust for the purpose of section 11(1)(d) as well. When the voluntary contribution made with a specific direction that it shall form part of the corpus of the trust itself cannot be treated as income both u/s 11 and u/s 12 then how the interest earned on such voluntary contribution kept in term deposits with banks could be treated as income of the trust.

In the reasons the CIT(A) also explained that the corpus fund by way of fixed deposits is property held in trust and income earned till the time the fund is actually used is also exempt. He relied on the following judgments in holding the assessee eligible for the said exemption-

CIT v. Vanchi Trust & Another (127 ITR 227) (Ker)

CIT v. Sthanakvasi Vardhanman Vanik Jain Sangh (260 ITR 366(Guj))

CIT v. Haryana CM Relief Fund (309 ITR 275 (P&H))

CIT v. Punjab Energy Development Agency (323 ITR 463 (P&H))

In one of the grounds the Dept. contended that, Intention of the donor can be restricted only to the amount of corpus donations made and not the income earned thereon. There is no such restriction in the Income Tax Act whatsoever and therefore that ground is also not sustainable. Unless the income is received in a particular year, it cannot be applied. The interest from corpus deposits is also taken the corpus fund and hence the assessee had rightly excluded the interest income on Term Deposits with Bank which were accrued but not due. This is being consistently followed by the assessee.

The CIT(A)’s reason against the said contention was –

In ITO v. Shrisachyaya Mataji Trust Osian, Jodhpur ITA No.538/Jodh/2013, dated 09/05/2014, the Jodhpur bench of ITAT held that if a voluntary contribution is made with a specific direction, it shall be treated as capital of the trust for carrying on its charitable or religious activities. Then such an income falls under section 11(1)(d) as is not liable to tax. If the intention of the donor is to give that money to a trust to keep in trust the account in deposit and utilise the income therefrom for carrying on a particular activity, it satisfies the definition part of the corpus. The assessee would be entitled to the benefit of exemptions from payment of tax.

The CIT(A)’s conclusions were as follows-

  1. The interest got added on to the deposit by virtue of specific directions to do so and both the principal and interest continuously remained with the bank.

  2. The income does not reach the hands of the assessee as it gets added on to the deposit. In other words, income should actually be earned and cannot be due from, which is a notional income and cannot be actually spent for charitable purposes.

  3. It is not the case of the AO that the assessee had failed to bring out documentary evidence for donations received and mandate given. All these were verified by the AO.

  1. Second appeal before Hon. ITAT Cochin  went in appeal before the Hon. ITAT Cochin. which upheld the order of the CIT(A) and answered specific grounds taken by the Dept. in negative as follows-

    1. In the Grounds of Appeal, in point 2(a), the Department has taken a stand that neither the intention of the donor nor the objects of the trust will be fulfilled since both the capital and interest will not be applied for the objects of the trust in the interest of beneficiaries and continue to remain unutilised perpetually. This argument is incorrect since the mandate is for specific number of years for which period alone the interest gets added to the corpus. Thereafter the interest on such corpus becomes available for the objects of the trust. Therefore, this argument of the department is incorrect.

    2. In Ground 2(b) the department has taken a stand that there is no provision under the Income Tax Act which exempts interest income out of deposits made out of the corpus donations u/s 11(1)(d) of the IT Act. In the case of the assessee: the issue is not with regard to exempting interest income out of the deposits made of corpus funds, but the question is whether the interest earned on such corpus donations kept as deposits with a specific mandate to accrue the interest on the principal, would not amount to the corpus itself by virtue of an overriding title created as a result of the mandate.

    3. In Ground 2 (c), the department has taken a ground that intention of the donor can be restricted only to the amount of corpus donations made and not the income earned thereon. There is no such restriction in the Income Tax Act whatsoever and therefore that ground is also not sustainable. Unless the income is received in a particular year, it cannot be applied. The interest from corpus deposits is also taken to the corpus fund and hence the assessee had rightly excluded the interest income on Term Deposits with Bank which were accrued but not due. This is being consistently followed by the assessee.

    4. In ITO v. Shrisachyaya Mataji Trust Osian, Jodhpur ITA No.538/Jodh/2013, dated 09/05/2014, the Jodhpur bench of ITAT held that if a voluntary contribution is made with a specific direction, it shall be treated as capital of the trust for carrying on its charitable or religious activities. Then such an income falls under section 11(1)(d) as is not liable to tax. If the intention of the donor is to give that money to a trust to keep in trust the account in deposit and utilise the income therefrom for carrying on a particular activity, it satisfies the definition part of the corpus. The assessee would be entitled to the benefit of exemptions from payment of tax.

    5. In view of the aforesaid reasoning and the judicial pronouncements, we hold that the CIT(A)’s order is correct and in accordance with law no interference is called for. It is ordered accordingly.

    ACIT v. Mata Amrithanandamayi Math, (2016) 48 CCH 0503 Cochin Trib, ITA No 185 to 188/ Coch/2016

  2. Appeal before Hon. High Court of Kerala The common questions of law framed for the consideration of the Court were the following:

    1. Whether the ITAT has erred on facts and law in treating the interest on corpus funds received by the assessee as corpus donations u/s. 11(1)(d) of the IT Act, to be exempt from Income Tax while section 11(1)(d) covers donations with specific direction that they shall form part of corpus and not interest thereon since it will result in exemption to interest in perpetuity defeating the legislative intent?

    2. Whether voluntary contributions received by a trust with specific direction that they shall form part of the corpus includes interest accruing/credited on deposits from above donations?

    After considering the facts, the Hon. High Court ruled as follows-

    We are of the view that the question that is framed has to be answered in the light of Section 11(1)(d) of the Act. A reading of Section 11 shows that subject to the provisions of Sections 62 and 63, the incomes enumerated therein shall not be included in the total income of the previous year of the person in receipt of the income. The person in receipt of the income, insofar as these cases are concerned, is the respondent assessee. One of the income that is enumerated in clause (d) of sub-Section (1) of the Section is the income in the form of voluntary contributions made with a specific direction that they shall form part of the corpus of the trust or institution. The fact that the donors had instructed that the interest earned shall be added to the corpus of the trust is undisputed. If that be so, the interest earned on the contributions already made by the donors would also partake the character of income in the form of voluntary contributions made with a specific direction that they shall form part of the corpus of the trust. If that be so, conclusion is irresistible that the Tribunal has rightly held that the interest earned would qualify for exemption under Section 11(1)(d) of the Income Tax Act.

    CIT (Exemption) v. Mata Amrithanandamayi Math Amritapuri, (2017) 99 CCH 0449 KerHC

  3. SLP before Hon. Supreme Court

    Dept. further went before Hon. Apex Court with a SLP and after condoning the delay and hearing, Hon. Court dismissed the SLP saying that-

    We do not find any ground to interfere with the impugned order(s).

    CIT (Exemption) v. Mata Amrithanandamayi Math Amritapuri, (2018) 102 CCH 0050 ISCC, (2018) 256 TAXMAN 0062 (SC), dt. 14-5-2018

    In Kunhayammed and others v. State of Kerala and Another 2000 AIR (SC) 2587 – Hon. Apex Court has ruled about effects of dismissal of SLP that An order refusing special leave to appeal may be a non-speaking order or a speaking one. In either case it does not attract the doctrine of merger. An order refusing special leave to appeal does not stand substituted in place of the order under challenge. All that it means is that Court was not inclined to exercise its discretion so as to allow the appeal being filed.

    Although dismissal of SLP does not amount to a binding precedent as the same is under article 136 and not under article 141, as per general rules for interpretation, it might be taken as the affirmation of the High Court’s views on merits of the case. There is no reason to dilute the binding nature of precedents in such cases.

    (Refer Interpretation of Taxing Statutes, published by AIFTP, December 2005 first edition, page 158)

4. The case of Basanti Devi and Chakkhanlal Garg Educational Trust

  1. DIT (Exemption) v. Basanti Devi and Chakkhanlal Garg Educational Trust– Civil appeal disposed.

    The appeal in this case is under article 141 in a SLP with Civil and is disposed of. Briefly the case is as under-

    The assessee trust received a sum of ₹ 1,06,55,343/-, as infrastructure fund. Holding that this amount was not allowable as a deduction u/s 11 of the I.T. Act, the AO brought it to tax for AY 2002-03 in a reopened case.

    Before this, the ITAT had decided the matter in favour of the assessee’s own case for AY 2003-04 on the same issue, confirming the CIT(A)’s order in favour of assessee and against the AO.

    By the time the case for AY 2002-03 came before the ITAT, the Hon. Delhi High Court had already upheld the matter in favour of the assessee on 23-9-2009 (ITA no. 927/2009) and Dept. had filed a SLP before Hon. Apex court which had granted leave to file appeal against the Hon. High Court order, but without a stay to the HC order.

    The High Court order available on its portal is a very short and reads as follows-

    The respondent/assessee is admittedly a Charitable Organisation which is a trust registered under the Indian Trust Act which has also been granted registration under the Income Tax Act w. e. f. 1.4.2003. The assessee received certain donations towards its corpus which had been deposited in the bank and the money was admittedly spent for acquiring land for construction of a college. In these circumstances, we are of the opinion that the CIT(A) as well as ITAT rightly concluded that the donations received towards corpus of the trust would be capital receipt and not revenue receipt chargeable to tax. No question of law arises. Dismissed.

    For AY 2002-03, Dept. took a view before the Hon. ITAT that the aforesaid High Court order is under challenge before the Hon’ble Supreme Court by way of a SLP filed by the Department. But, Hon. ITAT did not agree saying, “this, however, is not premise enough to allow the Department’s appeal, particularly when the High Court order has not been shown to have been stayed.”

    Hon. ITAT allowed the appeal on 19-1-2011, respectfully following the High Court decision(supra) in the assessee’s own case for assessment year 2003-04, and rejected the grievance of the Department and held as follows-

    The assessee received certain donations towards its corpus which had been deposited in the bank and the money was admittedly spent for acquiring land for construction of a college. In these circumstances, are of the opinion that the CIT(A) as well as ITAT rightly concluded that the donations received towards corpus of the trust would be capital receipt and not revenue receipt chargeable to tax. No question of law arises. Dismissed.

    Hon. Apex Court has dismissed the appeal on 17-9-2018.

    (CA No. 002201/2013, SLP (C) CC No.004610/2013, SLP (C) No.010535/2013, all regd. on 4-3-2013 and disposed on 17-9-2018).

  2. The disposal is due to increase in monetary limits by CBDT to file appeal

The order reads as – “Delay, if any, is condoned. Leave granted. In these appeals, the tax effect is less than ₹ 1,00,00,000 (₹ One core) and are covered by the Circular of CBDT. These appeals are, accordingly, dismissed.”

This is a little twist in the matter. The SC has disposed of the appeals as an effect of increase in monetary limits of filing appeals by the Revenue vide CBDT circular No. 3/2018, of 11-7-2018. Hence, the binding effect needs to be examined.

Para 2 and 11 of the circular reads as under-

  1. It is clarified that an appeal should not be filed merely because the tax effect in a case exceeds the monetary limits prescribed above. Filing of appeal in such cases is to be decided on merits of the case.

  2. The monetary limits specified in para 3 above shall not apply to writ matters and Direct tax matters other than Income tax. Filing of appeals in other Direct tax matters shall continue to be governed by relevant provisions of statute and rules. Further, in cases where the tax effect is not quantifiable or not involved, such as the case of registration of trusts or institutions under section 12A/12AA of the IT Act, 1961 etc., filing of appeal shall not be governed by the limits specified in para 3 above and decision to file appeals in such cases may be taken on merits of a particular case.

The circular clearly states that the decision to file appeals in cases having important matters is to be decided on merits.

Hon. Supreme Court has exhaustively dealt with the issue of whether the CBDT circulars in the matter operate retrospectively and in the course has analysed the Instruction No.3 of 2011 dated 9.2.2011 and the National Litigation Policy in the case of DIT v. S.R.M.B. Dairy Farming Pvt. Ltd. (2018) 400 ITR 0009 (SC) dt.27-11-2017.

Hon. Apex court has quoted CIT & JCIT v. Ranka & Ranka, (2013) 352 ITR 0121, and stated that –

  1. We consider it appropriate to refer to some of the observations in the judgment of the Karnataka High Court, which have our imprimatur, as under:

“22. The Government has formulated the National Litigation Policy with a view to ensure conduct of responsible by the Central Government and urges every State Government to evolve similar policies. Its aim is to transform Government into an efficient and responsible litigant. “Efficient litigant” means ensuring that good cases are won and bad cases are not needlessly persevered with. The litigation should not be resorted to for the sake of litigating. The Government must cease to be a compulsive litigant. The philosophy, “that matters should be left to the courts for ultimate decision”, has to be discarded. The easy approach, “Let the court decide,” must be eschewed and condemned. The purpose underlying this policy is also to reduce the Government litigation in courts so that valuable court time would be spent in resolving other pending cases, so as to achieve the goal in the National Legal Mission to reduce average pendency time from 15 years to 3 years. All pending cases involving the Government has to be reviewed with the intention of filtering frivolous and vexatious matters from the meritorious one. Panels have to be set up to implement categorization, review such cases, to identify cases, which can be withdrawn. These include cases which are covered by decisions of courts and the cases which are found without merit. Such cases have to be withdrawn. This must be done in a time bound fashion.

Hon. Supreme court has also quoted in para 10 of the judgment, the National Litigation Policy and the para of Review of Pending cases reads as under-

Review of pending cases

  1. All pending cases involving the Government will be reviewed. This due diligence process shall involve drawing upon statistics of all pending matters which shall be provided for by all Government departments (including public sector undertakings). The Office of the Attorney General and the Solicitor General shall also be responsible for reviewing all pending cases and filtering frivolous and vexatious matters from the meritorious ones.

  2. Cases will be grouped and categorized. The practice of grouping should be introduced whereby cases should be assigned a particular number of identity according to the subject and statute involved. In fact, further sub- grouping will also be attempted. To facilitate this process, standard forms must be devised which lawyers have to fill up at the time of filing of cases. Panels will be set up to implement categorization, review such cases to identify cases which can be withdrawn. These include cases which are covered by decisions of courts and cases which are found without merit withdrawn. This must be done in a time bound fashion.

It is obvious that the dismissal of appeal by Hon. Supreme Court in the case under discussion must have been done after considering the merits of the matter as compelled in the policy. But, the binding nature needs to be examined by experts in the constitution and civil laws and comments on the same are welcome.

5. Donations held towards corpus when not expressly stated by donors

At this juncture, it is proper to refer the decisions clarifying as to what constitutes the donations to corpus especially when it is not expressly conveyed by the donors.

  1. If the receipts issued to the donors clearly mention that they were given towards corpus, then it had to be construed that the contributions were made with a specific direction that they shall form part of the corpus –  A. Ramachandra Raja Charity Trust v. First ITO (1985) 14 ITD 230 (Mad. Trib.); Meherangarh Museum Trust v. Asstt. CIT (2014) 48 taxmann.com129 (Jodh. Trib)

  2. If the trust deed clearly provides that donations received by trustees shall be deemed to be accretions to the trust and imposes an obligation on the trustees to hold such donations as part of the corpus of the trust, then contributions could be received only towards corpus of the trust – Hakmuddin Mulla Hasanbhai Singaporewala Charitable Trust v. 5th ITO [1985] 23 TTJ 43 (Bom. Trib.)

  3. If the intention of the donor is to give that money to a trust which will keep it in trust account in deposit and the income from the same is utilised for carrying on a particular activity, it satisfies the definition part of the corpus – DIT v. Sri Ramakrishna Seva Ashrama [2012] 18 taxmann.com 37, 205 Taxman 26 (Kar.)

  4. Donations received towards ‘Building Fund’ and ‘Kayami Fund’ (Permanent Fund) were held to be towards corpus –
    ITO v. Satya Kabir Sahabani Gadi [1994] 50 TTJ501 (Ahd. Trib.)

  5. Contribution received towards specific purpose of construction of Wadi was held to be forming part of corpus – CIT

  6. Sthanakvasi Vardhman Vanik Jain Sangh [2003] 131 Taxman 270 (Guj)

  7. Voluntary contributions made by the donors with a specific direction that they were made towards construction of a building in the premises of the assessee for its use –  Ann’s Home for the Aged v. ITO [1980] 10 TTJ 144 (Bang. Trib.)

  8. No specific letter was received from the donors that the donations were Towards corpus. However, the counter foil of receipts showed that they were received for construction of temple and Dharamshala. The Tribunal held that the preamble to the trust deed, directions of the donors and the contents of the receipts showed that the donations could be treated as corpus donations – Shri Vasu Pujiya Jain Derasar Pedhi v. ITO [1991] 39TTJ337 (JP. Trib.)

  9. Although the receipts indicated that the donations were received towards corpus, in some cases the donors had not specifically stated that the donations were towards corpus. The donations were utilized towards the objects of the trust to establish a technical institution. The Tribunal held that the donations were a part of the corpus – ITO v. Sardar Vallabhbhai Education Society [2012] 26 taxmann.com 174 (Ahd. Trib.) (TM)

  10. Donation received towards purchase and investment in Sidha Land Project which was a capital project was a corpus donation – Dharma Pratishthanam v. ITO [1985] 11 ITD40 (Delhi- Trib.)

  11. Donation towards construction of stadium for indoor games was a corpus donation – CIT v. Indore Table Tennis Trust [1997] 92 Taxman 199 (MP)

6. Donations towards corpus are exempt even if there is no registration under sec. 12A/AA with different facts –

It is worth considering various cases which had different issues and facts, but ultimately the donations are held exempt.

  1. DCIT v. Nasik Gymkhana, (2001) 72 TTJ 0467, (Pune) AY 1984-85

    This is an interesting case. The trust had received donations from unidentified donors which was not attributed to the corpus. Donations attributed to the corpus by shop owners belonging to the assessee, proved not voluntarily made as they were allotted extended area in consideration. Hon. ITAT observed as under-

    Accordingly, such donations, though not voluntarily made, are held as capital receipts and consequently, cannot be considered as income of the trust. Even assuming for the sake of convenience that such donations were made voluntarily, as contended by the counsel for the assessee, the same cannot be held as income since such donations were, given towards corpus of the trust. The receipts issued by the trust clearly show that donations were received towards buildings reserve and general maintenance fund. The receipts are duly signed by the donors. All the donations received were transferred to this fund. Further, there is nothing on the record to suggest that this fund was not used for construction of building. Later on, all the donors have certified that such donations were given towards corpus of the trust. No adverse inference can be drawn from the fact that receipts were issued by one person or the fact that the amount was given towards building fund was printed on the receipts. There is sufficient material to hold that donations were towards corpus of the trust. Hence, such donation cannot be considered as income of the assessee. The legal contention of the Departmental Representative that prior to 1st April, 1989, donations towards corpus were not exempt is without force. prior to 1st April, 1989, the donations towards corpus were exempt under s. 2(24)(iia) itself. Therefore, this contention of the Revenue is rejected.

  2. CIT v. Trustees of Visha Nima Charity Trust, (1982) 138 ITR 0564 (Bom HC) – AY 1965-66

    One of the clauses of the deed of Trust authorised the trustees to invite and receive or without such invitation, receive voluntary contributions from any person and that all such contributions shall be treated as forming part of the Trust fund. The assessee organised a charity show and invited advertisements in souvenirs which brought a net receipt of ₹ 96,771 which was transferred to the trust fund or corpus. The amount collected was used for the payment of the price of the ownership flats purchased by the assessee. The ITO took the view that the said income was income from property held under a trust wholly for charitable purposes, which would have been exempt from tax under the terms of s. 11(1)(a) if applied to such purposes, but since it was accumulated for application to such purposes it was held that exemption was available only to the extent of 25% thereof and after granting the same he brought the balance to tax. Hon. High Court held as under-

    The object of the Trust was to have a permanent home for providing shelter for a short duration which was in the nature of general public charity. It is hardly likely that on the facts and circumstances of the case and taking into account the nature of the Trust, the persons to whom the appeal for tickets and advertisements was issued and other relevant factors, any one would have given an advertisement in this souvenir for any purpose other than the charity and as a voluntary contribution and the same can be said about the persons who must have purchased the tickets for the said show. In these circumstances the contributions made by way of tickets and for advertisements should, on the facts and circumstances of this case, be regarded as merely voluntary contributions and in view of this the exemption contained in sub-s. (1) of s. 12 would be clearly attracted, even assuming that these receipts constituted the income of the assessee and not the corpus thereof. Moreover, these contributions could never be regarded as income derived by the assessee- trust from property. Accordingly, the entire income contribution received by the assessee trust was exempt.

    Amount received by assessee trust from sale of charity show tickets and advertisement in souvenir were from voluntary contributions, exempt under s. 12(1).

    This judgment is referred to in many other orders & judgments.

  3. CIT v. Sri Durga Nimishamba Trust, (2011) 79 CCH 0890 KarHC – AY – Not mentioned

    Tribunal had set out decision on which Appellate Commissioner relied on to come to conclusion that contribution made towards corpus fund could not be treated as income for purpose of levying of tax— Even if that corpus fund was misused it could not be treated as income and income tax levied—Only course was to seek for cancellation of registration granted u/s 12A of Act—In that view of matter court did not saw any merit in this appeal—Application for condonation of delay was dismissed, as cause shown do not constitute sufficient cause under section 5 of Limitation Act—Revenue’s appeal dismissed.

    This Karnataka HC has settled that even if there is misuse of corpus fund, still the same cannot be taxed but the course open is to cancel the registration u/s 12A/12AA.

  4. ITO v. Gaudiya Granth Anuved Trust, (2014) 65 SOT 0137 (Agra) ((URO)) – AY 2007-08

    The question arises whether such corpus donation is taxable as income or not even in the cases in which the trust is not registered u/s 12AA because for those trusts which are registered u/s 12AA, exemption to corpus donation has been provided as per provision of section 11(1)(d). Corpus donation being in the nature of capital receipt are not chargeable to income Tax.

    The ITAT AM delivering the order further observed that,

    I have also come across another decision of Hon’ble ITAT, Kolkatta in case of Shri Shankar Bhagwan Estate v. ITO dated 13.01.1997 reported in (1997) 61 ITD 196 (Cal) in which, the taxability of corpus donation has been examined in the light of section 12 read section 2(24(iia) of the Income Tax Act and in this decision, it has been held as under :-“So far as section 2(24)(iia) is concerned, this section has to be read in the context of the introduction of the present section 12 it is significant that section 2(24)(iia) was inserted with effect from 01.04.1973 simultaneously with the present section 12, both of which were introduced from the said date by the Finance Act, 1972. Section 12 makes it clear by the words appearing in parenthesis that contributions made with a specific direction that they shall from part of the corpus of the trust or institution shall not be considered as income of the trust. The Board’s Circular no. 108 dated 20.03.1973 is extracted at page 1277 of Vol. I of Sampat Iyengar’s Law of Income tax, 9th Edn. In which the inter-relation between section 12 and section 2(24) has been brought out. Gifts made with clear directions that they shall form part of the corpus of the religious endowment can never be considered as income. In the case of R.B. Shreeram Religious and Charitable Trust v. CIT (1988) 172 ITR 373/39 taxman 28 it was held by the Bombay High Court that even ignoring the amendment to section 12, which means that even before the words appearing to parenthesis in the present section 12, it cannot be held that voluntary contributors specifically received towards the corpus of the trust may be brought to tax. The aforesaid decision was followed by the Bombay High Court in the case of CIT v. Trustees of Kasturbai Scindia Commission Trust (1991) 189 ITR 5/57 taxman 38. The position after the amendment is a forori. In the present cases the Assessing Officer on evidence has accepted the facts that all the donations have been received towards the corpus of the endowments. In view of this clear finding, it is not possible to hold that they are to be assessed as income of the assessees. We, therefore, hold that the assessment of the corpus donations cannot be supported.

    This order is invariably referred to in many orders/judgments. Similar view is expressed in the following orders/judgments-

  5. CIT v. Pentafour Software Employees’ Welfare Foundation, (2019) 418 ITR 427 (Mad HC) –

AY 1998-99, 1999-2000 & 2002-03

  1. The assessee filed appeal before the CIT(A), who held that the amounts paid by the businessmen towards advertisements could not be considered as “donations”. On appeal to the Tribunal, the Tribunal following the judgment of the Bombay High Court in CIT v. Trustees of Visha Nima Charity Trust (1982) 28 CTR (Bom) 227: (1982) 138 ITR 564 (Bom), held that the amounts received by the society could not be treated as “trading receipts” and they were mere voluntary contributions. Further, the Tribunal confirmed the finding recorded by the authorities that the society was not a charitable institution. When the matter was carried on appeal to the Bombay High Court, the question referred was whether the Tribunal was correct in holding that the amount received by way of advertising charges are voluntary contributions or donations and are not trading receipts. After taking note of s.2(24) of the Act, it was held that the assessee society has been held as not a charitable institution and it is not also one of the institutions which are satisfied under s. 2(24) of the Act which are treated as “income” within the meaning of s. 2(24) of the Act and therefore, voluntary contributions received by the assessee society cannot be treated as “income” or “trading receipts”. This decision applies with full force in support of the assessee herein and the Revenue is not able to put forth any submission to dislodge such conclusion.

  1. Bank of India Retired Employees Medical Assistance Trust v. ITO (Exemption)

    (2018) 196 TTJ 0706 (Mumbai)-AY 2012-13

    In this case the trust was registered with the Charity Commissioner. It was for the object of not for the benefit of the general public, but was solely dedicated for the welfare of the retired employees of the bank, and the same could not be held as a charitable trust as contemplated u/s 2(15). It had received voluntary contribution towards corpus of the trust. The AO added the donation to income and taxed. CIT(A) confirmed the addition. But Hon. ITAT allowed the same as exempt being capital receipt.

  2. Chandraprabhu Jain v. ACIT, (2016) 47 CCH 0650 MumTrib, AY 2011-12

In this case the trust’s registration copy was not traceable, hence it applied for copy of registration u/s 12A/AA but there was no communication from the authority. For want of the registration certificate the AO denied the exemption to corpus donations and taxed at maximum marginal rate. CIT(A) upheld the AO’s order but reduced the rate of tax to normal rate, object being a public trust.

ITAT allowed the claim of the trust and held the corpus donations as capital receipt. In the process it has discussed various decisions holding the corpus donations as capital receipt and exempt from tax.

  1. ITO v. Serum Institute of India Research Foundation, (2018) 195 TTJ 0820 (Pune), AY 2005-06

    In this case the issues in corpus donations are exhaustively discussed. This case was a second round of appeal in assessee’s case before Hon. ITAT for the same year. Provisions of Sec. 2(24)(iia), 11 and 56(2) are discussed and position after amendment in 1989. The ld. DR had argued that the cases hitherto decided by various authorities merely held the corpus donations as capital receipt, being for the period prior to the amendments and were decided without going into the amended provisions of the Act and hence were not applicable to the case.

    Hon. ITAT has discussed the provisions in detail, rejected the ld. DR’s contentions, and still concluded that –

    The Corpus-specific-voluntary contributions are outside the taxation in case of an unregistered Trust u/s.12/12A/12AA of the Act too. From this point of view, and for this reason, the decision of the CIT(A) in granting relief to assessee does not call for any interferences. Accordingly, grounds of appeal raised by the Revenue are dismissed.

7. Registration u/s 12A/AA

To make the discussion complete, at least a brief mention about the amendment in Sec. 12A(2) is necessary. These are held to be retrospective. Thus, once the registration is granted, the same is held effective retrospectively. Following cases give an interesting insight in the issue-

  1. Shree Bhanushali Mitra Mandal Trust v. ITO, (2016) 47 CCH 0197 AhdTrib – AY 2011-12

  2. Punjab Educational Society v. ITO, (2018) 192 TTJ 0037 (Asr) ((UO))- AY 2011-12

  3. ITO v. M/s. Shri Vishwakalyan Jivraksha Pratishthan, 2013/PN/2014, dt. 22-07-2016 – AY 2011-12

  4. Shree Halar Deshodhharak P.Pu. Vijammrusurji Smarak Trust v. ITO (Exemption), ITA.No.2494/Ahd/2015 – AY 2008-09

Finance Act 2020 has made many changes in taxation of trusts and one of them is amendments in Sec. 12A.

The existing proviso to Sec.12A(2) which is interpreted in the foregoing cases is amended and is now a second proviso. However, the contents are kept as it is except that the new Sec.12AB is also mentioned along with 12AA.

In my personal view, this has not disturbed the view already settled in the issue.

I may quote the observation of Hon. ITAT Ahemdabad in the case of Shree Halar Deshodhharak case referred above. In that case Hon. ITAT Ahmedabad has quoted the order of Hon. ITAT Kolkata in the case of Sree Sree Ramkrishna Samity v. CIT, (2016) 156 ITD 0646 (Kolkata), and one paragraph especially in respect of interpretation which worth quoting as follows –

We also hold that though equity and taxation are often strangers, attempts should be made that these do not remain always so and if a construction results in equity rather than in injustice, then such construction should be preferred to the literal construction. It is only elementary that a statutory provision is to be interpreted “ut res magis valeat quam pereat”, i.e. to make it workable rather than redundant. Applying this legal maxim, it would be just and fair to hold that the amendment in section 12A is brought in the statute to confer benefit of exemption u/s 11 of the Act on the genuine trusts which had not changed its objectives and had carried on the same charitable objects in the past as well as in the current year based on which the registration u/s.12AA is granted…….

8. Conclusion

To avoid any controversy, it is better –

  • to obtain a letter from the donor with specific direction that the donation is towards corpus of the trust;

  • issue the receipt specifically conveying that the donation is accepted towards corpus of the trust; and

  • entries in the books of account must be correctly reflecting the donation towards corpus;

  • preferably have a clause in trust deed to accept the donations towards corpus.

Philanthropy in taxation of trusts is getting complicated day by day due to various reasons on both sides of the table.

John Rockefeller once said, “The best philanthropy is constantly in search of the finalities — a search for a cause, an attempt to cure evils at their source.” Based on Rockefeller’s quote, I may say in the matter that, philanthropy in taxation, at least in India, is also in search of finality constantly.

  1. Introduction

The determination of Indian tax liability of a foreign enterprise has been a contentious and litigious matter under the Indian tax law regime. One of the issues involved is the determination of whether a foreign enterprise is conducting its business in India through a permanent establishment (‘PE’), and the resultant Indian tax liability of the enterprise. Many foreign enterprises have been involved in litigation with the Indian tax authorities over this issue since many years. This article briefly covers, by way of background, the concept and definition of PE and thereafter analyses the most recent Supreme Court judgment in the case of Samsung Heavy Industries Co. Ltd.

 

  1. Overview of PE

    1. The general principle of taxation is that a person, who is resident of a country, would normally be taxable on its global income. However, as a rule of exception to this general principle, a person may also be taxed in the country of source i.e., the place where the business of a person is carried on, though he may be a resident of another country.

    2. Section 5 of the Income-tax Act, 1961 (‘the Act’) provides that a non-resident shall be liable to income-tax only on the income, that is received or deemed to be received in India, or that accrues or arises or is deemed to accrue or arise in India.

    3. Section 9(1)(i) of the Act inter alia states that income shall be deemed to accrue or arise in India if it accrues or arises, whether directly or indirectly, through or from any ‘business connection’ in India. The definition of Business connection under the Act is continuously a subject matter of expansion and now it also includes a new phrase called Significant Economic Presence. However, in international tax treaties, the term Permanent Establishment (PE) is a widely used concept used to determine the right of the source country, i.e., to tax the profits of a non-resident from a business carried on by such non-resident in the source country. Nevertheless, the PE shall be liable to be taxed in the source country only to the extent of its business profits which are attributable to such PE. The Tax payer has the choice to apply the Business Connection test as is available under the Act while comparing it with Permanent Establishment provision available under the applicable Tax treaty.

    4. In the context of the Transfer Pricing Provisions as per section 92F(iiia) of the Act, ‘Permanent Establishment’ includes a fixed place of business through which the business of the enterprise is wholly or partly carried on. This is similar to the definition as found in most of the Treaty whereas Sec 9 while dealing with the general attribution rule employs the Business Connection test which is more wider than the test of PE as laid down under the Tax Treaty.

    5. Further, as per section 90 of the Act, the Central Government has the power to enter into an agreement with other country for avoidance of double taxation or for the exchange of the information or for recovery of Income Tax under this act (‘DTAA’ or ‘Tax Treaty’).

      Also, as per section 90(2) of the Act, if the DTAA provisions are more beneficial to a Tax Payer than the provisions of the Act, then he may choose to apply DTAA provisions. Therefore, the provisions of DTAA will supersede the provisions of the Act to the extent they are more beneficial to the assessee.

      In these DTAA agreements, the broad definition of Permanent Establishment has been elucidated and most of India’s agreements have adopted the definition of OECD’s Model Tax Convention on Income and on Capital.

    6. Article 5 of both the “Organisation for Economic Co-operation and Development (OECD) Model Tax Convention” and the “United Nations Model Double Taxation Convention (UN Model)” defines the term PE, and this definition has been adopted by countries globally in their tax treaties. The main purpose of tax treaties is to encourage international trade and commerce by avoiding double taxation, eliminating tax avoidance and providing certainty by clearly delineating the taxing rights of each jurisdiction.

    7. Definition of PE:

      Relevant extracts of the definition of PE as per Article 5 of OECD Model Convention are given here under for convenience:

      1. For the purposes of this Convention, the term “permanent establishment” means a fixed place of business through which the business of an enterprise is wholly or partly carried on.

      2. The term “permanent establishment” includes especially:

        1. a place of management;

        2. a branch;

        3. an office;

        4. a factory;

        5. a workshop, and

        6. a mine, an oil or gas well, a quarry or any other place of extraction of natural resources.

      3. A building site or construction or installation project constitutes a permanent establishment only if it lasts more than twelve months.

      4. Notwithstanding the preceding provisions of this Article, the term “permanent establishment” shall be deemed not to include:

        1. the use of facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise;

        2. the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or delivery;

        3. the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise;

        4. the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise or of collecting information, for the enterprise;

        5. the maintenance of a fixed place of business solely for the purpose of carrying on, for the enterprise, any other activity;

        6. the maintenance of a fixed place of business solely for any combination of activities mentioned in subparagraphs
          a) to e),

        7. provided that such activity or, in the case of subparagraph f), the overall activity of the fixed place of business, is of a preparatory or auxiliary character.

    8. Concept of Service PE:

      1. The concept of Service PE was first inserted in the U.N. Model Tax Convention in 1980 under which services provided by a non-resident may give rise to a PE. This concept has led to controversy whether a Service PE requires a fixed place of business in the source country. India’s tax treaties e.g. with UK, USA also provide for clauses relating to Service PE.

      2. The relevant Article 5(3) of the U.N. Model is given below:

        3. The term “permanent establishment” also encompasses:

        1. A building site, a construction, assembly or installation project or supervisory activities in connection therewith, but only if such site, project or activities last more than six months;

        2. The furnishing of services, including consultancy services, by an enterprise through employees or other personnel engaged by the enterprise for such purpose, but only if activities of that nature continue (for the same or a connected project) within a Contracting State for a period or periods aggregating more than 183 days in any 12-month period commencing or ending in the fiscal year concerned.

        It may be noted that usually, in most treaties, the provisions relating to Service PE are included in Article 5(2) itself. It may be noted that Article 5(2) starts with the words “The term ‘permanent establishment’ includes especially” and then goes on to list various types of fixed places of business and also includes the supervisory nature of activities or the furnishing of services through employees without actively specifying whether such PE requires fixed place or not.

      3. Thus, the issue often arises is whether a Service PE requires a fixed place of business and whether it requires physical presence of employees. The controversy emanates due to interpretation of whether Article 5(1), which defines PE as a fixed place of business in the source country is independent of Article 5(2) although Article 5(2) uses the words “includes especially” while providing for inclusions to the definition of PE.

        In the case of ABB FZ-LLC [(2017) 83 taxmann.com 86], the Tribunal observed that Article 5(2) of the India- UAE Tax treaty broadened the scope of Article 5(2). Therefore, Article 5(2) was not a prerequisite to fulfilling the requirement of Article 5(1), as Article 5(2) is independent of Article 5(1) and the condition of fixed place of business is not attached. Accordingly, it determined that ABB FZ had a Service PE and held that the presence of employees is not required in the source country for a Service PE to exist. The rationale behind the Tribunal’s decision appears to be contrary to the concept of tax neutrality between a sale of goods and provision of services. Profit arising from a transaction that involves a simple sale of goods from a non-resident is not taxable in the source country in the absence of a PE of such non-resident seller. By similar reasoning, services performed outside India for an Indian resident should also be free of tax in India, if only to preserve similar treatment for sales and services.

        The Johannesburg Tax Court also reached a similar conclusion in AB LLC and BD Holdings LLC v. Commr. SARS, [(13276) 2015 ZATC 2] when it observed that, by using the phrase “includes especially”, the drafters of the treaty intended that the factors referred to in Article 5(2)(k) of the U.S. – South Africa Tax treaty be made part of the definition referred to in Article 5(1); otherwise, they would not have used the words “includes especially.” The Tax Court, therefore held that the contents of Article 5(2)(k) must be read as an integral part of Article 5(1).

        Based on this analysis, an enterprise becomes liable for taxation in the non- resident country as soon as its activities fall within the ambit of Article 5(2)(k). There is no need to examine whether a fixed place of business exists under Article 5(1).

      4. To conclude, the Service PE clause was first inserted in the U.N. Model Tax Convention in 1980 when electronic commerce was unheard of. It is therefore understandable that the drafters did not intend to impose tax on services provided there was no physical presence in the source country. However, with advances in technology, the concept of a fixed base seems to be out of touch with today’s business practices and hence there is a discerning trend amongst various jurisdictions to move towards taxing of such digital or electronic services. Recent E.U. proposals to tax the income of U.S.- based digital companies, such as Amazon and Google, reflect a similar approach.

    9. Dependant Agency PE and Independent Agency PE:

      A Dependent Agency PE (‘DAPE’) is created when an enterprise resident of a contracting state becomes taxable in another host country on its business profit, if it is represented by an agent in the host country, and the agent has and habitually exercises an authority to conclude the contract. The provisions relating to DAPE are stipulated in Article 5(5) of the OECD Model. Article 6(6), which deals with Independent Agent, states that Article 5(5) shall not apply where the person acting in a Contracting State on behalf of an enterprise of the other Contracting State carries on business in the first-mentioned State as an independent agent and acts for the enterprise in the ordinary course of that business.

      When determining the profit attributable to the DAPE, it would logically follow that if the DAPE is paid for its services equivalent to what would have been payable to an Independent agent, then no further attribution of income or profits may be required to be made on the DAPE. However, jurisprudence and OECD commentary in this regard differs with this interpretation.

      In the case of Set Satellite (Singapore) [2007 106 ITD 175 Mum], it was observed that in respect of the DAPE, the issue to be addressed is one of determining the profits of the non-resident enterprise which are attributable to its dependent agent PE in the host country (i.e., as a result of activities carried out by the dependent agent enterprise on the non- resident enterprise’s behalf). For this situation, Article 7 will be the relevant article. Further, the quantum of that profit is limited to the business profits attributable to global trading operations performed through the PE in the host country. Accordingly, in order to attribute profits to the DAPE, the arms’ length principle as per the authorized OECD approach involving a FAR analysis i.e. functions undertaken, assets used and risks assumed should be followed.

    10. PE and BEPS Action Plan & MLI:

      1. As part of the OECD/G20 Base Erosion and Profit Shifting (BEPS) Project, the OECD has published in Oct. 2015 its final report on Action Plan 7 “Preventing the artificial avoidance of permanent establishment status” (BEPS Report). Action Plan 7 contains changes to the definition of PE to prevent its artificial circumvention, e.g., such as arrangements through which taxpayers replace subsidiaries that traditionally acted as distributors, by commissionnaire arrangements, with a resulting shift of profits out of the country from where the sales took place, without a substantive change in the functions performed in that country.

      2. Action Plan 15 provides an analysis of legal issues related to the development of a multilateral instrument (MLI) to enable countries to streamline the implementation of the BEPS treaty measures. Accordingly, Article 12 and Article 13 of the MLI deal with “Artificial Avoidance of Permanent Establishment Status through Commissionnaire

      3. Arrangements and Similar Strategies” and “Artificial Avoidance of Permanent Establishment Status through the Specific Activity Exemptions” respectively. The Government of India, on 6th June 2017, has provided the provisional list of expected reservations and notification pursuant to Article 28(7) and 29(4) of the MLI, and India has accepted certain provisions of Articles 12 and 13 of the MLI.

  2. Supreme Court Judgment in the case of DIT-II New Delhi Vs Samsung Heavy Industries Co. Ltd. [DIT New Delhi Vs Samsung (Civil Appeal No. 12183 of 2016)]

    1. This recent judgment of July 2020 is concerned with the preparatory or auxiliary activities exception to permanent establishment, otherwise known as the specific activity exemption. The case involves the India – Korea DTAA.

      As per Article 7(1) the said DTAA, the business profits of such enterprise would generally be taxable only in Korea, unless the enterprise engages in business through a PE situated in India. In such a case, the profits of enterprise would be taxable in India as well. However, only that portion of the profits which can be attributed to the Indian PE may be taxed in India. For this, the Indian Revenue has to first establish that there is a PE of the enterprise in India.

    2. Facts of the case

      1. In 2006, the Oil and Natural Gas Corporation, a state-owned enterprise of the government of India, awarded a turnkey contract to a consortium comprising of Samsung Heavy Industries (‘Samsung’), a company incorporated in South Korea, and an Indian company.

      2. The scope of the contract was to carry out work, inter alia, of surveys, design, engineering, procurement, fabrication, installation and modification at existing facilities, and start-up and commissioning of the entire facilities covered under the Vasai East Development Project.

      3. Samsung set up a project office in Mumbai to act as a communication channel with the Oil and Natural Gas Corporation for the project. Pre-engineering, survey, engineering, procurement, and fabrication activities took place abroad.

      4. Samsung ’s India income tax return declared a loss in relation to its activities carried out in India.

    3. Assessment Officer’s findings

      1. The assessing tax officer issued a show cause notice, alleging that Samsung’s offshore supply and services should be taxed in India as they were attributable to a permanent establishment in India. According to the assessing officer, the project office was involved in the core activity of execution of the project the designing or fabrication of materials and therefore was a permanent establishment of Samsung in India within the meaning of Article 5.1 of the India-Korea DTAA.

      2. Samsung argued that the offshore supply and services were not attributable to the permanent establishment in India as the project office was acting as a mere communication channel and therefore was used merely for preparatory and auxiliary activities which are specific exempt activities.

      3. However, the assessing officer alleged that the project in question was a single, indivisible “turnkey” project which could not be split up and, therefore, the entire profit from the project should be taxable in India and accordingly attributed 25% of the revenues allegedly earned outside India as the profit attributable to the permanent establishment in India. The order of the assessing officer was upheld by the Dispute Resolution Panel.

    4. Tax Tribunal ruling

      1. In appeal by Samsung, the tribunal relied on an application that was submitted by Samsung to the Reserve Bank of India for the registration of the project office. The application referred to a board resolution of the company for opening the project office in India, which stated that “the company hereby open one project office in Mumbai, India for coordination and execution of Vasai East Development Project”. The tribunal held that it was clear from the board resolution that the project office was opened for coordination and execution of the project. It then held that the project office was a fixed place of business of Samsung Heavy Industries in India.

      2. Samsung argued that even if there was a permanent establishment, the activities of the permanent establishment met the test of preparatory or auxiliary activities in Article 5.4. The tribunal rejected this argument, stating that the onus of proving that the activities were preparatory or auxiliary was on Samsung and that it brought no material on record to prove this fact.

        Samsung produced the accounts of the project office to demonstrate that there was no expenditure related to the execution of the project. Samsung also demonstrated that only two people worked in the project office, neither of whom was qualified to perform any core activity of Samsung. The tribunal rejected these arguments, stating that the accounts were in the hands of Samsung and that the mere mode of maintaining the accounts alone cannot determine the character of a permanent establishment.

      3. The tax tribunal, however, remanded the matter back to the tax officer to reconsider the deemed profit of 25% attributed by the tax officer to the permanent establishment. The tribunal found that there was insufficient information on record to ascertain the extent of business activities carried on by Samsung Heavy Industries through the project office.

    5. High Court ruling

      The Uttarakhand High Court allowed the appeal only on the question of whether the tax officer used an arbitrary profit rate of 25% without examining whether it was attributed to the activities of the permanent establishment. According to the High Court, neither the tax officer nor the tribunal made any effort to bring on record any evidence to justify this figure.

    6. Supreme Court ruling

      1. In appeal by the tax department in the Supreme Court, the tax department again argued that the project office was connected with Samsung’s core business.

      2. However, Samsung reiterated that the Mumbai project office consisted of only two employees, neither of whom had any technical qualifications to execute the project. Further, the project office accounts demonstrated that it had not incurred any expenditure for execution of the project.

      3. The Supreme Court relied on the board resolution enclosed with the application to the Reserve Bank of India for the registration of the project office, which stated that the project office was established for coordinating and executing “delivery of documents in connection with construction of offshore platform modification of existing facilities for Oil and Natural Gas Corporation above”.

        The Supreme Court stated that the findings of the tribunal were perverse to the extent of its conclusion that the project office was involved in the core activity of execution of the project and that merely maintaining accounts cannot determine the character of permanent establishment.

      4. The Supreme Court thus concluded that the activities performed by the project office were of auxiliary nature as the project office acted as a communication channel between Samsung and ONGC. In deriving the above conclusions, the Supreme Court relied on its rulings in Morgan Stanley & Co. Inc. and E-Funds IT Solutions, Inc., where, depending on the specific facts of the case, certain back office and support functions were held not to give rise to a fixed place permanent establishment.

    7. Key takeaways

      1. In addition to the current judgment in the case of Samsung, there have been quite a few landmark judgments on the matter of fixed place PE viz. DIT Mumbai
        v. Morgan Stanley & Co. (2007) 292 ITR 416, CIT v. Hyundai Heavy Industries Co. Ltd. (2007) 7 SCC 422, Ishikawajma-Harima Heavy Industries Ltd. v. DIT Mumbai (2007) 3 SCC 481 and ADIT New Delhi v. E-Funds IT Solution Inc. (2018) 13 SCC 294.

      2. A reading of the aforesaid judgments makes it clear that when it comes to “fixed place” permanent establishments under DTAAs, the deciding factors are as follows:

        1. The condition precedent for applicability of Article 5(1) of the DTAA and the ascertainment of a “permanent establishment” is that it should be an establishment “through which the business of an enterprise” is wholly or partly carried on.

        2. The profits of the foreign enterprise are taxable only where the said enterprise carries on its core business through a permanent establishment.

        3. The maintenance of a fixed place of business which is of a preparatory or auxiliary character in the trade or business of the enterprise would not be considered to be a permanent establishment under Article 5.

        4. It is only so much of the profits of the enterprise that may be taxed in the other State as is attributable to that permanent establishment.

      3. The current ruling of Samsung as well the ruling in UAE Exchange Center demonstrates that the test of ‘preparatory or auxiliary’ activities is very factual. In this case of Samsung, the Supreme Court relied on the Reserve Bank of India registration and the accounts of the project office to determine the scope of the activities of the project office. Even in the UAE Exchange Center case, the Supreme Court relied on permission granted by the Reserve Bank of India (among others) in concluding that the activities of UAE Exchange Center’s liaison office in India were ‘preparatory or auxiliary.’

        The reliance by the Supreme Court on the Reserve Bank of India permission is a significant development in jurisprudence relating to the interpretation of permanent establishment. Both of the above rulings demonstrate that assessees having a project office or liaison office should perform activities within the realm of the permission of the Reserve Bank of India.

      4. The rulings also highlight the importance of a taxpayer’s ability to demonstrate, through appropriate documentation, that activities performed by it are indeed preparatory or auxiliary. Also, the Supreme Court reiterated that the onus of proving that a taxpayer has a permanent establishment in India is on the tax authorities and not the taxpayer.

  3. Conclusion and Post MLI position India and Korea has adopted an option A as provided in Article 13 dealing with the specified activities that do not constitute PE and fact pattern of this case does not even trigger application of the anti-fragmentation rules and hence there is no avoidance of the PE through specific exemption activities. In view of the above the decision the case will not be impacted by the MLI as the activities of the Samsung is limited to the one covered in the exempted activities.