In the instant case, a batch of writ petitions challenging the constitutional validity of Section 16(4) of the CGST Act, had been heard together by the Patna HC. The main question to be decided by the HC was whether the denial of ITC due to the delayed filing of the annual return infringes upon the constitutional right under Articles 14 and Article 300A of the Constitution of India. The Petitioners also sought a declaration that Section 16(4) should not override the substantive ITC conditions in Section 16(1) and Section 16(2).
The Petitioners argued that refusal denial of ITC under Section 16(4) of the Act beyond the date contemplated therein is confiscatory in nature. They contended that ITC is a vested right protected under Article 300A of the Constitution and cannot be casually revoked due to a late return filing. On the contrary the Department placing reliance on the Supreme SC decision in the decision of the Supreme Court in the case of ALD. Automotive Private Limited [2018 (10) TMI 814 - Supreme Court], contended that ITC is a benefit/concession granted to registered persons, and the statutory framework of Section 16, including the restrictions in sub-section (4), applies uniformly without violating any rights guaranteed under Article 19(1)(g) of the Constitution.
Upon reviewing the language of Section 16, the HC observed that the said section, is clear and unambiguous in its language as it explicitly states that a registered person shall not be entitled to claim ITC in respect of any invoice or debit note for the supply of goods or services after a specified date. The Court also emphasized that ITC is not an unconditional right rather, it is subject to certain conditions and restrictions outlined in the CGST Act. Furthermore, the Court highlighted that the presumption of the constitutional validity of legislation, and the burden of proving otherwise lies with the party challenging its validity. Further, Section 16(4) of the CGST Act was found to be constitutionally valid and not in violation of Articles 19(1)(g) and 300 A of the Indian Constitution. Instead, it is a valid provision that governs the entitlement to ITC based on the fulfillment of prescribed conditions. Accordingly, the court upheld the constitutionality of Section 16(4) of the CGST Act, emphasizing that ITC is subject to conditions and restrictions, and the provision does not violate constitutional rights or principles of statutory interpretation.
M/s. Gobinda Construction [2023-VIL-623-PAT]
GLS Comments:
Interestingly, the instant judgment aligns with a parallel judgment from the Andhra Pradesh High Court in the case of M/s. Thirumalakonda Plywoods [W.P.No.24235 of 2022], which also upheld the constitutionality of Section 16(4). Both rulings emphasize that ITC is not a vested right but a concession or benefit accorded under the law, on which conditions may be imposed on the availment of the same. The Section 16 (4) of the CGST Act, has been a subject matter of challenge in multiple High Courts and this is the second High Court rulings on this issue. The industry would now await for the other High Courts and the ultimate Apex Court to hear and decide the issue.
The Central Govt. vide Notification dated September 14, 2023 has notified the constitution of the state benches of the GST Appellate Tribunal. Notably, the states of Maharashtra and Uttar Pradesh to have to 3 benches each.
With the G20 Summit just around the corner, foreign investment and NRI interest is also expected to increase during India's presidency. Such strides on a global level, have only been possible with a strong internal system. This also includes the tax sphere. In a landmark decision, the Calcutta HC has held that ITC cannot be denied to recipient without due investigation of supplier. However, the Patna HC seems to have taken a contrary view in another judgement, holding that the buyer cannot claim ITC if supplier has not paid his tax to the Government.
In this edition, we have delve into recent judicial and legislative advancements in the realm of taxation. W.r.t. Direct Taxes, CBDT has amended the valuation criteria for the perquisite of residential accommodation from September 1, 2023. Further, the CBDT has issued Guidelines on 'life insurance policy' tax exemption pursuant to Finance Act, 2023 amendments. In an important ruling, the HC has held that revisionary jurisdiction not valid merely on PCIT's disagreement with AO's view. Alongside these updates, here are the salient developments covered in this Newsletter:
In addition, thereto, true to our view of bringing news which are beyond facts, we have covered all the judicial and regulatory developments in direct and indirect taxes with interesting insights. We have also covered developments of the erstwhile indirect tax laws, which can be helpful precedents for disposing the pending litigations.
We are pleased to present to you the 35th Edition of our 'Vision 360' Newsletter in partnership with TIOL. This edition encapsulates the pivotal judicial and legislative advancements in Direct Tax, Indirect Tax, and other regulatory domains throughout the month of August 2023. We trust that perusing this newsletter will provide you with an enriching experience. Your valuable feedback is always appreciated and can be shared with us at consult@gstlegal.co.in or updates@gstlegal.co.in
The GSTN has issued an advisory regarding reporting ITC reversal opening balances. The Taxpayers have been advised to use this facility to report their eligible ITC reversal balances that have not been previously reclaimed.
GLS Comments:
The instant advisory comes at an important time when the due date for the annual return is just around the corner. While the reporting of reclaimable ITC had been clarified vide Circular No. 170/02/2022 – GST dated July 06, 2022, the alignment of the time-limit of the functionality with Section 16(4) was not clear. The instant advisory addresses and clarifies the same.
However, the legal backing for allowing mere 3 amendments for reporting ITC reversal opening balances is something that seems to require a deeper analysis. While the courts have held that ITC is not a vested right, but a concession, the question whether such a restriction on rectification can be put on reclaim of ITC, may be analysed.
The Petitioner had purchased goods from its supplier and paid the applicable taxes, however, the supplier failed to remit the tax amount to the government. The Petitioner availed the ITC since they had paid the tax. Subsequently, the Revenue Department denied the ITC on the ground that the Petitioner did not meet the conditions outlined in section 16(2) of the CGST Act. Aggrieved the Petitioner preferred a Writ before the Patna High Court.
The HC examined the provisions of Section 16(1) and 16(2)(c) of the CGST Act, which outline the conditions for claiming ITC. The Court relied on the judgments like M/s D.Y. Beathel Enterprises [2021-TIOL-890-HC-MAD-GST] and M/s Ecom Gill Coffee Trading Private Limited [2023-VIL-20-SC] and noted that the burden of proving tax payment by the supplier lies with the buyer, and mere production of invoices isn't enough. The Court emphasized that eligibility for ITC hinges on both tax collection and payment by the supplier. It further clarified that the conditions for enabling the benefit of ITC outlined in Section 16(2) of the CGST Act must be satisfied together and not separately. The Court asserted that the statutory levy and the benefit of ITC depend not only on the collection of tax by the seller but also the due payment of tax by the seller to the government. Accordingly, the HC held that when the supplier fails to comply with the statutory requirement, the Petitioner cannot claim ITC and the remedy available to the Petitioner is only to proceed for recovery against the seller.
M/s Aastha Enterprises [2023-TIOL-1021-HC-PATNA-GST]
GLS Comments:
The recent judgment from the Patna High Court seems to clash with a recent ruling by the Calcutta High Court in the case of M/s. Suncraft Energy Private Limited and Another [2023-VIL-487-CAL]. While the former ruling has complicated the process of claiming ITC, the latter seems to curb arbitrary denial of ITC of genuine buyer due to supplier non-compliance. What’s intriguing is that the Patna HC observation places the onus on the buyer to verify tax payment by the supplier. However, it is interesting to note that the very case of M/s. D.Y. Beathel Enterprises [supra], which the Patna HC relied upon, distinctly held that recovery should not be made from the recipient for the supplier’s fault. This disparity in interpretations underscores the predicament faced by genuine buyers, highlighting an element of uncertainty.
It would be pertinent to note that the judiciary’s differing viewpoints on this issue have existed right from the VAT regime but yet a definitive resolution is still lacking. Moreover, since the validity of Section 16(2)(c) has been itself challenged before contested in various other HCs it would will be interesting to see whether the instant Patna HC judgment is challenged before the Apex Court and it would be worth waiting for their interpretations in the future.
In a historic move to safeguard digital privacy, the Indian Parliament has officially ratified the Digital Personal Data Protection Bill 2023 (‘the Bill’) on August 12, 2023. This legislation is set to revolutionize data handling practices across various entities operating within India, with a significant impact on tech giants and emerging startups. At its core, the bill provides clear guidelines for managing users' personal data and obtaining their consent, introducing the concept of a 'data fiduciary' responsible for defining data processing methods. By using the word ‘she’ instead of ‘he’, for the first time any bill acknowledges women in Parliamentary law-making.
Notably, certain entities may be designated as ‘Significant Data Fiduciaries’, including potential inclusion of financial services and fintech startups. However, stringent accountability accompanies this legislation, with non-compliance incurring hefty penalties of up to Rs 250 crore. As India's data protection narrative evolves, the Digital Personal Data Protection Bill 2023 emerges as a transformative force, aligning legal provisions with transparency, informed consent, and a future where data is treated as a sacred trust.
Key Features of the Bill:
GLS Comments:
At essence, the bill represents a vital step forward in crafting a resilient legal framework for safeguarding personal data in the ever-evolving digital domain. Striking a delicate balance between upholding individual rights, facilitating legitimate interests, and addressing pressing security concerns, this bill marks a momentous stride towards a digitally empowered future under a vigilant regulatory umbrella.
The journey towards revamping India's data protection law began after the Supreme Court's pivotal judgment in RE: Justice K S Puttaswamy and Anr v. UOI and Ors [Writ Petition (Civil) No. 494 of 2012], affirming the right to privacy as a 'fundamental right'.
Notably, the Bill does not aim to revamp existing data protection laws but coexists with sector-specific regulations like banking and insurance. As expected with new legislation, challenges arise. The absence of a sensitivity-based classification system, uncertainty about forthcoming regulations, exemptions under deemed consent, and the extensive authority of the Board raise questions.
Various countries and regions have embraced or put forth different data protection frameworks. Nonetheless, a universal data protection approach doesn't exist, as each model resonates with the distinct backdrop, ethics, principles, and aims of its realm. Consequently, it's crucial to assess the advantages and limitations of various models, drawing lessons from successful strategies and insights of others, and consider local requirements and challenges when shaping data protection policies.
The month of July has been marked by significant milestones in the taxation sphere, with a series of critical Notifications and Circulars issued by CBIC that have provided much-needed clarifications. These clarifications have shed light on various pressing issues in GST matters, ranging from credit reconciliation with GSTR-2A/2B to interest calculation under section 50(3), and the distinction between Input Service Distributor (ISD) and Cross Charge mechanisms, among others.
An important ruling emerged from the Andhra Pradesh High Court, wherein the constitutionality and validity of the time limit for claiming ITC under section 16(4) of the CGST Act were upheld. This ruling underscores the significance of adhering to prescribed conditions for availing the ITC. Our in-depth analysis of this judgment is featured in the newsletter, providing insights into its implications and the interpretation of key sections.
In this edition, we also delve into recent judicial and legislative advancements in the realm of taxation. W.r.t. Direct Taxes, the CBDT has introduced the Income-tax (Twelfth Amendment) Rules, 2023. Additionally, the CBDT has extended the exemption to non-residents earning income from investment funds to encompass investment funds regulated by IFSCA form the filing of their income tax returns. Alongside these updates, here are the salient developments covered in this Newsletter:
We are pleased to present to you the 34th Edition of our 'Vision 360' Newsletter in partnership with TIOL. This edition encapsulates the pivotal judicial and legislative advancements in Direct Tax, Indirect Tax, and other regulatory domains throughout the month of July 2023. We trust that perusing this newsletter will provide you with an enriching experience. Your valuable feedback is always appreciated and can be shared with us at consult@gstlegal.co.in or updates@gstlegal.co.in
The Andhra Pradesh High Court recently upheld the constitutional validity of Section 16(4) of the CGST Act, which imposes the time limit for claiming ITC. The HC has addressed three key questions in its ruling:
Thirumalakonda Plywoods [W.P.No.24235 of 2022]
The recent judgment by the Andhra Pradesh High Court holds significant implications as it addresses the long-standing debate over the interpretation of Section 16(2) and Section 16(4) of the CGST Act. The Court's observation regarding the non-obstante clause in Section 16(2) is particularly noteworthy. The Court clarified that the non-obstante clause in Section 16(2) starts with a negative sentence, making it evident that ITC will not be eligible unless the conditions mentioned in Section 16(2) are fulfilled. This interpretation establishes that Section 16(2) acts as a restrictive provision, limiting the eligibility otherwise provided under Section 16(1) for claiming ITC. Taxpayers must be aware of this ruling and ensure timely compliance with the specified conditions to avail themselves of the benefit of ITC under the GST law. It shall be noted that the Apex Court in its landmark judgement in RE: TVS Motors Co. Limited vs. State of Tamil Nadu [2018 (18) GSTL 769 (SC)], has held that Credit is not a right, but a concession given to the taxpayers and therefore, the Government may restrict the same.
It is interesting to note that the judiciary has consistently taken the stand that the non-obstante clause gives overriding effect to a provision over conflicting ones, but it does not render all other provisions ineffective. Various High Court judgments have opined that the application of the non-obstante clause must be examined in the context of specific provisions and their relevant legislative intent.
In a similar vein, a provision of restricting credit existed in the erstwhile regime as well, wherein the CENVAT credit had to be taken within six months from the date of the tax invoice specified under Rule 9(1) of the CCR, 2004. This had raised questions about whether imposing such restrictions on the vested rights of the assessee was unreasonable and arbitrary. In this context, it is pertinent to mention that in RE: Indsur Global Limited [2014-TIOL-2115-HC-AHM-CX], the Gujarat HC held that the restriction imposed was unreasonable and arbitrary.
While the Andhra Pradesh HC affirms the constitutional validity of Section 16(4) and provides clarity on the precedence of provisions, its vires are limited to the state of Andhra Pradesh. As regards, the other states, the instant judgement will have persuasive impact. Moreover, since the validity of Section 16(4) has been challenged before various other HCs as well, it would be interesting to see their interpretations.
In lines with the recommendations made during the 50th GST Council Meeting held on July 11, 2023, the CBIC vide a series of Circulars dated July 17, 2023, has clarified on various areas of GST in the manner as provided hereunder:
Circular No. 195/07/2023- GST dated 17.07.2023
The aforesaid Circular clarifies that GST would not be payable on such replacement of parts or supply of repair services, if no additional consideration is charged for these services. However, if any additional consideration is charged, GST would be applicable Further, as the value of original supply of goods with warranty includes the likely cost of replacement of parts / repair services, they cannot be considered as exempt supply and corresponding ITC is no required to be required.
Further there are cases wherein the distributor fulfills the warranty obligations of the manufacturer and provides replacement of parts / repair services free of cost to the customer. In this case, GST shall be payable only if any additional consideration is charged by the distributor to the customer. To provide such warranty services, the distributor may use his own stock or procure from third parties and recover such cost from manufacturer by issuing a tax invoice. Such recoveries from the manufacturer would be treated as taxable supply by the distributor, chargeable to GST.
In other cases, where the manufacturer provides parts without any consideration for replacement under warranty period, no GST is required to be paid, nor any ITC is required to be reversed. There may also be cases, where the distributor may replace the parts to the customer under warranty out of the supplies already received by him for which the manufacturer may issue credit note for replaced places, subject to provisions of Section 34(2) of the CGST Act. Here, the manufacturer may adjust his tax liability subject to the condition that the distributor has reversed the ITC availed on the parts replaced. In respect of repair services provided by the distributor under warranty for which consideration is received from the manufacturer, GST shall be levied which will be creditable for the manufacturer, subject to other conditions of CGST Act.
Clarification has also been issued for extended warranties provided along with the original supply of at a later stage i.e. before expiry of period of standard warranty period. For extended warranty provided at the time of original supply, the same shall be treated as a composite supply, the principal supply being the supply of goods. However, where such extended warranty is opted any time after the original supply, it would be treated as a separate contract and GST shall be paid as per the nature of the contract.
Circular No. 196/08/2023- GST dated 17.07.2023
The aforesaid Circular clarified that shares held by a holding company in a subsidiary company are not be treated as supply of services under the definition of the CGST Act and therefore are not subject to GST.
Circular No. 197/09/2023- GST dated 17.07.2023
The aforesaid Circular provides detailed clarification on various refund-related issues under the GST regime, including the refund of accumulated input tax credit, the requirement of undertaking in FORM RFD 01, the calculation of adjusted total turnover u/r. 89 of the CGST Rule, and the admissibility of refunds for exporters complying with sub-rule (1) of rule 96A of the CGST Rule.
Circular No. 198/10/2023- GST dated 17.07.2023
The aforesaid Circular clarifies that the Government Departments and PSUs registered for tax deduction at source u/s. 51 of the CGST Act are considered as registered persons under the GST law and e-invoicing is required for transactions under rule 48(4) of the CGST Rules, 2017.
Circular No. 199/11/2023- GST dated 17.07.2023
The aforesaid Circular clarifies on the most debatable topic i.e. Cross Charge vs. ISD. It provides clarification on taxability of services provided by an office of an organization in one State to the office of that organization in another State, both being distinct persons. The issues are clarified as under:
The GST Council has provided detailed clarification on different scenarios involved in provision of warranty services, which should bring a lot of clarity on the tax treatment of goods / services provided under warranty. Similarly, the controversial issue regarding the need to mandatorily obtain ISD registration as now been put to rest with the taxpayer given an option to obtain the said registration or continue to charge its other units (commonly known as cross-charge mechanism), and the value of invoice shall be treated as OMV in line with provisions of Rule 28 of the CGST Act.
Further, the Karnataka AAR in the case of Columbia Asia Hospitals Private Limited [Advance Ruling No. KAR ADRG 15 / 2018 dated July 27, 2018] had obtained a pandora’s box by treating services provided by the employees of HO as taxable services resulting in unnecessary demand and litigation. The judgment was controversial as there was a second school of thought which believed that the employees are engaged by the legal entity and not the unit and therefore services provided by employees to the employer should not be taxable. It has now been clarified that the cost of employees should not be included in the value of cross-charge invoices, which should bring a lot of relief to the taxpayers.
In lines with the recommendations made during the 50th GST Council Meeting held on July 11, 2023, the CBIC vide a series of Circulars dated July 17, 2023, has clarified on various areas of GST in the manner as provided hereunder:
Circular No. 192/04/2023- GST dated 17.07.2023
The aforesaid Circular clarified the charging of interest u/s. 50(3) of the CGST Act, 2017, in cases of wrongly availed IGST credit and its reversal in below two issues:
Circular No. 193/05/2023- GST dated 17.07.2023
The aforesaid Circular has clarified the process to be followed for verification of differences in ITC availed in FORM GSTR-3B vis-à-vis that detailed in FORM GSTR-2A for the financial years 2019-20 and 2020-21 in the below manner:
Circular No. 194/06/2023- GST dated 17.07.2023
The aforesaid Circular provides clarification on Tax Collected at Source (‘TCS’) liability u/s. 52 of the CGST Act for transactions involving multiple E-commerce Operators (‘ECOs’) in below manner:
The 50th Council meeting was quite eventful with decisions being taken on several key matters. One of the most challenging tasks for the taxpayer has been to tackle the issue of reconciliation of credit with GSTR-2A / 2B as the authorities tend to proceed with Show cause notices on the basis of differences without any real consideration. The Department has tried to clarify the process of verification of credit in line with the previous Circular issued for verification of credit of FY 17-18 and 18-19 (Circular No. 183/15/2022 dated December 27, 2022) while keeping in mind the provisions of Rule 36(4). Further the condition of availing the vendor / CA certificates has also been prescribed for subsequent two years as well. Hopefully, with this clarification, we can expect the authorities to proceed with relevant caution as they raise demand on account of ITC mismatch.
Further, a welcome clarification has also been issued with respect to charging of interest u/s 50(3). As balances of CGST and SGST can be utilized for payment of liability under IGST Head, the department has rightly clarified that the balances under these heads should also be considered while determining if the credit under the IGST Head has been utilized or not, for the purpose of calculation of interest u/s 50(3). However, it is not clarified as to whether the balance of IGST is to be clubbed while determining the interest liability for utilization of credit under CGST and SGST as well as the balance of IGST can be used for payment of liability under CGST / SGST Heads.
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