Supreme Court
Whether payment of non-compete fee is a revenue expenditure or capital expenditure? The Supreme Court faced with the abovementioned issue, ruled that the payment made to Larsen and Toubro (L&T) only to ensure that the appellant (taxpayer) operated the business more efficiently and profitably, cannot be considered as an expenditure incurred for acquisition of any capital asset or towards bringing into existence a new profit earning apparatus. That being the position, the payment to L&T as noncompete fee is an allowable revenue expenditure under Section 37(1) of the Income Tax Act.
On account of payment of non-compete fee, the Court found that the appellant had not acquired any new business and there is no addition to the profit-making apparatus of the appellant. The assets remained the same, and the expenditure incurred was essentially to keep a potential competitor out of the same business. Therefore, the Court concluded that when there is no complete elimination of competition, then payment made by the appellant to L&T did not create a monopoly of the appellant over the business of electronic products/ equipment, and hence, such payment of non-compete fee cannot be treated as capital expenditure.
A Two-Judge Bench comprising Justice Manoj Misra and Justice Ujjal Bhuyan observed that the non-compete fee only seeks to protect or enhance the profitability of the business, thereby facilitating the carrying on of the business more efficiently and profitably. Such payment neither results in creation of any new asset nor accretion to the profit-earning apparatus of the payer. The enduring advantage, if any, by restricting a competitor in business is not in the capital field.
While explaining that Section 44C of the Income Tax Act is a special provision that exclusively governs the quantum of allowable deduction for any expenditure incurred by a non-resident taxpayer that qualifies as ‘head office expenditure’, the Supreme Court ruled that Section 44C would come into play irrespective of fact that expenditure was ‘common’ or ‘exclusive’, once it is incurred by non-resident taxpayer outside India.
The Court clarified that it does not matter whether expense was common expense or expense exclusively for the Indian branch, so long as expense incurred is for business or profession. This view is fortified by the fact that Section 44C does not distinguish between head office expenditure incurred by non-resident taxpayer as is attributable to business or profession of taxpayer in India, or expenses incurred exclusively for Indian branches, for claiming deduction under Section 37 of the Income Tax Act.
A Two-Judge Bench comprising Justice J B Pardiwala and Justice K V Viswanathan observed that for an expenditure to be brought within the ambit of Section 44C, two broad conditions must be satisfied: (i) The non-resident taxpayer claiming the deduction must be a non-resident; and (ii) The expenditure in question must strictly fall within the definition of ‘head office expenditure’ as provided in the Explanation to Section 37.
While refusing to extend the fiscal benefit of Section 36(1)(viii) of the Income Tax Act to the ‘dividend income on investments in shares’, the Supreme Court ruled that the statute specifically mandates ‘interest on loans’ for allowing deduction under the said provision, and extending the said benefits to ‘dividends on shares’ would defy the legislative intent. Therefore, the Court held that the dividend income does not qualify as ‘profits derived from the business of providing long-term finance’.
The Court clarified that a fundamental distinction exists between a shareholder and a creditor, and the basic characteristic of a loan is that the person advancing the money has a right to sue for the debt. In stark contrast, a redeemable preference shareholder cannot sue for the money due on the shares or claim a return of the share money as a matter of right, except in the specific eventuality of winding up.
The Court explained that the dividends are a return on investment dependent on the profitability of the investee company, and this distinction is fundamental to the genealogy of the income. Essentially, dividend income is derived from the contractual relationship of the shareholder, not the underlying activity or the nature of the funds.
A Two-Judge Bench of Justice Pamidighantam Sri Narasimha and Justice Atul S. Chandurkar referred to Section 28, which provides a deduction in respect of any financial corporation engaged in providing long-term finance for industrial or agricultural development, and observed that ‘long-term finance’ means any loan or advance where the terms provide for repayment along with interest during a period of not less than five years.
While emphasising that the power of the Municipal Authorities in revising the property tax rates with the passage of time shall not be fettered upon by the Writ Courts, the Supreme Court asserted that the cost of the welfare and developmental activities has been constantly increasing with passage of time, and therefore, the property tax, which is the main source of revenue for undertaking these activities, calls for revision.
The Court has strongly deprecated the action of the Bombay High Court in invoking powers of judicial review in a public interest litigation to interfere in the economic policy decision taken by the appellant-Corporation to increase the rates of the property taxes, particularly when such revision was made after a considerable gap of about 16 years.
A Two-Judge Bench of Justice Vikram Nath and Justice Sandeep Mehta observed that if the taxes are not revised in keeping with the rise in cost of infrastructure, human resources, etc., that would make the municipal bodies defunct and nonfunctional. In essence, their functional efficacy, financial stability and administrative independence are integral to the discharge of these statutory obligations.
Emphasising that the ‘test of movability’ is the decisive factor in ascertaining whether an article qualifies as “goods” for the purpose of central excise duty, the Supreme Court ruled that the value of the duty paid on bought-out items, which were delivered directly to the buyer’s site, is not liable to be included in the value of the boiler cleared from the factory in completely knocked down (CKD) condition, for the purpose of assessment of excise duty.
The Court found from a perusal of the object of the contract for the steam generation plant, that the boiler parts manufactured by the appellant and transported to the site of erection in the CKD condition would be assembled at the site of delivery along with the bought-out parts which were directly delivered there, in order to form a steam generating plant.
Thus, the steam-generating plant comes into existence as a composite system comprising various components, some manufactured by the appellant (such as the boiler in CKD condition) and other components, such as the bought-out items. When these are assembled and erected together at the buyer’s site, the process results in a steam-generating plant that is permanently affixed to the earth and hence becomes an immovable property, added the Court.
A Two-Judge Bench comprising Justice J.B. Pardiwala and Justice Sandeep Mehta observed that the ‘transaction value’ under Section 4 of the Excise Act, 1944, merely serves as the basis for computing the quantum of excise duty payable, but cannot determine excisability. Essentially, valuation is a consequence of levy, not its determinant.
The Bench explained that the ‘transaction value’ becomes relevant only after the taxable event, i.e. manufacture of excisable goods, is first established. The measure of tax cannot be invoked to prove that what has been produced is excisable. The revenue has erroneously relied upon the ‘transaction value’ derived from the ‘contract price’ to argue that the excise duty on the boiler has to be computed based on the contract price.
The Supreme Court clarified that mere failure to obtain a business contract by itself would not be a determining factor to hold that a non-resident entity had ceased its business activities in India, if its conduct, from the standpoint of a prudent businessman, evinces intention to carry on business. The Court therefore backed the opinion of the ITAT that a business going through a lean period of transition, which could be revived if proper circumstances arose, must be termed as a lull in business and not a complete cessation of the business.
The Court found that the appellant, a non-resident company, had been awarded 10 10-year drilling contract by ONGC in 1983, which continued till 1993, and thereafter, the appellant failed to procure another contract till October 1998. However, during the interregnum, the appellant had continuous business correspondence with ONGC concerning the hiring of manpower services for drilling in deep waters, leading to an unsuccessful submission of a bid in 1996. The Court therefore allowed unabsorbed depreciation from previous years as allowable under Section 32(2) of the Income Tax Act.
A Two-Judge Bench of Justice Manoj Mishra and Justice Joymalya Bagchi observed that the Income Tax Act does not require a non-resident company to have a permanent office within the country to be chargeable to tax on any income accruing in India. Referring to Section 5(2) read with Section 9(1)(i) of the Income Tax Act, the Court observed that a non-resident person shall be liable to pay taxes on income which is deemed to accrue or arise in India.
The Apex Court also criticised the High Court’s restrictive interpretation of construing a non-resident company making business communications with an Indian entity from its foreign office, as not carrying on business in India, to be wholly anachronistic with India’s commitment to Sustainable Development Goal relating to ‘ease of doing business’ across national borders.
Refusing to grant any relief to the Airports Authority of India, the Supreme Court recently ruled that the exclusion of handling of export cargo from the definition of ‘Cargo Handling Service’ under Section 65(23) of the Finance Act, 1994, does not exempt it from being taxed as taxable service under Section 66, read with sub-clause (zzm) of 65(105) of the Finance Act 1994.
The Two-Judge Bench comprising Justice Pankaj Mithal and Justice Prasanna B Varale observed that the services provided by the Airports Authority in any airport, including those related to export cargo, are taxable under the broad definition of “taxable service” as per the relevant provisions, and the inclusion of sub-clause (zzm) of Section 65(105) of the Finance Act with effect from September 10, 2004 makes all services provided by the Airports Authority at airports chargeable to service tax, irrespective of the cargo’s export status.
To examine whether the services rendered by the Appellant at the airport in handling the export cargo are exempted from service tax, the Bench referred to Section 66 of the Finance Act, which envisages levying of “Service Tax” at the rate of twelve per cent of the value of “taxable services”, as referred to in the sub-clauses therein, including subclause (zzm) of Sub-section (105) of Section 65 of the Finance Act.
The Supreme Court exempted LG Electronics India (appellant) from payment of customs duty on the “G Smart Watch” imported from the Republic of Korea, by holding that its classification within Entry 8517 6290 as a ‘timekeeping device’, shall not disentitle it from seeking the benefit of the Notification No.152/2000–CUS dated December 31, 2009, which exempts certain goods falling under the First Schedule to the Customs Tarriff Act, 1975, that where imported into India from the Republic of Korea.
The Two Judge Bench comprising Justice J.B. Pardiwala and Justice Sandeep Mehta observed that the Certificate of Origin declared by the exporter and certified by the Customs Department makes it very clear that the goods were imported and originated from the Republic of Korea. Accordingly, the Bench allowed the appeal in favour of LG Electronics.
Reference was made to the submissions of the Department’s counsel regarding the condition precedent in applying the Notification 151/2009, as per which that the importer has to declare the place of origin and must produce the Certificate of Origin in accordance with the Customs Tariff (Determination of Origin of Goods under the Preferential Trade Agreement between the Governments of the Republic of India and the Republic of Korea).
No Service Tax on Exported Services to Clients Abroad: Supreme Court
After analysing the nature of the activity of the respondent-telecom service provider, in light of the parameters delineated in the proviso to sub-rule (3) of Rule 3 of the Export of Service Rules, 2005, the Supreme Court affirmed the decision of the CESTAT in granting the benefit of the exclusion from taxable services to the activities of the respondent as being an activity of export of services. What has been determined by the CESTAT are purely findings of fact, and there is no perversity in the determination of the said findings. Therefore, the Court refused to interfere with the orders of the CESTAT and the High Court.
The Division Bench comprising Justice B V Nagarathna and Justice Satish Chandra Sharma observed that the clients/customers of the respondent with whom the contract of service has been entered into and from whom payment in convertible foreign currency is received by the respondent, are all located outside India. As per the CESTAT, the services have indeed been delivered outside India to the customers located outside India, and therefore, based on the performance test, the Bench answered in favour of the taxpayer and dismissed the Revenue’s appeal.
While explaining the maxim “ut res magis valeat quam pereat”, the Supreme Court emphasized that a statute is to be interpreted in a way that gives the law force rather than makes it fail, and therefore, allowing the Revenue Department to issue fresh provisional order of attachment after initial order lapsed by operation of law, or to renew such lapsed order, would render text of Section 83(2) of the CGST Act, 2017, otiose. Accordingly, the Court also quashed the fresh attachment orders.
The Division Bench comprising Justice Dipankar Datta and Justice Augustine George Masih observed that there is a complete absence of any executive instruction consistent with the legislative policy and intendment of the CGST Act authorising renewal of a lapsed provisional attachment order. That apart, having regard to the draconian nature of power conferred on the revenue by sub-section (1) of Section 83 of the CGST Act to levy a provisional attachment, the terms of the entire section have to be construed in a manner so that sub-section (2) of Section 83 is not effectively reduced to a dead letter.
The Bench went on to observe that fresh issuance of a provisional attachment order premised on substantially the same grounds as the earlier one would be in disregard to the safeguard provided u/s 83(2), and to permit any other interpretation would result in an abuse of law and due process. Further, repeated or continuous issuance of a provisional attachment order, with no change in circumstances, under the garb of ‘renewal’, could lead to a serious anomaly.
The Supreme Court has ruled that Hyatt International Southwest Asia, a UAE-based entity, constitutes a “Permanent Establishment” (PE) in India under Article 5(1) of the India-UAE Double Taxation Avoidance Agreement (DTAA), thereby making it liable to pay tax in India on income earned through Strategic Oversight Services Agreements (SOSA) with Indian hotels.
A Division Bench comprising Justices J.B. Pardiwala and R. Mahadevan found that Hyatt’s extensive control over the day-to-day operations of Asian Hotels (Delhi and Mumbai) went far beyond a mere advisory role. The Court held that the rights conferred under the SOSA provided Hyatt with enforceable and ongoing authority over strategic, operational, and financial decisions of the hotel, establishing a clear and continuous business presence in India.
In a significant relief for aviation companies, including IndiGo, the Supreme Court upheld the Delhi High Court’s decision in striking down the Integrated Goods and Services Tax (IGST) levy on the repair cost of goods re-imported into India after being sent abroad for maintenance. The Court confirms that the amendment made to Notification No. 45/2017 dated July 2021, substituting “duty of customs” with “duty, tax or cess”, could not retrospectively impose IGST on reimported goods.
The case hinges on the interplay between the provisions of the Customs Act and the GST laws, especially in light of the constitutional changes brought about by the 101st Constitutional Amendment Act, and the petitions revolve around the reimportation of goods, specifically aircraft parts and engines, that were sent abroad for repair and maintenance.
Putting an end to this dispute, the Division Bench comprising Justice B V Nagarathna and Justice K V Viswanathan refuses to interfere with the order passed by the High Court whereby it was held that once the provisions of the CGST and IGST indicates that the power to levy tax on the import of services lies under Articles 246A and 269A, the respondents (Customs Department) cannot levy tax under the Customs Tariff Act (CTA) through Section 3(7) as an additional duty. In short, the amendments made by Notification No. 36/2021 and the corresponding clarification issued by the CBIC were rightly held to be deemed to expand the tax net improperly, and were rightly declared as unconstitutional by the High Court, added the Bench.
The Supreme Court has held that stem cell banking services fall within the ambit of “Healthcare Services” and are therefore eligible for exemption under Notification No. 25/2012-ST. The judgment, delivered by a Division Bench comprising Justice J.B. Pardiwala and Justice R. Mahadevan, marks a vital clarification in service tax jurisprudence concerning healthcare-related services.
The Court held that in the absence of fraud, collusion, wilful misstatement, or suppression of facts, the invocation of the extended period of limitation under Section 73 of the Finance Act, 1994 was unjustified. The Court highlighted that the appellant’s conduct compliance with departmental queries and voluntary deposit of tax under protest, indicated a bona fide belief in the exemption and no intent to evade tax.
Concluding that the entire demand was time-barred and legally untenable, the Court quashed the tax demand and penalties imposed. It further directed the Revenue to refund the full amount of ₹40 lakhs deposited by the appellant within four weeks.
High Courts
The Delhi High Court has dismissed a writ petition filed by LG Electronics India Pvt. Ltd., upholding the Income Tax Department’s decision to treat 1/3rd of the payment of USD 11,000,000 made to a Global Cricket Corporation Pvt. Ltd. (GCC), as royalty, liable to Tax Deduction at Source under Section 195 of the Income Tax Act.
A Division Bench of Justice V. Kameswar Rao and Justice Vinod Kumar held that the right granted to LG to use the International Cricket Council (ICC) marks and event marks under a Global Partnership Agreement was a substantive commercial right and not merely incidental to advertising, thereby attracting the definition of “royalty” under Section 9(1)(vi) of the Income Tax Act, 1961, read with Article 12 of the India–Singapore Double Taxation Avoidance Agreement (DTAA).
The Kerala High Court has quashed the assessment order passed under the Kerala Value Added Tax Act, 2003 (hereinafter the “KVAT” Act) by holding that SIM cards, rechargeable coupons, fixed monthly charges, and value-added services provided in relation to SMS, ringtones, and download music cannot be treated as “goods”, therefore no levy can be imposed under the KVAT Act.
The Division Bench comprising Justice A.K. Jayasankaran Nambiar and Justice Jobin Sebastian has observed that since the final decision on the issue already decided in the above-mentioned case, would be meaningless to relegate the assessee to pursue the statutory authorities. Accordingly, the High Court allowed the writ appeal by quashing the assessment order to the extent it demanded VAT on telecom receipts, holding that such receipts do not constitute a sale of goods under the KVAT Act.
The Bombay High Court (Aurangabad Bench) clarified that the operations of testing and pairing of the smart cards sent to the Set Top Box manufacturer would be covered under the phrase ‘further processing, testing or any other purpose’, and hence, Cenvat Credit availed by Dish TV at the time of clearance of the smart card to the Set Top Box manufacturer (Trend Electronics) is not liable for reversal under Rule 3(5) of Cenvat Credit Rules, 2004.
The Court emphasised that the basic objective behind allowing Cenvat Credit on inputs, input services or capital goods is to provide instant credit of duties/taxes paid thereon and consequential reduction in the cost. If the Cenvat credit availed on inputs or capital goods is not used for the intended purpose, then to counteract such eventualities, an embargo has also been created in the statute for not extending the benefit of the Cenvat facility.
The Division Bench comprising Justice Vibha Kankanwadi and Justice Hiten S. Venegavkar observed that though the smart cards were imported, they were not inserted in the Set Top Boxes as such, and they were required to be given for processing to Trend Electronics, which did not carry any manufacturing activities as regards the smart cards received from the respondent, rather, they simply paired the bar code of the smart card with that of Set Top Box.
The Delhi High Court has ruled that when an advertising agency is rendering services to its client and not to the media houses, and no separate obligation or contract with media houses exists, then incentives given by media houses would not be susceptible to service tax under ‘business auxiliary services’ in terms of the provisions of Section 65A of the Finance Act, 1994.
The Court explained that an advertising agency primarily books slots on electronic media and books space in the print media on behalf of its clients, and the advertising plans are negotiated with the media houses, with the help of the advertising agency and are finally approved by the clients.
The Court also clarified that the advertising agency merely renders service as per the advertising plans, which are approved by its clients and does not render any additional service to the media house. Moreover, achieving targets or revenue benchmarks is part of the service that is already being rendered, and since there is no additional service to the media house, it cannot be held that the incentives that are given by the media houses would be liable to service tax as it constitutes a ‘business auxiliary service’.
The Division Bench comprising Justice Prathiba M Singh and Justice Shail Jain observed that even under Section 66E(e) of the Finance Act, 1994, the advertising agency is neither carrying out any specific act nor is refraining from any specific act, and primarily, the advertising agency is rendering service on behalf of its clients to book the slots and space with the media houses.
The Bombay High Court ruled that the Municipal Commissioner has the authority to charge a fee for issuing licenses for sky-signs and hoardings. Since the statute itself recognises “fees” as a component of the Municipal Fund, distinct from “taxes”, the Court explained that the levy of fees by the municipal authority is a ‘regulatory fee’ and not a tax.
Finding no merit in the contention of the petitioners, the Court held that the Pune Municipal Corporation (PMC) has the authority to levy the license fee, which is a regulatory fee and not a tax. At the same time, it strongly asserted that the introduction of GST does not impact this power, and the retrospective sanction of the enhanced rate, derived from a market-based tender process, would be valid.
The Division Bench comprising Justice G S Kulkarni and Justice Advait M Sethna observed that for a regulatory fee, a direct service to the fee-payer is not essential, and a broad correlation between the fee collected and the expenses incurred for regulation is sufficient. Thus, the Bench explained that the functions of the Pune Municipal Corporation (PMC), including inspections for structural stability, traffic safety, and environmental impact, constitute a comprehensive regulatory mechanism justifying the fee.
The Bombay High Court declared the treatment being given to the sole manufacturer of country liquor, whose average production was below the threshold of 10 lakh cases and whose actual production was in excess of such threshold, as arbitrary. Accordingly, the Court held that the discrimination against manufacturers whose production exceeded 10 lakh cases in 2016-17, only because their preceding three-year average production had been below 10 lakh cases, is irrational.
Emphasising that the licence fee is a fee payable for the privilege of legitimately carrying out the activity for which a licence is necessary by law, the Court observed that the privilege in question covered by the CL-1 (Country Liquor) Licence was the production of country liquor for the year 2016-17, and the basis for charging the licence fee, specifically, was the overall production in that year.
A Single Judge Bench of Justice Somasekhar Sundaresan observed that where the production of any CL-1 License holder exceeds the three-year average, which formed the basis of paying the fees in advance, the fees payable are governed by the Notification issued under the Maharashtra Potable Liquor Rules, 1996.
The Delhi High Court clarified that the redemption fine, as a consequence of non-payment of the excise duty, should be considered as part of the Excise Duty for purposes of the Sabka Vishwas (Legacy Disputes Resolution) (SVLDR) Scheme. Hence, once such a duty stands settled under the Scheme, the redemption fine will be waived too as part of the overall settlement.
The Court examined the provisions of the Central Excise Act, particularly Section 12F, which allows for the seizure of goods due to non-payment of excise duty and mandates the payment of a redemption fine to release the goods. Since the redemption fine is a consequence of non-payment of excise duty, the Court asserted that it should be considered part of the Excise duty for the SVLDR Scheme.
The Division Bench comprising Justice Prathiba M Singh and Justice Shail Jain addressed the scope of the SVLDR Scheme, specifically Section 123(b), which defines “tax dues” as the duty payable in a show cause notice issued before June 30, 2019. Since the matter was remanded by CESTAT and the show cause notice (SCN) was yet to be adjudicated, the demand raised therein was still pending, making the petitioners eligible for the Scheme.
Speaking for the Bench, Justice Singh held that the purpose of the SVLDR Scheme is to bring finality to disputes and to resolve them comprehensively, including the waiver of redemption fines. Therefore, rejecting the argument of the Department that redemption fines should not be waived contradicts the intent of the Scheme.
Kerala HC: Rule 68B Time Bar Under Income Tax Act Inapplicable to Recovery Under RDDB Act
The Kerala High Court (Ernakulam Bench) clarified that Rule 68B of the Second Schedule to the Income Tax Act does not mandatorily apply to recovery proceedings under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (RDDB Act). The Court pointed out that since Section 29 of the RDDB Act adopts provisions of the Income Tax Rules only “as far as possible” and “with necessary modifications”, only procedural parts that aid recovery may apply, and not substantive restrictions that impede it.
Emphasising that the RDDB Act is a self-contained code enacted to secure speedy recovery of bank debts, the Court found that importing the time bar in Rule 68B would frustrate the statutory object. The Court added that even if there were procedural irregularities relating to timing, those do not render a sale, or consequent orders, void unless the adjudicating authority lacked inherent jurisdiction.
A Single Judge Bench of Justice Mohammed Nias C.P. examined Rule 68B and observed that its references to “financial year,” “finality under Section 245-I,” and “Chapter XX” are specific to the Income Tax regime, whereas the RDDB Act itself provides a complete framework for recovery under Sections 19(22) and 25 without prescribing any time limit.
The Bombay High Court (Aurangabad Bench) upheld the order passed by the State Information Commissioner, which had denied access to GST return details of six private firms sought under the Right to Information Act, 2005 (RTI Act), and clarified that the GST Act, 2017, being a special enactment, overrides the RTI Act, a general law.
The Court ruled that GST returns furnished under Section 158(1) cannot be disclosed by the authorities except as provided in sub-section (3). Essentially, the disclosure of GST returns is barred under Section 158(1) of the GST Act, which prohibits dissemination of particulars contained in tax statements and returns, except as provided under sub-section (3).
A Single Judge Bench of Justice Arun R. Pednekar observed that when Section 158(1) of the GST Act expressly prohibits disclosure of GST data, the RTI Act cannot override such explicit statutory confidentiality. The Bench interpreted Sections 8 and 11 of the RTI Act and Section 158 of the GST Act, to reiterate that while the RTI Act seeks to minimize information asymmetry between citizens and the State, the Parliament consciously incorporated exceptions under Section 8 to safeguard privacy, confidentiality, and fiduciary interests.
Accordingly, the Bench emphasized that GST filings, being business-sensitive documents filed by individual entities, are third-party information that prima facie fall within the ambit of Section 8(1)(d) of the RTI Act which talks of commercial confidence, as well as Section 8(1)(j) of the RTI Act, which talks about personal information.
The Delhi High Court has ruled that the Income Tax Settlement Commission (ITSC), being a creation of a statute, the taxpayers do have a statutory right to approach the same, seeking a concession. Though the orders of the ITSC may have the trappings of a concession, the same is exercised by the State through a statutory scheme, and whether or not the concession is granted, the taxpayers are, in fact, vested with a right to apply for the same to the ITSC.
The Court held so while referring to the Press Release dated September 07, 2021, and the subsequent order under Section 119(2)(b) of the Income Tax Act dated September 28, 2021, wherein it was clarified that the taxpayers, who were eligible to apply for settlement on or before January 31, 2021, but could not file the same due to the cessation of the ITSC, could file their applications till September 31, 2021 before the Interim Board.
The Court clarified that since such a Press Release was purportedly passed to relax the rigors of a statutory provision, it could not have merely extended the time limit for filing an application while simultaneously denying the benefit of such extension to a class of taxpayers. That apart, the purpose of the amendment being to make ITSC inoperative and bring the pending applications before the Interim Board, it cannot be said that the legislature had any intent to do away with pending applications in respect of cases that arose between February 01, 2021, and March 31, 2021.
The Division Bench comprising Justice V. Kameswar Rao and Justice Vinod Kumar observed that the power of the Parliament to enact Amendment Acts with retrospective application cannot be curtailed. However, the ITSC being a creature of statute, Section 245C of the Income Tax Act grants a vested right to the taxpayer to have their applications decided. The Bench, therefore, asserted that such rights of the taxpayer cannot be taken away in the absence of any express words or necessary implication in the Finance Act, 2021, to that effect.
The Karnataka High Court (Bengaluru Bench) held that the Petitioner, a major contender in the Civil and Industrial Construction business, being similarly circumstanced, is entitled to the same relief that is granted by the co-ordinate bench of this court in WP.No.9721/2019, disposed on April 11, 2023, and WP.No.104908/2023, disposed on August 29, 2023.
The Court clarified that a supplementary agreement may be signed with the petitioner for the revised GST-Inclusive work value for the Balance Work completed or to be completed as determined above and in case the revised GST-inclusive work value for the Balance Work, completed or to be completed after 01.07.2017, is more than the original agreement work value, the Petitioners are to be paid /reimbursed, as the case may be, the differential tax amount by the concerned employer.
The Court also pointed out that in case payments for works completed pre-GST are made post-GST, the concerned employer has to pay or reimburse, as the case may be, the differential tax amount to the Petitioners. For this, the Court emphasized that the Respondent-State and other Government agencies /Respondents who have entered into a works contract have been issued guidelines, and accordingly, directed the petitioner to submit comprehensive representations to the respective employers/Respondents.
A Single Judge Bench of Justice M. Nagaprasanna observed that the tax component is an independent component, which the petitioners do not retain as a profit, and is a statutory payment to be made. Looking into the nature of such payment of GST, the respondents/employers are required to honour the same after determining the differential tax burden, especially for the Petitioners, where a “works contract” was entered during the KVAT regime and works are completed pre-GST.
The Karnataka High Court (Bengaluru Bench) ruled that claims of the sales tax authorities would stand extinguished if they had not taken part in the resolution process and had not submitted their claims in the resolution plan. Accordingly, no demand can be made in respect of claims that have been extinguished. The Court reiterated that once a moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016 (IBC) is declared, the proceedings can happen only before the resolution professional. There is no jurisdiction to parallelly initiate proceedings and raise a demand.
Additionally, the Court clarified that in the light of CIRP becoming a moratorium, kicking in resolution plan acceptance up to the date of CIRP, all the claims are, therefore, before the resolution professional. Hence, if there is no claim registered by the State or the Centre, they would lose the right to demand from the corporate debtor.
A single Judge Bench of Justice M. Nagaprasanna further observed that after the declaration of moratorium, the Revenue Authority has no power to assess the quantum of duties and submit its claims. Reference was made to the decision in the case of ABG Shipyard Liquidator vs Central Board of Indirect Taxes and Customs [(2023) 1 SCC 472], where it was held that “once moratorium is imposed in terms of Sections 14 or 33(5) of the IBC as the case may be, the respondent authority only has a limited jurisdiction to assess/determine the quantum of customs duty and other levies”.