2024 (11) TMI 977 - HC - GST

Chit fund operator's GST show cause notice quashed as interest from defaulting subscribers not taxable consideration

M/s. KERALA STATE FINANCIAL ENTERPRISES LTD Versus THE UNION OF INDIA, THE CENTRAL BOARD OF INDIRECT TAXES AND CUSTOMS, THE ADDITIONAL DIRECTOR GENERAL, GOODS AND SERVICES TAX INTELLIGENCE, KOCHI ZONAL UNIT, THE ADDITIONAL / JOINT COMMISSIONER OF CENTRAL TAX, STATE OF KERALA

The Kerala HC quashed a GST show cause notice issued to a chit fund operator regarding interest received from defaulting subscribers. The court held that ... Maintainability of the writ petition - Jurisdiction of SCN - quashing the exercise of the jurisdiction vested in this Court under Article 226 of the Constitution of India - challenge to Ext.P9 notification which relates to the rate of GST for commission received in terms of the provisions contained in Section 21(1)(b) of the Chit Funds Act, 1982. Maintainability of the writ petition - HELD THAT:- The contention of the Senior Standing Counsel appearing for the respondents that this Court should not interfere with a show cause notice should be accepted in normal circumstances. However, where on admitted facts, the show cause notice is found to be without jurisdiction, it is not that an objection raised to the maintainability of the writ petition is sustainable. It is settled law that where the proceedings are challenged as being without jurisdiction, the availability of an alternate mechanism for resolution of disputes (here through adjudication of the show cause notice) is no ground for the Court to refuse to exercise jurisdiction. The judgment of a Constitution Bench of the Supreme Court in Calcutta Discount Co. Ltd. v. ITO and Anr, [1960 (11) TMI 8 - SUPREME COURT] is the authority for this proposition. When faced with an argument that the question as to whether re-assessment notices were properly issued under the provisions of Section 34 of the erstwhile Indian Income Tax Act, 1922 should not be investigated in a writ petition under Article 226 of the Constitution of India it was held 'We have therefore come to the conclusion that the Company was entitled to an order directing the Income Tax Officer not to take any action on the basis of the three impugned notices.' In the facts of the present case, it is clear on the authority of the judgment of the Supreme Court in Oriental Kuries Limited [2019 (11) TMI 1818 - SUPREME COURT] and the provisions of Notification No.12 of 2017 that the issuance of a show cause notice alleging that the transactions, which are the subject matter of Ext.P1 show cause notice, should be subject to a levy of GST is clearly without jurisdiction. There are no disputed questions of fact. The matter can be decided purely as a matter of law. Therefore, the fact that this writ petition has been filed challenging a show cause notice is no ground to refuse the exercise of jurisdiction under Article 226 of the Constitution of India. Ext.P1 show cause notice is confined to the interest received from the defaulting subscribers. In such circumstances, for reasons indicated, it must be held that the amount of interest received by the foreman of a chit on defaulting subscriptions cannot be said to be amounts received as consideration for the supply of services. It is declared that Ext.P1 show cause notice is issued without jurisdiction. It is accordingly quashed - this writ petition is allowed. Issues Involved:1. Jurisdiction of the show cause notice under the CGST/SGST Acts.2. Classification of interest received from defaulting subscribers as consideration for services under GST.3. Applicability of Notification No.12/2017 to the transactions in question.4. Maintainability of the writ petition under Article 226 of the Constitution of India.Issue-wise Detailed Analysis:1. Jurisdiction of the Show Cause Notice:The petitioner challenged the jurisdiction of the show cause notice (Ext.P1) issued under Section 74 of the CGST/SGST Acts, asserting it was without jurisdiction. The petitioner argued that the notice was based solely on the premise that interest collected from defaulting subscribers should be subject to GST. The petitioner relied on the Supreme Court's decision in Oriental Kuries Limited, which clarified the relationship between a chit foreman and a subscriber as a debtor-creditor relationship. The court agreed with the petitioner, finding that the show cause notice was issued without jurisdiction, as the interest collected does not constitute a supply of services under the CGST/SGST Acts.2. Classification of Interest Received from Defaulting Subscribers:The petitioner contended that the interest collected from defaulting subscribers is not consideration for services rendered. The court examined the provisions of the 1982 Act and the CGST/SGST Acts, noting that the relationship between the foreman and the subscriber is contractual, creating a debt on subscription. The court found that the interest collected on defaulted subscriptions does not constitute consideration for services, as the subscription itself is not for services rendered. The Supreme Court's observations in Pratibha Processors supported this view, highlighting that interest is an accessory to the principal amount and cannot independently constitute consideration for services.3. Applicability of Notification No.12/2017:The petitioner argued that the transactions fall within the scope of Notification No.12/2017, which exempts services by way of extending deposits, loans, or advances where consideration is represented by interest. The court agreed, stating that the interest received from defaulting subscribers falls within this exemption. The court emphasized that the transaction is akin to extending a loan, and thus, the interest does not attract GST as per the notification.4. Maintainability of the Writ Petition:The respondent contended that the petitioner should not challenge the show cause notice directly in a writ petition, suggesting the matter be resolved through statutory authorities. However, the court held that when a show cause notice is issued without jurisdiction, the writ petition is maintainable. The court cited precedents, including the Constitution Bench judgment in Calcutta Discount Co. Ltd. v. ITO, affirming that a writ petition can be entertained when jurisdictional issues are involved, even if alternate remedies exist. The court found that the legal issues raised did not involve disputed facts, making it appropriate for adjudication under Article 226.Conclusion:The court allowed the writ petition, declaring the show cause notice (Ext.P1) to be issued without jurisdiction and quashed it. The challenges to other notifications were dismissed as not pressed, and the challenge to Ext.P9 was left open for future adjudication. The court's decision was based on the interpretation of the relationship between the foreman and subscriber, the nature of interest as consideration, and the applicability of the relevant GST notification.