GST levy on escrowed lease rentals to Union Ministry held unsustainable; writ petition allowed, demand quashed

HC allowed the writ petition and set aside the impugned GST demand raised on amounts lying in an escrow account created for collection of lease rentals ultimately payable to a Union Ministry or the Consolidated Fund of India. HC noted that the Ministry of Finance had categorically opined that the demand raised by the jurisdictional CGST authority lacked merit. Treating this internal governmental view as determinative of the taxability of the escrowed sums in the present facts, HC held that the levy of GST on such receipts, including from exempt Government Departments and Autonomous Bodies, was unsustainable. The impugned order was quashed and the petition was disposed of.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether GST liability on lease proceeds from the Kidwai Nagar (East) redevelopment project could be lawfully fastened on the implementing agency acting as agent of the concerned Ministry.

1.2 Whether Section 86 of the Central Goods and Services Tax Act, 2017, which creates joint and several liability for agents and principals, extends to services so as to cover the leasing services in question.

1.3 Whether initiation and continuation of GST proceedings against the implementing agency were legally sustainable when the Ministry, as principal supplier, remained available to accept any GST demand.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: GST liability of the implementing agency in respect of lease proceeds from the redevelopment project

Interpretation and reasoning

2.1 The Court noted that the project was undertaken pursuant to a Memorandum of Understanding under which the implementing agency acted as the executing arm of the Ministry, with funding structured through lease proceeds from commercial and residential properties and ultimate ownership and regulatory control resting with the Ministry.

2.2 Lease proceeds were deposited into an escrow arrangement managed by a committee constituted by the Ministry, and were not appropriated as revenues of the implementing agency.

2.3 An Office Memorandum issued by the Ministry of Finance, after inter-ministerial consultation and in the context of the present dispute, recorded a considered view that the demand of GST raised against the implementing agency on such lease proceeds "has no merit", and that proceedings against the agent appeared "unnecessary and without authority of law" where the Ministry was the principal supplier.

Conclusions

2.4 In light of the Ministry of Finance's clear opinion negating the GST demand against the implementing agency, the Court held that the impugned adjudication order confirming the GST demand on the implementing agency could not be sustained and set it aside.

Issue 2: Applicability of Section 86 of the CGST Act, 2017 to services supplied by an agent

Legal framework (as discussed)

2.5 Section 86 of the CGST Act, 2017, as extracted in the Office Memorandum considered by the Court, provides that where an agent supplies or receives any taxable goods on behalf of his principal, such agent and his principal shall be jointly and severally liable to pay the tax payable on such goods.

Interpretation and reasoning

2.6 The Ministry of Finance, in its Office Memorandum, observed that there is no corresponding statutory provision extending such joint and several liability to services, and that an attempt to extend Section 86 to supply of services by an agent on behalf of the principal "has no legal sanction within the CGST Act, 2017".

2.7 It was specifically recorded therein that Section 86 creates joint and several liability only for goods, not for services, and therefore does not cover the case of leasing services involved in the present matter.

Conclusions

2.8 The Court, relying on the Ministry of Finance's position, proceeded on the basis that Section 86 could not be invoked to impose joint and several GST liability on the implementing agency for the leasing services rendered on behalf of the Ministry.

Issue 3: Legality of proceeding against the agent when the principal supplier is available

Interpretation and reasoning

2.9 The Office Memorandum noted that where the Ministry is the principal supplier and remains available to accept any GST demand, initiation of proceedings against the agent appears "unnecessary and without authority of law".

2.10 This position was communicated to be brought to the attention of the Court, and was taken into account while examining the sustainability of the impugned demand.

Conclusions

2.11 The Court, taking note of the Ministry of Finance's conclusion that the demand raised against the implementing agency lacked merit and authority of law, held that the impugned order confirming GST demand against the agent could not stand and accordingly set it aside, thereby disposing of the petition.

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