TaxTMI Updates e-Newsletter
Mar 13,2020

Works contract deemed to be supply of service - transfer of property in goods during execution of works contract - explanation to Entry No. 234 - deemed bifurcation of gross consideration into 70% goods and 30% services - Entry No. 38 - construction/engineering/installation services in relation to items in Entry No. 234 - distinct divisible supplies under a turnkey contract

Explanation to Entry No. 234 - deemed bifurcation of gross consideration into 70% goods and 30% services - Entry No. 38 - construction/engineering/installation services in relation to items in Entry No. 234 - Applicability of the explanation to Entry No. 234 of Schedule I to Notification No. 1/2017 - whether it applies to the applicant's turnkey contract for construction of substation and transmission line for a solar power project. - HELD THAT: - The explanation to Entry No. 234 applies only where goods specified in Entry No. 234 are supplied along with other supplies including a taxable service covered by Entry No. 38. Entry No. 38 covers services of construction/engineering/installation "in relation of" setting up the goods listed in Entry No. 234. The explanation is contained in Entry No. 234 and thus its applicability is conditional on supply of items expressly listed in Entry No. 234 or their parts. The applicant's contract, while related to a solar power project, does not involve supply of the renewable energy devices or parts listed in Entry No. 234; the applicant supplies equipment and materials for substation and transmission line which are not items covered by Entry No. 234. Consequently the deemed 70:30 bifurcation under the explanation to Entry No. 234 is not attracted to the applicant's supplies under this contract. [Paras 7, 8]

Explanation to Entry No. 234 does not apply to the supply under the applicant's contract because goods listed in Entry No. 234 are not supplied.

Works contract deemed to be supply of service - transfer of property in goods during execution of works contract - distinct divisible supplies under a turnkey contract - Whether the value of goods supplied under the turnkey contract (independently ascertainable) forms part of the works contract value and is taxable as service. - HELD THAT: - Under the GST definition, a works contract is a supply in the nature of a service where transfer of property in goods is involved in execution of the contract; in such cases the value of those goods is included in the assessable value of the works contract service. A turnkey contract may comprise multiple divisible activities; where the contract itself and its Annexures clearly segregate supplies and assign values to independent activities, goods that are supplied as distinct supplies (not forming part of the transfer of property in goods in execution of a works contract) are taxable as goods at rates applicable to those goods. The applicant's agreement specifically delineates equipment/material supplies (for substation and transmission line) separately from erection/testing/commissioning and civil works which are works contract in nature. Equipment and materials for substation and transmission line, where transfer of property is not in execution of the works contract portion, shall be taxed as supply of goods; erection/testing/commissioning and civil work portions where transfer of property occurs in execution of works contract shall be taxed as works contract service. [Paras 7, 8]

Goods supplied as distinct, independently valued supplies under the turnkey contract are not to be included in the value of the works contract service; goods forming part of and transferred in execution of the works contract are included in the works contract value and taxed as service.

Final Conclusion: The Authority rules that the Explanation to Entry No. 234 (70% goods: 30% services bifurcation) is not attracted to the applicant's contract because the goods listed in Entry No. 234 are not supplied; further, separately identified supplies of equipment and materials under the turnkey contract shall be taxed as goods, while those goods whose property is transferred in the execution of the works contract (erection/testing/commissioning and civil works) shall be included in and taxed as the works contract service.

Condonation of delay - exemption from filing certified copy - special leave petition dismissed - review petition before High Court on GST aspect - disposal of review petition on merits - application for impleadment dismissed

Exemption from filing certified copy - Exemption from filing certified copy was granted. - HELD THAT: - The Supreme Court allowed the petitioner exemption from the requirement to file a certified copy of the impugned order, thereby permitting the Special Leave Petitions to proceed without the certified copy being produced. The order records the grant of this procedural relief without elaboration of underlying reasons.

Exemption from filing certified copy granted.

Condonation of delay - Delay in filing the Special Leave Petitions was condoned. - HELD THAT: - The Court exercised its discretion to condone the delay in presentation of the petitions and proceeded to consider the matters on merits to the extent recorded in the order. The condonation is recorded as an enabling procedural step for adjudication of the petitions.

Delay condoned.

Special leave petition dismissed - The Special Leave Petitions were dismissed. - HELD THAT: - After permitting procedural relaxations (exemption from certified copy and condonation of delay), the Supreme Court dismissed the Special Leave Petitions. The order is a final disposition of the petitions brought before this Court and contains no extended reasoning in the text provided.

The Special Leave Petitions are dismissed.

Review petition before High Court on GST aspect - disposal of review petition on merits - In SLP Diary No. 41632 of 2019 the Union of India was permitted to apply for review before the High Court of Bombay in respect of the GST aspect; if such application is filed within four weeks, the High Court will dispose of the review petition on merits. - HELD THAT: - Although the Special Leave Petitions were dismissed generally, the Court carved out SLP Diary No. 41632 of 2019 and afforded the Union an opportunity to seek review in the High Court limited to the GST-related issue. The Court specified a four-week time-limit for filing the review application and directed that, upon such filing, the High Court shall decide the review petition on its merits. This direction confines further remedy in that petition to the specified review process before the High Court.

Union of India may apply for review before the High Court of Bombay within four weeks; the High Court shall dispose of the review petition on merits.

Application for impleadment dismissed - The application for impleadment was dismissed. - HELD THAT: - The Court considered and rejected the request for impleadment in these proceedings. The dismissal of the impleadment application is recorded without further elaboration in the order provided.

Application for impleadment dismissed.

Final Conclusion: Procedural relaxations (exemption from certified copy and condonation of delay) were granted; the Special Leave Petitions were dismissed; in respect of SLP Diary No. 41632 of 2019 the Union may seek review before the High Court of Bombay within four weeks for the GST aspect and the High Court is directed to decide the review on merits; the application for impleadment was dismissed.

Detention under Section 129 of the CGST Act - e-way bill amendment and validity of vehicle details - judicial interference in administrative detention - provisional release on bank guarantee pending adjudication

Detention under Section 129 of the CGST Act - e-way bill amendment and validity of vehicle details - judicial interference in administrative detention - Whether detention of the vehicle and goods was unsustainable because the e-way bill had been amended to show the substituted vehicle number prior to interception. - HELD THAT: - The Court examined whether the cited authorities relied upon by the petitioner applied to the facts. It found the decisions were distinguishable: those decisions concerned substitution of a vehicle for long-distance transport or mere change of route, whereas the present case involved an e-way bill that, at the relevant time of interception, did not record the substituted vehicle number (the e-way bill showed vehicle KL07 CM 5213 while the vehicle in transit was KL07 BY 3069). Section 129 contains a non-obstante clause empowering revenue officers to detain vehicles moved without requisite statutory documents. Given that the amended vehicle number was not reflected in the e-way bill at the material time, the Court declined to sit in appeal over the adjudicating authority's exercise of its detention powers and refused to quash the detention order on the materials before it.

The Court declined to interfere with the detention; the decision of the adjudicating authority to detain was left for its consideration.

Provisional release on bank guarantee - provisional release on bank guarantee pending adjudication - Whether the vehicle and goods could be provisionally released pending adjudication and the terms on which such release should be ordered. - HELD THAT: - Although the Court refused to adjudicate the merits of the detention, it exercised its supervisory jurisdiction to grant interim relief. The Court ordered provisional release of the vehicle and goods upon the petitioner furnishing a bank guarantee in terms of Section 129, conditioned on the petitioner submitting necessary documents and complying with statutory requirements. The Court directed that the adjudicating authority shall decide the matter on merits within two months and restrained encashment of the bank guarantee until the conclusion of those proceedings. The Court expressly disclaimed that anything stated should be treated as an opinion on the merits for the adjudicating authority.

Vehicle and goods provisionally released on submission of a bank guarantee; matter remanded to the adjudicating authority to decide within two months and the guarantee not to be encashed meanwhile.

Final Conclusion: The writ petition was not allowed to set aside the detention on the factual ground that the e-way bill did not reflect the substituted vehicle at the time of interception; however, the Court granted provisional release on furnishing a bank guarantee and remanded the matter to the adjudicating authority to decide within two months, directing that the guarantee not be encashed until the authority's final decision.

Intelligence based enforcement action - authority initiating investigation empowered to complete proceedings - cross-empowerment of Central and State tax authorities - search under Section 67 of the CGST Act, 2017 - prevention of undue harassment by multiple authorities

Intelligence based enforcement action - authority initiating investigation empowered to complete proceedings - cross-empowerment of Central and State tax authorities - Clarification that the authority which initiates intelligence-based enforcement action is empowered to complete the entire process of investigation and related proceedings, and its application to the facts of the case. - HELD THAT: - The Court noted and applied the Board's letter dated 5th October 2018 which clarifies that officers of both Central and State tax administrations are authorised to initiate intelligence-based enforcement action across the taxpayer base and that the authority which initiates such action is empowered to complete investigation, issuance of show cause notice, adjudication, recovery and appeals. The Court observed that, on the materials, the search was carried out by DGGI, AZU, Ahmedabad under Section 67 of the CGST Act, 2017, and there is no record of transfer of the case by the initiating Central tax officer to the State authority. Although separate summons issued by different offices (Deputy Commissioner of State Tax and DGGI Surat) appeared on record, the Court relied on the stated administrative clarification to the effect that the initiating authority may carry the matter to its logical conclusion and that such cross-empowerment is permissible. The Court, however, refrained from expressing any opinion on the merits of the underlying investigation or liability. [Paras 5, 6]

The Board's clarification governs; the initiating authority is entitled to continue the proceedings, subject to ensuring no duplication of action or harassment.

Prevention of undue harassment by multiple authorities - search under Section 67 of the CGST Act, 2017 - Whether the writ applicant should be protected from harassment arising from multiple authorities pursuing the same subject-matter proceedings. - HELD THAT: - Having noted that two different offices had issued summons in relation to the same subject-matter following a search, the Court directed the DGGI, AZU, Ahmedabad to look into the matter and ensure that the writ applicant is not subjected to undue harassment by different authorities on the same subject-matter. The Court made clear that this direction was limited and that it did not express any view on the merits of the underlying case. The order was confined to preventing multiple coercive measures or duplicative enforcement steps which could cause harassment to the taxpayer while the investigation/proceedings continue. [Paras 7]

Writ disposed with a direction to DGGI, AZU, Ahmedabad to ensure no undue harassment or duplicative coercive measures are taken against the writ applicant; no expression of opinion on merits.

Final Conclusion: Writ petition disposed of by directing DGGI, AZU, Ahmedabad to ensure that no undue harassment or duplicative enforcement action is taken by different authorities in respect of the same subject-matter; the Court did not quash the proceedings and expressed no opinion on the merits; direct service permitted.

Cancellation of registration - continuous six months' default - furnishing of returns - show cause notice - jurisdictional fact - opportunity of being heard - natural justice

Continuous six months' default - jurisdictional fact - Cancellation of registration - show cause notice - furnishing of returns - Validity of the cancellation order where the statutory requirement of continuous six months' non-filing of returns existed at the show-cause stage but not at the stage of passing the final cancellation order. - HELD THAT: - The Court examined whether the essential jurisdictional fact of a continuous six months' default in filing returns under Sec. 29(2)(c) of the CGST Act was present when the final cancellation order (Ext.P-3) was passed. It was undisputed that on the date of issuance of the show-cause notice (Ext.P-1 dated 13.11.2019) there was a continuous six months' default, which justified issuance of the notice. However, the petitioner filed the return for May, 2019 on 10.12.2019 (Ext.P-2), the same date on which the 4th respondent passed the cancellation order. Consequently, as on 10.12.2019 the petitioner was in default for only five continuous months and not the mandatory six months required by Sec. 29(2)(c). The Court held that the requirement of six months' continuous default must be satisfied not only at the show-cause stage but also at the stage of passing the final order; absence of that jurisdictional fact when the final order is made renders the cancellation order illegal and ultra vires. The Court noted that the 4th respondent could not be faulted for being unaware of the return filed electronically on the same date, and that the petitioner had not informed the officer of the filing. The decision was confined to this limited jurisdictional question and did not preclude the competent officer from proceeding afresh in accordance with law, ensuring compliance with principles of fairness and natural justice. [Paras 7, 11, 12]

The impugned cancellation order (Ext.P-3) dated 10.12.2019 is quashed because the statutory requirement of continuous six months' non-filing of returns under Sec. 29(2)(c) was not satisfied at the time the final order was passed; the assessing authority may proceed afresh in accordance with law after observing fairness and natural justice.

Final Conclusion: Writ petition allowed in part; the cancellation order dated 10.12.2019 is quashed on the limited ground that the jurisdictional requirement of six months' continuous non-filing of returns was lacking on the date the final order was passed; the tax authority remains free to take further action consistent with law and with observance of fairness and natural justice.

Treatment of buy-back as distribution/dividend within the meaning of section 2(22)(a)/2(22)(d) - liability to pay tax under section 115 O and consequence of deemed assessee in default under section 115 Q - treatment of departmental communication as a show cause notice - opportunity of hearing and adjudication on merits by the concerned authority - continuation of interim protection pending adjudication and appeal

Treatment of departmental communication as a show cause notice - opportunity of hearing and adjudication on merits by the concerned authority - continuation of interim protection pending adjudication and appeal - Whether the communication dated 22.03.2018 should be treated as a show cause notice and the procedure to be followed pending its adjudication - HELD THAT: - The Court directed that the communication dated 22.03.2018 shall be treated as a show cause notice calling upon the appellant to respond to the matters set out therein. The appellant was permitted to file its reply and place material within ten days, to be followed by oral hearing. The concerned authority was directed to decide the matter on merits within two months from the date of the judgment. Pending such consideration and until the period for preferring an appeal from the decision on merits expires, the interim order passed by the Single Judge of the High Court (dated 03.04.2018) and continued by this Court shall remain in operation. The amounts deposited and fixed deposits referred to in the interim orders shall remain subject to the ultimate decision or further directions by the Appellate Authority. The Court accepted the parties' agreed course to treat the communication as a show cause notice and furnished an effective timetable and protective directions without adjudicating the merits. [Paras 18]

Communication of 22.03.2018 to be treated as a show cause notice; appellant to reply and be heard; authority to decide within two months; interim protection to continue and deposited/specified amounts to remain subject to final decision.

Treatment of buy-back as distribution/dividend within the meaning of section 2(22)(a)/2(22)(d) - liability to pay tax under section 115 O and consequence of deemed assessee in default under section 115 Q - Merits as to whether the buy back payments amount to dividend and attract tax under the provisions relied upon by the Department - HELD THAT: - The Court expressly refrained from deciding the merits of whether the payments made pursuant to the court sanctioned scheme of arrangement constitute dividend liable to tax under the provisions invoked by the Department. The matter was left to the concerned authority to decide afresh on merits without being influenced by observations of the High Court or this Court. The Court recorded that it would not be taken to have dealt with merits or demerits and directed independent adjudication; accordingly the substantive question of taxability is remitted for fresh consideration by the appropriate authority. [Paras 19]

Merits on whether the buy back payments are dividends and attract tax are not decided and are remitted to the concerned authority for fresh adjudication on merits.

Final Conclusion: The communication dated 22.03.2018 is to be treated as a show cause notice; the appellant is granted a brief period to reply and be heard, the authority shall decide on merits within two months, interim protection granted earlier is continued and deposited/specified funds remain subject to the final decision; the substantive question whether the buy back payments are dividends attracting tax is not decided and is remitted for fresh consideration.

Treatment of stale demand drafts as income of a bank - unclaimed bank liabilities do not cease in law - application of the ratio in T. V. Sundaram Iyengar & Sons Ltd. - inapplicability of Section 41(1) to unclaimed bank drafts - role of banking practice and RBI guidelines in determining liability

Treatment of stale demand drafts as income of a bank - unclaimed bank liabilities do not cease in law - application of the ratio in T. V. Sundaram Iyengar & Sons Ltd. - inapplicability of Section 41(1) to unclaimed bank drafts - Whether amounts payable on stale demand drafts or pay orders not encashed for more than three years, and thereby becoming time-barred, can be treated as the bank's income for taxation purposes - HELD THAT: - The Tribunal found, and this Court concurs, that sums standing to the credit of customers as unencashed demand drafts/pay orders do not cease to be the bank's liabilities merely by lapse of time. Given the nature of banking transactions and relevant banking practice (including revalidation and ongoing current-account operation), ordinary limitation does not ipso facto convert such liabilities into income. The Division Bench decision relied upon (following the Supreme Court in T. V. Sundaram Iyengar & Sons Ltd.) holds that where the liability to repay has not legally ceased, the amounts cannot be treated as revenue receipts under Section 41(1). The Assessing Officer failed to establish that the liability had in fact become unclaimable; on that basis the addition made on account of stale drafts was unsustainable and rightly deleted by the Tribunal. The reasoning of the Tribunal and the Division Bench was accepted without any contrary finding warranting disturbance. [Paras 2, 5]

Addition made by the Assessing Officer treating stale demand drafts as the bank's income was deleted; the deletion is upheld and the addition is unsustainable in law.

Final Conclusion: The substantial question of law is answered against the Revenue and in favour of the assessee; the appeal is dismissed.

Bogus purchases - addition under Section 69C of the Income tax Act - estimation of profit element embedded in purchases - reasonableness of appellate estimate - reliance on information obtained from Sales Tax Department/Investigation Wing - concurrent findings of fact - no substantial question of law

Bogus purchases - estimation of profit element embedded in purchases - reasonableness of appellate estimate - concurrent findings of fact - Whether the disallowance of the entire alleged bogus purchases was warranted or whether the profit element estimated at 17.5% should be added to the assessee's income - HELD THAT: - The Assessing Officer treated total alleged purchases of Rs. 1,14,92,970 as bogus and added the whole amount. The first appellate authority found on the facts that the suppliers were accommodation/bogus billers but concluded that the assessee had carried out job work and likely made unrecorded cash purchases, taking only bills as accommodation; accordingly the CIT(A) applied the Gujarat High Court line of authority and estimated the profit element at 17.5% to meet the ends of justice. The Tribunal affirmed the CIT(A)'s conclusion as a reasonable view and noted the assessee's acceptance of the percentage to close litigation. This Court, after considering the appellate authorities' concurrent findings and relevant precedents, found no error in the Tribunal's approach of taxing the profit element rather than disallowing the entire purchases. The determinative reasoning is that where appellate fact finding supports that purchases (or at least the economic effect) occurred and only the paper suppliers are suspect, it is reasonable to estimate and tax the embedded profit rather than disallow the entire purchase amount; that conclusion by two lower authorities is a concurrent factual finding not warranting interference. [Paras 13, 14, 15, 16]

Tribunal's confirmation of CIT(A)'s direction to add 17.5% of the alleged bogus purchases as profit is upheld; no interference with that estimate.

Reliance on information obtained from Sales Tax Department/Investigation Wing - addition under Section 69C of the Income tax Act - concurrent findings of fact - no substantial question of law - Whether the Assessing Officer could rely on information from the Sales Tax Department/Investigation Wing to treat purchases as bogus without further enquiries and furnishing of material to the assessee - HELD THAT: - The Court reviewed the principle that mere reliance on information from Sales Tax or Investigation units, or statements recorded therein, is insufficient unless the assessee is permitted to test the veracity of such information; earlier decisions require the Revenue to place such material before the assessee and to make further enquiries if necessary. In the present case, however, the appellate authorities recorded concurrent factual findings based on the totality of material and circumstances and reached a reasoned conclusion to estimate profit rather than disallow entire purchases. On the facts and in view of the concurrent findings, the Court found no error requiring interference. The Court therefore treated the question as not raising any substantial question of law warranting reversal of the concurrent factual conclusion. [Paras 11, 15, 16]

Principle requiring testing of information noted, but on the facts and because of concurrent findings by two appellate authorities, no substantial question of law arises and no interference is called for.

Final Conclusion: The appeal is dismissed; the Tribunal's order affirming the CIT(A)'s estimate of 17.5% profit on the alleged bogus purchases is upheld and no substantial question of law is found to arise.

Stock appreciation rights (SARs) - perquisite - income under the head 'salaries' - clause (iiia) of Section 17(2) - specified securities taxable as perquisite - retrospective operation of tax statute - taxability of employees' benefits arising prior to legislative amendment

Stock appreciation rights (SARs) - perquisite - income under the head 'salaries' - clause (iiia) of Section 17(2) - specified securities taxable as perquisite - retrospective operation of tax statute - Whether the amount received on redemption of SARs prior to 1.4.2000 could be assessed as income under the head 'salaries' as a perquisite in view of the insertion of clause (iiia) to Section 17(2). - HELD THAT: - The Court examined clause (iiia) inserted into Section 17(2) by the Finance Act, 1999 w.e.f. 1.4.2000, which treated specified securities allotted or transferred to an employee as a perquisite and provided taxation on exercise of option. The Tribunal had held that receipts on redemption of SARs were taxable as salary. However, the Supreme Court in Bharat V. Patel held that clause (iiia) could not be applied retrospectively to receipts arising before 1.4.2000. The Assessing Officer himself recorded that the SARs were redeemed in financial year 1997-98 (assessment year 1998-99), i.e., prior to the effective date of the amendment. In the absence of any express statutory provision making the 1999 amendment retrospective, the revenue could not subject the redemption proceeds to tax as a perquisite under the head 'salaries'. Applying the binding principle that a taxing enactment is not to be given retrospective effect unless expressly stated, the Court followed the Supreme Court's decision and held that the amount could not be taxed as salary under the amended provision for the relevant period. [Paras 10, 11, 12, 13]

The substantial questions of law were answered in favour of the assessee: the redemption proceeds of SARs realised prior to 1.4.2000 are not taxable as salary perquisite under clause (iiia) of Section 17(2), and the revenue's appeal is dismissed.

Final Conclusion: Following the Supreme Court's ruling that clause (iiia) of Section 17(2) is not retrospective, the Court allowed the appeal of the assessee for assessment year 1998-99 and held that the amount received on redemption of SARs in financial year 1997-98 could not be taxed as salary; appeal allowed with no order as to costs.

Interpretation of Section 2(14)(iii)(a) of the Income-tax Act, 1961 - agricultural land exclusion from 'capital asset' - population threshold for area to cease being agricultural land (population of not less than 10,000) - legal effect of municipal corporation constitution notification

Legal effect of municipal corporation constitution notification - interpretation of Section 2(14)(iii)(a) of the Income-tax Act, 1961 - Whether village Juchandra became part of Vasai-Virar Municipal Corporation on 03.07.2009 by virtue of the notification dated 03.07.2009 and the legal consequence thereof for classification of the land. - HELD THAT: - The Court held that the Government of Maharashtra notification dated 03.07.2009 constituted the larger urban area called Municipal Corporation of the city of Vasai-Virar and that village Juchandra was included therein from 03.07.2009. A subsequent notification dated 31.05.2011 excluded 29 villages but did not exclude Juchandra; that later notification therefore did not alter the legal date of constitution of the Municipal Corporation. Administrative matters such as late tax collection or continued separate recording in revenue records do not change the legal effect of the 03.07.2009 constitution notification. [Paras 20]

Village Juchandra legally became part of Vasai-Virar Municipal Corporation on 03.07.2009.

Agricultural land exclusion from 'capital asset' - population threshold for area to cease being agricultural land (population of not less than 10,000) - interpretation of Section 2(14)(iii)(a) of the Income-tax Act, 1961 - Whether the land sold in village Juchandra was a 'capital asset' or agricultural land excluded from capital gains assessment under Section 2(14)(iii)(a) when the population and municipal jurisdiction tests are read conjunctively. - HELD THAT: - Clause (iii)(a) of Section 2(14) requires two conjunctive conditions to be satisfied for land to lose the character of agricultural land: (i) the land must be situated within the jurisdiction of a municipality or cantonment board, and (ii) the area must have a population of not less than 10,000. Even accepting that Juchandra was within municipal limits, the Tribunal found on facts, supported by census and village population certificate, that the population was 5,912 at the relevant time, which is below the statutory threshold. This factual finding as to population was not challenged as perverse by the revenue. Because the population condition was absent, the land retained the character of agricultural land and did not become a capital asset. [Paras 21, 22]

The lands in Juchandra were agricultural land and not 'capital asset' within Section 2(14)(iii)(a) as the population requirement of not less than 10,000 was not satisfied.

Final Conclusion: Both substantial questions of law were answered in favour of the assessee: though Juchandra was included in the Vasai Virar Municipal Corporation by notification dated 03.07.2009, the population condition of Section 2(14)(iii)(a) was not met, and therefore the sold lands were agricultural land excluded from capital gains; the revenue appeal is dismissed.

Most Appropriate Method (MAM) - Comparable Uncontrolled Price (CUP) method - Transactional Net Margin Method (TNMM) - Resale Price Method (RPM) - Arm's Length Price (ALP) - Transfer Pricing Officer (TPO) determination and remand for computation - Aggregation of closely linked transactions / package deals - Provision for warranty - recognition as a provision under accounting standards and deductibility under section 37 - Book profit computation under section 115JB and effect of allowing provision

Most Appropriate Method (MAM) - Comparable Uncontrolled Price (CUP) method - Transactional Net Margin Method (TNMM) - Arm's Length Price (ALP) - Adoption of CUP as the MAM for import of parts and components (manufacturing segment) for determination of ALP - HELD THAT: - The Tribunal examined the reasoning of the TPO for rejecting the Assessee's internal CUP analysis and the Assessee's replies, and reviewed precedents in the Assessee's own case for earlier assessment years where CUP had been upheld. Noting no change in facts or circumstances for the year under consideration, the Tribunal held that CUP should be adopted as the MAM. The TPO is directed to apply CUP as MAM and determine ALP after affording the Assessee an opportunity of being heard. Because CUP is accepted as the MAM, the alternative application of TNMM as having been adopted by the TPO does not require further adjudication in respect of the selection of MAM. [Paras 10, 11]

CUP is to be adopted as the MAM; matter remitted to the TPO to determine ALP under CUP after affording the Assessee opportunity to be heard.

Advertising, Marketing and Promotion (AMP) expenditure - Resale Price Method (RPM) - Net profit margin method (TNMM) as an alternative benchmark - Characterisation of unilateral AMP expenditure as an international transaction - Whether AMP expenditure in the trading segment could be treated as an international transaction and the approach to determine ALP in respect of trading segment - HELD THAT: - The Tribunal accepted the Assessee's contention that the trading segment's net margins should be reexamined using the net profit margin approach (Scenario-3 submitted by the Assessee). The Tribunal observed that if the trading segment margins are found to be at arm's length under TNMM/net margin method, then treating AMP expenditure as a separate international transaction would not arise, following the reasoning in Sony Ericsson (as applied). Accordingly, the Tribunal set aside the TPO/AO determination on AMP and remanded the matter to the TPO to consider ALP of the trading segment by applying the net profit margin method; if ALP is found to be at arm's length there will be no separate AMP adjustment. [Paras 12, 13, 16, 17]

Issue set aside and remanded to the TPO to determine ALP of the trading segment using the net profit margin method; if margins are at arm's length, no separate AMP-based addition is warranted.

Aggregation of closely linked transactions - Transaction-by-transaction application of arm's length principle - Rule 10A(d) and aggregation where necessary - Whether sales facilitation services and administrative & business support services should be benchmarked on an aggregated basis or separately - HELD THAT: - The Tribunal explained that aggregation may be appropriate where transactions are closely linked or form a composite package, but that the question depends on facts and was not addressed by the TPO/DRP. Because the TPO aggregated the two segments without dealing with the Assessee's objection that the FAR analyses were distinct, the Tribunal set aside that part of the order and remanded the question to the TPO to decide-on the facts-whether aggregation is warranted; if aggregation is inappropriate, ALP for each segment should be determined separately, after affording the Assessee an opportunity to be heard. [Paras 18, 19, 20]

Matter remitted to the TPO to freshen consider whether aggregation is appropriate; if not, ALP for each service segment must be determined separately with opportunity to the Assessee.

Provision for warranty - recognition as a provision under accounting standards and deductibility under section 37 - Rotork Controls principles for recognizing provisions - Book profit computation under section 115JB - Allowability of the provision for warranty as a deductible expense and consequential treatment in book profit under section 115JB - HELD THAT: - The Tribunal analysed the Assessee's warranty provisioning methodology (Machine months x repair rate x cost per claim), the historical data of provisioning and utilization, and the Supreme Court criteria in Rotork Controls for recognizing a provision. It held that the Revenue's comparison of provision created in a year with actual claims in the same year was flawed because warranty outflows occur in subsequent periods. Given the scientific basis of the method, its consistent application and prior Tribunal findings in the Assessee's earlier years, the Tribunal accepted the provisioning method as reliable and allowed the provision as a deductible business expense. Consequentially, the addition made to book profits under section 115JB was required to be deleted. [Paras 31, 33, 34, 35]

Provision for warranty is allowable as a deduction; the addition to book profit under section 115JB is to be deleted; consequential relief to be given by the AO.

Final Conclusion: The appeal is partly allowed. CUP is held to be the MAM for import of parts and components and the matter is remitted to the TPO to compute ALP under CUP after hearing the Assessee. The AMP-related addition in the trading segment and the aggregation of service segments are set aside and remitted to the TPO for fresh consideration (trading segment to be examined under net profit margin method; aggregation question to be decided on facts). The provision for warranty is accepted as a scientific provision and allowed as a deduction; associated addition to book profit under section 115JB is deleted. Parties to be afforded opportunity of being heard and AO/TPO to give consequential relief.

Fees for Technical Services - Permanent Establishment - Make available test under Article 12 of the DTAA - Binding effect of Authority for Advance Ruling under section 245S - Computation of profits attributable to a PE under Article 7 - net profit v. gross receipts - Applicability of domestic disallowance provision to fees for technical services (Section 44D) - Transfer pricing benchmarking under Rule 10B and mark-up imputation - Interest under section 234B where income is subject to tax deduction at source

Binding effect of Authority for Advance Ruling under section 245S - Fees for Technical Services - Whether the Authority for Advance Ruling's finding that services were managerial and not FIS is binding on the Tribunal and on revenue authorities in these proceedings. - HELD THAT: - The Tribunal recognised that an AAR ruling is statutorily binding on the applicant and on the Commissioner and the income tax authorities subordinate to him under section 245S. However, it held that the AAR is not a subordinate authority to the Tribunal and therefore its rulings are not binding on the ITAT, which must examine the reasons why revenue authorities did or did not follow the AAR in the assessment. The Tribunal further observed that the AAR's own order contained an express caveat leaving open factual examination by competent authorities (paras 29-30 of the AAR reproduced in the record). Because the AAR had not reached an absolute, conclusive finding on the nature of services rendered by the Vice President (Manufacturing) and left the matter open for appropriate proceedings, the Tribunal concluded that the AAR ruling did not preclude the AO and CIT(A) from making independent factual enquiries and taking a contrary view where warranted by facts or by non production of evidence by the assessee. [Paras 5, 6, 7, 8, 9]

AAR ruling is not binding on the Tribunal; where AAR leaves factual matters open the authorities and the Tribunal may examine and decide the issue.

Fees for Technical Services - Make available test under Article 12 of the DTAA - Permanent Establishment - Whether amounts invoiced under the Management Provision Agreement attributable to the Vice President (Manufacturing) constitute 'fees for included services' (FIS) under the India-US DTAA or are business profits attributable to a PE. - HELD THAT: - The Tribunal examined the MPA, the deputationists' job profiles and the factual material (or the absence thereof). It accepted the CIT(A)'s finding that the President & Managing Director performed managerial functions and is not taxable as FIS (no appeal by Revenue on that aspect). As to the Vice President (Manufacturing), the Tribunal agreed with the lower authorities that he possessed substantial technical knowledge and experience which was made available to the Indian subsidiary in its day to day production activities. The Tribunal adopted the reasoning that transfer of key technical/expert personnel to India can, in substance, amount to making available technical know how or expertise within the meaning of Article 12, and therefore such receipts fall within FIS. The Tribunal also emphasised that absence of cooperation by the assessee in producing service agreements justified drawing adverse inferences and examining the MPA terms to conclude that technical experience was made available. [Paras 11, 12, 13, 14, 15]

Payment attributable to the Vice President (Manufacturing) is taxable as 'fees for included services' since his technical experience was made available to the Indian enterprise; the President & MD's services are managerial and not FIS.

Computation of profits attributable to a PE under Article 7 - net profit v. gross receipts - Applicability of domestic disallowance provision to fees for technical services (Section 44D) - Fees for Technical Services - Whether receipts attributable to the assessee's activities should be taxed on net profit basis under Article 7(3) of the DTAA or on gross receipts (by applying domestic Section 44D). - HELD THAT: - The Tribunal held that Article 7(3) permits deduction of expenses subject to the limitations of the taxation laws of the State where the PE is situated. Section 44D of the domestic law disallows deductions in computing income by way of fees for technical services for the relevant period. The Tribunal concluded that where domestic law (Section 44D) prohibits deductions for FIS, Article 7(3) cannot be read so as to permit a net computation contrary to that domestic limitation; thus domestic law governs the allowability of deductions in computing profits attributable to a PE. The Tribunal rejected the assessee's reliance on coordinate bench precedents to the extent those decisions did not take into account the domestic disallowance under Section 44D. [Paras 22]

Where receipts are taxable as FIS, the domestic prohibition on deductions in Section 44D applies and such receipts may be subjected to tax on gross basis; accordingly the assessee is not entitled to net basis computation to the extent disallowed by domestic law.

Transfer pricing benchmarking under Rule 10B and mark-up imputation - Fees for Technical Services - Whether the Assessing Officer was justified in invoking a 10% mark up on invoices billed to GMIL without referring the matter to the Transfer Pricing Officer or applying prescribed benchmarking methods. - HELD THAT: - The Tribunal noted that the AO imposed a 10% mark up without undertaking transfer pricing benchmarking or referring the international transaction to the TPO, and without applying any of the prescribed methods under Rule 10B. It observed that in subsequent assessment years the TPO, after economic analysis, accepted the cost to cost nature of the transactions and did not allow a mark up. Given the absence of any ALP analysis or adoption of Rule 10B methods by the AO, the Tribunal found the AO's arbitrary imputation of 10% mark up unsustainable. [Paras 23]

Adjustment by way of a 10% mark up is not sustained; the matter requires application of transfer pricing principles and benchmarking under Rule 10B and therefore the AO's mark up is disallowed.

Interest under section 234B where income is subject to tax deduction at source - Whether interest under section 234B is payable by the non resident assessee where the income in question was subject to withholding tax. - HELD THAT: - Relying on binding jurisdictional High Court and other authorities, the Tribunal accepted the assessee's submission that section 234B is not attracted where the taxpayer's income is subject to tax deduction at source and the payers are obliged to make the deduction under section 195. The Tribunal followed the Bombay High Court's decision in NGC Network Asia LLC and Delhi High Court authority and held that in such circumstances no interest under section 234B is leviable on the assessee. [Paras 24]

No interest under section 234B is payable by the assessee for the years in question where the income was subject to deduction of tax at source.

Final Conclusion: The Tribunal partly allowed the appeals: it sustained taxation of amounts attributable to the Vice President (Manufacturing) as fees for included services (FIS) on the basis that technical expertise was made available, accepted that the President & MD's services were managerial (not FIS), rejected the binding effect of the AAR as a bar on Tribunal examination in the circumstances, held that domestic disallowance under Section 44D prevents net basis computation for FIS, disallowed the AO's arbitrary 10% mark up for lack of transfer pricing benchmarking (grounds 5-8 allowed), and held that no interest under section 234B is leviable where income was subject to withholding tax; similar relief was applied to the subsequent assessment years listed.

Admissibility of seized document as proof of unexplained receipts - requirement that a seized document 'belongs to' the person assessed before invoking proceedings based on it - invocation of proceedings under

Rejection of books of account under section 145 - Estimation of income by adopting net profit rate - Effect of surrendered/unaccounted income credited to profit and loss account - Principles of natural justice in assessment proceedings - Search and seizure disclosures and their treatment in regular assessment

Principles of contesting grounds not pressed before the tribunal - Grounds raised by the assessee challenging addition under section 40A(3) were not pressed and were dismissed. - HELD THAT: - The assessee's grounds seeking deletion of an addition under section 40A(3) were not pursued at the hearing. The assessee's counsel expressly did not press those grounds because of the smallness of the amount, and the Revenue offered no objection. The Tribunal therefore dismissed those grounds without adjudicating their merits. [Paras 3]

Assessee's unpressed grounds regarding addition under section 40A(3) dismissed.

Rejection of books of account under section 145 - Estimation of income by adopting net profit rate - Effect of surrendered/unaccounted income credited to profit and loss account - Principles of natural justice in assessment proceedings - Search and seizure disclosures and their treatment in regular assessment - Whether the Assessing Officer was justified in rejecting the assessee's books under section 145 and estimating profits by adopting an average net profit rate, and in adding the surrendered amount credited in P&L. - HELD THAT: - The AO rejected the books and estimated income by applying an average net profit rate, also adding the amount the assessee had surrendered during search which had been credited in the P&L. The CIT(A) examined the remand reports, the detail replies furnished by the assessee to a lengthy questionnaire and the material showing reasons for fall in gross and net profit (increase in raw material cost, purchases, finance cost, etc.), and concluded that the AO had not confronted the assessee with requisite show-cause material before rejecting books and that the remand proceedings did not disclose discrepancies warranting rejection. The Tribunal noted an identical conclusion in decisions concerning the sister concern, observed that the surrender had been explained and documented, that the search disclosures had been honoured, and that the AO had not brought forward adverse material or issued a show cause notice regarding rejection of books; further, rejection merely on the basis of a fall in net profit ratio without confronting the assessee violated principles of natural justice. Following the sister-concern precedent and the reasoning of the CIT(A), the Tribunal found no infirmity in deleting the addition made by the AO. [Paras 14, 16]

Addition determined by the AO by rejecting books and estimating profits deleted; order of the CIT(A) upheld and Revenue's appeal dismissed.

Final Conclusion: The Tribunal dismissed the assessee's unpressed grounds under section 40A(3) and, on the core dispute, upheld the CIT(A)'s deletion of the addition made by the AO after rejecting books under section 145 and estimating profits; the AO's rejection and estimation were held unsustainable for lack of adverse material and failure to observe principles of natural justice, and the Revenue's appeal was dismissed.

Disallowance under Section 14A - application of Rule 8D methodology - where no exempt income is earned, Section 14A is not invocable - disallowance under Section 40A(2)(b) - formation of AO's opinion having regard to fair market value and legitimate needs of business - inadmissibility of ad hoc disallowance without market comparison

Disallowance under Section 14A - application of Rule 8D methodology - where no exempt income is earned, Section 14A is not invocable - Whether disallowance under Section 14A read with Rule 8D is called for where the assessee did not earn exempt income in the relevant year. - HELD THAT: - The Tribunal noted that the assessee did not earn any exempt income from the investments in the relevant assessment year and that Revenue did not controvert this fact. It relied on the decision upholding that where no exempt income is earned Section 14A cannot be invoked (the Madras High Court decision sustained by dismissal of SLP by the Apex Court). Accordingly, the disallowance computed under Rule 8D was held not to be leviable and the AO was directed to delete the disallowance. The appellant's alternate plea about funding (own funds) was rendered academic once the primary issue was decided in favour of the assessee. [Paras 6, 7]

Disallowance under Section 14A r.w. Rule 8D deleted; ground allowed; ground No.2 dismissed as academic.

Disallowance under Section 40A(2)(b) - formation of AO's opinion having regard to fair market value and legitimate needs of business - inadmissibility of ad hoc disallowance without market comparison - Whether a 5% ad hoc disallowance under Section 40A(2)(b) is sustainable where AO has not compared the payments with prevailing market rates or recorded reasons to form the requisite opinion. - HELD THAT: - Section 40A(2)(b) requires the AO to form an opinion that expenditure is excessive or unreasonable having regard to fair market value, legitimate business needs or benefits derived. The Tribunal found that the AO did not undertake any exercise to compare the amounts paid with market rates for similar services nor arrive at an exact figure of excess; instead an ad hoc 5% disallowance was made. In absence of any material showing payments were excessive or unreasonable, and without a reasoned market comparison, the statutory requirement for disallowance was not satisfied. Accordingly the disallowance was deleted. [Paras 12, 13, 14]

Ad hoc 5% disallowance under Section 40A(2)(b) deleted; ground allowed.

Final Conclusion: The assessee's appeal is partly allowed: the disallowances under Section 14A r.w. Rule 8D and under Section 40A(2)(b) are deleted; the alternate ground regarding funding is academic and dismissed.

Deemed dividend under section 2(22)(e) - share application money not recharacterisable as loan for invoking section 2(22)(e) - lending in ordinary course of business - exception to clause (ii) of section 2(22)(e) - unexplained cash credit under section 68 - disallowance under section 14A read with rule 8D - piercing the corporate veil / substance over form - sham transaction versus legitimate tax planning

Deemed dividend under section 2(22)(e) - share application money not recharacterisable as loan for invoking section 2(22)(e) - piercing the corporate veil / substance over form - sham transaction versus legitimate tax planning - Whether the preference share application money of Rs. 90 crores received from Banneret Trading Pvt. Ltd. (BTPL) is liable to be treated as deemed dividend under section 2(22)(e) - HELD THAT: - The Tribunal examined (i) the corporate relationships and fund flows, (ii) the audited accounts and board resolutions evidencing share application money, and (iii) relevant case law. It accepted that the assessee was not a registered or beneficial shareholder of BTPL and held that the statutory conditions for invoking section 2(22)(e) are to be strictly construed. The Tribunal relied on precedents holding that equity transactions (share application money) cannot be recharacterised as debt in absence of legal basis to do so, and that indirect/beneficial ownership cannot be automatically imputed to treat an intermediate company's payment as coming from a different company having accumulated profits. The Tribunal further found that BTPL's books and board authorisations supported the treatment of the receipts as share application money, and that the transactions were within the four corners of law and not sham (legitimate commercial considerations and actual fund transfers were recorded). Even on alternative grounds, the Tribunal held that (i) BTPL did not have accumulated profits as on the relevant date and (ii) both CISPL and BTPL carried out lending/advancing as substantial part of business so clause (ii) exclusion would apply if the amounts were treated as loans. Applying these determinations, the Tribunal concluded that section 2(22)(e) did not apply and the addition was to be deleted. [Paras 14, 15, 16, 17]

Addition of Rs. 90 crores as deemed dividend under section 2(22)(e) deleted.

Unexplained cash credit under section 68 - identity, genuineness and creditworthiness under section 68 - source of source not required where identity and genuineness established - Whether the same Rs. 90 crores received as preference share application money could alternatively be treated as unexplained cash credit under section 68 - HELD THAT: - The Tribunal found that identity of BTPL, CISPL and Merind as counterparties was established from audited accounts and board resolutions, that the source of funds (including the source-of-source) was explained (BTPL had borrowed from CISPL and Merind), and that actual bank transfers and records supported genuineness and creditworthiness. Relying on binding authorities that once the assessee furnishes the names/identity and primary evidence the initial onus shifts to the department, the Tribunal held that the ingredients of section 68 were satisfied and that the AO could not treat the receipts as unexplained cash credit. [Paras 18, 19, 21]

Addition under section 68 deleted; share application money cannot be taxed as unexplained cash credit.

Disallowance under section 14A read with rule 8D - restriction of disallowance to exempt income - application of Maxopp and related precedents - Whether the disallowance under section 14A read with rule 8D should be restricted to the amount of exempt dividend income - HELD THAT: - The Tribunal noted that the assessee's exempt dividend income during the year was markedly lower than the AO's computed disallowance. Applying the principle in Maxopp Investments Ltd. and subsequent High Court authorities, the Tribunal concluded that the disallowance under section 14A must be restricted to the amount of exempt income actually earned. Accordingly, it directed the AO to limit the disallowance to the exempt dividend amount. [Paras 22, 24, 26]

Disallowance under section 14A read with rule 8D to be restricted to the exempt dividend of Rs. 7,02,745; revenue appeal dismissed on this point.

Final Conclusion: The Tribunal allowed the assessee's appeal: the addition of Rs. 90 crores as deemed dividend under section 2(22)(e) was deleted; the alternative addition under section 68 was also disallowed; and the disallowance under section 14A/read with rule 8D was directed to be restricted to the exempt dividend earned (appeal of the revenue dismissed).

Share premium account and its characterization as capital receipt - taxability under section 56(1) of the Income tax Act - utilisation of share premium and compliance with Section 78(2) of the Companies Act, 1956 - deemed dividend under section 2(22)(a) and dividend distribution tax under section 115O - genuineness, identity and creditworthiness of share subscribers - distinction between company law utilisation rules and income tax chargeability - reliance on precedents treating share premium from non resident/group concerns as capital transaction

Share premium account and its characterization as capital receipt - taxability under section 56(1) of the Income tax Act - genuineness, identity and creditworthiness of share subscribers - reliance on precedents treating share premium from non resident/group concerns as capital transaction - Whether the share premium received by the assessee is taxable as income under section 56(1) of the Income tax Act for AY 2010 11. - HELD THAT: - The Tribunal accepted that the identity, creditworthiness and genuineness of the share subscribers were proved by documentary evidence and replies to notices, and that the share premium receipt was justified on valuation and commercial rationale. The bench rejected the Assessing Officer's adverse factual findings as perverse and held that Company Act compliance (Section 78(2)) and the manner of utilisation of the premium are concepts distinct from the characterisation of the receipt for income tax purposes. Following the co ordinate decision relied upon and the reasoning that share premium received from related/group/non resident subscribers in the factual matrix represents a capital receipt and not income, the Tribunal directed deletion of the addition made under section 56(1). [Paras 7, 12]

Addition of Rs. 10,66,23,000 made under section 56(1) was deleted; ground(s) of the assessee allowed.

Utilisation of share premium and compliance with Section 78(2) of the Companies Act, 1956 - deemed dividend under section 2(22)(a) and dividend distribution tax under section 115O - distinction between company law utilisation rules and income tax chargeability - Whether the utilisation of share premium (alleged violation of Section 78(2)) results in a deemed distribution attracting section 2(22)(a) and dividend distribution tax under section 115O. - HELD THAT: - The Tribunal held that the Assessing Officer's invocation of deemed dividend and consequent levy of dividend distribution tax was founded on the primary finding of violation of Section 78(2). The Tribunal found no violation of Section 78(2) by the assessee and in any event held that compliance or non compliance with Section 78(2) of the Companies Act is not determinative of income tax chargeability in the facts of this case. The CIT(A)'s conclusion that there was no distribution of accumulated profits to shareholders was affirmed. As the foundational finding for invoking section 2(22)(a)/115O failed, the revenue's grounds were dismissed. [Paras 10, 11]

Revenue's appeal against denial of levy of dividend distribution tax was dismissed; invocation of section 2(22)(a)/115O not sustained.

Final Conclusion: The Tribunal partly allowed the appeal: the addition of the share premium under section 56(1) was deleted and the assessee's appeals were partly allowed, while the revenue's challenge to the CIT(A)'s rejection of dividend distribution tax was dismissed; the assessment is to be revised accordingly for AY 2010 11.

Registration under section 12AA: procedure and scope - requirement of actual charitable activity before registration - genuineness of activities test - objects of the trust as determinative for registration - power to cancel registration where activities contravene section 13 or are not genuine - reconsideration of approval under section 80G(5)(vi)

Registration under section 12AA: procedure and scope - requirement of actual charitable activity before registration - objects of the trust as determinative for registration - genuineness of activities test - Carrying out of actual charitable activity is not a pre-condition for registration under section 12AA; registration is to be considered on the basis of compliance with procedural requirements and charitable nature of objects. - HELD THAT: - The Tribunal follows the jurisdictional High Court in D.P.R. Charitable Trust and other decisions to hold that section 12AA prescribes procedure for registration and permits the Commissioner to examine the objects and genuineness of activities, but does not mandate that the trust must have carried out charitable activities prior to applying for registration. The proper enquiry at the registration stage is whether the application complies with the requirements of Rule 17A and Form No.10A/10G and whether the trust deed discloses charitable objects within the meaning of the Act. If the registration is granted and subsequently the Commissioner is satisfied that activities are not genuine or are carried out in a manner attracting the operation of section 13, the Commissioner may cancel registration after giving a reasonable opportunity. Applying these principles to the assessee-whose trust deed was found to contain charitable objects-the Tribunal directed grant of registration under section 12AA. [Paras 11, 14, 15]

Registration under section 12AA directed to be granted to the assessee.

Reconsideration of approval under section 80G(5)(vi) - genuineness of activities test - Approval under section 80G(5)(vi) was not finally adjudicated and is remitted for reconsideration by the Commissioner. - HELD THAT: - While directing registration under section 12AA, the Tribunal did not decide the grant of approval under section 80G(5)(vi) on the merits. The matter is restored to the file of the Commissioner for fresh examination of facts and law applicable to the assessee's claim for 80G approval, permitting the authority to consider the application in accordance with statutory requirements and relevant guidelines. [Paras 15]

Application for approval under section 80G(5)(vi) restored to the Commissioner for reconsideration.

Final Conclusion: The Tribunal allowed the appeal against rejection of registration and directed the Commissioner to grant registration under section 12AA; the claim for approval under section 80G(5)(vi) was not decided and is remitted to the Commissioner for fresh consideration.

Deemed dividend under Section 2(22)(e) - security deposit versus loan or advance - business expediency / commercial transaction - distinction between deposit and loan - CBDT Circular No.17 of 2019 (low tax effect)

Deemed dividend under Section 2(22)(e) - security deposit versus loan or advance - business expediency / commercial transaction - distinction between deposit and loan - Whether the sum of Rs. 83,00,000 received from M/s. Patel Alloy Steel Pvt. Ltd. is taxable as deemed dividend under Section 2(22)(e) or is a security deposit given in the ordinary course of business. - HELD THAT: - The Tribunal found on the facts that the amount was furnished as a refundable, interest-free security deposit pursuant to an agreement for letting industrial land and arose from a commercial arrangement between sister concerns. Applying the distinction between a 'deposit' and a 'loan', and having regard to precedents where trade advances or refundable security deposits given in the ordinary course of business were not held to be advances/loans attractable as deemed dividend, the Tribunal held that the transaction was a business expediency and not a diversion of company profits to a shareholder. The Tribunal relied on judicial decisions (including the Allahabad High Court in CIT v. Atul Engineering Udyog and the Creative Dyeing & Printing line of authority) and the Board's guidance that commercial trade advances/security deposits do not fall within the ambit of Section 2(22)(e). On these findings of fact and law the addition under Section 2(22)(e) was deleted. [Paras 6, 9, 10]

Addition of Rs. 83,00,000 as deemed dividend under Section 2(22)(e) deleted; appeal of the assessee allowed.

CBDT Circular No.17 of 2019 (low tax effect) - Whether the Revenue's appeal against deletion of additions (relating to annual letting value and section 14A) should be admitted and restored. - HELD THAT: - The Tribunal noted that the Revenue's appeal was covered by the Board's Circular addressing appeals with low tax effect and, in view of that Circular, the Revenue's appeal was dismissed without deciding the issues on merits. The dismissal was therefore administrative under the CBDT guidance rather than a determination on substantive tax questions. [Paras 12]

Revenue's appeal dismissed on account of low tax effect as per CBDT Circular; substantive issues not adjudicated.

Final Conclusion: For A.Y. 2014-15 the Tribunal allowed the assessee's appeal deleting the addition of Rs. 83,00,000 as deemed dividend (holding it to be a business-related security deposit) and dismissed the Revenue's appeal under the CBDT Circular as being of low tax effect.

Penalty under section 271(1)(c) for concealment of income - penalty under section 271AAB for undisclosed income on search - undisclosed income found in the course of search - voluntary disclosure in return filed under section 153A during search proceedings - requirement of incriminating material/documents to establish undisclosed income post-search

Penalty under section 271(1)(c) for concealment of income - voluntary disclosure in return filed under section 153A during search proceedings - undisclosed income found in the course of search - requirement of incriminating material/documents to establish undisclosed income post-search - penalty under section 271AAB for undisclosed income on search - Whether penalty under section 271(1)(c) can be sustained where the assessee declared additional income in the return filed in consequence of search but no incriminating material or documents were found in the course of search to establish undisclosed income - HELD THAT: - The Tribunal held that penal liability consequent to search arises only where there is "undisclosed income" within the meaning of the explanation to the provision enacted for search linked penalty liability. The evidence on record did not disclose any incriminating material, documents, entries, money, bullion, jewellery or other valuable articles found in the course of search that would link the declared amount to undisclosed income discovered by the search. The additional income was declared in the return filed under the search linked procedure but, on facts, was a voluntary disclosure unaccompanied by any seized material establishing concealment. The Tribunal relied on the distinction between an admission/declaration made by an assessee and undisclosed income proved by incriminating material, and followed precedent holding that absent such material the special search linked penalty cannot be levied. In those circumstances the levy of penalty under section 271(1)(c) was not sustainable; the Tribunal also observed the relevance of the scheme of section 271AAB and its definition of "undisclosed income" in demonstrating that a mere disclosure in the return, without incriminating material found in search, does not justify imposing search related penalty provisions. The Tribunal therefore set aside the orders of the lower authorities and directed deletion of the penalty. [Paras 12, 14, 16, 18, 19]

Penalty imposed by the Assessing Officer and confirmed by the CIT(A) is deleted; the appeals are allowed.

Final Conclusion: All eleven appeals are allowed; the penalty imposed by the Assessing Officer and confirmed by the CIT(A) is set aside and the AO is directed to delete the penalty in respect of the specified assessment years.

Provisional attachment - continuation of attachment during investigation (time cap under Section 8(3)(a)) - definition of "proceeds of crime"-three limbs including "value of such property" and "property equivalent in value" - attachment of property acquired prior to scheduled offence or prior to enactment - recording of reasons / "reason to believe" for attachment (material basis required) - scope of Section 5 and Section 8-checks and safeguards - relationship between Section 2(1)(u), Section 3 and Section 8

Provisional attachment - continuation of attachment during investigation (time cap under Section 8(3)(a)) - checks and safeguards under Section 5 and Section 8 - Provisional attachment ceases on expiry of the statutory period prescribed for continuation during investigation where the cap has been applied by the Adjudicating Authority. - HELD THAT: - The Adjudicating Authority had confirmed provisional attachment to continue during investigation for a period not exceeding 90 days; the statutory cap (originally 90 days, later 365 days) applies as per Section 8(3)(a). The Court rejected the respondent's contention that the appellants were disentitled to the benefit of the time cap because a complaint had been filed before the amendment; the authority cannot take a position contrary to the Adjudicating Authority's order confirming a 90 day cap. As investigation remains pending and the prescribed period (whether 90 or 365 days) has expired, the provisional attachment stands ceased by operation of law. [Paras 15]

Where the Adjudicating Authority limited continuation of attachment during investigation, the attachment ceased on expiry of that statutory period and the appellants are entitled to that benefit.

Definition of "proceeds of crime"-three limbs including "value of such property" and "property equivalent in value" - attachment of property acquired prior to scheduled offence or prior to enactment - relationship between Section 2(1)(u), Section 3 and Section 8 - Property acquired prior to the commission of the scheduled offence (or prior to enactment) cannot be treated as "proceeds of crime" merely by reason of being in the hands of a person who obtained proceeds from a scheduled offence unless it falls within the specific limbs of the definition; the phrase "value of such property" does not extend to any property unrelated (directly or indirectly) to the criminally obtained property. - HELD THAT: - The Court construed the three limbs of Section 2(1)(u) and emphasized that the second limb ("value of such property") must be read in conjunction with Sections 3 and 8. ''Value of such property'' denotes property that is the converted form or direct derivation of the proceeds of a scheduled offence (for example, proceeds invested to acquire another asset), not any unrelated property owned by the same person. The third limb (property equivalent in value where proceeds are held abroad) has a distinct meaning and cannot be conflated with the second limb. Reading the definition in isolation would render other procedural safeguards and the notice/response mechanism under Section 8 meaningless and could unduly expand criminal and attachment liability contrary to scheme and constitutional protections. Consequently property acquired prior to the alleged criminal activity cannot be attached unless it properly falls within the definition's limbs (e.g., as converted value or equivalent where the overseas limb applies). [Paras 16]

The expression "value of such property" is confined to property directly or indirectly representing the proceeds of the scheduled offence; properties purchased before the criminal activity do not become proceeds of crime merely by virtue of their owner having derived other proceeds from the offence.

Recording of reasons / "reason to believe" for attachment (material basis required) - checks and safeguards under Section 5 - judicial review of reasons - rational nexus and non application of mind - An officer making a provisional attachment under Section 5 must record specific reasons in writing, grounded in material in his possession, showing why the property is likely to be concealed, transferred or otherwise dealt with so as to frustrate confiscation; mere verbatim reproduction of the statutory language is insufficient. - HELD THAT: - Relying on established authorities concerning the expressions 'reason to believe' and 'is of opinion', the Court held that reasons must have a rational connection to the material relied upon and must not be a mere formalistic repetition of the statute. In the present case the attachment order merely echoed the words of Section 5 and invoked all three alternative possibilities (concealment, transfer or dealing) without pointing to specific material or a particular mode of risk; this indicated non application of mind. Given the absence of material showing any attempt to dispose of or deal with the mortgaged properties after 2009 or after the alleged offence, the requirement to record specific, material based reasons was not satisfied and the attachment was therefore invalid. [Paras 17]

The provisional attachment was invalid for failure to record specific, material based reasons; mere reproduction of statutory language does not meet the statutory requirement.

Final Conclusion: The three appeals are allowed. The Tribunal's order confirming the provisional attachments is set aside: the attachments have ceased on expiry of the statutory continuation period, the properties purchased prior to the scheduled offence cannot be treated as proceeds of crime absent a proper nexus to the criminal proceeds, and the attachment orders are vitiated for failure to record specific, material based reasons as required by Section 5.

Mistake apparent on the face of the record - rectification of mistake under Section 35C - failure to consider material evidence - extended period for confirmation of tax demand - remand for fresh consideration

Mistake apparent on the face of the record - failure to consider material evidence - rectification of mistake under Section 35C - Whether the CESTAT's dismissal of the rectification application suffered from an error apparent on the face of the record by failing to consider the appellant's repeated invocation of the extended period plea. - HELD THAT: - The Court applied the principle that omission to consider material evidence on the record constitutes a mistake apparent on the face of the record and is corrigible under the tribunal's rectification powers. Relying on the Supreme Court authority cited in the judgment, the Court held that the appellant had, on numerous recorded occasions, raised the plea concerning invocation of the extended period and that the CESTAT failed to take that material into account when refusing rectification. That failure was characterised as a mistake apparent on the face of the record warranting interference. The Court therefore concluded that the impugned order could not be upheld for want of consideration of the material contention relating to limitation and the extended period. [Paras 16, 17, 18]

The CESTAT erred in law by failing to consider material evidence and the appellant's repeated plea as a mistake apparent on the face of the record; that finding is answered in the appellant's favour.

Remand for fresh consideration - rectification of mistake under Section 35C - Whether the appropriate relief is to quash the CESTAT's order and remit the matter for fresh consideration of the rectification application. - HELD THAT: - Having found that a mistake apparent on the face of the record existed because the CESTAT did not consider material aspects of the appellant's plea on extended period, the Court set aside the impugned order and directed that the rectification application be reconsidered afresh by the CESTAT. The remand is for fresh consideration in accordance with law of the application seeking rectification of mistake, thereby leaving the merits to be reopened and decided by the tribunal after taking into account the material that was previously overlooked. [Paras 19]

The CESTAT's order dated 8th March, 2019 is quashed and set aside and the matter is remanded to the CESTAT, New Delhi for fresh consideration of the rectification application in accordance with law.

Final Conclusion: The appeal is allowed: the High Court held that the CESTAT committed a mistake apparent on the face of the record by failing to consider material evidence of the appellant's invocation of the extended period plea, quashed the CESTAT order dismissing the rectification application and remitted the matter to the CESTAT for fresh consideration in accordance with law.

Business Auxiliary Service - commission as consideration - discount on purchase - service tax liability

Business Auxiliary Service - commission as consideration - discount on purchase - Whether amounts received by the assessee from sugarcane societies amounted to consideration for Business Auxiliary Service and were exigible to service tax - HELD THAT: - The Tribunal examined the nature of payments received by the respondent from district societies in the context of Business Auxiliary Service. It noted that the assessee did not act to promote sales, provide services on behalf of the societies, or undertake activities as an agent for the societies. The factual characterisation in the assessee's own accounts described the receipts as 'society commission' under 'other income', and the Tribunal adopted the view - as taken in the assessee's earlier case decided by the Tribunal - that the amounts were effectively a rebate or discount when sugarcane was purchased. On that basis the receipts did not constitute consideration for promotion, marketing, procurement or any business auxiliary activity that would attract service tax under Business Auxiliary Service. The Tribunal therefore upheld the Commissioner (Appeals) order dropping the demand and rejected Revenue's contention that the receipts were taxable as commission for Business Auxiliary Service.

Payments received from the societies were a type of discount/rebate on sugarcane purchase and not consideration for Business Auxiliary Service; the service tax demand was not sustainable.

Final Conclusion: Revenue's appeal is rejected; the receipts from societies are held to be discounts on purchase and not exigible to service tax as Business Auxiliary Service.

Deemed sale under Article 366(29A)(d) - classification of transponder as goods - business support service - limitation and proviso extending period of limitation for service tax - reverse charge mechanism - penalty and interest where no intention to evade; revenue neutral situation

Deemed sale under Article 366(29A)(d) - classification of transponder as goods - Whether hiring/lease of satellite transponders from a foreign owner amounts to a deemed sale under Article 366(29A)(d) of the Constitution and thus falls outside service-tax classification. - HELD THAT: - The Tribunal analysed the nature of a transponder as an electronic transmitter-cum-receiver and noted precedent treating satellites as machines and thus goods. It held that the constitutional concept of deemed sale (Article 366(29A)) applies to transactions that fall within the territorial ambit of the sale law; where the owner/vendor is situated outside India and the agreement is between a party in India and a party beyond Indian territory, the transaction cannot be characterised as a sale within the meaning of the law. The Tribunal relied on principles that sale requires transfer of property within the territory and authorities holding that sales outside the State or in course of import/export are not taxable by the State under Entry 54 read with Article 366(29A). On these facts, because the owner of the transponders was a foreign company with no office in India, the hire/lease could not be classified as a deemed sale for Indian sales-tax purposes. [Paras 3, 4, 5]

The hire/lease of transponders from the foreign-based owner is not a deemed sale under Article 366(29A)(d) as the transaction does not constitute a sale within the territory of India.

Business support service - reverse charge mechanism - Whether the supply of transponder capacity by the owner to the broadcaster is taxable as a business support service and whether the confirmed demand for service tax was sustainable. - HELD THAT: - The Tribunal found that, irrespective of the deemed-sale contention, the activity of providing transponder capacity amounted to support of the appellant's broadcasting business and therefore fell within the category of business support services. The Tribunal observed that such activity could attract service-tax liability and, on the facts, the department was correct in characterising the transaction as a business-support service. The Tribunal further noted that liability, if exigible, would arise under the service-tax regime and could have been liable under the reverse charge mechanism applicable to imported services. [Paras 6, 8]

The transaction qualifies as a business support service liable to service tax (and would attract reverse charge), but the challenge to the confirmed demand is dealt with on limitation grounds.

Limitation and proviso extending period of limitation for service tax - penalty and interest where no intention to evade; revenue neutral situation - Whether the show-cause notice and consequent demand were time-barred and whether penalty and interest could be sustained in the absence of intention to evade tax and where the position is revenue neutral. - HELD THAT: - The Tribunal examined service records and departmental correspondence and concluded that the department had notice of the transaction and did not plead suppression, fraud or wilful mis-statement by the appellant. The show-cause notice as served was held to be barred by limitation for the periods in dispute (2006-07 to 2009-10), and the Tribunal held that the proviso extending limitation could not be invoked in these circumstances. Further, since the hire charges would have been available as credit (rendering the situation revenue neutral) and there was no finding of intent to evade tax, the imposition of penalty was held to be unjustified and harsh; interest and penalty were set aside accordingly. [Paras 7, 8]

The show-cause notice is time-barred and the proviso extending limitation is not invokable; accordingly the demand (and the associated penalty and interest) is set aside in view of limitation and absence of intent to evade, notwithstanding the classification as a taxable service.

Final Conclusion: The Tribunal held that the lease/hire of transponders from a foreign-based owner is not a deemed sale under Article 366(29A)(d), affirmed that the activity constitutes a business support service (and would attract reverse-charge service-tax liability), but set aside the department's demand, interest and penalty as the show-cause notice was barred by limitation and there was no intent to evade tax; the appeals are allowed.

Maintainability of appeals under Section 35G - determination of excisability / whether a process amounts to 'manufacture' - scope of Section 35L(2) as including taxability/excisability within determination of rate of duty - mutual exclusivity of jurisdiction between High Court under Chapter VI A and Supreme Court under Section 35L

Maintainability of appeals under Section 35G - scope of Section 35L(2) as including taxability/excisability within determination of rate of duty - determination of excisability / whether a process amounts to 'manufacture' - mutual exclusivity of jurisdiction between High Court and Supreme Court - Appeals filed by Revenue under Section 35G raising questions on excisability/manufacture are not maintainable before the High Court. - HELD THAT: - The Court held that after the insertion of sub section (2) in Section 35L by the Finance Act, 2014 (w.e.f. 06.08.2014) the scope of appeals before the Supreme Court expressly includes determination of taxability or excisability of goods as part of the determination of questions having relation to the rate of duty. Chapter VI A provisions are mutually exclusive as to forum competence, and questions which directly and proximately relate to whether a process amounts to manufacture or whether goods are excisable fall within the domain of the Supreme Court under Section 35L rather than the High Court under Section 35G. The Court relied on the reasoning in Navin Chemicals and subsequent High Court decisions (including Karnataka High Court precedents) to explain that disputes touching classification, excisability or the core question whether a process is a manufacturing process are matters that do not fall within Section 35G jurisdiction. The Court therefore confined the proper scope of appeals maintainable before the High Court under Section 35G to other categories (for example, issues like extended limitation, refunds, penalties, interest, confiscation, CENVAT/modvat issues etc.), and concluded that the present appeals - raising the root question of excisability/manufacture - must be dismissed as not maintainable before the High Court, with liberty to the Revenue to approach the Supreme Court under Section 35L. [Paras 6, 7, 11, 17, 20]

Appeals dismissed as not maintainable before the High Court; liberty granted to the Revenue to file appeal to the Supreme Court under Section 35L.

Final Conclusion: The High Court upheld the preliminary objection and dismissed the Revenue's appeals as not maintainable under Section 35G because the central questions of excisability and whether the processes amounted to 'manufacture' fall within the exclusive appellate domain of the Supreme Court under Section 35L (as expanded by sub section (2)); liberty was granted to the Revenue to pursue remedy before the Supreme Court.

Summary order. Petition seeking refund of pre-deposit(s) and release of bank guarantee filed after CESTAT allowed the appeals; Court issued notice, directed service on respondents and listed matter before the Regular Bench on 15.05.2020.

Cenvat credit admissibility - benefit of doubt - investigative evidence and cross-examination - transportation evidence - maintainability of show cause notice

Cenvat credit admissibility - benefit of doubt - Cenvat credit denied on ground that only cenvatable invoices were received and not the goods - HELD THAT: - The Tribunal examined the material placed on record including the DGCEI investigation and the appellant's contention that goods were received against invoices issued by M/s. Unnati Alloys Pvt. Ltd. and payment was made by account payee cheque. The Tribunal noted that the transporter alleged to have carried the goods was found non-existent in the course of investigation and that there was no examination of transporters to verify movement of goods. In these circumstances, and in the absence of adequate investigative proof to negativate the receipt of goods, the appellant is entitled to the benefit of doubt. The Tribunal also observed that the goods received were used in manufacture and cleared on payment of duty, which supports the claim of input credit. Applying the principle that where incriminating evidence is not cogently established the benefit of doubt must go to the assessee, the Tribunal held that Cenvat credit should be allowed. [Paras 5]

Cenvat credit allowed to the appellant

Investigative evidence and cross-examination - transportation evidence - maintainability of show cause notice - Whether the show cause notice/order based on the DGCEI investigation was maintainable in the absence of examination of key persons and transporters - HELD THAT: - The Tribunal found that the DGCEI investigation relied upon statements of Shri Amit Gupta but Shri Amit Gupta was neither made party to the show cause notice nor was he cross-examined; further, transporters were not examined or made parties to the show cause notice. The Tribunal treated these lacunae in the investigative process as undermining the case against the appellant. On that basis, the Tribunal concluded that the show cause notice was not properly sustainable and that the denial of credit founded on that defective investigation could not stand. [Paras 5, 6]

Show cause notice/order set aside as not properly sustainable

Final Conclusion: The impugned order denying Cenvat credit is set aside; the appellant's appeal is allowed and Cenvat credit is granted with consequential relief, the show cause notice being held not properly sustainable due to defects in the investigation.

Summary order. Appeal dismissed as withdrawn following appellant's election under the Sabka Vishwas (Legacy Dispute Resolution) Scheme, 2019 and filing of SVLDRS-4 discharge certificate.

Finality of Tribunal's order - lack of jurisdiction to reopen or re examine an earlier Tribunal order - confirmation of interest upheld by virtue of prior appellate decision - refund claim subject to consistency with appellate/Tribunal directions

Finality of Tribunal's order - lack of jurisdiction to reopen or re examine an earlier Tribunal order - confirmation of interest upheld by virtue of prior appellate decision - Whether the present Bench can entertain a challenge to the confirmation of interest when the same interest liability has been confirmed by an earlier Tribunal order. - HELD THAT: - The earlier Tribunal (Final Order No. 57659-57652/2017 dated 1.11.2017) had confirmed specified demands along with interest. The appellant sought to challenge confirmation of interest before this Bench, contending that interest provisions did not apply for the period in question and that any interest, if payable, should be only from the date of adjudication. This Bench held that the challenge to confirmation of interest at this stage would amount to revisiting the earlier Tribunal's decision which has attained finality. The Bench has no jurisdiction to sit in appeal over that earlier Tribunal order; if the appellant wished to dispute the interest liability they should have done so before the earlier bench or by challenging that Tribunal order. As the interest liability stands confirmed by the earlier Tribunal, the impugned orders of the lower authorities, which conform to the Tribunal's order, do not warrant interference.

Appeal rejected; no interference with confirmation of interest as upheld by the earlier Tribunal order.

Final Conclusion: The appeal is dismissed: the Bench declined to disturb the earlier Tribunal's confirmation of demand and interest, holding it lacked jurisdiction to re examine the Tribunal's final order and therefore refused to interfere with the lower authorities' orders consistent with that Tribunal decision.

Prospective application of amendment limiting time for availing Cenvat credit - eligibility to avail Cenvat credit on capital goods received before amendment - Cenvat credit where clearances are exempted under notification based on annual clearances - Rule 6(4) of the Cenvat Credit Rules - effect on reversal requirement for capital goods - voluntary reversal of Cenvat credit - refund not permissible - no provision for refund of voluntarily reversed credit

Prospective application of amendment limiting time for availing Cenvat credit - eligibility to avail Cenvat credit on capital goods received before amendment - Appellants entitled to avail Cenvat credit on capital goods received in 2012-2013 despite the time-limit introduced by notification no. 06/2015, since that amendment has prospective effect. - HELD THAT: - The Tribunal found that at the time the capital goods were received (financial year 2012-2013) there was no time restriction for availing Cenvat credit on capital goods. The time-limit restricting availment was introduced only by notification no. 06/2015 dated 01/03/2015. Relying on earlier Tribunal decisions (Bharat Resins Ltd. and Sicgil Industrial Gases Ltd.) which held that the 2015 amendment operates prospectively, the appellant is not barred by that subsequent time-limit from claiming credit for capital goods received prior to the amendment. Applying that principle, the appellant is eligible to avail the Cenvat credit without being subject to the time-limit imposed by the 2015 notification. [Paras 4]

Credit allowed for capital goods received in 2012-2013; the 2015 time-limit is prospective and does not apply.

Cenvat credit where clearances are exempted under notification based on annual clearances - Rule 6(4) of the Cenvat Credit Rules - effect on reversal requirement for capital goods - Appellants entitled to avail Cenvat credit notwithstanding that they claimed full exemption under notification based on annual clearances, in view of Rule 6(4) of the Cenvat Credit Rules. - HELD THAT: - The Revenue's contention that credit was barred because the goods manufactured by the appellant were fully exempt was considered. The Tribunal relied on the decision in Nova Plasmold Pvt. Ltd., observing that where exemption is granted by notification on the basis of total clearances during a financial year, Rule 6(4) operates so that the restriction on availment of Cenvat credit does not apply to capital goods. Given the appellants were claiming exemption under such a notification, they are eligible to avail the Cenvat credit. [Paras 4]

Restriction on availment does not apply; appellant eligible for Cenvat credit despite claiming full exemption under the annual-clearance based notification.

Voluntary reversal of Cenvat credit-refund not permissible - no provision for refund of voluntarily reversed credit - Refund of Cenvat credit voluntarily reversed by the appellant is not permissible; no provision allows refund of voluntarily reversed credit and the appellant must re avail credit if wrongly reversed. - HELD THAT: - Though the Tribunal accepted that the appellant may be entitled to Cenvat credit on merit, it held that a voluntary reversal of credit does not give rise to a legal entitlement to refund in cash. The earlier Prerna Cables order relied upon by the appellant was examined and found not to mandate a cash refund in such circumstances. The Tribunal observed that refund can only be granted where sanctioned by law and specific provisions exist; none sanction refund of credit voluntarily reversed by the assessee. Allowing refund of voluntarily reversed credit would amount to encashment of credit and defeat the Cenvat scheme. Consequently, the appellant, if entitled to credit, must take steps to re avail it rather than claim a refund of the reversed amount. [Paras 4]

No refund of voluntarily reversed Cenvat credit; refund claim dismissed and appellant must re avail credit if entitled.

Final Conclusion: Although the appellants are held entitled to Cenvat credit on the capital goods received in 2012-2013 (the 2015 time limit being prospective and Rule 6(4) applying where exemption is on annual clearances), their claim for refund of credit voluntarily reversed is not maintainable; appeal dismissed.

Entitlement of purchasing dealers to registration under the Central Sales Tax Act despite GST migration - Right to purchase specified goods against declaration in Form 'C' at concessional rate under Section 8(3)(b) of the CST Act - Effect of Constitutional 101st Amendment and GST enactment on the scope of CST Act (restriction of 'goods' to six specified items) - Illegality of executive circulars exceeding statutory power and violation of principles of natural justice - Invidious classification violative of Article 14 by administrative fiat

Entitlement of purchasing dealers to registration under the Central Sales Tax Act despite GST migration - Right to purchase specified goods against declaration in Form 'C' at concessional rate under Section 8(3)(b) of the CST Act - Purchasing dealers such as manufacturers (including cement companies) continue to be entitled to registration under the CST Act and to inter state purchase of the six specified goods against Form 'C' at the concessional rate after 1.7.2017. - HELD THAT: - The Court held that Section 7(2) of the CST Act independently permits dealers to obtain registration even if they are not liable to pay tax as sellers under Section 7(1); registration of purchasing dealers is not automatically vitiated by the GST migration. The amendment restricting the definition of 'goods' to six items does not obliterate the operative provisions (including Section 8(3)(b)) that permit purchasers to claim concessional tax by furnishing Form 'C'. The TNVAT/State law continues to apply to those six goods and the CST Act itself was not repealed qua inter state transactions in those goods; therefore purchasing dealers retain both registration rights and the right to purchase at concessional rate. The Court preferred a construction that gives effect to Section 8(3) (ut res magis valeat quam pareat) to preserve seamless interstate trade and the constitutional freedom of trade under Articles 301/304 rather than a construction that renders those provisions unworkable. [Paras 10, 14, 15, 20, 21]

The appeals fail on this point; the Respondent dealers may continue to hold registration under the CST Act and use Form 'C' for inter state purchase of the six specified goods at concessional rate.

Illegality of executive circulars exceeding statutory power and violation of principles of natural justice - Invidious classification violative of Article 14 by administrative fiat - Scope of State advance ruling/clarification power under Section 48 A of TNVAT Act - The Commissioner's Circular dated 31.5.2018 (and consequential notices/proceedings) was invalid: it exceeded statutory power under Section 48 A of the TNVAT Act, effected arbitrary classification in breach of Article 14, and was issued without affording affected dealers an opportunity of hearing, thereby violating principles of natural justice. - HELD THAT: - The Court found Section 48 A empowers clarification and advance ruling limited to points concerning the rate of tax and is subject to procedural constraints; it does not authorize a general statewide policy or classification as effected by the Circular. The impugned communication created categories of dealers and barred a class (including cement manufacturers) from using Form 'C' without statutory basis or hearing. Such unilateral administrative action, motivated by revenue targets, lacked jurisdictional foundation and procedural fairness. The Court followed and relied upon the reasoning in decisions of other High Courts and the endorsement of the Punjab & Haryana view by the Supreme Court to conclude the Circular must be quashed. [Paras 24, 25, 27, 36, 41]

The Circular dated 31.5.2018 and consequential notices/proceedings are quashed; authorities are directed not to restrict online issuance/download of Form 'C' to eligible dealers.

Effect of GST enactment on prior registrations - implied or pro tanto cancellation - Interaction of State VAT/TNVAT continuity with CST registration - Registration of dealers under the CST Act is not impliedly or pro tanto cancelled by the GST enactments; registration continues where statutory conditions remain satisfied. - HELD THAT: - The Court rejected the Revenue's submission that registrations granted under CST/State VAT should be treated as pro tanto amended or cancelled upon introduction of GST. The TNVAT/State VAT has not been wholly repealed and continues to apply to the six specified goods; State GST/IGST enactments and the saving provisions do not automatically extinguish prior registrations. Cancellation or amendment of a registration is a quasi judicial act prescribed by statute and cannot be presumed by executive fiat without following statutory procedure and giving the dealer an opportunity of hearing. [Paras 16, 26, 27]

The contention of implied or pro tanto cancellation of registration is rejected; registrations continue unless validly amended or cancelled following statutory process.

Final Conclusion: Writ Appeals filed by the Revenue are dismissed. The impugned Circular dated 31.5.2018 and consequential notices/proceedings are quashed; registered dealers (including the assessees) remain entitled to CST registration and to download/use Form 'C' for inter state purchase of the six specified goods at concessional rate, subject to statutory conditions.

Penalty under Section 12(3)(a) of the Tamil Nadu General Sales Tax Act - effect of filing return and payment on levy of penalty - assessment under Section 12(2) of the Tamil Nadu General Sales Tax Act - ex parte restoration of penalty by the Tribunal

Penalty under Section 12(3)(a) of the Tamil Nadu General Sales Tax Act - effect of filing return and payment on levy of penalty - ex parte restoration of penalty by the Tribunal - Whether the penalty imposed under Section 12(3)(a) could be sustained when the assessee had filed returns and paid the tax due, notwithstanding registration and return-filing following departmental inspection, and whether the Tribunal was justified in restoring the penalty by an ex parte order. - HELD THAT: - The Court held that the contingency for levying penalty under Section 12(3)(a) is the non-filing of returns; the provision does not distinguish whether any return was subsequently filed in consequence of an inspection or otherwise. The assessing authority's own order recorded that the assessee had filed the annual return in Form A1 and paid the tax due. The first appellate authority correctly deleted the penalty on that basis. The Tribunal erred in restoring the penalty by an ex parte order on the ground that the liability came to light only after inspection and that there was no voluntary filing; such circumstances are not material to the statutory condition for imposing penalty under Section 12(3)(a). Consequently, restoration of the penalty could not be sustained where return was filed and tax paid. [Paras 8, 9]

The Tribunal's restoration of the penalty was erroneous; since the assessee filed return and paid the tax, the penalty under Section 12(3)(a) could not be sustained and must be set aside.

Final Conclusion: Writ petition allowed; the Tribunal's ex parte restoration of the penalty under Section 12(3)(a) is set aside and the penalty is deleted.

Retrospective operation of fiscal amendment - forfeiture of input tax credit - input tax credit as a statutory concession - reasonable classification under Article 14 - delegated legislation and retrospective rules - necessity of machinery provisions for assessment

Retrospective operation of fiscal amendment - forfeiture of input tax credit - input tax credit as a statutory concession - Validity of substituted provisos (notification dated 08.02.2016) that introduced forfeiture of balance ITC and were given retrospective effect from 23.09.2015 - HELD THAT: - The substituted proviso inserted by notification dated 08.02.2016 for the first time provided that balance input tax credit remaining after allowance to the extent of CST payable "shall not be available for adjustment from any tax, penalty or interest payable". The Court examined the statutory scheme (notably Sections 17 and 52(3)) which allowed carry forward and refund of excess ITC, and compared the pre-amendment working of Rule 26(5). The Court held that the substituted proviso effected a substantive forfeiture and thus created new obligation or took away vested rights of dealers for transactions between 23.09.2015 and 07.02.2016; it was not merely clarificatory. Reliance on principles forbidding retrospective operation of provisions detrimental to vested rights was applied (referencing Jayam & Co.). Accordingly the retrospectively applied forfeiture provision could not stand. [Paras 29, 30, 31, 32, 33]

The substituted provisos of 08.02.2016 are not clarificatory and are ultra vires to the extent given retrospective effect; they shall have effect only prospectively from 08.02.2016.

Retrospective operation of fiscal amendment - input tax credit as a statutory concession - Articles 14 and 19(1)(g) - Whether retrospective effect from 23.09.2015 to 07.02.2016 of the substituted proviso infringed vested rights and fundamental rights (Articles 14 and 19(1)(g)) - HELD THAT: - Petitioners contended that retrospective withdrawal of ITC curtailed vested rights and violated Articles 14 and 19(1)(g). The Court observed ITC to be a concession but emphasised that provisions imposed to the detriment of dealers for the first time cannot be retrospective so as to impair vested rights. Since the substituted proviso introduced forfeiture of ITC for the first time, retrospective operation impinged on vested rights and was therefore struck down to the extent of retrospective application. The petitioners did not press other substantive Article 14 challenges to the proviso itself. [Paras 26, 28, 31, 32, 33]

Retrospective effect given to the substituted proviso is struck down (prospective effect from 08.02.2016); retrospective interference with vested rights for the period is impermissible.

Reasonable classification under Article 14 - input tax credit as a statutory concession - Validity of insertion of clause (xviii) in Section 18(8) denying ITC for goods consumed or burnt up in manufacture - HELD THAT: - The Court considered whether excluding consumables (goods consumed/burnt up and not existing in finished product) from ITC eligibility constituted arbitrary classification. Applying established principles regarding taxation and classification, and recognising the wider legislative latitude in fiscal policy, the Court found the distinction to be a reasonable classification and a policy decision within legislative competence. Prior precedent acknowledging ITC as a concession and the Government's power to restrict concessions in public interest were applied. [Paras 34, 35, 36, 37, 38]

Clause (xviii) of Section 18(8) is intra vires; challenge under Article 14 and Article 19(1)(g) fails.

Delegated legislation and retrospective rules - Power to make Rules - Competence of State Government to insert Rule 26(11A) with retrospective effect (notification dated 17.02.2017) under Section 94 of the JVAT Act - HELD THAT: - The Court analysed Section 94 and controlling precedents (including Regional Transport Officer v. Associated Transport and Federation of Indian Mineral Industries) establishing that a delegate cannot make subordinate legislation retrospective unless the parent statute expressly or by necessary implication permits it. Mere requirement to lay rules before the legislature does not imply power to make them retrospective. Applying these principles, the Court held that the State Government exceeded its rule-making competence by making Rule 26(11A) retrospective to 01.04.2015. [Paras 40, 41, 42, 43, 44]

Retrospective operation of Rule 26(11A) is ultra vires; Rule 26(11A) shall operate prospectively from 17.02.2017 only.

Necessity of machinery provisions for assessment - unworkability of provision in absence of rules - Consequences of absence of machinery provisions for enforcing the substituted proviso during 23.09.2015 to 16.02.2017 and workability of the proviso for that period - HELD THAT: - The Court applied the consistent line of authority requiring adequate machinery and procedure to assess and implement fiscal obligations (Heinz India; Larsen & Tubro; Mahim Patram distinguished). Since the forfeiture introduced by the substituted proviso required a mechanism for computation (which was furnished only by Rule 26(11A) made prospective from 17.02.2017), the proviso was unworkable for the period 23.09.2015 to 16.02.2017. Consequently, assessments or orders effecting forfeiture of ITC during that period are unlawful. The Court noted changes to return formats and the absence of columns for forfeited ITC prior to the rule amendment as indicative of the need for machinery. [Paras 48, 50, 51, 52, 53]

For the period 23.09.2015 to 16.02.2017 the substituted proviso could not be given effect to in absence of machinery provisions; any assessment/scrutiny/forfeiture orders for that period are quashed and ITC is to be computed as per pre-existing Rule 26(5).

Final Conclusion: In these writ petitions the Court (a) struck down the retrospective operation (from 23.09.2015) of the substituted provisos of 08.02.2016 and held them effective only prospectively from 08.02.2016; (b) upheld insertion of clause (xviii) in Section 18(8) as intra vires; (c) held that Rule 26(11A) could not be made retrospective and will operate prospectively from 17.02.2017; and (d) declared that consequences of forfeiture under the substituted proviso could not be given effect to for the period 23.09.2015 to 16.02.2017, quashing any orders effecting forfeiture of ITC for that period.