TaxTMI Login
Just a moment...
By creating an account you can:
of 45
Press 'Enter' after typing page number.
of 45Press 'Enter' after typing page number.
No Folders have been created
Are you sure you want to delete "My most important" ?
NOTE:
of 45Press 'Enter' after typing page number.
of 45Press 'Enter' after typing page number.
All Daily Newsletter
of 45Press 'Enter' after typing page number.
All Daily Newsletter
Join Channel
Note
Bookmark
Share
Don't have an account? Register Here
The core legal questions considered by the Court include:
2. ISSUE-WISE DETAILED ANALYSIS
Issue 1: Legal Identity of the Petitioner Firm under Different GST Registrations
Relevant Legal Framework and Precedents: Section 25(4) of the CGST Act, 2017 provides that a person who has obtained or is required to obtain more than one registration, whether in one State or Union territory or more than one State or Union territory, shall be treated as distinct persons for the purposes of the Act. This provision implies that each GST registration number corresponds to a distinct person in the eyes of the law, even if the underlying business entity is the same.
Court's Interpretation and Reasoning: The respondent department relied heavily on Section 25(4) to argue that the petitioner firm's U.P. and M.P. GST registrations represented two distinct persons. Consequently, the tax and penalty paid under the U.P. registration could not be refunded under the M.P. registration. The Court acknowledged this statutory provision but also noted that whether the two registrations represent the same firm or distinct entities is a matter of evidence, which was not conclusively established by the department.
Key Evidence and Findings: The petitioner firm contended that the two GST registrations belonged to the same entity, as it was the same partnership firm operating in different states. However, the petitioner failed to produce documentary evidence to prove this identity conclusively, particularly in the context of the appeal proceedings before the Commissioner (Appeals).
Application of Law to Facts: While Section 25(4) treats different registrations as distinct persons, the Court recognized that the underlying reality of the business entity might differ. The absence of clear evidence from the petitioner firm to establish the unity of the entity under both registrations left the issue unresolved, requiring further factual determination in appeal proceedings.
Treatment of Competing Arguments: The petitioner emphasized the continuity of business and identity of the firm, whereas the department stressed the statutory distinction between registrations. The Court found merit in both arguments but underscored the necessity of proper evidence and procedural fairness.
Conclusion: The Court did not conclusively determine the identity issue but held that it is a factual question to be decided after proper opportunity of hearing and evidence.
Issue 2: Legality and Validity of Refund under Different GST Registration
Relevant Legal Framework and Precedents: Section 54 of the CGST Act, 2017 governs refund of tax. Refund claims must be filed under the same registration number under which the tax was paid. The principle underlying this is to maintain consistency and prevent wrongful claims.
Court's Interpretation and Reasoning: The refund of Rs. 2,24,118/- was granted to the petitioner firm under its M.P. GST registration, although the tax and penalty were originally paid under the U.P. registration. The Commissioner reviewed this refund and found it to be "not correct, legal and proper" because the refund was sanctioned to a different GSTIN than the one that paid the tax and penalty, violating Section 54.
Key Evidence and Findings: The refund order dated 07.08.2021 was passed in favor of the M.P. GSTIN, and the department challenged this via a review and subsequent appeal, which was decided ex-parte against the petitioner firm.
Application of Law to Facts: The Court acknowledged that the refund should be granted only to the entity under whose GST registration the tax was paid. The department's challenge was based on this legal principle.
Treatment of Competing Arguments: The petitioner argued that the two registrations belonged to the same firm, and hence refund under the M.P. GSTIN was proper. The department argued that the refund was irregular as per law. The Court found that without proper evidence and hearing, the ex-parte decision against the petitioner was not justified.
Conclusion: The Court set aside the ex-parte appellate order and directed re-hearing, emphasizing the need to determine the legal entitlement to refund after proper procedure.
Issue 3: Compliance with Principles of Natural Justice and Service of Notices
Relevant Legal Framework and Precedents: The principles of natural justice require that a party must be given adequate notice and opportunity to be heard before adverse orders are passed. Proper service of notice is essential for valid proceedings.
Court's Interpretation and Reasoning: The petitioner firm contended that no notices were served upon it regarding the appeal filed by the Assistant Commissioner and the subsequent show cause notice demanding recovery. The appellate authority claimed multiple opportunities of personal hearing were provided, but the petitioner did not appear.
Key Evidence and Findings: The Court observed that the department failed to produce any evidence of proper service of notices on the petitioner's registered address in U.P. or on the GST portal for the U.P. registration. The appeal was decided ex-parte without demonstrating that the petitioner had actual or constructive notice.
Application of Law to Facts: The Court held that the failure to serve notice violated the principles of natural justice, rendering the ex-parte order and subsequent recovery proceedings invalid.
Treatment of Competing Arguments: While the department claimed due process by issuing notices at the M.P. address and providing hearing opportunities, the petitioner's lack of knowledge and absence of notice service at the U.P. address was decisive.
Conclusion: The Court set aside the ex-parte order and all subsequent orders, restoring the appeal for fresh adjudication after proper notice and hearing.
Issue 4: Legality of Recovery and Penalty under Section 74(1) of the CGST Act, 2017
Relevant Legal Framework and Precedents: Section 74(1) pertains to cases of tax evasion involving fraud, willful misstatement, or suppression of facts, allowing for demand of tax, interest, and penalty up to 100% of tax.
Court's Interpretation and Reasoning: The department issued a show cause notice and confirmed demand with penalty on the ground that the refund was erroneously allowed to the petitioner firm. The petitioner denied any fraud or suppression, asserting that the refund was legitimately claimed.
Key Evidence and Findings: No evidence was produced to establish fraud or willful misstatement by the petitioner. The Court noted that the penalty and demand were based on procedural technicalities rather than substantive fraud.
Application of Law to Facts: The Court implied that invoking Section 74(1) without proof of fraud or misstatement was improper, especially when the petitioner had a valid refund claim under the earlier appellate order.
Treatment of Competing Arguments: The department relied on procedural irregularities to justify penalty; the petitioner argued absence of malafide intent or fraud.
Conclusion: The Court did not uphold the penalty demand and stayed all recovery proceedings pending fresh adjudication.
3. SIGNIFICANT HOLDINGS
The Court held:
"It is not in dispute that tax and penalty was imposed upon the petitioner, which was deposited and subsequently the appeal was allowed and attained finality. Meaning thereby, petitioner was entitled for return of tax and penalty."
"Section 25(4) of the CGST Act treats different registrations as distinct persons; however, the identity of the firm under both registrations is a factual question requiring evidence."
"No notice was issued to the petitioner firm at its registered address or uploaded on the GST portal for the relevant registration number, and the appeal was decided ex-parte without affording opportunity to the petitioner."
"In the absence of proper service of notice and opportunity of hearing, the ex-parte order and all subsequent orders are liable to be set aside."
"The refund must be granted to the same entity under whose registration the tax was paid; however, the question of identity must be determined after proper hearing."
"Proceedings under Section 74(1) for penalty demand cannot be sustained without proof of fraud or willful misstatement."
The Court set aside the order dated 31.01.2023 by the Commissioner (Appeals), all subsequent show cause notices, original orders, and third-party recovery orders. The appeal was restored for fresh adjudication after proper notice and hearing to the petitioner firm. The petitioner was directed to appear before the appellate authority on a specified date.
Refund claim obtained by different entity - petitioner firm, registered under GST in two different states (U.P. and M.P.), constitutes the same legal entity or distinct persons for the purposes of GST law, particularly under Section 25(4) of the CGST Act, 2017 - HELD THAT:- Whether M/s. Ashirwad Industries, Ghaziabad and M/s. Ashirwad Industries, Rewa are the same firm or different entity, it is a matter of evidence but the same could not be produced by the petitioner firm in the absence of receipt of notices of the appeal preferred by Assistant Commissioner, CGST and Central Excise, Rewa Division, Rewa before Joint Commissioner (Appeals), CGST and Central Excise, Bhopal.
Admittedly, no notice was issued to M/s. Ashirwad Industries, Ghaziabad and no acknowledgement of the notice has been brought on record by the respondent in the present petition to demonstrate that the notices of appeal were duly served upon the petitioner firm. The appeal was decided ex-parte. Notice of the appeal was also not uploaded on the portal of M/s. Ashirwad Industries, Ghaziabad. Even in the order dated 31.01.2023, it is not mentioned as to how the opportunity of personal hearing was provided to the petitioner firm through virtual/ physical mode. It is nowhere mentioned in the order that any notice was issued and the same was duly served to the petitioner firm or any authorized person.
It is deemed just and proper to grant an opportunity to the petitioner firm to defend the Appeal No.34-GST/2022 preferred by Assistant Commissioner, CGST and Central Excise, Rewa Division, Rewa which was decided ex-parte as it is not satisfied that the notices of the appeal were properly served upon the petitioner firm.
The order dated 31.0.2023 passed by Joint Commissioner (Appeals), CGST and Central Excise, Bhopal and all consequent actions included show cause notice dated 29.08.2023, order in original dated 13.12.2023 and order to third party dated 04.07.2024 are set aside. Appeal No.34- GST/2022 is hereby restored to its original number.
Petition allowed in part.
The core legal questions considered by the Court in this matter include:
- Whether the petitioner was duly served with the Show Cause Notice (SCN) under Section 73 of the Central Goods and Services Tax Act, 2017, given that the notice was uploaded only on the GST portal under the category "Additional Notices" rather than the standard "View Notices and Orders" tab.
- Whether the mode of communication of the SCN via the GST portal's "Additional Notices" tab satisfies the requirement of proper service and principles of natural justice.
- Whether the petitioner's failure to respond to the SCN and subsequent demand order can be attributed to insufficient service of notice.
- Whether the impugned demand order dated 19.06.2024, passed without the petitioner having an opportunity to respond, is sustainable.
- The procedural fairness and adherence to principles of natural justice in tax demand proceedings under the CGST Act, particularly regarding service of notices through electronic portals.
2. ISSUE-WISE DETAILED ANALYSIS
Issue 1: Validity of Service of Show Cause Notice via GST Portal under "Additional Notices" Tab
Relevant legal framework and precedents: The Court examined the provisions of Section 73 of the CGST Act, 2017, which governs the issuance of demand notices and the requirement of proper communication to the taxpayer. The Court relied heavily on precedents from the Madras High Court and the Delhi High Court, which have dealt with similar issues concerning the mode and manner of service of GST notices via the GST portal.
Notably, the Madras High Court in East Coast Constructions and Industries Ltd. v. Assistant Commissioner (ST) and Sabari Infra (P.) Ltd. v. Assistant Commissioner (ST) highlighted the confusion caused by the GST portal's bifurcation of notices under two separate headings: "View Notices and Orders" and "View Additional Notices and Orders". The Madras High Court observed that notices uploaded under "Additional Notices" were not adequately brought to the notice of taxpayers, thereby impairing their ability to respond.
Further, the Madras High Court in Murugesan Jayalakshmi v. State Tax Officer noted that the GST portal was subsequently redesigned to consolidate these tabs under one heading, addressing the problem of notice visibility.
The Delhi High Court Division Bench in Umang Realtech (P.) Ltd. v. Union of India and Anhad Impex v. Assistant Commissioner relied on the Madras High Court's reasoning to hold that service of SCNs solely through the "Additional Notices" tab is insufficient and violates principles of natural justice.
Court's interpretation and reasoning: The Court recognized that the petitioner was unaware of the SCN because it was uploaded only under the "Additional Notices" tab, which was not the standard or expected location for such notices. The Court noted that the petitioner could not reasonably be expected to have seen the notice, given the portal's complex architecture and the segregation of notices.
The Court emphasized that mere uploading of the SCN in a less conspicuous section of the portal does not amount to proper service. The Court held that proper communication is a sine qua non for adherence to principles of natural justice, which require that the party against whom adverse orders are passed must have an opportunity to know the case against it and respond accordingly.
Key evidence and findings: The petitioner's counsel submitted that the SCN was uploaded only under "Additional Notices" and no other mode of communication was employed. The impugned order itself records that the petitioner did not respond to the SCN or deposit the tax amount, but the petitioner attributed this to non-receipt of proper notice.
The Court also examined the manual instructions on the GST portal, which direct taxpayers to view notices under the "View Notices and Orders" tab, not under "Additional Notices". This discrepancy was a critical factor in the petitioner's ignorance of the SCN.
Application of law to facts: Applying the principles established in the cited precedents, the Court found that the petitioner's failure to respond was due to insufficient service of the SCN. The Court concluded that the impugned demand order was passed without affording the petitioner a fair opportunity to be heard, thereby violating natural justice.
Treatment of competing arguments: The respondents contended that the petitioner was put to notice and failed to respond, justifying the demand order. However, the Court found this argument untenable in light of the mode of communication employed and the petitioner's unawareness of the proceedings.
Conclusions: The Court held that the SCN was not properly served and the petitioner must be granted an opportunity to respond. The impugned order was set aside, and the matter was remanded for fresh adjudication after proper service and hearing.
Issue 2: Procedural Fairness and Opportunity to be Heard in Tax Demand Proceedings
Relevant legal framework and precedents: The principles of natural justice, particularly audi alteram partem (right to be heard), are fundamental in quasi-judicial proceedings under tax laws. Section 75(3) of the CGST Act mandates that the proper officer shall pass an order after giving the person an opportunity of being heard.
Court's interpretation and reasoning: The Court underscored that the absence of a response or personal appearance by the petitioner was a consequence of non-receipt of proper notice. Therefore, the procedural requirement of affording an opportunity to the petitioner was not fulfilled.
Key evidence and findings: The impugned order itself recorded non-response by the petitioner, but the petitioner's explanation for non-response was accepted due to the mode of communication.
Application of law to facts: The Court directed that the petitioner be allowed to file a response to the SCN within two weeks through the portal, after which the proper officer shall re-adjudicate the matter, providing a personal hearing and passing fresh speaking orders in accordance with law within the prescribed time.
Treatment of competing arguments: The respondents' reliance on the petitioner's non-response was outweighed by the petitioner's valid contention of insufficient notice, mandating a fresh opportunity.
Conclusions: The Court mandated fresh adjudication ensuring procedural fairness and compliance with statutory requirements.
3. SIGNIFICANT HOLDINGS
- "Clearly, petitioner has made out a case that Petitioner has missed out the receipt of the notice and accordingly could not respond to the Show Cause Notice because it was merely uploaded on the portal under the category of "Additional Notices" tab and accordingly could not respond to the Show Cause Notice."
- "The impugned order categorically records that the taxpayer has not replied or appeared in person. Consequently, we are of the view that petitioner needs to be granted one opportunity to respond to the Show Cause Notice and thereafter, the Show Cause Notice to be re-adjudicated."
- "Respondents shall open the portal to enable the Petitioner to file a response to the said Show Cause Notices Form GST DRC-01 which shall be filed within a period of two weeks. Thereafter, the Proper Officer shall read-judicate the Show Cause Notices after giving an opportunity of personal hearing and shall pass fresh speaking orders in accordance with law within the period prescribed under Section 75 (3) of the Act."
Core principles established include the necessity of proper and effective service of statutory notices to ensure compliance with natural justice, especially in electronic communication contexts. The judgment affirms that mere uploading of notices in less conspicuous or non-standard sections of a government portal does not constitute valid service. Tax authorities must ensure that notices are communicated in a manner reasonably calculated to inform the taxpayer.
Final determinations on each issue are that the impugned demand order is set aside due to defective service of the SCN, and the petitioner is entitled to a fresh opportunity to respond and be heard before any fresh order is passed.
Violation of principles of natural justice - service of SCN - Petitioner was unaware of the order passed and could not prefer the appeal within time, initiation of any such proceedings and accordingly could not respond to the same - HELD THAT:- Clearly, petitioner has made out a case that Petitioner has missed out the receipt of the notice and accordingly could not respond to the Show Cause Notice because it was merely uploaded on the portal under the category of "Additional Notices” tab and accordingly could not respond to the Show Cause Notice. The impugned order categorically records that the tax payers was put to notice however, no reply by way of GST DRC-13. However, the tax payer neither deposited the tax amount nor filed any response the said notice and consequently, the demand has been created against the petitioner.
Conclusion - Perusal of the impugned order shows that the impugned order categorically records that the taxpayer has not replied or appeared in person. Consequently, the petitioner needs to be granted one opportunity to respond to the Show Cause Notice and thereafter, the Show Cause Notice to be re-adjudicated.
The impugned orders dated 19.06.2024 is set aside - petition allowed.
The core legal questions considered by the Court were:
(a) Whether the Appellate Authority was justified in rejecting the appeal filed by the petitioners on the ground that the appeal was not filed electronically as prescribed under Rule 108 of the Central Goods and Services Tax Rules, 2017 (GST Rules);
(b) Whether the petitioners were entitled to file the appeal manually under the proviso to Rule 108(1) of the GST Rules due to non-availability of the order-in-original on the GST portal;
(c) Whether the Appellate Authority complied with the procedural mandate under Rule 108(1), particularly the issuance of provisional acknowledgment upon manual filing of the appeal;
(d) Whether the impugned order-in-original dated 30.10.2023 passed by the Assistant Commissioner was available on the GST portal at the relevant time, thereby affecting the mode of filing the appeal;
(e) Whether the appeal filed manually by the petitioners should have been considered on merits or was liable to be rejected on technical grounds.
2. ISSUE-WISE DETAILED ANALYSIS
Issue (a) and (b): Validity of rejection of appeal on ground of non-electronic filing and entitlement to manual filing under Rule 108(1) proviso
The relevant legal framework is Section 107 of the Central Goods and Services Tax Act, 2017 (CGST Act) which governs appeals to the Appellate Authority, and Rule 108(1) of the GST Rules which prescribes the manner of filing such appeals. Rule 108(1) states that an appeal shall be filed in FORM GST APL-01 electronically or otherwise as notified by the Commissioner. The proviso to Rule 108(1) permits manual filing of the appeal only if either the Commissioner has notified such mode or the appeal cannot be filed electronically due to non-availability of the order-in-original on the common portal. In such cases, a provisional acknowledgment must be issued immediately to the appellant.
The Court noted that the petitioners filed the appeal manually with a pre-deposit of 10% of disputed dues, citing non-availability of the order-in-original on the GST portal as the reason for manual filing. The Appellate Authority rejected the appeal solely on the ground that it was not filed electronically, without considering the proviso to Rule 108(1).
The Court observed that the Appellate Authority failed to verify whether the order-in-original was uploaded on the GST portal at the time of filing the appeal. The petitioners' contention that the order was not available electronically was not rebutted, and the Appellate Authority did not issue the mandatory provisional acknowledgment as required by the proviso.
The Court emphasized that the Appellate Authority's mechanical rejection of the appeal without application of mind to the facts and the legal provisions constituted a failure to comply with Rule 108(1). The petitioners had followed the procedure prescribed for manual filing due to non-availability of the order on the portal, and such appeal ought to have been accepted.
Issue (c): Compliance with procedural requirements under Rule 108(1)
The Court highlighted that the proviso to Rule 108(1) mandates issuance of provisional acknowledgment immediately upon manual filing of the appeal when electronic filing is not possible. The Appellate Authority merely acknowledged receipt of the letter on 17.01.2024 but did not issue any provisional acknowledgment in FORM GST APL-02 as required.
This procedural lapse was material and contributed to the invalid rejection of the appeal. The Court found that the Appellate Authority's failure to issue provisional acknowledgment and consider the appeal on merits amounted to non-application of mind and procedural impropriety.
Issue (d): Availability of order-in-original on GST portal
The Court noted that the Appellate Authority did not verify the availability of the order-in-original on the GST portal at the time of appeal filing. The petitioners contended that the order dated 30.10.2023 passed by the Assistant Commissioner was not uploaded on the portal, which prevented electronic filing.
The Appellate Authority's order did not address or disprove this contention but rejected the appeal on the assumption that electronic filing was possible and mandatory. The Court found this to be a critical oversight undermining the validity of the rejection.
Issue (e): Consideration of appeal on merits versus rejection on technical grounds
The Appellate Authority rejected the appeal solely on the technical ground of non-electronic filing without considering the merits or the factual circumstances justifying manual filing. The Court held that such rejection without application of mind to the facts and law was unsustainable.
The Court set aside the impugned order-in-original dated 30.10.2023 on this ground and remanded the matter to the Appellate Authority with directions to consider the appeal on merits within 12 weeks from receipt of the order.
The Court explicitly declined to express any opinion on the maintainability or merits of the appeal beyond the procedural issue of mode of filing and acceptance thereof.
3. SIGNIFICANT HOLDINGS
The Court held:
"The Appellate Authority has failed to comply with the provisions of Rule 108(1) of the GST Rules and ignoring the fact that the order-in-original was not available on GST portal so as to enable the petitioner to file the appeal electronically, the Appellate Authority ought to have considered the appeal filed by the petitioner manually and could not have rejected the same on technical ground, that the appeal was not filed electronically."
"There is total nonapplication of mind to the facts of the case that the appeal was filed manually due to non-availability of the order-in-original on GST portal."
"The impugned order-in-original dated 30.10.2023 passed by respondent No.1 is therefore set aside only on this ground and the matter is remanded to the Appellate Authority to consider the appeal filed by the petitioners on merit within a period of 12 weeks from the date of receipt of this order."
Core principles established include:
- The proviso to Rule 108(1) of the GST Rules permits manual filing of appeals when electronic filing is not possible due to non-availability of the order on the common portal.
- The Appellate Authority is obligated to verify the availability of the order on the GST portal before rejecting an appeal on the ground of mode of filing.
- The Appellate Authority must issue a provisional acknowledgment upon manual filing under the proviso.
- Mechanical rejection of appeals without application of mind to these facts and procedural requirements violates principles of natural justice and statutory mandates.
- Appeals filed manually under the proviso must be considered on merits and not rejected on technical grounds.
Manual filing of appeal due to non-availability of order on common GST portal - proviso to Rule 108(1) - entitlement to file appeal manually where decision is not available on portal - provisional acknowledgment upon manual filing - remand for fresh consideration
Manual filing of appeal due to non-availability of order on common GST portal - proviso to Rule 108(1) - entitlement to file appeal manually where decision is not available on portal - provisional acknowledgment upon manual filing - Validity of rejection of appeal for not being filed electronically where the impugned order was not available on the GST portal - HELD THAT: - The Appellate Authority rejected the appeal solely on the ground that it was not filed electronically, without addressing the petitioners' contention that the order-in-original was not available on the common GST portal and therefore could not be filed electronically. Rule 108(1) permits manual filing of FORM GST APL-01 where the decision or order to be appealed against is not available on the portal, and requires issuance of a provisional acknowledgment in such cases. The Appellate Authority did not verify the portal availability of the impugned order, nor did it issue the provisional acknowledgment after receipt of the manual filing; instead it mechanically applied the electronic-filing requirement and rejected the appeal. That approach displayed non-application of mind to the proviso to Rule 108(1) and the facts pleaded by the petitioners. The impugned order-in-original dated 30.10.2023 is thus set aside on this ground and the matter is remanded to the Appellate Authority to consider the appeal on merits, observing the procedure under Rule 108(1), including issuance of provisional acknowledgment where appropriate.
Impugned order rejecting the appeal for non-electronic filing set aside; appeal remanded to the Appellate Authority for merit consideration in accordance with Rule 108(1), with directions to act within twelve weeks.
Final Conclusion: The petition is disposed of by setting aside the impugned rejection and remanding the appeal to the Appellate Authority for consideration on merits in accordance with Rule 108(1), to be completed within twelve weeks; no order as to costs and notice discharged.
The core legal questions considered by the Court are:
(a) Whether the Input Tax Credit (ITC) on input services can be included along with ITC on inputs for computing the refundable amount under the inverted duty structure refund mechanism prescribed under Rule 89(5) of the CGST Rules, 2017;
(b) Whether the amended formula under Rule 89(5) of the CGST Rules, 2017, as notified by Notification No. 14/2022 dated 05.07.2022, which modifies the computation of refund under the inverted duty structure, applies retrospectively to refund claims filed prior to the date of such amendment;
(c) Whether the authorities below erred in rejecting the petitioner's refund claims by excluding ITC on input services and applying the pre-amendment formula, despite the amendment and judicial pronouncements favoring a broader inclusion;
(d) Whether the petitioner is entitled to statutory interest under Section 56 of the CGST Act, 2017, on delayed refund payments;
(e) Whether the petitioner's remedy lies before the GST Tribunal or the High Court, given the Tribunal's non-constitution at the relevant time.
2. ISSUE-WISE DETAILED ANALYSIS
Issue (a): Inclusion of ITC on Input Services in Refund Computation under Rule 89(5)
The legal framework revolves around Section 16 of the CGST Act, which permits availing ITC on inputs and input services, and Rule 89(5) of the CGST Rules, which prescribes the formula for refund of accumulated ITC due to inverted duty structure (where input tax rates exceed output tax rates).
Earlier, the formula under Rule 89(5) was interpreted to exclude ITC on input services from the computation of "Net ITC" for refund purposes, as upheld by the Assistant Commissioner relying on the judgment of the Gujarat High Court in VKC Footsteps India Pvt. Ltd., which was subsequently set aside by the Supreme Court.
The petitioner contended that ITC on input services must be included in the refund computation, as per the original judgment of the High Court in VKC Footsteps and the amended Rule 89(5) formula. The Assistant Commissioner and the Additional Commissioner (Appeals) rejected this claim, relying on the Supreme Court's overruling of the High Court's decision and limiting refund to ITC on inputs alone.
The Court noted the conflict between the earlier High Court decision and the Supreme Court's ruling, and the petitioner's reliance on the amended Rule 89(5) formula which includes ITC on input services.
Issue (b): Retrospective Application of the Amended Rule 89(5) Formula
The amendment to Rule 89(5) by Notification No. 14/2022 dated 05.07.2022 was introduced following recommendations by the GST Council and directions from the Supreme Court to remove anomalies in the refund computation formula.
The respondents argued that the amendment applies only prospectively to refund claims filed on or after 05.07.2022, and not to claims already decided or finalized before that date.
The petitioner relied on the High Court's decisions in Ascent Meditech and Tirth Agro, which struck down the Circular No. 181/2022 that restricted the amended formula's application to post-05.07.2022 claims. The Court in Ascent Meditech held that the amendment is clarificatory and curative in nature, thus retrospective, and applies to all refund claims filed within the statutory limitation period of two years under Section 54(1) of the CGST Act.
The Court extensively quoted the Ascent Meditech judgment, emphasizing the principle that clarificatory amendments are to be given retrospective effect to remove anomalies and ensure uniformity, thereby preventing discrimination between taxpayers who filed claims before or after the amendment.
The Court also relied on precedents from the Supreme Court and various High Courts holding that curative and clarificatory amendments have retrospective effect, including the case of Collector of Central Excise, Shillong vs. Wood Craft Products Ltd.
Issue (c): Legality of the Authorities' Rejection of Refund Claims
The Assistant Commissioner excluded ITC on input services from the refund computation relying on the Supreme Court's decision in Union of India v. VKC Footsteps India Pvt. Ltd., which set aside the High Court's earlier judgment.
The Additional Commissioner (Appeals) upheld this approach, dismissing the petitioner's appeals.
However, the Court found that the authorities failed to consider the subsequent amendment to Rule 89(5) and the clarificatory judicial pronouncements that the amended formula applies retrospectively to refund claims filed within two years.
The Court held that failure to re-adjudicate the refund claims in light of the amended formula and clarificatory judgments results in denial of legitimate refunds and causes unjust enrichment to the Government.
Issue (d): Entitlement to Statutory Interest under Section 56 of the CGST Act
The petitioner sought statutory interest on delayed refunds as per Section 56 of the CGST Act, which mandates interest payment if refunds are not paid within 60 days of the application.
The Court directed the authorities to consider the petitioner's entitlement to statutory interest while re-adjudicating the refund claims, in accordance with law.
Issue (e): Availability of Alternative Remedy Before the GST Tribunal
The respondents contended that the petitioner's remedy lies before the GST Tribunal, which was not constituted at the relevant time.
The Court acknowledged this fact and accepted the petitioner's approach to seek relief before the High Court under Article 226 of the Constitution, given the absence of the Tribunal.
3. SIGNIFICANT HOLDINGS
The Court held:
"The amendment made by the Notification No. 14/2022 is clarificatory only as per the decision of the GST Council pursuant to the direction issued by the Hon'ble Apex Court."
"Notification No. 14/2022 dated 05.07.2022 cannot be applied prospectively for the refund claim which were made within two years as prescribed under section 54 (1) of the GST Act."
"As per the provisions of section 54 (1) read with section 54 (3) of the Act if the assessee has made refund application within the prescribed period of two years, then the assessee would be entitled to the refund as per the amended formula which has been notified w.e.f. 05.07.2022."
"The petitioner cannot be denied the refund as per the provision of 54 (3) of the Act only because the petitioner has been granted the refund prior to 05.07.2022 as it would create a discrimination resulting into inequality between the assesses who have been granted refund prior to 05.07.2022 and the assesses who have applied for refund after 05.07.2022."
"Failure to re-adjudicate the refund claim of the Petitioners in light of the amended Rule 89 (5) would result in denial of the Petitioners legitimate refund and would cause unjust enrichment to the Government."
Consequently, the Court quashed and set aside the Orders-in-Original dated 31.03.2022 and 30.11.2022, directing the Respondent to re-adjudicate the refund claims for the period February 2021 to February 2022 in accordance with the amended Rule 89(5) within twelve weeks, including consideration of statutory interest under Section 56.
Inclusion of ITC on input services within the scope of “Net ITC” for the purpose of computing refund under Rule 89 (5) of the CGST Rules, 2017 - whether the benefit of the Notification No. 05.07.2022 vide Circular No. 14/2022 can be extended to refund claims which were decided on the basis of the old formula of inverted duty structure in Rule 89 (5) of the CGST Rules, 2017? - HELD THAT:- The sum and substance of the aforesaid ratio in Ascent [2025 (5) TMI 149 - SC ORDER], which has been approved by the Hon’ble Supreme Court by rejecting the Special Leave Petition No.8134/2025 by the order dated 28.03.2025 is to the clear effect that the benefit of the amended Rule 89 (5) as per the Notification No.14/2022 dated 05.07.2022 would be applicable to all refund claims filed before or after 05.07.2022. Thus, the only aspect to be checked by the authority granting the refund is whether the said refund application had been filed before the prescribed limitation of two years. In such view of the matter, we find that the authorities below must be directed to re-adjudicate the refund claim of the Petitioners in light of the amended Rule 89 (5). The failure, to do so, would result in denial of the Petitioners legitimate refund and would cause unjust enrichment to the Government.
The Respondent No. 2 is directed to re-adjudicate the refund applications filed by the petitioners herein for the period of February, 2021 to February, 2022 as per the Chart below paragraph No.3.5 hereinabove within a period of Twelve (12) weeks from the date of receipt of a copy of this Order in accordance with law.
Conclusion - i) The amendment made by the Notification No. 14/2022 is clarificatory only as per the decision of the GST Council pursuant to the direction issued by the Hon'ble Apex Court. ii) Notification No. 14/2022 dated 05.07.2022 cannot be applied prospectively for the refund claim which were made within two years as prescribed under section 54 (1) of the GST Act.
Petition allowed.
1. Whether the impugned Notification No. 56/2023-Central Tax dated 28th December, 2023, issued under Section 168A of the Central Goods and Services Tax Act, 2017 (CGST Act), is valid, having regard to the procedural requirements, specifically the necessity of prior recommendation by the GST Council before issuance.
2. Whether the extension of time limits for adjudication under Section 73 of the CGST Act for the financial year 2019-2020, as effected by the impugned notifications, was legally permissible.
3. The impact of conflicting judicial pronouncements from various High Courts on the validity of the impugned notifications and the role of the Supreme Court in resolving these conflicts.
4. Whether the Petitioner was afforded adequate opportunity of personal hearing before passing the impugned adjudication order under Section 73 of the CGST Act.
5. The extent to which the adjudicating authority can rely on grounds beyond those specified in the show cause notice (SCN) when passing an order.
Issue 1: Validity of Notification No. 56/2023-Central Tax under Section 168A of the CGST Act
The legal framework governing this issue is Section 168A of the CGST Act, which mandates that any extension of the time limit for adjudication of show cause notices must be preceded by a recommendation from the GST Council. The Petitioner challenged the impugned notification on the ground that it was issued without the requisite prior recommendation; rather, the ratification was given only subsequent to issuance, rendering the notification procedurally defective.
The Court noted that this issue is part of a larger batch of petitions with similar challenges, and that various High Courts have taken divergent views. For instance, the Allahabad and Patna High Courts upheld the validity of the notification, while the Guwahati High Court quashed it. The Telangana High Court also expressed reservations on the validity of Notification No. 56/2023.
Furthermore, the Supreme Court has admitted a Special Leave Petition (SLP No. 4240/2025) concerning this very issue, recognizing the cleavage of opinion among High Courts. The Supreme Court's order explicitly identified the question of whether the time limit for adjudication under Section 73 and the corresponding State GST Act could be extended by such notifications under Section 168A.
The Court in the present case refrained from expressing any opinion on the validity of the notification, deferring to the pending Supreme Court adjudication. This approach aligns with judicial discipline and the principle of avoiding conflicting rulings on identical issues.
Issue 2: Extension of Time Limits for Adjudication under Section 73 of the CGST Act
Section 73 of the CGST Act deals with determination of tax not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilized. The time limit for adjudication under this section is statutorily prescribed. The impugned notifications purportedly extended these time limits for the financial year 2019-2020.
The Court acknowledged that the extension of limitation periods is a critical issue, as it affects the validity of adjudication proceedings initiated after the original limitation expired. The notifications in question were challenged on the ground that the extensions were not validly granted.
Given the pendency of the matter before the Supreme Court and the conflicting High Court decisions, the Court did not delve into the merits of this issue but noted that the final determination would depend on the Supreme Court's ruling.
Issue 3: Conflicting Judicial Pronouncements and Supreme Court Intervention
The Court highlighted the existence of differing views among various High Courts on the validity of the impugned notifications and the extensions granted under Section 168A. This judicial discord necessitated Supreme Court intervention to ensure uniformity and legal certainty.
The Punjab and Haryana High Court, in its order, refrained from expressing any opinion on the vires of Section 168A and the notifications, directing that the matter be governed by the Supreme Court's eventual decision. The present Court adopted a similar stance, emphasizing adherence to judicial discipline.
Issue 4: Adequacy of Opportunity of Personal Hearing Before Passing the Adjudication Order
The Petitioner contended that despite filing a reply to the show cause notice dated 31st May 2024, and requesting an adjournment for personal hearing, no subsequent hearing opportunity was granted. The Petitioner argued that the impugned order was passed ex-parte and on grounds beyond those raised in the SCN, thus violating principles of natural justice.
The Court examined the impugned order and found that the adjudicating authority had recorded that the Petitioner did not avail the personal hearing but had sent a reply by speed post. The order noted deficiencies in the Petitioner's submissions, including failure to produce documents proving receipt of goods/services and that the tax collected by suppliers was actually paid to the government, as required under Section 16(2)(c) of the CGST Act.
However, the Court held that the Petitioner was not afforded sufficient opportunity to be heard, particularly in light of the Petitioner's request for adjournment and the absence of any subsequent hearing notice. The Court emphasized the fundamental principle of natural justice that an opportunity to be heard must be provided before adverse orders are passed.
Accordingly, the Court set aside the impugned order and granted the Petitioner 30 days to file a supplementary reply to the SCN. The adjudicating authority was directed to issue a fresh notice for personal hearing, communicate it properly, and consider the Petitioner's submissions before passing a fresh order.
Issue 5: Reliance on Grounds Beyond Those in the Show Cause Notice
The Petitioner submitted that the impugned order was passed on grounds not raised in the SCN, rendering the reply inadequate and the adjudication unfair.
The Court's examination of the impugned order revealed that the adjudicating authority indeed considered issues beyond the Petitioner's initial reply, particularly the failure to produce supporting documents for receipt of goods/services and payment of tax by suppliers.
While the Court did not explicitly rule on the legality of reliance on such additional grounds, it implicitly recognized the need for the Petitioner to have an opportunity to address these new grounds through the supplementary reply and personal hearing. This approach safeguards the Petitioner's right to fair adjudication and natural justice.
Significant Holdings and Core Principles Established
"In view of the above position, this Court is of the opinion that the impugned order has been passed without affording the Petitioner with sufficient opportunity to be heard. Thus, an opportunity ought to be afforded to the Petitioner to contest the matter on merits."
"The Petitioner is permitted to file a supplementary reply within a period of 30 days. Upon filing of the supplementary reply, the Adjudicating Authority shall issue to the Petitioner, a notice for personal hearing."
"The supplementary reply filed by the Petitioner to the SCN along with the submissions made in the personal hearing proceedings shall be duly considered by the Adjudicating Authority and fresh order with respect to the SCN shall be passed accordingly."
"However, it is made clear that the issue in respect of the validity of the impugned notification is left open. Any order passed by the Adjudicating Authority shall be subject to the outcome of the decision of the Supreme Court."
The Court underscored the paramount importance of adherence to the principles of natural justice, particularly the right to be heard, before passing adverse orders under tax adjudication proceedings.
It also reaffirmed the principle of judicial discipline by deferring the question of validity of the impugned notifications to the Supreme Court, recognizing the ongoing litigation and conflicting High Court judgments on this issue.
Finally, the Court's directions ensure that the Petitioner's substantive rights are protected by mandating a fresh opportunity to present their case, thereby promoting fairness and due process in tax adjudication.
Violation of principles of natural justice - submission of the Petitioner is that the impugned order has been passed without giving the Petitioner any opportunity to be heard - Challenge to adjudication order and N/Ns. 9/2023-Central Tax dated 31st March, 2023 and 56/2023- Central Tax dated 28th December, 2023 issued by the Central Board of Indirect Taxes and Customs - HELD THAT:- This Court is of the opinion that the impugned order has been passed without affording the Petitioner with sufficient opportunity to be heard. Thus, an opportunity ought to be afforded to the Petitioner to contest the matter on merits. The Petitioner is permitted to file a supplementary reply within a period of 30 days.
The impugned order is set aside. The Petitioner is granted 30 days’ time to file the reply to SCN. Upon filing of the reply, the Adjudicating Authority shall issue to the Petitioner, a notice for personal hearing - Petition disposed off.
The core legal questions considered by the Court include:
2. ISSUE-WISE DETAILED ANALYSIS
a) Validity of the Impugned Notifications under Section 168A of the CGST Act
Relevant legal framework and precedents: Section 168A of the CGST Act empowers the Central Government to extend the time limits for adjudication of SCNs and passing of orders beyond the statutory period, subject to the prior recommendation of the GST Council. The notifications under challenge purportedly extend these time limits for the tax period April 2018 to March 2019 and subsequent periods.
Several High Courts have delivered conflicting judgments on the validity of these notifications. The Allahabad High Court upheld Notification No. 9/2023, while the Guwahati High Court quashed Notification No. 56/2023 (Central Tax). The Patna High Court upheld Notification No. 56/2023. The Telangana High Court expressed reservations about the validity of Notification No. 56/2023 but did not conclusively rule on its vires. This conflicting judicial landscape has necessitated intervention by the Supreme Court.
The Supreme Court, in SLP No. 4240/2025, has issued notice and is considering whether the time limits for adjudication under Section 73 of the CGST Act and the corresponding State GST Act could be extended by the impugned notifications. The Supreme Court recognized the cleavage of opinion among High Courts and has stayed the matter for final adjudication.
Court's interpretation and reasoning: The Delhi High Court acknowledges the ongoing Supreme Court proceedings and the divergent High Court rulings. It refrains from expressing any opinion on the validity of the impugned notifications, deferring to the Supreme Court's ultimate decision. The Court also notes that the challenge to the notifications is part of a batch of petitions, with the lead matter being heard extensively.
Application of law to facts: Given the pendency of the Supreme Court's decision and the conflicting views, the Delhi High Court holds that the challenge to the impugned notifications must be subject to the outcome of the Supreme Court proceedings. The Court directs that the adjudication orders passed pursuant to these notifications be considered in light of the Supreme Court's final ruling.
Treatment of competing arguments: The Court records the submissions of the parties challenging the notifications on procedural grounds, including non-compliance with Section 168A's requirement of prior GST Council recommendation. The Court also notes the Government's reliance on the notifications to extend limitation periods. However, the Court does not resolve these disputes at this stage, leaving them open for the Supreme Court's determination.
Conclusions: The validity of the impugned notifications remains an open question pending the Supreme Court's decision. The Delhi High Court defers to the higher forum and refrains from adjudicating on this issue.
b) Validity of the Show Cause Notice and Adjudication Order - Procedural Fairness and Opportunity to be Heard
Relevant legal framework and precedents: Principles of natural justice and procedural fairness require that a party be given adequate notice of proceedings, an opportunity to file replies, and a personal hearing before adverse orders are passed. The CGST Act and allied procedural rules mandate issuance of SCNs and personal hearings before passing orders under Section 73.
Recent decisions of the Delhi High Court have addressed issues arising from the GST portal's practice of uploading notices under an 'Additional Notices & Orders' tab, which was not prominently visible to taxpayers, resulting in non-receipt of SCNs and consequent ex-parte orders. The Court in W.P.(C) 13727/2024 (Neelgiri Machinery) and other similar cases held that such procedural irregularities vitiate the adjudication process and remanded the matters for fresh adjudication after providing an opportunity to be heard.
Court's interpretation and reasoning: The Court finds that the SCN dated 6th December 2023 was uploaded under the 'Additional Notices Tab', and as a result, the Petitioner did not come to know of the notice. Consequently, the impugned order dated 18th April 2024 was passed without affording the Petitioner a personal hearing or an opportunity to file a reply. This violates the principles of natural justice.
The Court relies on its own precedent and similar decisions to hold that orders passed in default due to non-receipt or non-awareness of SCNs must be set aside and the matter remanded for fresh adjudication.
Key evidence and findings: The Court notes that post 17th January 2024, the Department has made changes to the GST portal to ensure SCNs are more visible and accessible to taxpayers. However, the SCN in the present case predates these changes. The Petitioner's inability to access the notice and the absence of personal hearing are critical findings.
Application of law to facts: Applying the principles of natural justice and the precedents, the Court sets aside the impugned demand orders dated 23rd April 2024 and 5th December 2023. It directs the Petitioner to file replies within thirty days and mandates that hearing notices shall not merely be uploaded but also communicated by email and phone to ensure actual notice.
Treatment of competing arguments: While the Department may argue that the notices were uploaded on the portal, the Court emphasizes that mere uploading under a less visible tab does not satisfy the requirement of effective notice. The Court prioritizes ensuring fairness over procedural technicalities that result in prejudice to the Petitioner.
Conclusions: The adjudication order is quashed, and the matter is remanded for fresh consideration after affording the Petitioner a genuine opportunity to be heard. The Court prescribes procedural safeguards for communication of notices going forward.
c) Effect of Pending Supreme Court Proceedings on the Present Petition
Relevant legal framework and precedents: When a matter involving identical or similar questions of law is pending before the Supreme Court, lower courts generally refrain from expressing final views to maintain judicial discipline and avoid conflicting judgments.
Court's interpretation and reasoning: The Court notes that the Punjab and Haryana High Court has disposed of connected petitions with interim orders, deferring to the Supreme Court's forthcoming judgment. The Delhi High Court follows suit, acknowledging that the issue of the validity of Section 168A and the impugned notifications is sub judice before the Supreme Court.
Application of law to facts: The Court holds that the present petition challenging the notifications shall be subject to the Supreme Court's decision in SLP No. 4240/2025. The Court refrains from adjudicating on the vires of the notifications and confines itself to procedural issues and interim reliefs.
Conclusions: The Court's order is expressly made subject to the Supreme Court's ultimate determination on the validity of the impugned notifications.
3. SIGNIFICANT HOLDINGS
"Since the challenge to the above mentioned notifications is presently under consideration before the Supreme Court in S.L.P No 4240/2025... the challenge made by the Petitioner to the impugned notification in the present proceedings shall also be subject to the outcome of the decision of the Supreme Court."
"The impugned demand orders dated 23rd April, 2024 and 5th December, 2023 are accordingly set aside. In response to show cause notices dated 04th December, 2023 and 23rd September, 2023, the Petitioner shall file its replies within thirty days. The hearing notices shall now not be merely uploaded on the portal but shall also be e-mailed to the Petitioner and upon the hearing notice being received, the Petitioner would appear before the Department and make its submissions. The show cause notices shall be adjudicated in accordance with law."
"Let the entire matter be considered afresh and an order be passed on merits after duly considering the reply and the submissions made by the Petitioner in the personal hearing."
Core principles established include:
Violation of principles of natural justice - submission of the Petitioner is that the SCN was not brought to the knowledge of petitioner - Challenge to adjudication order and N/Ns. 9/2023-Central Tax dated 31st March, 2023 and 56/2023- Central Tax dated 28th December, 2023 issued by the Central Board of Indirect Taxes and Customs - HELD THAT:- The Court has heard the parties. In fact this Court in NEELGIRI MACHINERY THROUGH ITS PROPRIETOR MR. ANIL KUMAR VERSUS COMMISSIONER DELHI GOODS AND SERVICE TAX AND OTHERS [2025 (3) TMI 1308 - DELHI HIGH COURT] under similar circumstances where the SCN was uploaded vide ‘Additional Notices Tab’ had remanded the matter subject to terms imposed.
It is relevant to note that post 17th January 2024, the Department has effected changes in the portal to ensure that the SCNs become visible to parties. However, the SCN in the present case is of December 2023, therefore, following the above decision in Neelgiri Machinery, this Court inclined to set aside the impugned order and grant the Petitioner a fresh hearing.
The matter is relegated back to the adjudicating authority and the Petitioner is permitted to file a reply within 30 days - petition disposed off.
1. Whether the impugned adjudication order passed under Section 73 of the Delhi/Central Goods and Services Tax Act, 2017 (DGST/CGST Act, 2017) is valid, particularly in light of procedural fairness and opportunity to be heard.
2. The validity and legality of Notification Nos. 09/2023-Central Tax and 56/2023-Central Tax issued by the Central Board of Indirect Taxes and Customs under Section 168A of the CGST Act, 2017, specifically whether the notifications were issued following the proper procedure, including the requirement of prior recommendation of the GST Council.
3. The effect of the ongoing judicial controversy and conflicting High Court decisions on the notifications' validity, and the impact of pending Supreme Court proceedings on the present petition.
4. Whether the petitioner was denied a fair opportunity to respond to the Show Cause Notice (SCN) due to the manner of its issuance and communication, and the consequent validity of the adjudication order passed ex-parte.
Issue-wise Detailed Analysis:
1. Validity of the Impugned Notifications under Section 168A of the CGST Act, 2017
Legal Framework and Precedents: Section 168A of the CGST Act mandates that any extension of the time limit for adjudication of show cause notices and passing orders requires a prior recommendation of the GST Council. The notifications challenged were issued purportedly under this provision.
Multiple High Courts have taken divergent views on the validity of these notifications. The Allahabad High Court upheld Notification No. 9, the Patna High Court upheld Notification No. 56, whereas the Guwahati High Court quashed Notification No. 56. The Telangana High Court observed invalidity issues with Notification No. 56 but did not decide on its vires. This conflicting judicial stance underscores the unsettled nature of the law on this point.
The Supreme Court has admitted a Special Leave Petition (SLP No. 4240/2025) concerning the legality of these notifications and issued notices, highlighting the importance and complexity of the issue. The Supreme Court's order indicates that the key question is whether the time limits for adjudication under Section 73 of the GST Act can be extended by issuing these notifications under Section 168A.
Court's Interpretation and Reasoning: The Court acknowledged the ongoing judicial divergence and the pendency of the Supreme Court proceedings. It refrained from expressing any opinion on the validity of the notifications, deferring to the Supreme Court's final adjudication.
Application of Law to Facts: The Court held that the challenge to the notifications in the present petition would be subject to the Supreme Court's decision in the pending SLP. It recognized the notifications' centrality to the adjudication proceedings but did not decide their validity at this stage.
Treatment of Competing Arguments: The Court noted the petitioner's challenge to the notifications on procedural grounds and the respondents' reliance on the notifications' validity. Given the conflicting High Court rulings and the Supreme Court's intervention, the Court chose judicial restraint.
Conclusion: The issue of the notifications' validity remains open and pending before the Supreme Court. The Court's orders and directions are without prejudice to the final outcome of the Supreme Court's decision.
2. Procedural Fairness in Issuance of Show Cause Notice and Adjudication Order
Legal Framework and Precedents: Principles of natural justice require that a party must be given adequate notice and an opportunity to be heard before adverse orders are passed. The GST portal's practice of uploading notices under an 'Additional Notices' tab, which was not prominently visible, has been challenged in several cases.
Precedents from this Court and others (e.g., W.P.(C) 13727/2024, Satish Chand Mittal, Anant Wire Industries) have held that failure to bring SCNs to the petitioner's actual notice and denial of a personal hearing renders the adjudication order liable to be set aside and remanded for fresh adjudication.
Court's Interpretation and Reasoning: The Court found that the petitioner was not aware of the SCN dated 22nd May 2024 because it was uploaded under the 'Additional Notices' tab on the GST portal and was not brought to the petitioner's attention. This resulted in the petitioner being deprived of the opportunity to file a reply or appear for a personal hearing.
The Court noted that the respondents had rectified the portal after 16th January 2024 to make such notices more visible, but this did not assist the petitioner in the present case.
Key Evidence and Findings: The petitioner's submissions and the procedural history showed that the SCN was effectively concealed from the petitioner. The impugned demand orders were passed ex-parte without the petitioner's participation.
Application of Law to Facts: Applying the settled principles of natural justice, the Court concluded that the impugned orders were passed in violation of the petitioner's right to be heard and thus could not stand.
Treatment of Competing Arguments: While the respondents argued that the SCN was issued after the portal was fixed, the Court held that this did not cure the procedural defect in the present case.
Conclusion: The Court set aside the impugned demand orders and directed that the petitioner be given a fresh opportunity to file replies and be heard through personal hearings. It mandated that hearing notices not only be uploaded on the portal but also communicated via email and phone to ensure actual notice.
3. Impact of Pending Supreme Court Proceedings and Judicial Discipline
The Court recognized that the issue of the validity of the impugned notifications is sub judice before the Supreme Court and that several High Courts have either stayed or disposed of related petitions in deference to the Supreme Court's forthcoming decision.
Respecting judicial discipline, the Court declined to decide on the notifications' validity and directed that the adjudicating authority's orders be subject to the Supreme Court's final ruling.
This approach ensures uniformity and avoids conflicting decisions on a matter of national importance.
Significant Holdings:
"The challenge made by the Petitioner to the notification in the present proceedings shall also be subject to the outcome of the decision of the Supreme Court."
"Be that as it may, intention is to ensure that the Petitioner is given an opportunity to file its reply and is heard on merits and that orders are not passed in default."
"The impugned demand orders dated 23rd April, 2024 and 5th December, 2023 are accordingly set aside."
"The hearing notices shall now not be merely uploaded on the portal but shall also be e-mailed to the Petitioner and upon the hearing notice being received, the Petitioner would appear before the Department and make its submissions."
Core principles established include the mandatory nature of procedural fairness in tax adjudication proceedings, the necessity of effective communication of notices, and judicial restraint in matters pending before the Supreme Court.
Final determinations on each issue are:
- The validity of the impugned notifications under Section 168A of the CGST Act remains undecided and subject to the Supreme Court's ruling.
- The impugned adjudication orders passed without affording the petitioner a fair opportunity to respond are set aside.
- The petitioner is entitled to file replies and be heard through personal hearings, with proper communication of notices ensured.
- The adjudicating authority shall pass fresh orders in accordance with law, subject to the Supreme Court's final decision on the notifications' validity.
Violation of principles of natural justice - submission of the Petitioner is that the SCN was not brought to the knowledge of petitioner - Challenge to adjudication order and N/Ns. 9/2023-Central Tax dated 31st March, 2023 and 56/2023- Central Tax dated 28th December, 2023 issued by the Central Board of Indirect Taxes and Customs - HELD THAT:- The Court has heard the parties. In fact this Court in NEELGIRI MACHINERY THROUGH ITS PROPRIETOR MR. ANIL KUMAR VERSUS COMMISSIONER DELHI GOODS AND SERVICE TAX AND OTHERS [2025 (3) TMI 1308 - DELHI HIGH COURT] under similar circumstances where the SCN was uploaded vide ‘Additional Notices Tab’ had remanded the matter subject to terms imposed.
The impugned demand orders dated 23rd April, 2024 and 5th December, 2023 are accordingly set aside. In response to show cause notices dated 04th December, 2023 and 23th September, 2023, the Petitioner shall file its replies within thirty days. The hearing notices shall now not be merely uploaded on the portal but shall also be e-mailed to the Petitioner and upon the hearing notice being received, the Petitioner would appear before the Department and make its submissions. The show cause notices shall be adjudicated in accordance with law.
Petition disposed off.
1. Whether the impugned notifications Nos. 9/2023-Central Tax and 56/2023-Central Tax issued by the Central Board of Indirect Taxes and Customs comply with the procedural requirements under Section 168A of the Central Goods and Services Tax Act, 2017, particularly regarding the necessity of prior recommendation by the GST Council for extending deadlines related to adjudication under the GST Act.
2. Whether the adjudication order dated 31st December, 2023 passed by the Sales Tax Officer under Section 73 of the DGST/CGST Act, 2017, is valid, specifically considering the Petitioner's contention that the order is cryptic and does not adequately consider the reply filed.
3. The broader issue of whether the time limit for adjudication of show cause notices and passing of orders under Section 73 of the GST Act and corresponding State GST Acts for the financial year 2019-2020 could be extended by issuance of the impugned notifications under Section 168A of the GST Act.
4. The question of whether the impugned notifications were issued following the proper procedure, including whether the GST Council's recommendation was obtained prior to issuance, and the implications of any procedural irregularity on the validity of the notifications.
5. The treatment of ex-parte adjudication orders passed against Petitioners who were allegedly unable to file replies or avail personal hearings.
Issue-wise Detailed Analysis
1. Validity of the impugned notifications Nos. 9/2023 and 56/2023 under Section 168A of the GST Act
Relevant legal framework and precedents: Section 168A of the Central Goods and Services Tax Act, 2017 mandates that any extension of the time limit for adjudication of show cause notices and passing of orders must be made on the prior recommendation of the GST Council. The notifications in question purportedly extended such deadlines.
Several High Courts have taken divergent views on the validity of these notifications. The Allahabad High Court upheld Notification No. 9, the Patna High Court upheld Notification No. 56, whereas the Guwahati High Court quashed Notification No. 56. The Telangana High Court expressed reservations regarding Notification No. 56 but did not conclusively rule on its vires. This cleavage of opinions has led to the Supreme Court taking cognizance of the issue in SLP No. 4240/2025.
Court's interpretation and reasoning: The Delhi High Court acknowledged the conflicting judicial opinions and the pendency of the matter before the Supreme Court. It noted that Notification No. 9 was issued following the GST Council's recommendation, whereas Notification No. 56 was issued prior to such recommendation, which was only given subsequently, thus potentially violating the statutory mandate under Section 168A.
Application of law to facts: The Court recognized that the procedural irregularity in the issuance of Notification No. 56, if established, could render it invalid. However, given the ongoing Supreme Court proceedings, the Court refrained from expressing a definitive opinion on the validity of the notifications.
Treatment of competing arguments: The Court considered the submissions challenging the notifications on procedural grounds and noted the interim orders and judicial restraint exercised by other High Courts pending Supreme Court adjudication.
Conclusion: The Court held that the challenge to the notifications shall be subject to the Supreme Court's final decision and accordingly did not decide on their validity.
2. Validity of the adjudication order dated 31st December, 2023
Relevant legal framework and precedents: Section 73 of the DGST/CGST Act, 2017 empowers the Sales Tax Officer to adjudicate demands arising from show cause notices. The principles of natural justice require that the adjudicating authority consider replies filed and provide reasoned orders.
Court's interpretation and reasoning: The Petitioner contended that the impugned order was cryptic and failed to consider the reply filed on 7th December, 2023. The Court examined the order and found it to be a reasoned order wherein the Petitioner's submissions were duly considered. The Court noted that a personal hearing was also granted to the Petitioner.
Key evidence and findings: The record showed the reply was filed in time and a personal hearing was conducted. The impugned order contained reasoning addressing the Petitioner's contentions.
Application of law to facts: Since the order was reasoned and considered the Petitioner's reply, the Court declined to set aside the adjudication order.
Treatment of competing arguments: The Petitioner's grievance of ex-parte adjudication was addressed by noting that personal hearings were granted and replies were considered.
Conclusion: The Court upheld the adjudication order but permitted the Petitioner to file an appeal under Section 107 of the CGST Act, 2017 within 30 days with requisite pre-deposit, which shall not be dismissed on limitation grounds and shall be adjudicated on merits.
3. Relief and interim measures pending Supreme Court decision
The Court observed that many writ petitions challenging the notifications were pending before various High Courts and the Supreme Court. The Punjab and Haryana High Court had disposed of related petitions, deferring to the Supreme Court's forthcoming decision and maintaining interim orders.
The Delhi High Court also refrained from expressing a final view on the validity of the notifications and directed that the outcome of the Supreme Court's decision would be binding on the parties.
Regarding cases where adjudication orders were passed ex-parte due to inability to file replies or avail personal hearings, the Court indicated a prima facie view that affected Petitioners should be afforded an opportunity to place their stand before the adjudicating authority or pursue appellate remedies, without deciding the validity of the notifications at this stage.
Significant Holdings
"Insofar as Notification No. 56/2023 (Central Tax) the challenge is that the extension was granted contrary to the mandate under Section 168A of the Central Goods and Services Tax Act, 2017 and ratification was given subsequent to the issuance of the notification. The notification incorrectly states that it was on the recommendation of the GST Council."
"Since the challenge to the above mentioned notifications is presently under consideration before the Supreme Court ... the challenge made by the Petitioner to the notifications in the present proceedings shall also be subject to the outcome of the decision of the Supreme Court."
"A perusal of the impugned order and the attachment would show that the former is in fact a reasoned order wherein the Petitioner's reply has been duly considered. Hence, this Court is not inclined to set aside the impugned order."
"If the appeal is filed along with the requisite pre-deposit within a period of 30 days, the same shall not be dismissed on the ground of limitation and shall be entertained and adjudicated on merits."
Core principles established include:
Final determinations:
Violation of principles of natural justice - submission of the Petitioner is that the impugned order is cryptic and does not consider the reply - Challenge to adjudication order and N/Ns. 9/2023-Central Tax dated 31st March, 2023 and 56/2023- Central Tax dated 28th December, 2023 issued by the Central Board of Indirect Taxes and Customs - HELD THAT:- The Court has perused the records. A perusal of the impugned order and the attachment would show that the former is in fact a reasoned order wherein the Petitioner’s reply has been duly considered. Hence, this Court is not inclined to set aside the impugned order.
The Petitioner is permitted to file an appeal under Section 107 of the Central Goods and Services Tax Act, 2017 challenging the impugned order, if required - Petition disposed off.
The core legal questions considered in the judgment are:
2. ISSUE-WISE DETAILED ANALYSIS
Validity of Notifications Issued Under Section 168A of the CGST Act
Relevant Legal Framework and Precedents: Section 168A of the CGST Act empowers the government to extend the time limit for issuance of show cause notices and passing of orders beyond the prescribed period, but only upon prior recommendation of the GST Council. The notifications challenged include Notification No. 9/2023-Central Tax dated 31st March, 2023, and Notification No. 56/2023-Central Tax dated 28th December, 2023, as well as corresponding State Tax notifications.
Various High Courts have delivered conflicting judgments on the validity of these notifications. The Allahabad High Court upheld Notification No. 9/2023, the Patna High Court upheld Notification No. 56/2023, while the Guwahati High Court quashed Notification No. 56/2023 (Central Tax). The Telangana High Court made observations regarding invalidity of Notification No. 56/2023 (Central Tax), and this issue is currently pending before the Supreme Court in S.L.P No. 4240/2025.
Court's Interpretation and Reasoning: The Court acknowledged the divergence of judicial opinions and noted that the Supreme Court is seized of the matter for final adjudication. The Court refrained from expressing any opinion on the validity of the notifications, deferring to the Supreme Court's forthcoming decision.
Application of Law to Facts and Treatment of Competing Arguments: The Court recognized that the petitioner challenged the notifications on procedural grounds, specifically the absence of prior GST Council recommendation before issuance of Notification No. 56/2023 (Central Tax), and the timing of issuance of State Tax Notification No. 56/2023 after expiry of limitation. However, given the pending Supreme Court proceedings, the Court held that the challenge to the notifications in the present petition would be subject to the Supreme Court's outcome.
Conclusions: The Court did not decide on the validity of the impugned notifications but stayed the issue pending the Supreme Court's ruling. It noted that interim orders passed in related cases would continue to operate.
Legality of the Impugned Order-in-Original Passed Without Opportunity of Hearing
Relevant Legal Framework: Section 73 of the CGST Act governs adjudication of tax demands arising from show cause notices. Principles of natural justice mandate that a taxpayer must be given an opportunity to file a reply and participate in personal hearings before adverse orders are passed. Section 75(4) of the CGST Act mandates issuance of personal hearing notices and reminders.
Key Evidence and Findings: The petitioner was issued a show cause notice dated 15th May, 2024, with a deadline to reply by 15th June, 2024. The petitioner did not file any reply. The Sales Tax Officer afforded a personal hearing opportunity on 22nd July, 2024, but neither the petitioner nor its authorized representative attended. The adjudicating authority proceeded ex-parte and confirmed the demand. An application for rectification filed by the petitioner was rejected.
Court's Interpretation and Reasoning: The Court observed that the petitioner's failure to file a reply was due to the reply being handed to an accountant who failed to act. Moreover, the petitioner contended it was not afforded a proper opportunity for personal hearing. The Court held that passing an order without hearing the petitioner violated principles of natural justice. It emphasized that an opportunity to contest the matter on merits must be granted.
Application of Law to Facts: The Court set aside the impugned order and granted the petitioner 30 days to file a reply to the SCN. It directed the adjudicating authority to issue a fresh notice for personal hearing, ensuring communication through specified mobile number and email address. The adjudicating authority was mandated to consider the petitioner's reply and submissions before passing a fresh order.
Treatment of Competing Arguments: While the respondents relied on the absence of reply and non-attendance at the hearing to justify ex-parte adjudication, the Court prioritized the petitioner's right to be heard and procedural fairness over the procedural default by the petitioner's accountant.
Conclusions: The impugned order was quashed for lack of opportunity to be heard. The petitioner was afforded a fresh chance to present its case, and the adjudicating authority was directed to pass a fresh order after due consideration.
Relief Pending Supreme Court Decision
The Court recognized that the validity of the impugned notifications is a threshold issue pending before the Supreme Court. It held that any fresh order passed by the adjudicating authority after hearing the petitioner would be subject to the Supreme Court's decision. The Court also noted that interim orders in related cases would continue to operate and that the petitioner could pursue appellate remedies.
3. SIGNIFICANT HOLDINGS
"The Court is of the opinion that since the Petitioner has not been afforded an opportunity to be heard and the impugned order has been passed without hearing the Petitioner, an opportunity ought to be afforded to the Petitioner to contest the matter on merits."
"The impugned order is set aside. The Petitioner is granted 30 days' time to file the reply to SCN. Upon filing of the reply, the Adjudicating Authority shall issue to the Petitioner, a notice for personal hearing."
"However, it is made clear that the issue in respect of the validity of the impugned notifications is left open. Any order passed by the Adjudicating Authority shall be subject to the outcome of the decision of the Supreme Court."
Core principles established include:
Final determinations on each issue are:
Violation of principles of natural justice - submission of the Petitioner is that the impugned order has been passed without giving the Petitioner any opportunity to be heard - Challenge to adjudication order and N/Ns. 9/2023-Central Tax dated 31st March, 2023 and 56/2023- Central Tax dated 28th December, 2023 issued by the Central Board of Indirect Taxes and Customs - HELD THAT:- This Court is of the opinion that since the Petitioner has not been afforded an opportunity to be heard and the impugned order has been passed without hearing the Petitioner, an opportunity ought to be afforded to the Petitioner to contest the matter on merits.
The impugned order is set aside. The Petitioner is granted 30 days’ time to file the reply to SCN. Upon filing of the reply, the Adjudicating Authority shall issue to the Petitioner, a notice for personal hearing - Petition disposed off.
The core legal questions considered by the Court include:
2. ISSUE-WISE DETAILED ANALYSIS
Validity of the Impugned Notifications under Section 168A of the CGST Act
The legal framework governing the issuance of notifications extending time limits for adjudication under the CGST Act is Section 168A, which mandates that any such extension must be preceded by a recommendation of the GST Council. The Petitioner challenged both Notification No. 09/2023 and Notification No. 56/2023 on the ground that the latter was issued without prior GST Council recommendation, with ratification occurring only post issuance, thus violating statutory procedure.
The Court noted a divergence in judicial opinions on this issue: the Allahabad and Patna High Courts upheld the validity of the notifications, whereas the Guwahati High Court quashed Notification No. 56/2023. The Telangana High Court expressed doubts on the validity of Notification No. 56/2023 without delving into detailed vires analysis. The Supreme Court has admitted Special Leave Petition No. 4240/2025, which raises the question of whether the time limit for adjudication under Section 73 of the GST Act could be extended via these notifications issued under Section 168A. The Supreme Court's order recognized a cleavage of opinion among High Courts and issued notice with interim relief pending final adjudication.
Thus, the Court acknowledged that the validity of the impugned notifications is currently sub judice before the Supreme Court and that the issue is of significant legal importance, involving statutory interpretation and procedural compliance.
Adjudication Order under Section 73 of the CGST Act
The Petitioner contended that the impugned adjudication order dated 5th April, 2024 was a non-speaking order passed without affording sufficient opportunity to be heard, thereby violating principles of natural justice. The Court examined the record, including the show cause notice dated 8th December, 2023 and the DRC-06 Forms, which demonstrated that the Petitioner was afforded multiple opportunities to file a reply but failed to do so.
On these facts, the Court found no merit in the contention that the order was non-speaking or passed without due opportunity. The failure to respond led to the ex-parte confirmation of demand. Consequently, the Court declined to set aside the impugned order.
Relief and Procedural Accommodations Pending Supreme Court Decision
While the validity of the notifications remains undecided, the Court recognized the practical difficulties faced by petitioners who were unable to file replies or attend personal hearings, resulting in ex-parte orders and significant financial demands and penalties. The Court identified six broad categories of cases and indicated a prima facie view that, depending on the category, petitioners should be allowed to place their stand before the adjudicating authority and pursue appellate remedies without prejudice to the question of the notifications' validity.
The Court granted liberty to the Petitioner to file an appeal against the impugned order within 30 days, directing that such appeal would not be dismissed on limitation grounds if filed within the stipulated period and would be adjudicated on merits. The Court clarified that the appellate authority's order would remain subject to the Supreme Court's final decision on the notifications' validity.
Judicial Discipline and Impact of Conflicting High Court Decisions
The Court observed that multiple High Courts had issued conflicting rulings on the notifications' validity, and that the Supreme Court was seized of the matter. The Punjab and Haryana High Court had disposed of connected writ petitions by deferring to the Supreme Court's pending adjudication and refraining from expressing opinions on the vires of Section 168A or the notifications. This approach was endorsed to maintain judicial discipline and avoid conflicting outcomes pending the Supreme Court's ruling.
3. SIGNIFICANT HOLDINGS
"The challenge made by the Petitioner to the notifications in the present proceedings shall also be subject to the outcome of the decision of the Supreme Court."
"The DRC-06 Forms attached with the petition clearly reveal that sufficient opportunities were afforded to the Petitioner to file a reply. It is only upon the failure of the Petitioner to file the same, that the Ld. Assistant Commissioner has proceeded to pass the impugned order confirming the demand."
"If the appeal along with the requisite pre-deposit provided under Section 107 of the Central Goods and Services Tax Act, 2017 is filed within a period of 30 days, the same shall not be dismissed on the ground of limitation and shall be entertained and adjudicated on merits."
Core principles established include:
Final determinations:
Violation of principles of natural justice - no personal hearing was given before making the demand - Challenge to adjudication order dated 25th August, 2024 and N/N. 56/2023-Central Tax dated 28th December, 2023 issued by the Central Board of Indirect Taxes and Customs - HELD THAT:- The Court has perused the record. The impugned order arises from the show cause notice dated 8th December, 2023. The DRC-06 Forms attached with the petition clearly reveal that sufficient opportunities were afforded to the Petitioner to file a reply. It is only upon the failure of the Petitioner to file the same, that the Ld. Assistant Commissioner has proceeded to pass the impugned order confirming the demand to the tune of Rs. 35,03,595/-.
This Court is not inclined to set aside the impugned order - petition disposed off.
Regarding the validity of the impugned notifications, the Court analyzed the statutory framework under Section 168A of the CGST Act, which mandates prior recommendation of the GST Council before extending time limits for adjudication of show cause notices and passing orders. The Court noted that while Notification No. 9/2023-Central Tax was issued following the GST Council's recommendation, Notification No. 56/2023-Central Tax was issued without such prior recommendation, with ratification occurring only after issuance. This procedural irregularity formed the basis of the challenge to Notification No. 56/2023.
The Court observed that various High Courts have taken divergent views on the validity of these notifications: the Allahabad and Patna High Courts upheld the notifications, whereas the Guwahati High Court quashed Notification No. 56/2023-Central Tax. The Telangana High Court also expressed reservations regarding the validity of Notification No. 56/2023 without deciding on its vires, and this issue is presently sub judice before the Supreme Court in S.L.P No. 4240/2025. The Supreme Court's order in this SLP highlighted the cleavage of judicial opinion and issued notice, indicating the matter's complexity and importance.
The Court emphasized judicial discipline and refrained from expressing any opinion on the validity of Section 168A and the impugned notifications, noting that the Punjab and Haryana High Court had similarly deferred to the Supreme Court's forthcoming decision. Consequently, the Court held that the challenge to Notification No. 56/2023 in the present petition would be subject to the Supreme Court's ruling.
On the procedural fairness issue, the petitioner contended that it was not granted a personal hearing before the adjudication order confirming a demand of approximately Rs. 9,96,765/- was passed. The impugned order arose from a show cause notice dated 9th May 2024, to which the petitioner filed a reply on 4th June 2024. However, the adjudication order noted that the petitioner did not avail the opportunity for personal hearing. The Court scrutinized the record and confirmed that no personal hearing was conducted prior to passing the order. The order specifically mentioned a mismatch in input tax credit claims and that the petitioner admitted to claiming ITC without proper accumulation, leading to the demand.
Applying principles of natural justice and procedural fairness, the Court set aside the impugned order and directed that a personal hearing be granted to the petitioner. The Court ordered issuance of a personal hearing notice to the petitioner's counsel's email address. It clarified that the validity of the impugned notification remains an open question and that any subsequent order passed by the adjudicating authority shall be subject to the Supreme Court's final decision in the pending SLP.
In balancing the competing arguments, the Court acknowledged the petitioner's inability to file replies and attend personal hearings due to various reasons, which resulted in ex-parte adjudication and imposition of heavy demands and penalties. The Court's approach was to protect the petitioner's right to be heard without prejudging the larger question of the notifications' validity, thereby preserving the petitioner's substantive and procedural rights pending the Supreme Court's authoritative pronouncement.
The Court also categorized the petitions before it into six broad categories and indicated that, depending on the category, appropriate orders could be passed affording parties an opportunity to present their case or pursue appellate remedies. This pragmatic approach sought to balance the need for procedural fairness with the ongoing litigation over the notifications' validity.
Significant holdings from the judgment include the following verbatim excerpt from the impugned adjudication order, which the Court analyzed to determine the absence of personal hearing:
"W.r.t. mismatch in Table 8A of GSTR-9 with GSTR-3B for the FY 2019-20 amounting to Rs. 8634/- SGST Rs. 8634/- CGST Rs. 92797 /- IGST, the taxpayer had not availed the opportunity of personal hearing afforded to him and accordingly the case has been decided on the basis on the reply filed by the taxpayer on 01-06-2024. As per the reply the taxpayer had stated that CGTMSE had not reported the ITC on their fees amount and in spite of their take up with them the same are still not reflecting. In other words it is admitted by the taxpayer that the input has been claimed without its accumulation irrespective of whatever is the reason and accordingly I raise the demand against the taxpayer."
The Court's core principles established include:
In conclusion, the Court set aside the impugned order for lack of personal hearing and directed issuance of a personal hearing notice to the petitioner. The Court refrained from adjudicating on the validity of Notification No. 56/2023-Central Tax, leaving that issue open pending the Supreme Court's decision. The petition was disposed of accordingly, with pending applications also disposed of.
Right to personal hearing - Natural justice - Setting aside adjudication order - Validity of notification - Subjudice reference to Supreme Court
Right to personal hearing - Natural justice - Setting aside adjudication order - Impugned adjudication order set aside for failure to afford personal hearing and matter remitted for fresh hearing. - HELD THAT: - The impugned order records that the taxpayer did not avail the opportunity of personal hearing and the case was decided on the basis of the reply. The Court found from the record that no personal hearing had in fact been afforded before confirmation of demand. For want of a personal hearing, the impugned order was quashed and the matter was directed to be placed for a personal hearing; the adjudicating authority is to issue a personal hearing notice to the petitioner at the email address furnished and reconsider the matter in accordance with law. The decision pertains to the adjudication arising from the show cause notice dated 9th May, 2024 concerning FY 2019-20 and is set aside on the ground of breach of the principles of natural justice. [Paras 8, 9]
Impugned order set aside; personal hearing to be granted and adjudicating authority to reconsider the matter.
Validity of notification - Subjudice reference to Supreme Court - Challenge to the validity of the impugned notification left open and to be governed by the outcome of the pending Supreme Court proceedings. - HELD THAT: - The petition also impugned Notification No. 56/2023-Central Tax and related notifications. The Court observed that the vires of the notifications are being considered in an SLP pending before the Supreme Court (SLP No. 4240/2025) and that several High Courts have rendered differing views. Consequently, the Court refrained from adjudicating the validity of the notifications in these proceedings and held that any order passed by the adjudicating authority shall be subject to the final decision of the Supreme Court. The question of the notifications' validity remains open and governed by the Supreme Court's outcome. [Paras 5, 10]
Validity of the impugned notification left open; any subsequent adjudication to be subject to the Supreme Court's decision.
Final Conclusion: The petition is disposed of by setting aside the adjudication order for failure to afford personal hearing and directing a fresh personal hearing and reconsideration; the challenge to the impugned notification is left open and any adjudication shall be subject to the outcome of the pending Supreme Court proceedings.
The core legal questions considered by the Court include:
(a) The validity and legality of Notification No. 56/2023 (Central Tax) issued by the Central Board of Indirect Taxes and Customs under Section 168A of the Central Goods and Services Tax Act, 2017 (hereinafter, "the GST Act"), particularly whether the notification was issued in compliance with the mandatory procedural requirements including prior recommendation of the GST Council.
(b) The extension of time limits for adjudication of show cause notices and passing of orders under Section 73 of the GST Act and whether such extensions could be validly granted through the impugned notifications.
(c) The procedural fairness in the issuance of show cause notices (SCNs), specifically whether the SCN dated 20th December 2023 was effectively communicated to the Petitioner, given that it was uploaded under the 'Additional Notices Tab' on the GST portal and whether the Petitioner was afforded an opportunity for personal hearing before passing the adjudication order dated 9th April 2024.
(d) The impact of pending Supreme Court proceedings (SLP No. 4240/2025) on the adjudication and validity of the impugned notifications and related orders, and the appropriate course of action pending final adjudication by the Supreme Court.
(e) The scope of relief available to the Petitioners, including the possibility of remanding matters for fresh adjudication affording adequate opportunity to be heard, without pre-empting the validity of the impugned notifications.
2. ISSUE-WISE DETAILED ANALYSIS
(a) Validity of Notification No. 56/2023 (Central Tax) under Section 168A of the GST Act
The legal framework governing the issuance of notifications extending time limits for adjudication under the GST Act is Section 168A, which mandates that such extensions require prior recommendation of the GST Council.
The Court noted a divergence in judicial opinion from various High Courts on the validity of Notification No. 56/2023. The Allahabad and Patna High Courts upheld the notification, while the Guwahati High Court quashed it. The Telangana High Court observed invalidity but did not decide on vires, and this issue is currently under consideration by the Supreme Court in SLP No. 4240/2025.
The Supreme Court's order in the said SLP highlighted the cleavage of opinion and issued notice, indicating that the ultimate determination on the validity of the impugned notifications, including No. 56/2023, rests with the apex court.
The Court therefore refrained from expressing any opinion on the validity of the notification, deferring to the pending Supreme Court adjudication. It recognized that the notification purportedly extended the limitation period for adjudication under Section 73 of the GST Act, but the procedural correctness of such extension was in dispute.
(b) Extension of time limits for adjudication under Section 73 of the GST Act
The issue of whether the time limits for adjudication of show cause notices and passing of orders could be extended by notifications issued under Section 168A was central to the controversy. The Court observed that the impugned notification purported to extend these deadlines but was challenged on procedural grounds, including the timing of GST Council's recommendation.
The Court noted the legislative requirement for prior recommendation and the procedural irregularity alleged, which formed the basis of the challenge. However, as the Supreme Court was seized of the matter, the Court declined to decide this issue independently. The Court acknowledged that the question of validity of extension notifications directly impacts the enforceability of demands and penalties raised under extended limitation periods.
(c) Procedural fairness in issuance and communication of show cause notices
The Petitioner contended that the SCN dated 20th December 2023 was uploaded only under the 'Additional Notices Tab' on the GST portal, which was not readily visible or brought to the Petitioner's attention, resulting in non-receipt and inability to respond or appear for personal hearing.
The Court relied on precedents from this Court, including W.P.(C) 13727/2024 (Neelgiri Machinery) and other similar cases, where it was held that uploading SCNs under the 'Additional Notices & Orders' tab without adequate notice or communication to the party violates principles of natural justice. In such cases, orders passed ex-parte without personal hearing and opportunity to reply were set aside.
The Court emphasized the necessity of affording a fair opportunity of hearing and directed that hearing notices should not only be uploaded on the portal but also be communicated via email to the Petitioner to ensure effective notice.
Following this, the Court set aside the impugned adjudication order dated 9th April 2024 and demand orders dated 23rd April 2024 and 5th December 2023, and remanded the matter for fresh adjudication after affording the Petitioner a personal hearing and opportunity to file reply within 30 days.
(d) Impact of pending Supreme Court proceedings on the adjudication process
The Court acknowledged the pendency of the Supreme Court's decision on the validity of the impugned notifications and the extension of limitation periods. It observed that several High Courts had either stayed or deferred adjudication pending the Supreme Court's ruling.
In view of judicial discipline and to avoid conflicting decisions, the Court directed that adjudication orders passed by the authority shall be subject to the outcome of the Supreme Court's decision. It also noted interim orders passed by other High Courts and the Supreme Court's notice in the SLP, which indicated that the final determination on the vires of the notifications is awaited.
The Court accordingly left the issue of validity of the notifications open and confined itself to procedural safeguards ensuring fair hearing.
(e) Relief available to Petitioners and procedural directions
Recognizing the hardship caused by ex-parte orders and huge demands raised without opportunity to be heard, the Court categorized the petitions and proposed that, irrespective of the outcome on validity of notifications, Petitioners should be afforded an opportunity to place their case before the adjudicating authority.
The Court directed that the Petitioner shall be served hearing notices not merely by uploading on the portal but also by email, and that the Petitioner shall file replies within 30 days. The adjudicating authority was directed to consider the replies and pass orders afresh in accordance with law, ensuring compliance with principles of natural justice.
The Court's directions aimed to balance the procedural rights of the Petitioners while preserving the question of validity of the notifications for the Supreme Court's decision.
3. SIGNIFICANT HOLDINGS
The Court held:
"Since the challenge to the above mentioned notification is presently under consideration before the Supreme Court in S.L.P No 4240/2025 titled M/s HCC-SEW-MEIL-AAG JV v. Assistant Commissioner of State Tax & Ors., the challenge made by the Petitioner to the notification in the present proceedings shall also be subject to the outcome of the decision of the Supreme Court."
"The impugned order dated 9th April, 2024 was passed without providing the Petitioner a personal hearing and in absence of a reply on behalf of the Petitioner. The show cause notice dated 20th December, 2023 was uploaded on 'Additional Notices Tab' therefore, the same was not brought to the knowledge of the Petitioner."
"The impugned demand orders dated 23rd April, 2024 and 5th December, 2023 are accordingly set aside. In response to show cause notices dated 04th December, 2023 and 23rd September, 2023, the Petitioner shall file its replies within thirty days. The hearing notices shall now not be merely uploaded on the portal but shall also be e-mailed to the Petitioner and upon the hearing notice being received, the Petitioner would appear before the Department and make its submissions. The show cause notices shall be adjudicated in accordance with law."
Core principles established include:
(i) Procedural fairness and natural justice require that show cause notices and hearing notices must be effectively communicated to the party, including by email, and not merely uploaded on a portal under less visible tabs.
(ii) Adjudication orders passed ex-parte without opportunity to reply or personal hearing must be set aside and remanded for fresh consideration.
(iii) The validity of extension notifications issued under Section 168A of the GST Act, particularly Notification No. 56/2023, is a substantial question of law pending before the Supreme Court and must be left open by the High Courts.
(iv) Pending the Supreme Court's decision, adjudication must proceed subject to procedural safeguards and without pre-judging the validity of the notifications.
Final determinations on each issue were:
- The challenge to the validity of Notification No. 56/2023 is deferred to the Supreme Court.
- The impugned adjudication and demand orders are set aside for procedural infirmities.
- The Petitioner is granted opportunity to file replies and be heard personally before fresh adjudication.
- The adjudicating authority shall pass orders in accordance with law and subject to the Supreme Court's eventual ruling on the validity of the notifications.
Violation of principles of natural justice - service of SCN - SCN was uploaded on ‘Additional Notices Tab’ therefore, the same was not brought to the knowledge of the Petitioner - opportunity of hearing was also not provided - Challenge to adjudication order dated 25th August, 2024 and N/N. 56/2023-Central Tax dated 28th December, 2023 issued by the Central Board of Indirect Taxes and Customs - HELD THAT:- In fact this Court in Neelgiri Machinery through its Proprietor Mr. Anil Kumar V. Commissioner Delhi Goods And Service Tax And Others [2025 (3) TMI 1308 - DELHI HIGH COURT] under similar circumstances where the SCN was uploaded vide ‘Additional Notices Tab’ had remanded the matter, subject to conditions imposed.
It is relevant to note that post 17th January 2024, the Department has effected changes in the portal to ensure that the SCNs become visible to parties. However, the SCN in the present case is of December 2023, therefore, following the above decision, the impugned order is set aside. Let the entire matter be considered afresh after giving a personal hearing notice to the Petitioner on the following email ID of the Petitioner.
Petition disposed off by way of remand.
1. Whether the impugned Notifications Nos. 9/2023-Central Tax and 56/2023-Central Tax issued under Section 168A of the Central Goods and Services Tax Act, 2017 (CGST Act) were validly issued, particularly in light of procedural requirements such as prior recommendation by the GST Council.
2. Whether the extension of time limits for adjudication of show cause notices and passing of orders under Section 73 of the CGST Act for the relevant financial years was legally permissible through these notifications.
3. Whether the impugned orders passed under Section 73 of the CGST Act, confirming demands without considering the replies or providing personal hearings, were legally sustainable.
4. The impact of conflicting judicial opinions from various High Courts on the validity of the impugned notifications and the extent to which this Court should express views pending Supreme Court adjudication.
Issue-wise Detailed Analysis:
Validity of Notifications Nos. 9/2023 and 56/2023 issued under Section 168A of the CGST Act
The legal framework governing the issuance of these notifications is Section 168A of the CGST Act, which mandates that any extension of time limits for adjudication of show cause notices requires prior recommendation from the GST Council. The Petitioner challenged the notifications on grounds that the proper procedural mandate was not followed, specifically highlighting that Notification No. 56/2023 was issued without prior GST Council recommendation and that ratification was granted only post issuance, thereby violating statutory requirements.
The Court noted that this challenge is not isolated but part of a batch of petitions, with the lead matter extensively deliberated upon. Various High Courts have taken divergent views: the Allahabad High Court upheld Notification No. 9, the Patna High Court upheld Notification No. 56, whereas the Guwahati High Court quashed Notification No. 56. The Telangana High Court expressed reservations about Notification No. 56 but did not conclusively decide on its vires. This cleavage of opinion has led to the matter being admitted by the Supreme Court for final adjudication.
The Supreme Court's interim order recognized the controversy surrounding the extension of time limits under Section 168A and issued notices in the special leave petition, indicating that a final determination on the validity of these notifications is pending. This Court accordingly refrained from expressing a definitive opinion on the validity of the notifications, emphasizing judicial discipline and the binding nature of the Supreme Court's forthcoming decision.
Extension of Time Limits for Adjudication under Section 73 of the CGST Act
The notifications in question purportedly extended the limitation period for adjudication of show cause notices under Section 73. The Petitioner contended that such extension was invalid due to procedural lapses in notification issuance. The Court acknowledged that this issue is intrinsically linked to the validity of the notifications themselves and is currently under Supreme Court consideration. Hence, the Court deferred any conclusive determination on this aspect.
Legality of Impugned Orders Passed Under Section 73
On the factual matrix, the Petitioner submitted that the impugned orders confirming substantial tax demands were passed without considering the replies filed or affording personal hearings, resulting in ex-parte adjudications. The Court examined the record and found that the order dated 24th December 2023 was cryptic and template-based, merely stating that no payment was made within 30 days of the notice and that demand was created on the basis of available documents, without addressing the Petitioner's submissions.
The Court held that such a procedure violates principles of natural justice, particularly the right to be heard. Consequently, the impugned order was set aside, and the matter was remanded to the Adjudicating Authority with directions to provide the Petitioner a personal hearing and to pass a reasoned order on merits in accordance with law. The Court also directed that notice of personal hearing be communicated through specified email and phone contact details.
Treatment of Conflicting Judicial Opinions and Interim Relief
Given the divergent views of various High Courts and the pending Supreme Court adjudication, this Court emphasized restraint in expressing opinions on the notifications' validity. It noted that other High Courts had stayed or disposed of petitions subject to the Supreme Court's decision, and it adopted a similar approach, allowing interim relief by ensuring procedural fairness in adjudication without prejudging the validity of the notifications.
Application of Law to Facts
The Court applied the principles of natural justice and statutory procedural safeguards to the facts, finding that the impugned orders were passed without due consideration of the Petitioner's replies or personal hearings, which is impermissible. While the question of the notifications' validity remains open, the Court ensured that the Petitioner's right to be heard is protected pending final resolution.
Conclusions
The Court concluded that:
- The challenge to the impugned notifications is subject to the Supreme Court's decision and is not decided at this stage.
- The impugned orders passed under Section 73 without considering replies or affording personal hearings are unsustainable and are set aside.
- The Petitioner must be given an opportunity of personal hearing and the Adjudicating Authority must pass fresh orders in accordance with law.
- Interim relief is granted without prejudice to the final outcome of the notifications' validity.
Significant Holdings:
The Court held: "A show cause notice/statement referred to above was issued to you u/s 73 of the Act for reasons stated therein. Since, no payment has been made within 30 days of the issue of the notice by you; therefore, on the basis of documents available with the department and information furnished by you, if any, demand is created for the reasons and other details attached in annexure." This excerpt was criticized as cryptic and insufficient, leading to the order's setting aside.
Core principles established include the necessity of adherence to natural justice in tax adjudication proceedings, particularly the right to be heard and consideration of replies before passing orders imposing demands and penalties.
The final determination on the validity of the impugned notifications remains reserved for the Supreme Court, with this Court's order explicitly stating that any subsequent adjudication shall be subject to the Supreme Court's outcome.
Violation of principles of natural justice - impugned order has been passed without considering the reply or providing a personal hearing - Challenge to SCN, subsequent orders and N/N. 9/2023-Central Tax dated 31st March, 2023 and 56/2023-Central Tax dated 28th December, 2023 issued by the Ministry of Finance (Department of Revenue), Central Board of Indirect Taxes and Customs - HELD THAT:- The Court has perused the records. In this petition, as mentioned above, the Petitioner has filed a reply to the SCN dated 25th September, 2023 on 11th October, 2023. However, the impugned order has been passed on 24th December, 2023 confirming the demand to the tune of Rs. 2,98,74,272/- without considering the reply. In fact, a perusal of the order would show that the same is cryptic and is in a template form.
Under these circumstances, the Court is inclined to set aside the impugned order and provide an opportunity to the Petitioner to be heard on merits.
The impugned order is set aside. Let the notice of personal hearing be given to the Petitioner - Petition disposed off by way of remand.
Firstly, the Court addressed whether the impugned notifications extending the time limits for adjudication under Section 168A of the CGST Act were validly issued, considering the requirement of prior recommendation by the GST Council. Secondly, the Court considered the procedural fairness in the adjudication process, particularly whether the petitioner was afforded a reasonable opportunity to file replies and participate in personal hearings before the passing of the impugned order. These issues were considered in the context of the petitioner's challenge to an adjudication order dated 23rd December 2023 and the associated notifications issued by the Central Board of Indirect Taxes and Customs.
Regarding the validity of the impugned notifications, the Court noted that the challenge is part of a batch of petitions pending before various High Courts and the Supreme Court, with conflicting judicial opinions on the matter. The key statutory provision under scrutiny is Section 168A of the CGST Act, which mandates that any extension of time limits for adjudication must be preceded by a recommendation from the GST Council. The Court observed that while Notification No. 09/2023 was issued following the GST Council's recommendation, Notification No. 56/2023 was challenged on the ground that it was issued prior to the Council's recommendation, thus allegedly violating Section 168A's procedural mandate.
In analyzing this issue, the Court referred to the ongoing Supreme Court proceedings in S.L.P No. 4240/2025, where the validity of these notifications is being examined. The Supreme Court has acknowledged the divergence of views among High Courts, with some upholding and others quashing Notification No. 56/2023. The Court prudently refrained from expressing any opinion on the validity of the notifications, deferring to the Supreme Court's forthcoming decision, and directed that the outcome of the Supreme Court's ruling would be binding on the present petition.
On the procedural fairness issue, the petitioner contended that the SCN dated 22nd November 2023 was uploaded under the 'Additional Notices Tab' on the GST portal, which did not come to their notice, resulting in the impugned order being passed ex-parte without a personal hearing or opportunity to file a reply. The Court extensively examined this contention, drawing parallels with prior decisions where similar procedural lapses were identified. It cited earlier judgments of this Court where orders were set aside due to the SCNs being inaccessible or unsigned, and where the departmental portal's design led to notices being overlooked by the taxpayers.
The Court emphasized the fundamental principle of natural justice that no order should be passed in default without affording the affected party a fair opportunity to be heard. It acknowledged the Department's subsequent remedial measures to improve the visibility of SCNs on the portal post-January 2024 but noted that the present SCN predates these changes. Consequently, the Court set aside the impugned adjudication order dated 23rd December 2023 and the related demand orders dated 23rd April 2024 and 5th December 2023.
Further, the Court directed that the petitioner be granted a fresh opportunity to file replies to the SCNs dated 4th December 2023 and 23rd September 2023 within thirty days. It mandated that future hearing notices should not only be uploaded on the portal but also sent via email to ensure actual receipt by the petitioner. A personal hearing was to be granted, with the petitioner's submissions duly considered before passing any fresh adjudication order. The Court explicitly left open the question of the notifications' validity, making clear that any fresh order would be subject to the Supreme Court's ultimate determination.
In its reasoning, the Court balanced the competing interests of administrative efficiency and taxpayers' rights. While recognizing the necessity of timely adjudication and the legislative intent behind Section 168A, it underscored the non-negotiable requirement of procedural fairness. The Court's approach reflects adherence to established principles that administrative actions must be fair, transparent, and provide meaningful opportunities for representation.
Significant holdings include the Court's affirmation that the validity of the impugned notifications is a substantial question of law currently under the Supreme Court's consideration, and thus no definitive opinion is expressed at this stage. The Court held that the failure to provide adequate notice and opportunity for personal hearing constitutes a breach of natural justice, warranting the setting aside of the impugned orders. The Court's directive that hearing notices be communicated via email in addition to portal uploads establishes a procedural safeguard to prevent future lapses.
Verbatim, the Court stated: "Intention is to ensure that the Petitioner is given an opportunity to file its reply and is heard on merits and that orders are not passed in default." This encapsulates the core principle guiding the Court's intervention.
In conclusion, the Court disposed of the petitions by setting aside the impugned orders and directing fresh adjudication in accordance with law, while explicitly preserving the question of the notifications' validity for the Supreme Court's determination. This judgment reinforces the primacy of procedural fairness in tax adjudication and the necessity of compliance with statutory mandates governing extension of limitation periods.
Violation of principles of natural justice - Service of SCN - SCN was uploaded on ‘Additional Notices Tab’ and did not come to the knowledge of the Petitioner - impugned order passed without providing the Petitioner a personal hearing and in the absence of a reply on behalf of the Petitioner - Challenge to adjudication order - challenge to N/N. 09/2023-Central Tax dated 31st March, 2023 issued by the Central Board of Indirect Taxes and Customs - HELD THAT:- This Court in Neelgiri Machinery through its Proprietor Mr. Anil Kumar V. Commissioner Delhi Goods And Service Tax And Others [2025 (3) TMI 1308 - DELHI HIGH COURT] under similar circumstances where the SCN was uploaded vide ‘Additional Notices Tab’ had remanded the matter.
It is relevant to note that post 17th January 2024, the Department has effected changes in the portal to ensure that the SCNs become visible to parties. However, the SCN in the present case is of November 2023, therefore, following the above decision, the impugned order is set aside.
Let the entire matter be considered afresh and an order be passed on merits after duly considering the reply and the submissions made by the Petitioner in the personal hearing - Petition disposed off.
The core legal questions considered by the Court in this matter are:
(a) Whether the impugned Notification No. 09/2023-Central Tax dated 31st March, 2023 and Notification No. 56/2023-Central Tax dated 8th December, 2023, issued under Section 168A of the Central Goods and Services Tax Act, 2017 (CGST Act), are valid and lawful, particularly in light of procedural requirements such as prior recommendation by the GST Council.
(b) Whether the adjudication order dated 19th August, 2024, passed under Section 73 of the DGST/CGST Act, 2017, is sustainable, given the circumstances surrounding the issuance and communication of the Show Cause Notice (SCN) to the Petitioner.
(c) Whether the Petitioner was afforded a fair opportunity of hearing, including proper service and notice of the SCN, and whether the adjudication order was passed ex-parte without due process.
(d) The broader question of the extension of limitation periods for adjudication under the GST Act via notifications issued under Section 168A, and the conflicting judicial opinions on this issue pending before the Supreme Court.
2. ISSUE-WISE DETAILED ANALYSIS
Issue (a): Validity of Notifications Nos. 09/2023 and 56/2023 issued under Section 168A of the CGST Act
Relevant Legal Framework and Precedents: Section 168A of the CGST Act empowers the Central Government to extend the time limit for adjudication of show cause notices and passing of orders under Sections 73 and 74 of the Act, subject to prior recommendation of the GST Council. The notifications in question purportedly extend the limitation period for adjudication of SCNs for the financial year 2019-2020.
Various High Courts have taken divergent views on the validity of these notifications. The Allahabad High Court upheld Notification No. 9, the Patna High Court upheld Notification No. 56, while the Guwahati High Court quashed Notification No. 56. The Telangana High Court expressed reservations about Notification No. 56, and the matter is currently under consideration by the Supreme Court in S.L.P No. 4240/2025.
Court's Interpretation and Reasoning: The Court acknowledged the existence of conflicting judicial opinions and noted that the Supreme Court is seized of the issue. The Court refrained from expressing any opinion on the validity of the notifications, recognizing the principle of judicial discipline and the binding nature of the Supreme Court's eventual ruling.
Application of Law to Facts: The Court held that the challenge to the impugned notifications in the present petition would be subject to the outcome of the Supreme Court's decision in the pending SLP.
Treatment of Competing Arguments: While the Petitioner challenged the notifications on procedural grounds, including the timing of the GST Council's recommendation and the expiry of limitation periods, the Court deferred to the Supreme Court's authoritative determination.
Conclusion: The validity of the impugned notifications remains an open question, pending the Supreme Court's adjudication.
Issue (b) and (c): Validity of the Adjudication Order and Fair Opportunity of Hearing
Relevant Legal Framework and Precedents: Section 73 of the DGST/CGST Act mandates adjudication of show cause notices within prescribed timelines. Principles of natural justice require that a noticee be given proper notice of proceedings and an opportunity to be heard before any adverse order is passed. The Court referred to earlier decisions where similar issues arose regarding the manner of service of SCNs, particularly when notices were uploaded under an 'Additional Notices' tab on the GST portal, which was not readily visible to the noticee.
Court's Interpretation and Reasoning: The Court found that the SCN dated 9th May, 2024, was uploaded under the 'Additional Notices' tab, which was not effectively brought to the Petitioner's attention. This resulted in the Petitioner being deprived of the opportunity to file a reply or appear for personal hearing. The Court noted that the adjudication order was consequently passed ex-parte, violating the principles of natural justice.
The Court relied on precedents such as W.P.(C) 13727/2024 (Neelgiri Machinery) and W.P.(C) 12589/2024 (Satish Chand Mittal) where similar situations were remedied by remanding the matter to the adjudicating authority for fresh adjudication after affording the petitioner an opportunity of hearing.
Key Evidence and Findings: The Court observed that the GST portal was subsequently rectified to make the 'Additional Notices' tab more visible, but this did not remedy the Petitioner's lack of knowledge at the time of issuance of the SCN. The Respondent-CGST Department conceded that the issue had been addressed only after 16th January, 2024.
Application of Law to Facts: Given the failure to effectively communicate the SCN, the Court set aside the impugned adjudication order and directed that the Petitioner be allowed to file a reply within 30 days and be given a personal hearing. The Court further directed that hearing notices not only be uploaded on the portal but also sent via email to ensure effective communication.
Treatment of Competing Arguments: The Respondent argued that the SCN was issued after the portal was rectified and that the Petitioner should have accessed the notice. The Court rejected this, emphasizing the Petitioner's lack of actual knowledge and opportunity to respond.
Conclusion: The adjudication order dated 19th August, 2024, was set aside. The Petitioner was granted an opportunity to file replies and be heard, and the adjudicating authority was directed to pass a fresh order in accordance with law.
Issue (d): Extension of Limitation Periods under Section 168A and Conflicting Judicial Opinions
Relevant Legal Framework and Precedents: Section 168A allows the Central Government to extend limitation periods for adjudication of SCNs, subject to GST Council's prior recommendation. The notifications extending limitation periods have been challenged on grounds of procedural irregularity and validity.
Different High Courts have taken conflicting views on the validity of these extensions, leading to a split of opinion. The Supreme Court has admitted the matter for consideration in S.L.P No. 4240/2025.
Court's Interpretation and Reasoning: The Court acknowledged the cleavage of opinion and judicial discipline, refraining from expressing any opinion on the validity of the notifications. It directed that the interim orders in the present petitions would continue to operate, subject to the Supreme Court's final decision.
Application of Law to Facts: The Court disposed of the present petitions with the direction that the outcome of the Supreme Court's decision would be binding on all connected matters.
Treatment of Competing Arguments: The Court noted that the parties had been heard extensively and that the Supreme Court's order was awaited for final resolution.
Conclusion: The issue remains pending before the Supreme Court, and the Court declined to interfere further at this stage.
3. SIGNIFICANT HOLDINGS
"Since the challenge to the above mentioned notification is presently under consideration before the Supreme Court in S.L.P No 4240/2025, the challenge made by the Petitioner to the notification in the present proceedings shall also be subject to the outcome of the decision of the Supreme Court."
"It is the petitioner's case that he had not received the impugned SCN and, therefore, he had no opportunity to respond to the same. For the same reason, the petitioner claims that he had not appear for a personal hearing before the Adjudicating Authority... In view of the above, the present petition is allowed and the impugned order is set aside."
"The show cause notices shall be adjudicated in accordance with law after affording the petitioner an opportunity to be heard. Hearing notices shall not merely be uploaded on the portal but shall also be e-mailed to the Petitioner."
Core principles established include:
- The necessity of prior recommendation by the GST Council under Section 168A for extension of limitation periods and the procedural correctness of notifications issued under this provision.
- The fundamental requirement of natural justice that a noticee must be given proper and effective notice of SCNs and an opportunity for personal hearing before passing any adjudication order.
- The Court's adherence to judicial discipline by refraining from adjudicating on issues pending before the Supreme Court and directing that interim orders continue until final adjudication.
Final determinations on each issue are:
(i) The validity of the impugned notifications is left open and subject to the Supreme Court's decision.
(ii) The impugned adjudication order dated 19th August, 2024, is set aside for lack of proper notice and hearing.
(iii) The Petitioner is granted an opportunity to file replies and be heard, with directions for proper communication of hearing notices.
Violation of principles of natural justice - Service of SCN - SCN was uploaded on ‘Additional Notices Tab’ and did not come to the knowledge of the Petitioner - impugned order passed without providing the Petitioner a personal hearing and in the absence of a reply on behalf of the Petitioner - Challenge to adjudication order - challenge to N/N. 09/2023-Central Tax dated 31st March, 2023 issued by the Central Board of Indirect Taxes and Customs - HELD THAT:- This Court in Neelgiri Machinery through its Proprietor Mr. Anil Kumar V. Commissioner Delhi Goods And Service Tax And Others [2025 (3) TMI 1308 - DELHI HIGH COURT] under similar circumstances where the SCN was uploaded vide ‘Additional Notices Tab’ had remanded the matter.
Even though the SCN has been issued post 17th January, 2024, considering the fact that Petitioner did not get an opportunity to file the reply to the SCN, the Court is inclined to provide the Petitioner the same - Accordingly, following the above decision, the impugned order is set aside.
Let the entire matter be considered afresh and an order be passed on merits after duly considering the reply and the submissions made by the Petitioner in the personal hearing - Petition disposed off.
The core legal questions considered by the Court are:
2. ISSUE-WISE DETAILED ANALYSIS
Issue 1: Locus Standi of the Corporate Debtor Post-Resolution Plan Approval
Relevant Legal Framework and Precedents: The Court referred to the Supreme Court decision in Ghanashyam Mishra & Sons Private Limited vs. Edelweiss Asset Reconstruction Company Limited, which clarified the locus standi of a corporate debtor post-approval of a resolution plan by the NCLT.
Court's Interpretation and Reasoning: The Court noted that the resolution applicant steps into the shoes of the corporate debtor and takes over its management. However, the corporate debtor itself retains locus to challenge proceedings, as the approval of the resolution plan does not divest the corporate debtor of its right to seek judicial remedies.
Key Findings: The Department's objection that the appellant corporate debtor lacked locus standi was rejected based on the Supreme Court's clear ruling that the corporate debtor can maintain writ petitions despite the resolution plan approval.
Conclusion: The appellant has locus standi to file writ petitions challenging the reassessment proceedings.
Issue 2: Validity of Income Tax Proceedings Under Section 148A(d) Post-Insolvency Admission and Moratorium
Relevant Legal Framework and Precedents: The Insolvency and Bankruptcy Code, 2016, particularly sections 227, 239(2)(zk), 131(1), and 238, and the Income Tax Act, 1961, including sections 148A(b), 148A(d), 142(1), and 178(6). The Supreme Court's ruling in Ghanashyam Mishra was pivotal, establishing that once a resolution plan is approved, claims not included in the plan are extinguished and no proceedings can be initiated or continued against the corporate debtor.
Court's Interpretation and Reasoning: The Court observed that the moratorium under IBC prohibits initiation or continuation of proceedings against the corporate debtor during insolvency resolution. The notices under Section 148A(b) were issued after the moratorium commenced, and the reassessment order under Section 148A(d) was passed after the resolution plan was approved. The Court held that such proceedings are ex facie without jurisdiction.
Key Evidence and Findings: The timeline showed that the NCLT admitted the insolvency application on 8th October 2021, public announcement was made on 11th October 2022, notices under Section 148A(b) were issued in March 2023, and the resolution plan was approved on 11th August 2023. Despite objections and requests to drop proceedings, the Department proceeded with reassessment.
Application of Law to Facts: The Court applied the Supreme Court's principle that claims not included in the approved resolution plan stand extinguished, and no proceedings can continue. The Department's continuation of reassessment proceedings post-approval violated this principle and the moratorium under IBC.
Treatment of Competing Arguments: The Department relied on a Madras High Court decision distinguishing voluntary and non-voluntary insolvency to justify continuation of proceedings. The Court rejected this distinction, holding that the IBC does not differentiate between voluntary and non-voluntary insolvency for the purpose of moratorium and overriding effect. The Division Bench of the Delhi High Court's contrary view was accepted.
Conclusion: The reassessment proceedings initiated and continued by the Department after the insolvency admission and resolution plan approval were without jurisdiction and unsustainable in law.
Issue 3: Consideration of Objections by the Assessing Officer
Relevant Legal Framework: Principles of natural justice and procedural fairness require that the assessing officer consider and deal with the objections raised by the assessee before passing an order.
Court's Interpretation and Reasoning: The Court noted that the assessing officer failed to address the jurisdictional objections raised by the appellant and instead proceeded to make merit-based observations, including characterizing transactions as bogus without considering the explanations.
Key Findings: This failure to consider the appellant's objections amounted to a breach of procedural fairness and was a sufficient ground to quash the reassessment order.
Conclusion: The reassessment order under Section 148A(d) was liable to be quashed due to non-consideration of objections.
Issue 4: Overriding Effect of the Insolvency and Bankruptcy Code Over Income Tax Act
Relevant Legal Framework: Section 238 of the IBC provides that its provisions have overriding effect notwithstanding anything inconsistent in any other law. Section 178(6) of the Income Tax Act acknowledges that IBC provisions override contrary provisions in the Income Tax Act.
Court's Interpretation and Reasoning: The Court emphasized that the IBC's overriding effect precludes continuation of any proceedings under the Income Tax Act inconsistent with the moratorium and resolution plan provisions of the IBC.
Key Evidence: Reference was made to the Supreme Court's decision in PCIT vs. Monnet Ispat and Energy Ltd., which upheld the overriding effect of the IBC over other enactments.
Conclusion: The IBC provisions override the Income Tax Act provisions, rendering the reassessment proceedings invalid post-approval of the resolution plan.
3. SIGNIFICANT HOLDINGS
"The resolution applicant steps into the shoes of the corporate debtor. Such finding in this respect would also not be sustainable in law."
"Once the resolution plan is duly approved by the adjudicating authority under sub-section (1) of section 31, the claims as directed in the resolution plan shall stand frozen and will be binding on the corporate debtor and its employees, members, creditors, including the Central Government, any State Government or any local authority, guarantors and other stakeholders."
"On the date of approval of the resolution plan by the adjudicating authority, all such claims, which are not a part of the resolution plan, shall stand extinguished and no person will be entitled to initiate or continue any proceeding in respect to a claim, which is not part of the resolution plan."
"The purpose of issuing a show cause notice is to afford an opportunity to the assessee to explain and if the assessee has made an explanation, the assessing authority is duty bound to consider the explanation and deal with the points raised in the explanation and then proceed to record his conclusion. This basic principle has been lost sight of by the assessing officer."
"In terms of section 238 of the Insolvency and Bankruptcy Code, 2016, the said provision states that the provision of IBC shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of such law."
"A conjoint reading of section 238 of IBC and section 178(6) of the Income Tax Act will clearly show that the provision of IBC shall override the provision of the Income Tax Act."
"The proceeding initiated by the respondent/department commencing from the issuance of notice under section 148A(b) of the Act and culminating in the order passed under section 148A(d) of the Act and the consequential notice issued under section 142(1) of the Act should ex facie be without jurisdiction and unsustainable in law."
Final determinations:
Reopening of assessment against company under insolvency - Jurisdiction or authority to reopen or assess income for any period prior to the approval of the Resolution Plan - HELD THAT:- On perusal of the order we are surprised to note that the objections regarding the jurisdiction of the authority to continue the proceeding has not been dealt with by the assessing officer and proceeded to make certain observations on merits and held the transaction to be a bogus transaction and that it remained unexplained. The manner in which the assessing officer has passed the order dated 24.4.2023 has to be necessarily deprecated.
The purpose of issuing a show cause notice is to afford an opportunity to the assessee to explain and if the assessee has made an explanation, the assessing authority is duty bound to consider the explanation and deal with the points raised in the explanation and then proceed to record his conclusion. This basic principle has been lost sight of by the assessing officer while passing the order dated 24.4.2023. This ground would be more than sufficient to quash the said order and the entire proceeding.
Since submissions were made on either side on the other issue as well, we have examined the other contentions.
Whether the assessing officer could have continued the proceeding on and after the admission of the application by NCLT and the public announcement thereof and after the NCLT has approved the resolution plan - We find the answer in the decision of Ghanashyam Mishra [2021 (4) TMI 613 - SUPREME COURT] wherein held that once the resolution plan is duly approved by the adjudicating authority under sub- section (1) of section 131, the claims as directed in the resolution plan shall stand frozen and will be binding on the corporate debtor and it’s employees, members, creditors, including the Central Government, any State Government or any local authority, guarantors and other stakeholders.
As on the date of approval of the resolution plan by the adjudicating authority, all such claims, which are not a part of the resolution plan, shall stand extinguished and no person will be entitled to initiate or continue any proceeding in respect to a claim, which is not part of the resolution plan. The decision of the Hon’ble Supreme Court is clearly apply to the facts of the case on and after approval of the resolution plan which was done by NCLT on 11.8.2023 the assessing authority could not have proceeded further and on this ground also the order impugned in the writ petition is liable to be set aside.
As provision of IBC shall override the provision of the Income Tax Act. In this regard we refer to the decision of the Hon’ble Supreme Court in Monnet Ispat And Energy Ltd.[2018 (8) TMI 1775 - SC ORDER] wherein the Hon’ble supreme Court has held that going by section 238 of IBC it is obvious that the court will override anything inconsistent contained in any other enactment, including the Income Tax Act.
Thus, for all the above reasons, we hold that the proceeding initiated by the respondent/department commencing from the issuance of notice u/s 148A(b) of the Act and culminating in the order passed under section 148A(d) of the Act and the consequential notice issued u/s 142(1) of the Act should ex facie without jurisdiction and unsustainable in law.
Validity of reassessment proceedings - Issue the satisfaction note w/o DIN number to the assessee at the time of issuance of notice for reassessment - As decided by HC [2024 (6) TMI 1462 - GUJARAT HIGH COURT] on perusal of the section 148 there is no provision to give a copy of satisfaction note recorded by the AO along with the notice u/s 148. AO has uploaded the satisfaction note which is an internal communication sent along with the proposal which is evident from the communication addressed by the AO to the PCIT which clearly shows the enclosure as a satisfaction note. No interference is called for in the impugned notice issued u/s 148.
HELD THAT:- We are not inclined to interfere with the impugned judgment passed by the High Court. Hence, the Special Leave Petition is dismissed.
Pending applications, if any, shall stand disposed of.
Validity of assessment order passed u/s 144C - assessment order passed by FAO two years after the DRP directions - Refund of amount paid in excess of the legitimate tax due on the returned income along with applicable interest - As decided by HC [2023 (11) TMI 449 - BOMBAY HIGH COURT] assessment order passed by FAO two years after the DRP directions, is time barred and cannot be sustained. Consequently, the ROI as filed has to be accepted. Petitioner is entitled to receive the refund together with interest, in accordance with law. The procedure to be completed within 30 days of this order being unloaded.
HELD THAT:- Heard the learned Additional Solicitor General appearing for the petitioners.
There is a gross delay of 295 days in filing the Special Leave Petition which has not been satisfactorily explained by the petitioners. Special Leave Petition is, accordingly, dismissed on the ground of delay.
Disallowance u/s 14A - TP adjustment on account of AMP expenditure - HC [2022 (11) TMI 384 - DELHI HIGH COURT] allowed assessee appeal
HELD THAT:- As there is a gross delay of 597 days in filing the Special Leave Petition which has not been satisfactorily explained by the petitioner/Revenue.
Special Leave Petition is, accordingly, dismissed on the ground of delay. Pending applications, if any, also stand disposed of.
Issues: (i) Whether the writ petitions challenging the assessment orders ought to have been entertained despite the statutory appellate remedy under section 246A of the Income-tax Act, 1961. (ii) Whether section 65B of the Indian Evidence Act, 1872, and the corresponding provision in section 63 of the Bharatiya Sakshya Adhiniyam, 2023, apply to assessment proceedings before the income tax authorities.
Issue (i): Whether the writ petitions challenging the assessment orders ought to have been entertained despite the statutory appellate remedy under section 246A of the Income-tax Act, 1961.
Analysis: The assessment machinery under the Income-tax Act provides a complete appellate remedy, and the existence of exceptions to the rule of alternative remedy does not create any automatic right to invoke writ jurisdiction. Even where allegations of procedural breach or natural justice are raised, the writ court must still exercise discretion and examine whether the grievance truly goes to the root of the matter. The Court found that the assessments involved extensive material, substantial additions, and a completed statutory process, and that it would be inappropriate to annul the assessments and order de novo proceedings on a technical ground. The Court therefore preferred relegation to the appellate forum, while preserving limited liberty to urge certain contentions there.
Conclusion: The writ petitions were not maintainable as a matter of discretion in view of the effective alternative remedy, and the assessee was relegated to appeal.
Issue (ii): Whether section 65B of the Indian Evidence Act, 1872, and the corresponding provision in section 63 of the Bharatiya Sakshya Adhiniyam, 2023, apply to assessment proceedings before the income tax authorities.
Analysis: The Court held that assessment proceedings are not judicial proceedings governed by the strict rules of evidence, and income tax authorities are not bound by the technical requirements of the Evidence Act or the Bharatiya Sakshya Adhiniyam in the same manner as courts. The statutory scheme and prior authority distinguish quasi-judicial tax adjudication from court proceedings, and the absence of a section 65B certificate cannot, by itself, exclude electronic material from consideration in assessment. At the same time, the assessee remains entitled to challenge the genuineness and probative value of the material before the appellate authority.
Conclusion: Section 65B of the Indian Evidence Act, 1872, and section 63 of the Bharatiya Sakshya Adhiniyam, 2023, do not apply to assessment proceedings before the income tax authorities.
Final Conclusion: The writ appeals succeeded, the writ court's interference was set aside, and the assessees were directed to pursue the statutory appeal remedy with limited liberty on the evidentiary objection.
Ratio Decidendi: Where an effective statutory appeal lies under the Income-tax Act, writ relief is ordinarily declined in assessment matters, and the strict rules governing admissibility of evidence in court proceedings do not govern quasi-judicial income tax assessment proceedings.
Principles of natural justice - alternative remedy by appeal to Commissioner (Appeals) - discretionary exercise of writ jurisdiction notwithstanding exceptions - applicability of Section 65B of the Indian Evidence Act to assessment proceedings - rules of evidence not strictly binding on assessing authorities - obligation to furnish seized panchnamas
Alternative remedy by appeal to Commissioner (Appeals) - discretionary exercise of writ jurisdiction notwithstanding exceptions - principles of natural justice - Whether the writ petitions were maintainable despite the availability of an alternative remedy of appeal under the Income Tax Act - HELD THAT: - The Court held that when the Income Tax Act provides a complete machinery of assessment and appellate remedies, the writ remedy under Article 226 ought not to be invoked in place of the statutory appeal, reiterating the principle in Chhabil Dass Agarwal and earlier decisions. Although exceptions exist where orders are passed in total violation of natural justice, the existence of such exception does not automatically entitle the petitioner to bypass the appellate remedy; the writ court must still exercise its discretion and examine whether the challenge goes to the root of the matter. Applying this principle to the facts, the Division Bench observed that the petitioners had an adequate alternative remedy and that the alleged breaches did not justify automatic bypassing of the appeal forum; several factual contentions and evidentiary issues were better left for the appellate process. The Court therefore non-suited the writ petitions and set aside the Single Judge's order which had permitted de novo assessments on the basis that the statutory appeal remedy should be availed. [Paras 7, 8, 9, 10, 11]
Writ petitions are non-maintainable in view of the available appeal remedy; the Single Judge's order allowing de novo assessments is set aside and the petitioners are relegated to file appeals under Section 246A.
Applicability of Section 65B of the Indian Evidence Act to assessment proceedings - rules of evidence not strictly binding on assessing authorities - Whether the statutory requirement under Section 65B of the Indian Evidence Act (and corresponding provisions of the Bharatiya Sakshya Adhiniyam) is a pre-condition for receiving electronic records in income-tax assessment proceedings - HELD THAT: - The Court concluded that Sections 65A/65B of the Evidence Act (and the corresponding provision in BSA) are provisions applicable to judicial proceedings and do not apply to quasi-judicial assessment proceedings before the assessing officer, appellate authority or tribunal. Relying on precedent that income-tax authorities are not bound by the strict rules of evidence and noting the distinction between courts and quasi-judicial/adjudicatory authorities, the Court held that non-furnishing of a certificate under Section 65B cannot be used as a shield to resist reception of electronic material in assessment proceedings. The Court nevertheless clarified that the assessee remains free to challenge the genuineness or probative value of electronic material before the appellate forum. [Paras 13, 14, 15, 16]
Section 65B is inapplicable as a pre-condition to receipt of electronic records in income-tax assessment proceedings; however, genuineness and probative value of such material can be contested before the appellate authority.
Obligation to furnish seized panchnamas - right to cross-examination before appellate authority - Relief and procedural directions to be given in light of non-maintainability of writ petitions - HELD THAT: - While declining to order de novo assessments and refraining from making factual findings that may prejudice the assessee's case on appeal, the Court directed limited and specific procedural reliefs: the department must furnish copies of all panchnamas prepared after the searches, and the petitioners are permitted to urge before the appellate authority any contentions relating to non-availability of opportunity for cross-examination. The Court refused to micromanage or restrict the assessing authority's discretion but ensured that material necessary to pursue the statutory appeal is supplied. [Paras 11, 12, 18]
Department directed to furnish the 101 panchnamas forthwith; petitioners given four weeks from receipt to file appeals under Section 246A; contentions (except on applicability of Section 65B) left open for adjudication on appeal.
Final Conclusion: The High Court allowed the revenue's appeals, set aside the Single Judge's order that had allowed de novo assessments, held that the petitioners must pursue the statutory appeal remedy (Section 246A) rather than writ relief, ruled that Section 65B is not a pre-condition for receipt of electronic records in assessment proceedings, directed the department to furnish the seized panchnamas within three weeks, and afforded the petitioners a limited period to file their appeals while leaving all other contentions open for the appellate forum.
The core legal questions considered by the Court in this batch of writ petitions primarily revolve around the validity and procedural correctness of reassessment notices issued under Section 148 of the Income Tax Act, 1961. Specifically, the issues include:
2. ISSUE-WISE DETAILED ANALYSIS
Issue 1: Validity of orders rejecting objections under Section 148(A)(d)
Relevant legal framework and precedents: Section 148(A)(d) of the Income Tax Act, 1961, mandates that the Assessing Officer must consider the objections filed by the assessee before initiating reassessment proceedings under Section 148. The Supreme Court's decisions in Union of India vs. Rajeev Bansal and Union of India vs. Ashish Agarwal have clarified the scope and limitations regarding the issuance of reassessment notices during the specified period in 2021.
Court's interpretation and reasoning: The Court observed that the orders passed rejecting the petitioners' objections under Section 148(A)(d) were not in conformity with the law as laid down by the Supreme Court. The Court emphasized that these orders require reconsideration in light of the authoritative pronouncements.
Key evidence and findings: The Court noted that the petitioners had filed objections against the initiation of reassessment proceedings, which were summarily rejected. The Supreme Court's rulings have now provided the legal framework for adjudicating such objections.
Application of law to facts: The Court directed that the orders rejecting objections be quashed and set aside, mandating the Assessing Officer to allow the petitioners to file fresh objections and dispose of them in accordance with the Supreme Court's judgments.
Treatment of competing arguments: While the Income Tax Department defended the validity of the reassessment notices and the rejection orders, the Court gave precedence to the binding Supreme Court rulings, thereby overruling the Department's stand.
Conclusions: The Court held that the petitioners must be granted an opportunity to raise fresh objections, including jurisdictional challenges, and that the Assessing Officer must reconsider objections in line with the Supreme Court's authoritative guidance.
Issue 2: Effect of Supreme Court rulings on reassessment notices issued between 1st April 2021 and 30th June 2021
Relevant legal framework and precedents: The Supreme Court in Rajeev Bansal and Ashish Agarwal dealt with the validity of Section 148 notices issued during the transitional period following amendments to the Income Tax Act, particularly focusing on procedural compliance and time limits.
Court's interpretation and reasoning: The Court recognized these rulings as final and binding, clarifying the legal position on reassessment notices issued in that period. It acknowledged that the Supreme Court had conclusively addressed the validity and procedural requirements, including the time bar issues.
Key evidence and findings: The Court relied extensively on the Supreme Court's detailed analysis and findings, particularly paragraphs 112 to 114 of Rajeev Bansal, which discuss the time limits and the consequences of non-compliance.
Application of law to facts: The Court applied these principles to the present cases, holding that any orders or proceedings inconsistent with these rulings must be set aside and reconsidered.
Treatment of competing arguments: The Department's reliance on the reassessment notices' validity was superseded by the Supreme Court's authoritative rulings, which the Court enforced strictly.
Conclusions: The Court mandated adherence to the Supreme Court's directions and required reassessment proceedings to be conducted strictly within the legal framework outlined therein.
Issue 3: Procedural rights of petitioners to file fresh objections and raise jurisdictional challenges
Relevant legal framework and precedents: The Income Tax Act provides for the filing of objections under Section 148(A)(d) before reassessment proceedings commence. The Supreme Court has recognized the importance of these procedural safeguards.
Court's interpretation and reasoning: The Court emphasized that petitioners must be afforded a meaningful opportunity to raise all objections, including fresh and jurisdictional ones, in light of the Supreme Court's rulings.
Key evidence and findings: The Court noted that the petitioners had been denied such an opportunity in the initial orders and that this procedural lapse warranted corrective action.
Application of law to facts: The Court directed that petitioners be allowed four weeks to file fresh objections and that the Assessing Officer must hear and decide these objections in accordance with law.
Treatment of competing arguments: The Department's argument that objections had already been considered was rejected, as the Court found that the earlier consideration was not in conformity with the Supreme Court's rulings.
Conclusions: Petitioners' procedural rights were restored, and the Assessing Officer was directed to conduct fresh proceedings in a fair and lawful manner.
Issue 4: Treatment of time-barred orders under Section 148(A)(d)
Relevant legal framework and precedents: The Supreme Court in Rajeev Bansal examined the consequences of orders passed beyond the prescribed time limits under Section 148(A)(d), emphasizing strict adherence to statutory timelines.
Court's interpretation and reasoning: The Court reiterated that the observations and directions in paragraphs 112, 113, and 114 of Rajeev Bansal regarding time-barred orders are binding and must be followed.
Key evidence and findings: The Court observed that some orders passed under Section 148(A)(d) in the present batch of cases may have been beyond the prescribed time limits.
Application of law to facts: The Court held that such orders are liable to be set aside and that the procedural safeguards must be strictly observed.
Treatment of competing arguments: The Department's arguments for validating such orders were rejected in light of the Supreme Court's clear directives.
Conclusions: The Court mandated strict compliance with time limits and procedural requirements, invalidating any orders passed beyond the prescribed period.
3. SIGNIFICANT HOLDINGS
The Court made the following crucial legal determinations:
"The orders passed under Section 148(A)(d) of the Income Tax, 1961, in all the above matters and any other consequential proceedings, are required to be quashed and set aside with a direction upon the Assessing Officer to allow the petitioners to once again file objections, and thereafter, dispose of the objections in terms of the law laid down by the Supreme Court in Ashish Agarwal (supra) and Rajeev Bansal (supra)."
"The petitioners shall be at liberty to raise new objections, including jurisdictional ones and rely upon other judgments of the Apex Court as applicable."
"With regard to the orders passed under Section 148(A)(d) of the Income Tax Act, 1961 that may have been passed beyond time as observed by the Supreme Court in paragraphs 112, 113 and 114 of Rajeev Bansal (supra), we make it clear that the observations made therein shall apply."
Core principles established include the binding nature of the Supreme Court's rulings on reassessment notices issued during the transitional period, the necessity of procedural fairness in considering objections under Section 148(A)(d), and strict adherence to statutory timelines.
Final determinations on each issue mandate quashing of impugned orders, allowance for fresh objections, and re-adjudication in conformity with Supreme Court precedents, thereby ensuring lawful exercise of reassessment powers.
Validity of reopening of assessment - order passed u/s 148(A)(d) wherein their objections to the initiation of reassessment proceedings rejected - HELD THAT:- We are of the view that the orders passed u/s 148(A)(d) of the Income Tax, 1961, in all the above matters and any other consequential proceedings, are required to be quashed and set aside with a direction upon the Assessing Officer to allow the petitioners to once again file objections, and thereafter, dispose of the objections in terms of the law laid down by the Supreme Court in Ashish Agarwal [2022 (5) TMI 240 - SUPREME COURT] and Rajeev Bansal [2024 (10) TMI 264 - SUPREME COURT (LB)]
The petitioners shall be at liberty to raise new objections, including jurisdictional ones and rely upon other judgments of the Apex Court as applicable. These objections should be filed by the petitioners within a period of four weeks. The authority shall thereafter grant an opportunity of hearing to the petitioners and pass orders in accordance with law.
With regard to the orders passed under Section 148(A)(d) of the Income Tax Act, 1961 that may have been passed beyond time as observed by the Supreme Court in paragraphs 112, 113 and 114 of Rajeev Bansal (supra), we make it clear that the observations made therein shall apply.
The core legal questions considered by the Court were:
- Whether the notice issued under Section 148 of the Income Tax Act, 1961 (the Act) for reassessment of income relating to Assessment Year (AY) 2016-17 was barred by limitation under Section 149(1) of the Act.
- Whether the extended limitation period of ten years under Section 149(1)(b) of the Act and Section 153A of the Act applies in the present case, given that a search under Section 132 was conducted in the previous year 2022-23.
- Whether the conditions stipulated under the fourth proviso to Section 153A(1) of the Act, requiring possession of books of account or other evidence revealing escaped income represented in the form of an asset, were satisfied to justify reopening beyond six years.
- Whether the reassessment notice issued pursuant to the search and seizure proceedings was valid and sustainable in law.
2. ISSUE-WISE DETAILED ANALYSIS
Issue 1: Limitation for issuance of notice under Section 148 of the Act
Relevant legal framework and precedents: Section 149(1) of the Act prescribes time limits for issuance of notices under Section 148. Sub-clause (a) limits reassessment to three years from the end of the relevant AY, except where clause (b) applies. Clause (b) allows reassessment up to ten years if the AO has evidence that escaped income represented in the form of an asset, expenditure, or entries exceeding Rs. 50 lakh has escaped assessment. The first proviso to Section 149(1) restricts issuance of notices for AYs beginning on or before 1 April 2021 if notices could not have been issued under the earlier regime's time limits.
The Supreme Court in Union of India & Anr. v. Rajeev Bansal clarified that the extended ten-year period under the new regime applies prospectively, and reassessment notices cannot be issued retrospectively beyond the time limits applicable before the Finance Act, 2021.
Court's interpretation and reasoning: The Court observed that the impugned notice dated 21.03.2024 was issued for AY 2016-17, which predates the AY 2023-24 relevant to the previous year in which the search was conducted (FY 2022-23). The petitioner argued that the limitation period for reassessment should be reckoned from AY 2023-24, and since AY 2016-17 falls beyond six years preceding AY 2023-24, the notice is barred by limitation.
The Revenue contended that the extended ten-year limitation under Section 149(1)(b) and Section 153A applies, allowing reopening beyond six years if incriminating material is found during search. The Court noted that the proviso to Section 149(1) prohibits issuance of notices if such notices could not have been issued under Sections 148, 153A, or 153C at the relevant time under the earlier regime.
Application of law to facts: The Court held that the limitation for issuing the reassessment notice must be analyzed in the context of Section 153A, which governs reopening after search. Section 153A(1) allows reassessment for six years preceding the AY relevant to the previous year in which search was conducted, and for relevant assessment years beyond six years but not exceeding ten years, subject to conditions.
Treatment of competing arguments: The petitioner emphasized that the extended ten-year limitation applies only if the escaped income is represented by an asset, as per the fourth proviso to Section 153A(1). The Revenue argued that the extended period applies generally for reassessment after search. The Court found the petitioner's argument persuasive, noting that the extended limitation applies only when the AO has evidence that escaped income represented in the form of an asset exceeds Rs. 50 lakh.
Conclusion: The Court concluded that the limitation period for issuing the notice under Section 148 read with Section 153A is confined to six years preceding the AY relevant to the previous year in which the search was conducted, unless the conditions for the extended ten-year period are satisfied.
Issue 2: Applicability of the extended ten-year limitation under Section 153A(1) and conditions for reopening beyond six years
Relevant legal framework: Section 153A(1) allows reopening of assessments for six years preceding the AY relevant to the previous year in which search or requisition is made, and for relevant assessment years beyond six years but not exceeding ten years (Explanation 1), subject to possession of evidence revealing escaped income represented in the form of an asset (fourth proviso).
'Asset' is defined in Explanation 2 to include immovable property, shares, securities, loans, advances, and bank deposits.
Court's interpretation and reasoning: The Court examined the reasons recorded by the AO for reopening the assessment. The AO alleged that the petitioner's income escaped assessment due to disallowance of certain expenses: payments to non-filers, personal expenses of key managerial personnel, and payments to a related party (Vihaan Infrasystems Ltd.) purportedly without receipt of genuine services.
However, the AO did not allege that the escaped income was represented in the form of an asset. The Court noted that the AO lacked possession of any books of account or documents revealing escaped income represented by an asset as required under the fourth proviso to Section 153A(1).
Application of law to facts: Since the escaped income was alleged to arise from disallowed expenditures and entries, not assets, the extended ten-year limitation under Section 153A(1) was inapplicable. The limitation for reopening was therefore confined to six years preceding AY 2023-24, i.e., AYs 2017-18 to 2022-23. AY 2016-17 falls outside this block.
Treatment of competing arguments: The Revenue's contention that the extended period applies generally was rejected as inconsistent with the statutory requirement that the AO must have evidence of escaped income represented in the form of an asset. The petitioner's argument that the extended limitation does not apply absent such evidence was accepted.
Conclusion: The Court held that the conditions for extending the limitation period beyond six years under Section 153A(1) were not met. Therefore, the reassessment notice for AY 2016-17 was barred by limitation.
Issue 3: Validity of the reassessment notice issued post-search
Relevant legal framework: The issuance of notice under Section 148 post-search is governed by the interplay of Sections 148, 149, and 153A of the Act, along with provisos limiting retrospective reassessment beyond prescribed time limits.
Court's interpretation and reasoning: The Court analyzed the AO's reasons for reopening, which included alleged tax-avoiding arrangements, shifting of profits to associated enterprises, and booking of non-genuine expenses. The AO relied on incriminating evidence seized during search and post-search investigations.
However, the Court emphasized that the limitation period is a jurisdictional bar, and the absence of evidence that escaped income was represented by an asset precluded application of the extended limitation period.
Application of law to facts: Since the reassessment notice was issued beyond the six-year block and without satisfying conditions for extension, it was held to be without jurisdiction.
Treatment of competing arguments: The Revenue's reliance on search-related provisions to extend limitation was rejected due to non-fulfillment of statutory conditions. The petitioner's challenge on limitation grounds was upheld.
Conclusion: The reassessment notice dated 21.03.2024 and the proceedings initiated pursuant thereto were held to be barred by limitation and therefore unsustainable.
3. SIGNIFICANT HOLDINGS
The Court's crucial legal reasoning is encapsulated in the following observations:
"A plain reading of the first proviso to Section 149 (1) of the Act indicates that the issuance of a notice under Section 148 of the Act is proscribed if a notice under Sections 148, 153A or 153C of the Act could not have been issued at that time on account of the time limit specified under Clause (b) of Section 149 (1) of the Act, or under Section 153A or Section 153C, as in force at that time."
"Once, we accept that a notice under Section 148 of the Act cannot be issued if such a notice could not be issued under Section 153A of the Act; it would be necessary to determine the period of limitation for issuance of a notice under Section 153A of the Act."
"The expression 'relevant assessment year' is defined under Explanation 1 to sub-section (i) of Section 153A of the Act to mean a year that falls beyond the period of six assessment years preceding the assessment year relevant to the previous year in which search is conducted or requisition is made, but not later than ten assessment years from the end of the assessment year relevant to the previous year in which search is conducted or requisition is made."
"There is no allegation that the income which has escaped assessment was represented in the form of an asset. Therefore, the conditions as stipulated in Clause (a) of the fourth proviso to Section 153A (1) of the Act are not satisfied. The AO does not have the possession any books of account, other documents or evidence, which reveals that the petitioner's income that is represented in the form of an asset has escaped assessment."
"In the aforesaid view the period of limitation for issuing a notice under Section 153A of the Act, in the given facts of this case, would necessarily have to be confined to a period of six assessment years immediately preceding the assessment year relevant to the previous year in which the search under Section 132 of the Act was conducted."
Core principles established include:
Final determinations on each issue:
Time-barred reassessment - limitation under Section 149(1) - Section 153A - six assessment years block and relevant assessment year - fourth proviso to Section 153A(1) - requirement of income represented in the form of an asset - reopening after search - applicability of ten year extension only when asset requirement satisfied
Limitation under Section 149(1) - Section 153A - six assessment years block and relevant assessment year - fourth proviso to Section 153A(1) - requirement of income represented in the form of an asset - Validity of the notice dated 21.03.2024 under Section 148 for AY 2016-17 in view of limitation prescribed by Section 149(1) and the applicability of the extended ten-year period under Section 153A. - HELD THAT: - The Court examined the interplay between Section 149(1) and Section 153A(1) as in force prior to the Finance Act, 2021 and the conditions for invoking the extended limitation contemplated by Explanation 1 to Section 153A(1). Section 153A permits reopening for the six assessment years immediately preceding the assessment year relevant to the previous year in which a search is conducted, and, by Explanation 1, permits a further extension up to ten years only in respect of a "relevant assessment year". However, the fourth proviso to Section 153A(1) conditions issuance of notice for any relevant assessment year on the Assessing Officer having in his possession books of account or other documents or evidence which reveal that the escaped income is represented in the form of an asset. The reasons furnished for reopening in this case disclosed suspected non-genuine expenses, personal expenses and payments to a conduit entity, but contained no allegation that the escaped income was represented in the form of an asset as defined by Explanation 2. Absent any material establishing that the escaped income was represented by an asset, the condition in the fourth proviso to Section 153A(1) is unsatisfied and the ten-year extension is inapplicable. Consequently, the period for reopening must be confined to the six assessment years block preceding the assessment year relevant to the previous year in which the search (21.03.2023) was conducted; AY 2016-17 therefore falls outside that block and the notice is time-barred. [Paras 16, 17, 20, 21, 22]
The notice dated 21.03.2024 under Section 148 insofar as it seeks to reopen assessment for AY 2016-17 is barred by limitation and is set aside.
Final Conclusion: The petition is allowed; the impugned notice and reassessment proceedings in respect of AY 2016-17 are quashed as time-barred because the extended ten-year period under Section 153A is inapplicable in the absence of evidence that the escaped income was represented in the form of an asset.
The core legal questions considered by the Court include:
- Whether the assessment order dated 21.04.2021 under Section 143(3) of the Income Tax Act, 1961 was erroneous and prejudicial to the interest of revenue for failing to verify the discrepancy between declared turnover and cash deposits in bank accounts.
- Whether the addition of unexplained cash credits under Sections 68 and 69A of the Income Tax Act was justified based on the evidence and explanations provided by the petitioner.
- Whether the petitioner's explanation that the excess cash deposits corresponded to VAT/GST collections not included in turnover was acceptable without further verification.
- Whether the petitioner's failure to maintain stock registers and produce conclusive proof of GST/VAT payments and purchases invalidated the genuineness of sales and justified addition to income.
- Whether the petitioner could bypass the statutory remedy of appeal and invoke the High Court's extraordinary writ jurisdiction under Article 226 of the Constitution of India.
2. ISSUE-WISE DETAILED ANALYSIS
Issue 1: Validity of the Assessment Order under Section 143(3) and the Subsequent Revision under Section 263
Relevant legal framework and precedents: Section 143(3) of the Income Tax Act empowers the assessing officer to complete assessment after scrutiny. Section 263 allows revision of an assessment order if it is found to be erroneous and prejudicial to the interest of revenue. The Supreme Court has held that revision under Section 263 requires that the original order be erroneous and prejudicial, and the revising authority must conduct proper inquiry before revising.
Court's interpretation and reasoning: The Court noted that the Principal Commissioner of Income Tax (PCIT) issued a revision order under Section 263 on the ground that the assessing officer had accepted the petitioner's declared turnover without verifying the large difference between turnover and cash deposits. The PCIT concluded that the assessment order was erroneous as it was passed without proper inquiry into this discrepancy.
Key evidence and findings: The petitioner declared turnover of Rs. 19,86,02,939/- but deposited Rs. 27,85,96,000/- in bank accounts. No inquiry was made initially to reconcile this difference. The PCIT's order directed further investigation and verification.
Application of law to facts: The Court found the PCIT's exercise of power under Section 263 justified as the assessing officer failed to verify material discrepancies, making the original order erroneous and prejudicial.
Treatment of competing arguments: The petitioner argued that the revision order was unjustified as the excess cash deposits pertained to VAT/GST collections not included in turnover. The respondents contended that the failure to verify was prejudicial and warranted revision. The Court accepted the latter view.
Conclusions: The revision under Section 263 was valid and necessary to safeguard revenue interests.
Issue 2: Justification for Addition of Unexplained Cash under Sections 68 and 69A
Relevant legal framework and precedents: Section 68 deals with unexplained cash credits, requiring the assessee to satisfactorily explain the nature and source of such credits. Section 69A addresses unexplained money found during search or otherwise. The burden lies on the assessee to prove the genuineness of cash deposits.
Court's interpretation and reasoning: After the revision, the assessing officer issued notices under Section 142(1) and 68/69A to probe the unexplained cash. The petitioner submitted audited financial statements, GSTR-9C, VAT payment details, purchase invoices, and transportation receipts to explain the cash deposits.
The assessing officer rejected these explanations, holding that purchase invoices and transport receipts alone do not prove actual physical stock or sales. The petitioner admitted to not maintaining stock registers. Moreover, the petitioner failed to produce proof of GST/VAT/Cess payments to the government, which undermined the genuineness of claimed sales and ITC credits.
Key evidence and findings: The absence of stock registers and lack of documentary proof of tax payments were critical. The assessing officer found a difference of Rs. 7,99,93,061/- between cash deposited and declared turnover, treating it as unexplained money under Section 69A.
Application of law to facts: The Court upheld the assessing officer's conclusion that the unexplained cash deposits represented unaccounted sales or undisclosed income. The petitioner's failure to furnish conclusive evidence justified the addition to taxable income.
Treatment of competing arguments: The petitioner argued that the excess cash was VAT/GST collected on sales and hence not part of turnover, supported by statutory forms and documents. The assessing officer and respondents countered that without proof of payment of these taxes, the explanation was insufficient. The Court sided with the assessing officer.
Conclusions: The addition of unexplained cash under Sections 68 and 69A was legally sustainable.
Issue 3: Availability and Exercise of Extraordinary Jurisdiction under Article 226
Relevant legal framework and precedents: The High Court's writ jurisdiction under Article 226 is discretionary and exercised sparingly, especially where alternative statutory remedies exist. The Supreme Court has clarified that availability of an effective statutory remedy ordinarily bars writ jurisdiction except in exceptional circumstances such as failure of natural justice or lack of jurisdiction.
Court's interpretation and reasoning: The petitioner sought to invoke writ jurisdiction to challenge the assessment order and additions, bypassing the statutory appellate remedy. The Court examined whether exceptional circumstances existed to warrant such interference.
Key evidence and findings: The petitioner's submissions on lack of alternative remedy were cursory and unsubstantiated. There was no allegation of violation of natural justice or jurisdictional error.
Application of law to facts: The Court reiterated that since the petitioner had an effective remedy of appeal under the Income Tax Act, the writ jurisdiction could not be invoked in absence of exceptional grounds.
Treatment of competing arguments: The petitioner contended the statutory remedy was ineffective; the respondents emphasized the availability and adequacy of appeal. The Court agreed with the respondents.
Conclusions: The writ petition was not maintainable and was dismissed, leaving the petitioner free to pursue statutory remedies.
3. SIGNIFICANT HOLDINGS
- "Having purchase invoices and transportation receipts does not prove beyond doubt that physical stock was actually held. Further the assessee has only admitted that even stock registers are not maintained. Assessee's failure to produce proof of deposit of GST/VAT/Cess in Govt account in the garb of ITC also renders the genuineness of said sales as unproven, as again the purchases on which ITC is claimed are unproven. Hence, it is established that the differential amount of Rs. 7,99,93,061/- between cash deposited in bank account and turnover/sales shown is nothing but unaccounted sales/undisclosed income and is hereby added to the total income as unexplained money u/s 69A of the I.T. Act, 1961."
- The Court emphasized that revision under Section 263 is justified when the original assessment order is passed without proper inquiry and is prejudicial to revenue.
- The Court reaffirmed that the burden of proving the source and nature of cash credits lies on the assessee, and failure to maintain proper records and produce conclusive evidence justifies additions under Sections 68 and 69A.
- The Court held that extraordinary writ jurisdiction under Article 226 cannot be exercised to bypass statutory appeal remedies unless exceptional circumstances exist, such as violation of natural justice or jurisdictional errors.
- The final determination was to dismiss the writ petition and leave the petitioner to avail statutory remedies in appeal.
Revision u/s 263 - huge difference in the turnover declared and the cash deposited, regarding which, no inquiry was made by the assessing authority and as such the petitioner was required to show cause as to why the assessment order be not treated as erroneous insofar as the same was prejudicial to the interest of the revenue - HELD THAT:- The determination made by the authority is based on the material available on record. The view taken by the authority is open to appeal. The petitioner with regard to the availability of alternative remedy, has made cursory submissions indicating in para 26 of the petition that there is no alternative much less efficacious remedy available to the petitioner but to approach this Court and invoke its extraordinary jurisdiction under Article 226 of the Constitution of India.
The parameters for exercising jurisdiction under Article 226 of the Constitution of India are well settled, wherein it can be exercised sparingly and only in exceptional circumstances despite availability of statutory remedy. Recently, in Jaipur Vidyut Vitran Nigam Limited vs. MB Power (MP) Limited [2024 (1) TMI 1459 - SUPREME COURT] after referring to the judgement in Radha Krishan Industries vs. State of H.P. [2021 (4) TMI 837 - SUPREME COURT] has laid down that though availability of an alternative remedy is not a complete bar in the exercise of power of judicial review by the High Courts, the recourse to such a remedy would be permissible only if extraordinary and exceptional circumstances are made out. It was observed that when a right is created by a statute, which itself prescribes the remedy or procedure for enforcing the right or liability, resort must be had to that particular statutory remedy before invoking the discretionary remedy under Article 226 of the Constitution of India.
In the present case, the petitioner has failed to point out any extraordinary and exceptional circumstance for bypassing the statutory alternative remedy. Neither there has been a failure of principles of natural justice nor it is the case of the petitioner that proceedings were without jurisdiction, which are the grounds under which the bar of statutory remedy does not come in the way of entertaining the petitions under Article 226 of the Constitution of India. The petition is, therefore, dismissed.
The core legal questions considered by the Court in this matter are:
(a) Whether the requirement of filing Form No. 67 along with the income tax return for claiming Foreign Tax Credit (FTC) under Rule 128(9) of the Income Tax Rules is mandatory or directory in nature;
(b) Whether the delay in filing Form No. 67 can be condoned, particularly when the Form is filed after the due date but before the completion of the assessment proceedings;
(c) Whether the foreign tax credit claimed by the petitioner should be allowed despite the procedural lapse of late filing of Form No. 67;
(d) The proper interpretation and application of relevant judicial precedents concerning the procedural requirements for claiming FTC and the consequences of non-compliance;
(e) The scope and extent of the Assessing Officer's discretion in rejecting FTC claims on procedural grounds.
2. ISSUE-WISE DETAILED ANALYSIS
Issue (a): Mandatory or Directory Nature of Form 67 Filing for Claiming Foreign Tax Credit
The Court examined Rule 128(9) of the Income Tax Rules, which introduced Form 67 from the Assessment Year 2018-19 as a procedural requirement for claiming FTC under Section 90 of the Income Tax Act. The petitioner contended that the requirement to file Form 67 along with the return of income is only directory and not mandatory, and hence the delay in filing should not result in denial of FTC.
The Court relied heavily on a recent decision of the same High Court in a similar case, where it was held that Rule 128 is directory and not mandatory. The Court referred to the reasoning that procedural rules cannot convert a substantive right into a forfeitable claim merely by imposing a strict timeline for filing Form 67.
Further, the Court cited the Supreme Court judgment in Commissioner of Income-Tax, Maharashtra v. G.M. Knitting Industries (P) Limited, which held that even if the prescribed form (Form 3AA in that case) is not filed along with the return but is filed during the assessment proceedings before the final order, it amounts to sufficient compliance. This principle was applied analogously to Form 67, emphasizing that procedural non-compliance can be rectified before completion of assessment.
The Court noted that the petitioner had disclosed the foreign income and claimed FTC in the original return, albeit without Form 67, and subsequently filed Form 67 before the completion of assessment proceedings.
Issue (b): Condonation of Delay in Filing Form 67
The petitioner filed Form 67 belatedly on 20.05.2020, nearly two years after filing the original return on 30.06.2018. The Assessing Officer rejected the claim on the ground that Form 67 was not filed along with the return and was submitted only after processing of the return.
The Court, relying on the aforementioned precedent, held that the delay was a procedural lapse and that the delay in filing Form 67 could be condoned. The Court emphasized that the procedural rule was introduced only recently and the petitioner was under a bona fide impression that FTC would be allowed automatically.
In the interest of justice, the Court condoned the delay subject to the petitioner paying a cost of Rs. 10,000/- to a government institution. This condition was imposed to balance procedural discipline with substantive justice.
Issue (c): Allowance of Foreign Tax Credit Despite Procedural Lapse
The Court found that the foreign income of Rs. 65,61,171/- was undisputed and admitted by the Department. The petitioner had claimed FTC of Rs. 18,85,919/-, withheld by the foreign employer. The only ground for rejection was the procedural failure to file Form 67 on time.
Given the procedural nature of the lapse and the petitioner's compliance before final assessment, the Court held that the rejection of FTC was not in accordance with law. The Court directed the Assessing Officer to allow the FTC after the petitioner complied with the payment of the cost and filed proof thereof.
The Court remitted the matter back to the Assessing Officer for reassessment, emphasizing that the final order must consider the FTC claim filed by the petitioner.
Issue (d): Interpretation and Application of Judicial Precedents
The Court extensively relied on the principle laid down in the Supreme Court decision in Commissioner of Income-Tax, Maharashtra v. G.M. Knitting Industries (P) Limited, which clarified that procedural requirements for filing forms related to claims under the Income Tax Act are generally directory and not mandatory, provided compliance is made before the conclusion of assessment proceedings.
The Court also referred to its own earlier decision in Duraiswamy Kumaraswamy Vs. Principal Commissioner of Income Tax, which held that Rule 128 is directory and that delay in filing Form 67 can be condoned.
The Court rejected the respondents' contention that the procedural requirement is mandatory, recognizing that strict adherence to procedural rules should not defeat substantive rights.
Issue (e): Scope of Assessing Officer's Discretion in Rejecting FTC Claims
The Court observed that the Assessing Officer's rejection of the FTC claim solely on the ground of delay in filing Form 67 was not proper. The procedural lapse was rectified before final assessment, and the Assessing Officer was directed to reconsider the claim in light of the petitioner's compliance and the binding judicial precedents.
The Court's order effectively limited the discretion of the Assessing Officer to reject FTC claims on procedural grounds when the substantive claim is genuine and compliance is made before the final assessment.
3. SIGNIFICANT HOLDINGS
The Court held:
"The filing of Form 67 in terms of Rule 128 is only directory in nature. The rule is only for the implementation of the provisions of the Act and it will always be directory in nature."
"Even if the prescribed form is not filed along with the return of income but is filed during the assessment proceedings before the final order of assessment is made, that would amount to sufficient compliance."
"The rejection of foreign tax credit solely on the ground that Form 67 was not filed along with the return is not in accordance with law, when the Form is filed before completion of assessment."
"Delay in filing Form 67 is a procedural lapse which can be condoned in the interest of justice, subject to payment of cost."
Accordingly, the impugned order rejecting the foreign tax credit claim was set aside, and the matter was remitted to the Assessing Officer to grant credit for the foreign tax paid, after the petitioner pays the cost and furnishes proof thereof.
Denial of Foreign tax credit - delay in filing Form 67 is only the procedural lapse on the part of the petitioner - HELD THAT:- There is no dispute with regard to filing of income tax return in time i.e., 30.06.2018. While filing the income tax return, the petitioner disclosed Foreign Income at 65,61,171/- and claimed a sum of Rs. 18,85,919/- towards foreign tax credit which was withheld by employer. The 2nd respondent vide order dated 14.05.2020 rejected the foreign tax credit on the ground that Form 67 was not submitted along with Income Tax Return.
The Form 67 was introduced for the 1st time from the Assessment Year 2018-19 vide Rule 128(9) Income Tax Act and the same was filed by the petitioner on 20.05.2020. Thereafter, the petitioner filed the rectification petition on 20.05.2020 and the same was rejected by the 3rd respondent on the ground that Form 67 was not filed in time.
As rightly contended by the learned counsel for the petitioner the delay in filing the Form 67 is only the procedural lapse. That apart, this Court in the decision cited by petitioner has observed that Rule 128 is not mandatory but to be considered as directory in nature.
This Court is inclined to condone the delay in filing the Form 67 subject to payment of a cost of Rs. 10,000/- to the Principal Government Naturopathy Medical College and Hospital.
Issues: (i) Whether the assessee, a fiscally transparent entity, was entitled to benefits under the India-USA DTAA; (ii) whether receipts from domain name registration services were taxable as royalty; (iii) whether receipts from web hosting, web designing, SSL certification and sale of on-demand products were taxable as fees for technical services.
Issue (i): Whether the assessee, a fiscally transparent entity, was entitled to benefits under the India-USA DTAA.
Analysis: The assessee's treaty entitlement turned on whether liability to tax in the United States, and not actual current tax payment in the entity's own hands, was the relevant test for residence under Article 4. The Tribunal followed the settled view that fiscally transparent entities are not disqualified from treaty access merely because their income is taxed in the hands of members or because the entity itself is not taxed in the conventional manner, provided the residence certificate and treaty conditions are otherwise satisfied.
Conclusion: The issue was decided in favour of the assessee, and treaty benefits under the India-USA DTAA were allowed.
Issue (ii): Whether receipts from domain name registration services were taxable as royalty.
Analysis: The character of the domain name registration business was examined and it was found that the assessee acted only as a registrar facilitating registration of domain names for customers. Mere facilitation of registration did not amount to granting any proprietary right in the domain name, nor did it amount to transfer of the right to use any asset owned by the assessee. On that basis, the receipts could not be brought within the royalty limb under the Act or the corresponding treaty provision.
Conclusion: The issue was decided in favour of the assessee, and the domain name registration receipts were held not taxable as royalty.
Issue (iii): Whether receipts from web hosting, web designing, SSL certification and sale of on-demand products were taxable as fees for technical services.
Analysis: The Tribunal found that these services were standardised internet-based services supplied to customers without transmission of technical knowledge, skill, know-how or processes enabling the customer to perform the service independently. The services did not satisfy the make available requirement under the treaty, and were not rendered merely because they were commercially connected with domain registration. The consideration therefore fell outside the scope of fees for technical services.
Conclusion: The issue was decided in favour of the assessee, and the receipts from non-domain services were held not taxable as fees for technical services.
Final Conclusion: The additions made on account of treaty denial, royalty and fees for technical services did not survive, and the appeal was allowed in part with relief granted on the substantive transfer-pricing and treaty-taxability issues decided.
Ratio Decidendi: A fiscally transparent foreign entity is not denied treaty benefits merely because tax is levied through its members, and receipts from domain registration or standardised internet services are not taxable as royalty or fees for technical services unless the arrangement transfers a right to use property or satisfies the make available test.
Accrual of income in India - Eligibility of the assessee benefit of DTAA and taxability of income from non-domain services such as web hosting, web designing services etc. - assessee has submitted that Appellant had claimed that the income earned by it from provision of non- domain services was not chargeable to tax in India in accordance with the provisions of the Act read with India- USA DTAA - AO had held that the income earned by the appellant was taxable in India as FTS /FIS as per section 9(1)(vii) of the Act as well as 12(4) (a) of India -USA DTAA - HELD THAT:- The co-ordinate bench in the assessee’s own case in [2025 (1) TMI 449 - ITAT DELHI] wherein the tribunal made a distinction between liability to taxation and actual payment tax. The Tribunal has clarified that liability to taxation refers to the fundamental power to tax an income through the incidence of taxation, which may differ from the actual payment to tax
We hold that the assessee should be qualify as a resident under article 4 of the India-USA DTAA and entitled to avail the benefits under the India-USAA DTAA. Ground raised by assessee is decided in favour of the assessee.
Income earned by the Appellant from domain name registration services - chargeable to tax in India as ‘royalty’ under the provision of section 9(1) (vi) of the act as well as Article 12(3) of India- USA DTAA - HELD THAT:- We find that this view has been affirmed in Go Daddy. Com, LLC [2025 (1) TMI 449 - ITAT DELHI] as held that the income earned by the Appellant from providing domain name registration services to Indian customers is not taxable in India under either section 9(1) (vi) of the Act or Article 12(3) of the India-USADTAA.
Income earned income from providing services (such as web hosting, web designing, SSL certification services and sale of on-demand products) to Indian customers - The co-ordinate bench in the assessee’s own case in [2025 (1) TMI 449 - ITAT DELHI] income from provision of non-domain services (such as web hosting, web designing services etc.) do not ‘make available’ any technical knowledge, experience, skill, know-how, or processes or result in transfer of any technical plan or technical design to the users. Accordingly, the consideration received by the Appellant for rendering such services should fall outside the ambit as FIS as per Article 12(4)(b) of the India-USA DTAA.
The core legal questions considered by the Tribunal in this appeal are:
(a) Whether the addition of Rs. 83,86,539/- made by the Assessing Officer (AO) towards technical services fees paid to various persons is justified, given the lack of corroborative evidence supporting the genuineness of such expenses;
(b) Whether the addition of Rs. 66,61,467/- under section 40A(3) of the Income Tax Act, on account of cash payments exceeding the prescribed threshold limit of Rs. 10,000/-, is sustainable in light of the assessee's explanations regarding the nature of payments and alleged exceptional circumstances;
(c) Whether principles of natural justice were violated by the Revenue authorities by allegedly using information gathered without the assessee's knowledge or opportunity to respond;
(d) Miscellaneous grounds including general objections (grounds 1 and 10) which were dismissed as general in nature.
2. ISSUE-WISE DETAILED ANALYSIS
Issue 1: Addition of Rs. 83,86,539/- towards technical services fees
Relevant legal framework and precedents: The burden of proof lies on the assessee to establish the genuineness and commercial expediency of claimed expenses. Mere deduction of tax at source (TDS) is not conclusive evidence of the expenditure's authenticity. The AO is empowered to disallow expenses if the assessee fails to provide satisfactory evidence under relevant provisions of the Income Tax Act.
Court's interpretation and reasoning: The AO found that the assessee paid technical service fees to about ten persons but failed to produce any agreements, qualification details, or bank evidence of payments. Notices under section 133(6) issued to these parties went unanswered, and the assessee's submissions were limited to Form 16A copies showing TDS deductions and bald assertions regarding the nature of services rendered. The CIT(A) concurred with the AO's findings, emphasizing the absence of cogent evidence.
Key evidence and findings: The assessee's bank statements did not reflect payments to the recipients, and no contracts or qualification details were furnished. The parties to whom fees were allegedly paid did not file income tax returns despite notices.
Application of law to facts: The Tribunal noted the well-established principle that the assessee must furnish evidence to support claimed expenses. Mere TDS deduction is insufficient. The absence of agreements, payment proofs, and qualifications led to the conclusion that the expenses were not satisfactorily established.
Treatment of competing arguments: The assessee's reliance on prior submissions and documents was rejected due to lack of substantive evidence. The Revenue's contention that no presumption of genuineness could be drawn without demonstrative proof was accepted.
Conclusions: The addition was upheld, and the grounds challenging this addition were dismissed.
Issue 2: Addition of Rs. 66,61,467/- under section 40A(3) for cash payments exceeding Rs. 10,000/-
Relevant legal framework and precedents: Section 40A(3) aims to curb cash transactions exceeding Rs. 10,000/- to ensure traceability and prevent tax evasion. Rule 6DD of the Income Tax Rules provides exceptions where cash payments exceeding the limit may be justified, such as non-availability of banking facilities or payments to low-income laborers.
Court's interpretation and reasoning: The AO observed that cash expenses aggregating Rs. 66,61,467/- exceeded the statutory threshold. The assessee's explanation included payments of rent to landlords who were partners, stipends to students without bank accounts, and salaries to contractual staff also lacking bank accounts. The CIT(A) found these explanations insufficient, particularly rejecting the landlord's insistence on cash and the claim of non-availability of banking facilities in a metropolitan city like Chennai.
Key evidence and findings: The cash book was produced but failed to justify the exceptional circumstances required under Rule 6DD. The Tribunal accepted the CIT(A)'s view that the assessee did not establish valid grounds for such cash payments.
Application of law to facts: The Tribunal emphasized the legislative intent behind section 40A(3) to create an identifiable trail of expenses. The exceptions under Rule 6DD were narrowly construed, and the facts did not satisfy these exceptions.
Treatment of competing arguments: The assessee's arguments were considered but found unpersuasive. The Revenue's reliance on the statutory provisions and absence of valid justification was accepted.
Conclusions: The addition under section 40A(3) was confirmed, and the related grounds were dismissed.
Issue 3: Alleged violation of principles of natural justice
Relevant legal framework and precedents: Principles of natural justice require that no adverse order be passed without giving the affected party an opportunity to be heard. Use of information obtained without the assessee's knowledge or opportunity to respond may violate these principles.
Court's interpretation and reasoning: The Tribunal found no specific details or arguments substantiating the claim that information was used against the assessee without notice. The impugned orders contained no indication of such procedural irregularity.
Key evidence and findings: The record was silent on any breach of natural justice.
Application of law to facts: Without any concrete evidence or particulars, the ground was held to be without merit.
Treatment of competing arguments: The assessee's claim was dismissed for lack of substantiation.
Conclusions: The ground was rejected as infructuous.
Issue 4: General grounds of appeal
Grounds 1 and 10 were dismissed as general and non-specific.
3. SIGNIFICANT HOLDINGS
"It is trite law that it is the assessee which is required to lead evidence in its case in support of claims made. Mere tax deduction by the assessee can be a factor to justify the claim, but cannot be the sole factor."
"Section 40A(3) of the act has been brought on the statute with the objective of curbing cash transactions so that a bona-fide identifiable trail of expenses is available on records."
"The argument of landlord insisting for cash payments cannot be a justified ground. Similarly, stipend payments and salary etc to white collar workforce located in metropolis of Chennai could have been easily given by cheque as argument of non-availability of adequate banking facilities in Chennai cannot be accepted."
"No specific detail or arguments were brought to our knowledge in support of the impugned ground [violation of natural justice]. There is nothing in the order of lower authorities which alludes towards utilization of any information gathered at its back."
The Tribunal confirmed the additions made by the AO and upheld the orders of the CIT(A) in respect of both the disallowance of technical services fees and the addition under section 40A(3). The appeal was dismissed in its entirety.
Addition of technical services fees paid by the assessee to various persons - HELD THAT:- As undisputed fact of the case that the assessee has not provided any evidence in the form of qualifications of the parties, agreements entered with them, details of amounts paid to them through banking channels etc thus far. It is trite law that it is the assessee which is required to lead evidence in its case in support of claims made. The assessee was therefore required to provide all the above evidence for examination of the lower authorities.
Mere tax deduction by the assessee can be a factor to justify the claim, but cannot be the sole factor. The assessee was required to explain the commercial expediency of the impugned expenses including the genuineness of the transactions, identify of persons etc. Accordingly, we are of the opinion that there is no case of any interference to be made in the order of FAA The same is therefore confirmed and grounds of appeal nos. 2 to 5 raised by the assessee are dismissed.
Addition u/s 40A(3) - cash expenses where expenditure exceeded the threshold limit u/s 40A(3) - HELD THAT:- Rule 6DD of the Income Tax rules presumes situations where it may not be possible to comply with the said threshold limit of Rs. 10,000/- and hence certain exceptions have been made to allow for cash expenses in exceptional circumstances, chiefly being non-availability of adequate banking facilities, low end laborers etc. We find sufficient force in the findings of the Ld.CIT(A) that the assessee does not have any justified grounds in support of its claim.
The argument of land lord insisting for cash payments cannot be a justified ground. Similarly, stipend payments and salary etc to white collar workforce located in metropolis of Chennai could have been easily given by cheque as argument of non-availability of adequate banking facilities in Chennai cannot be accepted. Accordingly, we do not feel any need to interfere with the order of the Ld.CIT(A) as this stage.
Violation of principles of natural justice to the extent of using information against it, which was gathered at its back - As we have noted that no specific detail or arguments were brought to our knowledge in support of the impugned ground. There is nothing in the order of lower authorities which alludes towards utilization of any information gathered at its back.
The core legal questions considered by the Tribunal are:
(a) Whether the assessment framed under section 153C of the Income Tax Act was valid, given that the assessee was a searched person and his statement was recorded under section 132(4), thereby attracting the provisions of section 153A instead of section 153C;
(b) Whether the warrant of authorization and Panchnama correctly identified the searched person, and if a clerical error in the Panchnama affects the jurisdiction to frame assessment under section 153C;
(c) Whether the addition of Rs. 1,30,50,000 as unexplained investment under section 69 of the Act, based on loose sheets and seized documents, was justified;
(d) Whether the evidentiary value of the statement recorded under section 132(4), particularly the part admitting investments sourced from a third party (Mr. Aswin Thakker), can be selectively accepted or rejected;
(e) Whether the properties in question, registered in the name of the assessee and his wife but under dispute in courts, can be considered as undisclosed investments liable to tax.
2. ISSUE-WISE DETAILED ANALYSIS
Issue (a) & (b): Jurisdiction to frame assessment under section 153C vs. section 153A
Relevant legal framework and precedents: Section 153A applies to searched persons, allowing assessment or reassessment of their income for relevant years. Section 153C applies to persons other than the searched person, when incriminating documents relating to them are found during a search conducted on another person. The warrant of authorization and Panchnama are critical to determining the searched person(s).
Court's interpretation and reasoning: The Tribunal examined the warrant of authorization dated 27-11-2013, which was issued in the name of Shri D. Ramgopal to search the premises of the assessee. However, the Panchnama recorded on the same date bore the name of the assessee instead of Shri D. Ramgopal. The first appellate authority (CIT(A)) held this to be a clerical error and accepted the validity of the assessment under section 153C. The Tribunal disagreed with this conclusion.
Key evidence and findings: The incriminating documents were seized from the assessee's premises, and the statement of the assessee was recorded under oath pursuant to the search. The warrant of authorization was not issued in the name of the assessee, but the seized documents and statement clearly pertained to the assessee, indicating he was the person searched.
Application of law to facts: Since the incriminating material was found in the possession of the assessee during a search at his premises, and his statement was recorded under section 132(4), the Tribunal held that the assessee must be considered a searched person within the meaning of section 153A. Consequently, the assessment should have been framed under section 153A and not under section 153C.
Treatment of competing arguments: The Department argued that the warrant was issued only in the name of Shri D. Ramgopal and hence section 153C was applicable. The Tribunal rejected this on the ground that the Panchnama naming the assessee was not a mere clerical error but indicative of the actual searched person, supported by the seizure and recording of statement. The Tribunal emphasized that section 153C applies only when documents are found during search on another assessee, which was not the case here.
Conclusions: The Tribunal concluded that the assessment framed under section 153C was invalid and bad in law, and the proceedings should have been initiated under section 153A. This conclusion was upheld for both assessment years.
Issue (c): Validity of addition of Rs. 1,30,50,000 as unexplained investment under section 69
Relevant legal framework and precedents: Section 69 deals with unexplained investments, allowing the Assessing Officer to add unexplained investments to income if the assessee fails to satisfactorily explain the sources. The evidentiary value of seized documents and statements recorded under section 132(4) are crucial in such cases.
Court's interpretation and reasoning: The addition was primarily based on loose sheets seized from the assessee's premises, which contained entries of investments but lacked dates and direct attribution to the assessee. The assessee claimed that these entries related to amounts provided by Mr. Aswin Thakker and that he was merely maintaining accounts for these amounts.
Key evidence and findings: The statement of the assessee under section 132(4) admitted investments sourced from Mr. Aswin Thakker, but this was denied by Mr. Thakker himself. The properties were registered in the names of the assessee and his wife; however, ownership was disputed in courts. No corroborative evidence was found to link the loose sheets conclusively to the assessee's unexplained investments.
Application of law to facts: The Tribunal noted that the Assessing Officer partially accepted and partially rejected the statement of the assessee, which is impermissible. Since the assessee's claim of external funding was not disproved conclusively, and given the ongoing disputes over property ownership, the addition lacked a solid foundation.
Treatment of competing arguments: The Department relied on the presumption under sections 132(4A) and 292C and the seized documents to justify additions. The assessee challenged the evidentiary value of the loose sheets and the lack of direct connection to him. The Tribunal sided with the assessee on the insufficiency of evidence.
Conclusions: The addition of Rs. 1,30,50,000 as unexplained investment was deleted for both assessment years.
Issue (d): Treatment of statement recorded under section 132(4)
Relevant legal framework and precedents: Statements recorded under section 132(4) during search and seizure proceedings can be used as evidence but must be considered in entirety and corroborated by other material.
Court's interpretation and reasoning: The Tribunal observed that the Assessing Officer accepted part of the statement (investments made by the assessee) and rejected another part (source of funds from Mr. Aswin Thakker) without adequate basis. This selective acceptance and rejection of the statement was found to be impermissible.
Key evidence and findings: The statement was recorded on oath and admitted the source of funds from a third party. The denial of this by the third party without further corroboration was insufficient to reject the entire statement.
Application of law to facts: The Tribunal emphasized that the statement should be read as a whole and not piecemeal. The absence of corroborative evidence to disprove the source of funds claim weakened the basis for additions.
Treatment of competing arguments: The Department argued that the denial by the third party negated the claim of external funding. The Tribunal found this argument inadequate without supporting evidence.
Conclusions: The Tribunal held that the statement could not be partially accepted and partially rejected, thereby undermining the additions based solely on it.
Issue (e): Treatment of disputed properties as undisclosed investments
Relevant legal framework and precedents: Ownership and possession of properties, along with clear evidence of investment, are necessary to treat properties as undisclosed investments liable to tax.
Court's interpretation and reasoning: The properties in question were registered in the name of the assessee and his wife but were subject to ongoing litigation and ownership disputes. The assessee denied possession and claimed lack of source for purchase, further stating that he had requested authorities to sell the properties to adjust tax demands.
Key evidence and findings: The properties' disputed status before courts indicated uncertainty regarding ownership and possession. The assessee's inability to demonstrate clear ownership and source of funds was noted, but the ongoing litigation and lack of possession weighed against treating the properties as undisclosed investments conclusively.
Application of law to facts: Given the disputed ownership and lack of possession, the Tribunal found it inappropriate to treat the properties as unexplained investments for tax additions.
Treatment of competing arguments: The Department relied on registration documents to assert ownership and justify additions. The assessee's contention of dispute and lack of possession was accepted by the Tribunal.
Conclusions: The Tribunal declined to uphold additions on account of disputed properties for both assessment years.
3. SIGNIFICANT HOLDINGS
"Upon commutative consideration of above stated facts including that fact of seizure of impugned documents from the assessee and statement recorded on oath u/s 132(4) from the assessee, the conclusion of Ld. CIT(A) that there was a clerical error in the Panchnama could not be accepted."
"The provisions of Sec.153C would apply only if the documents are found during search on another assessee. The same is not the case here. In the present case, the incriminating document has been found from assessee's possession during search at his premises and the same form the very basis of impugned additions in the hands of the assessee himself."
"On these facts, the assessee was to be considered as searched person within the meaning of Sec.153A and therefore, the proceedings should not have been initiated u/s 153C in the case of the assessee. Therefore, the assessment so framed u/s 153C was to be considered as bad-in-law."
"The statement recorded under section 132(4) cannot be selectively accepted and rejected. Part of the statement admitted investments, and part claimed external source of funds, which was denied without corroboration. Such selective acceptance is impermissible."
"Considering totality of facts and circumstances of the case, the impugned additions are deleted for both the years."
Core principles established include the correct application of sections 153A and 153C based on the identity of the searched person, the inadmissibility of assessments framed under section 153C when the assessee is the searched person, and the necessity of corroborative evidence to sustain additions based on statements recorded under section 132(4). The Tribunal also emphasized the importance of considering ownership disputes in assessing unexplained investments in properties.
Final determinations were that the assessments framed under section 153C were invalid and the additions of Rs. 1,30,50,000 under section 69 were deleted for both assessment years, allowing the appeals of the assessee.
Assessment u/s 153C OR 153A - statement made by the assessee u/s 132(4) - HELD THAT:- As per fact of seizure of impugned documents from the assessee and statement recorded on oath u/s 132(4) from the assessee, the conclusion ofCIT(A) that there was a clerical error in the Panchnama could not be accepted. The provisions of Sec.153C would apply only if the documents are found during search on another assessee. The same is not the case here. In the present case, the incriminating document has been found from assessee’s possession during search at his premises and the same form the very basis of impugned additions in the hands of the assessee himself.
On these facts, the assessee was to be considered as searched person within the meaning of Sec.153A and therefore, the proceedings should not have been initiated u/s 153C in the case of the assessee. Therefore, the assessment so framed u/s 153C was to be considered as bad-in-law. The assessee succeeds on this foremost legal grounds, in both the years.
Only basis to make the impugned additions is the statement made by the assessee u/s 132(4) -There is no corroboration of the admission as made by the assessee. Pertinently, in the same statement, the assessee has stated that the impugned investments were sourced out of funds provided by Shri Aswin Thakker which has been rejected by AO. Part of the statement has been accepted and part of the statement has been rejected which is impermissible. The same is also evident by the fact that the properties in which the investments were made by the assessee were under dispute before various courts. The same would show that the ownership of the properties was in dispute despite the fact that the same was registered in the name of the assessee and his wife. Therefore, we concur with the aforesaid submissions of Ld. AR that the impugned additions could not have been made on given facts.
Regarding the addition of unexplained cash deposits, the relevant legal framework involves the provisions empowering the AO to make additions where cash deposits are not satisfactorily explained by the assessee. The AO had scrutinized cash withdrawals and redeposits during FY 2016-17, particularly focusing on the demonetization period. The assessee, a retired BSNL employee, contended that cash deposits were explained by withdrawals made during the year, sale proceeds of agricultural land from FY 2010-11, pension income, and other sources. However, the AO found that the assessee failed to provide a complete and cogent linkage between earlier withdrawals and current deposits, especially disallowing the Rs. 21 lakhs from the agricultural land sale as it was from an earlier financial year. Consequently, the AO estimated Rs. 33,20,000 as unexplained cash and made an addition of Rs. 20 lakhs after allowing some relief for personal needs. The first appellate authority concurred with this finding.
The Court noted an apparent discrepancy in the arithmetic of the addition, observing that if Rs. 33,20,000 was unexplained and a relief of Rs. 10,20,000 was given, the addition should have been Rs. 23 lakhs, not Rs. 20 lakhs. In effect, the assessee received a greater relief than projected. The Court further observed that the assessee failed to produce cogent demonstrative evidence linking deposits to prior withdrawals or legitimate sources. Balancing the equities, the Court directed an additional relief of Rs. 5 lakhs, reducing the addition to Rs. 15 lakhs. This adjustment reflects the Court's discretionary power to temper strict tax assessments where some explanation exists but is incomplete. Thus, the grounds challenging the addition were partly allowed.
On the issue of applicability of section 115BBE, the legal framework involves the amendment introduced by the Taxation Laws (Second Amendment) Bill, 2016, effective from 1 April 2017, which imposed a higher tax rate (60%) on undisclosed income to curb black money, particularly in the context of demonetization. The Revenue contended that the amendment applied to the entire assessment year 2017-18, encompassing transactions from 8 November 2016 to 30 December 2016, the demonetization period.
The Court relied on a recent authoritative decision of the Madras High Court in the case of S.M.I.L.E Microfinance Ltd., which held that the enhanced tax rate under section 115BBE applies only to transactions occurring on or after 1 April 2017. Transactions prior to that date are subject to the erstwhile tax rate of 30%. The High Court's reasoning emphasized the legislative intent as reflected in the objects and reasons of the amendment bill, which sought to impose stringent tax measures prospectively from the fiscal year beginning 1 April 2017. The Court highlighted that the amendment was not retroactive and that the use of the word "again" in the legislative intent indicated applicability to future transactions, not those preceding the amendment.
Applying this precedent, the Court found that since the transactions under scrutiny occurred during FY 2016-17, section 115BBE could not be invoked. The orders of the lower authorities invoking section 115BBE were set aside, and the AO was directed to recompute the income without applying the provisions of section 115BBE. Consequently, the ground of appeal concerning section 115BBE was allowed.
In conclusion, the Court held that the addition of Rs. 20 lakhs as unexplained cash deposits was partly justified but required reduction to Rs. 15 lakhs, granting the assessee additional relief. The invocation of section 115BBE was held to be incorrect for transactions prior to 1 April 2017, and the income was to be recomputed accordingly. The appeal was therefore partly allowed.
Significant holdings include the Court's observation on the arithmetic discrepancy in addition and the discretionary grant of relief to the assessee, reflecting a balanced approach to unexplained cash deposits. Further, the Court's reliance on the Madras High Court decision firmly establishes the principle that section 115BBE's enhanced tax rate applies prospectively from 1 April 2017, not retrospectively to transactions during the demonetization period in FY 2016-17. The judgment preserves the principle that legislative amendments imposing harsher tax rates must be applied prospectively unless explicitly stated otherwise.
Verbatim from the Madras High Court decision quoted by the Court:
"The next contention raised by the Learned Senior Counsel is that under section 115BBE the rate of tax imposed is increased from 30% to 60% and the same is applicable with effect from 01.04.2017 onwards as per the amendment. Therefore, the same is applicable to any transaction from 01.04.2017 onwards and not prior to any transactions prior to 01.04.2017. Since in the present case all alleged transactions are for the period from 08.11.2016 to 30.12.2016, hence the erstwhile rate of tax 30% only is applicable. ... In the aforesaid objects and reasons nowhere it is stated that due to 'demonetization' the unaccounted money ought to be charged 60% rate of tax. ... From the language of the object 'that instead of allowing people to find illegal ways of converting their black money into black again', it is evident that the government is intended to impose the same for future transactions. Especially the use of word 'again' in the object would clearly indicate it is for future transactions i.e. from 01.04.2017. Therefore this Court is of the considered opinion that the revenue is empowered to impose 60% rate of tax for the transactions from 01.04.2017 onwards and not prior to the said cut-off date. And for prior transaction the revenue is empowered to impose only 30% rate of tax...."
Unexplained cash deposits - case of assessee was selected under limited scrutiny category for examining the cash deposits and withdrawal made during the year - HELD THAT:- As undisputed fact of the case that the assessee was required to explain the sources of cash deposits made during the year. As per the assessment and appellate orders, the assessee was given a further benefit of Rs. 10, 20,000/- and an addition of Rs. 20 lakhs was made.
There is some mistake in the figures of addition.
Admittedly Rs. 33,20,000/- was found as unexplained and the assessee was given a further benefit of Rs. 10, 20,000/-. If that be so, the addition ought to hve been of Rs. 23 lakhs and not Rs. 20 lakhs. However, with the present figures, in reality the assessee has been given a relief of Rs. 13,20,000/- and not Rs. 10, 20,000/- as projected. We have also noted that the assessee is trying to justify its cash deposits with amounts and withdrawals made in earlier years without being able to link the same with any cogent demonstrative evidence. Be that as it may be, we are of the view that ends of justice would be met if the assessee is given another relief of Rs. 5 lakhs. AO is accordingly directed to restrict the addition to Rs. 15 lakhs. The grounds of appeal raised by the assessee are therefore partly allowed.
Invocation of section 115BBE - Section 115BBE would be applicable for transactions undertaken w.e.f. 1/4/2017 and not of earlier period. In the present case undisputedly transaction were undertaken in FY 2016-17 and hence section115BBE could not have been invoked in this case. The orders of lower authorities on the issue is therefore set aside and the Ld.AO is directed to recompute the income without applying provisions of section 115BBE. Accordingly, the ground of appeal raised by the assessee are allowed.
Issues: Whether the deletion of additions made on account of cash deposits treated as unexplained money and repayment of unsecured loans treated as unexplained credits was justified on the basis of the evidence produced by the assessee.
Analysis: The assessee furnished reply before the Assessing Officer and produced books of account, purchase and sales records, cash flow details, audit report, confirmations from loan parties, bank statements, PAN details, and income-tax return particulars. The material on record showed that the cash deposits were explained as arising from opening cash in hand and cash sales during the relevant period, while the loan repayments were supported by documentary evidence and shown to have been made through banking channels. The additions were therefore found to have been made without properly appreciating the evidence and on an assumption basis.
Conclusion: The deletion of the additions under section 69A and section 68 was upheld, and the revenue's challenge failed.
Unexplained cash credits u/s 69A - assessee not produced any cogent evidences to prove that the deposits made in the Bank accounts represent the business receipts - HELD THAT:- As the appellant had filed various details which are mentioned in the copy of ‘e-Proceedings Response Acknowledgement’ of Income-tax Department before the CIT(A). After considering the details submitted by the appellant before AO and CIT(A), we find that the appellant has duly explained the nature and source of the cash deposited in his bank account. He has also explained the source of the repayment of loan to various parties during the year.
CIT(A) has duly considered the explanation and details filed by the assessee and has rightly observed that the AO made the addition on the basis of assumption only. On appreciation of the explanation and details furnished by the appellant, he has deleted the additions made u/s 69A and 68 of the Act. Therefore, we do not find any infirmity in the order of the CIT(A) passed u/s 250 of the Act. Accordingly, the ground Nos.1, 2 and 3 raised by the revenue are dismissed.
The core legal questions considered by the Tribunal are:
2. ISSUE-WISE DETAILED ANALYSIS
Validity and Jurisdiction of Reassessment Notice under Section 148
Relevant legal framework and precedents: Sections 147 to 151 of the Income Tax Act govern reassessment proceedings. The Supreme Court in NTPC Ltd. vs. CIT (1998) 229 ITR 383 (SC) emphasized the strict adherence to jurisdictional requirements and limitation periods for issuing reassessment notices. The Bombay High Court in CIT vs. Jet Airways (I) Ltd. (2010) 331 ITR 236 (Bom.) and the Delhi High Court in Ranbaxy Laboratories Ltd. vs. CIT (2011) 335 ITR 136 (Del.) held that reassessment proceedings must be confined to the reasons recorded in the section 148 notice and cannot be extended to unrelated issues.
Court's interpretation and reasoning: The Tribunal noted that the reassessment notice was issued on the basis of cash deposits of Rs. 15,56,000/- made by the assessee in Canara Bank, questioning the source of these deposits as unexplained cash credits. The assessee submitted explanations and source details for these deposits, which were accepted by the AO. However, the AO proceeded to make additions based on other issues, such as large credit and debit entries in the books of account, estimating income at 8% of total business receipts, which were unrelated to the original reasons recorded in the notice under section 148.
Key evidence and findings: The show-cause notice and section 148 notice were confined to unexplained cash credits. The AO's assessment order introduced new grounds for addition without issuing fresh notice or recording reasons for reassessment on those grounds. The assessee was not given an opportunity to explain these new issues.
Application of law to facts: The Tribunal applied the principle from Jet Airways and Ranbaxy Laboratories that reassessment must be strictly restricted to the reasons recorded in the section 148 notice. Since the AO deviated from the stated reasons without fresh notice or opportunity to the assessee, the reassessment was held to be invalid.
Treatment of competing arguments: The Revenue relied on the lower authorities' orders confirming the additions. The assessee pressed the additional grounds challenging jurisdiction and limitation, relying on the above precedents. The Tribunal found the assessee's arguments more compelling and consistent with settled law.
Conclusion: The reassessment proceedings initiated were without jurisdiction and barred by limitation, making the notice and consequent assessment order liable to be quashed.
Validity of Additions Made by AO and Confirmed by CIT(A)
Relevant legal framework and precedents: Principles of natural justice require that additions to income be made based on evidence and after providing the assessee an opportunity to explain. The CIT(A) must appreciate the assessee's submissions and provide reasons for confirming additions. The AO must record reasons and provide corroborative evidence for additions.
Court's interpretation and reasoning: The Tribunal observed that the CIT(A) confirmed additions made by the AO without appreciating the assessee's submissions and without providing the opportunity of hearing via video conferencing despite specific requests. Further, additions were upheld on issues not raised during assessment proceedings, denying the assessee the right to explain. The AO did not provide corroborative evidence or prior approval for the additions.
Key evidence and findings: The assessee's grounds of appeal highlighted procedural lapses, including failure to provide hearing, lack of jurisdiction, absence of corroborative evidence, and additions on new issues. The Tribunal noted these procedural infirmities and the violation of principles of natural justice.
Application of law to facts: The Tribunal held that the CIT(A) erred in confirming additions without proper appreciation of submissions and without affording the assessee a fair hearing. Additions made on issues not part of the reassessment notice violated statutory requirements and natural justice.
Treatment of competing arguments: The Revenue defended the orders of lower authorities. The assessee's submissions on procedural lapses and jurisdictional defects were accepted by the Tribunal.
Conclusion: The additions confirmed by the CIT(A) were not sustainable due to procedural irregularities and jurisdictional defects.
Opportunity of Hearing and Procedural Fairness
Relevant legal framework and precedents: The principles of natural justice mandate that an assessee be given an opportunity of being heard before passing any adverse order. The right to be heard includes the mode of hearing, such as video conferencing when requested, especially in faceless appeal proceedings.
Court's interpretation and reasoning: The Tribunal found that despite the assessee's specific request for hearing via video conferencing, the CIT(A) failed to provide such opportunity before passing the impugned order.
Key evidence and findings: The grounds of appeal and record showed the assessee's request for video conferencing was not granted. No opportunity was given to explain or rebut the additions.
Application of law to facts: The failure to provide opportunity of hearing violated principles of natural justice and rendered the impugned order liable to be set aside.
Treatment of competing arguments: The Revenue did not contest this procedural lapse effectively.
Conclusion: The CIT(A)'s order was flawed for failure to provide opportunity of hearing as requested by the assessee.
3. SIGNIFICANT HOLDINGS
The Tribunal held that:
The core principle established is that reassessment proceedings must strictly adhere to the reasons recorded in the section 148 notice and must comply with statutory requirements of jurisdiction, limitation, and procedural fairness including the right to be heard. Additions made beyond the scope of the notice or without opportunity to explain are liable to be quashed.
Accordingly, the appeal was partly allowed, setting aside the reassessment and additions made beyond the scope of the notice.
Reopening of assessment u/s 147 - cash deposits made by the assessee during the year - HELD THAT:- Assessee as submitted the relevant information and explained the source of cash deposits made by the assessee during the year. AO has accepted the same and proceeded to observe that assessee has large credit and debit entries in his books of account and proceeded to estimate the income of the assessee considering only the credit entries recorded in the books of account.
As per the facts available on record, it is clear that AO has initiated the proceedings for the reason of cash deposits, however he proceeded to complete the assessment on some other issues for which no reasons were recorded and notice u/s 148 was not issued. Therefore, the facts of the case clearly apply the decision in the case of Jet Airways (I) Ltd [2010 (4) TMI 431 - BOMBAY HIGH COURT] and case of Ranbaxy Laboratories Ltd [2011 (6) TMI 4 - DELHI HIGH COURT] Since the decision of Ranbaxy Laboratories Ltd. (supra) is squarely covered in the present case, to allow the additional grounds raised by the assessee.
1. Whether the engineering and technical service fees/charges paid to the local agent of the foreign supplier are includible in the assessable value of the imported goods under Rule 9(1)(a) and Rule 9(1)(e) of the Customs Valuation Rules read with Section 14(1)(a) of the Customs Act, 1962.
2. The nature and character of the payment made to the local agent: whether it constitutes a commission/agency fee forming part of the transaction value or a separate payment for post-importation services not includible in the assessable value.
3. The applicability and interpretation of the Note to Rule 4 of the Customs Valuation Rules, which excludes charges for maintenance or technical assistance undertaken after importation from the assessable value.
4. The relevance of the contractual terms between the foreign supplier, the local agent, and the importer, including whether the payment to the local agent was a condition of sale or a separate service contract.
Issue-wise Detailed Analysis
1. Inclusion of Engineering and Technical Service Charges in Assessable Value under Customs Valuation Rules
The legal framework involves Section 14 of the Customs Act, 1962, which provides that the value of imported goods for customs duty purposes shall be the price at which such goods are ordinarily sold for delivery at the time and place of importation, where the buyer and seller have no interest in each other's business, with the price determined in accordance with the Customs Valuation Rules. Rule 4 of the Customs Valuation Rules defines transaction value as the price actually paid or payable for the goods, adjusted as per Rule 9. Rule 9(1)(a) requires addition of commissions and brokerage (except buying commissions) to the transaction value if incurred by the buyer but not included in the price paid. Rule 9(1)(e) mandates inclusion of "all other payments actually made or to be made as a condition of sale of the imported goods, by the buyer to the seller or by the buyer to a third party to satisfy an obligation of the seller," if not already included in the price.
The Court noted that the Assistant Commissioner, Commissioner (Appeals), and CESTAT uniformly held that the engineering and technical service charges paid to the local agent, M/s Voltas Limited, were includible under Rule 9(1)(e) as a condition of sale. The foreign supplier's quotation and the purchase order explicitly stipulated payment of 8% of the FOB value to Voltas as engineering and technical service fees, payable in Indian rupees, over and above the FOB price payable to the foreign supplier. This payment was not deducted from the FOB amount but was an additional charge.
The Court emphasized that these payments were not for post-importation services but were integral to the sale transaction itself, forming a condition precedent to the sale and importation of the goods. The services rendered by Voltas Limited were on behalf of the foreign supplier and were related to ensuring the smooth procurement, customs clearance, and delivery of the imported spare parts.
The Court rejected the appellant's contention that these charges were for maintenance or technical assistance post-importation, which would be excluded under the Note to Rule 4. Instead, the services were pre-importation and directly linked to the sale process, thus falling within the ambit of Rule 9(1)(e).
2. Nature of Payment to Local Agent: Commission or Separate Service Fee
The appellant argued that the payment to Voltas Limited was for engineering and technical services rendered independently and had no nexus to the value of the imported goods. It contended that there was no contract between the appellant and Voltas Limited, and the payment was for services rendered post-importation, thus not includible in the assessable value.
The Court, however, analyzed the contractual documents and found that Voltas Limited was the local agent/distributor of the foreign supplier, and the payment was a condition of sale imposed by the foreign supplier. The appellant had no choice but to make the payment to Voltas Limited to procure the goods. The amount paid was linked to the transaction and was not contingent on any specific services rendered by Voltas Limited to the appellant. The Court observed that if there was no import, no payment would be due, indicating the payment's direct nexus to the imported goods.
Thus, the Court held that the payment was effectively a commission or agency fee forming part of the transaction value, not a separate service contract. It was a payment made by the buyer to satisfy an obligation of the seller, falling squarely within Rule 9(1)(e).
3. Interpretation of the Note to Rule 4 of Customs Valuation Rules
The appellant relied on the Note to Rule 4, which excludes charges for construction, erection, assembly, maintenance, or technical assistance undertaken after importation from the value of imported goods. The appellant contended that the engineering and technical service charges were for such excluded activities.
The Court referred to precedents where this Note was interpreted, notably in the J.K. Corporation Limited and Ferodo India (P) Ltd. cases. The Court reiterated that the Note excludes post-importation charges only and does not exclude payments made as a condition of sale or pre-importation services that facilitate the sale and import of goods. Since the services rendered by Voltas Limited were pre-importation and integral to the sale, the exclusion under the Note did not apply.
4. Contractual Terms and Nexus of Payment to Imported Goods
The Court carefully examined the purchase order and quotation documents. Clause 5 of the purchase order mandated payment of 100% FOB value to the foreign supplier by letter of credit and separately stipulated payment of engineering and technical service charges at 8% of FOB value to Voltas Limited. The foreign supplier's quotation made it clear that this payment was an additional charge, not deductible from FOB, and was payable in Indian rupees.
The Court found that the services described-such as product support visits, assistance in spare parts identification, customs clearance support, and coordination for insurance surveys-were aimed at ensuring the sale and delivery of the imported goods. These services were rendered on behalf of the foreign supplier by its local agent and formed a condition of sale.
Therefore, the Court concluded that the payment had a direct nexus to the imported goods' value and was properly includible in the assessable value under Rule 9(1)(e).
Treatment of Competing Arguments
The appellant's argument that the payment was for independent services and not part of the transaction value was rejected on the basis of documentary evidence and the legal framework. The Court found that the absence of a direct contract between the appellant and Voltas Limited did not negate the fact that the payment was a condition of sale imposed by the foreign supplier.
The respondent's argument that the payment was integral to the sale and thus includible in the transaction value was accepted, supported by the contractual terms and the Customs Valuation Rules.
Significant Holdings
The Court held:
"The payment made to M/s Voltas Limited was only in connection with the sale of goods because M/s Voltas Limited was an agent/distributor of the foreign supplier. The payment had a direct nexus to the value of the goods imported and was a condition of sale."
"The services rendered by the Indian agent were not post-importation activities but were directly relatable to the import of the goods by way of product support service which is covered by Sections 14(1) and 14(1A) of the Customs Act read with Rule 9(1)(e) of the Customs Valuation Rules."
"The Note to Rule 4 excludes charges for maintenance or technical assistance undertaken after importation, but does not exclude payments made as a condition of sale or pre-importation services integral to the sale."
"The value of imported goods shall include all payments made or to be made as a condition of sale, by the buyer to the seller or to a third party to satisfy an obligation of the seller, to the extent such payments are not included in the price actually paid or payable."
"The view taken by the lower authorities that the engineering and technical service fees/agency commission/charges paid to the local agent of the foreign supplier are includible in the assessable value of the imported goods is correct and no interference is warranted."
Accordingly, the appeal was dismissed.
Valuation of imported goods - engineering and technical service charges paid to a local agent of a foreign supplier must be included in the assessable value of imported goods under the Customs Valuation (Determination of Price of Imported Goods) Rules, 1988 or not - HELD THAT:- In so far terms of payment is concerned, 100 percent of FOB value had to be paid in U.S. Dollars. It was also mentioned therein that product support service would be rendered by M/s Voltas Limited on payment of engineering and technical service charges. After referring to instances of product support service, it was stipulated that payment of engineering and service charges at the rate of 8 percent of the net FOB value would be made on pro-rata basis to M/s Voltas Limited in equivalent Indian currency at the exchange rate prevailing on the date of the bill of lading. Product support services included determination of actual requirement of spares, to assist in speedy customs clearance including insurance survey, prompt replacement in case of discrepancies in supplies etc.
The foreign supply had made it clear that the appellant had to pay an additional 8 percent of the total FOB amount on a pro-rata basis against each shipment to M/s Voltas Limited in Indian currency. It was clarified that this payment was to be made to Voltas Limited and was not to be deducted from the FOB amount payable to the foreign supplier.
Engineering and technical service charges paid to the local agent M/s Voltas Limited were 8 to 10 percent of the transactions of the appellant with the principal i.e. the foreign supplier. Such charges were paid as a recompense for the services rendered towards making the sale effective. Hence, engineering and technical service charges were nothing but commission - Observing that the sale had become conditional in view of the conditions posed in quotation by the foreign supplier, the consequential engineering and technical service charges were fully covered by Rule 9(1)(e) of the Customs Valuation Rules. Assistant Commissioner referred to the Note to Rule 4 of the Customs Valuation Rules and observed that engineering and technical service charges were not being paid for maintenance of any industrial plant, machinery or equipment. It was nobody’s case that these charges were being paid under a contract for maintenance, erection, commissioning of an industrial plant, equipment or machinery.
Looking into the nature of imports, Commissioner (Appeals) held that services provided by the Indian agent was on behalf of the foreign seller and was directly related to the sale of imported goods. Provision for such service and payment of service charges constituted a condition of sale. In such circumstances, the first appellate authority upholding the view taken by the Assistant Commissioner held that engineering and technical service charges were includible in the assessable value of the imported goods.
What Section 14(1)(a) provides for is that for the purpose of the Customs Tariff Act, 1975 or any other law for the time being in force whereunder a duty of customs is chargeable on any goods by reference to their value, the value of such goods shall be deemed to be the price at which such or like goods are ordinarily sold or offered for sale, for delivery at the time or place of importation or exportation, as the case may be, in the course of international trade where the seller or buyer had no interest in the business of each other or one had no interest in the business of the other. As per sub-section (1A), subject to the provisions of sub-section (1), the price referred to in that sub-section in respect of the imported goods shall be determined in accordance with the rules made in this behalf - In exercise of the powers conferred by Section 156 of the Customs Act read with Section 22 of the General Clauses Act, 1897, the Customs Valuation Rules have been framed. Rule 4 deals with transaction value. The transaction value of the imported goods shall be the price actually paid or payable for the goods when sold for export to India, adjusted in accordance with the provisions of Rule 9 of the Customs Valuation Rules.
In J.K. Corporation Limited [2007 (2) TMI 1 - SUPREME COURT], this Court considered the question as to whether customs duty would be payable on the purchase price of the goods by adding the value of the license and technical knowhow to the value of the imported goods - Note to Rule 4 has been explained by this Court in J.K. Corporation Limited. This Court after adverting to the relevant portion of the Note to Rule 4 held that what would be excluded for computing the assessable value for the purpose of levy of customs duty is any amount paid for postimportation activities including any amount paid for postimportation technical assistance.
From the above case, it is found that the services rendered by the Indian agent were not post-importation activities. The services provided were directly relatable to the import of the goods by way of product support service which is covered by Sections 14(1) and 14(1A) of the Customs Act read with Rule 9(1)(e) of the Customs Valuation Rules.
Conclusion - The view taken by the lower authorities that the engineering and technical service fees/agency commission/charges paid to the local agent of the foreign supplier are includible in the assessable value of the imported goods is correct and no interference is warranted.
Appeal dismissed.
Condonation of gross delay of 229 days in filing the appeal which has not been satisfactorily explained by the appellant - Violation of principles of natural justice - no speaking order - Challenge to order of adjudication under section 17(4) of Customs Act, 1962 - enhancement of value and classification of goods - it was held by CESTAT that 'The observation made by the Ld. Commissioner (Appeal) in the impugned order agreed upon wherein it has been held that the Adjudicating Authority is mandatorily required to pass the speaking order under section 17(5) of the Act which Adjudicating Authority fails to do so.' - HELD THAT:- The Civil Appeal is, accordingly, dismissed on the ground of delay, keeping the question of law open.
Seeking release of detained goods - Smuggling of 1065.10 grams of gold - disposing of the detained gold without proper intimation to the Petitioner - it was held by High Court in [2025 (2) TMI 641 - DELHI HIGH COURT] that 'This Court is of the opinion that the Petitioner is entitled to the entire value of the detained gold as on the market rate prevalent today, which would be liable to be paid by the Customs Department within a period of three weeks.' - HELD THAT:- No case for interference is made out in exercise of our jurisdiction under Article 136 of the Constitution of India.
The Special Leave Petition is accordingly dismissed.
Issues: Whether the common order of the Tribunal allowing the assessees' appeals on the basis of the earlier decision in Canon India could survive after that decision was reviewed, and whether the matters required reconsideration on their own merits.
Analysis: The basis on which the Tribunal had allowed the assessees' appeals was the earlier decision in Canon India. Since that decision had subsequently been reviewed and the review had been allowed, the foundation of the Tribunal's order could not be sustained. The matters therefore required examination afresh without reliance on the earlier decision as a concluded basis.
Conclusion: The common impugned order was set aside and the matters were remitted to the Tribunal for fresh consideration in accordance with law, in favour of the Revenue.
Benefit of exemption - Import of Camera - Extended period of limitation - Jurisdiction of DRI to issue Show Cause Notice (SCN) - Proper Officer - Validity of proceeding initiated for Recovery of duty not paid - clearance of the cameras on the basis that they were exempted from levy of basic Customs duty under Notification No.15/2012 - HELD THAT:- The decision relied upon by the Tribunal was taken in review by this Court in the case of “Commissioner of Customs vs. Canon India Pvt. Ltd. [2021 (3) TMI 384 - SUPREME COURT]. The review was at the instance of Revenue and the same was allowed.
The common impugned order passed by the CESTAT set aside and the matter remitted to the Tribunal for fresh consideration on its own merits in accordance with law.
Appeal disposed off.
Condonation of Delay in filing the special leave petition - HELD THAT:- Following the order in Union of India and Another vs. M/s Asia Exporters & Others [2023 (10) TMI 1435 - SC ORDER], this Special Leave Petition also stands dismissed.
Issues: Whether the petitioner was entitled to regular bail in view of his alleged limited role in the conspiracy and the prolonged pre-trial detention affecting the right to speedy trial.
Analysis: The petitioner was alleged to have acted only as a conduit for routing funds and there was no prima facie material showing that he himself forged any Customs documents or knew the nature and scale of the alleged offence. The chargesheet had already been filed, 49 witnesses had been cited, the record was voluminous, and charges had not yet been framed. The petitioner had remained in judicial custody for over 13 months. Applying the settled principles that pre-trial custody is not punitive, that bail turns on the necessity of continued detention, and that Article 21 protects the right to speedy trial, the continued incarceration was found unjustified.
Conclusion: Regular bail was granted to the petitioner.
Ratio Decidendi: Where an undertrial has already spent substantial time in custody, the investigation is complete, and no specific material shows a necessity for continued detention or a prima facie role in the core forgery, prolonged incarceration must yield to the constitutional guarantee of speedy trial and bail may be granted.
Right to speedy trial - undertrial has been in custody for too long - large-scale economic offence involving criminal conspiracy, forgery, cheating, and misappropriation of public funds - grant of regular bail - HELD THAT:- It is crucial for a court to recognise and be conscious of the right of an accused to speedy trial; and to prevent that right from being defeated, rather than wake-up much too late and lament that such right has been defeated. In Mohd. Hakim vs. State (NCT of Delhi) [2021 (10) TMI 1414 - DELHI HIGH COURT], a Division Bench of this court, of which the undersigned was a member, has urged courts to act as doctors instead of coroners, to highlight that a court seized of a bail petition must endeavour to assess the pace at which a trial is proceeding and to not wait for too long, by which time the Article 21 right of an accused is already trampled upon.
In the present case, for example, the chargesheet comprising about 10,000 pages was filed over 01 year ago citing 49 prosecution witnesses but charges are yet to be framed. It is therefore obvious that trial will take a long time to conclude. In the meantime however, the petitioner has already suffered more than 01 year of judicial custody and has been exposed to ‘prisonisation’; and there appears to be no cogent basis to satisfy the test of ‘necessity’ as discussed above for his continued detention.
Considering the allegations in the subject FIR insofar as they relate to the petitioner, this court is accordingly persuaded to admit the petitioner to regular bail, pending trial, subject to the conditions imposed - bail application allowed.
The primary legal questions considered by the Court in this matter were:
2. ISSUE-WISE DETAILED ANALYSIS
Modification/Deletion of Bail Condition Regarding Passport Surrender and Travel Permission
Relevant Legal Framework and Precedents: The Court relied on prior decisions of the same High Court in Mohammad Hanif Nurani Vs. The State of Maharashtra and Manish Gulabchand Birawat Vs. State of Maharashtra, which addressed the issue of bail conditions related to passport surrender and travel permissions under the Passport Act and criminal procedure norms.
Court's Interpretation and Reasoning: The Court observed that the Applicant's case prima facie fell within the ambit of these precedents, which supported modification or deletion of similar bail conditions. The Court saw no impediment to allowing modification of the conditions, particularly those in prayer clauses (a) and (c) seeking deletion or relaxation of the passport surrender condition.
Application of Law to Facts: The Applicant had complied with the Court's direction to meet the Investigating Officer and provide necessary details regarding her travel and medical condition. The Court emphasized the Applicant's willingness to cooperate and furnish all required information before traveling.
Treatment of Competing Arguments: The prosecution opposed the modification primarily on grounds of flight risk, and because the Applicant had been summoned for hearings she was allegedly unaware of. The Court noted these objections but also highlighted the Applicant's cooperation and the absence of interrogation during custody, diminishing the prosecution's concerns.
Conclusion: The Court found sufficient basis to modify the bail conditions related to passport surrender and travel permission, subject to the Applicant's compliance with detailed disclosure requirements and cooperation with investigation.
Applicant's Request to Travel Abroad for Medical Treatment and Daughter's Graduation
Relevant Legal Framework and Precedents: The Court considered medical necessity and humanitarian grounds as legitimate bases for modifying bail conditions to permit travel abroad, consistent with principles protecting personal liberty and health rights under criminal procedural law.
Court's Interpretation and Reasoning: The Applicant was diagnosed with Complex Regional Pain Syndrome requiring periodic Stellate Ganglion Block treatment under ultrasound guidance, which she was receiving in the USA prior to arrest. The Court acknowledged that while similar treatment might be available in India, the Applicant's status as an Overseas Citizen of India (OCI) and prior treatment history in the USA justified her preference and need to continue treatment there.
Key Evidence and Findings: Detailed medical documents, prescriptions, appointment schedules, and itinerary were appended to the Application. The Court found these to be credible and sufficient to establish the medical necessity of travel.
Treatment of Competing Arguments: The prosecution's argument that treatment could be undertaken in India was rejected as "preposterous," emphasizing that the Applicant could not be compelled to receive treatment in India against her preference, especially given her OCI status and prior treatment history abroad.
Application of Law to Facts: The Court balanced the Applicant's medical needs and personal circumstances against prosecution concerns. It recognized the Applicant's right to seek medical care and attend a significant family event, while ensuring conditions to maintain cooperation with investigation.
Conclusion: The Court accepted the Applicant's request to travel abroad for medical treatment and to attend her daughter's graduation, subject to strict disclosure and cooperation conditions.
Applicant's Obligation to Cooperate with Investigation During and After Travel
Relevant Legal Framework: Bail conditions customarily include cooperation with investigation and attendance at hearings. The Court emphasized the importance of such cooperation, especially when travel abroad is permitted.
Court's Interpretation and Reasoning: The Applicant had complied with directions to meet the Investigating Officer and provide details about her travel and medical condition. The Court directed that the Applicant must continue to furnish itinerary details, contact information, and cooperate fully with the investigation, including submission of bank statements and LIC policies as requested by prosecution.
Treatment of Competing Arguments: While the prosecution expressed concerns about the Applicant being a flight risk and her awareness of summons, the Court noted the Applicant's cooperation and willingness to comply with all investigative requirements, diminishing the prosecution's apprehensions.
Conclusion: The Court imposed conditions requiring the Applicant to provide detailed travel information in advance and to remain available for investigation, thereby balancing liberty interests with prosecutorial concerns.
Procedural and Substantive Implications of Modifying Bail Conditions Post-Bail
Relevant Legal Framework: The Court recognized that modification of bail conditions post-grant of bail is permissible where circumstances justify such changes, especially to accommodate medical needs and personal exigencies.
Court's Interpretation and Reasoning: The Court clarified that the modification of conditions Nos. 6 and 7 in the bail order dated 20.03.2025 was warranted, with the proviso that the Applicant must inform the prosecution in writing, under affidavit, of all travel-related details before departure and maintain communication during travel.
Application of Law to Facts: The Court set out a framework for future compliance, including informing the prosecution about passport renewals and itinerary changes, and made clear that any breach of these conditions could lead to revocation of bail.
Conclusion: The Court's order provided a balanced approach, allowing the Applicant's travel while safeguarding prosecutorial interests through stringent conditions and oversight.
3. SIGNIFICANT HOLDINGS
The Court held:
"The submission and argument on the face of record is preposterous as prosecution cannot force the Applicant to undertake medical treatment in India and resist her request to undertake treatment in the USA when she desires to travel to USA for that reason and return back."
"Applicant is an OCI holder and has a citizenship of USA and had undertaken medical treatment in USA in the past also, the details of which have also been placed on record."
"Condition Nos. 6 and 7 both in the bail order dated 20.03.2025 stands deleted by issuing clarification that as and when Applicant desires to travel abroad, it shall be mandatory for Applicant to inform in writing all such necessary details in writing on affidavit about her itinerary, date of travel, date of return, details of the place where and with whom she will be residing during her visit, details of the places which she intends to visit during her visit to abroad, her phone number, email ID etc. to the prosecution officer before she undertakes to travel abroad on affidavit and that she will undertake to respond to them in an emergency and shall fully co-operate with the investigation in the present case."
"If there is any breach of this order by Applicant, liberty is given to the prosecution to apply for revocation of this order by applying to this Court."
Core principles established include the recognition of the Applicant's right to travel abroad for legitimate medical and personal reasons even while on bail, subject to strict conditions ensuring cooperation with investigation and safeguarding against flight risk. The Court emphasized that bail conditions must be reasonable and not infringe upon fundamental rights unnecessarily, especially when supported by credible medical evidence and personal exigencies.
Final determinations included the deletion/modification of passport surrender and travel permission conditions, allowing the Applicant to travel to the USA for treatment and family reasons, subject to detailed disclosure and cooperation requirements. The Court quashed the Magistrate's order denying travel and directed immediate return of the passport upon production of the Court's order.
Seeking modification/deletion in bail condition requiring the Applicant to deposit/surrender her passport with the Trial Court and seek permission before traveling abroad - HELD THAT:- It is seen from the affidavit that prosecution is in the process of issuing Show-Cause-Notice to Applicant for which her presence is required in India and therefore her Application is opposed by prosecution. Applicant can always co-operate with the investigation after she returns back in July 2025 as stated by her. In the bail order, it is noted by the Court that when she was in custody since 21.02.2025 she was not at all interrogated. Applicant can always co-operate with the investigation after she returns back in July 2025 as stated by her.
What is argued across the Bar is that Applicant is required to submit her bank statements and LIC policies in her name to the prosecution. Though the prosecution has objection to the present Application, it is opined that the case of Applicant in respect of prayer clauses (a) & (c) seeking modification / deletion of condition No. 6 is covered by the decisions of this Court in the cases of Mohammad Hanif Nurani [2025 (2) TMI 220 - BOMBAY HIGH COURT] and Manish Gulabchand Birawant [2025 (3) TMI 420 - BOMBAY HIGH COURT]. Needless to state that Applicant will have to furnish all such necessary details to the prosecution before she embarks upon her travel to USA at this time and at all times in future.
Insofar as Applicant's medical condition is concerned, prima facie adequate documentation has been appended to the Application and all such necessary details have already been given to the prosecution by her. If any further details are required to be informed, it is directed that Applicant shall inform the same and all such necessary details pertaining to her itinerary, date of travel, date of return, details of the place where and with whom she will be residing during her visit, details of the places which she intends to visit during her visit to USA etc. It is seen that Applicant is having deep roots in Mumbai and prima facie she is having the medical ailment for which she desires to take treatment from her home country i.e. USA, details of which have already been given to the prosecution and appended to the Application. It is also seen that she has been taking medical treatment for her ailment in the USA even earlier. Prima facie there are no reason to disbelieve the same.
The condition Nos. 6 and 7 both in the bail order dated 20.03.2025 stands deleted by issuing clarification that as and when Applicant desires to travel abroad, it shall be mandatory for Applicant to inform in writing all such necessary details in writing on affidavit about her itinerary, date of travel, date of return, details of the place where and with whom she will be residing during her visit, details of the places which she intends to visit during her visit to abroad, her phone number, email ID etc. to the prosecution officer before she undertakes to travel abroad on affidavit and that she will undertake to respond to them in an emergency and shall fully co-operate with the investigation in the present case. This order shall be read along with order dated 20.03.2025. It is clarified that, if there is any breach of this order by Applicant, liberty is given to the prosecution to apply for revocation of this order by applying to this Court.
Conclusion - The Applicant is accordingly permitted to travel abroad to USA as delineated in the bail order as corrected / modified by the present order subject to she abiding by the directives contained in the present order.
Application allowed.
- Whether the petitioner, a 100% Export Oriented Unit (EOU), is entitled to immediate export of goods covered under the Shipping Bill No. 7083124 dated 07.01.2025, which were detained by customs authorities pending examination and testing.
- Whether the customs authorities acted lawfully in sealing the petitioner's containers, drawing samples, and withholding the Let Export Order (LEO) without timely determination.
- Whether the provisional release of the detained goods by customs was justified and on what conditions such release should be granted, including the quantum of security or bank guarantee to be furnished by the petitioner.
- The legal validity and reasonableness of the customs authorities' demand for a bank guarantee of Rs. 3 crores, which significantly exceeds the Free on Board (FOB) value of the goods (Rs. 1,98,85,906.26).
- The applicability and interpretation of relevant Customs circulars and regulations regarding provisional release of goods, security requirements, and the treatment of demurrage/detention charges during the pendency of investigation.
- The extent of the petitioner's obligation to cooperate with the customs authorities during the enquiry and the procedural fairness in handling the export clearance process.
2. ISSUE-WISE DETAILED ANALYSIS
Issue 1: Entitlement to export goods and legality of detention
The petitioner, operating as a 100% EOU, filed the shipping bill for export of areca nut powder with the expectation of obtaining the Let Export Order (LEO) promptly. However, customs officials detained the goods for examination and drew samples on 7th and 8th January 2025, without concluding the enquiry or issuing the LEO. The petitioner's request for provisional export permission remained pending.
The Court noted that while the customs authorities are empowered to examine and test goods under the Customs Act, the petitioner must not be unduly delayed in exporting goods unless they fall under prohibitory categories. The authorities had not demonstrated that the goods were prohibited for export. The petitioner's bona fide belief in the urgent export and contractual obligations was recognized. The Court directed the customs authorities to expeditiously decide on the petitioner's application for provisional export, emphasizing procedural fairness and the need for timely resolution.
Relevant legal framework and precedents: Customs Act, 1962 provisions on examination and provisional release; Circulars dated 4th January 2011 (No. 01/2011-Cus) and 16th August 2017 (No. 35/2017-Cus) guiding provisional release of seized goods.
Court's reasoning: The Court balanced the customs authorities' duty to verify goods with the petitioner's right to export without unnecessary delay, especially since no prohibitory status was established.
Issue 2: Provisional release conditions and quantum of bank guarantee/security
Upon provisional release, the customs authorities demanded a bank guarantee of Rs. 3 crores, exceeding the FOB value of the goods. The petitioner challenged this as excessive and sought reduction to 25% of the goods' value, relying on precedents and circulars that permit security to be fixed at 25% of value in provisional release scenarios.
The customs authorities justified the higher security on the basis that the goods were duty-free imports under an export obligation, and the security was intended to cover potential fines and penalties if misdeclaration was confirmed. They cited Circular No. 01/2011-Cus which requires bonds equal to the goods' value plus security to cover potential confiscation and penalties.
The Court analyzed both positions and the relevant circulars. It observed that the provisional release order did not specify reasons for fixing the security at Rs. 3 crores, nor was there any indication that confiscation proceedings were contemplated. The Court emphasized that security should be "appropriately reduced in accordance with law" and directed the customs authorities to reconsider the quantum of bank guarantee within seven days, applying the principles in the circulars and taking into account the absence of confiscation proceedings.
Relevant precedents: Judgment in Commissioner of Customs (Preventive), Kolkata v. M/s J.S. Jewels Pvt. Ltd., which upheld a bond plus 25% bank guarantee security; Priyanka Maurya v. Commissioner of Customs (Preventive), Kolkata, which applied Circular No. 686/2/2003-CX for provisional release security fixed at 25% of goods' value.
Court's interpretation: The Court distinguished the present case from J.S. Jewels as it involved export goods provisionally released, not imported goods. It underscored the need for reasoned determination of security amount, aligned with statutory and circular guidelines.
Issue 3: Treatment of demurrage/detention charges during investigation
The petitioner sought relief from container demurrage and detention charges arising from delayed export due to customs examination. The Court referred to Notification No. 26/2009-Cus (Handling of Cargo in Customs Areas Regulations, 2009) and Notification No. 38/2018-Cus (Cargo Manifest and Regulation 2018), which prohibit charging rent or demurrage on goods detained by customs during verification, provided entries are found to be correct.
The Court held that demurrage/detention charges should be stayed during the investigation, subject to the petitioner's cooperation and the outcome of enquiry. It allowed the customs authorities to obtain appropriate bond/security to cover any future liability but restrained them from saddling the petitioner with demurrage charges at this stage.
Application of law to facts: Since the goods were detained for testing and not found prohibited, and the petitioner was cooperating, imposing demurrage charges would be unjust.
Issue 4: Obligation to cooperate and procedural fairness
The Court emphasized that the petitioner must cooperate with the customs enquiry, including allowing sample testing and providing information. The customs authorities are required to provide the petitioner with the test results within seven days of receipt, ensuring transparency and procedural fairness.
The Court's directions aimed at expediting resolution and minimizing prejudice to the petitioner while safeguarding customs' regulatory interests.
3. SIGNIFICANT HOLDINGS
"A conjoint perusal of the aforesaid Circulars would demonstrate that in case of mis-declaration and pending confirmation of such mis-declaration by test, ordinarily, the export goods detained for the purpose of test must be dealt with on priority basis and the export should be allowed expeditiously unless the same is found to be prohibitory items under the Customs Act 1962."
"Although Mr. Dey, learned advocate representing the respondents has submitted that the same is likely to cover the redemption fine and penalty in case the goods are liable to be confiscated, the documents as available on record do not disclose that the steps taken by the respondents contemplate confiscation of the said goods."
"I direct the concerned authorities to take a decision only on the aspect of determining the amount of bank guarantee in the light of the Circulars dated 4th January, 2011 and 16th August, 2017. Having regard to the fact that no confiscation at this stage is contemplated, the security may be appropriately reduced in accordance with law."
"Having regard to the aforesaid, I am of the view that the detention charges for the time being subject to the investigation to be made by the concerned respondents be not saddled on the petitioner, though appropriate bond/security may be obtained in this regard."
Core principles established:
Final determinations:
100% EOU - Prayer for a direction upon the respondents to forthwith allow the petitioner to export the goods immediately - requirement to furnish bank guarantee - HELD THAT:- The conditions set forth for provisional release of the goods are noted - the Circulars dated 4th January, 2011, being Circular No. 01/2011-Customs and the Circular No. 35/2017-Cus dated 16th August, 2017 also noted.
A conjoint perusal of the aforesaid Circulars would demonstrate that in case of mis-declaration and pending confirmation of such mis-declaration by test, ordinarily, the export goods detained for the purpose of test must be dealt with on priority basis and the export should be allowed expeditiously unless the same is found to be prohibitory items under the Customs Act 1962. In this context, the respondents have not been able to confirm that the export goods are of prohibitory items, as such, has permitted export.
Whether the conditions imposed by the respondents are onerous? - HELD THAT:- The petitioner, apart from execution of bond of an amount equal to the value of the goods has been directed to furnish an amount of Rs. 3 crore as bank guarantee which is far beyond the value of the goods.
Nothing has also been placed before this Court to demonstrate that the respondents are contemplating confiscation of the goods - Be that as it may, since the aforesaid provisional release does not identify the reasons for determining the amount of security by way of furnishing bank guarantee, the concerned authorities are directed to take a decision only on the aspect of determining the amount of bank guarantee in the light of the Circulars dated 4th January, 2011 and 16th August, 2017. Having regard to the fact that no confiscation at this stage is contemplated, the security may be appropriately reduced in accordance with law. The above decision must be taken within seven days from the date of communication of this order.
The judgment referred to in the case of M/s J.S. Jewels Pvt. Ltd. [2025 (2) TMI 887 - CALCUTTA HIGH COURT] does not squarely cover this case as the case involved detention and provisional release of imported goods.
Having regard to the fact that goods covered under the Shipping Bill is meant for export and has been detained, it is only expected that the respondents shall make over a copy of the test result to the petitioner within seven days from the date of receipt of the test result. It is made clear that the petitioner shall cooperate in the investigation.
The detention charges for the time being subject to the investigation to be made by the concerned respondents be not saddled on the petitioner, though appropriate bond/security may be obtained in this regard.
Conclusion - i) The petitioner is entitled to provisional export of goods pending enquiry, subject to cooperation and reasonable security. ii) The customs authorities must reconsider and fix the bank guarantee amount in accordance with applicable circulars and the absence of confiscation proceedings. iii) Demurrage/detention charges are stayed during the investigation period. iv) The petitioner must be provided with test results promptly and cooperate with the enquiry.
Petition disposed off.
Issues: (i) Whether the Customs authorities were justified in withholding and delaying clearance of the perishable kiwi consignment by refusing timely amendment of the import manifest and by delaying transshipment and filing of the bill of entry; (ii) Whether the importer was entitled to refund of customs duty and compensation for loss caused by the deterioration of the goods.
Issue (i): Whether the Customs authorities were justified in withholding and delaying clearance of the perishable kiwi consignment by refusing timely amendment of the import manifest and by delaying transshipment and filing of the bill of entry.
Analysis: The import documents showed the final place of delivery as Ludhiana, and the dispute arose because the manifest was not corrected in time, preventing filing of the bill of entry and timely movement of the goods. The record showed repeated court directions were required before the consignment could be shifted and cleared. The statutory scheme under Section 30 of the Customs Act, 1962 permitted amendment of an incorrect or incomplete import manifest where there was no fraudulent intent, and the Court found that the authorities failed to act with the urgency required for perishable goods. The delay and obstruction were held to be wrongful, and the subsequent detention of the consignment was found to have contributed to its deterioration.
Conclusion: The issue was decided in favour of the importer, and the Customs authorities were held to have wrongly and illegally withheld the consignment.
Issue (ii): Whether the importer was entitled to refund of customs duty and compensation for loss caused by the deterioration of the goods.
Analysis: The Court construed Section 26A of the Customs Act, 1962 in the factual setting of prolonged official delay causing the perishability loss. It held that the exclusion in Section 26A(3) could not be used to deny relief where the goods perished because of the authorities' own delay and failure to comply promptly with the judicial directions. The evidence on record showed that the kiwi consignment had become unfit for human consumption, and allowing the State to retain the duty would amount to unjust enrichment. The Court also relied on the power under Article 226 of the Constitution of India to grant public law compensation for loss caused by State action.
Conclusion: The importer was held entitled to refund of customs duty with interest and to compensation of Rs. 50 lakhs, recoverable from the erring officers.
Final Conclusion: The writ petition succeeded with monetary relief for the importer, including refund of duty, interest, and compensation for the loss caused by the delayed release of the perishable consignment.
Ratio Decidendi: Where perishable imported goods are lost in value or become unusable because of unjustified delay and obstruction by customs authorities, the importer may be granted refund of duty and compensatory relief under the Court's writ jurisdiction, and the statutory exclusion in the refund provision cannot be applied so as to sanction unjust enrichment by the State.
Detention of consignment of perishable goods Mistake in filing of Import General Manifest (IGM) by the Shipping Company - Restraint on movement of goods from Sea Port of Mundra to ICD Ludhiana - seeking permission for filling of Manual Bill of Entry at the port of ICD Ludhiana for clearance of goods, which are highly perishable in nature -HELD THAT:- From the perusal of the facts which have come on record and the orders passed by this Court from time to time, we are satisfied that the respondent-Custom Department had wrongfully and illegally withheld the perishable food item i.e. Kiwi which has limited shelf life. It is noticed that in import cases of perishable goods there is an inherent urgency which needs to be noticed and considered by the concerned stakeholders. In the facts of the present case, there has been huge delay in compliance of the procedure. While initially the respondents did not issue the necessary orders, it is only with the direction of this Court that the respondents permitted the amendment of Import General Manifest (IGM) from Mundra port to GRFL ICD, Sahnewal, Ludhiana.
It is only when the Court found that its orders were not being complied with and action amounted to committing contempt of Court that the goods were transhipped to Ludhiana. The respondents did not release the goods even thereafter and again raised a doubt with regard to the place of origin of import of Kiwi fruit inspite of there being documents issued by the UAE Custom evidencing the origin of the goods as Chile. Upon joint inspection conducted in terms of orders passed by this Court on 24.07.2023, 25% of the goods were only examined which reflected 25% of the said goods have been completely damaged.
The interpretation of Section 26A (3) of the Act, cannot be held to mean the denial of a refund claim even where the goods have perished and the shelf life has ended after the goods have already touched the store - The same reflects the attitude adopted by the Custom Authorities that they were not ready to release the goods. The shipping company also did not cooperate in spite of directions by this Court, and an attitude of insensitivity to the goods being perishable was adopted.
Hon’ble Supreme Court recently in Zulfiquar Haider vs The State of Uttar Pradesh [2025 (4) TMI 1527 - SUPREME COURT] has awarded compensation to the victims whose houses were wrongfully demolished. The Courts in cases where there is deliberate and willful action of the State or its functionaries in depriving any person ought not shy away from granting compensation. Keeping in view that in spite of several orders passed by this Court for release of perishable fruit ‘Kiwi’, the respondents did not act promptly and the entire consignment of imported goods got perished.
Conclusion - i) The Import General Manifest filed by the shipping company was incorrect in declaring Mundra as the final place of delivery; the Customs authorities were empowered and obligated to amend the IGM to reflect ICD GRFL Ludhiana as per Section 30(3) of the Customs Act. ii) The petitionerias entitled to refund of the import duty paid, with interest, despite Section 26A(3) excluding refund for perishable goods, as the loss was caused by official delay and non-compliance with Court orders. iii) The petitioner is entitled to compensation for the loss suffered due to negligence and wrongful detention by the respondents, fixed at Rs. 50 lakhs recoverable from responsible officers.
The respondents are directed to release the amount paid as custom duty on the Kiwi for import into India along with interest @ 6% per annum - petition allowed.
1. Whether the goods imported by the appellant were correctly classified under Customs Tariff Heading (CTH) 23091000 or should be reclassified under CTH 23099090, thereby affecting eligibility for concessional duty under Notification No. 46/2011 dated 01.06.2011.
2. Whether the invocation of the extended period of limitation under Section 28(4) of the Customs Act, 1962, for demand of differential customs duty is legally sustainable in the absence of fraud, collusion, wilful misstatement, or suppression of facts.
3. Whether the imposition of penalty under Section 114A of the Customs Act, 1962 is justified in the facts of the case.
4. Whether the imposition of redemption fine under Section 111(q) of the Customs Act, 1962 in lieu of confiscation of goods is sustainable when there was no proposal for confiscation and the goods were not physically available.
Issue-wise detailed analysis:
Issue 1: Correct classification of goods and eligibility for concessional duty
Relevant legal framework and precedents: Classification of goods under the Customs Tariff is governed by the Customs Tariff Act and related notifications. The proper classification determines the applicable rate of duty and eligibility for exemptions or concessions. The appellant had classified the goods as 'Nutracor 88 (Calcium Salts made from Palm Oil Fatty Acids), Animal Feed Supplement Not For Medical/Human Use' under CTH 23091000 and claimed concessional duty under Notification No. 46/2011 dated 01.06.2011.
Court's interpretation and reasoning: The Customs Revenue Audit scrutinized the appellant's records and concluded that the goods were correctly classifiable under CTH 23099090, not 23091000, and thus the appellant was not eligible for the concessional exemption. The appellant accepted the revised classification and paid differential duty for the normal limitation period. The Tribunal upheld this reclassification and held that the appellant was not entitled to the exemption under the said notification.
Application of law to facts: The Tribunal confirmed that the goods fall under CTH 23099090 and the exemption under Notification No. 46/2011 does not apply. This conclusion was based on the audit findings and the appellant's acceptance of the revised classification.
Conclusions: The appellant's classification under CTH 23091000 was incorrect. The goods are rightly classifiable under CTH 23099090, and the appellant is not eligible for the concessional duty notification.
Issue 2: Invoking extended period of limitation under Section 28(4) of the Customs Act, 1962
Relevant legal framework and precedents: Section 28(4) allows the Customs Department to demand duty beyond the normal limitation period if there is evidence of fraud, collusion, wilful misstatement, or suppression of facts. The extended period cannot be invoked merely on account of wrong classification or erroneous claim of exemption. Precedents including decisions affirmed by the Supreme Court have held that wrong classification or erroneous exemption claims do not amount to misdeclaration or suppression warranting extended limitation.
Court's interpretation and reasoning: The Tribunal observed that the appellant had declared the goods with correct descriptions and the department had cleared the goods without objection for over three and a half years. The appellant was notified through consultative letters about the incorrect classification and ceased the concessional claim upon audit's observation, paying differential duty within the normal limitation period. There was no evidence of suppression, fraud, or wilful misstatement. The Tribunal relied on authoritative precedents including the Dabur India Ltd. case and others, which held that classification disputes do not amount to suppression or misdeclaration.
Key evidence and findings: The appellant's cooperation, acceptance of revised classification, payment of differential duty within the normal period, and absence of any concealment or fraudulent intent were critical. The department's prior acceptance of classification and absence of objections during clearance were also significant.
Application of law to facts: The Tribunal applied settled legal principles to hold that extended limitation could not be invoked in this case. Only demands relating to three Bills of Entry within the normal limitation period were sustainable; demands for other consignments were time-barred.
Treatment of competing arguments: The department argued that misdeclaration was established and extended limitation was rightly invoked. The Tribunal rejected this, emphasizing absence of suppression or fraud and reliance on settled jurisprudence.
Conclusions: The extended period of limitation under Section 28(4) is not invokable as there was no suppression or wilful misstatement. Demands beyond the normal limitation period are set aside except for three Bills of Entry.
Issue 3: Imposition of penalty under Section 114A of the Customs Act, 1962
Relevant legal framework and precedents: Section 114A penalizes short levy or non-levy of duty caused by fraud, collusion, suppression of facts, or wilful misstatement. Mere erroneous classification or incorrect claim of exemption without fraudulent intent does not attract penalty under this provision.
Court's interpretation and reasoning: The Tribunal found no evidence of suppression or intent to evade duty. The appellant had declared goods with correct description and had been allowed clearance by the department. The erroneous classification was accepted and corrected once pointed out. The Tribunal held that penalty under Section 114A was not sustainable.
Application of law to facts: Since no fraud or suppression was established, the penalty imposed was set aside.
Conclusions: Penalty under Section 114A is not sustainable in the absence of fraud or suppression and is accordingly quashed.
Issue 4: Imposition of redemption fine under Section 111(q) of the Customs Act, 1962
Relevant legal framework and precedents: Redemption fine under Section 111(q) is imposed in lieu of confiscation of goods. However, a proposal for confiscation must be made in the show cause notice, and the goods must be available for confiscation.
Court's interpretation and reasoning: The Tribunal noted that no proposal for confiscation was made in the show cause notice. Further, the goods in question had already been cleared and were not physically available for confiscation. Therefore, imposition of redemption fine was not legally sustainable.
Application of law to facts: Since the procedural requirement of proposing confiscation was not fulfilled and goods were not available, redemption fine was set aside.
Conclusions: Redemption fine imposed without proposal for confiscation and when goods are not available is not sustainable and is quashed.
Significant holdings:
"It is a settled law that claim of wrong classification does not amount to misdeclaration, as there is always scope for the assessing officers to rectify it based on the facts brought on record."
"Wrong claim of classification or inapplicable claim of exemption Notification cannot be equated with mis-declaration to give rights to the revenue to invoke extended period of limitation for raising duty demand."
"When the importer filed the classification under a particular Customs Tariff Heading with correct description of the goods, the revenue was within its power and jurisdiction to change the said classification or to raise an objection if they felt that the classification was incorrect."
"Extended period of limitation under Section 28(4) of the Customs Act, 1962 is not invokable in the absence of fraud, collusion, suppression of facts or wilful misstatement."
"The penalty under Section 114A of the Customs Act, 1962 cannot be imposed without establishing fraud, collusion, suppression or wilful misstatement."
"Redemption fine under Section 111(q) cannot be imposed without a proposal for confiscation and when goods are not physically available."
Final determinations:
(i) The goods are correctly classifiable under CTH 23099090 and not eligible for concessional duty under Notification No. 46/2011 dated 01.06.2011.
(ii) Demands confirmed invoking extended period of limitation are set aside except for three Bills of Entry within the normal limitation period.
(iii) Redemption fine imposed in lieu of confiscation is set aside for lack of proposal and physical availability of goods.
(iv) Penalty imposed under Section 114A is set aside due to absence of fraud or suppression.
Classification of imported goods - Nutracor 88( Calcium Salts made from Palm Oil Fatty Acids), Animal Feed Supplement Not For Medical/Human Use - to be classified under the tariff item 23091000 or under the CTH 23099090? - concessional rate of duty vide N/N. 46/2011 dated 01.06.2011 - mis-declaration of the goods - Extended period of limitation - Imposition of redemption fine in lieu of confiscation - Penalty u/s 114A of the Customs Act - HELD THAT:- Customs Revenue Audit conducted scrutiny of the records of the appellant and observed that the goods imported by the appellant are rightly classifiable under the CTH 23099090 and the appellant are not eligible for the exemption as provided under the Notification No. 46/2011 dated 01.06.2011. When Audit observed that the goods imported by them are rightly classifiable under the CTH 23099090 and they are not eligible for the exemption as provided under the Notification No. 46/2011 dated 01.06.2011, the appellant has accepted the revised classification and paid the differential duty demanded for the normal period of limitation.
The issue involved is a classification dispute of the goods imported by the appellant. It is a settled law that claim of wrong classification does not amount to misdeclaration, as there is always scope for the assessing officers to rectify it based on the facts brought on record. It has been categorically held in a catena of judgments that wrong claim of classification or inapplicable claim of exemption Notification cannot be equated with mis-declaration to give rights to the revenue to invoke extended period of limitation for raising duty demand - When the importer filed the classification under a particular Customs Tariff Heading with correct description of the goods, the revenue was within its power and jurisdiction to change the said classification or to raise an objection if they felt that the classification was incorrect. Hence, we hold that extended period of limitation is not invokable in this case.
In the present case, it is found that there is absolutely no suppression of facts on the part of the Appellant so far as the impugned consignments are concerned and hence, the invocation of the extended period of limitation under Section 28(4) of the Customs Act, 1964 is legally not sustainable and accordingly, those demands confirmed by invoking extended period of limitation in the impugned order set aside.
Imposition of redemption fine in lieu of confiscation - HELD THAT:- There is no proposal in the Notice to confiscate the goods. Further, we observe that the goods involved in respect of all the 19 Bills of Entry have already been cleared and they are not physically available for confiscation. Thus, it is found that the imposition of redemption fine without even having the proposal for confiscation in the notice, is not sustainable. Accordingly, no redemption fine imposable in this case and hence the redemption fine imposed in the impugned order set aside.
Penalty u/s 114A of the Customs Act - HELD THAT:- The basic requirement of law for invocation of Section 114A of the Customs Act 1962 is that the short levy or non levy of duty should have happened on account of fraud, collusion, suppression of fact or wilful mis-statement on the part of the appellant. As discussed there is no suppression of facts with intention to evade the duty established in this case. This being a case of erroneous claim of wrong classification and benefit of exemption notification, which continued to be accepted by the Departmental officers over such a long period of time spanning more than three and a half years, in the absence of any mis-statement or suppression of facts, the provisions of neither Section 28(4) nor Section 114A of the Act could be invoked against the Appellant herein. Thus, the penalty imposed on the appellant under section 114A of the Customs Act, 1962 is not sustainable and hence the same is set aside.
Conclusion - i) The goods imported by the appellant are rightly classifiable under the CTH 23099090 and the appellant are not eligible for the exemption as provided under the Notification No. 46/2011 dated 01.06.2011. ii) The demands confirmed by invoking extended period of limitation in the impugned order set aside. iii) No redemption fine imposable and is set aside. iv) The penalty imposed on the appellant under section 114A of the Customs Act, 1962 is not sustainable.
Appeal disposed off.
Issues: Whether the declared transaction value of exported iron ore fines could be rejected and the export value re-determined on the basis of the Customs House chemical report, and whether assessment of iron ore fines had to be made on Wet Metric Ton basis.
Analysis: The declared export value was supported by the final invoice, the sale terms and the Bank Realisation Certificate, and there was no material showing receipt of any consideration beyond the invoice price. Section 14(1) of the Customs Act, 1962 requires acceptance of the transaction value unless the conditions for rejection are established. The chemical report relied upon by the revenue did not state moisture content and did not indicate whether Fe content was tested on wet or dry basis, whereas the authorised inspection report specifically recorded moisture content and was consistent with the assessment basis required by the governing law. The settled position and the CBIC circular required Fe content for export duty assessment of iron ore to be determined on WMT basis.
Conclusion: The rejection of the declared transaction value was not sustainable, and the assessment finalized on the basis of the authorised test report and invoice value was correct.
Final Conclusion: The impugned order was set aside and the appellant's assessment was restored with consequential relief.
Ratio Decidendi: Declared export transaction value cannot be rejected absent substantive evidence of extra consideration or other valid grounds, and Fe content for iron ore export assessment must be determined on Wet Metric Ton basis where that is the legally prescribed method.
Valuation of export goods - Rejection of declared value under Rule 8 of the Customs Valuation (Determination of the Value of Export Goods) Rules, 2007 - Department has relied on the chemical examiner’s report dt.29.11.2010 given by the Customs House, Kakinada which reported Fe content at 63.2%, in place of report dt.16.01.2010, given by Inspectorate Griffith India Pvt Ltd, Bellary, Karnataka, which reported the Fe content at 61.02% on dry basis - HELD THAT:- The report given by Customs House, Kakinada as sought by the Department did not contain any moisture content and nowhere it is mentioned that it is tested on WMT or DMT basis, which is in contravention of norms as laid down by Hon’ble Supreme Court in UOI Vs Gangadhar Narsingdas Aggarwal [1986 (4) TMI 71 - HIGH COURT OF BOMBAY], as also in the circular issued by CBIC. Whereas, the report given by Inspectorate Griffith India Pvt Ltd, which is authorized agency for inspection under section 7(1) of Export (Quality Control & Inspection) Act, 1963, under Export Inspection Council of India under Ministry of Commerce & Industry (GOI), has specifically mentioned moisture content while testing the sample on DMT (dry basis). Therefore, the reliance placed by Commissioner (Appeals) on the test report given by Customs House, Kakinada is misplaced as it has not tested the sample as required by law. Hence the findings given by Commissioner (Appeals) on basis of report dt.29.01.2010 given by Customs House, Kakinada is not tenable.
The Commissioner (Appeals) has also not referred to any material evidence for substantiating any additional consideration received by the exporter over and above the Invoice Price for rejection of the transaction value. Whereas, the Assistant Commissioner has correctly finalized the assessment in terms of Final Invoice dt.23.12.2009 based on Fe content of 61.02% as per the Test Report at the load port and realization of the price confirmed by the BRC in terms section 14 ibid as per the terms of the sale contract. The Order of the Commissioner (Appeals) is based on the Test Report dt.29.01.2010, which is not according to the CBIC circular and the decision of Hon’ble Supreme Court in the case of Gangadhar Narsingdas Aggarwal.
The impugned order of the Commissioner (Appeals) is not proper, legal and correct in the facts of the case and therefore, liable to be set aside.
Conclusion - The finalization of assessment based on the authorized agency's test report specifying moisture content and Fe content on DMT basis, corroborated by the final invoice and BRC, is correct and must be upheld.
Appeal allowed.
Issues: Whether the re-assessment of the Bill of Entry by enhancing the declared value could be sustained when no written acceptance of the enhanced assessment was recorded and no speaking order was issued, and whether value loading was permissible under the valuation law.
Analysis: The enhanced assessment was not shown to have been accepted in writing by the importer. In the absence of such written acceptance, section 17(5) of the Customs Act, 1962 required the proper officer to pass a speaking order within fifteen days, which was not done. Mere payment of duty for clearance could not by itself justify an inference of voluntary acceptance of the enhanced value. On merits also, the valuation law does not recognise arbitrary loading of value by the assessing authority. Transaction value remains the basis unless rejected under the prescribed procedure under Rule 12 of the Customs Valuation Rules, and any re-determination must follow the sequential method under the valuation rules.
Conclusion: The re-assessment was without authority of law and could not be sustained. The appeal succeeded and the impugned order and re-assessment were set aside.
Enhancement of assessable value of the imported goods - rejection of declared value - speaking order not issued - violation of principles of natural justice - HELD THAT:- The Assessing Officer committed a grave error in not issuing the speaking order because there is nothing on record to show that the appellant had accepted the re-assessment in writing. The reliance placed by the Commissioner (Appeals) on the order of this Tribunal in case of Commissioner of Customs vs. Hanuman Prasad & Sons [2020 (12) TMI 1092 - CESTAT NEW DELHI] is highly mis-placed. In that case, the assessee had accepted the re-assessment in writing and, therefore, no speaking order was issued. It was, therefore, held in that case that the assessing Officer was correct in not issuing a speaking order.
Even on merits, the Commissioner (Appeals) recorded in the impugned order that the Assessing Officer had “loaded the value”. Neither section 14 of the Customs Act nor the Customs Valuation Rules provide for any “loading of value” by the Assessing Officer. The transaction value shall be the assessable value unless it is rejected following the procedure prescribed under Rule 12. If it is so rejected, when the value should be re-determined sequentially following rules 4 to rule 9 of the Valuation Rules. None of these Rules or Section 14 empower the Assessing Officer to load the value.
Conclusion - The re-assessment of the Bill of Entry by the Assessing Officer was without any authority of law and he also committed an illegality in not issuing a Speaking Order as mandated under section 17(5) of the Act. The impugned order of the Commissioner (Appeals) wrongly upheld such re-assessment. Therefore, it cannot be sustained.
The impugned order is set aside along with the re-assessment of the Bill of Entry by the assessing Officer - Appeal allowed.
The core legal questions considered by the Tribunal in this matter are:
(a) Whether the enhancement of the declared transaction value of imported goods, namely LED and non-LED Christmas lights and LED strip/rope lights, by adopting data from the National Import Database (NIDB) without following the prescribed statutory procedure under the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007, is legally sustainable.
(b) Whether the Revenue's action of rejecting the declared transaction value without valid reasons or adherence to the due procedure under Section 14 of the Customs Act and the Valuation Rules amounts to illegal or arbitrary enhancement of assessable value.
(c) Whether the impugned order passed by the Commissioner of Customs (Appeals) setting aside the enhancement and directing assessment at the declared transaction value is justified.
(d) Whether the Revenue's stay petition against the impugned appellate order is maintainable.
2. ISSUE-WISE DETAILED ANALYSIS
(a) Legality of Enhancement of Declared Transaction Value Using NIDB Data Without Following Prescribed Procedure
The relevant legal framework comprises Section 14 of the Customs Act, which governs the determination of the value of imported goods, and the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007. These rules prescribe a sequential and procedural approach to valuation, emphasizing that the transaction value declared by the importer shall be accepted unless there is a valid reason to reject it, such as related-party transactions or non-arm's length dealings. The rules mandate that any rejection of the declared transaction value must be supported by cogent reasons and adherence to the prescribed procedure.
The Tribunal referred to binding precedents including earlier decisions of the same Tribunal and the Hon'ble Supreme Court, which emphasize that the transaction value should be the basis for valuation unless it is conclusively shown that it does not represent the full price paid or payable. The Tribunal cited the case law which held that "the assessing officer has rejected the transaction value without any valid reasons and without new procedure as per Section 14 and valuation rules."
The Court noted that the Revenue had adopted the NIDB data selectively to enhance the value, without furnishing the complete data or following the due process mandated by law. It was observed that the Revenue had supplied data of only 88 cases out of 1341 cases cited, indicating a "pick and choose approach" which is impermissible. The Tribunal relied on authoritative pronouncements that reject such selective acceptance of higher prices and rejection of lower prices, holding it to be "clearly illegal."
The Tribunal found that the Revenue did not produce any evidence to show that the declared transaction value was not the price actually paid, nor that the buyer and seller were related persons or that the price was not the sole consideration for sale.
Application of Law to Facts: The Tribunal applied the statutory provisions and precedents to the facts, concluding that the enhancement of value by adopting NIDB data without following the statutory procedure and without valid reasons was unsustainable. The Tribunal emphasized that the impugned Order-in-Original enhancing the value was rightly set aside by the Commissioner (Appeals).
Treatment of Competing Arguments: The Revenue argued for the enhancement based on DRI investigations and NIDB data. However, the Tribunal found these arguments unsubstantiated due to lack of procedural compliance and incomplete data disclosure. The Tribunal gave precedence to the statutory scheme and prior authoritative rulings over the Revenue's selective data reliance.
Conclusion: The enhancement of declared transaction value without adherence to Section 14 and Valuation Rules is illegal and liable to be set aside.
(b) Validity of the Impugned Order Passed by the Commissioner of Customs (Appeals)
The Commissioner (Appeals) had set aside the enhancement of value and directed assessment at the declared transaction value. The appellate order was detailed and reasoned, highlighting the failure of the Revenue to follow due procedure and the absence of any evidence to justify rejection of the declared value.
The Tribunal found no infirmity in the appellate order and held that it was well reasoned and legally sound. The Tribunal emphasized that the Commissioner (Appeals) correctly applied the law and precedent, and the order was not ex facie illegal or without jurisdiction.
Application of Law to Facts: The Tribunal upheld the appellate order as it conformed with the legal framework and prior decisions, and the Revenue had failed to demonstrate any error warranting interference.
Conclusion: The impugned order of the Commissioner (Appeals) is upheld.
(c) Maintainability of the Revenue's Stay Petition
The Revenue filed a stay petition against the impugned appellate order. The Tribunal prima facie found that the impugned order was not ex facie illegal or without jurisdiction and accordingly rejected the stay petition as devoid of merit.
Conclusion: The stay petition is rejected.
3. SIGNIFICANT HOLDINGS
The Tribunal, following the ratio of earlier decisions, notably the decision in the case involving M/s Prabhu Electrical Industries, held:
"The enhancement of values done in this case is without having any sanction of law and is thus liable to be set aside outrightly."
"The assessing officer has rejected transaction values without any valid basis/reasons and without following the due procedure as per section 14 and Valuation Rules, especially when there is nothing on record to suggest that the transaction value declared by the appellant was not the price actually paid for the good when sold for export to India."
"The Revenue has accepted that value and rejected all other values. Clearly, the effort is to assess imported goods at the higher end of the value spectrum. This is contrary to market reality as well as Valuation Rule."
"The enhancement of values in the present case is not sustainable in the eyes of law and accordingly assessment of the impugned bills of entry is ordered at the values declared at invoice value."
"We do not find any reason to interfere with the impugned order passed by the Ld. Commissioner (Appeals). Therefore, we do not find any reason to interfere with the same. Accordingly, the impugned order is upheld."
Core principles established include:
- The transaction value declared by the importer is the primary basis for customs valuation unless valid grounds and due procedure justify rejection.
- Any enhancement of value must be supported by valid reasons, evidence, and adherence to statutory valuation procedures.
- Selective or partial reliance on data such as NIDB without furnishing complete information or following due process is impermissible.
- The appellate authority's detailed and reasoned order setting aside illegal enhancement must be respected unless shown to be erroneous.
Final determinations on each issue are:
(i) The enhancement of declared transaction value by the Revenue without following the statutory procedure and without valid reasons is illegal and unsustainable.
(ii) The impugned order of the Commissioner (Appeals) setting aside the enhancement and directing assessment at declared values is legally valid and upheld.
(iii) The Revenue's stay petition against the impugned appellate order is rejected.
(iv) The appeal filed by the Revenue against the Commissioner (Appeals) order is dismissed.
Seeking stay of operation of the impugned Order - enhancement of the declared transaction value of imported goods by adopting data from the National Import Database (NIDB) - rejection of declared transaction value without valid reasons - HELD THAT:- An identical issue has already been dealt with by this Tribunal in the case of Commissioner of Customs (Port), Kolkata v. M/s. Prabhu Electrical Industries [2025 (2) TMI 1174 - CESTAT KOLKATA], wherein it was held that the enhancement of value based solely on selective NIDB data without adherence to statutory provisions and without valid reasons is unsustainable.
Conclusion - Considering the fact that the issue has already been settled by this Tribunal in the case of M/s. Prabhu Electrical Industries, the above ratio is squarely applicable to the present case. Therefore, by following the ratio laid down in the above decision, the enhancement of values in the present case is not sustainable in the eyes of law.
There are no merit in the appeal filed by the Revenue and therefore, the same is dismissed.
1. Whether the appellant, a debenture holder represented by a debenture trustee, had exercised due diligence in filing their claim against the corporate debtor within the prescribed timelines set under the Resolution Framework and insolvency proceedings.
2. Whether the delay in filing the appellant's claim could be condoned and the belated claim admitted at this stage, given the circumstances and the nature of the claim arising from a guarantee obligation co-extensive with the subsidiary's obligations.
3. Whether the debenture trustee was obligated and empowered to file claims on behalf of the debenture holders without explicit written instructions, and if not, whether the trustee's failure to file timely claims could be attributed to the appellant.
4. Whether the timelines for filing claims under the insolvency resolution framework are mandatory or directory, and the implications of such classification on admission of delayed claims.
5. Whether admission of belated claims at this stage would prejudice the ongoing insolvency resolution process, including interim distributions already made to creditors, and the broader public interest.
6. Whether the appellant's claim, although admitted in the insolvency process of the subsidiary, could be separately admitted in the insolvency resolution process of the parent company given the guarantee obligations.
Issue-wise Detailed Analysis:
1. Due Diligence and Timeliness of Claim Filing
The legal framework governing the filing of claims in insolvency proceedings is primarily derived from the Insolvency and Bankruptcy Code, 2016 (IBC), the Resolution Framework approved by the Tribunal, and the Debenture Trustee Deed (DTD) executed between the parties. The Resolution Framework issued public announcements inviting creditors to file claims within stipulated timelines, which were extended multiple times until 18.08.2022.
Precedents emphasize the importance of creditors exercising due diligence in filing claims timely to ensure smooth and equitable resolution processes. The Tribunal noted that the appellant was duly informed of the claim process and timelines through public announcements and direct communication from the debenture trustee.
Evidence showed that the appellant filed claims against two group entities within the prescribed timelines, but failed to file any claim against the parent company until 05.06.2023, well beyond the extended deadline. Correspondence from the debenture trustee to the appellant dated 24.05.2019 requested timely submission of claims, reinforcing that the appellant was aware of the process.
The Court applied the law to the facts and found that the appellant failed to exercise requisite vigilance and due diligence in filing their claim against the parent company within the extended timelines. The delay was inordinate and unjustified, and the appellant's conduct was remiss.
Competing arguments by the appellant that the delay was due to reliance on the debenture trustee to file claims and that the trustee was negligent were considered but rejected because the trustee had repeatedly informed the appellant to submit claims timely and could not act unilaterally without instructions.
The conclusion was that the appellant's failure to file claims timely was attributable to their own inaction and lack of due diligence.
2. Condonation of Delay and Admission of Belated Claims
The appellant contended that the delay should be condoned, relying on the principle that timelines under insolvency proceedings are directory and not mandatory, citing a Supreme Court precedent. They argued that since the resolution plan had not yet been finalized or approved, there was scope to admit claims till that stage, and that no prejudice would be caused.
The respondents and the Tribunal emphasized that while timelines may be directory, condonation of delay requires cogent and plausible reasons, which were lacking here. The appellant failed to provide any credible justification for the delay despite multiple extensions of the claim window.
The Tribunal further held that admitting belated claims at this stage would disrupt the ongoing resolution process, which had already progressed to interim distributions to creditors based on verified claims. Allowing such claims would necessitate remapping creditors and revising distributions, leading to an endless and unceasing process contrary to the objectives of timely resolution under the IBC.
The Court applied the law and facts to conclude that the delay was unjustified and condonation was not warranted. The appellant's request for admission of belated claims was rightly refused.
3. Role and Obligations of the Debenture Trustee
The DTD and Parent Agreement governed the relationship between the debenture holders, the trustee, and the corporate debtor. The trustee's authority to act was limited by Clause 11(b) of the DTD, requiring written instructions from debenture holders before filing claims.
The appellant argued that the trustee was obligated to file claims on their behalf without needing explicit instructions and that the trustee's failure to do so caused the delay. The respondents contended that the trustee could not act unilaterally and had duly informed the appellant to provide instructions and submit claims.
The Tribunal found that the trustee's conduct was consistent with the contractual terms and that the appellant was aware of the need to provide instructions. The trustee's emails requesting claims submission and the appellant's delay in providing instructions were material facts.
The Court concluded that the trustee could not be held responsible for the delay and the appellant's failure to provide timely instructions was a key factor.
4. Nature of Timelines for Filing Claims
The appellant relied on the Supreme Court's ruling that timelines under the IBC are directory, not mandatory, to argue for admission of belated claims. The Tribunal acknowledged this principle but emphasized that condonation of delay is not automatic and requires sufficient cause.
The Court noted that the appellant failed to demonstrate any sufficient cause or bona fide reason for the delay. The principle of directory timelines does not override the need for diligence and fairness to other creditors.
Thus, the Tribunal held that the directory nature of timelines does not justify admission of claims filed without justification beyond the extended deadlines.
5. Prejudice to Ongoing Resolution Process and Public Interest
The respondents argued that admitting belated claims would prejudice other creditors and disrupt the ongoing resolution process, which had reached advanced stages including interim distributions. The resolution of the parent company depended on the resolution of its group entities, and reopening claims would cause delays and uncertainty.
The Tribunal agreed that reopening the claims process would undermine the objectives of the IBC to ensure timely resolution and would prejudice creditors who had complied with timelines.
The Court applied the law to the facts and held that the larger public interest and the integrity of the resolution process outweighed the appellant's belated claim.
6. Admission of Claims in Parent Company Insolvency Despite Admission in Subsidiary Insolvency
The appellant contended that since their claim arose from a guarantee by the parent company co-extensive with the subsidiary's obligations, admission of claims in the subsidiary's insolvency process should not preclude admission in the parent's insolvency process.
The Tribunal accepted the legal principle that guarantee obligations are co-extensive and that claims can arise separately against parent and subsidiary. However, the appellant's failure to file claims timely in the parent's insolvency process was fatal.
The Court concluded that while the legal basis for the claim was valid, procedural non-compliance and delay barred admission.
Significant Holdings:
"The Appellant had clearly failed to discharge their obligation to lodge claims within the prescribed time period. Allowing belated claims will open flood gates of multiple such claims and render the resolution process endless."
"While timelines under the Insolvency and Bankruptcy Code may be directory, condonation of delay requires cogent grounds which are absent in the present case."
"The Debenture Trustee could not act unilaterally without explicit instructions from the Debenture Holders and had duly informed the Appellant to submit claims timely."
"Admission of belated claims at this stage would prejudice other creditors and disrupt the ongoing resolution process, contrary to the objectives of timely resolution under the Code."
"The Appellant's failure to exercise due diligence and vigilance in filing claims within the extended timelines disentitles them from relief."
In conclusion, the Tribunal upheld the Adjudicating Authority's order dismissing the application for admission of belated claims, emphasizing the necessity of timely claim submission, the limited discretion to condone delay without sufficient cause, and the imperative to protect the integrity and finality of the insolvency resolution process in the larger public interest.
Dismissal of application seeking admission of the claim filed by the Appellant in the insolvency process of IL&FS-Respondent No.2 - claim was filed belatedly - exercise of due diligence by debenture holder represented by a debenture trustee or not - sufficient reasons/grounds exist to admit the belated claim at this stage or not - HELD THAT:- The public announcement of 22.05.2019 made by Respondent No.1-CMA inviting claims clearly stipulated that in case of those Debenture Holders having an appointed trustee, the claims were to be filed only through such a trustee. It is also an undisputed fact that the Appellant did not file their claim qua Respondent No.2 within the extended time so allowed either directly by themselves or through the Respondent No.3-DT. Their claim was eventually filed on 05.06.2023 by the DT which was much beyond the sixth extension of time-line allowed until 18.08.2022. It is therefore abundantly clear that substantial time had elapsed since the date of issue of public announcement inviting claim and the actual date of filing of claim on behalf of the Appellant by the DT qua the obligations of Respondent No.2-ILFS.
While claim had been filed in respect of group entities of ILFS, no claim forms were submitted in so far as ILFS-Respondent No.2 was concerned. It has been admitted by the Appellant that there were several exchanges of communication as late as from March 2023 onwards between the Appellant and Respondent No.3 regarding filing of claims of the Appellant in relation to insolvency resolution process of Respondent No.2-ILFS following which on 05.06.2023 the Respondent No.3 filed Form-C with the CMA with request to admit the claim of the Appellant. It therefore becomes clear that no claim had been filed in respect of the Appellant qua the Respondent No.3 though the time-line had lapsed - The Appellant should have been more vigilant in taking timely steps to file their claim. The Appellant has been clearly found wanting in this regard as due diligence was not shown towards satisfying the prescriptive requirement of filing their claims even within the extended time period. It is not required of the Adjudicating Authority to determine as to whether the Appellant or the DT was responsible for the delay in filing the claims but has to be merely satisfied whether any inordinate and unjustified delay occurred in the filing of claims. The Adjudicating Authority has therefore not committed any mistake in concluding that claims qua the obligations to be discharged by Respondent No.2 not having been filed within the extended time period allowed for filing of claims for any genuine reason, the conduct of the Appellant was clearly remiss.
While it is agreed with the Appellant that merely because the claim of the Appellant was admitted in the insolvency process of ITNL by the CMA, it could not be a fetter on the right of the Appellant to seek admission of their claims in the insolvency resolution process of ILFS since their guarantee obligation to pay the Appellant was co-extensive and co-terminus with ITNL, however, it cannot be countenanced that the lethargic and lackadaisical approach of the Appellant in pursuing their claims qua ILFS. The Appellant had clearly failed to discharge their obligation to lodge claims within prescribed time period. In these circumstances, it is inclined to agree with the Respondents that allowing belated claim of the Appellant will open flood gates of the multiple such claims. If belated claims are allowed for any specific party, there is all likelihood from other similarly placed claimants to seek reopening of the claim window leading to the need of remapping of the creditors and pro-rata revision revision/adjustment of the of the proceeds already distributed or proposed to be distributed thereby rendering the resolution process endless.
The first round of interim distribution of funds to creditors had already been carried out in the interest of successful implementation of the Resolution Framework and revival of the ILFS and its group entities following approval of the interim distribution mechanism by this Tribunal on 31.05.2022 as is placed at page 189 of reply of Respondent No.2.
Coming to the reliance placed by the Appellant on the judgement of this Tribunal in Puneet Kaur judgement [2022 (6) TMI 108 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL, PRINCIPAL BENCH, NEW DELHI], it is noticed that the facts of the present case are distinguishable. While in Puneet Kaur matter, the resolution plan had not yet been approved by the Adjudicating Authority, in the present case, at the time of filing belated claims by the Appellant, distribution of proceeds in terms of interim resolution framework had already commenced.
In the instant case, the Appellant has failed to provide any plausible justification for delay in filing their claims. The Appellant for no justifiable reasons had clearly dropped the guard of being vigilant in pursuing their claims within the time-lines and now seeks to stall the resolution process disregarding the larger interest of other stakeholders. The Appellant because of their inaction cannot prejudice the creditors who had filed their claims in a timely manner to their detriment. In the absence of credible and genuine grounds extending the delay, it does not commend us to overturn the findings of Adjudicating Authority for any indulgence shown by way of belated admittance of claim at this stage is also likely to jeopardise the ongoing resolution process of ILFS and its group entities. The Adjudicating Authority has not committed any error in the given facts and circumstances in not acceding to the request of the Appellant for admission of their belated claims.
Conclusion - The Appellant had clearly failed to discharge their obligation to lodge claims within the prescribed time period. Allowing belated claims will open flood gates of multiple such claims and render the resolution process endless.
Appeal dismissed.
Another significant issue concerns the procedural propriety of the High Court's dismissal of writ petitions filed by homebuyers on the ground of alternate remedies, and whether such dismissal was appropriate given the public interest and the scale of the grievance. Further, the Court examined the conduct of banks and builders in complying with Court directions to furnish information on project completion, payments, and possession status, and whether there exists collusion between banks and builders warranting investigation.
Regarding the first issue of liability for EMI/pre-EMI payments, the legal framework includes the tripartite agreements under the subvention schemes, the RBI Guidelines of 2013 governing loan disbursal and due diligence by banks, and the Insolvency and Bankruptcy Code, 2016 (IBC) concerning resolution of insolvent builders. Precedents emphasize the protection of homebuyers as consumers and the obligations of banks to ensure compliance with regulatory norms before advancing funds.
The Court reasoned that the subvention schemes were structured such that builders-cum-developers were to bear the burden of EMI/pre-EMI payments till possession or a cut-off date, and the banks' upfront disbursal of large loan tranches to builders without ensuring project milestones were met violated the RBI Guidelines. The failure of builders to make the payments and the subsequent demand by banks on homebuyers-who had not yet received possession-was inequitable and contrary to the contractual and regulatory framework. The Court noted that many projects remained incomplete, and homebuyers were unfairly burdened with loan repayments for undelivered properties.
On the issue of the High Court's dismissal of writ petitions, the Court acknowledged the availability of alternate remedies through Real Estate Regulatory Authorities and consumer fora but observed that the writ petitions involved substantial public interest affecting thousands of homebuyers. The Court implied that the High Court's dismissal might have overlooked the urgency and scale of the grievance, warranting this higher forum's intervention.
Regarding compliance with Court directions to furnish detailed affidavits on project status, payments, possession, and insolvency proceedings, the Court found gross non-compliance by most banks and builders despite repeated instructions. This non-cooperation suggested possible collusion, undermining the Court's ability to ascertain facts and provide relief. The Court emphasized the gravity of the situation and the need for a thorough investigation.
The Court's application of law to facts led to the conclusion that homebuyers should not be held liable for EMI/pre-EMI payments defaulted by builders, especially given the incomplete projects and ongoing insolvency proceedings. It underscored the banks' failure to exercise due diligence and comply with RBI Guidelines when disbursing funds. The Court also recognized the inadequacy of existing remedies and the necessity for judicial intervention to protect homebuyers' interests.
Competing arguments from banks and builders likely centered on the availability of alternate remedies, the contractual terms of loan agreements, and the procedural propriety of recovery actions. The Court treated these by balancing the regulatory framework, contractual obligations, and the equitable rights of homebuyers, ultimately prioritizing consumer protection and adherence to regulatory norms.
The Court concluded that recovery actions against homebuyers should be stayed pending resolution of the substantive issues and directed that no Recovery Certificate be executed against homebuyers in the meantime. It also ordered the constitution of a Special Investigation Team (SIT) to probe the nexus between banks and builders, with the Central Bureau of Investigation's Standing Counsel directed to assist and consider registration of a case or constitution of an SIT on its own motion.
In terms of significant holdings, the Court held:
"The banks and financial institutions violated several provisions of the 2013 RBI Guidelines when disbursing the amounts as the disbursal was done without any form of due diligence on behalf of the banks."
"This blatant disregard and ignorance of the Court's directions, coupled with their reluctance in appropriately assisting the Court, hints towards a possible collusion between the builders-cum-developers and the banks/financial institutions."
"Meanwhile, proceedings before the Debt Recovery Tribunals or any other Tribunal may continue. However, no Recovery Certificate shall be executed against the home-buyers."
These pronouncements establish the principle that banks must adhere strictly to regulatory guidelines and exercise due diligence before disbursing loans to builders, and that homebuyers cannot be held liable for payments defaulted by builders under subvention schemes where possession has not been delivered. The Court's determination to investigate possible collusion marks a significant step towards ensuring accountability and protecting consumer rights in real estate financing.
Disbursement of funds by banks to builders-cum-developers through subvention schemes for various housing development projects in Noida, Greater Noida, Gurugram, and other nearby areas - Ognorance of court's directions - HELD THAT:- Despite this Court’s repeated instructions, emphasizing the seriousness of the matter, out of roughly 40 builders-cumdevelopers and roughly 30 banks/financial institutions, only 9 banks/financial institutions and 5 builders-cum-developers have filed their compliance affidavits for the order dated 05.11.2024.
This blatant disregard and ignorance of the Court’s directions, coupled with their reluctance in appropriately assisting the Court, hints towards a possible collusion between the builders-cum-developers and the banks/financial institutions.
In such circumstances, it may be necessary to constitute a Special Investigation Team (SIT) to uncover the nexus between the banks/financial institutions and the builders-cumdevelopers with respect to the development projects where the homebuyers have paid substantial amounts and where the development projects have not even been launched, have not completed construction, or have not begun construction - The Standing Counsel for the Central Bureau of Investigation (CBI) is directed to remain present in this Court on the next date of hearing for the purpose of constituting an SIT. He may also have instructions as to why the CBI should not be asked to register a case and then proceed to investigate the nexus between the banks and the builders. Alternatively, constitution of a SIT at its own will also be considered by this Court.
Conclusion - The banks must adhere strictly to regulatory guidelines and exercise due diligence before disbursing loans to builders, and that homebuyers cannot be held liable for payments defaulted by builders under subvention schemes where possession has not been delivered.
Application allowed.
Issues: (i) Whether the assignment deed was void in respect of the immovable property situated in Tamil Nadu under the Tamil Nadu amended registration provision; (ii) whether the Section 7 application was barred by limitation; (iii) whether deposit of the principal amount pursuant to the interim order discharged the financial debt.
Issue (i): Whether the assignment deed was void in respect of the immovable property situated in Tamil Nadu under the Tamil Nadu amended registration provision.
Analysis: The assignment deed was a composite instrument covering several financial assets and accounts, but it also dealt with an equitable mortgage over land and building in Coimbatore. The amended place-of-registration rule applicable in Tamil Nadu rendered a document registered outside the State void to the extent it affected immovable property situated in Tamil Nadu. The offending part of the transaction was therefore severable from the rest of the assignment, and the invalidity did not extend to the entire deed.
Conclusion: The assignment deed is void only to the extent it creates an interest over the immovable property situated at Coimbatore, but it is not void in its entirety.
Issue (ii): Whether the Section 7 application was barred by limitation.
Analysis: The account was declared NPA on 30.09.2011, but the corporate debtor's balance sheets for subsequent financial years recorded the debt consistently. An acknowledgment of liability in the corporate debtor's financial statements constitutes acknowledgment for the purpose of extending limitation, even if the assignee's name is not separately mentioned. The assignee was entitled to rely on such acknowledgments as the transferee of the debt.
Conclusion: The Section 7 application was not barred by limitation.
Issue (iii): Whether deposit of the principal amount pursuant to the interim order discharged the financial debt.
Analysis: The amount deposited corresponded only to the principal sum mentioned in the assignment deed, whereas the relevant financial debt for the Section 7 proceeding was the outstanding claim as on the date of the application. A partial deposit made during the appeal did not liquidate the entire debt or extinguish the default.
Conclusion: The deposit did not discharge the financial debt.
Final Conclusion: The admission of the Section 7 application was upheld, the interim protection was vacated, the deposited amount was directed to be returned with accrued interest, and the assignment was held invalid only insofar as it related to the Tamil Nadu immovable property.
Ratio Decidendi: A registered assignment instrument is severable, so statutory invalidity affecting immovable property in one part of the transaction does not necessarily nullify the entire assignment; and acknowledgment of debt in a corporate debtor's balance sheets can extend limitation even where the assignee is not named separately.
Admission of section 7 application - Validity of assignment agreement executed by Allahabad Bank in favour of Pegasus - application filed by Pegasus under Section 7 was barred by limitation or not - discharge of debt of financial creditor stands fulfilled by depositing the principal amount as mentioned in Part IV of Section 7 application by the appellant in the order of this Tribunal or not.
Whether assignment agreement dated 27.09.2023, executed by Allahabad Bank in favour of Pegasus is void on the strength of Section 28 of the Registration Act, 1908 as substituted by state of Tamil Nadu by Act No.19/1997? - HELD THAT:- A suit has been filed by the appellant challenging the assignment in the year 2017, which is said to be pending. Challenge to assignment agreement could not have been directly raised in Section 7 application. However, in the present case, it is required to consider the effect and consequence of Section 28(b) as applicable in the state of Tamil Nadu. Section 28 deals with the registering document relating to land, sub-Clause (a) mentions that every document affecting immovable property and sub-Clause (b) provides that any document registered outside the state of Tamil Nadu in contravention of provisions of Clause (a) shall be deemed to be null and void. The document thus has to be treated null on void in respect to the property situated in the state of Tamil Nadu, which document was required to be registered in state of Tamil Nadu. Thus, assignment agreement qua the immovable property which is covered by the assignment, which property is situated in the state of Tamil Nadu is null and void and no right can be claimed by financial creditor with respect to the said land.
The assignment agreement indicates that apart from creating mortgage in the assets situated in Tamil Nadu, there large number of other accounts and other financial assets which are dealt in the assignment agreement. Assignment deed dated 27.09.2013 can be held to be void insofar as the mortgage of land situated in Coimbatore and no rights in the said land by virtue of assignment can be claimed by financial creditor, but that itself is not sufficient to hold the entire assignment void so as to make application Section 7 as not maintainable - the submission of the appellant on the strength of Section 28 (a) & (b) of the Registration Act as applicable in the state of Tamil Nadu, can be accepted to the extent that on the basis of assignment, no rights can be claimed by financial creditor qua the assets situated in Coimbatore since the assignment agreement insofar as creating any mortgage or any other interest in the immovable assets is void. However, the entire assignment cannot be declared as null and void on the said ground.
The judgment in Mattapalli Chelamayya Vs. Mattapalli Venkataratnam [1972 (1) TMI 118 - SUPREME COURT] fully support the submission of the respondent that assignment qua immovable property situated in state of Tamil Nadu which is hit by Section 28(b) is severable from the entire assignment agreement and assignment agreement has to be held to be void to that extent only.
Whether the application filed by Pegasus under Section 7 on 18.08.2022 was barred by limitation? - HELD THAT:- The acknowledgement contained in the balance sheet is acknowledgement of debt. The debt is continuously acknowledged in the balance sheets of the corporate debtor. It is acknowledgement of the corporate debtor, it is relevant for extension of limitation. The mere fact that Allahabad Bank has assigned the debt to the Pegasus and non-mention of Pegasus in the balance sheet shall not deny the benefit of Section 18 of the Limitation Act in facts of the present case - the application filed by the financial creditor was not barred by time.
Whether by depositing the principal amount as mentioned in Part IV of Section 7 application by the appellant in the order of this Tribunal dated 28.05.2024, it can be said that debt of financial creditor stand discharged? - HELD THAT:- The deposit which was offered to be made by the appellant was amount of ₹220,02,051,721/- which was mentioned as amount due on 15.07.2013 in the assignment agreement. The relevant amount is the amount due at the time of filing of Section 7 application as claimed in Part IV. The amount mentioned in the assignment, agreement has no relevance to find debt and default of the corporate debtor - the amount deposited in no manner liquidate the debt of financial creditor.
Conclusion - i) The assignment agreement dated 27.09.2013 is held void in so far as it creates equitable mortgage of 253.89 acres of land and building situate at Coimbatore, State of Tamil Nadu. The assignment deed qua the immovable property situated in Tamil Nadu is void, but the rest of the assignment relating to financial assets is valid. ii) The application filed under Section 7 on 18.08.2022 is not barred by limitation. iii) The amount mentioned in the assignment, agreement has no relevance to find debt and default of the corporate debtor, thus, the amount deposited in no manner liquidate the debt of financial creditor.
There are no error in the order of the adjudicating authority in admitting Section 7 application - appeal disposed off.
- Whether the delay of 7 days in filing the appeal is liable to be condoned on grounds of bona fide circumstances and procedural challenges.
- Whether the Adjudicating Authority was justified in directing the Liquidator to deposit Rs. 50,000/- from his own pocket for non-compliance with the orders regarding payment of employees' salaries during liquidation proceedings.
- Whether the Liquidator fulfilled his obligation to make payments to employees as per the directions of the Adjudicating Authority, considering the correspondence and documents exchanged between the Liquidator and employees' representatives.
- Whether the Liquidator's act of informing the Stakeholders Consultation Committee about the order absolves him from the obligation of complying with the Court's directions.
2. ISSUE-WISE DETAILED ANALYSIS
Condonation of Delay in Filing Appeal
The legal framework governing condonation of delay requires the appellant to demonstrate sufficient cause for the delay, which is neither willful nor intentional but due to circumstances beyond control. The application pleaded that the delay arose from the time taken to review the order after receipt, extensive consultations to determine the appropriate course, and procedural challenges during the Christmas holiday season impacting administrative functions.
The Tribunal observed that the reasons provided constituted sufficient cause. The delay was not deliberate but circumstantial, involving bona fide efforts to finalize the appeal. The Tribunal's reasoning aligns with established principles that delay caused by genuine difficulties and procedural impediments, especially during holiday periods, can be condoned in the interest of justice and equity. Consequently, the Tribunal condoned the 7-day delay, allowing the appeal to proceed.
Justification of Adjudicating Authority's Direction to Liquidator to Deposit Rs. 50,000/-
The core legal principle is that the Liquidator, once appointed, is under a statutory obligation to comply with directions of the Adjudicating Authority, particularly regarding payment of employees' dues. The Adjudicating Authority had passed multiple orders directing the Liquidator to pay pending salaries by specified dates. The Liquidator's failure to comply led to the impugned order directing a personal deposit of Rs. 50,000/- as penalty for violation.
The Tribunal examined the chronology: employees were paid till December 2023 by the Resolution Professional; liquidation commenced on 01.05.2024; Liquidator appointed on 10.05.2024; orders directing payment issued on 23.09.2024 and 29.10.2024; and the impugned order on 21.11.2024. The Liquidator contended non-receipt of all salary payment details and late receipt of bank statements on the date of hearing.
However, the Tribunal noted that details of 34 employees and bank statements were indeed provided to the Liquidator, and thus, he was in possession of sufficient information to initiate payments. The Tribunal emphasized that the Liquidator's obligation to comply with Court orders is independent of procedural delays in receiving complete data. The reasoning reflects the principle that possession of relevant documents triggers the duty to act promptly to fulfill statutory obligations.
Assessment of Liquidator's Compliance and Correspondence with Stakeholders Consultation Committee
The Liquidator argued that all issues were brought before the Stakeholders Consultation Committee, evidenced by an email dated 25.09.2024, implying that this sufficed as compliance or at least demonstrated bona fide efforts.
The Tribunal rejected this contention, holding that mere communication to the Committee does not absolve the Liquidator from direct compliance with the Adjudicating Authority's orders. The statutory duty to pay employees' salaries as per Court directions cannot be delegated or deferred by internal consultations. The Tribunal underscored that even partial payment to the 34 employees, whose details were available, should have been undertaken to exhibit bona fide compliance.
This analysis underscores the legal principle that internal stakeholder consultations do not substitute for compliance with judicial directions, especially when employees' rights are involved.
Conclusion on the Appeal
The Tribunal concluded that the Adjudicating Authority did not err in directing the Liquidator to deposit Rs. 50,000/- as penalty for non-compliance. The Liquidator's failure to act despite having requisite information and Court orders warranted the penalty. The appeal was dismissed accordingly.
3. SIGNIFICANT HOLDINGS
"We find sufficient cause to condone the delay. 7 days' delay in filing the appeal is condoned."
"When the Court had issued direction to the Liquidator to release payment to the employees by 04.10.2024 and thereafter, again passed order on 29.10.2024, it was obligation of the Liquidator to make payment."
"The Liquidator is in possession of all relevant documents which reflect payments made by the Resolution Professional. We, thus, are of the view that the Adjudicating Authority has not committed any error in issuing direction to the Liquidator to deposit an amount of Rs.50,000/-."
"The mere fact that the Appellant has brought the order in the notice of the Stakeholders Consultation Committee, cannot absolve the obligation on part of the Liquidator of complying with the orders of the Court."
"Even if, bank details of all employees were not received by the Liquidator, at least details of 34 employees were submitted to the Liquidator and the Liquidator could have started making payment for at least those employees to show his bonafide."
Core principles established include the strict enforcement of the Liquidator's duty to comply with Court orders regarding employee payments during liquidation, the non-derogable nature of such obligations despite procedural or administrative challenges, and the limited scope of internal stakeholder consultations in discharging judicial mandates.
Final determinations: The delay in filing the appeal was condoned; the penalty imposed on the Liquidator was justified; the appeal was dismissed for lack of merit.
Direction to liquidator to deposit an amount of Rs.50,000/- from his own pocket for violating the orders, regarding payment of employees' salaries during liquidation proceedings - HELD THAT:- When the Court had issued direction to the Liquidator to release payment to the employees by 04.10.2024 and thereafter, again passed order on 29.10.2024, it was obligation of the Liquidator to make payment. The Liquidator is in possession of all relevant documents which reflect payments made by the Resolution Professional. The Adjudicating Authority has not committed any error in issuing direction to the Liquidator to deposit an amount of Rs.50,000/-.
The mere fact that the Appellant has brought the order in the notice of the Stakeholders Consultation Committee, cannot absolve the obligation on part of the Liquidator of complying with the orders of the Court. Even if, bank details of all employees were not received by the Liquidator, at least details of 34 employees were submitted to the Liquidator and the Liquidator could have started making payment for at least those employees to show his bonafide - Thus, no grounds have been made out to interfere with the order passed by the Adjudicating Authority.
Conclusion - When the Court had issued direction to the Liquidator to release payment to the employees by 04.10.2024 and thereafter, again passed order on 29.10.2024, it was obligation of the Liquidator to make payment.
Appeal dismissed.
Issue-wise Detailed Analysis:
1. Existence of a Pre-existing Dispute Prior to Demand Notice
The legal framework governing this issue is Section 9(5)(ii)(d) of the IBC, which bars admission of an insolvency application if a pre-existing dispute exists between the Operational Creditor and Corporate Debtor. The Supreme Court in Mobilox Innovations clarified that the adjudicating authority must reject an application if a plausible dispute exists, even without delving into the merits, provided the dispute is not spurious or illusory.
The Court examined voluminous correspondence exchanged between the parties prior to the demand notice dated 01.07.2022. The Corporate Debtor had repeatedly raised concerns about the Operational Creditor's performance, including delayed mobilization of rigs, slow progress, site protection issues, failure to clear muck/slush, inadequate security and lighting, and defective piling work. Multiple letters dated between December 2021 and June 2022 documented these grievances and called for rectification, compliance, and acceleration of work. Notably, the Corporate Debtor issued a Show Cause Notice on 21.06.2022 explicitly alleging defective work, losses incurred, and reserving rights to recover damages.
The Court found that these communications constituted a genuine and substantive dispute, not a mere afterthought. The existence of the Show Cause Notice prior to the demand notice was particularly significant, as it demonstrated that the Corporate Debtor had formally raised objections and claimed damages before the insolvency proceedings were initiated.
The Court applied the Mobilox Innovations test, emphasizing that the dispute must be "plausible" and not "patently feeble." The detailed correspondence and formal notices evidenced a bona fide dispute on quality and performance issues, which was neither spurious nor hypothetical.
Consequently, the Court concluded that the dispute was pre-existing and barred the maintainability of the Section 9 application.
2. Impact of Corporate Debtor's Conduct on the Existence of Dispute
The Operational Creditor argued that the Corporate Debtor's conduct-such as approval of proforma invoices, partial payments, and assignment of additional piling work after completion of the initial scope-negated any claim of pre-existing dispute. The contention was that no party would assign further work to a contractor whose performance was disputed, and that prior approvals constituted conclusive acceptance under Clause 69.2 of the contract.
The Court acknowledged these submissions but found them insufficient to negate the documented disputes. It observed that despite partial payments and approvals, the Corporate Debtor's repeated complaints and formal Show Cause Notice indicated ongoing dissatisfaction and unresolved issues. The Corporate Debtor's partial payments were viewed as efforts to ease cash flow rather than acceptance of the work quality. Furthermore, the assignment of additional work was not determinative of the absence of dispute, given the subsequent communications highlighting defects and delays.
The Court noted that the dispute related to quality and rectification obligations, which are distinct from mere payment approvals. The Corporate Debtor's invocation of contractual clauses for recovery of losses and refusal of further payments until defects were rectified underscored the existence of a substantive dispute.
3. Timing and Nature of Dispute Raised Post Demand Notice
The Operational Creditor claimed that the dispute was fabricated and raised only after the demand notice, citing the Corporate Debtor's reply dated 12.07.2022 as vague and unsubstantiated. It argued that disputes raised post demand notice do not qualify as pre-existing under judicial precedents.
The Court, however, found that the dispute had been raised well before the demand notice, as evidenced by the Show Cause Notice and prior correspondence. The Corporate Debtor's reply to the demand notice was thus a continuation of an existing dispute, not a new or contrived claim. The Court rejected the Operational Creditor's characterization of the dispute as afterthought or reactionary.
4. Application of Law to Facts and Treatment of Competing Arguments
The Court carefully balanced the parties' submissions and the documentary evidence. It applied the legal standard from Mobilox Innovations, which requires the adjudicating authority to assess whether a dispute is genuine and not spurious, without deciding the merits. The Court found that the Corporate Debtor's detailed complaints, formal notices, and invocation of contractual remedies demonstrated a plausible dispute.
The Operational Creditor's reliance on invoice approvals and partial payments was considered but found insufficient to override the documented disputes. The Court emphasized that approval of invoices does not preclude the Corporate Debtor from raising quality-related disputes, especially when such disputes were contemporaneously communicated.
The Court also noted that the adjudicating authority's role is limited to a prima facie examination of the existence of dispute, not its resolution. Since a pre-existing dispute was established, the Section 9 application was rightly dismissed as not maintainable.
Significant Holdings
The Court upheld the principle that "once the operational creditor has filed an application, which is otherwise complete, the adjudicating authority must reject the application under Section 9(5)(ii)(d) if notice of dispute has been received by the operational creditor or there is a record of dispute in the information utility." It reiterated the Supreme Court's guidance:
"Therefore, all that the adjudicating authority is to see at this stage is whether there is a plausible contention which requires further investigation and that the 'dispute' is not a patently feeble legal argument or an assertion of fact unsupported by evidence. It is important to separate the grain from the chaff and to reject a spurious defence which is mere bluster. However, in doing so, the Court does not need to be satisfied that the defence is likely to succeed. The Court does not at this stage examine the merits of the dispute except to the extent indicated above. So long as a dispute truly exists in fact and is not spurious, hypothetical or illusory, the adjudicating authority has to reject the application..."
Further, the Court concluded that the dispute raised by the Corporate Debtor was "much prior in time to the issuance of demand notice" and was "not moonshine or spurious." The dismissal of the Section 9 application was therefore affirmed, with the Appellant being free to pursue other remedies as per law.
Dismissal of Section 9 Application on the ground that there was a pre-existing dispute between the parties - concerns regarding the quality of work - operational debt was due and payable or not - HELD THAT:- From the materials on record, it is found that before the demand notice dated 01.07.2022 was issued by the Operational Creditor – Drilltech Engineers, the Corporate Debtor – DLF had already issued a Show Cause Notice (SCN) dated 21.06.2022, which is being dealt little later as per chronology of events. From the records, it can also be seen that the show cause notice had called upon the Operational Creditor to rectify the defective works and reserved its rights to recover revenue losses suffered by it.
The Appellant-Operational Creditor – Drilltech Engineers claims that the alleged disputes were raised post facto. The Corporate Debtor had availed GST input credit on invoices, for which the work has already been performed by the Operational Creditor, but were subsequently disputed by the Corporate Debtor for evading payment. Corporate Debtor had made partial payments without protest and continued receiving services from the Appellant - The Operational Creditor – Drilltech Engineers also contends that part payments were made even after raising so-called disputes by the Corporate Debtor. At no point in time the contract was terminated or proceedings for liquidated damages were issued. It also contends that the piles were undercast as per the letter dated 02.05.2022 and 23.05.2022 issued by the Corporate Debtor, whereas its own subsequent letters show that there is an issue of earth settlement and loose status while at the site.
From the materials on record and in the above facts and circumstances, it is found that there is lot of communication exchanged between the two parties indicating pre-existing dispute, which cannot be ignored and which cannot be said to be moonshine or spurious and it is much prior in time to the issuance of demand notice by the Operational Creditor – Drilltech Engineers. The final SCN dated 21.06.2022 issued by Corporate Debtor, prior to the demand notice of the Operational Creditor dated 01.07.2022 succinctly captures the pre-existing dispute. It is concluded that these are pre-existing disputes which cannot be adjudicated by NCLT and this need to be settled at appropriate forum. The law is very clear that as per Section 9(5)(ii)(d) of the Code, on existence of pre-existing dispute, the application is not maintainable.
Conclusion - The Adjudicating Authority has rightly rejected the Section 9 Application. Perusal of the rival contentions indicate that there is a pre-existing dispute, which has been going on prior to the issuance of demand notice by the Operational Creditor – Drilltech Engineers. There are no infirmity in the orders of the Adjudicating Authority.
Appeal dismissed.
Issues: (i) Whether the delivery order with one year validity continued as a subsisting contract by the parties' conduct after its expiry; (ii) Whether a pre-existing dispute existed within the meaning of Sections 8 and 9 of the IBC such that the Section 9 application required rejection; (iii) Whether the corporate debtor established that it never refused to supply coal against advances received.
Issue (i): Whether the delivery order with one year validity continued as a subsisting contract by the parties' conduct after its expiry.
Analysis: The delivery order stipulated a one year validity but subsequent correspondence and continued supplies after expiry show parties acted under the same contractual terms. Communications from the corporate debtor confirming future supply and operational creditor acknowledgments of supply up to a later date demonstrate continuation of performance by conduct.
Conclusion: The contract is held to have continued by conduct after expiry of the stated validity period; conclusion is in favour of the Appellant (corporate debtor).
Issue (ii): Whether a pre-existing dispute existed within the meaning of Sections 8 and 9 of the IBC such that the Section 9 application required rejection.
Analysis: The corporate debtor raised a detailed dispute in its reply to the demand notice and authenticated a dispute status in the Information Utility (Form C / NeSL) on the same day as the debt submission. Section 9(5)(ii)(d) mandates rejection where a notice of dispute has been received by the operational creditor or there is a record of dispute in an information utility. The record shows both conditions satisfied and the Adjudicating Authority did not properly apply this statutory bar when admitting the Section 9 application.
Conclusion: A pre-existing dispute existed and the Section 9 application should have been rejected; conclusion is in favour of the Appellant (corporate debtor).
Issue (iii): Whether the corporate debtor established that it never refused to supply coal against advances received.
Analysis: Correspondence before issuance of the demand notice indicates the corporate debtor expressed willingness and reasons for temporary suspension of supply (e.g., mine waterlogging) and reiterated readiness to supply thereafter. Contractual terms provided for refund of advance if unable to supply, but available material shows willingness to perform rather than an outright refusal.
Conclusion: The material supports that the corporate debtor did not repudiatively refuse supply; conclusion is in favour of the Appellant (corporate debtor).
Final Conclusion: On the composite findingscontinuation of the contract by conduct, existence of a bonafide pre-existing dispute recorded in the Information Utility, and absence of established refusal to supplythe admission of the Section 9 application was incorrect and the impugned order is set aside in favour of the Appellant.
Ratio Decidendi: Where a notice of dispute has been received by the operational creditor or there is an authenticated record of dispute in an information utility, Section 9(5)(ii)(d) requires rejection of the Section 9 application and the Adjudicating Authority must not admit insolvency proceedings despite an operational creditor's demand notice.
Admission of Section 9 application - continuation of contract between the parties, taking into account validity of the delivery order dated 16.09.2022 being only one year - existence of pre-existing dispute between the parties within the meaning of Sections 8 and 9 of the IBC - sufficiency of material to establish that Corporate debtor never refused to supply coal against the advance received from the Operational Creditor.
Whether validity of the delivery order dated 16.09.2022 being only one year the contract between the parties still continues? - HELD THAT:- The e-mail dated 13.08.2024 indicate the statement of Corporate Debtor to supply the coal after 20.09.2024 which indicate that parties were acting under the delivery order as if the period of contract has not come to an end. Thus, by conduct of the parties, the contract was held subsisting and amount advanced by the Operational Creditor supplies were to be made by the Corporate Debtor even after expiry of the validity period of delivery order.
Whether there was any pre-existing dispute between the parties within the meaning of Sections 8 and 9 of the IBC and application deserved to be rejected? - Whether the Corporate Debtor has brought sufficient material on the record to indicate that it never refused to supply the coal against advance received from Operational Creditor? - HELD THAT:- Section 9(5)(ii)(d) provides that Adjudicating Authority shall reject the application if notice of dispute has been received by the operational creditor or there is a record of dispute in the information utility - On looking into the reply to the demand notice, the said reply is clearly a notice of dispute sent by the Corporate Debtor to ‘Armaco Infralinks Pvt. Ltd.’. Detailed facts as stated in the reply to the demand notice clearly make the said notice as notice of dispute. The Corporate Debtor has also filed a reply to Section 9 application and in the reply, the Corporate Debtor has also pleaded that the claim is already disputed in the record of the Information Utility.
There are two circumstances under which Section 9 application deserves to be rejected i.e. (i) notice of dispute has been received by operational creditor or (ii) there is record of dispute in the Information Utility. In the present case, both the above clauses are fully met since notice of dispute has been received by operational creditor and there is record of dispute in the Information Utility. The record of dispute in the Information Utility as extracted was information which was submitted by ‘Armaco Infralinks Pvt. Ltd.’ for authentication and authentication made on the same day by the corporate debtor disputing the information which is captured in the Information Utility information. The statutory condition as contained in Section 9(5)(ii)(d) was fully in existence, hence, Adjudicating Authority had to reject the application.
The initiation of insolvency against the Corporate Debtor has a serious consequences and when there are sufficient material to indicate that condition as mentioned in Section 9(5)(ii)(d) are in existence, Adjudicating Authority cannot proceed to ignore the same. There can be no dispute to the proposition laid down by the Hon’ble Supreme Court in “Mobilox Innovations Private Limited vs. Kirusua Software Pvt. Ltd. [2017 (9) TMI 1270 - SUPREME COURT] that dispute which is contemplated in Section 8(2)(a) has to be a bonafide dispute.
In the present case, the Corporate Debtor has expressed its willingness to supply the goods, it cannot be said that Corporate Debtor has breached the contract. The observation of the Adjudicating Authority that defence raised by the Corporate Debtor is a moonshine defence to cover up its failure to supply the goods against the advance also cannot be approved. In any view of the matter, requirement for rejection of Section 9 application as contemplated in Section 9(5)(ii)(d) being present, Adjudicating Authority without adverting to the said provision has admitted Section 9 application which cannot be approved.
Conclusion - i) By conduct of the parties, the contract was held subsisting and amount advanced by the Operational Creditor supplies were to be made by the Corporate Debtor even after expiry of the validity period of delivery order. ii) The application filed by the Operational Creditor did not deserve admission and was liable to be rejected as required by Section 9(5)(ii)(d) of the IBC. Adjudicating Authority neither adverted to Section 9(5)(ii)(d) nor addressed itself to the said condition and proceeded to admit the application which order cannot be sustained.
Appeal allowed.
Issues: Whether the appeal against the order rejecting the application for payment of rent and the connected contempt appeal were maintainable when the order only left the rent to be worked out by negotiation and no punishment order had been passed in contempt.
Analysis: The impugned order did not finally determine the appellant's entitlement to rent or use and occupation charges. It merely continued the earlier direction that the rent was to be settled by negotiation, with the liquidator assisting as an umpire. Since the controversy regarding fixation of rent remained open and no concrete adjudication of rights had been made, the order did not furnish a substantive basis for an appeal on merits. On the contempt side, the relevant directions had not been violated in a manner attracting penal consequences, and contempt jurisdiction under the statutory framework becomes appealable only when punishment is imposed.
Conclusion: The appeal against the rent-related order was not maintainable on the facts presented, and the connected contempt appeal was also not maintainable in the absence of any punishment order.
Rejection of Appellant’s claim of rent, directing instead that the rent is to be determined by way of negotiations - dismissal of contempt petition.
Rejection of Appellant’s claim of rent, directing instead that the rent is to be determined by way of negotiations - HELD THAT:- The determination of rent by way of negotiation is yet to be initiated, and the Liquidator is yet to play the role of an umpire so as to resolve the controversy. In other words, it could be said that no concrete positive action has been taken which may amount to be taken as deciding the right of the Appellant, which could have granted liberty to the Appellant to file an Appeal under Section 61 of the I & B Code, 2016, particularly when all the issues pertaining to the determination of rent by way of negotiation, between the parties were yet a factor open to be considered by the Liquidator - If the observation in Para 38 is read with the observations made in the preceding paragraphs of the Impugned Order of 04.10.2024, it is nothing but a direction issued in continuation to the unchallenged order of 02.08.2023, where the direction to arrive at a negotiated agreement is yet to be implemented, if both the orders are taken into consideration, it is opined that, since the Impugned Order is not deciding the right, which was yet left open to be considered on merits by the Liquidator, it may not be made appealable under Section 61 of I & B Code, 2016, as all contentions are still left open to be considered by the learned Adjudicating Authority.
Dismissal of the Contempt Petition - HELD THAT:- It pertinent to observe that Section 425 of the Companies Act, 2013, which contemplates drawing of a contempt proceedings observes that the proceedings and powers of contempt would be akin to the powers as it has been granted to the Hon’ble High Court for drawing a contempt proceedings under Section 12/14 of the Contempt of Courts Act - If that be the situation, the Appeal would only lie for any act of commission of a contempt, when there happens to be a determination by an order of punishment. Since, in both the orders, i.e., the order dated 02.08.2023 and 04.10.2024 impugned herein, there is no positive action, which has been directed to be made, the learned Adjudicating Authority found that there is no apparent contempt and has rejected the application - Since, the Contempt Petition has been rejected, in view of Section 19 of the Contempt of Courts Act, no Appeal would lie as against the dismissal of the Contempt Petition, as under law. The Appeal in such cases is maintainable only, when in a contempt proceedings, there is an order of punishment which is not a factor available for the Appellant to sustain Company Appeal.
Conclusion - i) Orders directing negotiation without final adjudication on rights are procedural and not appealable under Section 61 of the I & B Code. ii) Dismissal of Contempt Petitions without punishment is not appealable under the Contempt of Courts Act.
Appeal dismissed.
Issues: (i) Whether immovable properties acquired before the alleged predicate offence could be attached and confirmed as property of equivalent value under the Prevention of Money Laundering Act, 2002. (ii) Whether settlement or likely quashing of some scheduled offence FIRs entitled the appellant to relief against confirmation of attachment.
Issue (i): Whether immovable properties acquired before the alleged predicate offence could be attached and confirmed as property of equivalent value under the Prevention of Money Laundering Act, 2002.
Analysis: The expression "proceeds of crime" is wide enough to include not only property derived from criminal activity relating to a scheduled offence but also the value of such property. Where the tainted property is not available or has been siphoned off, the statute permits attachment of property of equivalent value. The pre-acquisition of assets, by itself, does not immunise them from attachment when the material shows diversion, layering, and disappearance of the proceeds of crime.
Conclusion: The issue was decided against the appellant and in favour of the Revenue.
Issue (ii): Whether settlement or likely quashing of some scheduled offence FIRs entitled the appellant to relief against confirmation of attachment.
Analysis: The appellant was facing multiple criminal cases of similar nature forming part of the same enforcement material, and the alleged proceeds of crime were not confined to only two FIRs. Even assuming settlement or quashing of some FIRs, that would not erase the broader allegations or the other connected cases. The offences relied upon also included non-compoundable offences, and the attachment could not be undone merely on the basis of partial settlement.
Conclusion: The issue was decided against the appellant and in favour of the Revenue.
Final Conclusion: The confirmation of provisional attachment was upheld and the appeal failed on all substantive grounds.
Ratio Decidendi: Under the Prevention of Money Laundering Act, 2002, attachment may extend to property of equivalent value where the actual proceeds of crime are unavailable, and partial settlement of some scheduled offence cases does not defeat attachment when the wider money-laundering allegations and other connected criminal cases survive.
Money Laundering - investments/acquisitions made by the appellant prior to the alleged period of offence - proceeds of crime or not - Negotiation with the complainant for amicable settlement.
Investments/acquisitions made by the appellant prior to the alleged period of offence are proceeds of crime or not - HELD THAT:- The perusal of the definition of proceeds of crime reveals three limbs of the definition out of which first part refers to the property acquired or derived directly or indirectly by a person relating to the criminal activity to a scheduled offence. The second part includes “the value of any such property”. The second part is generally mixed with third part for giving interpretation. However, an elaborate judgment on the issue has been given by the Delhi High Court in the case of Prakash Industries Ltd. v. Directorate of Enforcement [2022 (7) TMI 877 - DELHI HIGH COURT] where it was held that 'properties purchased prior to 01 July 2005 may also become vulnerable and subject to action under the Act. However, enforcement action against such properties would have to satisfy the tests and safeguards as propounded in Axis Bank with the learned Judge observing that in such a situation it would have to be established that the person accused of money laundering had an interest in such property at least till the time that he indulged in the proscribed criminal activity. The learned Judge further observed that bona fide rights acquired by third parties prior to the commission of the predicate offense would stand saved.'
Further, this Tribunal has also given an elaborate judgment on this issue in the case of Sadananda Nayak v. The Deputy Director, Directorate of Enforcement, Bhubaneswar [2024 (10) TMI 1619 - APPELLATE TRIBUNAL UNDER SAFEMA AT NEW DELHI], where all the judgments on the issue have been considered and thereby this issue was decided in favour of ED.
Negotiation with the complainant for amicable settlement - HELD THAT:- The same is likely to be settled, and further contention that FIR no. 135/2013 is already settled with the complainant and same is likely to be quashed by Hon’ble High Court of Gujarat is also devoid of any merits, seeing the fact that the appellant is facing the number of criminal cases of similar nature, as mentioned in table from page 13 to 17 of impugned order, which are also the part of Original Complaint no.1009/2018. Thus, the quantum of offence and generation of proceeds of crime is much larger and cannot restricted to just two FIRs. Therefore, even if, the FIR no.105/2016 & 135/2016 are quashed, even then, the appellant will face trial in other criminal cases of similar nature, as mentioned in the PAO, Original Complaint and impugned order. He cannot be permitted to enjoy the fruits of crime by settling with the complainant of just two cases. Even otherwise, commission of offence under section 467 & 468 IPC are non-compoundable offences.
Conclusion - i) Attachment under the PMLA can extend to properties acquired prior to the offence if the tainted property is not traceable and the attached property is equivalent in value, provided the accused had an interest in such property at the relevant time. ii) The settlement or quashing of some FIRs does not automatically entitle the accused to relief from attachment when multiple related criminal cases are pending, particularly where serious offences like forgery and cheating are involved.
Appeal dismissed.
(a) Whether the inordinate and unexplained delay in adjudication of the show cause notices (SCNs) violates principles of natural justice and constitutional mandates, thereby rendering the adjudication orders and SCNs liable to be quashed;
(b) Whether the statutory time limits prescribed under Section 73(4B) of the Finance Act, 1994, which provide for adjudication within six months or one year "where it is possible to do so," impose a mandatory obligation on authorities to conclude proceedings within such timeframes;
(c) Whether the delay in adjudication, despite personal hearings and replies filed by the Petitioner, constitutes sufficient grounds for quashing the demands of service tax, interest, and penalty;
(d) The applicability and interpretation of judicial precedents concerning delay in adjudication, including the extent of discretion available to tax authorities under the Finance Act, Customs Act, and CGST Act;
(e) The effect of pandemic-related lockdowns and other external factors on the limitation period and adjudication timelines;
(f) Whether the adjudicating authorities have discharged their statutory obligation to conclude proceedings with due expedition and reasonable dispatch.
Issue-wise Detailed Analysis
1. Delay in Adjudication and Principles of Natural Justice
The Petitioner challenged the impugned orders and SCNs primarily on the ground of inordinate delay ranging from six to eleven years in adjudicating service tax demands for multiple financial years. The Petitioner contended that such delay deprived it of a fair opportunity to defend its case, thereby violating the principles of natural justice and rendering the orders constitutionally untenable.
The Court examined the relevant statutory framework, particularly Section 73(4B) of the Finance Act, 1994, which prescribes that the Central Excise Officer shall determine the amount of service tax due within six months or one year from the date of notice "where it is possible to do so." The adjudicating authority in the impugned order interpreted this phrase as conferring discretion and flexibility, allowing for extended timelines where necessary.
However, the Court referred extensively to the recent judgment in Vos Technologies (P) Ltd., which clarified that the phrase "where it is possible to do so" does not license lethargy or inaction. The Court held that statutory authorities are bound to conclude adjudication with due expedition and that unexplained and inordinate delays constitute sufficient grounds to quash proceedings. The flexibility afforded by the statute must be read narrowly, applicable only in cases of insurmountable exigencies or genuine impediments beyond the control of the authorities.
The Court found that the Respondents failed to demonstrate any such insurmountable constraints or justifications for the protracted delay. The delay was attributed to departmental inertia rather than external or unavoidable factors. The pandemic-related lockdowns, invoked by the Respondents, were insufficient to explain delays spanning several years before and after the lockdown period.
The Court further noted that for the first four SCNs, a personal hearing was conducted in December 2016, and the Petitioner had submitted written clarifications. Despite this, the adjudication remained pending for over seven years, indicating neglect of statutory duty.
2. Interpretation of Section 73(4B) of the Finance Act, 1994 and Comparison with Customs Act
The adjudicating authority distinguished the Finance Act's Section 73(4B) from the Customs Act's Section 28(9), emphasizing that the former contains the phrase "where it is possible to do so," which allows discretion, whereas the latter imposes strict mandatory timelines with provisions for extension and deeming proceedings concluded if not completed within the stipulated period.
The Court, however, relying on precedents including Vos Technologies, held that the discretion under Section 73(4B) is not unfettered and must be exercised reasonably. The statutory language contemplates flexibility only when it is genuinely impracticable to conclude adjudication within the prescribed period, not as a blanket justification for delay.
The Court underscored that the legislative intent behind such provisions is to balance the need for timely adjudication with the practical complexities of tax investigations, but this cannot be stretched to condone prolonged inaction.
3. Applicability of Judicial Precedents on Delay and Time-bound Adjudication
The Court extensively analyzed judicial precedents, including the Vos Technologies judgment and others such as Paras Products and M/s Shyam Indus Power Solutions, which uniformly emphasize that tax authorities must conclude proceedings expeditiously and that inordinate delay without reasonable cause is a ground for quashing proceedings.
The Court also considered the Supreme Court decisions cited by the Respondents, including Commissioner, GST and Central Excise Commissionerate-II v. M/s Swati Menthol and CCE v. Bhagsons Paint Industry. These were distinguished on facts and legal grounds, with the Court observing that those decisions do not authorize indefinite delay or non-adjudication.
The Court reaffirmed that the principles of natural justice and statutory mandates require that adjudication must be completed within a reasonable time, failing which the proceedings become unsustainable.
4. Effect of Pandemic-related Lockdowns and External Factors
The Respondents justified delay partly on account of COVID-19 lockdowns and related judicial directions suspending limitation periods. The Court acknowledged these factors but held that they do not justify delays extending several years beyond the lockdown period.
The Court emphasized that the burden lies on the authorities to prove that delay was due to insurmountable factors. The mere invocation of the pandemic or procedural complexities without concrete evidence does not satisfy this requirement.
5. Application of Law to Facts and Treatment of Competing Arguments
The Court meticulously compared the timelines of SCNs issuance and final adjudication, highlighting delays of up to eleven years. The Petitioner's submissions on delay and prejudice were accepted as valid and substantiated.
The Respondents' arguments emphasizing statutory discretion and ongoing procedural complexities were rejected due to lack of credible justification and failure to demonstrate genuine impediments.
The Court found the impugned orders' reasoning inadequate and inconsistent with the established legal principles and precedents.
Conclusions
The Court concluded that the delay in adjudication was inordinate, unexplained, and attributable to the department's inaction. The statutory discretion under Section 73(4B) of the Finance Act does not permit such delay. The principles of natural justice and the jurisprudence on timely adjudication mandate quashing of the impugned SCNs, Order-In-Original, and Order-In-Appeal.
Significant Holdings
The Court held:
"The flexibility which the statute confers is not liable to be construed as sanctioning lethargy or indolence. Ultimately it is incumbent upon the authority to establish that it was genuinely hindered and impeded in resolving the dispute with reasonable speed and dispatch."
"The phrase 'where it is possible to do so' could not be equated with lethargy or an abject failure to act despite there being no insurmountable factor operating as a fetter upon the power of the proper officer to proceed further with adjudication."
"Matters which have the potential of casting financial liabilities or penal consequences cannot be kept pending for years and decades together."
"The respondents have clearly failed to establish the existence of an insurmountable constraint which operated and which could be acknowledged in law as impeding their power to conclude pending adjudications."
"The inaction and the state of inertia which prevailed thus leads us to the inevitable conclusion that the respondents clearly failed to discharge their obligation within a reasonable time."
Accordingly, the Court quashed and set aside the impugned SCNs dated 17.04.2013, 07.05.2014, 20.04.2015, 10.05.2016, and 19.03.2018, the Order-In-Original dated 27.06.2024, and the Order-In-Appeal dated 31.01.2025.
Inordinate and unexplained delay in adjudication of SCN - mandatory obligation as per statutory time limits prescribed under Section 73(4B) of the Finance Act, 1994 - violation of principles of natural justice - HELD THAT:- As is apparent, the Respondent kept the adjudication of the impugned SCNs pending for a period of 6 to 11 years.
This Court in Vos Technologies (P) Ltd. [2024 (12) TMI 624 - DELHI HIGH COURT] had occasion to deal with the issue of delay on behalf of the authorities in concluding the proceedings within a reasonable time (arising out of the Customs Act, 1962, the Finance Act, 1994, the Central Goods and Services Act, 2017 and the Central Excise Act, 1944).
After a detailed analysis of the relevant provisions and previous judgments of the Hon’ble Supreme Court and High Courts, this Court, in Vos Technologies (P) Ltd., while highlighting the fact that the authorities are legally obligated to conclude the adjudication with due expedition, held that, an inordinate and unexplained delay on behalf of the authorities to act within a reasonable period would constitute sufficient grounds to quash the proceedings.
Ultimately it is incumbent upon the authorities to establish that it was genuinely hindered and impeded in resolving the dispute with reasonable dispatch. A statutory authority, when faced with such a challenge, would be obligated to prove that it was either impracticable to proceed with or was constrained by factors beyond its control which prevented it from moving with reasonable expedition. The authority does not, in fact, assert as such in the present case - there are no hesitation in holding that the rationale put forth in Vos Technologies (P) Ltd., would apply squarely to the facts and circumstances of the present case.
Conclusion - The respondents clearly failed to discharge their obligation within a reasonable time.
Petition allowed.
1. Whether the appellant, engaged in Electrical Contractor Services under the Restructured Accelerated Power Development and Reforms Programme (R-APDRP), is liable to pay Service Tax on the amounts received from the Government of Sikkim for services rendered.
2. Whether the appellant's services fall within the ambit of exemption under Notification No. 25/2012-Service Tax dated 20.06.2012, particularly Serial No. 12A, which exempts certain services provided to government or local authorities.
3. Whether the extended period of limitation invoked for the demand of Service Tax is valid in the facts of the case.
4. Whether penalties under Sections 69, 70, and 78(1) of the Finance Act, 1994 are justified in the circumstances.
Issue-wise Detailed Analysis
1. Liability to pay Service Tax on Electrical Contractor Services under R-APDRP
The appellant provided services related to erection, commissioning, and installation of plant, machinery, or equipment under the Government of India's R-APDRP scheme, aimed at reducing Aggregate Technical & Commercial (AT & C) losses in state electricity distribution utilities. The Revenue alleged that the appellant failed to discharge Service Tax liability on amounts received, as the appellant was not registered and did not levy Service Tax in invoices issued to the Government of Sikkim. The demand was raised under Section 66B (levy of Service Tax) and Section 69 (failure to pay Service Tax) of the Finance Act, 1994.
The appellant contested the demand, asserting that their services qualify as "original works" under Explanation (1)(a) to Rule 2A of the Service Tax (Determination of Value) Rules, 2006, and fall within the exemption provided under Serial No. 12A of Notification No. 25/2012-ST dated 20.06.2012. The appellant relied on the Tribunal's earlier decision in M/s. Arvindra Electricals, which held that similar services provided to government entities were exempt from Service Tax.
Legal Framework and Precedents:
Section 66B of the Finance Act, 1994, imposes Service Tax on taxable services. Notification No. 25/2012-ST dated 20.06.2012 exempts services provided to government or local authorities by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of civil structures or original works predominantly meant for use other than commerce, industry, or business.
The Explanation (1)(a) to Rule 2A defines "original works" to include new constructions, additions, alterations, and erection or installation of plant, machinery, or equipment.
The Tribunal in M/s. Arvindra Electricals applied the Apex Court's decision in Larsen & Toubro, which classified services provided along with material as Works Contract services, and noted that prior to 01.07.2012, such services were not liable to Service Tax under "Erection, Commissioning and Installation Services." Post 01.07.2012, the exemption Notification No. 25/2012-ST applies to services provided to government entities for original works not used for commerce or industry.
Court's Interpretation and Reasoning:
The Tribunal noted that the appellant's services fall squarely within the scope of "erection, commissioning and installation of plant and machinery or equipment or structures" under the R-APDRP, which is a government programme. The services were provided to the Government of Sikkim, a governmental authority.
Since the services related to original works predominantly meant for use other than commerce or industry, the exemption under Serial No. 12A of Notification No. 25/2012-ST applies. The appellant's reliance on the Arvindra Electricals decision was found to be well-founded and directly applicable.
The Tribunal emphasized that the appellant's services are exempt from Service Tax liability under the said Notification and thus no Service Tax was payable.
Key Evidence and Findings:
The appellant's audited books of accounts showed revenue from operations amounting to Rs.10,19,82,144/- for services rendered to the Energy and Power Department, Government of Sikkim. The appellant was not registered under Service Tax and did not levy Service Tax in invoices.
The Revenue's Show Cause Notice was issued invoking extended limitation, but the Tribunal did not find any merit in the demand given the exemption.
Application of Law to Facts:
The Tribunal applied the exemption Notification and relevant definitions to the facts, concluding that the appellant's services are exempt. The appellant's failure to register or levy Service Tax was irrelevant since no tax was payable on the exempted services.
Treatment of Competing Arguments:
The Revenue argued for confirmation of demand and penalties. However, the Tribunal found that the exemption notification clearly covers the appellant's services, and the appellant's reliance on precedent was appropriate. The Revenue's contention was rejected.
Conclusion:
The appellant is not liable to pay Service Tax on the said services.
2. Validity of Penalties and Extended Limitation
The impugned order imposed penalties under Sections 69, 70, and 78(1) of the Finance Act, 1994, along with interest. These penalties were predicated on the appellant's alleged failure to discharge Service Tax liability and non-registration.
Legal Framework:
Section 69 and 70 impose penalties for failure to pay Service Tax and for contravention of provisions of the Act. Section 78(1) provides for penalty equivalent to the amount of tax evaded or not paid.
Court's Reasoning:
Since the Tribunal held that the appellant's services are exempt and no Service Tax was payable, the foundation for imposing penalties collapses. Penalties cannot be levied where no tax liability exists.
Conclusion:
No penalty is imposable on the appellant.
Significant Holdings
"Notification No. 25/2012-C.E. dated 20.06.2012 (Sl. No. 12A) exempts the services provided by the appellant... Admittedly, the services have been provided by the appellant to Government authorities by way of construction, erection, commissioning, installation or completion of structures predominantly used other than for commerce or industry. In these circumstances, the said services are not liable to Service Tax."
"In view of the above discussion and following the decision of this Tribunal in the case of M/s. Arvindra Electricals (supra), we find that the appellant is not liable to pay Service Tax on the said services provided by them to the Government of Sikkim. In these circumstances, we hold that no Service Tax is payable."
"Consequently, no penalty is imposable on the appellant."
The Tribunal conclusively determined that the appellant's services are exempt from Service Tax under the specified Notification, and accordingly, the demand and penalties were set aside. This reinforces the principle that exemption notifications must be strictly construed and applied as per their terms, and no tax or penalty can be imposed where exemption applies.
Classification of services -Demand for Service Tax along with interest and penalty - Activity of erection, commissioning and installation of plant and machinery or equipment or structures under the Restructured Accelerated Power Development and Reforms Programme (R-APDRP), a programme initiated by the Government of India for reducing AT & C losses in the State owned electricity distribution utilities in India - Show Cause Notice issued invoking the extended period of limitation - HELD THAT:- Admittedly, the services have been provided by the appellant to Government authorities by way of construction, erection, commissioning, installation or completion of structures predominantly used other than for commerce or industry. Thus, the said services are not liable to Service Tax.
Following the decision of this Tribunal in the case of M/s. Arvindra Electricals [2018 (9) TMI 86 - CESTAT CHANDIGARH], we find that the appellant is not liable to pay Service Tax on the said services provided by them to the Government of Sikkim. In these circumstances, we hold that no Service Tax is payable.
- Whether the construction of individual villas qualifies as construction of a "residential complex" liable to Service Tax under the Finance Act, 1994, given the statutory definitions and exemption notifications.
- Whether the demand of Service Tax on construction of villas can be sustained when the assessee had entered into separate contracts with individual landowners and the development involved common amenities.
- Whether the development charges received by the assessee for land development should be classified under "Works Contract Service" or "Site Formation and Clearance Service" for Service Tax purposes.
- Whether the assessee is entitled to the benefit of reduced penalty under Section 78(1) of the Finance Act, 1994, given the timeline of payment of penalty.
- Whether the Commissioner (Appeals) erred in setting aside the demand on construction of villas while confirming the demand on commercial shops and land development charges.
2. ISSUE-WISE DETAILED ANALYSIS
Issue 1: Whether construction of individual villas amounts to construction of a residential complex liable to Service Tax
Legal Framework and Precedents: The Finance Act, 1994 defines "construction of complex" under Section 65(30a) and "residential complex" under Section 65(91a). The latter requires a complex to comprise:
Exemption Notification No. 25/2012-ST dated 20.06.2012 exempts construction of single residential units (e.g., villas) from Service Tax.
Relevant precedents include the Tribunal's decisions in M/s Macro Marvel Projects (2008), upheld by the Supreme Court, which held that construction of buildings with twelve or fewer residential units is not taxable as a residential complex. Subsequent decisions such as Arvind Tiwari (2024), M/s P.S. Builders et al. (2023), and Quality Builders & Construction (2023) reaffirm this interpretation, emphasizing that individual houses or villas do not constitute a "residential complex" for Service Tax purposes.
Court's Interpretation and Reasoning: The Tribunal noted that the assessee constructed individual houses (villas) pursuant to separate contracts with individual landowners. Although the land was developed with common amenities (parks, roads, streetlights, sewerage), the individual houses did not form a "residential complex" as defined, because each building had fewer than twelve residential units. The Tribunal emphasized that the legislative intent was to tax only construction of complexes with more than twelve residential units, not individual residential units.
Key Evidence and Findings: The record showed that the land was divided into plots with common areas, and the assessee entered into separate contracts for construction of villas on these plots. The presence of common amenities did not convert these individual houses into a residential complex liable to Service Tax.
Application of Law to Facts: Applying the statutory definition and settled precedents, the Tribunal held that the construction of villas did not attract Service Tax as construction of a residential complex. The exemption notification applied, and the demand on the construction of villas was rightly set aside by the Commissioner (Appeals).
Treatment of Competing Arguments: The Revenue argued that the development was part of residential projects with common amenities and thus taxable. The Tribunal rejected this, distinguishing the facts from earlier cases cited by the Revenue and underscoring the statutory requirement of more than twelve residential units per building or complex.
Conclusion: The Tribunal concluded that the construction of villas was exempt from Service Tax as they did not constitute a residential complex under the Finance Act, 1994.
Issue 2: Classification of land development charges and construction of commercial shops
Legal Framework and Precedents: The assessee received development charges from landowners and was engaged in construction of commercial shops. Service Tax liability on such activities is recognized under "Works Contract Service" or related taxable services.
Court's Interpretation and Reasoning: The Tribunal observed that the assessee had accepted and paid Service Tax on construction of commercial shops and land development charges. The show cause notice and adjudicating authority records confirmed that the land development involved activities such as land filling, road construction, sewerage, street lighting, and park construction, involving supply of materials and labor, which fall within the ambit of Works Contract Service.
Key Evidence and Findings: The assessee's own admissions and payments, as well as the departmental enquiry, established the taxable nature of these services. The Commissioner (Appeals) confirmed the demand of Rs. 21,44,696 along with interest.
Application of Law to Facts: Since the assessee did not dispute the tax liability on these services before the Commissioner (Appeals), and had paid the tax and interest, the Tribunal upheld the demand.
Treatment of Competing Arguments: The assessee contended that land development charges were incorrectly classified as Site Formation and Clearance Service instead of Works Contract Service. The Tribunal found this distinction immaterial, as the demand was sustained on the basis of Works Contract Service classification, which is taxable.
Conclusion: The demand on construction of commercial shops and land development charges was confirmed.
Issue 3: Entitlement to benefit of reduced penalty under Section 78(1) of the Finance Act, 1994
Legal Framework: Section 78(1) provides for imposition of penalty equal to the amount of Service Tax demand, but allows benefit of reduced penalty if the penalty is paid within 30 days of the order-in-original.
Court's Interpretation and Reasoning: The Tribunal noted that the assessee had not paid the reduced penalty amount within 30 days of the issue of the order-in-original. The proviso to Section 78(1) clearly conditions the benefit of reduced penalty on timely payment.
Key Evidence and Findings: The penalty was not paid within the stipulated period, as confirmed by the adjudicating authority and Commissioner (Appeals).
Application of Law to Facts: The Tribunal held that the assessee was not entitled to the benefit of reduced penalty due to non-compliance with the time limit.
Treatment of Competing Arguments: The assessee claimed entitlement to reduced penalty on the ground that the tax liability was paid before issuance of the show cause notice. The Tribunal rejected this, emphasizing the statutory requirement of payment of penalty within 30 days.
Conclusion: The benefit of reduced penalty was denied to the assessee.
Issue 4: Whether the Commissioner (Appeals) erred in setting aside the demand on construction of villas but confirming the demand on commercial shops and land development charges
Court's Interpretation and Reasoning: The Tribunal found no error in the Commissioner (Appeals)'s order. The setting aside of the demand on villas was consistent with statutory definitions and judicial precedents, while the confirmation of demand on commercial shops and land development charges was supported by the assessee's own acceptance of tax liability and payments.
Conclusion: The Tribunal upheld the Commissioner (Appeals)'s order in toto.
3. SIGNIFICANT HOLDINGS
"It is abundantly clear from the above provisions that construction of residential complex having not more than 12 residential units is not sought to be taxed under the Finance Act, 1994. For the levy, it should be a residential complex comprising more than 12 residential units. Admittedly, in the present case, the appellants constructed individual residential houses, each being a residential unit... the law makers did not want construction of individual residential units to be subject to levy of service tax."
"The proviso to Section 78 (1) of the Finance Act, 1994 makes it clear that the benefit of reduced penalty is available only if the amount of such reduced penalty is also paid within such period [30 days]. As the appellant has not paid the amount of penalty within thirty days of the issue of the impugned order, the benefit of reduced penalty is not admissible to him."
Core principles established include:
Final determinations:
Classification of services - Demand of service tax along with interest and penalty - activity of construction of villas, commercial shops, and development of land in lieu of development charges from the owner of the land, under different projects - Definition of Construction of Complex as per Section 65 reproduced (30a) of Finance Act 1994 - HELD THAT:- From the definition it is abundantly clear from the provisions that construction of residential complex having not more than 12 residential units is not sought to be taxed under the Finance Act, 1994. For the levy, it should be a residential complex comprising more than 12 residential units.
Admittedly, in the present case, the appellants constructed individual residential houses, which is evident from the fact that the appellant had entered into different contracts with each individual owner, which has been noted in the order-in-original. In any case, it is clear that the law makers did not want construction of individual residential units to be subject to levy of service tax. We hold that for something to be a residential complex, each individual building should have at least 12 residential units. In the instant case, we note that a piece of land was developed and divided into plots along with some common areas and the plot was sold to each customer. Consequently, we hold that each of these structures is in the form of individual house and the eligible for the exemption.
We note that this issue is no more res-integra as the matter stands decided in case the decision of M/s Macro Marvel Projects Vs Commissioner, Service Tax [2008 (9) TMI 80 - CESTAT, CHENNAI] wherein this Tribunal held that service tax can be levied only if a building concerned has more than 12 units. This decision was upheld by the Hon'ble Supreme Court.
Consequently, the departmental appeal is dismissed.
As regards the assessee’s plea on reduced penalty, we note that the proviso to Section 78 (1) of the Finance Act, 1994 makes it clear that the said benefit is available only if the reduced penalty is paid within 30 days of the order-in-original. As the same was not paid within such period, the benefit cannot be extended.
Thus, we uphold the impugned order and dismiss both the appeals.
The core legal questions considered by the Tribunal are:
- Whether the services rendered by the appellant to foreign universities and foreign group entities constitute "export of service" under the Finance Act, 1994 and the Place of Provision of Service Rules, 2012 (POPS Rules), thereby exempting the appellant from service tax liability.
- Alternatively, whether the appellant's activities amount to "intermediary services" as defined under Rule 2(f) of the POPS Rules, which would render the place of provision of service as India and make the appellant liable to service tax.
- Whether the appellant acts as an independent service provider on principal-to-principal basis or as an agent/broker facilitating services between foreign universities and Indian students.
- The applicability and interpretation of relevant legal provisions, including Section 66B and 66C of the Finance Act, 1994, Rules 3, 6A, 9(c), and 14 of the POPS Rules, and the criteria for export of services.
- The legal effect of agreements between the appellant and foreign universities or foreign group entities, and whether the appellant is subcontracted or acting as an intermediary.
2. ISSUE-WISE DETAILED ANALYSIS
Issue 1: Whether the services rendered by the appellant qualify as "export of service"
Relevant legal framework and precedents: Section 66B of the Finance Act, 1994 levies service tax on services provided in the taxable territory. Section 66C empowers framing of rules to determine the place of provision of services. The POPS Rules, 2012, particularly Rule 3 (general rule) and Rule 6A (export of service), govern the place of provision of services. Rule 3 states the place of provision is the location of the service recipient, while Rule 6A defines export of service as services provided to a person outside India, with payment received in convertible foreign exchange.
Precedents include the CESTAT Chandigarh decision in Sunrise Immigration Consultants P. Ltd. (2018) holding such services as Business Auxiliary Service qualifying as export of service, and the Tribunal's own decision in Medway Educational Consultants (2024), which concluded that services rendered to foreign universities located outside India, paid in foreign exchange, qualify as export of service.
Court's interpretation and reasoning: The Tribunal examined the appellant's agreements with foreign universities and group entities, finding that the appellant provides consultancy and promotional services to foreign universities located outside India. The appellant receives payment in convertible foreign exchange directly from these foreign entities. The Indian students are not service recipients as there is no agreement or consideration from them.
The Tribunal emphasized that service tax applies only to services provided within the taxable territory (India). Since the service recipients are located outside India and the benefit of services accrues outside India, the services meet the criteria under Rule 6A and thus qualify as export of service.
It was noted that the place of consumption (location of service recipient) governs the place of provision, not the place of performance of the service, in line with the Larger Bench decision in Paul Merchants Ltd and Delhi High Court's ruling in Verizon Communication.
Application of law to facts: The appellant's services are promotional and consultancy services rendered to foreign universities or foreign group entities, which are located outside India and pay in foreign currency. The Indian students are merely beneficiaries of the foreign universities' services and not service recipients of the appellant. Therefore, the services are deemed exported and not taxable under service tax.
Treatment of competing arguments: The Revenue argued that the appellant acts as an intermediary facilitating enrolment of Indian students to foreign universities, thus making the place of provision India under Rule 9(c). However, the Tribunal rejected this, finding no agency or intermediary relationship but an independent contractual relationship on principal-to-principal basis.
Conclusions: The services qualify as export of services under Rule 6A and are not liable to service tax.
Issue 2: Whether the appellant's services constitute "intermediary services"
Relevant legal framework and precedents: Rule 2(f) of the POPS Rules defines 'intermediary' as a person who arranges or facilitates provision of service or supply of goods between two other persons and does not provide the service on his own account. The definition is pari materia with Section 2(13) of the IGST Act, and relevant case law includes Punjab and Haryana High Court in Genpact India Pvt. Ltd. and Delhi High Court in Ernest and Young Ltd., which clarified the scope of intermediary services and their place of supply.
CESTAT Mumbai's decision in Chevron Phillips Chemicals India P. Ltd., affirmed by the Supreme Court, also supports the interpretation that intermediary services require a three-party relationship and facilitation role rather than independent provision of services.
Court's interpretation and reasoning: The Tribunal analyzed the appellant's agreements with foreign universities and group entities. The agreements explicitly state the relationship as independent contractor to client, excluding agency or principal-agent relationships. The appellant's role is promotional and marketing services to foreign universities on principal-to-principal basis, not acting as an agent or broker.
The appellant does not facilitate or arrange services on behalf of the universities to Indian students but independently promotes the universities. The final decision to admit students lies solely with the foreign universities. The appellant neither provides education nor admits students.
Regarding agreements with foreign group entities, the Tribunal noted these entities subcontract their entire exercise to the appellant, who undertakes the full scope of services independently. The relationship between the appellant and foreign group entities is also principal-to-principal, not agency.
Precedents such as M/s IDP Educational India Pvt. Ltd. and M/s Oceanic Consultants Pvt. Ltd. were cited, where similar subcontracting arrangements were held not to constitute intermediary services due to absence of a three-party relationship and the independent nature of service provision.
The Tribunal also referred to Circular No. 159/15/2021-GST clarifying that intermediary services require minimum three parties and two distinct supplies, which are absent here.
Application of law to facts: The appellant's role is independent service provider, not an intermediary. The agreements and conduct demonstrate that the appellant acts on its own account and not as an agent or facilitator of services between foreign universities and Indian students.
Treatment of competing arguments: The Revenue's contention that the appellant acts as an intermediary was rejected on the basis of documentary evidence and legal principles. The Tribunal found that the appellant neither facilitates nor arranges services between two other parties but independently provides consultancy services.
Conclusions: The appellant does not qualify as an intermediary under Rule 2(f) of POPS Rules; hence Rule 9(c) is inapplicable.
Issue 3: Applicability of service tax demand and penalty
Relevant legal framework and precedents: Service tax is leviable only if the place of provision of service is within India, per Section 66B of the Finance Act. The POPS Rules govern place of provision. The demand for service tax, interest, and penalty arises if the appellant's services are taxable.
Court's interpretation and reasoning: Since the Tribunal concluded that the appellant's services qualify as export of service and not intermediary services, the place of provision is outside India. Therefore, the demand of service tax, interest, and penalty confirmed by the original order is unsustainable.
Application of law to facts: The appellant's services fall outside the taxable territory; hence no service tax liability arises.
Treatment of competing arguments: The Revenue's demand was based on the premise that the appellant acted as an intermediary with place of provision in India, which the Tribunal rejected.
Conclusions: The service tax demand, interest, and penalty are set aside.
3. SIGNIFICANT HOLDINGS
- "The appellant satisfies the criteria as per Rule 6A of the Service Tax Rules, 1994 and cannot be imposed service tax on the services provided."
- "An intermediary is a person who while dealing with a third-party, acts for another person. The appellant is not acting as an agent of the university but as an independent service provider on principal to principal basis."
- "The services rendered by the appellant to the foreign university/foreign group entity do not fall under the category of 'intermediary services' and the appellants are eligible for the benefit of 'export of services'."
- "The Indian students cannot be termed as service recipients of the services provided by the appellant as there is no agreement or consideration from them."
- "Rule 9 of POPS Rules will not be applicable to the appellant and consequently Rule 3 would apply, placing the location of service recipient outside India and exempting the appellant from service tax."
- "The demand confirmed by the impugned order is unsustainable and is hereby set aside."
Demand of service tax, alongwith interest and penalty under the provisions of the Finance Act, 1994 [Act, 1994] - consultancy services - services rendered to foreign universities and foreign group entities constitute "export of service" or “intermediary service” - Finance Act, 1994 and the Place of Provision of Service Rules, 2012 (POPS Rules) - in lieu of the services of arranging/facilitation was chargeable to service tax - powers under Section 66C, the Central Government framed the Place of Provisions Service Rules, 2012 (POPS Rules) - HELD THAT:- It is evident that the services rendered by the appellant is for promotion and marketing of foreign universities among the Indian students. Therefore, the foreign universities or group entities are service recipients which are located outside India. The consideration is received by the appellant from the foreign universities or group entities in convertible foreign exchange. In so far as the Indian students are concerned, the appellant has no agreement with them and no consideration is received from the Indian students and there cannot be any taxable service without any consideration. Thus, the Indian students cannot be termed as service recipients of the services provided by the appellant. Applying Rule 3 of POPS Rules, the foreign universities, being the service recipient located outside the taxable territory cannot be subjected to service tax on the simple principle as provided in section 66B of the Act that for service tax to be levied in terms of Chapter V of the Act, the service has to be provided within the taxable territory. Coming to the next aspect of the services being provided outside the taxable territory, where the service provider is in India and the recipient of service is located outside India, the Apex Court in All India Federation of Tax Practitioners versus Union of India[2007 (8) TMI 1 - SUPREME COURT] observed that in normal parlance, it would be ‘export of service’. Further, it has been settled that the destination has to be decided on the basis of place of consumption and not the place of performance of service as laid down by the Larger Bench in Paul Merchants Ltd versus CCE, [2012 (12) TMI 424 - CESTAT, DELHI (LB)] and affirmed by the High Court of Delhi in Verizon Communication, India Pvt Ltd versus Assistant Commissioner, ST [2017 (9) TMI 632 - DELHI HIGH COURT] Hence we reiterate the conclusion that the appellant satisfies the criteria as per Rule 6A of the Service Tax Rules, 1994 and cannot be imposed service tax on the services provided.
The Chandigarh Bench in M/s Oceanic Consultants Pvt. Ltd. versus Commissioner Central Excise & Service Tax [2024 (8) TMI 399 - CESTAT CHANDIGARH] had also considered the Circular No. 159/15/2021-GST dated 20.0 9.2021, which has been issued with reference to the definition of ‘intermediary service’ under the CGST Act, which clarified that in respect of intermediate services, there should be a minimum of three parties and two distinct supplies, i.e., main supply and ancillary supply. It was also clarified that a person involved in supply of main supply on principal to principal basis to another person cannot be considered as a supplier of intermediary service. The facts of the present case are absolutely identical to the said two decisions, and there is no reason to differ from the same.
Following the decision of M/s. Arcelor Mittal Projects India Pvt. Ltd. versus Commissioner of Service Tax, Mumbai-II [2023 (8) TMI 107 - CESTAT MUMBAI-LB] interpreting the provisions of law, we hold that the services rendered by the appellant to the foreign university/foreign group entity do not fall under the category of “intermediary services” and the appellants are eligible for the benefit of ‘export of services’.
Thus, the demand confirmed by the impugned order is unsustainable and is hereby set aside.
All the three appeals are, accordingly, allowed.
1. Whether the appellant's transactions involving purchase and redemption of mutual fund units constitute 'trading of securities' within the meaning of the relevant statutory provisions.
2. If such transactions amount to trading of securities, whether this activity qualifies as an exempted service under the negative list provisions of the Finance Act, 1994, thereby attracting the provisions of Rule 6 of CCR relating to reversal or payment of credit.
3. Whether the appellant is entitled to avail Cenvat credit on input services and inputs used in relation to such transactions, or whether such credit must be reversed or paid as per Rule 6 of CCR.
4. The applicability and correctness of the Adjudicating Authority's reliance on Rule 6(3AA) of CCR, which was introduced with effect from 01.04.2016, for periods prior to its introduction.
5. The validity of penalty imposition under section 78 of the Finance Act for irregular availment of credit.
Issue 1: Nature of Transactions - Trading of Securities or Investment
The statutory framework defines 'goods' under section 65B(25) of the Finance Act to include 'securities', and 'securities' are defined by reference to the Securities Contract (Regulation) Act, 1956, to include units issued under mutual fund schemes. Section 66D(e) exempts 'trading of goods' from service tax, placing such activity in the negative list. Consequently, if the appellant's transactions are 'trading of securities', they would be exempted services for the purpose of service tax.
The appellant contended that their activity was investment in mutual fund units, not trading. They argued that trading requires transfer of property or security from seller to buyer, which does not occur in the mutual fund context where units are allotted rather than transferred. They relied on the Supreme Court's decision in Canbank Financial Services Ltd, which distinguished allotment from transfer and characterized the activity as investment, not trading. Further, they emphasized that no Securities Transaction Tax (STT) was applicable on their transactions, indicating the non-trading nature.
The Tribunal examined definitions from dictionaries and legal lexicons, noting that 'trading' involves buying and selling or exchange of commodities, typically involving transfer of possession and multiple parties. The appellant's transactions were with the mutual fund operator alone, with no transfer of underlying assets or securities. The mutual fund acts as custodian of assets, allotting and redeeming units based on Net Asset Value (NAV), with no say by the appellant in asset management.
The Tribunal also referenced the Supreme Court's ruling in Khoday Distilleries Ltd, which distinguished between allotment (creation) and purchase (transfer) of shares. Applying this reasoning, the allotment and redemption of mutual fund units were not transfers constituting trading. Thus, the Tribunal found the appellant's activity to be investment, not trading.
Issue 2: Whether Activity Constitutes Exempted Service under Negative List
Section 66B levies service tax on all services except those in the negative list under section 66D, which includes trading of goods. Rule 2(e)(2) of CCR defines 'exempted service' as a service on which no service tax is leviable under section 66B.
The Tribunal observed that for an activity to be an exempted service, it must first qualify as a 'service' under section 65B(44), which requires an activity carried out by one person for another for consideration. The appellant's activity did not involve provision of service to the mutual fund; rather, the mutual fund provided a financial product to the appellant.
The Adjudicating Authority had relied on Explanation 3 to Rule 6(1) (effective 01.04.2016), which deems certain non-service activities as exempted services for the purpose of credit reversal, but the Tribunal noted this explanation's retrospective application was limited and could not be invoked for periods before its introduction. Further, the Tribunal found that the appellant's transactions did not constitute a service, and thus could not be considered exempted services under the negative list. The Tribunal also distinguished the Adjudicating Authority's reliance on various judgments holding that credit on input services used partly for non-taxable activities must be reversed, noting that the appellant's activity was not a service at all.
Issue 3: Eligibility to Avail Cenvat Credit and Reversal Under Rule 6 of CCR
Rule 6 of CCR regulates availment and utilization of credit where input or input services are used partly for exempted services. The Department alleged irregular credit on input services and inputs used in relation to the appellant's trading activity (considered exempted service), requiring reversal or payment of an amount equal to 6%/7% of the value of exempted service.
The Tribunal found that since the appellant's activity was not trading and not a service, the provisions of Rule 6 could not be invoked to deny credit or require reversal. The appellant's credit on input services and inputs was therefore not irregular. The Tribunal further noted that the appellant had already reversed credit relating to non-taxable portions of other contracts and paid interest, and penalty was not warranted.
Issue 4: Applicability of Rule 6(3AA) of CCR for Periods Prior to 01.04.2016
The Department challenged the Adjudicating Authority's use of Rule 6(3AA), introduced w.e.f. 01.04.2016, to reduce the demand for periods before its introduction, asserting this was erroneous and illegal.
The Tribunal agreed with the Revenue that the Adjudicating Authority erred in applying Rule 6(3AA) retrospectively. However, since the fundamental charge of trading activity was not sustained, the issue of retrospective application became immaterial to the final outcome. The Tribunal accordingly dismissed the Revenue's appeal on this ground.
Issue 5: Penalty under Section 78 of the Finance Act
The Department sought imposition of penalty for irregular availment of credit. The appellant contended that penalty was not applicable as they had reversed the credit and paid interest before issuance of show cause notice, invoking protection under section 73(3) of the Act.
The Tribunal found that since the demand itself was not sustainable on merits, and the appellant had paid the amounts along with interest prior to initiation of proceedings, the imposition of penalty was not justified. The penalty under section 78 was set aside accordingly.
Significant Holdings and Core Principles
"Admittedly, no actual transfer of underlying assets or securities is being effected from the fund to the appellant or vice versa. In fact, it is more like mutual fund is the custodian of all the underlying assets... and in lieu thereof they have created certain units in their name and are holding the same on their behalf."
"Trading would invariably require transfer of possession as well as presence of at least three persons, which in this case is not getting complied. A trader in goods is expected to buy goods from 'A' and sell to 'B', whereas, in the present case, the transaction is only between the appellant and the mutual fund operator."
"For an activity to be an exempted service, it has to be a service in the first instance as defined under section 65B(44) of the Finance Act, 1994, meaning an activity carried out by a person for another for consideration."
"The appellant cannot be considered as a service provider to the mutual fund, and therefore, it cannot be said that they were engaged in providing any service to any other person for a consideration."
"Since the demand is not sustained on merit itself, the issue of limitation and penalty do not survive."
The Tribunal concluded that the appellant's transactions in mutual fund units constitute investment, not trading of securities. Consequently, such activity is not an exempted service under the negative list, and the appellant is entitled to avail Cenvat credit on input services and inputs used in relation to these transactions without reversal or payment under Rule 6 of CCR. The application of Rule 6(3AA) retrospectively was incorrect but immaterial given the dismissal of the primary charge. Penalty imposition was also unwarranted.
Demand of tax along with interest and equal penalty under Rule 15(3) of Cenvat Credit Rules, 2004 (CCR) read with section 78 of the Finance Act, 1994 (Act) - availed irregular Cenvat Credit on exempted services and on certain inputs in relation to supply and installation of e-boarding facility - transactions of sale and purchase of mutual fund units - appellants found to be providing both exempted service as well as dutiable service - HELD THAT:- We note that the Coordinate Bench at Delhi in the case of M/s Seigwerk India Pvt Ltd Vs CCGST [2025 (3) TMI 1066 - CESTAT NEW DELHI] dealing in similar issue, inter alia, held that subscription and redemption of liquid mutual fund units cannot be termed as trading of goods and therefore, would not fall under the exempted service under section 66D(e) of the Act. The activity to classify as ‘exempted service’ under Rule 2(e) of CCR, needs to be qualified as ‘service’, as defined under section 65B(44) of the Act, meaning thereby that service is an activity carried out by a person for another for consideration and includes a ‘declared service’ but excludes a transfer of title in goods or immovable property by way of sale, gift, etc. Therefore, the activity of investment in mutual fund does not involve the presence of a service rendered by a service provider towards a recipient of service for some consideration. We find much force in this judgment as the ground taken to arrive at the conclusion is that in order to become an exempted service, the activity has to be first a service, in terms of section 65B(44).
Thus, we find that in the present factual matrix, there is no trading of security and therefore, the very charge for applying Rule 6 could not be sustained. Moreover, we also find that in terms of definition for service, the appellants cannot be considered as provider of service and therefore, it cannot be said that they were engaged in providing any service to any other person for a consideration. Therefore, on both these counts, demand cannot be sustained and accordingly, the Order of the Commissioner is liable to be set aside and we do so. Since the demand is not sustained on merit itself, we have not examined the issue of limitation. Further, as regards inadmissibility of credit on input, we find that they are not contesting on merit and only on imposition of penalty. We find that they paid the entire amount along with interest before issue of SCN. Therefore, there is no substantive ground to impose penalty under section 78 and therefore, it is liable to be set aside.
Therefore, Appeal ST/30046/2021, filed by the appellant is allowed.
Further, the appeal ST/30344/2020, filed by Revenue will also not sustain and therefore, liable to be dismissed. Accordingly, the appeal ST/30344/2020 is dismissed.
In Appeal ST/31076/2019, the appellants are in appeal against order of Commissioner (Appeals), wherein, similar issue has been examined and it has, inter alia, upheld the decision that they are liable to reverse the credit in terms of provision of Rule 6. However, for the reasons cited supra, the basic ground for raising the demand itself cannot be sustained and accordingly, the order of the Commissioner (Appeals) can also not be sustained and accordingly, the order is liable to be set aside.
Therefore, Appeal ST/31076/2019, filed by the appellant is allowed.
(i) Whether the demand of service tax on services received from an overseas entity classified as 'Management or Business Consultancy Services' was rightly dropped, given the nature of services rendered;
(ii) Whether the demand based on reconciliation differences between financial statements and service tax returns was correctly dropped;
(iii) Whether the appellant was eligible for rebate claimed on Market Research Agency Services (MRAS) treated as export of service, and whether the revenue could recover the rebate sanctioned without appeal;
(iv) Whether service tax was payable under the Reverse Charge Mechanism (RCM) on corporate guarantees provided by overseas associated enterprises to banks on behalf of the appellant;
(v) Whether the demand on short payment of service tax under Erection, Commissioning and Installation Service (ECIS) was justified;
(vi) Whether interest and penalty were properly imposed on Cenvat Credit wrongly availed on Rent-a-Cab and Event Management Services;
(vii) Whether penalty under section 77 was rightly imposed on various confirmed demands including double availment of Cenvat credit and short payment under RCM.
Issue-wise Detailed Analysis:
(i) Classification of Services Received from Overseas Entity (Management or Business Consultancy vs. ECIS):
The relevant legal framework involves the definitions under Section 65(105)(zzd) of the Finance Act, 1994, which defines Erection, Commissioning and Installation Services (ECIS), and the principle that management consultancy services cover advisory roles only, not actual performance of work.
The Tribunal examined the nature of services provided by the overseas entity (Huawei China) in Nepal, focusing on the sub-contract agreement dated 09.10.2010 and a certificate from Huawei China detailing activities such as physical handling, unpacking, installation of telecom equipment, and testing. The Court emphasized that the service provider performed actual installation and commissioning rather than mere advisory or consultancy services.
Precedents cited include decisions holding that operational autonomy and responsibility distinguish a management contract from consultancy (Basti Sugar Mills Pvt. Ltd.) and Supreme Court affirmations that consultancy implies advice, not execution.
The Tribunal rejected the revenue's argument relying on financial statement terminology ('Project Management Service' and 'Network Rollout Services'), holding that classification must be based on the actual service performed and contract terms rather than invoice or accounting descriptions.
Conclusion: The demand under Management or Business Consultancy Services was rightly dropped, as the services fell under ECIS and were not taxable as consultancy.
(ii) Demand Based on Reconciliation Differences:
The issue concerned discrepancies between financial statements and ST-3 returns, leading to a demand of Rs. 6.75 crore. The Commissioner initially dropped the demand based on reconciliation submitted by the appellant.
The Tribunal found that the principle adopted by the Commissioner-that service tax is payable on receipt basis and that the gross amount charged includes taxable value plus service tax-is sound. However, the revenue pointed out numerical discrepancies between figures used in the show cause notice and those accepted by the Commissioner.
The Tribunal remanded the issue to the adjudicating authority for proper reconciliation of figures based on correct records, recognizing the validity of the appellant's principle but acknowledging the need to resolve accounting differences.
Conclusion: Demand dropped by the Commissioner was set aside and remanded for re-examination and reconciliation.
(iii) Rebate Claimed on Market Research Agency Services (MRAS) and Recovery of Refund:
The appellant claimed rebate/refund on MRAS treated as export of service. The Commissioner confirmed demand and recovery of rebate on the ground that the services were MRAS and not Business Auxiliary Services (BAS) as claimed by the appellant.
The Tribunal analyzed the service agreement, noting that the appellant's activities involved promotion, marketing, customer liaison, and market information gathering, which fall under BAS as per Section 65(19) of the Finance Act. The Tribunal cited precedents including Microsoft Corporation India Pvt Ltd and Kesar Products Ltd, where similar activities were held to be BAS.
Further, the Tribunal acknowledged decisions holding that where market research benefits a customer outside India, the service qualifies as export (Medallion Consulting Pvt Ltd, B.A. Research India Ltd, etc.).
Regarding recovery of rebate without appeal against the refund sanction order, the Tribunal relied on the principle that once refund is sanctioned and no appeal is filed, the order attains finality (Eveready Industries India Ltd, BT (India) Pvt Ltd). It held that revenue cannot recover the refund by invoking Section 73(1) as erroneous refund without going through proper appellate process.
Conclusion: The appellant was entitled to rebate/refund on BAS classification and export of service; recovery of rebate without appeal was not permissible, and the demand was set aside.
(iv) Service Tax on Corporate Guarantee under RCM:
The Commissioner imposed service tax on corporate guarantees provided by overseas associated enterprises to banks on behalf of the appellant, valuing services at 2% of the guaranteed amount based on Safe Harbour Rules.
The appellant contended there was no service or consideration involved, relying on multiple precedents (DLF Home Developers Ltd, Jindal Stainless Steel, Edelweiss Financial Services Ltd, Sterlite Industries India Ltd, Sowar Pvt Ltd) holding that corporate guarantees by associated enterprises are not taxable services under banking and financial services.
The Tribunal noted that the Finance Act requires both a service and consideration for taxability. The revenue failed to produce evidence of consideration or cost benefit flowing to the appellant. The Tribunal also observed that applying notional value under Safe Harbour Rules is not supported by the Finance Act.
Conclusion: The demand for service tax on corporate guarantees was set aside as no taxable service or consideration existed.
(v) Demand on Short Payment under ECIS:
The appellant admitted payment of Rs. 21.56 crore twice, later rectified by reversal entries certified by a Chartered Accountant. The Commissioner confirmed demand of Rs. 35.41 lakh after reconciliation.
The Tribunal observed that the appellant had paid the confirmed demand along with interest and penalty. It remanded the issue to the adjudicating authority to verify the payments and confirm the demand accordingly.
Conclusion: Partial demand confirmed; verification and confirmation remanded to lower authority.
(vi) Interest and Penalty on Cenvat Credit on Rent-a-Cab and Event Management Services:
The appellant reversed the Cenvat credit of Rs. 1,56,959 before issuance of Show Cause Notice and contended no penalty or interest was payable as the credit was not utilized.
The Tribunal relied on the decision in M/s Strategic Engineering (P) Ltd, holding that interest and penalty are not leviable if credit is reversed before utilization and before show cause notice.
Conclusion: Penalty and interest imposed were set aside.
(vii) Penalty under Section 77 on Various Confirmed Demands:
The appellant argued no mens rea or suppression existed, and service tax was paid before show cause notice. The Tribunal referred to precedents (Bio-Med Healthcare Products Pvt Ltd) holding that no show cause notice is required if tax is paid and no fraudulent intent is established.
Conclusion: Penalty under Section 77 was set aside given absence of mens rea and prior payment of tax.
Significant Holdings:
"An ocean separates a manager from a management consultant, a performer from an advisor or a coach... There is no management consultancy in the facts of the present case and the demand is clearly beyond the scope of the statute."
"Classification must be based on the actual service performed and terms of the contract and not merely on accounting or invoice descriptions."
"Where market research benefits a customer situated outside India in its business, the service is treated as performed outside India and qualifies as export of service."
"Once refund is sanctioned and no appeal is filed, the order attains finality; revenue cannot recover the refund invoking Section 73(1) without challenging the refund order."
"No service tax is payable on corporate guarantees provided by associated enterprises in absence of consideration or taxable service."
"Interest and penalty are not leviable where Cenvat credit is reversed before utilization and prior to issuance of show cause notice."
"Penalty cannot be imposed where there is no mens rea and tax is paid before show cause notice."
Final Determinations:
(i) Demand on Management or Business Consultancy Services was rightly dropped;
(ii) Demand on reconciliation differences remanded for proper verification;
(iii) Demand on rebate on MRAS set aside; appellant entitled to rebate/refund;
(iv) Demand on service tax on corporate guarantees set aside;
(v) Partial demand on ECIS confirmed; verification remanded;
(vi) Penalty and interest on Cenvat credit reversed before utilization set aside;
(vii) Penalty under Section 77 on various demands set aside.
Classificationof Services Received as 'Management or Business Consultancy Services' -Demand of service tax along with interest and penalty - Wrongly availed CENVAT credit - reconciliation of financial statements vis-à-vis ST-3 Returns - Claim for Refund/rebate - Show Cause Notice, issued invoking extended period - Services Agreement between Huawei China/Singapore - Management or Business Consultancy Service - liability to pay interest and penalty under section 77 - non-payment of service tax under RCM on expenses for Sponsorship services - Corporate Guarantee obtained from their Overseas Associate - HELD THAT:- We find that the services fall under Business Auxiliary Services in terms of Section 65(19) of the Act. It was held in M/s. Microsoft Corporation India Pvt Ltd. [2014 (10) TMI 200 - CESTAT NEW DELHI (LB)] that dissemination of information to potential customers, commenting on any developments in the territory affecting the software industry, investigating feasibility of new markets for Microsoft retail products and providing other services of marketing nature, etc. local advertising; performing other activities including dissemination of information to potential customers, commenting on any developments in the territory affecting the software industry qualify as BAS. We also find that the Tribunal held similarly in Kesar Products Ltd [2014 (5) TMI 689 - CESTAT MUMBAI] and J.J. Foam Pvt Ltd and [2013 (7) TMI 554 - CESTAT NEW DELHI]
We find that Tribunal in the cases of M/s. Medallion Consulting Pvt Ltd. [2017 (4) TMI 96 - CESTAT NEW DELHI]; B.A. Research India Ltd. [2009 (11) TMI 213 - CESTAT, AHMEDABAD]; Misys Software Solutions India Pvt Ltd. [2017 (6) TMI 51 - CESTAT BANGALORE]; M/s. Medallion Consulting Pvt Ltd. [2017 (4) TMI 96 - CESTAT NEW DELHI] and Glaxo SmithKline Asia [2023 (10) TMI 998 - CESTAT CHANDIGARH], held that even services under Market Research and Analysis Services, where benefit of the research is used by a customer situated outside India in its business, the same will be treated to have been performed outside India and thus, amounting to export. Thus, we find that either way the appellants claim for Refund/rebate can not be denied.
Following the Jindal Stainless Steel [2023 (6) TMI 1197 - CESTAT CHANDIGARH]; Sterlite Industries India Ltd. [2019 (2) TMI 1249 - CESTAT CHENNAI] and Sowar Pvt Ltd. [2023 (5) TMI 193 - CESTAT NEW DELHI] holding that Extending Corporate Guarantee is not a taxable service. We also find that there is no provision under the Finance Act, 1944 to impose any notional value on services. In view of the same, we find that the issue is decided in favour of the appellants.
The Revenue contends that assessee did not submit any proof. The appellants submit that service tax was discharged on receipt basis as against the demand raised on accrual basis in different financial years; the appellants have accepted the demand and paid the amount along with interest and penalty totaling to Rs.67,48,987/-. We find that learned Commissioner has confirmed demand of Rs.35,41,833/- on account of reconciliation of financial statements vis-à-vis ST-3 Returns along with interest and equal penalty. The appellants claim that they have paid the demand along with interest and penalty. However, the same needs to be verified by the lower authorities.
Under the facts and circumstances of the case, where mens rea was not established, looking into the fact that the appellants had sufficient balance and have paid the service tax before issuance of show cause notice, we find that no penalty can be imposed. We find that the Tribunal held in the case of Bio -Med Healthcare Products Pvt Ltd. [2014 (12) TMI 289 - CESTAT NEW DELHI] that no show cause notice is required to be issued when service tax stands paid by the appellant.
Thus, the appeal Nos.ST/61636/2018; ST/60160/2020 filed by the appellants M/s Huwaei Telecommunications Co. India Pvt Ltd and appeal No. ST/61696/2018 filed by the Department are partly allowed in the following terms:
(i) Impugned order dropping the demand of Rs.3,66,07,637/-, on account of Management Business Consultants Service, is upheld.
(ii) Demand of alleged wrongly availed CENVAT credit of Rs.11,92,94,464/- and availment of rebate of the same, is set aside; interest and penalty are also accordingly set aside.
(iii) Demand of Rs.10,69,70,856/- raised on Corporate Guarantee is set aside; interest and penalty are also accordingly set aside.
(iv) Dropping of service tax liability of Rs.6,75,40,376/- is set aside and remanded back to the authority to reconcile with the financial records and ST-3 Returns and any other evidence that may be submitted by the appellants.
(v) Regarding the demand of service tax of Rs 35,41,833 along with interest and penalty, the issue is remanded to the adjudicating authority to confirm the payment of service tax along with interest and penalty by the appellants.
(vi) As regards the demands of Rs 1,56,959 on Rent-a-Cab Service and demand of Rs 92,78,438 (Rs 8282930 + Rs 75664 + Rs 360500 + Rs 559344) as the appellant has discharged the liability along with interest, penalties imposed are set aside.
(vii) Penalty of Rs.10,000/- imposed under Section 77 of Finance Act, 1994 is also set aside.
Regarding the classification of the service as GTA, the Tribunal considered the statutory definition under Section 65(50b) of the Finance Act, 1994, which defines a Goods Transport Agency as any person who provides service in relation to transport of goods by road and issues consignment notes, by whatever name called. The Tribunal noted that two conditions must be fulfilled for a service to qualify as GTA: the provision of transport service by road and the issuance of a consignment note. The appellant contended that they did not avail GTA services, as the contractors did not issue consignment notes and the contract was for vehicle hire rather than transportation service. The appellant emphasized that the consignment notes were issued by themselves and not by the contractors, and that the contract restricted the contractors from carrying goods other than those of the appellant, with the appellant retaining control over the goods and transit.
The Tribunal analyzed precedents, including the Birla Ready Mix case, where it was held that absence of consignment notes issued by the operator precludes classification as GTA. The Tribunal referenced the interpretation of Rules 4A and 4B of the Service Tax Rules, 1994, which require GTA to issue consignment notes, and emphasized that the statutory definition must be understood independently of these rules to avoid circularity. It was further noted that mere transportation activity does not automatically qualify a person as a GTA; the issuance of consignment notes is a critical element. The Tribunal also cited the Andhra Pradesh High Court's view that contracts for vehicle hire do not amount to transportation service contracts for tax purposes, reinforcing that the nature of the contract is determinative.
In the Chartered Logistics Ltd. decision, the Tribunal reiterated that only those who issue consignment notes qualify as GTA, and that transportation services by others fall under the negative list and are exempt from service tax. The appellant relied on this reasoning to argue that their contractors merely supplied vehicles and did not provide GTA services. The Tribunal also considered decisions where charges based on kilometers traveled, with no consignment notes issued, were held not to constitute GTA services, as the vehicles operated under the direction of the appellant rather than as independent transport agents.
The appellant challenged the demand on the ground that the consideration paid to contractors was for vehicle hire and not for GTA services, invoking revenue neutrality principles and citing Supreme Court decisions that emphasize the need for clear evidence and proper classification before imposing tax demands. The appellant also contested the invocation of extended limitation periods, relying on authoritative decisions that restrict such extensions to cases of fraud or suppression.
The Revenue's position, supported by the show-cause notice and adjudicating authority, was that the contractors issued consignment notes as per contractual clause 10.2.7, which contained details of consignments and served as conclusive evidence of the goods' nature and quantity. The Revenue relied on Tribunal decisions such as M.L. Agro Products Ltd., where the issuance of documents containing truck numbers, amounts, and load details was held sufficient to constitute consignment notes, thereby qualifying the service as GTA and justifying service tax demands under RCM. The Revenue argued that consignment notes need not follow a prescribed format and that documents accompanying goods identifying consignor, consignee, route, and goods suffice. The Revenue also cited the U.P. State Sugar Corporation case to support this broader interpretation.
In rejoinder, the appellant pointed out the absence of the actual contract on record and contended that the contract clauses were contradictory, invoking the Supreme Court's principle that where clauses are repugnant, the earlier clause prevails. The appellant emphasized that the consignment notes were issued by them, not the contractors, and that the bills raised by contractors were fixed charges inconsistent with consignment notes. The appellant argued that the Revenue failed to produce any admissible evidence of consignment notes issued by contractors, thus undermining the basis for classifying the service as GTA.
On the Tribunal's own examination, it was found that the impugned order's demand was premised on the service being GTA provided by contractors. However, the appellant's documents showed consignment notes issued by the appellant themselves, not by the contractors. The Tribunal observed that in the absence of any document issued by the contractors that could be equated to a consignment note, the service could not be classified as GTA. The Tribunal distinguished the M.L. Agro Products Ltd. decision on facts, noting that no similar vouchers or invoices were produced in the present case. The Tribunal reiterated the Birla Ready Mix principle that without consignment notes issued by the operator, the operator cannot be considered a GTA. It was further noted that the contract appeared to be for transfer of the right to use vehicles rather than transportation service, thus excluding the service from GTA classification.
Regarding the issue of limitation, while the appellant raised objections to the extended period invoked by the Revenue, the Tribunal did not find it necessary to delve deeply into this aspect given the substantive conclusion on the nature of the service.
In conclusion, the Tribunal held that the appellant did not avail GTA services from the contractors, as the essential condition of issuance of consignment notes by the service provider was not satisfied. The contract was for vehicle hire and not for transportation service, and the consignment notes were issued by the appellant, making them the GTA if at all. Consequently, the demand for service tax under Reverse Charge Mechanism on the appellant was unsustainable and the impugned order was set aside, allowing the appeals.
Significant holdings include the Tribunal's affirmation of the dual conditions for GTA classification: provision of transport service by road and issuance of consignment notes by the service provider. The Tribunal emphasized that "to be called 'goods transport agency' a person should fulfill two conditions, namely, he should provide service in relation to transport of goods by road and issue consignment note, by whatever name called and none of them are satisfied" in the present case. The Tribunal also preserved the principle from Birla Ready Mix that absence of consignment notes issued by the operator precludes GTA classification. Additionally, the Tribunal underscored that contracts for vehicle hire, even if involving transportation of goods, do not automatically attract service tax as GTA services unless the statutory conditions are met.
Classification of service - Goods Transport Agency Service (GTA) or not - service provider has not issued any consignment note to consider the activity as falling under GTA Service - reverse charge mechanism - Extended period of limitation - HELD THAT:- In present case there is no such documents in whatever name available on record to presume the same as consignment note. As held by the Tribunal in the matter of Birla Ready Mix [2012 (12) TMI 736 - CESTAT, NEW DELHI], when the consignment notes are not issued by the operator, they cannot be considered as a goods transport agency. As per the impugned order, service tax is made under the category of transport of goods by road under Section 65(105)(zzp) and not under Goods Transport Operator, the term used in Finance Act, 1994 during the period from November 1997 to June 1998.
As per the evidence on record, the contract is for transfer of right to use the vehicle rather than for providing service of transportation and hence cannot be considered as GTA service or under the category of transport of goods by road as held by the adjudicating authority. It is clear that to be called “goods transport agency” a person should fulfill two conditions, namely, he should provide service in relation to transport of goods by road and issue consignment note, by whatever name called and none of them are satisfied.
Conclusion - The appellant did not avail GTA services from the contractors, as the essential condition of issuance of consignment notes by the service provider is not satisfied. The demand for service tax under Reverse Charge Mechanism on the appellant was unsustainable and the impugned order is set aside.
Appela allowed.
Regarding the first issue, the relevant legal framework includes Entry No. 9 of Notification No. 06/2014 dated 11.07.2014, Section 65B(44) of the Finance Act, 1994 (defining 'service'), and the statutory provisions governing the powers and functions of the university under the respective University Act. The appellant contended that the affiliation fee is not taxable as it is a fee charged for a public duty of affiliating colleges, which is not a commercial activity carried out for consideration as envisaged under the Finance Act. The appellant relied heavily on the recent Supreme Court decision which accepted the Karnataka High Court ruling in the Rajeev Gandhi University of Health Sciences case, where the court held that the affiliation fee does not constitute a taxable service. The Karnataka High Court's reasoning emphasized that affiliation is a sovereign function, a public duty performed by the university to grant colleges the privilege to impart education, and that such fees are not consideration in the commercial sense but are statutory fees for regulatory functions. The court also examined the concept of consideration in contract law, noting that only activities carried out for consideration (quid pro quo) attract service tax. The affiliation fee, being a statutory levy for public regulatory functions, does not meet this criterion.
The Tribunal accepted the Supreme Court's endorsement of the Karnataka High Court's reasoning, which was detailed and included references to the definition of affiliation, the statutory provisions under the university act (such as Sections 2(a), 4, 45, and 48), and the nature of the fee as a non-commercial regulatory charge. The Tribunal also noted that the affiliation fee is not a bundled service under Section 66F(3) of the Finance Act and that fines or penalties connected with affiliation fees retain the character of fees rather than taxable consideration. Consequently, the Tribunal concluded that the appellant is not liable to pay service tax on affiliation fees collected during the relevant financial years.
In contrast, the Department relied on a decision of the Madras High Court in Pondicherry University Vs. Joint Commissioner of GST & Central Excise, where the affiliation fee was held taxable. However, the Tribunal gave precedence to the Supreme Court's ruling, which has overriding authority, thereby rejecting the Department's contention.
On the second issue concerning the rental income from immovable property, the legal framework includes the threshold exemption limit prescribed under Notification No. 33/2012-ST dated 20.06.2012, which exempts service tax liability if the aggregate amount received in the previous financial year is below Rs. 10 lakhs. The Department contended that the appellant had not raised this plea before the adjudicating authority and that no rebuttal was provided, justifying confirmation of demand. However, the Tribunal found that the appellant had consistently disclosed the rental income amounts in the reply to the show cause notice and during personal hearings. The evidence on record, including the impugned order's own tabulation, showed that the rental income was below the threshold limit in each relevant financial year. Therefore, the Tribunal held that the demand for service tax on rental income was wrongly confirmed, as the exemption was applicable.
The Tribunal also noted that the adjudicating authority's finding was internally inconsistent, as it acknowledged the lack of rebuttal but failed to consider the exemption notification and the evidence provided. The Tribunal thus reversed the demand on rental income.
In conclusion, the Tribunal held that the appellant is not liable to pay service tax on either the affiliation fee or the rental income from immovable property. The order imposing the demand was set aside, and the appeal was allowed.
Significant holdings include the Tribunal's reliance on the Supreme Court's authoritative interpretation of the term 'consideration' and the nature of affiliation fees, emphasizing that such fees are statutory regulatory charges and not taxable services. The Tribunal stated:
"The function related to affiliation cannot be treated as a 'bundled service under clause (3) of section 66F of the Finance Act, 1994. The interests fines/penalties levialble on account of default also have a thick connect with the fees regularly leviable and therefore they would partake the character of fees only. In view of all this, the Revenue is not justified in levying Service Tax on the income accruing to the University on account of affiliation during the academic year between 2012-13 and 2016-17."
Further, the Tribunal emphasized the importance of the threshold exemption for rental income, stating:
"Notification No. 33/2012-ST dated 20.6.2012 prescribes exemption from payment of tax if the amount received in the prior financial year is less than the threshold limit of Rs. 10 lakhs. Hence, we hold that the findings arrived at by the original adjudicating authority are contrary to the evidence already on record and are contrary even to the observations in para 26 the impugned order itself."
Thus, the core principles established are that affiliation fees charged by educational institutions for statutory regulatory functions are not taxable services under the Finance Act, and that rental income below the prescribed threshold is exempt from service tax. The final determinations were that the appellant's liability to pay service tax on both counts was negated, and the impugned demand was set aside accordingly.
Levy of service tax - affiliation fee collected by the appellant from affiliated colleges - rental income earned by the appellant from renting of immovable property.
Service tax on affiliation fee - HELD THAT:- Apparently and admittedly the issue stands settled by the Hon’ble Supreme Court in Principal Additional Director General Vs. M/s Rajeev Gandhi University of Health Sciences [2025 (1) TMI 1550 - SC ORDER] in favour of assessee. The decision of Hon’ble Karnataka High Court in Rajeev Gandhi University of Health Sciences 2024 (8) TMI 209 - KARNATAKA HIGH COURT] has been accepted by Hon’ble Supreme Court. The High Court had held 'The respondent-University answers the definition of educational institution since it provides services that fall into sub-clause (ii) of clause (l) of section 66D of the Finance Act, 1994. In fact, the education catered by the University broadly fits into the definition of auxiliary educational services. He is also right in pointing out that an otherwise interpretation of this Exemption Notification would defeat the very purpose for which it has been issued. The said exemption is continued vide Notification No. 3/2013-ST dated 1.3.2013, as well' - thus, appellant is not liable to pay any service tax with respect to the amount of affiliation fee.
Tax liability on the income received for rendering renting of immovable service -demand has been confirmed only for want of any evidence/rebuttal from the appellant - HELD THAT:- Right from the stage of filing the reply to the show cause notice till the stage of personal hearing before the original adjudicating authority, the appellant has provided the amount as has been received by the appellant in the respective financial year - Notification No. 33/2012-ST dated 20.6.2012 prescribes exemption from payment of tax if the amount received in the prior financial year is less than the threshold limit of Rs. 10 lakhs. Hence, the findings arrived at by the original adjudicating authority are contrary to the evidence already on record and are contrary even to the observations in para 26 the impugned order itself. Hence the demand even on renting of immovable property has wrongly been confirmed.
Conclusion - The affiliation fees charged by educational institutions for statutory regulatory functions are not taxable services under the Finance Act, and that rental income below the prescribed threshold is exempt from service tax.
Appeal allowed.
The core legal questions considered in the judgment are:
(a) What is the correct method for valuation of waste and scrap generated during the manufacture of BOPP films, which is partly captively consumed in the factory and partly sold to independent buyersRs.
(b) Whether the valuation of captively consumed waste and scrap should be based on the sale price to independent buyers (transaction value under Section 4(1)(a) of the Central Excise Act) or on the Cost of Production (CAS-4) under Rule 8 of the Central Excise Valuation Rules, 2000 (Cost Construction Method)Rs.
(c) Whether the Revenue's demand for differential duty based on valuation under Rule 8 is sustainable in light of the appellant's contention and relevant judicial precedents.
(d) Whether the extended period of limitation for demand of differential duty is invocable in the facts of the case.
2. ISSUE-WISE DETAILED ANALYSIS
Issue (a) & (b): Correct Valuation Method for Captively Consumed Waste and Scrap
Relevant legal framework and precedents: The valuation of excisable goods is governed primarily by Section 4 of the Central Excise Act, 1944, and the Central Excise Valuation Rules, 2000. Section 4(1)(a) provides for transaction value as the primary basis for valuation, while Section 4(1)(b) and Rule 8 provide a residual method based on cost of production when transaction value is not available.
Rule 8 states: "Where the excisable goods are not sold by the assessee but are used for consumption by him or on his behalf in the production or manufacture of other articles, the value shall be one hundred and ten per cent of the cost of production or manufacture of such goods."
Key precedents relied upon include the Apex Court decision in CCE Jaipur Vs. Scan Synthetics Ltd., which held that when independent factory sale price is available, it should be the basis for valuation of captively consumed goods. Other relevant precedents include Ispat Industries Ltd Vs. CCE, Raigad (Larger Bench), Avon Tubes Ltd Vs. CCE, Ludhiana, and the Tribunal's own prior decisions.
Court's interpretation and reasoning: The Tribunal examined whether Rule 8 applies when part of the production is sold to independent buyers and part is captively consumed. It held that Rule 8 applies only where the entire production is captively consumed and no sale to independent buyers occurs. This interpretation is supported by the plain language of Rule 8, which refers to goods "not sold" but used for consumption.
The Tribunal further reasoned that when sale price to independent buyers is available at the factory gate, it represents the transaction value under Section 4(1)(a) and should be preferred over the cost-based valuation under Rule 8. This sequential application of valuation rules avoids confusion and aligns with the parent statute's objective.
The Tribunal also rejected the Revenue's contention that the quality of waste and scrap captively consumed is better than that sold to independent buyers, noting the absence of any evidence or investigation to substantiate this claim. It observed that the waste and scrap arise from the same manufacturing process and there is no basis to treat them as different categories.
Key evidence and findings: The appellant demonstrated that the sale price to independent buyers was available and used it for valuation. The Revenue's demand was based on applying CAS-4 cost construction method, assuming the captively consumed scrap was of superior quality. However, no evidence was presented to prove this difference in quality. The Tribunal reviewed invoices and descriptions of scrap and found no distinction in nature or quality between scrap sold and scrap captively consumed.
Application of law to facts: Applying the principle from Ispat Industries Ltd. (Larger Bench), the Tribunal held that the value of transaction with independent buyers should be the assessable value for captively consumed goods. Rule 8 was held inapplicable because the goods were not entirely captively consumed. The transaction value method under Section 4(1)(a) thus governs valuation in this case.
Treatment of competing arguments: The appellant relied on the availability of independent sale price and judicial precedents favoring transaction value. The Revenue relied on the cost construction method under Rule 8 and the Cadbury India Ltd. decision, which was distinguished on facts because in Cadbury, the goods were 100% captively consumed with no independent sales. The Tribunal found the appellant's arguments and precedents more persuasive and factually applicable.
Conclusions: The Tribunal concluded that the valuation of captively consumed waste and scrap should be based on the sale price to independent buyers and not on the cost construction method under Rule 8. The Revenue's demand based on Rule 8 valuation was unsustainable.
Issue (c): Sustainability of Revenue's Demand for Differential Duty
Relevant legal framework and precedents: The demand was raised under Section 11A(1) of the Central Excise Act, 1944, with interest under Sections 11AB/11AA and penalty under Rule 25(1) of the Central Excise Rules, 2002. The valuation principles discussed above directly impact the legitimacy of the demand.
Court's interpretation and reasoning: Since the valuation method adopted by the appellant (transaction value) was upheld, the differential duty demand based on cost construction method valuation was invalid. The Tribunal also noted that the issue was known to the department, and the appellant had been discharging duty accordingly, negating any intention to evade duty.
Key evidence and findings: The Tribunal found no evidence of evasion or concealment. The appellant's method of valuation was consistent with legal principles and prior judicial rulings, including the Tribunal's own earlier decisions.
Application of law to facts: The demand for differential duty was quashed as unsustainable due to incorrect valuation basis by the Revenue.
Treatment of competing arguments: The Revenue's reliance on CAS-4 valuation and the Cadbury India Ltd. decision was rejected due to factual dissimilarity and absence of evidence.
Conclusions: The demand for differential duty was set aside.
Issue (d): Invocability of Extended Period of Limitation
Relevant legal framework: The extended period of limitation under the Central Excise Act is invocable only in cases of fraud, suppression, or willful misstatement.
Court's interpretation and reasoning: The Tribunal found that the appellant had disclosed the facts of sale and captive consumption to the department and had no intention to evade duty. The valuation issue was a question of law, which was later clarified by the Larger Bench decision in Ispat Industries Ltd.
Key evidence and findings: The appellant's compliance and disclosure negated any fraudulent intent.
Application of law to facts: Since there was no fraud or suppression, the extended period of limitation was not applicable.
Conclusions: The demand for the extended period was not maintainable.
3. SIGNIFICANT HOLDINGS
"Where the excisable goods are not sold by the assessee but are used for consumption by him or on his behalf in the production or manufacture of other articles, the value shall be one hundred and ten per cent of the cost of production or manufacture of such goods" (Rule 8 of the Central Excise Valuation Rules, 2000).
"Rule 8 of the Valuation Rules will not apply in a case where some part of the production is cleared to independent buyers."
"The provisions of Rule 4 are in any case to be preferred over the provisions of Rule 8 not only for the reason that they occur first in the sequential order of the Valuation Rules but also for the reason that in a case where both the rules are applicable, the application of Rule 4 will lead to a determination of a value which will be more consistent and in accordance with the parent statutory provisions of Section 4 of the Central Excise Act, 1944."
"In the absence of any evidence to show that the waste and scrap sold to independent buyers is different in quality from that captively consumed, the transaction value to independent buyers should be adopted for valuation."
"The extended period of limitation is not invocable in the absence of any intention to evade payment of duty."
"When independent factory sale price is available, that should be the basis for determining the value of the same excisable goods captively consumed."
Final determinations:
- The valuation of captively consumed waste and scrap must be based on the transaction value, i.e., the sale price to independent buyers, where such sale price exists.
- Rule 8 of the Central Excise Valuation Rules, 2000, applying the cost construction method, is applicable only when there is no sale to independent buyers.
- The Revenue's demand for differential duty based on valuation under Rule 8 is set aside.
- The extended period of limitation is not applicable as there is no evidence of fraud or suppression.
- The appeals are allowed, and the impugned orders are set aside.
Valuation of waste and scrap generated during the process of manufacture of final products, a part of which is captively consumed within the factory while rest is sold to independent buyers at the factory gate - HELD THAT:- This Tribunal considering the very same issue in the appellant’s own case for the previous period [2024 (6) TMI 1460 - CESTAT AHMEDABAD], held that as per the Ispat Industries decision [2006 (9) TMI 181 - SUPREME COURT] for the purpose of captive consumption, the value of transaction made through the outside buyer should be taken as assessable value.
In this case also, though the show cause notices allege that the scrap sold to independent buyers was not of the same quality as was used by them captively in the manufacture of PP granules but there is no evidence to support as to on what basis both the qualities are presumed to be different. In absence of any supportive evidence, demands raised by the department for earlier periods were set aside by the Tribunal. Therefore, the issue is no longer res-integra.
As regard department’s reliance on the decision of Cadbury India Ltd [2006 (8) TMI 2 - SUPREME COURT], it is found that the facts are entirely different. In Cadbury India case, goods were 100% consumed captively and no portion of it was sold to independent buyers, whereas in the instant case, there exists, sale price at which goods are sold to independent buyer(s) at the factory gate.
Conclusion - The valuation of captively consumed waste and scrap should be based on the sale price to independent buyers and not on the cost construction method under Rule 8. The Revenue's demand based on Rule 8 valuation is unsustainable.
Appeal allowed.
The core legal questions considered by the Court were:
(i) Whether the land in question, on the relevant valuation date, remained vacant land liable to wealth tax under Section 2(ea) of the Wealth Tax Act, given that construction of the building was not completedRs.
(ii) Whether the assessee is entitled to exemption under the Wealth Tax Act if the building construction is incomplete by the end of the relevant previous year but the building is under construction as a business assetRs.
(iii) Whether only land with a completed building qualifies for exemption from wealth tax or whether land with a building under construction also qualifiesRs.
(iv) Whether the Appellate Tribunal was correct in holding that the assessee's vacant urban land is not an asset liable to wealth tax under Section 2(ea) of the ActRs.
(v) Whether a building under construction exempts the land from being assessed as vacant urban land under the Wealth Tax provisionsRs.
2. ISSUE-WISE DETAILED ANALYSIS
Issue (i), (ii), (iii), (iv), and (v) - Interrelated Issues concerning classification of land and exemption under Section 2(ea) of the Wealth Tax Act
Relevant legal framework and precedents:
Section 2(ea) of the Wealth Tax Act defines "assets" and includes "urban land" as an asset liable to wealth tax. Explanation 1(b) to Section 2(ea) defines "urban land" and excludes certain categories of land from being treated as urban land for wealth tax purposes. The exclusion includes:
The key question was whether land with a building under construction (not fully constructed) qualifies for exemption under the exclusion clause as land "occupied by any building which has been constructed with approval".
Earlier, the Madras High Court in the Rohini Hotels (Madras) Limited case held that even a building under construction alters the nature of the land to commercial property and exempts it from wealth tax as vacant urban land. This view was followed by the ITAT in the impugned orders.
However, the Supreme Court in Giridhar G.Yadalam v. Commissioner of Wealth Tax overruled this position, holding that the exclusion applies only when the building "has been constructed", i.e., fully constructed, with approval. The Supreme Court emphasized strict interpretation of taxing statutes and exemption clauses, rejecting purposive interpretation to extend exemption to buildings merely under construction.
Court's interpretation and reasoning:
The Court examined the language of Explanation 1(b) to Section 2(ea)(v) and noted the following conditions for exemption:
The Court held that a building "under construction" does not satisfy the condition that the building "has been constructed". The land cannot be treated as occupied by a building if construction is incomplete. The Court rejected the assessee's argument that commencement of construction should qualify the land for exemption as it would lead to absurd results, such as exemption being granted even if construction is abandoned midway.
The Court also considered the legislative intent behind the exclusion clause, which was to stimulate investment in productive assets but only after construction is complete. The Court emphasized that taxing statutes must be interpreted strictly and exemption clauses even more strictly in favor of the Revenue.
Key evidence and findings:
The facts showed that the assessee took the land on lease in January 2006, commenced construction by laying pile foundations, surrendered the lease and acquired the land by sale in March 2007, and completed construction only in May 2010 when the commercial complex was inaugurated.
During the relevant assessment years (2007-08, 2008-09, 2009-10), construction was ongoing but not complete. The ITAT had earlier relied on the Madras High Court's Rohini Hotels decision to hold that the land was not vacant urban land liable to wealth tax. The Revenue challenged those orders relying on the Supreme Court's Giridhar G.Yadalam decision.
Application of law to facts:
Applying the Supreme Court's ruling, the Court found that since the building was not fully constructed on the valuation dates for the relevant assessment years, the land did not qualify for exemption under the exclusion clause. Therefore, it remained "urban land" liable to wealth tax under Section 2(ea).
The Court rejected the contention that the land was reserved for industrial purposes and thus exempt, noting the strict conditions for such exclusion and that the land was being used for commercial construction.
Treatment of competing arguments:
The assessee argued that construction activity commenced before the valuation date and continued thereafter, so the land was not vacant urban land. It relied on the earlier Madras High Court decision and the ITAT orders following it.
The Revenue relied on the Supreme Court's decision in Giridhar G.Yadalam, which reversed the Madras High Court's view and held that only fully constructed buildings qualify for exemption.
The Court accepted the Revenue's arguments, holding that the Supreme Court's ruling is binding and supersedes the earlier High Court decision. The Court also rejected the assessee's purposive interpretation of the exemption clause.
Conclusions:
The Court concluded that the land was liable to wealth tax as urban land under Section 2(ea) during the relevant assessment years because the building was not fully constructed on the valuation dates. The exclusion clause for land occupied by a building applies only when the building has been fully constructed with approval.
The ITAT orders relying on the reversed Madras High Court decision were set aside, and the substantial questions of law were answered in favor of the Revenue and against the assessee.
3. SIGNIFICANT HOLDINGS
The Court's key legal reasoning and holdings include:
"The expression 'has been constructed' obviously cannot include within its sweep a building which is not fully constructed or in the process of construction. The opening words of clause (ii) also become important in this behalf, where it is stated that 'the land occupied by any building'. The land cannot be treated to be occupied by a building where it is still under construction."
"Strict interpretation to the exemption provision is to be accorded... The Legislature in its wisdom conferred the benefit of exemption in respect of urban vacant land only when the building is fully constructed and not when the construction activity has merely started."
"If the argument of the assessee is accepted, it would lead to absurd results... for example, if construction is abandoned midway, exemption would have been granted in earlier years which is not permissible."
"The orders of the ITAT which are impugned herein are set aside. The Questions of Law that have been framed in these cases are answered in favour of the Revenue and against the assessee."
Core principles established:
Final determinations on each issue:
Wealth tax on land -exemption under the Wealth Tax Act if the building construction is incomplete - Tribunal held that the land remained vacant land in as much as the construction of the building was not completed as on relevant valuation date the said land would not be liable to be charged for wealth tax u/s 2(ea) of wealth tax - whether the land would be excluded from the urban land only when building is completely constructed there upon or it would be covered by the aforesaid clause even if the building activity is started and the building is not yet completed ?
HELD THAT:- From the reading of the decision of Giridhar G.Yadalam's case [2016 (1) TMI 826 - SUPREME COURT]] the issue raised on behalf of the assessee right from the beginning till the ITAT has been given a complete answer. In fact the ITAT in the first order in respect of the AY 2008-09 and 2009-10 dated 30.09.2013, in a very short order had dismissed the appeals filed by the Revenue on a short ground that, the issue was covered by the decision of this Court in the case of Rohini Hotels (Madras) Limited [2011 (9) TMI 1210 - MADRAS HIGH COURT]
Almost same view has been taken by the ITAT in the order where also even though the Judgment of the Karnataka High Court in Commissioner of Wealth Tax and another v. Giridhar G. Yadalam [2007 (3) TMI 334 - KARNATAKA HIGH COURT] and in Karur Vysya Bank Ltd. [2016 (9) TMI 985 - MADRAS HIGH COURT] had been stated. It was the view of the ITAT that, those Judgments are distinguished by the Madras High Court in Rohini Hotels case cited supra.
Therefore the sum and substance of these two decisions which are impugned herein of the ITAT, Chennai is concerned, the Tribunal mainly relied upon the decision of this Court in Rohini Hotels (Madras) Limited case which has been reversed by the decision in Giridhar G. Yadalam's case cited supra of the Hon'ble Supreme Court [2016 (1) TMI 826 - SUPREME COURT].
Hon'ble Supreme Court has given a complete answer to the stand taken by the assessee to state that, the expression, "has been constructed", obviously cannot include within its sweep a verdict which is not fully constructed or in the process of construction. The Hon'ble Apex Court has further held that, the purpose and objective of introducing Section 2(ea) of the Act was to stimulate productive assets. The situations where the land could not be treated as a urban land as given in explanation (1b) has also been dealt with and interpreted by the Supreme Court saying that the legislature in its wisdom conferred the benefit of exemption in respect of urban vacant land only when the building is fully constructed and not when the construction activity has merely started.
Here in the case in hand, admittedly it is the claim of the assessee that, the assessee after having taken over the land on lease from 18.01.2006, started the construction by laying the pile foundation, though the land was surrendered on 26.03.2007, on that date, i.e., on 26.03.2007 since the land was transferred by way of effecting the sale to and in favour of the assessee, the construction activities that has already been commenced under the lease hold right of the assessee was continuing after becoming the owner of the property and that was over by 2010 and ultimately the project was inaugurated in 2010 May. Therefore in all these period since there has been a continuous construction activities going on, the relevant Assessment Years, i.e., 2007-08, 2008-09 and 2009-10, the land in question cannot be treated as a urban vacant for the purpose of levying tax under the Wealth Tax Act, therefore such a move made by the Revenue imposing tax on the assessee is bad in law. This stand of the assessee stood shattered by virtue of the categorical decision made by the Hon'ble Supreme Court in the Giridhar G. Yadalam's case cited supra.
Before the decision was made by the Hon'ble Supreme Court since the orders were passed by the ITAT on 30.09.2013 and 13.11.2014, the Tribunal's decision was saved by the decision of this Court in Rohini Hotels (Madras) Limited case. Since the Rohini Hotels (Madras) Limited case decision has been reversed by the decision of the Hon'ble Supreme Court as cited supra, the orders passed by the ITAT which are impugned herein would have no legs to stand.
Orders of the ITAT which are impugned herein are set aside. Questions of Law that have been framed in these cases are answered in favour of the Revenue.
TaxTMI 