ITC1 denied for breakwater construction
The Bombay High Court (“Bombay HC”) in the case of Konkan LNG Limited vs. The Commissioner of State Tax and Ors., evaluated the availability of ITC with respect to construction of breakwater by Konkan LNG Limited (“Petitioner”).
The Petitioner imports LNG2 from various countries using vessels equipped with large cryogenic tanks, for its regassification facility. Tugs tow the carriers to the captive jetty, from where the LNG is transferred to cryogenic storage tanks in the regassification plant through insulated pipelines. Due to the rough weather during monsoons, the Petitioner reconstructed an existing breakwater (a protective wall) near the jetty. The Petitioner filed a writ petition before the Bombay High Court challenging the denial of ITC for the construction of breakwater adjacent to the jetty near the LNG regasification facility.
The Bombay HC dismissed the writ and upheld the rulings of the lower authorities, concluding that the breakwater does not qualify as ‘plant and machinery' under Section 17(5)(d) of the CGST Act3. The decision of the Bombay HC was based on the following:
- the breakwater, while essential for protecting vessels during LNG unloading, is not directly used for making outward supplies of goods or services. The breakwater's primary function is to protect ships and enable safe berthing, rather than participating in the actual regasification process or supply of services; and
- the breakwater is a civil structure and not an apparatus or equipment.
JSA Comment: The ruling emphasises that term ‘plant and machinery' for ITC purposes, should only include structures which are directly involved in the production or supply process, even if such structures are crucial for the overall operations. The ruling has significant implications for businesses in the infrastructure and energy sectors, particularly those with auxiliary structures that support their main operations.
ITC cannot be denied to bona fide recipients
The Hon'ble High Court of Gauhati (“Gauhati HC”) in the case of National Plasto Moulding vs. State of Assam4 ruled upon the requirement of reversal of ITC availed by bona fide recipient, in case of default by the supplier. As per Section 16(2)(c) of the CGST Act, tax in respect of which ITC is availed, is required to be paid to the Government of India by the supplier of goods/services. The GST5 authorities issued a SCN to National Plasto Moulding (“Petitioner”), seeking to reverse ITC on account of violation of conditions prescribed under Section 16(2)(c) of the CGST Act. The Petitioner filed a writ petition before the Gauhati HC challenging the SCN on the ground that he was a bona fide purchaser, who had fulfilled all the conditions for availment of ITC which were in his reasonable control.
The Petitioner relied on the judgement of the Hon'ble High Court of Delhi6, wherein it was observed that purchasing dealer cannot be punished for the act of the selling dealer, in case the selling dealer had failed to deposit the tax collected by it (under the erstwhile value added tax law). Given that the provisions of the Delhi Value Added Tax Act, 2004 are analogous to the provisions of Sections 16(2)(c) of CGST Act, the Guahati HC relied on the judgement and set aside the SCN issued to the Petitioner.
Principles of natural justice must be followed when blocking ITC under Rule 86A of the CGST Rules7
The High Court of Telangana (“Telangana HC”), in the case of Bhavani Oxides and others vs. The State of Telangana and Ors.8, clarified the applicability of principles of natural justice vis-à-vis Rule 86A of the CGST Rules, which allows tax authorities to block ITC in a taxpayer's ECL9. The Telangana HC held that while Rule 86A of the CGST Rules neither expressly nor by necessary implication excludes the principles of natural justice, the principles of natural justice should be read into the provision.
The court's reasoning hinged on the need for consistency within the GST framework. It pointed out that Section 74 of the CGST Act, which deals with similar circumstances of tax recovery and ITC denial, explicitly mandates following principles of natural justice. The Telangana HC argued that interpreting Rule 86A to allow ITC blocking without these safeguards would create an inconsistency with the parent statute. Furthermore, Telangana HC emphasised that this interpretation is crucial to prevent hardship, injustice, and friction in the GST system's operation.
JSA Comment: The ruling is a sign of relief for taxpayers as, it deters the GST authorities from invoking Rule 86A (i.e., blocking ITC in the ECL) of the CGST Rules without providing the taxpayers an opportunity to be heard. This decision strikes a balance between the need for effective tax administration and the protection of taxpayers' rights, ensuring that the principles of natural justice are upheld in the application of CGST Rules.
No GST leviable on personal guarantees extended by managing director
In the case of Manappuram Finance Ltd vs. Union of India and Ors.10 SCN was issued to Manappuram Finance Ltd (“Petitioner”) seeking to demand (a) GST under reverse charge mechanism on supply of services by the managing director (MD) of the Petitioner by way of providing personal guarantee on loans taken by the Petitioner and (b) GST on supply of services of extending loans by the Petitioner to its subsidiary company. Aggrieved by the issuance of SCN, the Petitioner filed a writ petition before the Hon'ble High Court of Kerala (“Kerala HC”).
The Petitioner contended that the matter was squarely covered by the clarifications issued by the CBIC11 vide Circular No.204/16/2023-GST dated October 27, 2023, and Circular No.218/12/2024-GST dated June 26, 2024. The Petitioner placed reliance on the said circulars, to argue the following:
- GST cannot be demanded on personal guarantee provided by the director; and
- in absence of a procedural requirement for processing the loan, the loan provided by the Petitioner to its subsidiary cannot be equated to loans provide by banks or independent lenders.
Considering the aforesaid arguments, the Kerala HC allowed writ petition by setting aside the SCN.
Payment during search considered involuntary payment, due to lack of Form GST DRC-04 issued by the authorities
In the case of ATR Malleable Casting Private Limited vs. The Inspector of Central Taxes12, ATR Malleable Casting Private Limited (“Petitioner”) paid a sum of INR 30,00,000 (Indian Rupees thirty lakh) during a search by tax authorities and consequently sought a refund thereof, claiming that such payment was made under the threat of arrest, coercion, and undue influence. The GST authorities denied the claims on the grounds that the payment was voluntary.
However, the Madras High Court (“Madras HC”) noted the absence of Form GST DRC-04 which is a receipt confirming payment of GST under Form GST DRC-03, which is mandatory for voluntary payments under Rule 142(2) of the CGST Rules (this observation has been observed under several judicial precedents). Further, Madras HC observed the discrepancy between the timing of conclusion of the search and the actual payment indicating that the payment could not have been voluntary. The facts suggested that the payment was made under coercion and not voluntarily, as it was recorded after the search concluded. Basis the above, the Madras HC directed the GST authorities to refund the said sum.
JSA Comment: Previously the Hon'ble Delhi High Court in the case of Vallabh Textiles vs. Senior Intelligence Officer13 had held where payment was made during a search proceeding for which acknowledgment was not issued in Form GST DRC-04, the same was not voluntary and had directed the Department to refund such payment along with interest. The High Court had heavily relied on CBIC Instruction No. 01/2022-23 GST – Investigation dated May 25, 2022, which clarified the position of making payment during a search, seizure and investigation proceeding.
Issuance of Form ASMT-10 not a pre-requisite for adjudication
In the case of Mandarina Apartment Owners Welfare Association and Gani Fashion vs. State Tax Authorities14, the Madras HC ruled on the validity of the GST adjudication proceedings where scrutiny proceedings were issued under Section 61 of the CGST Act read with Rule 99 of the CGST Rules, without issuance of notice in Form GST ASMT-10.
The Madras HC observed that Section 61 of the CGST Act indicates clearly that the obligation to issue notice arises upon fulfilment of following 2 (two) conditions:
- selection of returns for scrutiny; and
- discovery of discrepancies on such scrutiny.
Based on the above, it was concluded that issuance of Form ASMT-10 is mandatory only if the aforesaid conditions are satisfied.
The Madras HC further observed that as per Sections 61 and 73 of the CGST Act, there is no indication that scrutiny of returns and issuance of notice in Form ASMT-10 constitute a mandatory pre-requisite for adjudication even in cases where returns were scrutinised.
In the present facts, given that the petitioner was not provided the opportunity to be heard, the petitioner was given an opportunity to file a reply to SCN only on the grounds of principles of natural justice.
Footnotes
1. Input Tax Credit
2. Liquified natural gas
3. Central Goods and Services Tax Act, 2017
4. TS-469-HC(GAUH)-2024-GST
5. Goods and Services Tax
6. Quest Merchandising India Private Limited -Vs- Government of NCT of Delhi & Ors 2017 SCC OnLine Del 11286.
7. Central Goods and Services Tax Rules, 2017
8. WP Nos.10390, 10425, 10459 AND 12733 of 2024
9. Electronic credit ledger
10. TS-451-HC(KER)-2024-GST
11. Central Board of Indirect Tax and Customs
12. 2024 (6) TMI 1258 – Calcutta High Court
13. 2023 (70) G. S. T. L. 3 (Del.)
14. 2024 (7) TMI 1158 – Madras High Court
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