Darkness in GST Litigation: Is there light at the end of the tunnel?

[ManishRaj Dhandharia]

There’s a very famous legal maxim, which reads, ‘justice delayed is justice denied’. If the aggrieved party does not get timely relief, even when legal redressal mechanism exists, the delay in justice is equivalent to its denial. If there is injustice anywhere, it would be a threat to justice everywhere. There is plethora of cases piled up before the Supreme Court and various High Courts located across the nation. It is a well-known fact that certain judgments take years to come due to one adjournment after the other and the series is long stretched. Delay in justice in the presence of the redressal forum is one aspect of the maxim. However, what would we call the redressal system, which is merely on paper and not practically implemented? The non-constitution of GST Appellate Tribunals even after almost 6 years of implementation of GST is a serious threat to the delivery of justice. Tribunals are a crucial part of the judicial system of the country inasmuch as they aim to reduce the burden of the Courts. While Courts hear cases which entail matters of law, Tribunals are imperative as they are the ‘final’ fact finding authority and also hear cases on matters of fact.

GST was introduced in India on 1^st July, 2017. At its launch, in the words of Hon’ble Prime Minister Shri Narendra Modi, “GST is the taxation system of New India; of the Digital India. It is not merely Ease of doing Business. It is demonstrating Way of doing business. GST is not just a tax reform, but it is a landmark step towards economic reforms. Beyond the taxation revamp, it is also paving the way towards social reforms. It is a vouchment for corruption free taxation system. In legal parlance GST may be known as Goods and Services Tax but the benefits of GST will positively ensure it to be "Good and Simple Tax" for the citizens of India. Good because it liberates us from layers of taxation, Simple because it is uniformly implemented pan India. There will be "one nation, one tax" and tax system shall be executed in a standard manner in all the states. I am sure that we all will be able to take it forward in a unified manner.”

While he pointed out on the simple structure of GST, and highlighted on how remarkable this step is towards transformation of the taxation system, the actual ground reality is surprisingly very different. Compliances may become automated, even technological reforms may aid in moving towards digitisation, however, a statute which is incapable of providing justice to the aggrieved parties, no matter how revolutionary, would be draconian and a total failure. Issues in GST primarily are arising due to inconsistent drafting of the law, leading to several writ petitions and amendments in the Law. From remarkable judgments of UNION OF INDIA & ORS. VERSUS VKC FOOTSTEPS INDIA PVT LTD. - 2021 (9) TMI 626 - SUPREME COURT, to UNION OF INDIA & ANR. VERSUS M/S MOHIT MINERALS PVT. LTD. THROUGH DIRECTOR - 2022 (5) TMI 968 - SUPREME COURT, we have already come a long way, but there’s still a long way to go!

At this juncture, let us try to understand how the mechanism of litigation in GST works. In simple terms, any proceeding begins with a show cause notice by the adjudicating officer, whose responsibility is to adjudicate and assess the tax; followed by first appeal in case of any disparity in the assessment of tax under Section 109 of the CGST Act; after the first appeal, in case either of the party is aggrieved, they have to file the second appeal before the GST Appellate Tribunal (‘GSTAT’) as per Section 112 of the CGST Act. However, the GSTAT has not been formed yet. In the absence of GSTAT, the only remedy available with taxpayers is to file a writ petition before the High Court. In the absence of any alternate remedy, High Courts admit such writ petitions and hear the cases on merit.

However, the moot question is, can each and every taxpayer afford knocking the doors of the High Court? Filing a petition before the High Court is an expensive affair. The cost-benefit analysis at times is a major reason why people tend to back off from going to the High Court. Numerous adverse Orders by the first Appellate Authority are sitting tight for justice, just waiting for the formation of the GSTAT as the materiality of the amount demanded may be lesser than the litigation cost.

There are two broad types of litigation which are being witnessed in GST:

1. Litigation arising from legal inconsistency in the provisions of the GST law – Example: the definition of supply, which was amended to include ‘the activities or transactions, by a person, other than an individual, to its members or constituents or vice-versa, for cash, deferred payment or other valuable consideration’ following the judgment of the Hon’ble Apex Court in the case of State of West Bengal vs Calcutta Club Limited.
2. Litigation arising from other compliance issues – Discussed as under.

Some of the very common issues which majority of the taxpayers are facing is enlisted as under:

1. Constitutionality of Section 16(2)(c) of the CGST Act – It states that one of the conditions for availing input tax credit (‘ITC’) is if the supplier has paid tax to the Government. Numerous cases are pending on this matter before the High Courts. In the case of M/S LGW INDUSTRIES LIMITED & ORS. VERSUS UNION OF INDIA & ORS., ANMOL INDUSTRIES LTD. & ANR. VERSUS UNION OF INDIA & ORS., SURYA ALLOY INDUSTRIES LTD. & ANR. VERSUS UNION OF INDIA & ORS., RAJ METAL INDUSTRIES & ANR. VERSUS UNION OF INDIA & ORS. AND VICTORIA GLOBAL & ANR. VERSUS UNION OF INDIA & ORS. - 2021 (12) TMI 834 - CALCUTTA HIGH COURT the Calcutta High Court remanded the matter to the adjudicating authority for fresh adjudication to be done duly considering the genuinity of the transaction.
2. The saga of transitional credit – Since Day 1, taxpayers have been pleading for their rightful transitional credit. Finally, as a ray of hope, the TRAN-1 form was reopened following the judgment of the Hon’ble Apex Court in the case of UNION OF INDIA & ANR. VERSUS FILCO TRADE CENTRE PVT. LTD. & ANR. - 2022 (7) TMI 1232 - SC ORDER However, could all taxpayers file a petition? No. Although this judgment opened the road to justice for every taxpayer, however, all the other matters are not settled identically, right?
3. Mismatch in place of supply – The entire idea behind GST was based upon ‘one nation, one tax’. During FY 2017-18 and 2018-19 in particular, there have been several cases where taxpayers have availed ITC wherein the supplier had inadvertently mentioned an incorrect place of supply. Majority of the taxpayers have received such notices from the Department, demanding reversal of ITC pertaining to such mismatch in place of supply. The question here is, if it is proved beyond doubt that the incorrect place of supply was merely a clerical mistake and ITC does pertain to the respective state, should there not be an internal settlement system among states to ensure that the taxpayer is not denied his rightful credit?
4. Mismatch in GSTR-2A vs GSTR-3B – Another very common ground for issuance of notice after scrutiny of returns is mismatch in amount of ITC appearing in GSTR-2A vs the amount of ITC claimed in GSTR-3B. Whereas cases are pending for this issue as well, the Department is still recovering tax on such differences. Basically, the recipient is conveniently being penalized for the default of the vendors.
5. Others – Other issues related to filing of returns, disclosures, etc. are also very common.

As a major chunk of litigation is arising primarily from ‘compliances’ which ideally shall follow the course of appeal, it becomes imperative to have a proper judicial mechanism in place. The issue pertaining to absence of GSTAT is being widely discussed.

In procedure, once an appeal in respect of taxation matters is filed before the Tribunal, an amount specified under the relevant legislation is also deposited so as to stay the recovery of the demand pendente lite. This ensures that no demand is recovered from the dealer till the appeal is decided which safeguards the rights of the dealer.

Under the CGST Act, Section 112(8) prescribes for the mandatory deposit for filing of appeal to the Tribunal as follows:

1. 100% of the tax, interest, fine, fee and penalty admitted by the appellant; and
2. 20% of the remaining amount of disputed tax, in addition to the amount paid under sub-section (6) of section 107 (pre-deposit of first appeal), arising from the said order (maximum up to Rs. 50 Crores), in relation to which the appeal has been filed.

Further, as per Section 112(9) of the CGST Act, where the appellant has paid the amount as per sub-section (8), the recovery proceedings for the balance amount shall be deemed to be stayed till the disposal of the appeal.

In the absence of the GSTAT, what is the locus standi of such pre-deposit? Would no action against the adverse Order by the first appeal, would deem to be a stay?

Rulings of Different High Courts on the issue:

In the case of M/S. PRATAP KUMAR PRADHAN VERSUS COMMISSIONER OF CT & GST, ODISHA AND ORS. - 2023 (4) TMI 644 - ORISSA HIGH COURT, as the case pertained to rejection of appeal by First Appellate Authority, inasmuch as the appeal was barred by limitation, the Orissa High Court, as an interim measure, ordered the Petitioner to deposit entire tax amount to stay the demand during the pendency of the Petition. The Writ Petition was preferred against the order of the First Appellate Authority contending that the Petitioner is not liable pay the tax and the penalty imposed. The Writ Petition was admitted by the High Court on the condition that the amount of entire demand be deposited. It was also made clear by the High Court that such a Petition is being entertained only because the Second Appellate Tribunal, i.e., GSTAT is not constituted.

This is not a one-of-a kind ruling, but a lot such cases are coming into light in the recent times. The reason of all the chaos and confusion is that even after implementation of six years of the GST Acts, GSTAT is not established. Petitioners are exercising the constitutional right of Writ and moving the High Court in cases where an appeal lies in GSTAT.

Patna High Court in GAMMON ENGINEERS AND CONTRACTORS PVT. LTD. VERSUS THE STATE OF BIHAR THE ADDITIONAL COMMISSIONER OF STATE TAXES (APPEALS) CENTRAL DIVISION, PATNA. THE ASSISTANT COMMISSIONER OF STATE TAXES, PATLIPUTRA CIRCLE, PATNA - 2023 (4) TMI 820 - PATNA HIGH COURT and SAJ FOOD PRODUCTS PVT. LTD. VERSUS THE STATE OF BIHAR THROUGH THE SECRETARY CUM COMMISSIONER, DEPARTMENT OF STATE TAXES, NEW SECRETARIAT, BAILEY ROAD, PATNA, THE SECRETARY CUM COMMISSIONER, DEPARTMENT OF STATE TAXES, NEW SECRETARIAT, BAILEY ROAD, PATNA, THE ADDITIONAL COMMISSIONER OF STATE TAXES (APPEALS) , CENTRAL DIVISION, PATNA AND THE DEPUTY COMMISSIONER OF STATE TAXES, SPECIAL CIRCLE PATNA. (2017- 2018) - 2023 (8) TMI 1121 - PATNA HIGH COURT while following the verdict given in the case of ANGEL ENGICON PRIVATE LIMITED VERSUS STATE OF BIHAR, ASSISTANT COMMISSIONER OF STATE TAX - 2023 (3) TMI 879 - PATNA HIGH COURT ordered that:

“The respondent State authorities have acknowledged the fact of non-constitution of the Tribunal and come out with a notification bearing Order No. 09/2019-State Tax, S. O. 399, dated 11.12.2019 for removal of difficulties, in exercise of powers under Section 172 of the B.G.S.T Act, which provides that period of limitation for the purpose of preferring an appeal before the Tribunal under Section 112 shall start only after the date on which the President, or the State President, as the case may be, of the Tribunal after its constitution under Section 109 of the B.G.S.T Act, enters office.

……………

If the petitioner makes a deposit of a sum equal to 20 percent of the remaining amount of tax in dispute, in addition to the amount deposited earlier under Sub-Section (6) of Section 107 of the B.G.S.T. Act, then the petitioner must be extended the statutory benefit of stay under Sub-Section (9) of Section 112 of the B.G.S.T. Act, for he cannot be deprived of the benefit, due to non-constitution of the Tribunal by the respondents themselves. The recovery of balance amount, and any steps that may have been taken in this regard will thus be deemed to be stayed”. 

The Court further stated that the appeal should be presented to the Tribunal under Section 112 of the B.G.S.T. Act once the Tribunal is functional.

Orissa High Court, again in a recent ruling in the case of PRAFULLA KUMAR SAHOO VERSUS COMMISSIONER OF CT & GST ODISHA, BANIJYAKAR BHAWAN & OTHERS - 2023 (5) TMI 1145 - ORISSA HIGH COURT observed that as the dealer wanted to avail the provisions of appeal to GSTAT for the demand imposed on it, but since the GSTAT is not functional, such dealer should deposit entire amount of tax for stay of interest and penalty.

Non constitution of the Tribunals has affected the dispute resolution mechanism for the dealers looking forward to appeal to the GSTAT. Non establishment of the Tribunals is increasing the hardships of the dealers, and hence, they are approaching the High Court. It can be seen through the above cited judgments that the High Courts are following the provisions of the GST Act and trying to implement the same by providing interim relief to the dealers from demand recovery, as is stipulated in the Act. However, is it justified to direct the taxpayer to deposit 100% of the amount of tax for getting a stay?

While the High Courts are seen to be themselves struggling to provide relief to the dealers in the absence of the body responsible for the same, certain disparities can be seen. On one hand where the Patna High Court instructed the dealers to deposit an amount equivalent to 20 percent of the disputed demand for stay of demand, the High Court of Orissa ordered the dealer to deposit an amount equivalent to that of the entire tax demand. These differences of opinion in various High Courts on a particular subject matter, again put dealers in disadvantageous and ambiguous positions.

Further, while the GSTAT is not in force, the High Courts should grant an automatic stay to the recovery proceedings since the appeal with Tribunal is not filed at any stage and the provisions of Section 112(8) of CGST Act applies to appeal to a Tribunal.

After the Finance Act, 2023, and the amendment in the provisions of the GSTAT, there is a ray of hope that Tribunals would be functional soon. It is expected that the constitution of GSTAT will bring respite to the plight of the dealers and a smooth implementation of GST would be seen, as promised by the Government. But in the meantime, it becomes the responsibility of the GST Council to give some clarity on the issue. 

Disclaimer: All views expressed above are personal and do not represent any organization or group.