Tax Vista

Your weekly tax recap

Edn. 245 - 3rd March 2025

Dr. G. Gokul Kishore

Arrest provisions in Customs and GST laws are valid - Supreme Court

The Supreme Court has upheld the validity of Section 104 of Customs Act, 1962 and Section 69 of CGST Act, 2017 on power of officers to arrest. Section 70 of CGST Act on power to issue summons has also been upheld. The Apex Court took note of the amendments made in the Customs Act. It has held that the threshold for arrest under Section 104(1) of the Customs Act is higher than that under Section 41 of Cr.P.C. as it stipulates that a customs officers may only arrest a person if they have "reasons to believe" that a person has committed an offence and a person is said to have a "reason to believe" a thing, if they have sufficient cause to believe that thing but not otherwise and therefore, this is a more stringent standard than the "mere suspicion" threshold. It further said that the reasoning must weigh in why an arrest is being made in a specific case given the specific severity assigned to the offence by the legislature and such reasoning must also state how the monetary thresholds are met. It also relied on the provision requiring that the arrestee be informed of the grounds of arrest in writing and held that the provisions have sufficient safeguards against arbitrary arrests.

In respect of CGST Act, the Apex Court held that the Commissioner must satisfactorily show through reasons to believe recorded by him and should refer to the material forming the basis. The order notes - "An arrest cannot be made to merely investigate whether the conditions are being met. The arrest is to be made on the formulation of the opinion by the Commissioner, which is to be duly recorded in the reasons to believe. The reasons to believe must be based on the evidence establishing - to the satisfaction of the Commissioner - that the requirements of sub-section (5) to Section 132 of the GST Act are met."

Coercion and compulsion to make payment by treat of arrest was also dealt with and the Court said that the authorities must exercise due care and caution as coercion and threat would amount to violation of fundamental rights and directed the CBIC to formulate guidelines to ensure that taxpayers are not threatened with arrest for recovery under the garb of voluntary payment. The order is welcome as it enriches the jurisprudence on this subject as judiciary is always in the forefront when it comes to checking the excesses and abuse of authorities [2025-VIL-11-SC].

Rule 36(4) of CGST Rules - High Court rejects challenge to validity

More than one issue was involved in a recent case before Gauhati High Court. Order was issued under Section 74 of CGST Act wherein demand of input tax credit was confirmed along with interest and also interest for delay in payment of GST along with equivalent penalty. However, the High Court opted to examine the plea on challenge to the validity of Rule 36(4) of CGST Rules. The taxpayer argued that Rule 36(4) has been enacted using the power under Section 43A(4) which never came into force and the same was omitted from 1-10-2022. The department contended that validity of the said provision was upheld by Kerala High Court [2023-VIL-793-KER]. Rule 36(4) deals with ITC being subject to filing of GSTR-1 by suppliers and reflection of such details in GSTR-2B.

The Court noted that the department did not prove that the Central Government had issued notification providing for effective date for Section 43A till it was omitted and therefore, such provision never came into operation. According to the Court, Section 16 of the CGST Act and Rule 36 of CGST Rules are in relation to eligibility of a registered person who can avail input tax credit (ITC) by furnishing required documents, whereas Section 43A of the CGST Act defines procedure for furnishing returns for availing ITC and therefore, the same are different. However, Rule 36(4) has been held as framed as per the objects of the CGST Act and is covered within the general powers under Section 164(2). It did not approve of the plea taken in adjudication by the taxpayer that ITC was availed as per Rule 36(4) but the validity of the same is being challenged. The Court further said that a rule cannot be held as deriving power from a provision which has never been enforced - "In other words, when a provision of an Act never comes into operation, it cannot be treated as a source of power of a provision of a rule."

The general rule-making power has come to the rescue of the department in this case. Otherwise, the entire legacy of bringing GSTR-2A as facilitation measure, then GSTR-2A being mandatory upto certain limit, then making GSTR-2B as the basis, omitting certain provisions, etc., only to put the blame on the taxpayers availing ITC speaks volumes about the incapacity of tax administration in framing the law properly. Pathetic implementation is derailing GST as such and GST as a tax system will be blamed and cursed in future [2025-VIL-193-GAU].

Complying with law - GST regime does not take it lightly

After making payment using DRC-03 challan based on adjudication order passed, there was an additional demand and the taxpayer went to High Court. The department argued that payment against demand is to be made in Form GST PMT-01 against debit entry created for such demand whereas the taxpayer used DRC-03 for payment which is meant for regular payment. The High Court noted that DRC-03 also covers payments against demand as per Rule 142(2B) of CGST Rules inserted from 10-7-2024 and the taxpayer may file DRC-03A so that electronic liability register gets credited with the amount paid using DRC-03. In respect of the excess amounts, the Court instructed the taxpayer to file application for refund under Section 54 and directed the department to grant such refund.

This order is more on procedure but the same has been briefly analysed to highlight how even simple matters are complicated in GST. Payment of tax using a form after an order is passed has compelled the taxpayer to approach High Court. Being compliant is also sometimes a contravention in GST regime and God alone can save this country from such GST [2025-VIL-189-CAL].

Rectifying order to delete demand after payment by taxpayer is not valid

The comments made in the preceding portions on the state of affairs under GST may appear to be exaggerated but the order covered here will justify the same. Due to discrepancy in quantity loaded in the vehicle and the figure mentioned in the documents, proceedings were initiated under Section 129 of CGST Act / UPGST Act. Goods were released after the taxpayer paid the penalty through DRC-03 but by making the remark "the amount of penalty is paid under protest and without prejudice to our legal right to appeal." SGST authorities use rectification power under Section 161 everywhere these days and in this case too, the GST officer simply "rectified" the previous order by withdrawing it and mentioning amount payable as NIL. This ensured that the taxpayer was deprived of opportunity to file appeal. The High Court took note of the remarks on protest payment and rectification was held as after-thought by the officer and the amount paid cannot be held as voluntary. The rectification order was set aside and the taxpayer was allowed to file appeal [2025-VIL-181-ALH].

Provisional attachment citing non-cooperation in adjudication is not valid

In a case of renewed provisional attachment (the term "renewal" itself is not correct), the Delhi High Court went through the files and noted that the sole reason for such attachment was adjudication order has been passed in respect of the case / SCN and the taxpayer has been non-cooperative throughout the proceedings. The Court said that such reason cannot justify invocation of Section 83 of CGST Act. It said - "The respondents, in clear contravention of the requirements laid down in Radha Krishnan, have been unable to demonstrate any reasonable apprehension that the writ petitioner herein was at risk of defaulting on payment of any demands that may come to be imposed. On the contrary, the only reasons adduced by the respondents for the initiation of Section 83 proceedings was that the writ petitioner had failed to file any response to the DRC-01 or the SCN, did not attend the hearing of the adjudicating authority and allegedly refused to cooperate with the respondents during the adjudication of show cause proceedings."

The Court directed lifting of attachment after holding that such action cannot be justified on the basis of vague apprehensions or failure to cooperate or provide responses to notices. Despite salutary jurisprudence and departmental guidelines, these provisions have the potential to be misused particularly by those in tax administration who are either ignorant or avaricious. Such provisions have to go from the statute book [2025-VIL-183-DEL].

Parallel proceedings - High Court quashes adjudication order

CGST Authority passed adjudication order under Section 74 of CGST Act after scrutiny under Section 61. The SGST authorities conducted audit under Section 65 for the same period and the taxpayer accepted short payment of tax. The taxpayer assailed the order passed by CGST authority on the ground of parallel proceeding being barred by Section 6 by arguing that show cause notice was issued after audit report was filed and differential tax was accepted as payable. The Orissa High Court chose to rely on Allahabad High Court judgment in G.K. Trading Company [2021-VIL-12-ALH] and held that the SGST authority had initiated the probe by conducting audit and audit is a proceeding and there is no disputed as to the subject matter being same in the present case. The adjudication order was quashed and writ petition was allowed. The taxpayer should consider himself fortunate as High Courts have been examining the issue of parallel proceedings with a magnifying glass and have refused to interfere in the proceedings by holding subject matter being different in several cases. It is not clear as to what was the subject matter in this case [2025-VIL-192-ORI].

Construction pertaining to "railways" refers to the utility and not entity - Concessional GST rate applicable

The petitioner paid 12% GST reasoning that his activity was covered under Serial No.3(v) (a) of Notification No. 11/2017 - Central Tax (Rate) dated 28.06.2017 and Notification No.8/2017 - Integrated Tax (Rate) dated 28.06.2017 (subject notification). It was a JV formed for executing various railway projects. The petitioner claimed concessional rate of 12% on works contract services of original works executed pursuant to a contract entered with Rail Vikas Nigam Limited (RVNL). It carried out various activities such as doubling of track and construction of roadbed. The department denied the same stating that "railways" meant the Ministry of Railways, RVNL is a public sector undertaking listed on the stock exchange, employees are not common to RVNL and railways and RVNL does not function under the direct control of Railways. The petitioner stated that it functioned as an extended arm of the Ministry of Railways. The department's contentions were premised on the definition of 'Railway' under the Indian Railways Act, 1989 since that there is no definition for 'railways' under the GST law.

The High Court, however, opined if the legislature intended to incorporate or refer to the definition of 'railways' as contained under the Railways Act, it would have done so expressly like cost accountant or securities and the term "railways" used in the notification is not with reference or in relation to a particular entity i.e., Indian Railway, but intended to cover a utility / industry viz., railway. It held that the activities of the petitioner constitute original work pertaining to railway for the purpose of the subject notification and concessional rate would apply [2025-VIL-191-MAD].

Sketchy order not dealing with grounds of the appeal is not sustainable

The department bias though on a different note was quite visible in the appellate order. The appellate authority held that the adjudicating authority has done a good job of referring to statutory provisions and case law but the assessee merely raised contentions in the grounds of appeal and did not substantiate the same. Base on this "reason / discussion" the appeal was dismissed. The assessee contended that the appellate authority ought to list out the point stated for determination. The High Court held that statutory mandate under Section 107(12) of the CGST Act on following principles of natural justice and passing speaking order cannot be ignored and set aside the impugned order after terming it as "sketchy" and not dealing with the grounds of appeal with directions for passing fresh order. Quasi-judicial responsibilities should be divested from those involved in administration and there should be a separate cadre / hierarchy for such functions. Till such time, such charade cannot be contained [2025-VIL-195-TEL].

Waiver of SCN is not waiver of mandate of Rule 12(2) of Customs Valuation Rules

Value of imported aluminium scrap declared by the importer was enhanced by the department using DGoV Circular dated 01.12.2016. While the importer had accepted the reassessment albeit due to coercion and pressure of demurrage etc., it appealed against the order contending that the mandate of Customs Act, 1962 and Customs Valuation Rules, 2007 (CVR) was not followed and there was absence of contemporaneous import data or any investigation. The importer argued that Commissioner (Appeals) made a completely new case of related party valuation to distinguish the binding precedents in favour of them in their own case. Also, the Commissioner had relied upon an Order-in-Original related to a different party and imported the said OIO without assessing the facts. The Tribunal held that the mandate of Rule 12(2) of CVR cannot be "ignored or waived" and the department should pass a speaking order arriving at the assessable value as per the provisions in the statute. It also held that new allegation of related party without any investigation and more so pertaining to a different asssessee could not be used against the appellant [2025-VIL-314-CESTAT-CHD-CU].

Import and availment of technical services from same supplier does not indicate it is "condition of sale"

The importer assailed the inclusion of technical fee/royalty in value for customs purposes. According to the department since technical assistance and raw materials/capital goods are procured from the same supplier, the supplies were part of conditional sale though there was no explicit condition in the agreement between the parties for technical assistance. It held that royalty/technical fee was to be added to the transaction value in terms of Rule 10(1)(c) of Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 (CVR). The importer argued that imported goods were used in the manufacture of final products and the technical assistance services had nothing to do with the imported goods.

The Tribunal found that the entire agreement was only for sending technical personnel whose main function was to get the approval (from the supplier) of the products manufactured by the importer. It was held that merely because technical assistance and raw materials/capital goods are procured from the same supplier, without any explicit condition and such technical assistance being related to manufactured goods, no addition was warranted [2025-VIL-312-CESTAT-CHE-CU].

Unless reassessment is accepted in writing in terms of Section 17(4) of Customs Act, reasoned order has to be passed

Enhancement of value of Mix lot of 100% polyester knitted fabrics from China was made on the basis of NIDB data. The question before the CESTAT was whether the department had rightly re-assessed and enhanced the value of the imported goods without passing any speaking order but based on the fact that the differential duty has voluntarily been paid by the appellant. It held that both Section 17 of Customs Act, 1962 and Rule 12 of the relevant Valuation Rules mandatorily require the reasons in support of the "reason to doubt". It opined that if the proper officer did not even document the grounds on which it came to doubt the declared value there would be arbitrariness. Based on precedents it also held that only where the importer confirms his acceptance in writing about the re-assessment arrived at after following the procedure of Section 17(4), the proper officer would stand relieved of the obligation of passing his speaking order in respect of such assessment. The confirmation of additional duty was set aside being in violation of Section17(4) of Customs Act and of Rule 12 of Customs Valuation Rules [2025-VIL-304-CESTAT-DEL-CU].

Previous edition, dated 24th Feb, 2024

(The author is an Advocate, Gokul & Subha Advocates, Chennai. The views expressed are personal. The author has published books on cross-border taxation and investigations & appeals under GST. E-mail - advgokulsubha@gmail.com)