Tax Vista

Your weekly tax recap

Edn. 251 - 14th April 2025

Dr. G. Gokul Kishore

Services to members by association not exigible to GST - Amendments declared unconstitutional

The Kerala High Court has held the amendments made to relevant provisions in CGST Act to overcome principle of mutuality and to tax services by an association to own members are constitutionally not valid. The Indian Medical Association undertakes various services and implements certain schemes for the welfare of its members/ their families/dependents. Member doctors contribute an admission/annual fee and also a fraternity contribution on death disability. The department claimed that the entire sum is exigible to GST in terms of amendment of the provisions of Section 2(17)(e) and Section 7(1)(aa) read with the Explanation thereto of the Central Goods and Services Tax Act, 2017 [CGST Act] and the Kerala Goods and Services Tax Act, 2017 [KGST Act]. It argued that the principle of mutuality would not insulate services rendered by a Club/Association to its members from the levy of GST on supply of services, in view of the explicit clarificatory amendment. The demand covered a period of six years since the amendment was said to be retroactive. The petitioner argued that it was not liable to pay tax on the supply of services to its members and challenged the constitutional validity of the amendment.

The High Court held that accepted meaning of a term in a constitutional phrase could not be statutorily expanded and supply (sale in earlier statutes) and service as understood in the Constitution required plurality of persons and the club or association is not distinct from its members. Accordingly held that it would not be competent for a legislature to levy tax on a transaction when the taxable event in relation to the subject of taxation has not been recognised as such by the Constitution. With regard to the various judgments relied upon by the department upholding wider interpretation of subject matter of taxation such as income, it opined that words interpreted by judicial pronouncements were on a different footing as compared to a constitutional phrase which cannot be given a different meaning.

The Court further held following Ranchi Club v. Chief Commissioner of Central Excise & Service Tax [2012-VIL-126-JHR-ST], that taxable transaction such as supply/service necessarily involving two persons and the legislature cannot deem a transaction that does not involve two persons as a taxable transaction. It held that the concept of "supply" and "service" as understood under the Constitution and the CGST/SGST Acts (before their amendment) both excluded transactions informed by the principle of mutuality i.e. a supply/service from one entity to itself (self-supply/self-service) and consequently provisions of Section 2(17)(e) and Section 7(1)(aa) and the Explanation thereto of the CGST Act, 2017 and the provisions of Section 2(17)(e) and Section 7(1)(aa) and the Explanation thereto of the KGST Act were declared as unconstitutional and void being ultra vires the provisions of Article 246A read with Article 366 (12A) and Article 265 of the Constitution of India. The judgment is by Division Bench and the department will certainly file appeal in the Supreme Court. If Safari saga is the test, then even a retro amendment to the Constitution cannot be ruled out but it may be Herculean [2025-VIL-338-KER].

GST not applicable when partially completed building is sold without any service element

Immovable property is prone to disputes and litigation and GST law is no exception. One may wonder as to the dispute when transactions in immovable property like land and building are kept out of GST ambit and construction service alone has been made liable to GST. When the construction is half-done and then the building is sold, ambiguity sets in. The issue gets complicated when the property is part of insolvency proceedings and the bidder takes over such assets. Half-constructed mall was the centre of dispute and GST was paid under protest by the bidder and refund was sought which was rejected by the authorities. The petitioner contended that GST was not payable on sale of land and partly constructed building as the same did not satisfy the test of supply and there was no agreement to construct and the sale happened post the agreement in this case.

The High Court noted Entry 5 of Schedule III to CGST Act "Sale of land and, subject to clause (b) of paragraph 5 of Schedule II, sale of building" and Section 7 on supply and held that sale of land in all cases is excluded and sale of building is excluded except where the building is covered under clause (b) of paragraph 5 of Schedule II and if such building is covered under said clause of Schedule II, it does not come within the entry in Schedule III. It said that what is important to see is whether contract for rendering construction services exists which is liable to GST or is it a contract for sale of building, though incomplete, but as a building per se which is covered under stamp duty regime. It held that GST will not apply to the subject sale transaction when the partially completed building is sold without any service element or goods element being contemplated in the said agreement or sale deed. There was no service obligation on the liquidator in this case when the property was sold on "as is where is" basis.

The order is eloquent - "... the sale deed clearly shows that the said building would be sold on 'as is where is basis' by the liquidator; the liquidator does not have any further service obligations cast on him nor is there any consensus ad idem for the liquidator rendering construction or works contract services to the petitioner; as far as the liquidator is concerned, the sale of building, even if incomplete, is a sale on 'as is where is basis' with no further commitment or obligation to carry out any services and consequently, the aforesaid clauses of construction services under entry 5(b) or entry 6(a) of Schedule II to the GST legislation does not arise at all; that is also the reason why the sale deed carries substantial stamp duty. It follows there from that if the agreement or sale deed does not have a goods or service element at all, the question of the respondent authorities stating that service element of completion of a building should get taxed in the hands of the liquidator and be borne by the petitioner flies in the face of the facts itself and is completely contrary to the scope of the tax entries. Insisting on taxation of a building on the grounds that completion certificate is yet to be received will not reflect the true nature of the transaction being undertaken. The respondent authorities were clearly wrong in fastening the liability on the liquidator and the incidence on the petitioner as the said services were never rendered through the agreement nor it was in contemplation. In fact, when the petitioner takes over the building and gets the same completed, that is the point when GST may get attracted towards the completion of the building and in the hands of those who render such services or supply such goods. The charge, therefore, was made on non-existent services which was the fundamental error made in the said order assuming jurisdiction to tax a sale of immovable property on 'as is where is basis', even if not completed."

The High Court set aside the order rejecting refund and directed grant of refund along with interest. The issue has been well discussed in the order. But it seems to indicate there is apparently a grey area at least from the point of view of GST authorities. These are early days and GST law is evolving. Such jurisprudence will help in finetuning the provisions as well [2025-VIL-324-KAR].

Solatium/compensation for compulsory acquisition of land - Not exigible to GST

In an elaborate order with good discussion on "solatium", "obligation to tolerate an act" and "condition of contract v consideration" the Karnataka High Court held that compensation termed solatium received by the petitioner whose immovable property was acquired by Karnataka Industrial Area Development Board (KIADB) for the benefit of the BMRCL for the purpose of construction of Bangalore Metro Rail Project, is not exigible to GST. Under challenge were orders and show cause notices calling upon the petitioners to pay GST towards the solatium component of the package compensation. The department contended that the sum was taxable as consideration for agreeing to the obligation to refrain from an act, or to tolerate an act or a situation or to do an act as contemplated in Entry 5(e) of Schedule - II to the CGST / KGST Act and explained in the Circular No.177/09/2022-GST dated 03.08.2022, Circular No.178/10/2022-GST dated 03.08.2022, Circular No. 214/1/2023 - Service Tax dated 28.02.2023. Examining the exigbility to GST in terms of subject matter (immovable property), supply (whether activity is toleration) and consideration, the High Court held that the petitioners were entitled to relief.

Referring to the history of GST enactment with specific exclusion being provided to immovable property it held that compulsory acquisitions of land where the owners lose their entire right on the property is akin to sale and ought to be treated as such and GST cannot be levied. It also opined that since agreements under Section 29(2) of the Karnataka Industrial Area Development Act, 1966 (KIAD) were entered into between the petitioners and the petitioners had no right to challenge the compensation, it was not a case of any toleration and cannot be construed or treated or understood as solatium in the real sense of the term / expression "solatium" either under the Land Acquisition Act, 1894 (for short 'the L.A. Act') or Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013 (RFCTLA). It held that the activity is transfer of the property simpliciter and there is no agreement to tolerate an act or refrain from an act or to do an act and solatium is intended to compensate the owner for his disinclination to part with his property.

The High Court also referred to Circular 178 which provides that contractual arrangement for toleration must be an independent arrangement in its own right which was not the case herein. It drew a distinction between condition of contract and consideration and opined that the flow of money was merely a condition of contract and not consideration for any act of toleration. Interestingly, it was held that even if Entry 5 of Schedule III were not there, sale of land and building cannot be brought under GST as they are covered under the State List II and that Schedule II is merely a classification schedule and does not lead to taxability [2025-VIL-316-KAR].

ITC eligibility is not dependent on physical receipt of goods at particular location

It is a common practice in trade to raise invoice on a particular party who is the buyer of goods and deliver the goods in another place as instructed by the buyer. The place of delivery may be typically job worker's premises. The transaction is commonly referred as Bill-To-Ship-To and GST law recognizes such concept by providing for availment of input tax credit even when the goods are not physically received by the buyer. Explanation to Section 16(2)(b) of CGST Act provides for the same. The real reason is not clear but GST authorities refused to accept such statutory position and it appears disputed ITC availed in such cases.

The Patna High Court perused the provisions and held that CGST Act does not require that goods must be physically received at a specific location for ITC eligibility and based on agreement / memorandum between parties providing for delivery at another location, the registered person (buyer) will be deemed to have received the goods. The orders were set aside and the adjudicating authority has been directed to verify such facts and pass order afresh. The only issue that may arise is the Court's use of agreement or MOU providing for such terms and the authorities may find fault with any document that may be produced [2025-VIL-339-PAT].

Uploading of order is sufficient for service / communication under GST law

Uploading of order in GST portal is sufficient for the purpose of service or communication as per the recent judgment of Orissa High Court. Section 169 of CGST Act has been taken note of and the Court has said that the language used is clear and any one of the modes prescribed can be used out of the several methods prescribed and once the fact of order having been uploaded is not in dispute, then communication is complete. The order states - "The moment the order is uploaded in the common portal and the returns are statutorily required to be uploaded on such portal on periodical intervals, it is inconceivable that there was lack of knowledge of said order to the Petitioner."

On this issue, many High Courts have been disposing petitions holding both the views - there should be communication through mail or speed post along with uploading and mere uploading is not sufficient. In this column, these orders are also being analyzed with the view to attract the attention of the GST Council and CBIC to suitably amend Section 169 so that mode of communication ceases to be a point of dispute. In this case, the issue pertained to the year 2023 but the writ petition has been filed in 2025 and this is seen as delay and laches which is a ground to reject the petition as per settled position of law [2025-VIL-333-ORI].

GST registration cancellation - Filing of returns for 2 months not sufficient

The Kerala High Court framed the question as to whether order of cancellation of GST registration can be set aside if returns for a few months are filed after show cause notice when the cancellation was for failure to file return for six months. The petitioner argued that when returns were filed for two months after SCN but before the order, there was break in the six-month period and hence, registration ought to have not been cancelled. The High Court noted that Rule 22 of CGST Rules provides for dropping of proceedings if all the pending returns are filed and tax with interest is paid. It held that piecemeal filing of returns is not contemplated in the provisions, the cause of action that arose due to non-filing of returns was not wiped off. According to it, once the cause of action arose by issuance of show cause notice, the end result can be avoided only by filing returns for all six months along with tax, interest and late fee.

The taxpayer sought to rely on the same Court's order in Phoenix Rubbers [2020-VIL-105-KER] but the same has been held as per incuriam as proviso to Rule 22(4) was not brought to the notice of the Court in that case. The order is reasoned and it may be difficult to dislodge the same in intra-Court appeal also unless such proviso is read down by adopting purposive interpretation of the provision being benevolent to taxpayer and the intention is not to keep taxable persons out of the net [2025-VIL-335-KER].

IGST before amendment - Interest, confiscation, redemption fine and penalty not sustainable

The facts of the case are widely known - the petitioner was Advance Authorisation holder who did not pay IGST initially (specific period) but did not meet pre-import condition and to this extent, there was contravention as per investigations. The petitioner requested for re-assessment of bills of entry to enable them to pay IGST. In the meantime, the pre-import condition was quashed by Gujarat High Court in Maxim Tubes [2019-VIL-80-GUJ] which was appealed against by the department in the Supreme Court. The Apex Court allowed the appeal as reported in Cosmos Films [2023-VIL-47-SC]. CBIC by Circular No. 16/2023-Cus., prescribed the procedure for payment of IGST along with interest. In Mahindra and Mahindra [2022-VIL-690-BOM-CU], the Bombay High Court held that interest could not be levied as there was no machinery provision in the Customs Tariff Act to levy interest on IGST. The said decision was affirmed by the Supreme Court.

Taking note of such facts, the Bombay High Court has held that the issue was settled in the above said decision and the amendment to Section 3(12) of the Customs Tariff Act from 16-8-2024 is prospective and did not cover the past cases. This also led the Court to conclude confiscation was not sustainable and the order seeking to recover interest, redemption fine and penalty was set aside. By the said amendment, provisions of Customs Act including levy of interest were made applicable to IGST as well. The said circular seeking interest was also termed as bad in law, by the Court [2025-VIL-328-BOM-CU].

Refund sanctioned cannot be withheld without pending appeal merely on "opinion" of the department

The legal battles on reading "may" as "shall" or vice versa, "and" as "or" would appear to be excess of legalese for the department which read "and" as "or". The petitioner was successful in the appeal against denial of refund and the department had not filed appeal but stated that it intended to do so. Relying on Section 54(11) of CGST Act 2017 it argued that refund would be withheld if "an order giving rise to a refund is the subject matter of an appeal or further proceedings or where any other proceedings under this Act is pending and the Commissioner is of the opinion that grant of such refund is likely to adversely affect the revenue". The High Court held that the absence of an appeal or any other proceeding pending, challenging the order of the Appellate Authority, the opinion under Section 54(11) cannot result in holding back the refund. It also opined that since refund amounts are payable with interest for the delayed period for paying the refund, it would in fact be contrary to the interest of the Department itself to hold back the refund inasmuch as if any appeal is filed and the order of the Appellate Authority is reversed [2025-VIL-325-DEL].

Deficiency memo cannot read like an order of rejection of refund

GST jurisprudence is in the process of development so every coma, full stop, myriad form have to be interpreted. The petitioner had deposited tax mistakenly since name of the supplier alleged to eb non-existent and his supplier was similar. Subsequently the petitioner claimed refund of tax wrongly paid, in FORM GST RFD-01. A deficiency memo was issued in GST RFD-03 stating that refund not allowed in case of payment made voluntary by DRC-03. The petitioner argued and the High Court agreed that admissibility of refund cannot be determined by way of a deficiency memo at the stage of acknowledgement of the refund application filed by the assessee. Referring to Rule 90(3) of the CGST Rules, 2017, it was held that rejection if at all made can only be after issue of show cause notice and passing order and not at stage of communicating deficiency which is to permitted to be rectified under the act [2025-VIL-337-GUJ].

Previous edition, dated 7th Apr, 2025

(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)