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Proverbs are known to be a short cut to wisdom. The wisdom in the following proverbs fit the bill in the background of the recent recovery drive of the In-direct tax department and describes the state of affairs in India’s in-direct tax administration.

  1. The real danger of democracy is, that the classes which have the power under it will assume all the rights and reject all the duties – that is, that they will use the political power to plunder those who have. William Graham Sumner.
  2. We don’t know what we want, but we are ready to bite somebody to get it. Will Rogers.
  3. Many slow & sly deceptions make the justice system skew; due process when thus manoeuvred thwarts justice that is due – Art Buck.
  4. The real problem with which modern government has to deal with is how to protect the citizen against the encroachment upon his rights and liberties by his own government, how to save him from the repressive schemes born of egotism of public office. William E Borah.
  5. Things in our country run in spite of government not by the aid of it – Will Rogers.

The last one is the best and sums up how businesses function in India. The deliberation herein was occasioned due to the pressure tactics resorted to by the in-direct tax administration (department for short) given the decision of the Allahabad High Court in CC & CE Vs. J P Transformers, 2013-TIOL-1152-HC-ALL-ST by which an interpretation that the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) does not have the power to extend the operation of their stay order beyond a period of 365 days, came to be sustained. However, what needs consideration is that the order did not lay down any ratio to be followed with such zeal as a dog chases a cat or a cat a mouse, as a precedent in terms of Article 141 of the Constitution of India and was only an order operable inter-se amongst the parties to the lis. The order also did not appreciate the decision of the apex court in Kumar Cotton despite citing it as a referred case, there is no discussion in the decision of the Allahabad High Court why the ratio laid down in the case of CCE Vs. Kumar Cotton Mills Pvt., Ltd., 2005 (180) ELT 434 (SC) would not apply even to the third proviso in sub-section 2A of section 35C of the CEA. The order was hailed by the department as their lord almighty and their saviour granting them a warrant to initiate recovery proceedings in cases where there was a stay order passed by the Tribunal but the same was in force for a period of more than 365 days.

The department’s rise of temperature above all known states of excitement and agitation in recovering purported dues when there exists’ an interim order of the Tribunal directing stay of recovery and operation of an impugned order was unparalleled. The Bhramastra of the department and its ilk was section 35C of the Central Excise Act, 1944 (CEA). What comes to mind in the words of Clarence Darrow (One of the greatest American Lawyers) is – There is no such thing as justice – in or out of court.

Cause – Provisions of section 35 C of the CEA – Abstracted below for ease of reference:

Orders of Appellate Tribunal.SECTION 35C. — (1) The Appellate Tribunal may, after giving the parties to the appeal an opportunity of being heard, pass such orders thereon as it thinks fit, confirming, modifying or annulling the decision or order appealed against or may refer the case back to the authority which passed such decision or order with such directions as the Appellate Tribunal may think fit, for a fresh adjudication or decision, as the case may be, after taking additional evidence, if necessary.

(1A) The Appellate Tribunal may, if sufficient cause is shown, at any stage of hearing of an appeal, grant time, from time to time, to the parties or any of them and adjourn the hearing of the appeal for reasons to be recorded in writing:

Provided that no such adjournment shall be granted more than three times to a party during hearing of the appeal.].

(2) The Appellate Tribunal may, at any time within [six months] from the date of the order, with a view to rectifying any mistake apparent from the record, amend any order passed by it under sub-section (1) and shall make such amendments if the mistake is brought to its notice by the [Commissioner of Central Excise] or the other party to the appeal:

Provided that an amendment which has the effect of enhancing an assessment or reducing a refund or otherwise increasing the liability of the other party, shall not be made under this sub-section, unless the Appellate Tribunal has given notice to him of its intention to do so and has allowed him a reasonable opportunity of being heard.

[(2A) The Appellate Tribunal shall, where it is possible to do so, hear and decide every appeal within a period of three years from the date on which such appeal is filed :

Provided that where an order of stay is made in any proceeding relating to an appeal filed under sub-section (1) of section 35B, the Appellate Tribunal shall dispose of the appeal within a period of one hundred and eighty days from the date of such order:

Provided further that if such appeal is not disposed of within the period specified in the first proviso, the stay order shall, on the expiry of that period, stand vacated:]

[Provided also that where such appeal is not disposed of within the period specified in the first proviso, the Appellate Tribunal may, on an application made in this behalf by a party and on being satisfied that the delay in disposing of the appeal is not attributable to such party, extend the period of stay to such further period, as it thinks fit, not exceeding one hundred and eighty-five days, and in case the appeal is not so disposed of within the total period of three hundred and sixty-five days from the date of order referred to in the first proviso, the stay order shall, on the expiry of the said period, stand vacated.]

(3) The Appellate Tribunal shall send a copy of every order passed under this section to the [Commissioner of Central Excise] and the other party to the appeal.

(4) Save as provided in section 35G or section 35L orders passed by the Appellate Tribunal on appeal shall be final.

The third proviso to sub-section 2A of section 35C of the CEA does not postulate any embargo on the powers of the Tribunal to pass interim orders or to extend the operation of the stay once the same stood vacated. All that the proviso under discussion does is provide that after an expiry of 365 days the order of stay stands vacated. The provision did not postulate any other condition on the powers of the CESTAT to extend stay orders after an expiry of 365 days. The eternal principle of interpreting a provision of a statute by giving words used therein their plain and simple meaning was lost out by the department and with all due respect the Hon’ble High Court of Allahabad.

Effect – The assessees’ problems stand compounded due to the spirit shown by the department in enforcing the above underlined proviso given the High Court decision. I have never observed, noticed or seen the department acting with such zeal, spirit or speed in implementing an order of the High Court, when it construes any provision in favour of an assessee. The minions of the Finance Minister (FM) across India serving their master (FM) took upon themselves to issue instructions to recover amounts where the stay order was in operation beyond a period of 365 days. India was exported back to the British raj whence all that the Britishers were required and expected to do and were presumably interested to do was to collect Lagan. The interpretation placed by the department on the above proviso if accepted would result in empowering the CESTAT to grant stay for a **period not exceeding 365 days and if the appeal does not stand disposed of for any reason the disputed demand (either customs or excise duty or service tax) would have to be paid forthwith by the assessees and the process of appealing against the order and obtaining a stay would be effective only for a period of 365 days. In sum, if for any reason an appeal is not disposed off within a period of 365 days (in practice an appeal is not disposed off even after 5 – 6 years) an assessee would necessarily have to pre-deposit the entire demand. In effect this would mean that irrespective of the fact whether a demand proposed is sustainable in law, or fact, or pending disposal before an appellate forum, the demand would have to be paid after expiry of 365 days from the date of passing an order of stay. Such a reading of the proviso is perverse brilliancy at its zenith.

Taking a converse situation where one can look at the duty of the department the same yardstick does not apply and sauce for the goose is not sauce for the gander. I have never seen the department go out of its way in sanctioning refunds where they are due and when belatedly sanctioned I have known departmental officers to take an undertaking (the legality of such an undertaking not being an issue under deliberation herein) from assessees that they would not claim interest when refund is belatedly sanctioned. Such is the state of affairs in our great country that the department would assert only rights and their corresponding duties are lost in the din of their assertion of rights.

This brings us to another question i.e. why does the legislature not legislate on a similar provision in the statute books relating to refunds which are not sanctioned within a period stipulated in section 11BB of the CEA. I hope the department appreciates the fallacy of an interpretation as is canvassed in the decision of the Allahabad High Court. The arrangement of statutory provisions of law which have the effect of manoeuvring and giving impetus to illegal acts in the name of the rule of law ought to be curtailed and the draftsmen ought to show some restraint in drafting such provisions without putting in place the infrastructure which has the capability of disposing of appeals within a period of 365 days. Without first putting in place infrastructure which is capable of disposing appeals within a period of 365 days of passing the stay order, bringing into effect a provision merely for the collection of litigated dues during the pendency of such appeals and where a stay order has been passed before an appellate forum, is nothing short of expecting a sugar factory which has the crushing capacity of 2000 tonnes to crush 20000 tonnes or expecting a vehicle to run 500 kms without adequately fuelling the vehicle. Such an expectation is neither pragmatic nor feasible given the redundancies at ground level.

Background – The intent of inserting the proviso in subsection 2A of section 35C of the CEA would have been godly inasmuch as (and I’m guessing here) appeals would be disposed off expeditiously and there would be no reason for cases to drag on in the CESTAT in perpetuity for reasons attributable to the assessees’. The statement of object and reasons and the explanatory notes on clauses in the Budget of 2013-14 does not shed much light on the intent of the legislature for inserting such a proviso in section 35C of the CEA. Being a practitioner of tax litigation for more than a decade, I found that there exists a similar provision under the Income Tax Act, 1962 (ITA) i.e. section 254. However, the said provision under the ITA is worded differently though at first blush it may seem identical. It is a principle well settled in law, that words in a statute have to be strictly interpreted and there is no scope for reading into the provisions of the statute any intent. It is also well settled that the statute has to be looked at as a whole and not by segmenting the same as per the convenience of the department.

Income Tax Act, 1962 – The purpose of section 254 under the ITA, if looked at and the machinery in place for disposal of appeals at the ground level if ascertained would show that the Income Tax Appellate Tribunal (ITAT) has branches in Mumbai, Delhi, Agra, Ahmedabad, Allahabad, Amritsar, Bangalore, Chandigarh, Chennai, Cochin, Cuttack, Guwahati, Hyderabad, Indore, Jabalpur, Jaipur, Kolkata, Lucknow, Nagpur, Panaji, Patna, Pune, Rajkot, Raipur (Bilaspur), Ranchi and Visakhapatnam. This makes a total of 26 Benches across India with adequate infrastructure and bandwidth to dispose of cases within a period of 365 days. These figures would lead a man of ordinary prudence to conclude that under the ITA there exists infrastructure which is capable of disposing of appeals within a period of 365 days and that the proceedings are not in a state of inertia in perpetuity as in the case of CESTAT, which in comparison has Benches at 6 places. The adoption of provision from the ITA and making the same applicable to in-direct taxes is not justifiable nor is expecting that appeals would be disposed of within a period of 365 days from the date of passing the stay order legitimate in law or in fact.

New Year Gift – A pertinent observation is that at the start of 2013 the department gifted to the assessees’, circular dated 1.1.2013. This ensured that many lawyers were gainfully employed given the exigency of the situation and also the zeal of the department. Some Courts were quick in reprimanding such an act of the department and granting relief till the disposal of the appeal while some were sceptical and directed that the cases be expeditiously disposed. One case which stands out amongst many is the decision in KIADB order dated 25.03.2013 in W.P.No.14181 of 2013 (T-TAR) wherein it was pointed out that there existed a chasm, a deep one when it came to the number of benches of the CESTAT. The Court accordingly directed that co-ordinate benches be set-up for expeditious disposal of appeals and to reduce redundancies at the limited number of Benches at Delhi, Mumbai, Calcutta, Ahmadabad and Bangalore. The decision was dated 25.03.2013. The Court had also directed the UOI to report compliance and the UOI had indicated that it required 6 months to set up the requisite number of CESTAT benches. It is however more than a year and the status of the action taken by the UOI (with or without Zeal) is unknown and remains a mystery. I have been given to understand from reliable sources that a Bench at Hyderabad would be functional from June. How far this is true remains to be seen.

This paper in essence communicates that the law and ground realities are a world apart and what is sauce for the goose under the ITA cannot be made the sauce for the gander in the context of in-direct taxes. The wherewithal and infrastructure is in place with ample number of functional Tribunals to dispose of appeals and ensure disposal of appeals within a period of 365 days under the ITA whereas the same is absent in the context of excise, customs and service tax appeals before the CESTAT.

Discussion on Section 35C & 35F of the CEA – Reverting to the deliberation on hand, what assumes importance is that section 35C deals with orders of Appellate Tribunal and the promulgation on the scope of such orders stands stipulated in the said section. The said section does not postulate that the Tribunal shall not have the power to extend the stay granted on an examination of the prima-facie nature of a case. There is nothing in the section which brings out a reading that there is a fetter cast on the power of the Tribunal to grant extension of stay. All that the proviso under deliberation does is that it stipulates that the stay granted shall on the expiry of 365 days stand vacated. Now reading into the said proviso that the Tribunal does not have the power to extend the stay already granted would be doing injustice to the principle of strict interpretation of tax statutes. It is elementary that there is scope for interpretation only when there is ambiguity in any provision, where there is none the question of bringing into aid the interpretative skills of a person does not arise. There are scores of decisions which have held that no word in a statute can be omitted and at the same time no word can be added in the provision of a statute.

SECTION 35F. Deposit, pending appeal, of duty demanded or penalty levied. — Where in any appeal under this Chapter, the decision or order appealed against relates to any duty demanded in respect of goods which are not under the control of Central Excise authorities or any penalty levied under this Act, the person desirous of appealing against such decision or order shall, pending the appeal, deposit with the adjudicating authority the duty demanded or the penalty levied :

Provided that where in any particular case, the [Commissioner (Appeals)] or the Appellate Tribunal is of opinion that the deposit of duty demanded or penalty levied would cause undue hardship to such person, the [Commissioner (Appeals)] or, as the case may be, the Appellate Tribunal, may dispense with such deposit subject to such conditions as he or it may deem fit to impose so as to safeguard the interests of revenue.

[Provided further that where an application is filed before the Commissioner (Appeals) for dispensing with the deposit of duty demanded or penalty levied under the first proviso, the Commissioner (Appeals) shall, where it is possible to do so, decide such application within thirty days from the date of its filing.]

[Explanation. — For the purposes of this section ‘‘duty demanded’’ shall include, —

(i)  amount determined under section 11D;

(ii) amount of erroneous Cenvat credit taken;

(iii)            amount payable under rule 57CC of Central Excise Rules, 1944;

(iv) amount payable under rule 6 of Cenvat Credit Rules, 2001 or Cenvat Credit Rules, 2002 or Cenvat Credit Rules, 2004;

(v)  interest payable under the provisions of this Act or the rules made thereunder.]

The department failed to realise that the power to grant stay is not stipulated under any of the provisions of the CEA, CA or the FA. Some learned brethren may argue that section 35F of the CEA grants the power to the Tribunal. However, what stands missed out is the aspect that     section 35F merely stipulates that the Tribunal has the discretion to grant unconditional stay of recovery and operation of any challenged order. What has been missed out is that the power to grant stay is inherent in the establishment of the Tribunal as an appellate authority. The Tribunal has exceptional powers in this regard which is not stipulated or controlled by any provision under any of the three enactments referred to supra. Such powers are called inherent powers i.e. such powers exist in the body established by law by its very establishment and such power cannot be conferred or controlled. Section 35F only stipulates the general rule that deposit has to be made of the dues and carves out an exception to this general rule that where there is undue hardship to a person the Tribunal may (discretion vested) grant stay subject to further conditions as it may determine. What follows is that the power to grant stay is therefore inherent and not conferred under any of the provision of the three statutes. It is for this plain and simple reason that none of the sections under any of the three enactments grant any power to the CESTAT to grant a stay and section 35C postulates that the stay would stand vacated and by using such words does not imply directly, indirectly or by any degree of imagination that the Tribunal is divested of their powers to extend the operation of the stay where it decides on the undue hardship caused to any person. When such is the case, the inherency of powers of a Tribunal to grant stay cannot be impugned. Section 35F of the CEA is abstracted for ready reference.

Otiose interpretation to be avoided – The department in its haste to grind assessees to paste by mandating payment of disputed levies failed to appreciate that if the interpretation canvassed by the department is to be upheld the provisions of section 35F of the CEA would be rendered redundant and a mere embellishment. An interpretation which renders another provision of a statute is to be avoided and an interpretation which would further the object of all provisions and make them workable is to be adopted. This is again elementary.

On Inherent Powers of the CESTAT

The issue whether the CESTAT has inherent powers is a vexed question because there exists no precedent and no Bench of the tribunal is willing to enter into an issue of whether it has the power to determine vires of the provisions of the statute under which it was created. Be that as it may, the findings of the seven member bench of the Supreme Court in L. Chandra Kumar Vs. UOI, 1997 (92) ELT 318 (SC) are relevant, wherein it was held at para 64 In Minerva Mills v. Union of India, a five-Judge Constitution Bench of this Court had to consider the validity of certain provisions of the Constitution (42nd Amendment) Act, 1976 which, inter alia, excluded judicial review. The judgment for the majority, delivered by Chandrachud, C.J. for four Judges, contained the following observations (at p. 644, para 21): “…Our Constitution is founded on a nice balance of power among the three wings of the State, namely, the Executive, the Legislature and the Judiciary. It is the function of the Judges, nay their duty, to pronounce upon the validity of laws. If courts are totally deprived of that power, the fundamental rights conferred upon the people will become a mere adornment because rights without remedies are as writ in water. A controlled Constitution will then become uncontrolled.”

(Emphasis supplied) Para 65 The majority judgment held the impugned provisions to be unconstitutional. While giving reasons in support, Chandrachud, C.J. stated as follows: “…It is for the courts to decide whether restrictions are reasonable and whether they are in the interest of the particular subject. Apart from other basic dissimilarities, Article 31-C takes away the power of judicial review to an extent which destroys even the semblance of a comparison between its provisions and those of Clauses (2) to (6) of Article 19. Human ingenuity, limitless though it may be, has yet not devised a system by which the liberty of the people can be protected except through the intervention of courts of law.” The proper approach for a Judge who is confronted with the question whether a particular facet of the Constitution is part of the basic structure, is to examine, in each individual case, the place of the particular feature in the scheme of our Constitution, its object and purpose, and the consequences of its denial on the integrity of our Constitution as a fundamental instrument for the governance of the country. (supra at pp. 751-752). This approach was specifically adopted by Bhagwati, J. in Minerva Mill’s case (supra at pp. 671-672) and is not regarded as the definitive test in this field of Constitutional Law. Para 91 – Before moving on to other aspects, we may summarise our conclusions on the jurisdictional powers of these Tribunals. The Tribunals are competent to hear matters where the vires of statutory provisions are questioned. However, in discharging this duty, they cannot act as substitutes for the High Courts and the Supreme Court which have, under our constitutional set-up, been specifically entrusted with such an obligation. Their function in this respect is only supplementary and all such decisions of the Tribunals will be subject to scrutiny before a Division Bench of the respective High Courts. The Tribunals will consequently also have the power to test the vires of subordinate legislations and rules. However, this power of the Tribunals will be subject to one important exception. The Tribunals shall not entertain any question regarding the vires of their parent statutes following the settled principle that a Tribunal which is a creature of an Act cannot declare that very Act to be unconstitutional. In such cases alone, the concerned High Court may be approached directly. All other decisions of these Tribunals, rendered in cases that they are specifically empowered to adjudicate upon by virtue of their parent statutes, will also be subject to scrutiny before a Division Bench of their respective High Courts. We may add that the Tribunals will, however, continue to act as the only courts of first instance in respect of the areas of law for which they have been constituted

This decision in clear terms clarifies that the Tribunal is vested with the powers to determine the vires of provisions of the statute but not the vires of the statute under which it was established and that such orders would be liable to scrutiny by the High Courts. This in effect means that the approach that the Tribunal does not have the power to examine the vires of provisions of statute is erroneous as explicitly stated by the apex court in the above decision. This would in turn imply that the Tribunal is vested with immense powers all of which are not specifically conferred under the statute under which it was created.

The decision of the Karnataka High Court in CCE Vs. IOCL, 2010 (258) ELT 504 (Kar.), before the introduction of Section 2(A) and the provisos, there was no express provision in Section 35C of the Act providing for grant of an order of stay of the impugned orders. However, on an application filed for such stay order, the Tribunal was granting such stay orders. Similar situation was in existence in the appeal provisions under the Income Tax Act. The Apex Court in the case of Income Tax Officer v. M.K. Mohammed Kunhi reported in 1969 (71) ITR 815, in those circumstances held as under: “the arguments advanced on behalf of the appellant before us that, in the absence of any express provisions in Sections 254 and 255 of the Act relating to stay of recovery during the pendency of an appeal, it must be held that no such power can be exercised by the Tribunal, suffers from a fundamental infirmity inasmuch as it assumes and proceeds on the premises that the statute confers such a power on the Income-tax Officer who can give the necessary relief to an assessee. The right of appeal is a substantive right and the question of fact and law are at large and are open to review by the appellate Tribunal. Indeed, the Tribunal has been given very wide powers under Section 254(1), for it may pass such orders as it thinks fit after giving full hearing to both the parties to the appeal. If the Income-tax Officer and the Appellate Assistant Commissioner have made assessments or imposed penalties raising very large demands and if the Appellate Tribunal is entirely helpless in the matter of stay of recovery, the entire purpose of the appeal can be defeated if ultimately orders of the departmental authorities are set aside. It is difficult to conceive that the legislature should have left the entire matter to the administrative authorities to make such orders as they choose to pass in exercise of unfettered discretion. The assessee, as has been pointed out before, has no right to even move an application when an appeal is pending before the Appellate Tribunal under Section 220(6) and it is only at the earlier stage of appeal before the Appellate Assistant Commissioner that the statute provides for such a matter being dealt with by the Income-tax Officer. It is a firmly established rule that an express grant of statutory power carries with it by necessary implications the authority to use all reasonable means to make such grant effective. The powers which have been conferred by Section 254 on the Appellate Tribunal with widest possible amplitude must carry with them by necessary implication all powers and duties incidental and necessary to make the exercise of those powers fully effective”. The Supreme Court ultimately held “Section 255(5) of the Act does empower the Appellate Tribunal to regulate its own procedure, but it is very doubtful if the power of stay can be spelt out from that provision. In our opinion, the Appellate Tribunal must be held to have the power to grant stay as incidental or ancillary to its appellate jurisdiction. This is particularly so when Section 220(6) deals expressly with a situation when an appeal is pending before the Appellate Assistant Commissioner, but the Act is silent in that behalf when an appeal is pending before the Appellate Tribunal. It could well be said that when Section 254 confers appellate jurisdiction, it impliedly grants the power of doing all such acts, or employing such means, as are essentially necessary to its execution and that the statutory power carries with it the duty in proper cases to make such orders for staying proceeding as will prevent the appeal if successful from being rendered nugatory”. The right of appeal is a substantive right, and the question of fact and law are at large and are open to review by the Appellate Tribunal. It is firmly established rule that an express grant of statutory power carries with it by necessary implications the authority to use all reasonable means to make such grant effective. One such authority is the duty in proper cases to make such orders for staying proceedings as will prevent the appeal, if successful from being rendered nugatory. Therefore, the appellate Tribunal has the power to grant stay as incidental and ancillary to its appellate jurisdiction. When the parliament introduced the amendment restricting the operation of the stay order, they recognized this settled legal position that the appellate Tribunal has the power to grant an order of stay even in the absence of a specific provision conferring such power, and such power flowing from the appeal provision itself. What they intended by the amendment is to restrict the duration of the stay order which is passed by virtue of such power, In the light of the aforesaid law, prior to amendment even in the absence of an express provision, the Tribunal in exercise of its power under Section 35(C) is entitled to grant an order of stay of the impugned order. That is how, the stay orders were being granted, which was well accepted.

The decision of the Hon’ble High Court if appreciated would bring out the aspects that when the power of stay is not expressly granted it ought to be presumed that the power to grant stay is inherent in the Tribunal by its very establishment as an appellate authority and all incidental and ancillary powers in the exercise of its functioning ought to be, by necessary implication, be presumed to be inherent in the Tribunal to carry out its duties and obligations under the statute and such inherent power includes the power to grant stay and also extent it where there is no express prohibition and when there is an express prohibition and the appeal drags on for no fault of the assessee, the Tribunal will nevertheless have the power to grant stay and also extend the same in the light of its inherent power.

Another decision which has elucidated this principle, amongst many, is the decision of the Supreme Court in the case of Commissioner of Cus. & C.Ex., Ahmedabad v. Kumar Cotton Mills Private Limited reported in 2005 (180) E.L.T. 434 (S.C.) dealing specifically with the amended provision prior to insertion of the third proviso to sub-section 2A of section 35C of the CEA, held as follows: The provision has clearly been made for the purpose ofcurbing the dilatory tactics of those assessees who, having got an interim order in their favour, seek to continue the interim order by delaying the disposal of the proceedings. Thus, depriving the revenue not only of the benefit of the assessed value but also a decision on points which may have impact on other pending matters. The Tribunal which was then know as Customs, Excise Gold(Control) Appellate Tribunal (CEGAT) came to the conclusion that the amendment did not affect stay orders which were passed prior to the date of coming into force of the amendment and also held that the amendment did not in any way curtail the powers of the Tribunal to grant stay exceeding six months. During the pendency of the appeal before this Court, the matter was conferred to a Larger Bench of the Tribunal. The Larger Bench has by its decision reported in 2004 (169) E.L.T. 267 upheld the view impugned in this case. The decision of the Larger Bench has not been challenged by the Department being of the view that repeated special leave petition raising the same issue was unnecessary”.

It is also useful to refer to a decision of the Income Tax Appellate Tribunal, while considering an identical issue relating to the power of the Tribunal to grant further stay after the expiry of six months since passing the first order of say, in Centre for Women’s Development Studies v. Deputy Director of Income Tax, which reads as follows: “On a careful perusal of the relevant new provisions in the law and aforesaid judicial pronouncements, we are of the considered opinion that sub-section (2A) was inserted in Section 254 to curtail the delays and ensure the disposal of the pending appeals within a reasonable time frame. There is no intention of the Legislature to curtain or withdraw the powers of the Tribunal for granting a say exceeding a period of six months. Had it been the intention of the Legislature, there would be a specific amendment in the Act to this effect because if the powers of the Tribunal for granting the stay exceeding a period of six months are withdrawn by this amendment, the object of imparting justice by the Tribunal cannot be achieved even in those cases where the assessee has co-operated with the Tribunal to its full extent and the hearing is in progress. We, therefore, are of the considered view that the Tribunal has power to grant a further stay on the expiry of six months of earlier stay if the facts and circumstances so demand”. Affirming the said view, a Larger Bench in the case of IPCL v. Commissioner of Central Excise, Vadodara – 2004 (169) E.L.T. 267 observed as under: “We find that in Themis Pharmaceuticals the Bench has taken note of the fact that it is practically not possible to dispose of the appeals pending before the Bombay Bench of the Tribunal within 180 days. The Bench has also suggested some remedy for the problem. In this connection, we may observe that similar situation can arise in other Benches also where an appeal posted within 180 days could not be taken up for different reasons. It may be due to non-availability of time for the Bench or due to non-availability of the Bench itself. Unless the Tribunal has the power to extend stay beyond 180 days, the assessee’s interest will be in jeopardy for no fault of his. Even the order granting exemption from pre-deposit will be rendered nugatory as the assessee will be compelled to satisfy the demand during dependency of the appeal. It has been always the judicial view that no party should be prejudiced due to action or inaction on the part of the Court (Rajkumar Dey and Others v. Tarapada Dey) 1987 (4) S.C.C. 398.

What is clear is that the sub-section though was introduced in terrorem cannot be construed as punishing the assessee for matters which may be completely beyond their control. The sole object behind the amendment is to ensure speedy disposal of the appeals where orders of stay were granted and duty payable to the revenue are with-held. The said provisions act in terrorem preventing the assessee from delaying the disposal of the appeal. But if the assessee is not at fault and the Tribunal for reasons beyond its control is unable to dispose of the appeal within 180 days from the date of the grant of order of stay, the Tribunal cannot be held to be powerless to extend the order of stay granted on an application being made for extension of stay by the assessee. Merely because there is no express provision provided for extending stay granted earlier, it cannot be said that the appellate Tribunal has no power to extend the time. Prior to amendment in the absence of any specific provision it was granting stay. If the Tribunal is held to possess the power to grant stay, on the same analogy, the Tribunal is held to possess power to extend the order of stay granted, if the appeal is not disposed of within 180 days from the date of the stay order. In such circumstances, if an application is made by the assessee, the Tribunal has the power to extend the order of stay. The order of stay is not automatic. Therefore, even an order of extension of stay need not be automatic. When an application is filed for extension of stay, the Tribunal has to apply its mind to find out for what reasons, the appeal is not disposed within statutory period of 180 days. If the assessee conduct is not the cause for the appeal not being disposed of, then the assessee cannot be denied the benefit of extension of the stay order. Expressly they have not taken away the power of the Tribunal to extend the period of stay granted. To extend the period of stay granted no express provision is required. Once the power to grant stay exists and is conceded, the power to extend the period of stay follows from such power. It is settled law that no party should be prejudiced due to action or inaction on the part of the Court. In those circumstances, the contention of the revenue that in the absence of express provision conferring the power of the Tribunal to extend the stay order, the Tribunal cannot extend the stay is without any substance.


It is well settled that deciding on whether there is a prima-facie case in any given appeal before the CESTAT is a substantive right and is cannot be curtailed in a circumstance where undue hardship is established. However, the question which arises for our consideration is whether the operation of the period of such a stay though statutorily provided can be construed in a manner which curtails the power of the tribunal to extend the stay or to be construed in a manner which presupposes inherent power in the Tribunal to grant extension of the stay where the Tribunal is of the opinion that there is unde-hardship given the prima-facie nature of the case. It is well settled that the Tribunal on procedural matters have discretion to adopt a procedure which they are of the opinion is just and fair. This is because the establishment of any Court, judicial or quasi judicial is for dispensation of justice and not for perpetrating injustice. Tribunal has the flexibility and can adopt a procedure which is fair and adheres with the principles of natural justice. Every such procedure adopted will be acceptable and permissible until it is shown to be prohibited by law. Refer Hansraj Harjiwan Bhate Vs. Emperor, AIR 1940 Nag 390 wherein the court followed the decision in Narasingh Das Vs. Mangal Dubey 1882 ILR (5) All 583. In Suresh Jindal Vs. BSES Rajdhani Power Ltd., 2008 1 SCC 341, the apex court entered a finding that a statutory authority while exercising its statutory powers may do all things which are necessary for giving effect thereto. The oft quoted passage that rules of procedure are the handmaids of justice and not its mistresses comes to mind which establishes that procedural mandates ought not to come in the way of dispensing substantive justice more-so when the fault is not attributable to assessees. This is because procedural rules ought to serve the scheme and object of the enactment for the purposes of which they have been formulated and not otherwise because it is always that the dog wags its tails and not the tail it’s dog. In Kailash Vs. Nankhu, AIR 2005 SC 2441 and Salem Bar Association Vs. UOI, AIR 2005 SC 3353 it has been held that non grant of extension would amount to failure of justice. The object of procedural rules is not to promote failure of justice. Procedural rules ought to be read down to mean that where sufficient cause exists or events are beyond the control of the assessee, the Court would have inherent powers to extend that time. It ought to be appreciated that when for the purposes of the Constitution of India fair and just procedure is one of the basic structures of the Constitution of India, no law under the Constitution ought to be permitted to adopt a procedure which is not just or fair and even if a procedure is so perpetrated i the statute, as in the present case the same must be subservient to the objects of the creation of the CESTAT which in broad lines is to dispense justice and not to perpetrate in-justice.

Observations for future – The department would do well to appreciate the following before it embarks, in future, with great zeal to recover dues without appreciating whether a decision can be said to be a binding precedent in terms of Article 141 of the Constitution of India the following:

  1. That India is governed by rule of law and not rule of executive fiats or ukases.
  2. That the entire machinery set up to collect revenue for India is to serve the law abiding public.
  3. That India became independent and a republic 67 years ago and after 1947 there was, is and will not be a requirement for the administrative machinery to act as vasool rajas who are concerned only with recovery and no other aspect of the law. Lagan was abolished long ago.
  4. That the department and assessees have to work together as partners and not as adversaries, one trying to overdo the other.
  5. That all litigation is not to hoodwink the UOI.
  6. That merely because of a few rotten apples all assessees cannot be seen with a colored eye.
  7. That ultimately the UOI works, functions and is able to project so called growth compared to previous years only because of the lagan paid by law abiding assessees.
  8. That what is legitimately due to Ceaser ought to be recovered under due process of law and not by adopting arm twisting tactics to project growth figures for successive Governments.
  9. That all Government servants owe their allegiance to the general public and not to their administrative superiors because such administrative superiors also owe their allegiance to the public and as such the entire machinery serves one master.
  10. That the statute needs to fix accountability on the executive in the discharge of quasi judicial functions.
  11. That there needs to be a time limit prescribed for adjudication of cases.
  12. That the trend of fixing targets for the department, like insurance agents, needs to be abolished.
  13. That irrespective of the letter of law it is the spirit of law which needs to be upheld.

In the words of Auribondo in Bande Matram India should strive to be free, that she can be free and that she will be, by the impulse of her past and present, be inevitably driven to the attempt and the attainment of national self-realisation. A section has no right to lay down a law by which the whole will be bound and if they persist in the attempt they will only be inviting a permanent secession. 

Bande Mataram

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Great Expectations


Many readers while reading this article would feel that I am making motherhood statements and that this is not the right forum for such articles or that it is too harsh / bold and the like. However, I disagree. As stated infra this is my individual effort in an attempt to make the administration answerable and accountable, since neither the assessees nor the legislature is taking any action in this direction.

As a citizen I genuinely desire that my Country’s tax administration be efficient, clean, professional and in fact sub-serve the publics’ interest. This is one of the only forums I have at my individual disposal to script my unheard and minority voice.

This paper is written as a concerned citizen, aware lawyer and as a law-abiding denizen of India, fed up, disgusted and frustrated with the manner in which the Government of India purportedly promises to simplify tax regime, desires to make tax equitable and progressive (refer para 137 of the FM’s speech). I am exercising my freedom of speech in what follows. The fine print in the budget, as usual, has an open Pandora’s box full of goodies (sarcasm intended) in store for assessees, sets the background for ground realities, false promises leading to denial of many a right of the law-abiding tax payer and increasing the burden of tax administration for assessees beyond permissible limits. This paper is as much about the attitude of public servants as it is about the excesses of tax administration. Life for the tax payer in the coming years would be anything but simple, least of all equitable and regressive to the core.   Read on.


Experience at His Master’s office

I’ll start with my own experience at the tax office. What I’ve observed over the decade is the unmistakable servile attitude of most of the employees working in the departments of the GOI. The way they salute and stand in rapt attention when any high-ranking officer arrives at the office, how there are at least three peons following one officer, one with his bag, the other with his water bottle and newspapers and the next with his breakfast /lunch, depending on the hour of arrival. I have always had the thought that if public servants do not salute the common man who is firstly – the main cause for their existence and secondly for their salaries then:-

¨      How will the tax administration know who they are answerable to?

¨      How will it know that they are accountable to We the people? And

¨      How will they know they are there to do public service as public servants?

How many of us boast of knowing a high-ranking officer whose main aim genuinely is to help the public / tax payers. I’m not, for a moment, saying there are no officers of such calibre. I’m yet to come across a second and have only known a superintendent who has not only desired to help but has in fact helped the common man. This was only a superintendent in the whole scheme of the tax administration hierarchy which is only an aberration to the system which was successfully able to remove such aberration and keep the treacherous wheels of bureaucracy running. This superintendent takes care of more than 50 -60 destitute children and also runs a school and by now may be a college, hats off to this Gentleman. I wish God makes more like him.

The officers of the service tax department are especially of the calibre which will establish beyond an iota of doubt that they believe they are PUBLIC MASTERS. I have experienced (for more than a decade) and am yet to experience (since I’m not planning to retire any soon) that no officer represents a public office with a zest, desire, passion and motto to serve the tax payer or the country with a desire to be a bridge between the taxpayer and the administrator. All that most of the officers do is self-service to the exception of public service as we all know it.

A shining example of one such officer (high-ranking mind you) follows: For this officer’s actions speak louder than words for they are unmistakably that of a master and a king and not that of a public servant. The officer with all possible airs of a KING walks into his office at 11.30 a.m. or any time thereafter every day without exception (as far as I know), has his cuppa of tea or whatever he has (for he has not yet offered what he has to me, for me to state) and then calls the first one in a long line of people waiting for personal hearings. In the bargain assessees, consultants and their counsel imperatively have a long wait in his office and if they want to be heard by afternoon they have to arrive sharp at 10 and sometimes wait till 12.30 or even later to be the first one to be called in for a hearing. If a high-ranking authority in the system who has to lead by example (or that is what I thought) and be a beacon for others to see and emulate, functions in such a haughty, high-handed and KINGLY manner as if he were the ruler, a MONARCH, a master is there hope for officers lower in rank, more so when this particular officer stops functioning i.e. his morning shift ends sharp at 1.30 for lunch (without exception). No one (except me, since I’m yet to come across someone who tries or does something about it) questions such un-unprofessional, wasteful way of functioning. Bear in mind the adage “time is money”, which is especially true for a professional for time is of the essence. The un-professionalism does not end there – there’s more – once an assessee, consultant or counsel enters his chamber for a personal hearing, the first thing that greets such a person is pleasant music (specifically Ghazzals) emanating from the computer speakers and the assessee, consultant or counsel is expected to submit his case in the din of the music. The said officer sits on the same floor as many other COMMISSIONERS’ & a CHIEF COMMISSIONER. Ironical is’nt it? I believe that We are to blame and not the Master, for no one questions in this democratic country which is more of a banana republic, where public servants rule over the actual public masters. Read on there’s more.

All of us “We the People” need (in my opinion) introspect on the following:

¨      Can it be said that in such an office with an officer of such calibre will justice not only be done but be shown to be done?

¨      Should “We the people” have to pay for such dis-service?

¨      Should such officers be accountable? If yes to who?

¨      Should a public office function in such a manner, when there are others who function diligently in a professional manner?

I am not at all opposed to the passion the Officer holds for music, but it would be in the fitness of things if such passions are pursued at his own expense, time and place when he or she is alone and not in the midst of functioning as a quasi-judicial officer – for the farce is apparent. Should “We the people” have respect for such officers and office.


Cause for this state of autocratic rule of law

If public servants have attained the status of PUBLIC MASTERS it is all of us “We the people” as the great human Mr. Nani Palkhivala put it, the denizens who are to blame, because if in a private organization one enters office regularly at 11.30, such a person will not only have to be at home but will be marked for his acts and employment for such a person will be an impossibility. For discipline is for all of us to inculcate, especially public servants. We only become stronger by discipline. The apathetic and sad situation today is that no one (including upright, uptight and so-called doyens of the profession and business) question such un-professional, wasteful, haughty and high-handed acts of Public Masters. They would rather succumb to their fancies and whims because they are high-ranking officers and no one desires to take them on as the professionals feel that it is the cause of the tax payer that he represents and he has to be patient and should not show his personal traits before any such officer, not that the officer in question is judicious either.  Come to think of it my take is that consultants, lawyers state the above as a reason not to do anything about such state of affairs for they have also become a part of the system and do not want to change it. For change is scary. The same way as the country never elects BJP as a majority party – for fear of change. To even think such a thought would be to take a hit on ones profession (in these times of C & F agencies ruling the roost or be marked by other officers high-ranking or low ranking or be called a fighter cock a misguided missile and the like.

Many to whom I showed this article were of the opinion that I should not publish this article and that it would do me more harm than good. My answer was this article is not for any gain or recognition. It’s written with a sense of duty for a clean and accountable tax administration.

Shining examples in the Tax administration to emulate

The next example is of a person who was in Belgaum who had a placard behind his seat stating that his work timings are from 9 to 5.30 and if he is not to be found in his seat doing work or is found accepting a bribe the telephone number of the person with whom a complaint could be lodged was stated. This is a dead breed today. The present crop of public servants is a breed with no back bone, no moral fibre and spineless to the core. All that requires their constant attention is their APR’s to be impeccable. Public servants have forgotten who their BOSSES / MASTERS are. They have forgotten that they are answerable to the people. This article, if printed, will be the first one amongst a series to follow bringing out such instances which I personally have experienced and will be my contribution in this fight for my right to have an upright, morally truthful, ethical, professional, incorrupt and assessee friendly tax administration. Public servants have to be made accountable for their actions and time spent at public office to “We the people” for the Government / legislature also forms a part of the same system in which the Tax administration exists.

A dead star

A classic example of Tax administration’s functioning like a fishing expedition and hounding assessees’ (fishes in the sea) is the Information Technology sector companies who till date are used, misused and abused. Their patience is tried and tested on a trial and error basis by three departments, one of the State and two Central, seeking to tax one transaction, one consideration and one activity under three different statutes making one subject the object of three levies. Our Constitutional fathers (We the people) would be proud of the way in which the tax administration functions based on the demarcation and fetters put in the Constitution. Such are the great days We live in. The local VAT authorities, the central excise department and the service tax department. Should the IT companies pay central excise duty treating their activity to be a manufacturing activity equating themselves to a factory in an industrial area and its qualified educated engineers as labourers or should they pay VAT treating their activity as a sale or should they pay service tax treating their activity as service. In the alternative like my colleague (N Anand) propounds not pay anything treating it as a copyright (since it qualifies to be an original literary work). Well kaliyuga, what more can I say after writing all of the above and rest to follow. Such Companies are presently paying VAT and Service tax both. For Companies also are without a spine. I believe that it was NASSCOM and other IT companies due to whose endeavours ITSS was brought into the service tax net as a service. Who’s to blame. No one it’s not a blame game of the rule of law is to prevail. I’m not here to answer only question and attempt to make the tax administration accountable. This dear readers’ is the state of our tax administration in my India which proposes of being a developed nation in the comity of Countries.

Some thoughts

We, the people are under a blanket belief that the rule of law prevails in India. It’s time India and Indians wake up and make the tax administration answerable. If one delegates what one has to do it never gets done the way one wanted it done, experience has taught me this eternal truth.  It is time to own responsibility before there is nothing more left to own or manage and the category of people who come in “What’s in it for me” would have owned it all.

It ought to be clear to the Government and tax administration that because lakhs and lakhs of public and commoners pay their taxes, the Government can function and their so-called public servants be treated like GODs and the publics’ money wasted. If all of us were to stop paying taxes the Government will be powerless because there would be no money in its coffers to play with, to hoard ill-gotten wealth in banks abroad, to amass disproportionate assets, to send their kids to schools which the best of brains cannot enter and to seek bribes to do their duty since their allegiance ought to be towards the Constitution of India which is given by us to ourselves i.e. We the People.

The mandate and intent of the GOI is clear – pay maximum tax, shut down business, increase inflation, cut the Cenvat chain, increase fiscal deficit, go on foreign trips abroad with families on the public’s money, buy expensive cars, make changes to one’s office every year on the purported basis of vastu, make retrospective legislations overturning every decision passed in favour of the tax payer, increase the cost of every commodity be it essential or non-essential and then wonder why India is not growing in such a situation.

Citizens and tax payers should endeavour to bring to the GOI’s attention that laws should be framed to sub-serve the tax payers interests and not the Government’s or its tax administrators’ interest. Fact being tax administration is for the people and not otherwise ought to be borne in mind.

I have observed that Assistant Commissioners in the service tax department come in top end Verna’s, have independent bungalows and send their children to the most expensive of schools. How can this be possible in a country where the rule of law is supposed to govern everyone (including the public servants)?

Have all mother’s sons become napunsaks’ without a back bone or moral fibre for such injustice to be perpetrated in the name of tax administration, buying peace with the department and all kinds of reasons / justification which any fertile mind can think of.


Kautilya’s theory

The ideal system of tax according to Kautilya’s Arthashastra, in that day, age and time was gaining as much tax revenue as possible for his king; promoting economic growth and development within the kingdom; ensuring that resources are used efficiently; and applying taxes that are “fair” and “just”. Taxes during that time were convenient to pay, easy to calculate, inexpensive to administer, fair (equitable) in its burden, non-distortive of economic behavior in its impact (neutral), and in general did not inhibit economic growth and development. Now juxtapose the present tax proposals against the above principles and the answer to any person of ordinary prudence would be crystal clear. The point that the Government exists, subsists and functions for the people should be driven home and every PUBLIC SERVANT serving India should bear this in mind when he comes to office every day without exception. It is only then that We the people of India will see some semblance of efficiency. It is important for the GOI & its functionaries that their allegiance is towards the Citizens (We the people) and not towards purported PUBLIC MASTERS who are in fact public servants scripting their juniors APRs.

Award worthy feature of Budget – 2012

This year saw the advent of the all-pervasive GOI resorting to illogical and illegal means to justify their end by regimenting the understanding of the population by saying “Heads I win, Tails you Lose” in their all-pervasive Bhagavadgita titled “Education Guide” (EG). History will remember EG as one of the saddest days for tax administration and manner of functioning of the GOI. The EG has been issued with a disclaimer that the GOI (the very institution which issued the EG) is not bound by what is stated in the EG and that it is only for assessees’ guidance. Someone please tell me who needs guidance – the department or assessees’? If guidance is what they sought to give should’nt they (GOI) be bound by such guidance since it is they who are guiding.

Why the disclaimer?

Should We the people of India trust the GOI? and

By such acts of the GOI can it be trusted?

The effect of such an illegal guide is that even if the tax administration acts as per the guide and states so in writing, nothing can be done about it by a tax payer because the very issuance and existence of EG is illegal in the first place. In legal terms void ab-initio. It is neither in the nature of a regulation, rule or byelaw having the essential characteristics of law to enable tax payers to challenge the EG in a court of law.

Are We the people of India to expect justice when the GOI resorts to illegal means?

Whose Interests are being taken care of by the GOI by issuing illegal guides?

I entreat all Indians to wake up before it’s late for in the context of the present GOI it is not known who runs India. Is it the Prime Minister or is it the President or Is it the extra constitutional party President whose symbol is the palm of a hand.  When the engine which drags the bogey is functioning in such a blatant illegal manner can tax administration be expected to follow Dharma, rule of law or Constitution?

Take into consideration the experience of exporters till date and ask yourself a question – How many exporters have received export benefits (refunds in simple language)? The answer would be zilch, because across India the pending amount to be refunded to exporters hovers around the unimaginable figure of 3000 odd crore. A dimension that all of us should appreciate is that section 11BB of the Central Excise Act, 1944 (CEA) made applicable to the FA by section 83 postulates that when refunds are not sanctioned within three months from the date of filing the refund claim the assessee is entitled to interest (at whatever piddly rate). Now take the 3000 crore and calculate simple interest @ 6% for a minimum of three years. Understand this – the interest portion would have to be given by the department unless they challenge refund of the principal because interest is an accessory. Also understand that the interest would have to be paid by the GOI from the taxes that we citizens pay to the GOI. It’s the Citizens money being paid to exporters for inefficiencies built up by the GOI, for faults within their departments, for issuing illogical conditions to be fulfilled and for building and rewarding in-competencies in tax departments. Does no one, high enough, have some sense that it is We the people who will lose ultimately.

I implore all upright, straight forward, people to act and fight for our right. In India it is “giski lathi uske bhains”. Hopefully times will change.

My thanks are due to Rajesh Chander Kumar, Chidanand Urs, K S Naveen Kumar and N Anand (All practicing IDT lawyers).

Views expressed herein are solely that of the author and mistakes which have crept in the paper are also the singular responsibility of the author.

This article is not intended to hurt the sentiments of any person/s/ public servant/s.

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The legislature in the 11 – 12 budget amendments by insertions in Chapter V & VA of the Finance Act, 1994 (FA for short) made effective from 1.7.12 has enforced recommendations of the Kelkar committee i.e. to charge service tax based on a negative list of services.  The manner in which the legislature has gone about doing this in their usual slip-shod manner forms the subject of this paper.

Insertion of new charging section 66B

Presently section 66B is the charge for services defined as any activity (inertia included) by a person to another for a consideration except services in the negative list. Section 66B is the only charging section which in clear and singular terms postulates “the rate of tax to be charged on the value of all services except services spelt out in the negative list provided or to be provided in the taxable territory by one person to another and collected in a manner as prescribed.

The effect of section 66B is that:

¨      Service tax would be charged @ 12%

¨      On the value of service

¨      Excluding services specified in the negative list

¨      Provided or to be provided in the taxable territory

¨      By one person to another and

¨      Collection of such a charge would be as prescribed under the rules.

What emanates from the above is that the charge applies only in respect of services provided or to be provided in the taxable territory and not in respect of receipt of services from outside the taxable territory. Taxable territory is defined in section 65B(52) to mean the territory to which the provisions of the Chapter (V & VA of the FA) apply. This imperatively leads one to section 64 in terms of which the extent and application of the Chapter is postulated to be the whole of India except the state of Jammu & Kashmir. India is defined in section 65B(27) to mean the territory of the union as defined in clauses 2 & 3 of Article 1 of the Constitution of India, its territorial waters, continental shelf, exclusive economic zone or other maritime zone, seabed and subsoil underlining the territorial waters, air space above its territory and territorial waters and installations, structures and vessels located in the continental shelf of India for the purpose of prospecting or extraction or production of mineral oil and natural gas and supply thereof.

66B, in my opinion can be understood only in the manner stated above and not in any other manner.  This is because of the use of words taxable territory in the definition which leads one imperatively to services rendered in the Indian Territory.

Interpretation placed on the above section is based on the golden rule of interpretation which I believe does not need further elaboration.



My understanding of the charging section in 66B leads me to two questions –

  1. What about services received from outside India? And 

  2. Which is the charging section on services received from outside the taxable territory?

Background and Discussion

Readers would appreciate the background prior to section 66A in the FA. To summarise as per section 68 of the Finance Act, 1994:

¨      Liability to pay service tax was on the person providing the taxable service.

¨      However, as per section 68(2) the Government had to notify services for which a person other than service provider is made liable to pay the tax. 

¨      The Service Tax Rules framed by the Government of India, in rule 2(1)(d)(iv) of the said Rules, 1994 postulated that the liability to pay service tax is on the recipient of service when taxable service is provided by a non-resident or a person who is outside India and does not have any office in India w.e.f. 16.8.2002.

¨      However, the Government failed to notify such persons in the “official gazette” as per the mandate in section 68(2).

¨      A rule cannot override the provisions of the Act and provide for something, which the Act does not envisage.

¨      The Government of India officially notified such services for the purposes of section 68(2) only in the year 2004 vide notification no.36/2004-ST, dt.31.12.2004. 

It is to be appreciated that even after notification of such services no service tax liability crystallized on receipt of services from outside India. This was because there was no charging section in the act. Section 66A was inserted into FA to capture import of taxable services under the tax net with effect from 18.04.2006. It is further to be appreciated that insertion of 66A in the statute book itself led credence to the view that there had to be a charging section to enable the administration to charge service tax on import of service.

Examination of section 66A would reveal that what 66A did was create two deeming fictions, one deeming receipt of service from outside India as a taxable service and secondly treating the recipient of such service as the person providing such service within India. This inevitably led the recipient of service to section 66 by virtue of treatment of the imported services as if rendered in India. By virtue of such a deeming fiction there was a link between 66A & 66 which was the charge in respect of services provided within India and also the charge in respect of receipt of services from outside India. (Emphasis on the link between section 66 & 66A).


Present situation

Presently there is no link absolutely whatsoever between receipt of services from outside India and section 66B to enable the Government to seek service tax on import of service. The assessees have therefore been transported to the era prior to 18.4.2006 and I think that this would again lead assessees and the government into another loop of litigation.



What I fail to gather is despite the history behind taxation of import of services, i.e.rule 2(1)(d)(iv), etc., refer discussion above, how can the legislature create such a lacuna to the misfortune of assessees.

Experience is supposed to be a wise teacher, it appears it is otherwise for the legislature.

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Import of Service – Input service or Output service and Cenvat Setoff



The subject matter of this paper is – Whether Cenvat credit can be setoff against liability on import of services?

Argument of the Department against set-off is – Provision of Rule 5 of the Taxation of Services (Provided from Outside India and Received in India) Rules, 2006, which postulates that the services received would not be an output services for the purpose of availment of Cenvat credit.

The background on the advent of Cenvat and other attendant legal aspects on why setoff is permissible forms the matter of discussion in this paper.

Introduction of Modvat now Cenvat

Modvat / Cenvat scheme in our country owes its birth to the Indirect Taxation Enquiry Committee formed in 1976. This Committee was popularly/commonly known as the Jha Committee. The Committee made the following suggestions:

¨      The Long Term Fiscal Policy suggested extension of proforma credit to all excisable commodities to overcome the vexatious question of cascading effect tax on commodities.

¨      Modvat allowed a manufacturer to obtain instant and complete reimbursement of all excise duty paid on components and raw materials.

¨      The scheme provided transparency disclosing full taxation on a product.

¨      The scheme’s introduction was a measure of cost reduction of the final product.

¨      The scheme avoids payment of duties on earlier duties paid.

¨      It benefited consumers.

Object of the Cenvat Credit Scheme

The object of the Cenvat Credit scheme can be gathered from the decision of the Supreme Court in CCE Vs. Dai Ichi Karkaria Ltd., 1999 (112) ELT 353 (SC). The essence of the decision is:

¨      Credit available on receipt of inputs in a factory.

¨      Entitlement to use the credit any time thereafter.

¨      No provision that provides for reversal of credit except when it has been illegally availed.

¨      Its benefit is available without limitation in time.

¨      The credit is indefeasible.

¨      No co-relation of raw material and final product.

Purpose of Cenvat credit scheme

The scheme is a beneficial scheme implemented to avoid the cascading effect of taxes. It is a scheme that provides definitions of various expressions like, inputs, capital goods, exempted goods, exempted services, input service, output service etc. It also specifies various types of duties that can be availed as Cenvat credit. It specifies when such types of duties can be setoff against what type of liability. This is the scheme that governs the availability and utilization of Cenvat credit since the time of its inception.

Import of goods and payment of Customs Duty:

Import of goods into the territorial jurisdiction entails payment of Customs duties on clearance of goods from the warehouse. The amount of duty paid as CVD on import of goods is eligible as Cenvat credit to manufacturers and service providers. This is to maintain a level playing field between assessees’ manufacturing goods in India and those importing same/similar goods.  Point being that the amount of CVD paid as duty is available as Cenvat credit.

However, this is not equitable to the present situation because though economically speaking there is no difference between goods and services, for the purposes of the charge to be attracted under Customs Act, 1962 and Finance Act, 1994, what is to be examined is the charging section and not the actual transaction. This is because of creation of deeming fictions in the charging sections.

Further, there is no uniform GST in India.

Eligibility to avail Cenvat Credit

Eligibility to avail Cenvat credit is in terms of Rule 3 of the Cenvat Credit Rules, 2004. In terms of which twelve types of duties are allowed to be availed as credit on inputs, capital goods and input services. At serial no.(ix) service tax leviable u/s 66 of the Finance Act, 1994 is allowed to be availed as credit. Sub Rule (4) to Rule 3 provides that Cenvat credit may be utilized for payment of (e) service tax on any output service. Output service is defined in Rule 2(p) and input service in R.2 (l).

Advent of Service Tax on Import of Service:

As per section 68 of the Finance Act, 1994 liability to pay service tax is on the person providing the taxable service. However, as per section 68(2) the Government has to notify services for which any person other than the service provider is made liable to pay the tax. The Service Tax Rules framed by the Government of India, in rule 2(1)(d)(iv) of the said Rules, 1994 (as amended from time to time) envisages that the liability to pay service tax is on the recipient of service when taxable service is provided by a non-resident or a person who is outside India and does not have any office in India w.e.f. 16.8.2002. However, such persons who were made liable to pay service tax as per the above rule were not notified in the “official gazette” as mandated under section 68(2) of the Act. A rule cannot override the provisions of the Act and provide for something, which the Act does not envisage. The Government therefore could not have framed rules in August 2002, without first notifying the relevant scheme under section 68(2) by describing the categories of service providers in respect of whom the Government could frame rules to require the receivers of services to discharge service tax, payable by the provider of service. The Government of India officially notified such services for the purposes of section 68(2) only in the year 2004 vide notification no.36/2004-ST, dt.31.12.2004. In law there could not have been any liability of whatsoever nature on the service recipient to pay service tax before 31.12.2004. That the issuance of notification no.36/2004-St itself is enough proof that postulates of section 68(2) had to be fulfilled before the service recipient could be made liable to pay service tax. 

Section 66A is now the charge in terms of which service tax is imposed on import of services with effect from 18.04.2006. Notification 11/2006-St was issued in terms of sections 93 & 94 of the Finance Act, 1944 read with section 66A. This notification was the Taxation of Services (Provided from Outside India and Received in India) Rules, 2006.

Legal Position – Charging section

An examination of the charging section entails that the charge on import of service is in terms of section 66A which necessarily leads one to section 66 (the charging section for domestic service providers). The relevant part of the provision is extracted below for better comprehension:

“Section 66A postulates in sub-section (1) that “Where any service specified in clause (105) of section 65 is (b) received by a person (hereinafter referred to as the recipient) who has his usual place of business, fixed establishment, permanent address or usual place of residence, in India, such service shall, for the purpose of this section, be taxable service, and such taxable service shall be treated as if the recipient had himself provided the service in India and accordingly all the provisions of this chapter shall apply”.

Section 66A has three corollaries:

¨      Services imported are treated as taxable services.

¨      Such services are deemed to be provided in India by the service recipient and

¨      All provisions of Chapter V & VA of the Finance Act, 1994 (including the Cenvat Credit Rules) are made applicable.

This means that when a service recipient receives any service from abroad, the services are treated as if they were provided in India deeming such service as a taxable service rendered in India.

To appreciate the charging section on import of services (RCM) S.66A and its necessary linkage to S.66 it is imperative to understand the importance of the charging section and the effect of a deeming fiction in law. Both these aspects are addressed below:

The Charging section (in the present case S.66A r/w S.66) provides for the levy of service tax on import of service. It creates a charge and defines the nature of the charge. Service tax is primarily on rendering of taxable services. It is an indirect tax which the provider of service passes on to the ultimate consumer. The tax can be levied at any convenient stage so long as the character of the impost, that is, it is a tax on the provision of services, is not lost. The method or time or the person from whom it is collected does not affect the essence of the tax, but only relates to the machinery of collection for administrative convenience. In the context of import of services merely because the tax is collected from the recipient of services (which in fact would be an input service), it does not lose its nature of being an impost on the rendering of taxable services. In other words a charging section is a section which enables charging of tax or creating the liability to pay tax.  

There is a distinction between the object of tax, the incidence of tax and the machinery for the collection of the tax. The distinction is important but is often confused. Legislative competence is to be determined with reference to the object of the levy and not with reference to its incidence or machinery. There is a further distinction between objects of taxation in our constitutional scheme. The point at which the collection of the tax is to be made is a question of legislative convenience and part of the machinery for realization and recovery of the tax. The manner of the collection has been described as “an accident of administration; it is not the essence of tax”. It will not change and does not affect the essential nature of service tax. Subject to legislative competence tax can be imposed at the stage which the authority finds to be convenient and the most effective, whatever stage it may be. The Central Government is therefore legally competent to evolve suitable machinery for collection of the service tax subject to the maintenance of a rational connection between the tax and the person on whom it is imposed.

The argument that recipient of services are not connected with the service since the service is rendered to them would be farfetched and untenable because of the fiction in section 66A that – the services received are treated as if the recipient had himself provided the service in India.

Section 68 is a machinery section in that it provides for the incidence of taxation and is not the charging section which is Section 66. The amendments to Section 66 brought about in 2000 changed the point of collection of tax from the provider of the service to “such manner as may be prescribed”. Section 68(1-A) as it stood in 1997 provided for the collection and recovery of service tax in respect of the services referred in sub-clauses (g) to (r) of Section 65(41), from such person and in such manner as may be prescribed. The 1998 Finance Act maintained this. Now, the Service Tax Rules, 1994 provided for the collection and recovery of tax from the users or payers for the services. This was the prescribed method. All that the proviso to Section 68(1-A) did was to prescribe the procedure for collection with reference to services of goods transport operators and clearing agents which services had already been expressly included under the Finance Act, 2000 in the definition of taxable service.” The above averments are the findings of the Supreme Court in CCE Vs. Acer India Ltd., 2004 (172) ELT 289 (SC), KSEB Vs. CCE, 2008 (9) STR 3 (SC).

The Supreme Court in All India Federation of Tax Practitioners Vs. UOI, 2007 (7) STR 625 (SC), held that “Finance Act is passed every year to fix the rate of tax. This is the primary object for enacting the Finance Act. But it does not mean that a new distinct charge cannot be introduced by the Finance Act. For example, what is not “income” under the Income Tax Act (“IT Act”) can be made income by the Finance Act. This is, however, subject to the Finance Act complying with the Constitutional limitations. Additional tax revenue can be collected either by increasing the rate or by levy of a fresh charge. All levies through the medium of the Finance Act may either enhance the rate or levy a fresh charge. The Finance Act can also make an extensive modification in an Act”.

Fiction – applicability – what is?

To appreciate the delicate point being made here, an examination of what exactly is a fiction and how law treats a fiction is important. A legal fiction is defined in P. Ramanatha Aiyar’s Advanced Law Lexicon – 3rd Edition Re-print 2009 at page no.1814 & 2681. The Latin equivalent is Fictio juris.  A fiction of law is a supposition of law that a thing is true without enquiring whether it be so or not. A legal assumption that a thing is true which is either not true, or which is probably false. The Supreme Court in Bengal Immunity Co Vs. St of Bihar, AIR 1955 SC 661 in the context of Article 286(2) held that a legal fiction presupposes the correctness of the state of facts on which it is based and all the consequences which flow from that state of facts have got to be worked out to their logical extent. If the purpose of a legal fiction is for some specified purpose, one cannot travel beyond the scope of that purpose. In sum a fiction of law has to be given its due play and necessarily has to be taken to its logical end and all facts required for such a conclusion, if not present, have to be assumed.

Setoff Issue

As stated above input service credit is allowed to be setoff against any output service liability, except in the case of GTA 65(105)(zzp), which taxable service has been specifically excluded from the definition of “output service” in Rule 2(p) of the Cenvat Credit Rules, 2004.

Reason of doubt:

Rule 5 of the Taxation of Services (Provided from outside India and received in India) Rules, 2006, provides that the taxable services provided from outside India and received in India shall not be treated as output services for the purpose of credit of duty of excise paid on any input or service tax paid on any input services under Cenvat Credit rules, 2004.

However, the self-same rules in its definitions postulates that Output service shall have the meaning assigned to it in clause (p) of Rule 2 of the Cenvat Credit Rules, 2004.

(There is an apparent contradiction here – i.e. which definition ought to be given precedence. The one in CCR or the one in Rule 5).

The Commissionerates of Jamshedpur and Madurai in their wisdom have also issued two Trade Notices in No.43/2008 & 21/JAM/2008 clarifying (which they hardly do) that the taxable service is an output service only for the limited purpose of charging service tax and not for the purpose of Cenvat Credit Rules, 2004. That the payment for such services could be made in cash and input service tax can be availed as Cenvat credit.

Due to this clarity in the ambiguous provision of law (sarcasm intended) the trade and industry pay tax by cash and avail service tax as an input service.

The above provisions i.e. Rule 5 and the definition of an output service in the Taxation of Services (Provided from outside India and received in India) Rules, 2006 coupled with the two trade notices have had an effect of treating a deemed output service (in terms of the charging section 66A) as an “input service” negating the use of accumulated Cenvat credit to setoff the liability on import of service. The Question that comes up is whether the charging section has to be read down in line with the Taxation of Services (Provided from outside India and received in India) Rules, 2006 or vice-versa. The answer to this question would, in my opinion, resolve the issue. What has been missed out (whether deliberately is not known) is that both Rule 5 and the trade notices advance a theory that is conflicts with the effect of charging section 66A.

Open Issues:

The issues that arise from the above are: –  

  1. What is the nature of services received from abroad?
  2. Is it Input service or Output service?
  3. What is the legal position on import of service given the deeming fiction in section 66A?
  4. Should a legal fiction be given effect to even if it results in absurdity?
  5. What was the purpose of Taxation of Services (Provided from outside India and received in India) Rules, 2006?
  6. Can the Taxation of Services (Provided from outside India and received in India) Rules, 2006 postulate on what would be output service?
  7. Can the rule making authority go beyond the purpose of the delegation?
  8. What is the sanctity of the definition of output service in the Cenvat Credit Rules, 2004?
  9. What prohibited the legislature from incorporating Rule 5 of Taxation of Services (Provided from outside India and received in India) Rules, 2006 in the definition of output service in the Cenvat Credit Rules, 2004?
  10. Whether the express omission of import of services in the definition of output service would still have the effect of negating the fiction in the charging section 66A?
  11. When the provision of a rule is not in accordance with the provision of the charging section – how is it to be resolved?
  12. Can a limited interpretation be given to the charging section?
  13. Can it be argued that the charging section is only for the purpose of payment of tax?
  14. Are rules sub-servient to the provisions of a statute?
  15. What is the principle of reading down?
  16. Should the principle of reading down be applied in the present situation?
  17. Is’nt it a fact that Rules are framed to advance the purpose of the statute?

Alternative reason why import of service is an output service

Another aspect by virtue of which import of service would be an “output service” without placing reliance on the charging section are two definitions i.e. “person liable for paying service tax and provider of taxable service” in the Cenvat Credit Rules, 2004 read with section 68(2) of the Finance Act, 1994.

The definition of provider of taxable service includes a person liable for paying service tax and the definition of person liable for paying service tax has the meaning assigned to it in Rule 2(1)(d) of the Service Tax Rules, 1994. The relevant provision of Rule 2(1)(d) is extracted below to better appreciate this discussion:

Person liable for paying service tax ” means, –

(iv)      in relation to any taxable service provided or to be provided by any person from a country other than India and received by any person in India under section 66A of the Act, the recipient of such service.

The point being made here is this – that a provider of taxable service includes a person liable for paying tax i.e. service recipient. In other words a service recipient is a person liable to pay tax and therefore a service provider of output services. Reading section 68(2) also leads one to the above conclusion. This is because output services are defined to mean any taxable service, excluding the taxable service referred to in sub-clause (zzp) of clause (105) of section 65 of the Finance Act, provided by the provider of taxable service, to a customer, client, subscriber, policy holder or any other person, as the case may be, and the expressions ‘provider’ and ‘provided’ shall be construed accordingly. This analogy cannot be defeated by insertion of a rule in rules providing for taxation of import of services because the purpose of Taxation of Services (Provided from Outside India and Received in India) Rules, 2006 was only to provide for taxation of import of services and not to curtail the ambit of benefit extended by the Cenvat Credit Scheme and the deeming fiction created in terms of section 66A.

Factually the recipient is a service receiver and therefore the service received would be an input service but for the deeming fiction in section 66A. Because of the legal fiction created through section 66A, recipients pay service tax as if they are the “output service provider”. The rights and obligation of the ‘deemed service provider’ have been clearly stated in Section 68(2) of Finance Act, 1994 itself as: ……..the service tax thereon shall be paid by such person and in such manner as may be prescribed at the rate specified in Section 66 and all the provisions of this Chapter shall apply to such person as if he is the person liable for paying the service tax in relation to such service. Thus for the purpose of payment service tax, the service recipient has to be a treated as a service provider in respect of import of service and the two trade notices and Rule 5 of the Import of Service Rules have to be read down to bring them in line with the effect of section 66A.

This is also because when a Section of the Act creates a legal fiction as clear as the one created in section 66A, there is no room for doubt whether a manufacturer or service provider can or cannot be treated as a “service provider” under Rule 2(p) of CCR, 2004, irrespective of the effect of the fiction on the CCR.

Cenvat availability for setoff

It is equally settled that a service provider is entitled to pay output tax by adjustment of Cenvat credit; there is no provision in the entire scheme of the Cenvat credit rules that a “deemed service provider” is barred from this entitlement.

I therefore do not find any bar on the part of a service recipient in paying service tax through their Cenvat credit account. The question of availing Cenvat credit on a deemed output service is alien to the concept of availment and eligibility to Cenvat Credit in terms of Rule 3 of the Cenvat Credit Rules, 2004. This is the reason that the Government would stand to loose in the long run because the tax paid on an output service is being allowed to be availed as input tax credit. The analogy adopted is disturbing also because it brings to the fore the understanding (mis-understanding actually) of the limb administering the law relating to service tax, of the basic concepts of the provisions of the Service tax law and the Cenvat Scheme.

Judicial pronouncements

In CCE & C Vs Phil Corporation Ltd., 2008 (223) ELT 9 (SC), it was held that the Courts have to make serious efforts to ascertain the spirit and intention of the Parliament in enacting deeming fictions. Once the legislative intent is gathered, then the bounden duty and obligation of Courts is to decide the cases in consonance with the legislative intent.

 Hon’ble Justice Markandey Katju in Ispat Industries Ltd., Vs. CC, 2006 (202) ELT 561 (SC), held that if two interpretations of a rule are possible, one which would uphold its validity while the other which would invalidate it, the former should be preferred. It was further held in this decision that Rule 9(2) of Customs (Valuation) Rules, 1988 – Gunpradhan principle is fully applicable – Rule 9(2) ibid is subservient to Section 14 of Customs Act, 1962, hence, to be interpreted in such a way as to make it in accordance with main object that is contained in Section 14 ibid – Object of Section 14 ibid is ‘primary’ whereas conditions in Rule 9(2) ibid are ‘accessories’.    


The manner in which section 66A has been framed leaves no room for doubt that the services rendered from abroad and received in India are deemed to have been provided in India by the recipient of service. The effect of this legal fiction is that the recipient is the provider of taxable service. When we examine as to what services are normally provided by a provider of taxable service the only logical answer a man of ordinary prudence can arrive at is “output service”.

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The Union budget this year is historical not because of its intrinsic value or because it is relief oriented or because it has made petrol cheaper or home loans cheaper, but because the budget booklet is voluminous running into 540 pages. These 540 pages contain something purportedly called a “guidance note” running into 124 pages explaining the budget proposals. The intent of the budget proposals, according to me, can be explained in two words “more revenue”. This, in a nutshell is the progressive, equitable and simplistic budget.  It is stated by the FM that the proposals would result in a net revenue gain of Rs.45,940/- crore from indirect tax. The manner in which this windfall is proposed to be raised is disturbing, alarming and against the rule of law. The guidance note is akin to a command to post graduates in mathematics to recite multiplication tables while on job.


For example the proposals relating to “declared services” are nothing short of re-writing settled law and encroaching on the domain of State legislatures. It is startling to note that not a single State Government has raised any concern on this aspect. One may also look upon it as the equitable “jiski lathi uske bhains” adage. Meaning a message from the Centre to the state to tow their dikat relating to GST or else be prepared for encroachment. It is a clear message from the Centre that heads it wins and tails States lose. The proposals raise another important question – one relating to trust and rights of tax payers. This is because the trade and business was under the illusion that if something is goods service tax would be inapplicable. However as stated above, the proposals relating to declared services cast a serious doubt on the extent to which the businessmen, trade and common man can believe the government. The words uttered during the budget speech are at total divergence with the fine print. Given attempts by the Centre to encroach on the domain of the state legislature, what guarantee does any State Government have in future that once GST is implemented the Centre will not dictate and hold the State Governments to ransom to act as per its dikat because disbursing money due to State Governments would be at the sole discretion of the Centre. The autonomy given to the States under the Constitution will remain only on paper (already evidenced by the attempt to tax “deemed sale” by including the value of goods), while practice will be something else altogether. This phenomenon is disturbing because what is promised today would be conveniently broken tomorrow by retrospective amendments. The Central Government’s desires are clear. It is the story of the ends justifying the means. Rule of law has no relevance in Kaliyuga, it is a mere embellishment to be taught in schools and colleges and forgotten once it is to be implemented in practice. 


Progressively proceeding – The FM at para 175 states that budget measures were guided by a need to move towards simple, equitable and progressive system. One need not be a scientist to understand the implication of these words, as one look at the budget proposals, their size, and last but not the least the guidance note given to comprehend the proposals make the intent of these words crystal clear. The proposals in my humble opinion are complex, inequitable and regressive. If the proposals were to be simple, equitable and progressive there would be no reason to issue a guidance note of 124 pages clarifying the intent of the Government. The Government has set up a committee to ascertain cause of increase in litigation in this country. But the budget proposals act as a catalyst for fuelling litigation. This does not make sense. On the one hand there is a committee set up to examine the reasons for increase in litigation and on the other hand the budget proposals seek to charge service tax on the value of goods, thereby encroaching on the state legislature’s domain and increasing litigation.

The administrative implementation of collecting service tax under the category of declared services would not only create untold miseries but also cause havoc for the common man who might either be a service provider, recipient or person liable to pay service tax. In the Government’s ingenuity this year both the recipient and provider have been made liable to pay service tax in percentages subject to fulfilment of conditions. Thankfully once these percentages are added they do not exceed 100%. The FM has magnanimously left such an exercise for future FM’s.

The simplistic approach in defining “declared services” is clear from a perusal at Article 366(29A) of the Constitution of India and the background for which such an Article was inserted and comparing it with the declared services definition. The intent is patent. The “declared service” definition is nothing short of an attempt to garner and corner service tax on “sale” transactions. Assessees’ can look forward to a rewarding and prolonged litigating period of not less than 10 – 30 years initiated by Pranab Da’s contentious Budget proposals of 2012 – 2013. The person who proposed to charge service tax on such declared services ought to be conferred a life time achievement award for turning the wheel a full circle and re-opening the settled concept of “deemed sale” under the six sub-clauses of Article 366(29A). This would be one of the core reasons that the committee would find latter on why litigation in India is on the increase.  

In this paper I examine two simplistic, equitable and progressive proposals:

First – definition of “service” and Second the “valuation” of such service.

Assessees’ can rest assured that this Government is out to squeeze every pound of flesh along with bone, marrow and sinew to get every drop of blood available, without taking cognizance of the issue whether a transaction is sale or service. Both departments i.e. VAT & service tax will now hound assessees’ seeking to tax transactions by considering the entire value of a composite transaction, for only mere transfer of title in goods by way of sale now stands excluded from the definition of service. The operative word is mere. Mere means simpliciter, thereby simplistically excluding composite transactions involving elements of sale and service.

Readers would be aware of the fact that the Constitution had to be amended in order that sales tax (now VAT) be levied on a transactions resembling sale in the year 1982 by the 46th constitutional amendment. The FM and his lackeys did not consider it a necessity that the Constitution should be amended for service tax to be charged on the service element in a composite transaction. No such amendment has been proposed in the Constitution. The principle that “there is no intendment in a tax statute” is a well settled to cite precedents. Nevertheless, service tax is proposed on declared services. I am not saying that Centre does not have power to tax the service element in a composite contract. What I am saying is that the Centre cannot do so till the Constitution provides for it.  Assessees’ would bear the brunt of this proposal and would have to pay VAT on the sale portion under the composition scheme (which most of assessees’ do) and pay service tax by including the value of goods, thereby burdening the ultimate consumer with double taxation and steeply increasing the cost of the product to the end customer.

Budget proposals

Service is defined to mean – any activity carried out by a person for another for consideration and includes a declared service. The definition also has a “does not includepart which I will dwell on latter. A look at the definition brings us to the use of the word “means”. The meaning of means when employed in a definition and the interpretation to be accorded to such a definition without exception is restrictive. This is because it means a particular thing thereby restricting the scope and ambit of the definition. However a look at the definition of service is like wondering how the dark side of the moon looks. The expression “means any activity” cannot by any degree of inference be narrowly construed. This is because the meaning of “activity” is as wide as the ever expanding infinite universe itself (no exaggeration).  The word activity is not defined in the proposals but dictionaries define this word to mean – interest, hobby, pastime, pursuit, occupation, venture, undertaking, enterprise, project, action, motion, movement, commotion, hustle, bustle, labour, exercise, function- actual, potential or mental, observation, experiment, inquiry, discussion, re-creation, to name a few. The word activity encompasses many more meanings than what is given above. Readers would be interested to note that inertia for a consideration for another person is also an activity and would be liable to service tax once the proposals become law (refraining from doing something for a consideration).

The next crucial word in the definition of service is consideration which is not defined in the budget proposals. In the absence of a definition in the FA, definitions in any agnate or cognate act can be adopted. Neither the CEA nor the CA have defined consideration. However section 2(d) of the Indian Contract Act, 1872 defines consideration as follows: “when, at the desire of the promisor, the promise or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing, something, such act or abstinence or promise is called a consideration for the promise”. Given this definition, consideration means anything received in return for provision of activity. This includes monetary, non monetary or deferred consideration. Guidance note 2 provides the department’s understanding of the word consideration. Interested readers may refer to the guidance note for some guidance on consideration.

Proceeding further there ought to be mutuality when service is provided, it must be provided by one person to another. The word person is defined in section 65B(37) which may be profitably referred to. It is further submitted that there are two exceptions to this principle of mutuality i.e. an establishment in taxable territory and another establishment of the same person located outside the taxable territory would be treated as distinct persons and an unincorporated association or body of persons and members thereof would also be treated as distinct persons.

The next critical aspect but disturbing facet of the definition of service is the “does not include” part in the definition, in terms of which mere transfer of title in goods or immovable property by way of sale, gift or in any other manner for consideration does not constitute service. The effect of this exclusion from the definition of service is this –

  • There ought to be change in ownership of goods for the exclusion to apply.
  • Mere transfer of possession or custody without transfer of ownership would be service. – Readers would appreciate that when goods are transferred with possession coupled with effective control, such transaction is exigible to VAT. It is my surmise that henceforth such transactions would be a service, because in such transactions the condition of “mere transfer of title” is not fulfilled.
  • Readers can gauge the scope for litigation on this issue. There would be more work for the committee to arrive on causes of increase in litigation – yearly budgets being the frontrunner. 
  • The use of the word mere in the exclusion clause signifies that the department would hereafter take the schedule of the local VAT laws in which specified works contracts / composite contracts are mentioned excluding transactions relating to buildings and structures and hold alln other transactions as being exigible to service tax. Whether sales tax has been paid on the deemed sale value or not. It does not end here. What the department would contend is that the value of goods would also have to be included to compute service tax.
  • Another facet which arises for consideration is the re-emergence of the ‘dominant theory’ test to be applicable to all transactions which are composite in nature except works contract and catering contract, because according to the department all other clauses in Article 366(29A) would necessarily have to invoke the dominant intention test to ascertain if the contract is for a mere transfer of title or for rendering of any activity.
  • To top it all there is a proposal to delete notification 12/2003-ST, (for people who are not aware of this notification, this notification exempts the value attributable to sale of goods subject to non availment of Cenvat credit on such goods). This would buttress what I have stated above.

 The next bewildering aspect is the distrust created by the budget proposals – to cite an example – the guidance note states that deemed sales in Article 366(29A) are also included in the definition of sale. This would mean that the value attributable to such deemed sale would be outside the scope of the valuation mechanism under service tax law. However the blatant lie embedded in this statement stands exposed by the presence of the exclusion in the definition of service i.e. “mere transfer of title in goods or immovable property by way of sale, gift or in any other manner for consideration does not constitute service. This means to say that in all transactions detailed at Article 366(29A) clauses (a) to (f), there is no mere transfer of title but all the cases involve elements of service also. The scary part is that the dominant intention of most of such transactions would be service and by virtue of this, there is a stark contrast between what is stated to be purportedly excluded and the manner in which the fine print is going to be interpreted by the department given the guidance note misguiding the department. It is to be appreciated that the above definition is capable of creating insurmountable litigation for no fault of assessees and on issues which have attained finality. Assessees would do well to be prepared for another protracted round of litigation and retrospective amendments on this issue.

A fact to be noted is that the Tribunals across the Country have, even before the budget proposals confirmed service tax by invoking the dominant theory test on the value attributable to goods by holding that the dominant intention in transactions resembling sale is service and therefore even if sales tax is paid service tax would be payable on the value of goods. This is the equitable treatment meted out by our so-called justice system.

Some missed opportunities

Let us examine some pertinent questions –

  1. Why has the budget always enforced rights of governments in taxing the public without recognizing the corresponding duty of the administration?
  2. Why is no time frame fixed to conclude adjudication?
  3. Why is no accountability fixed for taking decisions contrary to precedents?
  4. Why does the tax payer not have any rights against the Government for frivolous and vexatious action by the executive?
  5. Why does the Government not guarantee tax payers rights against harassment by the Department?
  6. Why should assessees’ pay through the PLA during the month of March?
  7. Is it impossible to draft legislative documents using simple sentences and intelligible language?
  8. Why does the Government not comprehend it is a collective body of public servants?
  9. Why should the Government punish Jack for the sins of Peter?

Last but not the least the annual budget exercises have come to mean overcoming and outsmarting decisions of courts by amendments to laws (retrospectively) and creating controversies where none ought to exist. This is a bemoanable state of affairs in our country. From 1950 onwards, ever since we the citizens gave unto ourselves the Constitution, the Parliament is seen struggling against the effect of the provisions of the Constitution. Whenever there was any conflict between the policies of the political party in power and the mandate in the Constitution, the political party did not modify or mould its policies in consonance with the Constitution. It amended the Constitution unhesitatingly and sometimes mischievously and today the effect of these amendments is that the sacred parchment, setting out the rules of governance has been reduced to a political document to suit the convenience of the political party in power. Therefore amending law and crushing the common man under the weight of excessive taxation has become routine and is second nature of the party currently in power. It is akin to a monarchy being run by a super prime ministers without the authority of law (read Mrs. G) reducing others in the cabinet to myrmidons. This being the state of affairs, can “we the people” expect anything simple, equitable and progressive from the FM is the question all of us have to ask (Not forgetting that politics is a game of convenience and expediency).   

(The views expressed are entirely mine and errors which may have crept in, are inadvertent)

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Sale & Purchase – A Merry-go-around



Sales tax was introduced for the first time in India by the then C. P. & Berar Province (now Madhya Pradesh) in 1938. Madras(now Chennai) was the first state to enact a legislation known as Madras General Sales Tax Act, 1939. By 1948 almost all states enacted laws for taxing sale and purchase of various commodities. Under the Government of India Act, 1935 power to levy tax on sale was given under entry 48 of List II of VII schedule. After adoption of the Constitution of India State legislatures derived their powers to levy tax under Article 246 read with three lists. During the 50’s & 60’s, various State legislatures levied and collected sales tax on various transactions wherein one or more of the ingredients of “sale of goods” as legally understood under the Sale of Goods Act, 1930 was missing. For instance, compulsory acquisition of goods by the Government under the Essential Commodities Act, contract for works, hire purchase, supply of food and beverages by hotels and restaurants, etc. There were sharp conflict of opinion over such taxation amongst the High Courts and many cases reached the apex court and quashed by the apex court on the ground that essentials of “sale” are missing in the transaction. In order to resolve this controversy reference was made to the Law Commission. The Commission in its 61st report recommended certain amendments to the Constitution and it was decided to levy tax on transactions resembling sales. In the year 1982, Parliament passed the 46th amendment act amending the Constitution in order to bring many of the transactions in which property in goods passed but which could not be considered as sale of goods for the purposes of levy of sales tax.


Scope of the amendment

By the 46th amendment a new clause 29A was introduced in Article 366. This insertion defined the expression “tax on sale or purchase of goods” employed in various Articles including the Seventh Schedule to the Constitution to bring within its ambit six specific types of transactions which prior to 1982 were not sale transactions i.e. deemed sale. By virtue of this insertion hitherto non sale transactions were by a deeming fiction considered to be sale transaction and the value attributable to sale of goods was made exigible to sales tax.


Service Tax – Scope & background

Service tax was introduced for the first time in 1994. The tax was on three services initially and now has expanded to 119 services. The impost is on the rendering of taxable services defined in section 65(105) on the gross amount charged for rendering such services. The expression service has not been defined in the Finance Act, 1994. However, dictionaries give the meaning as “fruitful labour which does not give rise to tangible property”. Given this brief background on service tax, what is imperative is that in terms of the Constitution of India as expounded by the Supreme Court in decisions including but not limited to BSNL Vs. UOI, 2006 (2) STR 161 (SC) and Imagic Creative Pvt., Ltd., Vs. CCT, 2008 (9) STR 337 (SC), to name a couple, what emanates is that when sales tax is leviable on a particular transaction the self-same transaction cannot be said to be a service. In other words the Supreme Court has time and again held that payment of service tax and VAT are mutually exclusive. It held that composite transactions/contracts may consist of different elements attracting different levies under different enactments. Further it also held that the entire proceeds of the contract could not be made exigible to VAT / service tax. That VAT & Service tax would be leviable only to the extent of element of sale / service. As a result what follows is that once a transaction is held to be a sale the same transaction cannot be held to be a service and vice-versa.


Current trend in the CESTAT

The present trend in the CESTAT is – A view is being developed (by a few) that the value of goods is includible in the value of the service in the light of usage of the expression gross amount in section 67, which is the valuation mechanism prescribed in the Finance Act, 1994 and on applying the rule of harmonious interpretation and holding that sale for the constitution is not sale for service tax notification 12/03/.


Reason for this article

The recent path breaking decisions of the CESTAT is the reason for this article. This article is written as an informed citizen and denizen of India. I am exercising my right to freedom in writing this article. My aim and purpose in writing this article is not to ridicule or show the CESTAT decision making process in a bad light. All that I am doing is bringing to the fore certain glaring discrepancies in the recent decisions of the CESTAT, which in my opinion are unsettling settled law. This relates to Article 366(29A) (a) to (f) of the Constitution of India.


Food for thought

Here is some food for thought – Should the CESTAT by respecting the precedential value of a catena of Supreme Court decisions follow the law laid down or does it have the power, competence and jurisdiction to distinguish a Supreme Court decision rendered on an identical/similar issue?


My take on recent CESTAT Decisions

The decisions of the Tribunal in Sayaji hotels, Instrumentation Ltd & Mahabala Mannur have been arrived upon by recording a finding that actual sale is absent. That for the purposes of notification 12/03-ST the concept of sale under the Sale of Goods Act, 1930 would be inapplicable and that sale ought to be understood as per section 2(h) of the Central Excise Act, 1944. The rule of harmonious construction has also been cited to construe the meaning, scope and import of sale for the purposes of the Finance Act, 1994.


What I fail to understand is this – the basis to arrive upon the conclusions in the above decisions is palpably erroneous because after the 46th amendment to the Constitution of India the question in relation to the six instances enumerated therein i.e. sub articles (a) to (f) to Article 366 (29A) there is no scope to argue that sales tax is not exigible when there is no actual sale of goods. Because after the 46th amendment to the Constitution all the six instances under Article 366(29A) are by a deeming fiction deemed to be sale transactions and the value attributable to such sale is exigible to sales tax / VAT. In my view, though the six transactions enumerated in Article 366(29A) are deeming fictions but nevertheless these are construed and regarded as actual “sale” for all legal, practical and taxation purposes.


Now, when for the purposes of the Constitution of India the six instances in Article 366(29A) are sale transactions and when a lot of water has flown under the bridge on the argument whether there ought to be actual sale, intent of parties etc., is the CESTAT justified in law to rely on a rule of harmonious construction to construe an unambiguous provision against the assessee and lay down a ratio that the value of goods is includible in the gross amount charged for the purposes of imposition of service tax?


Secondly, does it not stand to reason that –

¨       When the Constitution of India had to be amended to bring six instances enumerated in Article 366(29A) within the ambit of concept of deemed sale then to impose service tax on similar transactions would the Constitution not have to be amended again?

¨       An argument against this reasoning would be that when the value attributable to sale of goods (deemed sale is what is being deliberated here) is made exigible to sales tax / VAT the remainder of the consideration is towards labour and this is the value of service exigible to service tax.

¨       The above argument would not stand the test of rule of law (in my opinion) because it is well settled by time and hallowed by decisions of the Apex Court that tax cannot be levied by implication.

¨       If service tax is leviable on remainder of the consideration would this not be a crystal clear instance of service tax being imposed by implication rather than as a result of a clear cut mandate?  

¨       There is no mandate according to the rule of law as enshrined in the Constitution of India to impose service tax on the value attributable to services in a composite transaction where there are elements of sale and service.

¨       Is’nt it intellectual dis-honesty on the part of the signatories to the decisions cited above to try to subvert the rule of law in trying to change settled law only to garner more revenue for the politicians to play havoc with such accumulation of hard earned monies – examples being the 2G scam, the CWG scam and many more which have not yet been unearthed.

¨       Is it right on the part of the members to lay down law a law stating that value of goods is includible in the gross amount charged for services in order to compute service tax liability when law is settled on the aspect that the Central government does not have the power, competence or jurisdiction to levy any tax (except where sale occasions the transport of goods interstate) on the sale of goods.

¨       More-so because in terms of the seventh schedule to the Constitution of India the power, competence and jurisdiction to levy sales tax is exclusively given to the State Governments.

¨       Therefore what cannot be done directly also cannot be permitted to be done in-directly.

¨       The decisions under deliberations are excellent examples and samples of in-directly perpetrating what cannot be done directly.


Coming back to the discussion on the ratio adopted by the CESTAT i.e. no actual sale and definition under section 2(h) of the CEA ought to be adopted an observation which springs to my mind is worthy of mention i.e. even the supreme court in the context of decisions rendered in the context of Constitutional validity of the service tax provisions have time and again reiterated their understanding. One such example of understanding can be gathered from Tamil Nadu Kalyana Mandapam Association Vs. UOI, 2004 (167) ELT 3 (SC) at para 42, 43 & 44 have referred to the concept of sale of goods under the Sale of Goods Act, 1930 and sale under the law of contracts holding in the following terms “as far as the above point is concerned, it is well settled that for the tax to amount to a tax on sale of goods, it must amount to a sale according to the established concept of a sale in the law of contract or more precisely the Sale of Goods Act, 1930. Legislature cannot enlarge the definition of sale so as to bring within the ambit of taxation transactions, which could not be a sale in law. The following judgments and the principles laid down therein can be very well applied to the case on hand.

1.          M/s. J.K. Jute Mills Co. Ltd. v. The State of U.P. & Anr. [1962] 2 SCR 1;

2.          M/s. Gannon Dunkerley & Co. and Ors. v. State of Rajasthan & Ors. (1993) 1 SCC 364;

3.          The State of Madras v. Ganon Dunkerley & Co. (Madras) Ltd. [1959] SCR 379;

4.          The Sales Tax Officer, Pilibhit v. M/s. Budh Prakash Jai Prakash [1955] 1 SCR 243;

5.          M/s. George Oakes (P) Ltd. v. State of Madras [1962] 2 SCR 570.

Para 43. In regard to the submission made on Article 366(29A)(f), we are of the view that it does not provide to the contrary. It only permits the State to impose a tax on the supply of food and drink by whatever mode it may be made. It does not conceptually or otherwise includes the supply to services within the definition of sale and purchase of goods. This is particularly apparent from the following phrase contained in the said sub-article “such transfer, delivery or supply of any goods shall be deemed to be a sale of those goods”. In other words, the operative words of the said sub-article is supply of goods and it is only supply of food and drinks and other articles for human consumption that is deemed to be a sale or purchase of goods.

Para 44. The concept of catering admittedly includes the concept of rendering service. The fact that tax on the sale of the goods involved in the said service can be levied does not mean that a service tax cannot be levied on the service aspect of catering


The interested reader is requested to read the decision of the Supreme Court in State of Uttar Pradesh Vs. UOI, 2004 (170) ELT 385 (SC) which decision went on the basis of substance of the transaction determining if the transaction is a sale or a service. A transaction could be sale for the purposes of one enactment and service for the purposes of another. The reason for stating this decision in this article is simply to enable the interested reader to gather from where the analogy adopted in the recent CESTAT decisions emerged. This decision was overruled by the decision of the Supreme Court in BSNL Vs. UOI, 2006 (2) STR 161 (SC). The extent to which the BSNL decision overruled the State of UP decision is not known. If the analogy adopted in the overruled Supreme Court decision is carefully appreciated, the source of the CESTAT’s reasoning would also be clear.


Despite all of the above, in 2011 the CESTAT arrives upon a conclusion that section 2(h) of the CEA is more sacrosanct than the definition of sale under the Sale of Goods Act, 1930. Does it not stand to reason that if the highest law of the land postulates that a certain transaction is a deemed sale would or could there be scope for any other Court in this country to hold to the contrary and advance a finding that there ought to be actual sale? Only time will tell.


Food for thought

Even if a Court does hold to the contrary – Is it not right to state that such a Court has not followed the law of the land as stated in Article 141 of the Constitution of India.

Even if it does lay down some law contrary to the Constitution of India would’nt such a decision be illegal ab-initio?


Another disturbing feature is the finding in the order of the CESTAT that the legal fiction of sale in Article 366(29A) of the Constitution of India is of no relevance for service tax and the gross amount of the contract would attract service tax. In other words value of the goods is includible in the gross amount of the service. The CESTAT does not give importance to the use of expression “for such service” after the words “gross amount”. It merely appreciates “gross amount” without appreciating that “gross amount” is for “such services” which would inevitably mean the portion of consideration not attributable to sale of goods.   It is a sine-qua-non that provisions of tax law have to be holistically appreciated and appreciation / interpretation of tax provisions in bits and pieces would lead to disastrous consequences.


On notification no.12/03

The decisions under deliberation appear to be a brain child to overcome benefit given under notification 12/03. On a mere perusal of notification 12/03 what emerges clearly is that the intent of the legislature is to give benefit / abatement to the value of goods sold in the course of rendering services subject to non availment of cenvat on the inputs and subject to evidence. The controversial decisions if appreciated would lead one to the conclusion that benefit under 12/03 is sought to be denied on one pretext or the other. By interpreting notification 12/03 as being available only to actual sale is to disfigure the intent, purpose and object of notification 12/03. The manner in which the word “sale” in notification 12/03 has been interpreted would lead to defeating the very purpose for which the notification was issued in the first place and in the second defeats the ratio laid down by the Supreme Court holding that levy of VAT & service tax is mutually exclusive.


As an informed denizen and a practicing in-direct tax lawyer what I fail to comprehend is – If the Supreme Court states that the deeming fiction in Article 366(29A) was to enable the states to levy sales tax on the portion of the contract which represents sale then is it prudent and judicially proper for the CESTAT to hold in Sayaji Hotels case at para 22.2 –

When a Mandap Keeper, while providing catering service as part of the service in relation to use of Mandap by his client, serves the food and drink, just because by virtue of the legal fiction of Article 366(29A)(f), sales tax is charged on the supply of the foods and drink served by treating the same as deemed sale, the Mandap Keeper does not became the seller of food and drinks for the purpose of Notification No. 12/03-S.T”.


If the above were to be the legal position, why should the Government give ad-hoc abatement under notification No.1/06-ST when Mandap Keepers supply food and drink.  Should it not be the duty of the CESTAT to examine the entire issue holistically keeping in mind the entirety of the Finance Act, 1944 including various notifications issued thereunder vis-à-vis Sales Tax laws? More-so when the President of the CESTAT is a retired High Court judge.


What the CESTAT failed to take cognizance of is that the said deeming fiction operates in the Constitution of India which I was told and had led to believe in these 10 years of my practice, as the supreme law of the land and if any other law advanced a principle / aspect / provision which was contrary to anything contained in the Constitution of India then such a contrary principle / provision/ enactment had to be read down and had to be brought in line with what was stated in the Constitution. This was one of my first lessons while I studied law.


Be that as it may, the question which needs immediate attention is whether the CESTAT is legal and proper in laying down law contrary to Constitutional mandate as interpreted by the Apex Court decisions which are binding in terms of Article 141 and advancing unsustainable theories that if deemed sale operates for the purposes of the Constitution it shall not operate for the purpose of a notification i.e. 12/03 because there is no actual intent etc., and there is no actual sale. When there is a deeming fiction created to enable the State Governments to levy sales tax can there be an argument that there is no actual sale. If that were to be so then could the State Governments tax such transactions, if there were to be no sale of goods? The very meaning of the expression deeming fiction is to acknowledge the presence of something which actually is not. The CESTAT members, it appears have lost sight of this elementary principle of law while rendering illogical and intellectually dis-honest decisions.  


The intent and actual sale concepts, in my opinion have no relevance in the post 366 (29A) era. After article 366(29A) was inserted the six clauses which were (emphasis supplied) hitherto not considered to be actual sale were thereafter considered to be actual sale of goods. What needs appreciation here is that there was no actual sale or intent because of the operation of the deeming fiction inserted in Article 366(29A). Therefore in the six clauses after insertion of Article 366(29A) in the Constitution of India there is a deemed sale of goods and such deeming fiction in the Constitution of India operates and cuts across all other laws in force in India. If any law advances or any attempt is made to advance a theory which goes against the deemed sale concept under Article 366 (29A) such law necessarily has to be read down and brought in line with what is stated in the Constitution of India.


However, the principle of reading down might not have been one of the principles by which the CESTAT would have been impressed and hence instead chose to apply the Rule of harmonious construction to a clear unambiguous notification 12/03. According to me there is no scope for interpretation when a provision is as clear as crystal. Notification 12/03 luckily is one such crystal clear notification which calls for no interpretative skills on the part of the person desirous of claiming its benefits.


If what has been stated above is appreciated the analogy adopted by the CESTAT would hold no water because the CESTAT is not competent to criticize or take a stand contrary to what the Supreme Court and the Constitution of India postulate. It is the bounden duty of the CESTAT not to create controversies which have a far-reaching impact and have the tendency of increasing litigation on issues which are settled. It is also the bounden duty of the CESTAT to follow the law laid down by the Supreme Court and to respect the mandate in the Constitution of India.   


I hope against hope that the people involved in the arguing the cases cited above challenge the validity of the decisions in the High Court where some constitutional appreciation can be expected. I also hope that the CESTAT is used as an instrument to reduce litigation rather than to create them.

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