Progress is man’s ability to complicate simplicity – Thor Heyerdahl.

 Promise –  Information available in the public domain makes the following claims in respect of GST:

  • Broadening of tax base,
  • Reduction of distortions in economy through a more comprehensive input tax credit,
  • Enhancement of export competitiveness by comprehensively relieving domestic consumption taxes on exports,
  • Ensuring greater regional equity by getting rid of inter-state sales tax,
  • Having a destination-based tax,
  • Help creation of a seamless national market by removing inter-state trade barriers,
  • Reducing compliance costs for taxpayers by simplifying and harmonising tax structure and making administration uniform across states. (emphasis in italics and underling supplied)

A query in this regard – Whether the tax proposals are progressive?

Answer lies in the negative bringing me to – Why can’t we as Indians (I’m thinking of us as the race which had nuclear bombs, planes and all kinds of contraptions which are not fathomable today i.e. in the times of Ramayan / Mahabharat) come upon tax innovation?, set the pace for the rest of the world, set a benchmark in implementing innovative, transparent and efficient tax administration / system (emphasis supplied). I realize, on introspection, that the answer to this quandary lies in us, as people. The varied janata / population given India’s density of population and the challenges that this in itself brings, let apart business, putting in place complex tax structures involving a mix of free use and abuse of principles of interpretation of law, lacuna in legislation, vague policy which is miles apart from practice and lastly implementation which needs radical transformation of mindset and hence by necessary implication a radical tax policy, legislation and entire re-vamp of tax administration.

Why ape Europe / west and attempt to implement the ways in which they legislate, they administer and they make policies, in the Indian text, context and sub-text when experience advises that apples and oranges are not comparable. It’s as if we (Indian’s) for some strange reason which alludes me are in awe of what the gori chamdi does. It’s not as if India, in the past has had a dearth of SAVANTS or in the present will ever have a brain drain, that figuring out for ourselves innovative ways to manage our taxes better becomes an attempt to ape the west/east and the rest of the world. Some suggestions do follow in this deliberation It’s not all negative, as some may choose to call it.

Present – The existing condition of India’s economy, given the morality of the general public, businesses and tax administration is evident from the paradox which the above vision, if I may call it that – promises. The present dispensation of in-direct taxes when logically evaluated, what emanates is – Customs Act, 1962, Central Excise Act, 1944 and Finance Act, 1994 form the pool of Central in-direct taxes apart from Central / State Sales tax levied on inter/intra-state sale of goods. All these levies except for customs are to be subsumed in GST (CGST, SGST & IGST) in addition to other levies. Presently law relating to Central in-direct taxes have a semblance of being settled in the sense that the words, phrases, sections, etc., are in some state of inertia given decades of contentious litigation (most of which still finds place in Courts/Tribunals). Legislation is an exercise in which all and sundry are involved and pundits sitting in the north block ably added by the bureaucracy determine outcome of legislation. In other words lacuna in the name of certainty, deletion of benefit in the name of reducing distortions, insertions of more and more condition precedents for input tax credit, keeping refunds in a state of flux without appreciating that the interest cost would again fuel inflationary trends, distorting sectors by inadequate policies, legislation, and the like. All of the above are solely attributable to the skeptical mind-set of the tax administration who still believes that they collect tax for the British. Investigations are abandoned for gratification and where it ought to start it stops. Umpteen instances where the Government to save face has had to retrospectively amend laws to the detriment of business in India as also for MNCs bears witness to this averment. I’m not for a moment, stating that all tax ill’s are attributable solely to tax administration, businesses are also equally to blame, it’s not as if one can expect in India that there is a lacuna in law and the business community brings it to the fore and plugs it before damage is done. Though, some naysayers may point out recent controversies created by the legislature and judiciary-there is no denying that fact. Aberrations would always be a part of the larger picture of chaos. Point being, that existing machinery of in-direct tax laws can fairly be said to be well oiled capable of exacting taxes (legal or otherwise) from its tax-paying denizens. The going thus far is more or less good and the law more or less settled. Give or take about 10 percentile points either way.

The Government (In-direct tax department) has its own way of functioning – it’s like the rest of India where people cannot fathom the Goan way of life – “sushegath” which equals “aram se” in Hindi. The departmental officers are in a comfortable position where show cause (kas in kannada means money) notices (SCNs) are issued periodically without taking a stand on the legality/tenability of the demand. It’s as if the department at some point of time lost it’s spine. SCNs are issued for heck’s sake and the justification is “I don’t want anybody pointing fingers at me.” Despite the outcome which is in no way linked to the tenacious officer’s APRs. More-so, since the seniors writing the APRs have also gone through the same rigmarole.  No one takes a stand contrary to “higher powers.” Intellectual dis-honesty is the norm and justifications ample, lest, it’s a hindrance to one’s promotion. To put it plainly never have I seen some government officer who is expected to serve the public actually serving the public, what is happening in the name of service is self-service and dis-service.

I have never in my life seen class divide as I’ve seen in the GOI (any department) where even if the occasion is republic day or independence day, the tea and snacks served to Class I officers and so on and so forth has to be at a different venue albeit in the same premises when compared with Class IV officers. It some-how perpetuates an aura of they are more important – a paradox in itself. Lal-bathis are another case in point.

Coming back, the periodicity of issuance of the SCN does not in any manner improve the quality of the show cause and uses time, effort and money in a wasteful manner. Whose time, whose effort and whose money – ours as a nation. The efficiency is never measured, its managed. In management terms it’s a branch called perception management, which the department manages well at the cost of efficiency. The upholding of the demand by the highest court of the land is not the criteria for APRs. It is issuance and confirmation of demands at the adjudication levels, which as all of us know is a farce, which form the basis. Such measures, if perpetuated – can anyone expect it to be anything else but distortionary /far away from the truth as can be. I have appeared (in my professional capacity) before officers who choose to listen to music while purportedly listening to me argue the case and sway their heads to the tune of the music. Adjudication is a sham and ought to be done away with – why unnecessarily conduct a procedure when it ought to be done in spirit. Embellishments need to be done away with.

I may add here as an anecdote that the deliberation here does not include amongst others, monthly doles which service providers, manufacturers, CHA’s, importers, sellers and other business doing citizenery shell out for the personal betterment of the law enforcing officers and thus by analogy law abiding tax administrators. The figures would be capable of running a small nation. I’m not aware of any survey / sting operation being conducted in this regard. All of us as citizens have come to accept this as a part and parcel of doing business whether with or without ease.

Ground Reality – Any law cannot envisage all fact situations – is reality. Creases / lacunas / interpretational nuances, if any are ironed out by litigation. Under the four enactments referred to supra i.e. Central / State in-direct taxes the attendant procedures to be followed are varied. By procedures what I mean is once the levy stands attracted, the next issue is of valuing the levy in terms of the enactments, rules framed thereunder, notifications-circulars issued and impromptu fly by night circulars / dikats / ipse-dixit of the tax administrators who have not been given their dues sorry doles. The principles to be followed for valuation of the respective levies are dissimilar, the periodicity of filing various returns and attendant procedures are also unlike. Further, the Cenvat Credit scheme w.e.f. 2004 has been made applicable across the goods and services sectors, which move I doubt has eased any pressure for the assessees’. Further, the Cenvat Credit scheme which is purported to be simple is anything but simple. There are disputes galore attributable mostly to the irreverently invalid arguments propounded by self-proclaimed experts serving the department for eons. The disputes are clearly unwarranted. The statics of departmental wins at the higher levels of judiciary establish this point- Refer cbec website for more details on the stats. Such administrators, for the sake of convenience are referred to in this deliberation as revenue generating machines (RGMs).  Most in-direct tax practitioners, “consultants” / in house tax departments know extremely well of the how’s to deal with RGMs. Point being, however well-oiled a machine may be, it requires to be driven and when the drivers are RGMs, frivolous litigation mushrooms. Empirical studies on government website referred to supra proves this point. The latest Excise Law Times in its editorials pegs the figure of pending cases before the CESTAT at a whooping 100000/-. The existing mechanics of in-direct taxes has too much semantics built in necessitating lis bringing Courts / Tribunals / Quasi-judicial forums into picture. This is apart from the ADRs referred to above. The so-called settlement commission is an example in point. Practice is whosoever goes with howsoever clean hands they are all thieves. Most of us denizens have to pay for our sins (read taxes-legal or otherwise) and clear our dues before we can dream of taking one step in the direction of growth. The blame is not solely on the administrators it’s also the fraternity of professionals some of whom I have reason to believe (without cogent proof of course) since I’m no Snowden/Julian Assange, are instigators giving impetus to the law abiding efficient and diligent administrators to obtain some – how do we say, in diplomacy – leverage so that their lives are comfortable. What is the cause – the GOI pays the best brains who have cracked the civil services a pittance which cannot provide anything else but an ego boost, which is all lost after superannuation.

Cause –              Onus is a word which an interpreter of law comes across often. A synonym for which is responsibility not only moral or professional, but also intellectual. It is my view that unless and until onus / responsibility is cast on tax administrators for each of their acts / actions, discharged in the course of rendering government service, there cannot be a change in the manner in which business is done nor would there be any hope in ease of doing business. All promises would fade if onus / responsibility is not cast on administrators. I do not see any expert in their reports bringing out this aspect. Neither do any of the recommendations propose any kind of responsibility on the tax administrator. My guess is that, the powers that be in the bureaucracy thwart any recommendation / change in this regard, if any. However, this does not preclude them from seeking increase in their pay scales. The VII pay commission report is an example in this behalf.

India expects everything stated above to change overnight by the sleight of hand that by legislating a law to be called GST all the ills of tax administration would be done away with. This is akin to expecting local blended whiskey to taste like single malt. No mother’s son (to use Shri Aurobindo’s language) has even attempted to cast responsibility on the administrators. I do not see one word about responsibility in the public domain juxtaposed with what is out there as we (commoners) know of GST. It’s a misnomer i.e. the word responsibility when we think of tax administrators. This is despite the despicable litigation results of colossal cases built up by the efficient, diligent and ever so law abiding james bond wings of the revenue i.e. Anti-evasion / DRI etc. I think they teach them how not to get caught while making a pathetic case against the dole givers. Kindly do not think that I’m generalizing here. But a majority of the 007 division are dole takers not DHARMA following Dharmadhikaris rendering a service to their denizens or to our Nation.

Reason –            I think (and this is my conspiracy theory) that the first thing that BJP ought to have done once they were in power is to shuffle the entire Bureaucracy up in the North block. Theory being – governments come and governments go – who remain constant like fixtures in the North Block it’s the North Blockers. Hence, they (North Blockers) have become a parallel government and are the ones who have their say to the detriment of the public at large. Take the example of how they try to dictate to the business men how to do business when they have not an iota / ounce of experience in doing business. Of how they expect forecasts of growth every year from businesses, while having the largest ever imaginable data base on businesses. How the trained 007 division of the GOI directs assesses under investigation to provide information in simple formats dictated by them. How they hoist false cases against assesses who refuse doles and the list goes on. North blockers are good at getting pay commission recommendations passed for which all of us the commoners have to bleed / shell out so that they (North Blockers) can increase their emoluments /pays without increasing their responsibilities and travel in lal battis. They have no inkling of any responsibility. All they can do is expect to get paid irrespective of what time they come into office, how they discharge their duties, how intellectually honest they are in serving the public and without asking themselves how morally, intellectually and professionally they diligently (in fact) discharge their duty for which they are paid, get a car, get accommodation, get TA/DA in addition to getting the right of doing us the common denizens a favour.

I suggest a radical approach in making them fall in line or fall by the wayside,  take away all their perks, perks ought not to be dependent on their class / grade of pay etc., it ought to be based on merit and deserve and desire ought to be the mandate. That it should be made mandatory for all of them irrespective of their grades / class to travel by Government transport be it metro / buses. Imagine how much the country would save. Refer to the number of central government employees and do the math. Further, perks ought to be linked to cases built up by them being upheld in the highest court of the land / High Court/Supreme Court. How about their promotions are not based on seniority (how many years they have put in) but based on performance which is linked to professionalism, diligence and intellectual honesty. How about they are made accountable for their acts and there is a separate department in every administrative agency which consist of us common denizens (like a jury which takes stock on a monthly / bi-monthly / quarterly / half-yearly and yearly) basis and only thereafter their promotions / perks are decided upon. How about they do not get anything for granted just because they have reached a particular level. How about banning all Delhilites from being eligible for government jobs except if it is not in Delhi. I think it is time that there are radical changes made in the administrative set-up, since they like a party that ruled us for more than 60 years have had it good for aeons and they have taken us the common denizens for granted. I fail to understand how all so-called intellectuals, professionals and other commoners do not see the fact that our courts are burdened with humongous backlogs in cases which are all attributable to some north blocker / 007 divisioner who is not accountable for the sheer mass of lis creation. Of how nothing ever seems to happen to them irrespective of what decision they take – legal or illegal. On the contrary it is the common denizens who have to suffer for their faults in not being upright and following their DHARMA. Nay-sayers would argue that this is all wishful thinking, however, it may be borne in mind that whenever it is said that so and so is not possible, that so and so has always happened. History of the world bears witness to this fact.

Wish list –         What brings perspective is – GST proposes to integrate Cenvat across VAT & CEA / FA, which is welcome in an Utopian society not KALIUGA in India, where a person is expected (repeat expected) to look both ways while walking on a one way street. Where he is presumed guilty before a verdict and where the guilty go scot free and poor suffer for lack of a good counsel. Modalities and fine print by which integration is proposed / GST is to be administered / implemented is in the realm of one’s imagination (to the exclusion of bureaucrats) which latter creed of people seem to be dictating the GST model-my theory again. If experience is a teacher it ought to teach us not to depend on administrators to don all caps i.e. of administrators and also law makers. There are other means of devising / writing laws. Merely because it has never been done does not mean that it cannot be done. This is negativism to the core and needs to be nipped in the bud. Let us be a country where the commoners dictate the manner in which the country is run and not the so-called elected few who dictate, who get the right to splurge our monies on vastu, cars, de-notifying land, amassing enormous wealth which they or seven generations cannot expend. Let us at least try to get in a legislation which actually helps us bring down the inflation caused by the excesses of the government, politicians and bureaucrats. Why is it, that laws are so complex that there needs to be scores of judgments, clarifications and lis on one particular issue.  Why can’t laws be simple in fact. Why is there a need to exclude Cenvat to builders and give the same to contractors just because some big brain in the North block came up with a devise to save or rather do some jugglery with numbers and ostensibly show that some pittance money is saved. Why can’t refunds be refunded within the time limit so that interest burden does not again stoke inflationary trends. The 7th pay commission when implemented the Finance Minister has made a statement that he needs to find 1 lakh crore to fund the same. This is now a reality. All of us citizens are more in debt for paying the servicers more for ostensibly rendering is a service, while in reality they sit on our heads like masters. Exclusions are always in existence and are the ones who prove the rule. Now, since the FM is not Houdini or a Merlin to garner 1 lakh crore from thin air, my guess is that some big brain would again come up with some magic jugglery and think that he is a big brain. Why can’t all of the GOI bear in mind when they come into work that it is for INDIA that they are all working towards and have inbuilt mechanisms to negate lis between governments – imagine how much this would save the country in litigation costs and reduce pendency in Courts. Referring matters to the Committee of disputes has now been done away with. This entire paper can be on this topic, however not being the discussion on paper, it is not.

Suggestions –       GOI may choose to note the principle of legislation by incorporation / reference. That the exercise of power of legislation by incorporation / reference is well settled. There are innumerable examples where existing provisions of one enactment have been made applicable to provisions / parts of another enactment by incorporation / reference. Various cesses levied as a duty of excise under the CEA are examples of exercise of such power. Such legislation have been successful in implementing the levies sought to be levied. The administering of such levies has also been successful. The same power i.e. legislation by reference / incorporation can, in my view, be exercised in respect of subsuming various taxes / levies which are proposed to be subsumed under the GST. Such exercise of power would entail tinkering with another column or two in the periodical returns which would do the job. Rather than enacting a completely new levy with its challenges of re-defining words, phrases and expressions well settled. Why re-invent when tinkering can do the job. Keeping out goods from the purview of GST which garners almost 45% of the state revenues as per the whims of the States and stating again and again on paper that GST would reduce distortion etc., is not fact but an attempt to distort fact. Whether the exercise of introducing GST is what is stated to be in the first para supra or whether the introduction of GST is for garnering and cornering more revenue for the States is a question which deserves an answer. That, keeping out majority goods which garner if not more at least 45% of revenue for the States and expecting that there would be no distortion in addition to proposing 1% additional IGST for the origin state without first doing the math relating to consuming States and origin states and putting such data out in the public domain, would be nothing short of giving a not so pleasant surprise to the States and also public/assesses’. Such exercise of powers by the GOI and wasting immense time, effort and money of the public according to me is unwarranted if simplicity, transparency and ease of doing business are what is sought to be achieved. Further, what is the logic in making promises that GST is a destination based levy and that the monies ought to go to the consuming states – Why? What is the logic and what actual difference does it actually make? Is it not more pragmatic to promise that whichever state is garnering revenue would not garner less than that. Is the objective to make lives of denizens of India easier, cheaper or is it that the State governments ought to fill their coffers since no majority party has power in all states and the political parties who are in power ought to fill their quotas. Why does petrol need to be so expensive when the barrel has reached 35$ we are still paying through our noses, while when the cost of one barrel goes up the price of petrol again goes up – what is this logic? Is everybody sleeping and too busy fighting because the person behind him honked? This is more so because the goods being kept out of the purview of GST which garner 45% of the revenue have been given a constitutional guarantee of not being subsumed under the GST. Refer Article 246A and also 279A of the 122ndConstitutional Amendment Bill. Further there is also a constitutional guarantee given by the Center that it would compensate the States which garner a loss due to GST being destination based. The focus appears to be on how the States can make more revenue rather than the focus being on the intent of proposals of GST – remember the discussion on intellectual, professional and Dharmic honesty supra. That we are one country and all of us ought to work towards it’s betterment seems to be completely lost in the din of demarcating more and more States and how a few can garner and corner revenue belonging to the people of India. The above discussion drives home the point that there is a lot to be thought of before GST is introduced. The focus as stated in the first para in this paper is lost in the din of upholding a promise made by the ruling party without fully comprehending its results. I state this because the statistics of all the aspects detailed above are not in public domain. Issues like which States stand to gain due to their consumption and which States loose revenue and by how much compared with earlier records are not clear and are not in the public domain.

Another facet which merits appreciation by one and all is how would the States retain financial, administrative and political autonomy (which is the corner stone of our Constitution) when the Center proposes that they would first collect all the monies and thereafter distribute it to the States. That they would insert such a promise in the Constitution. Is this what the Constitution is reduced to be tinkered with as per the ipse-dixit of the ruling party. If this were to be prudent imagine a situation where after the introduction of GST the States consuming more would be comparatively richer since it is a State which consumes more than it produces and as such would have more monies in its coffers as compared to State which is a manufacturing hub. What would the incentive be for business houses to set up shop in States for manufacture and how would such a State, loosing revenue due to it being a producing State promote business or seek investments. How does the GST address this issue? There is no clarity on these aspects and the GOI would do well to put in the public domain some legitimate statistics on these aspects which would provide clarity on these issues. A mere cursory glance at industries in Kerala would answer this query.

It is further to be appreciated that the goods proposed to be kept out of the ambit of GST in quantum are about 45% (approximately on an average i.e. petroleum, petroleum products, alcohol, tobacco and cigarettes). Therefore, what follows is that the GST which purportedly is being implemented to broaden tax base, reduce distortions in the economy through a more comprehensive input tax credit, enhance export competitiveness by comprehensively relieving domestic consumption taxes on exports, ensure greater regional equity by getting rid of inter-state sales tax and having a destination-based tax, and help create a seamless national market by removing inter-state trade barriers, reduce compliance cost for taxpayers by simplifying and harmonizing the tax structure and making the administration uniform across states achieve such a tall objective. The objective therefore cannot be what it is stated to be. For if, GST is for only 55% of the goods what sense does it make to enact such a law or take up such a mammoth task for only 55% of the goods and burden the denizens with uncertainty, more expenditure in the face of huge backlog in Courts and a meager number of judges present to do the job. The topic of judges is again worthy of a thesis and is not attempted here. It is also unclear as to whether the collective impact of the GST would be more than what it is presently or would it be lesser. All of these issues are serious and need clarity. As of now there is nothing in the public domain which sheds any light on these issues.

The point being that various issues / concepts / aspects under the respective laws are settled and the industry is also more or less in sync with the laws and their attendant procedures to be followed. Now the proposal by the GOI to introduce a new enactment encompassing a host of levies under the GST and integrating the Cenvat mechanism across various levies would be in its conception stage. It is only once the enactment is made known and the fine print is out in the public domain that the questions raised in this deliberation would be capable of being answered.

However, I’m of the view that old wine in a new bottle and administration of such old wine by the same old bottle in addition to the corrupt department of VAT would only give impetus to corruption, disorder, frivolous disputes and chaos. This is because unless and until the mind-set of the people administering the laws is changed expecting that pouring new wine would mature it instantaneously / introduction of a new law would change the ease with which business is done in our country is a logical fallacy. That this is a fact is staring us in the face while we are busy checking our new idiot box the mobile. This is more-so because the Babu tradition has seeped into the DNA of the administrative officers to such an extent that unless this aspect is first addressed before introducing the GST nothing on the ground would in fact change. Expecting change while the administrators of the law remain the same is like expecting the old wine to taste like single malt whiskey when poured in a new bottle. Such an expectation is nothing short of expecting a miracle which in Kaliyuga is not possible since we have lost Merlin and Houdini and it is not Dwapara yuga anymore.

Facts –               I have noticed loads of hoopla around GST and various articles on the why’s and how’s of GST. There are also books running into thousands of pages which are available in the market. Of how much use these books are I cannot say for I have not wasted time in reading someone’s opinion on a law whose bolts and nuts are invisible. According to me there is nothing out in the public domain conclusively informing us of the modalities of GST as pointed out supra. What I’ve however, failed to appreciate in respect of GST are the following: –

  1. Why is it imperative to bring in a new law?
  2. Can’t the existing law be tinkered to subsume the other taxes like what is done with various cesses, levied as a duty of excise?
  3. Can’t one levy be incorporated at a time all the while assessing its effectiveness?
  4. Can’t the mechanism of collection of taxes be tinkered with?
  5. Can’t invoices raised under one law have interconnection with other in-direct tax laws?
  6. Is it not possible to have minimal State interference, given the state of administration and corruption in local VAT offices?
  7. What would a return under the new GST look like?
  8. What would the frequency of filing the same be? Central Excise has a number of forms to be filed one monthly, one quarterly, one half yearly etc?
  9. How would the GST address this issue?
  10. Would the dispute resolution system be the same as it is presently?
  11. Would appeals have to be filed before the State Appellate Tribunals in respect of services earmarked to the States?
  12. What would the credit system look like?
  13. Would there be identical blockages of Cenvat credit given the definitions of exempted services / goods, while proposing to do away with the distinction of goods and services?
  14. How would software be treated? Presently the software industry pays service tax and also VAT on the same value. Given this fact which authority (State or Centre) would give up its right to tax software, given the fact that it cannot be a service and goods at the same time on the same value.
  15. Would all appeals including refund, rebate and demands be filed before the CESTAT?
  16. Would CESTAT as a Tribunal function and have jurisdiction over services and goods?
  17. What are the measures to be taken to fix accountability on the administrator?
  18. Why is no accountability fixed as per law on Babus?
  19. Why keep 45% of revenue generating goods outside the ambit of GST?
  20. How would distribution of taxes collected by the Center be done?
  21. Would the costs involved in setting up all what is proposed to be set up justify the collections?
  22. Can’t the GOI give us a presumptive figure based on the statistics collected by it?
  • ……. many more

Such are the questions which loom large in my mind. I have no clarity given the present literature available to all, including myself, on GST on the above aspects. I for one am of the firm belief that the advent of GST would give rise to immense litigation and would only be a lawyer friendly affair. There would be no ease of doing business, or change in the mind-set of the tax administrator given that accountability is not a major and singular feature of the proposed levy.

I do not understand the logic that GST ought to be introduced after such a long time of having the presence of CEA, CA and FA. Given the fact that the principles and various facets and aspects under these laws are litigated and there is a certain level of certainty to the litigation process. However, under the GST how would all these aspects be dealt with? Why should an assessee who has been diligently paying taxes to the central government be made to necessarily go before the State authorities, which latter authorities are known to be far more corrupt than the former. This is an open secret. That the VAT authorities exercise discretionary powers in an arbitrary fashion is well known more-so because the appeal mechanism under most VAT laws require full pre-deposit i.e. 50% deposit of the adjudged dues and 50% bank guarantee. Now given such exercise of power by the VAT authorities is there hope for justice in tax laws? If yes how is this going to be tackled without first fixing accountability on the administrators of the GST?

I have always wondered why is it that in Bangalore it is the house which is first constructed and thereafter all measures for plumbing are undertaken. It’s like akin to the tail wagging the dog. As stated above it is the mindset of the existing tax administrators and their Sardars which has to undergo a sea change. They ought to stop being recovery agents acting like the British stooges collecting revenue and not thinking of the Indian well-being or acting as facilitators. I have had instances where the administrator is clueless of the law despite being in the department for 30 odd years, such is the state of affairs.

The GOI is also to blame to a certain degree in this approach being adopted, for it is the GOI which fixes targets to be achieved. I don’t understand whether the department is an insurance agent to achieve targets or is he there to levy, collect and recover taxes where they are due and to guide assessee’s when in doubt, in accordance with law. I do not understand why has the sanctity of the phrase in accordance with law lost its meaning and relevance in today’s day and age. Unless and until such mind-set is changed and accountability is brought into the picture there would in my mind, be no change whether it be introduction of GST or any other levy which purportedly subsumes various taxes and levies and which purports to be simple and purports to reduce distortions. A case in point is a well-known fact that – creation of the post of Principal Commissioner while there already exists the post of Chief Commissioner and Commissioner makes the administration top heavy. If everyone is of the rank of the Commissioner, who is responsible for ground work? How many amongst the department desire to actually work? How may do justice to their pay? How many are on their seat at the designated time of the day? How many introduce best practices? How many actually help assessees? How many are not drawing twin salaries one from the GOI & One from every registered assessee? What is done in the GST law to tackle such menace to the society which has eaten away the very fabric of our country? How is accountability fixed on every departmental officer to ensure that he is paid for what he deserves? Who in the GST scheme of things acts as a check and balance? Or would it be like the Anti Corruption Beareau (ACB) law in Karnataka where the Judge himself would act as a check and balance setting aside the principle that no man can be a judge in his own cause and bringing to naught the latin maxim hallowed by time and sanctified by hundreds of judicial decisions – nemo judex in causa sua.

None of the above questions are answered in the literature present on GST as of today. I am not aware if there exists such provisions in the GST which casts an obligation on the administrator to act judiciously. No one seems to be concerned on these aspects either. This is because all that I read in various web-sites and books is all relatable to the hoopla surrounding the introduction of GST and not one line has been dedicated on the above aspects, which according to me would have a far reaching effect than introducing GST without first addressing the root problem i.e. not the law its administrators.

I entreat the readers to appreciate the following anomalies between the reason for proposing and implementing GST and the manner in which there has been a compromise with various states (as collected from various journals like ELT, STR, TIOL, India Today etc). Tobacco & Cigarettes after the advent of GST would nevertheless be leviable to a separate central excise duty. Now if this be true what is the point of GST? Is’nt the point of levying GST totally defeated? It was the demand of most States to keep out of GST petroleum, petroleum products and alcohol. If this be true again statics as stated in various journals indicate that the States earn more than 50% of their revenue from petroleum, petroleum products and alcohol. Would’nt keeping 50% revenue earning goods outside the ambit of GST be against the grain of the reason for proposing GST? Imagine this if 50% revenue earning goods are kept out of the ambit of GST of every State what is the point of having GST for the remainder except tobacco & Cigarette (the percentage of revenue earning from these products being unknown). Further the fact that these goods would be out of the ambit of GST is strengthened from the proposal of Article 279A which postpones levy of GST on petroleum and petroleum products to a latter date. The fine print of Article 246A further leads me to believe that there is still scope for keeping other goods outside the levy of GST which is clear from the exception carved out in Article 246A by use of the words except those which are kept out of the purview of GST. It may also be appreciated that the Center has promised the States that they would compensate the States for any loss for five years. That the present state of GST is, thanks to negotiations which are on-going since 2009. That in six years our bureaucracy and the political establishment along with various committees have not been able to come up with a solution.

That tinkering the existing law would be sufficient to implement all that is proposed to be done under the GST, there only needs to be a will to do so. That introduction of GST would only distort and set to naught whatever little semblance of legality and parity has been achieved amongst various taxes levied. That a simple solution is plausible rather than keep 50% revenue earning goods outside the ambit of GST, keep tobacco and Cigarettes out of the ambit of GST, keep alcohol out of the ambit of tax and start implementation of an onerous tax regime all over again for maybe 20% of the goods. I implore all and sundry to appreciate the costs involved in implementation of the proposed GST and ask themselves the question – whether expending the taxpayers hard earned monies in a venture called GST for maximum 30% of goods apart from allowing every state to levy 1% additional IGST to be retained in the origin state over and above the IGST rate of GST is an exercise of logic and prudence given our economic situation. Should’nt the GOI be focused in cleaning all administrative systems first than proposing to do everything at all times. Kindly ask yourselves – If all of these distortions provide for economic balance and growth? These distortionist tactics ought to be nipped in the bud and GST ought to be scrapped. I’m of the firm opinion that tinkering with the existing laws would provide ample room for maneuvering all that is proposed under the GST. This entire exercise of GST would provide nothing but a big hole in our pockets, the burden of which would have to be carried by the common man as always. That it is high time that before introduction of any law public consensus be obtained and the fine print be available for detailed analysis and comments by experts. Distortions be reduced and all goods irrespective of their revenue earning capacity be subsumed within the GST or to tinker the existing laws without any separate GST enactment. The interested reader would do well to appreciate that I have not brought to the fore further distortions which would be created by the proposed Cenvat facility to be across the supply and services sectors.

In parting I leave the reader with the following:

  • business function not because of governments but in spite of governments;
  • a little experience upsets a lot of theory;
  • a good lie finds more believers than a bad truth;
  • things pass for what they seem, not for what they are. Few see inside, many get attached to appearances.

The comments made in this article are based on my experience and the views expressed herein are singularly mine. Errors may have crept in the draft, all of which are solely attributable to me. The views expressed are immensely personal. References to published texts are stated wherever applicable. Readers will do better by reading studies and papers conducted and published on the web site of National Institute of Public Finance and Policy.

As always, I’m interested to know errors which may freely be pointed out to further increase my efficiency.

References – Reports & working papers by 

  • PawanK Aggarwal, Pinaki Chakraborty & Jeejabai Manay, Sacchidananda Mukherjee & R. Kavita Rao, R. Kavita Rao & Pinaki Chakraborty – published on the website of National Institute of Public Finance & Policy,
  • website of CESTAT,
  • CBEC website,
  • Excise Law Times,
  • Taxindiaonline,
  • various news-paper articles,
  • news,
  • various periodicals like The Week, Open, India Today etc.


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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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