OCTOBER 01, 2019

By Dr G Gokul Kishore

GST, being a successor to service tax, is a transaction-based tax and the law is contract-based. Generally, disputes over interpretation or breach of contract clauses are taken to courts and then the question is posed as to whether tax would be payable on compensation awarded by the court. In an important yet interesting case, the court itself was posed with the question whether it is, in respect of the functions carried out by the Court Receiver, liable to pay GST in certain situations. We shall discuss this landmark judgment in this 57th part for an important reason.

Judgment on GST where party is not tax department

The case was otherwise yet another typical one involving civil dispute where the defendant was alleged as occupying a property illegally and the plaintiff had filed suit in Bombay High Court. The High Court appointed Court Receiver to take 'formal possession' of the property while allowing the defendant to remain in actual possession of the property. However, finding prima facie case in favour of the plaintiff, it had ordered payment of a particular sum per month to the Receiver towards royalty / compensation which was to be parked in specified savings instrument in bank. The period of such events was around implementation of GST in July, 2017.

As the amount paid by the defendant to Receiver was for occupying the property, the plaintiff probably felt that the same would be in the nature of rent and liable to GST. Based on plaintiff's plea, the Court ordered that GST, if applicable, will be payable by the defendant [paragraph 10 refers]. While top law officers of both Central and State Governments were heard and amicus curiae was appointed who argued extensively, the judgment has laid down significant jurisprudence on GST liability in respect of damages Bai Mamubai Trust v. Suchitra - 2019-TIOL-2158-HC-MUM-GST .

Services of Receiver not liable to GST

Court Receiver is appointed under Order XL (Rule 1) of Civil Procedure Code (CPC). The court may entrust possession, custody or management of a suit property with such Receiver. The Receiver is empowered to manage the property and collect rents and profits and application and disposal of such receipts. He can be conferred power to execute documents like the owner. Rule 2 empowers the court to fix the amount to be paid as remuneration for the services of the Receiver.

The High Court in this case distinguished the fees or charges or remuneration of Receiver and moneys paid or deposited with the Receiver by a litigant or third person when litigation is pending. In the latter case, the amounts are paid based on interim order of protection. The High Court did not accept the State's submission that the Receiver is not a 'court'. It held that the Receiver is a department of the Court. It accepted the amicus curiae's argument that the fees received by Receiver would fall under Entry 2 of Schedule III of CGST Act which covers "Services by any court or tribunal established under any law for the time being in force". Being an entry in Schedule III, such services of Receiver are neither supply of goods nor that of service and, therefore, no GST is liable to be paid.

GST on estate controlled by Receiver

Section 92 of CGST Act provides for fastening GST liability when an estate of a taxable person owning a business is under the control of such Receiver who manages such business. The High Court noted that this provision is similar to the concept of representative assessee as provided in Income Tax Act. For Section 92 to apply, the Receiver should be engaged in taxable supply when the estate/business is under this control. The issue for determination before the High Court was the effect of payment of royalty by the defendant as a condition for remaining in possession of the suit property. The Court did not accept State Government's argument that royalty is, in substance, rent and the receiver acts as an agent of the plaintiff who is in the business of renting of property and therefore, the same is liable to tax. The fine point of jurisprudence emerges from this point onwards in this judgment.

The High Court held that the royalty paid was towards damages or compensation for violation of plaintiff's legal right in the suit premises. The defendant was permitted to remain in possession despite having no right to be in occupation of the premises subject to payment of such amount. The Court noted that the basis of this payment is the alleged illegal occupation or trespass by the defendant. The principle laid down by the Court is that such payment lacked necessary quality of reciprocity to make it a 'supply' and, therefore, GST was not payable on such amount. In the words of the Court "…where no reciprocal relationship exists, and the plaintiff alleges violation of a legal right and seeks damages or compensation from a court to make good the said violation (in closes possible monetary terms) it cannot be said that a supply has taken place ".

Supply requires enforceable reciprocal obligations

According to the High Court, enforceable reciprocal obligations are essential for a transaction to be covered under 'supply'. Wrongful unilateral act or any act resulting in payment of damages is not covered under supply. Though this judgment is related to amounts paid in relation to immovable property under litigation, it covers the issue of GST liability in respect of damages even when they arise due to breach of contract.When legal right is violated, the injured party is entitled to either compensation or restitution and the same is termed as 'damages'.

It is important to note that the High Court did not accept that the order of the Court enabling defendant to remain in possession of suit property subject to payment of royalty was a contract and such royalty was a consideration and the receiver was engaged in notional supply as an agent of the plaintiff. Considering market rent to quantify amount payable to receiver is only a method to quantify the claim for damages and the such amount does not assume the character of consideration to make the transaction one of supply under GST. An interesting observation of the Court relates to rejecting coverage under renting service as the same required positive act of permitting the occupier to use the property and is not applicable when property is illegally occupied.

Tolerating lack of clarity

The objective of this article series is to provide an agenda for further reforms. A detailed discussion on a landmark judgment is not necessarily within the agenda of this series. However, such judgment leads to the conclusion that damages awarded by the court, interim or final, are not liable to GST. One may point to exemption provided to liquidated damages payable to government which means liability exists. The amicus curiae, in this case, had pointed out that an award of damages is not an agreement to the obligation to refrain from an act or to tolerate an act or situation so as to attract GST as per Schedule II of CGST Act. The Department may hold the view that if damages arise from breach of contract and compensation is mutually agreed as per the terms, then it will attract such entry of Schedule II and, therefore, GST is payable.

When the trade and industry is confronted by the department based on entries in CGST Act and a few advance rulings, such judgment may help only to an extent. It is time that the tax administration issues comprehensive circular clarifying liability and non-liability in various situations involving damages. One only hopes that the circular is not drafted on the lines of No. 105 which had to be rescinded recently.

[To be continued…]

[The author is an Advocate. The views expressed are strictly personal.]

See Part 56 .