SEPTEMBER 21, 2020

By Shailesh Sheth, Advocate & Founder, M/s. SPS Legal

There is no worse torture than the torture of laws - Francis Bacon

THE disputes and controversies surrounding the sordid saga of the computation and recovery of interest under S.50(1) of the CGST Act, 2017 ('the Act') in case of delayed payment of tax are still raging across the country. Amidst this, the CBIC ('the Board'), in a grand rescue act, has finally issued  Administrative Instructions  under its Letter F.No. CBEC-20/01/08/2019-GST dated 18.09.2020 in the matter providing for the recovery of interest  on net cash tax liability w.e.f. 01.07.2017.  The  administrative arrangements  outlined by the Board through these instructions can be summed up as follows:

- Recovery of interest only on the net tax liability (i.e. the tax paid through electronic cash ledger or payable through cash ledger)  for the period 01.07.2017 to 31.08.2020;

- Transfer of the show cause notices issued demanding interest on the gross tax payable to 'Call Book'  till the retrospective amendment to S.50 of the Act is carried out.

Needless to say, these administrative instructions could not have come a day sooner and harassed taxpayers across the country will heave a sigh of relief at this timely intervention by the Board!

However, before we discuss the scope and implications of these  administrative instructions,   it would be worthwhile to trace the origin of this messy affair and understand the violent twists and turns it has taken in a short span of 2 years.

Levy of interest under S.50 (1) - Should it be on the gross or net tax liability?

S.50(1) of the Act provides for the levy of interest in case of delayed or belated payment of tax. Such levy of interest is held to be 'automatic' and is intended to compensate the Revenue for the remittance of  tax belatedly and beyond the time frame provided in law. Further, as held by the Supreme Court in  CIT, Mumbai vs. Anjum M.H. Ghaswala & Co.- 2002-TIOL-73-SC-IT-CB, interest, being 'compensatory' in nature, is 'mandatory'.

Interestingly, in CIT Vs. Ranchi Club Ltd.,(2001) 247 ITR 209 decided by the three judges of Supreme Court, the SLP was dismissed on merits. The facts stated in note published in ITR demonstrates that the High Court had held that the order of the assessing authority in the assessment order to charge interest is to be specific and clear and the assessee must be made to know that the assessing officer after applying its mind has ordered charging of interest. The mandatory nature of charging of interest and the actual charging of interest by application of mind and the mention of the provision of law under which such interest is charged are two different things.

The judgement of the Supreme Court in the case of Ranchi Club Ltd., still holds good and not at all affected by decision given in case of Anjum M.H. Ghaswala (supra).

While one may not have any serious dispute with the above legal propositions, the question, in the context of S.50(1) of the Act, that arose was 'whether the levy of interest on delayed payment of tax would apply only to the amount of tax paid in cash and would not apply in respect of the amount of tax paid or debited through the available Input Tax Credit ('ITC') [since such ITC represents credit due to an assessee and is nothing but tax paid, as held by the  Supreme Court in Eicher Motors Ltd. Vs. UOI - 2002-TIOL-149-SC-CX-LB and affirmed in CCE vs. Dai Ichi Karkaria Ltd. - 2002-TIOL-79-SC-CX-LB]?' In other words, the issue that arose was whether, in the case of belated payment of tax, interest is payable in terms of S.50(1) of the Act on the gross amount of tax paid/payable or only on the net amount of tax paid in cash after considering and adjusting/debiting the available ITC?

GST Council's half-hearted relief measure!

The above issue was slowly snowballing into a major dispute as Departmental authorities had started raising the demand of interest on the gross amount of tax paid belatedly by the taxpayers. The Board and the GST Council were, therefore, flooded with representations from the trade and industry seeking their intervention and suitable remedial action.

The GST Council took due note of this imbroglio at its 31st Meeting held on 22.12.2018  and recommended a suitable amendment to S.50 of the Act. The Press Release No. 81/2018 dated 22.12.2018 issued by the Board summarized the recommendations of the GST council as follows:

"The GST Council in its 31st meeting held today at New Delhi gave in principle approval to the following amendments in the GST Acts :

1. Creation of a Centralised Appellate Authority for Advance Ruling (AAAR) to deal with cases of conflicting decisions by two or more State Appellate Advance Ruling Authorities on the same issue.

2. Amendment of section 50 of the CGST Act to provide that interest should be charged only on the net tax liability of the taxpayer, after taking into account the admissible input tax credit, i.e. interest would be leviable only on the amount payable through the electronic cash ledger.

The above recommendations of the Council will be made effective only after the necessary amendments in the GST Acts are carried out.

Readers will carefully observe that while the Council recommended a suitable amendment to S.50 of the Act so as to provide for the levy of interest only on the amount of tax paid in cash, there was no indication - not even a whisper - that the amendment would be made effective retrospectively! As generally happens, revenue considerations were allowed to triumph over sound logic and settled legal position!

Megha Engineering's case - A bolt from the blue…!

Despite the ongoing dispute, taxpayers were taking comfort in the fact that the legal position on the above issue stood fairly settled in their favour in view of the preceding judicial pronouncements and the principles of law laid down therein. However, they were totally unprepared for a 'shocker' that came from the Telangana High Court!

In the case of  Megha Engineering and Infrastructures Ltd. Vs. CCT - 2019-TIOL-893-HC-TELANGANA-GST,  the Division Bench of the Telangana High Court, by its judgement dated 18.04.2019 held, in view of their elaborate reasoning, that when there is a belated payment of tax, interest shall be payable on the gross amount of tax in terms of S.50(1) of the Act and not only on the amount of tax paid in cash i.e. on net cash tax liability.

Amendment to S.50 of the Act- 'A dead letter!'

While the Revenue naturally felt emboldened by the above judgement of the Telangana High Court, the Central Government, nevertheless, was legally obliged to implement the recommendation of the Council -  a Constitutional body. By Section 99 of the Finance (No.2) Bill, 2019 presented by the Finance Minister on 5th July, 2019, S.50 of the Act was proposed to be amended by the insertion of the following proviso in sub-section (1) thereof:

"Provided that the interest on tax payable in respect of supplies made during a tax period and declared in the return for the said period furnished after the due date in accordance with the provisions of section 39, except where such return is furnished after commencement of any proceedings under section 73 or section 74 in respect of the said period, shall be levied on that portion of the tax that is paid by debiting the electronic cash ledger."

The Finance (No.2) Act, 2019 was enacted on 01.08.2019 and with that the above Proviso inserted in S. 50 by S. 100 (as renumbered) of the said Finance Act became a part of S.50 of the Act. However, in terms of S.1(2) of the Finance (No.2) Act, 2019, the provisions of S.100, amongst other specified provisions thereof, would have come into force only on the date to be notified by the Central Government, by notification in the Official Gazette. In the absence of notifying such date by the Central Government by a notification even after the enactment of the Finance Bill, the proviso inserted in S.50 of the Act remained a 'dead letter'. Consequently, the amendment, albeit prospective in nature, still did not bring any succour to the taxpayers! On the other hand, the Revenue, armed with the 'binding and effective' judgement of the Telangana High Court (supra) and comforted by the 'ineffective' amendment, continued their action of demand and recovery of interest on the gross amount of tax paid belatedly by defaulting taxpayers. The action was characterized, as usual, by arbitrary and unilateral demands, coercion and threats, attachment of bank accounts, invocation of Garnishee provisions of S.79 of the Act, unilateral adjustment from refund claims sanctioned or a combination of one or more of these steps. Only a few 'lucky' taxpayers were fortunate enough to be served with a proper show cause notice in the matter as is otherwise mandatorily required to be issued in law by the proper officer.

Thus, the woes of the taxpayers who remained entangled in the cobweb of these disputes continued!

Ruling in Refex Industries' case - Before its time …!

While the proviso inserted in S.50 of the Act was awaiting the 'life to be poured into it', in an interesting development, a Single Judge Bench of the  Madras High Court, by its judgment dated 06.01.2020 rendered in the case of  M/s. Refex Industries Limited & Anr. - 2020-TIOL-382-HC-MAD-GST, inter alia, held the proviso inserted in S.50 of the Act with effect from 01.08.2019,  as being clarificatory and operative retrospectively as it clearly sought to correct an anomaly in the provision as it existed prior to such insertion.

However, though taxpayers must have found the ruling 'bold and beautiful', it came before its time inasmuch the proviso inserted in S.50 of the Act had still not come into effect on the date of the ruling delivered by the Court and consequently, it was debatable whether the proviso - a 'dead letter'- could have been interpreted and held as clarificatory and retrospective in effect by the Court?

While all this was happening, Member of the CBIC entered the scene and stirred the Hornet's Nest with his   instructions   to the field to collect the astonishing amount of Rs.46,000 crores of illegitimate interest. Fortunately, again the CBIC itself and the GST Council saw reason and the Council in its meeting in March decided to put an end to this fiasco.

39th Meeting of the GST council - 'Finally, wiser counsel prevailed'!

The 39th Meeting of the Council was held on 14.03.2020 and the  Council recommended, inter alia, the charging  of interest for delay in payment of GST on the net cash tax liability w.e.f. 01.07.2017! The relevant abstracts of the Press Release (Law and Procedure related changes) dated 14.03.2020 summarizing the recommendations by the Council are reproduced below:

"The GST Council, in its 39th meeting held on 14.03.2020, has made the following recommendations:

1. Measures for Trade facilitation:

a. Interest for delay in payment of GST to be charged on the net cash tax liability w.e.f. 01.07.2017 (Law to be amended retrospectively."

Naturally, a great wave of relief swept over the taxpayers who had anticipated, one, the retrospective effect to the proviso inserted in S.50 of the Act, as the proviso was yet to be brought to life and two, discontinuation of the demand and recovery proceedings by the Department with regard to the levy of interest on the gross amount of tax paid belatedly.

However, on both counts, the hopes of the taxpayers were belied! In the first place, the notification by the Central Government giving effect to the proviso inserted in S.50 continued to elude all and the reason was not far to seek. Unless all the States and Union Territories carry out the amendments to their respective GST Acts on the lines of the amendments made to the CGST Act, 2017 by the Finance (No.2) Act, 2019, the proviso inserted in S.50 of the Act could not have been put into effect by the Central Government. Even though the Finance (No.2) Act, 2019 was enacted on 01.08.2019, the States/UTs for whatever reasons, were not showing any alacrity in suitably amending their respective GST laws! So the wait for the proviso to become 'alive and kicking' was became agonizingly longer! On the other hand, unless the above recommendation of the Council was implemented, the Departmental authorities did not consider themselves bound by it. For them, nothing had changed and they happily and unabashedly continued with their 'demand and recovery' action! The Board too did not consider it necessary to don the role of the samaritan here and issue 'Administrative Instructions' similar to those that have finally been issued now, restricting the field formations from taking or proceeding with any recovery action against the taxpayers! Thus, the headache, harassment and heartburns of the taxpayers continued!

Notification no. 63/2020-CT - 'Sending shockwaves all around….!'

It seems that finally, the necessary amendments to their respective GST Acts were carried out by all the States/UTs, by middle of August, 2020, that is, almost after 1 year of the enactment of the Finance (No.2) Act, 2019.  The Central Government then promptly issued a notification no. 63/2020-CT on 25.08.2020 notifying '1st September, 2020'  as the date on which S.100 of the Finance (No.2) Act, 2019 (by which the Proviso was inserted in S.50 of the Act) shall come into force.

The announcement and the notification giving prospective effect to the proviso to S.50(1) were received with disbelief, dismay and disappointment by the taxpayers and the tax professionals across the country! An immediate onslaught followed on social media that reflected the anguish, anger and a sense of betrayal felt by all!

Probably, startled by these fierce protests, the Board, with a view to smooth ruffled feathers, promptly issued a Press Release very next day i.e. on 26th August, 2020 clarifying that 'Notification no. 63/2020-CT relating to interest on delayed payment of GST has been issued  prospectively  due to certain  technical limitations.'

The Board also assured the taxpayers that nevertheless, in accordance with the decision taken by the GST Council at its 39th Meeting, no recoveries shall be made for the past period as well by the Central and State tax administrations.

One may here wonder what the Board meant by 'technical limitations'?  As explained above, S.100 of the Finance (No. 2) Act, 2019 amending S. 50 of the CGST Act, 2017 had remained a 'dead letter'. It could have come to life only on the date appointed by the Central Government through a notification issued in terms of S.1 (2) of the said Act. Here, the Board must have found itself handicapped in effectuating S.100 of the said Finance (No.2) Act, 2020 retrospectively through a notification to be issued in terms of S.1(2) of the said Act. Let us remember here that the Finance (No.2) Act, 2019 stood enacted on 01.08.2019 and much before the 39th Meeting of the Council that took place on 14.03.2020. The amending text of S.100 itself didn't contain anything so as to make it effective retrospectively. [Readers may compare the text with the amendment to S.7 ('Supply') by the CGST (Amendment) Act, 2018 or to S.140 (Transitional credit) by the Finance Act, 2020]. Again, this was for the simple reason that when the amendment was moved based on the Council's original recommendation in its 31st Meeting held on 22.12.2018, there was no intention nor any indication to make it effective retrospectively. It is my view that this is what the Board meant by 'technical limitations'. In other words, the whole exercise was considered as necessarily involving a two-stage process: first, make the provision effective and later, make it effective retrospectively. The first stage was crossed by putting the Proviso to S.50 in operation through notification no. 63/2020-CT ibid. Will the next process be undertaken and if yes, when and how?

Board's latest missive - Stage set for the retrospective operation of the Proviso to S.50

The Administrative Instructions issued by the Board on 18.09.2020 must be viewed and weighed in the context of the aforesaid 'twists and turns' the whole issue has taken in last 2 years! In Para 2 of these Instructions, the Board has categorically stated as under:

"2. The GST Council, in its 39th meeting, held on 14th March, 2020 recommended interest to be charged on the net cash tax liability w.e.f. 01.07.2017 and accordingly, recommended the amendment of section 50 of the CGST Act retrospectively w.e.f. 01.07.2017. The retrospective amendment in the GST laws would be carried out in due coursed through suitable legislation."

In my view, the retrospective effect to the Proviso to S.50 can be given through:

a. A CGST (Amendment) Bill (This can be moved immediately as the Parliament is in Session); or

b. The Finance Act, 2021.

Considering the exigency of the situation and wide spread panic coupled with raging disputes prevalent over the issue, it is fervently hoped that the Board will not wait for the tabling of the next Finance Bill but will resort to the first option!

It is heartening to note that the Board has also instructed field formations to effect the recovery of interest only on the net cash tax liability i.e. that portion of the tax liability that is paid or payable through electronic cash ledger for any period falling between 01.07.2017 and 31.08.2020. The Board has also simultaneously instructed to transfer show cause notices on this issue demanding interest on the gross tax liability to 'Call Book'  till the retrospective effect from 01.07.2017 is given to the amendment to S.50 of the Act.

'Call Book' - A 'Black Hole' of the Indirect Tax Universe...!

Now, one may wonder what is this 'Call Book'  ? For the uninitiated, let me clarify that the concept of 'Call Book' is neither a statutory concept nor a judicially recognised concept. It is purely an administrative mechanism put in place by the Board with a view to avoid multiple litigation over any issue. The mechanism has been operative for ages in the Excise and Customs regime and was also applied in the Service Tax regime. To put it briefly, "Call Book" is a sort of register to which pending show cause notice/s issued to an Assessee on any issue is/are transferred in some specified circumstances. One may here refer to Master Circular no. 1053/02/2017-CX (F.No. 96/1/2017-CX.I) dt. 10.03.2017 issued by the Board on "Show Cause Notice, Adjudication and Recovery" wherein on the aspect of 'Call Book Cases', the Board has clarified as under:

"9.3 Call-Book Cases: A call book of cases is maintained of such cases which cannot be adjudicated immediately due to certain specified reasons and adjudication is to be kept in abeyance. The following categories of cases can be transferred to call book:-

i. Cases in which the Department has gone in appeal to the appropriate authority;

ii. Cases where injunction has been issued by Supreme Court/ High Court/ CEGAT, etc.;

iii. Cases where the Board has specifically ordered the same to be kept pending and to be entered into the call book;

iv. Cases admitted by the Settlement Commission may be transferred to the Call-book, as it is already covered under Category (ii) above. Where there are multiple noticees, the case can be transferred only in respect of those noticees who have made application in the Settlement Commission, and whose case has been admitted by Settlement Commission, Cases shall be taken out of the Call-Book after Settlement Order has been issued or where the case has been reverted back for adjudication.

9.4 Intimation of Call Book cases to noticee: A formal communication should be issued to the noticee, where the case has been transferred to the call book."

Earlier, The Board, by its Circular No. 1028/16/2016-CX dt. 26.04.2016, had issued the certain clarifications with regard to "Disposal of Call Book cases which have been decided by Courts or Board". The relevant abstracts of the Circular are reproduced below:

"2. References have been received from field formations requesting clarification on disposal of Call Book cases pertaining to (i), (ii) and (iv) above, when the same have been decided on merit by Hon'ble Supreme Court or High Courts and where such order of Hon'ble High Court has attained finality, or in cases where Board has, after the issue of instruction as in clause (iv) above, has issued a clarification on merit.

3. The matter has been examined. It is hereby clarified that such cases shall be taken out of Call Book and adjudicated where:-

(i) The issue involved has either been decided by Hon'ble Supreme Court or Hon'ble High Court and such order of the Hon'ble High Court has attained finality or,

(ii)   Board has issued new instruction or circular clarifying the issue involved, subsequent to issue of the order to transfer the case to the Call Book.

4. A separate direction to take such cases out of the Call Book should not be awaited from the Board. This clarification applies to cases involving Central Excise duty, Customs duty and Service Tax."

The above instructions/clarifications relating to the 'Call Book Cases' still hold field today. Not only this, the same are relevant and in fact, being followed even under the GST regime.

I may here venture to say that 'Call Book' is a 'Black Hole' of the Indirect Tax universe that sucks in pending show cause notices on any issue and where the Department finds itself facing any 'unfavourable' development. It is a common experience that once a case 'disappears' into this mysterious black hole of 'Call Book', it rarely resurfaces! It is only when the Department finds the going in its favour, say, due to a favourable ruling from the higher appellate fora on the issue or any other favourable development that the show cause notices lying 'dead' in the 'Call Book' suddenly come to 'life' and start haunting the assessee! This sometimes happens after decades!

Readers may here refer to the following landmark judgements, to cite a few, for further enlightenment on this issue:

1. Geeta Fibres Pvt. Ltd. Vs UOI. - 2020-TIOL-935-HC-AHM-CUS ;

2. Siddhi Vinayak Syntex Pvt. Ltd. vs. UOI - 2017-TIOL-911-HC-AHM-CX

3. Raymond Limited Vs. UOI - 2019-TIOL-1864-HC-MUM-CX

The mechanism of 'Call Book' is generally used by the Departmental authorities when they do not wish to follow a binding precedent of the higher judicial fora in favour of the assessee on an issue. The reason cited is always the 'pendency of the appeal' filed by the Department against the decision in favour of the assessee whether such appeal was justified or not! It may be noted that the same philosophy does not apply when an assessee is in appeal against an adverse decision! In that case, the Department would promptly adjudicate and confirm the pending show cause notices as the avowed objective of 'avoidance of multiple litigation' has no relevance here. After all, the 'interest of Revenue' is supreme!

The issue of the present Administrative Instructions by the Board, therefore, comes as a 'pleasant surprise'! In fact, the Instructions to transfer the show cause notices to the 'Call Book' may well be one of the rare instances where the 'Call Book' mechanism is being applied for the benefit of the Taxpayers!

'Way Forward' - Can the refund of excess interest paid be claimed?

And finally, a 'million dollar' question - can the taxpayer who have paid the interest on the gross tax liability, whether voluntarily or under coercion, claim the refund of the interest paid in excess?

In my view, once the retrospective effect from 01.07.2017 is given to the Proviso inserted in S.50 of the Act, a Taxpayer who has paid the interest on the gross tax liability for any tax period, whether voluntarily or otherwise, is entitled to claim the refund of the amount of interest paid in excess. Even in those cases where the recovery is enforced by the Department either forcibly or through Garnishee provisions or by adjustment against the sanctioned refund claim or by any other means, the right of the taxpayer to claim the refund of the interest paid in excess remains unaffected. However, one caveat here. A taxpayer is expected to have challenged, by way of an appeal, any order recovering the interest on the gross amount of tax liability by way of an appeal. If this is not done, he may have to look for other remedial action for claiming the refund.

As for the filing of the refund claim, a taxpayer may file the claim even without waiting for the suitable amendment giving retrospective effect to the said Proviso or may await the amendment to be carried out. This would all depend upon the facts of each case and individual discretion.

One hopes that while moving a suitable amendment giving retrospective effect to the said Proviso inserted in S.50, a necessary provision will also be made providing for the claiming of the refund of the amount of interest paid in excess by the taxpayers for any tax period between 01.07.2017 and 31.08.2020. In past also, such provisions have been made in the specific cases.

Happy end of a regrettable chapter..!

Going by the tone and tenor of the Administrative Instructions of the Board, one may hopefully look forward to a happy and satisfactory ending to this regrettable episode! One can't help saying that the entire controversy and the resultant futile litigation could have been avoided or at least, reined in by the Board and the Council through their timely intervention! This would have restrained the field formations from inflicting any further misery on the taxpayers and subjecting them to futile litigation!

It usually takes a hundred years to make a law, and then, after it has done its work, it usually takes a hundred years to get rid of it - Henry Ward Beecher, Proverbs from 'Plymouth Pulpit'

[The views expressed are strictly personal.]