JANUARY 03, 2025

By CA Sanjay K Agarwal

PRESS release after the 55th GST Council meeting records that "To align the provisions of section 17(5)(d) of CGST Act, 2017 with the intent of the said section, the Council has recommended amending section 17(5)(d) of CGST Act, 2017, to replace the phrase "plant or machinery" with "plant and machinery", retrospectively, with effect from 01.07.2017, so that the said phrase may be interpreted as per the Explanation at the end of section 17 of CGST Act, 2017."

It is not clear, from where the Council found intent of the section. A constitution bench of the Supreme Court, way back in 1982 in case of Sanjeev Coke Manufacturing Company v Bharat Coking Coal Limited and Another 1983 (1) SCC 147: 10.12.1982 has held thus:

"The deponents of the affidavits filed into Court may speak for the parties on whose behalf they swear to the statement. They do not speak for the Parliament. No one may speak for the Parliament and Parliament is never before the Court. After Parliament has said what it intends to say, only the Court may say what the Parliament meant to say. None else. Once a statute leaves Parliament House, the Court's is the only authentic voice which may echo (interpret) the Parliament. This the court will do with reference to the language of the statute and other permissible aids. The executive Government may place before the court their understanding of what Parliament has said or intended to say or what they think was Parliament's object and all the facts and circumstances which in their view led to the legislation. When they do so, they do not speak for Parliament. No Act of Parliament may be struck down because of the understanding or misunderstanding of Parliamentary intention by the executive government or because their (the Government's) spokesmen do not bring out relevant circumstances but indulge in empty and self-defeating affidavits. They do not and they cannot bind Parliament. Validity of legislation is not to be judged merely by affidavits filed on behalf of the State, but by all the relevant circumstances which the court may ultimately find and more especially by what may be gathered from what the legislature has itself said."

In the Safari case [2024-TIOL-101-SC-GST], the Supreme Court has given a definite finding (in para 43) that "the legislature has intentionally used the expression "plant or machinery" in clause (d) as distinguished from the expression "plant and machinery", which has been used in several places." The understanding of the members of the GSTC council about 'intent of the said section' is clearly opposite to the conclusion reached by the Supreme Court.

There is now near unanimity amongst jurists and economists on what constitutes the paradigms for fair taxation. Amongst the ten commonly accepted rules, are equity and fairness ², certainty ³, tax neutrality, economic growth and efficiency, transparency and visibility.

Vide Finance Act, 2012, certain retrospective amendments were made in Income-tax Act, 1961 with stated intention of clarifying and restate the legislative intent of the source rule of taxation for non-residents in India. In particular, they addressed situations where transfers took place exclusively between such non-residents-hence indirectly-of underlying assets in India. The relevant section 9(1)(i) of the Act became effective retrospectively as of 01 April 1962.

After severe criticism, the Government appointed an Expert Committee headed by Dr. Parthasarathi Shome to examine the implications of above amendment, particularly in the context of the tax liability of portfolio investors and Foreign Institutional Investors (FIIs).

The Committee noted that retrospective amendments can be of following types -

(i) to correct apparent mistakes/anomalies in the Statute

(ii) to remove technical defects, particularly in procedure, which had vitiated the substantive law

(iii) to "protect" the tax base from highly abusive tax planning schemes that have the main purpose of avoiding tax, without economic substance

(iv) to "expand" the tax base.

And recommended

- As a matter of policy, Government should avoid anything which comes as a surprise or unexpected to the taxpayers.

- Retrospective application of tax law should occur in exceptional cases, and exclusively to address types (i), (ii) & (iii) above. It should be confined to matters that are genuinely of a clarificatory nature, or to "protect" the tax base by countering highly abusive tax planning schemes, rather than "expand" the tax base.

- In the Indian case, retrospective application of a tax law should occur only after exhaustive and transparent consultation with stakeholders who would be affected and in the rarest of rare cases.

- The provisions relating to taxation of indirect transfer as introduced by the Finance Act, 2012 are not clarificatory in nature.

The Government, did not accede to the conclusion of the Committee and reiterated that "these amendments are clarificatory amendments that are within the scope of Parliament to amend." The Government justified the retrospective amendment citing "avoiding paying taxes using complex tax avoidance structures". It is another story that Vodafone took the matter to Arbitration under the Bilateral Investment Treaty between the Netherlands and India. In September 2020 the Permanent Court of Arbitration at The Hague, Netherlands, judged the amendments in "breach of the guarantee of fair and equitable treatment". Thereafter, the government in 2021 enacted a law to end all retrospective taxation imposed on indirect transfer of Indian assets. It is interesting to note that when the legislation was amended retrospectively, the then opposition party described it as "tax terrorism", and feared it would deter foreign investment.

In the present case, there is no glimpse of resorting to "complex tax avoidance structures" by taxpayer.

The GST Act has been amended earlier also ⁴ with retrospective effect, enforced from prospective date. This style of legislature empowers the State to continue adjudication where show-cause has already been issued prior to enforcement date and collect consequent demands, if any. However, new show-cause cannot be issued only for the reason that amendment is w.e.f. a retrospective date. Revenue cannot invoke extended period as there cannot be a charge of fraud/wilful misstatement/suppression of facts.

Section 80HHC of the Income-tax Act was amended through the Taxation Laws (Amendment) Act, 2005 w.r.e.f. 01.04.1998. Writ Petitions were filed before different High Courts challenging the retrospectivity of the said amendment. The Supreme Court directed the Gujarat High Court to club all such Writ Petitions pending before different High Courts and thereafter to hear and dispose them off. Accordingly, they decided the matter ⁵ holding that the amendment does not have a retrospective effect. This judgment of the High Court of Gujarat has been further affirmed by the Supreme Court ⁶. The High Court held thus:

"21.1 In the case before us, there is no defect in the original legislation but the Tribunal has interpreted the language of the valid piece of legislation in a way, which benefits the assessee. In such a case, for overcoming the adverse decision of the Tribunal, the legislature cannot delete a valid piece of legislation and incorporate a totally new one with retrospective effect.

26. On consideration of the entire materials on record, we, therefore, find substance in the contention of the learned counsel for the petitioners that the impugned amendment is violative for its retrospective operation in order to overcome the decision of the Tribunal, and at the same time, for depriving the benefit earlier granted to a class of the assessees whose assessments were still pending although such benefit will be available to the assessees whose assessments have already been concluded. In other words, in this type of substantive amendment, retrospective operation can be given only if it is for the benefit of the assessee but not in a case where it affects even a fewer section of the assesses."

Let us, therefore, wait for the imminent legal battle that would ensue.

One thing is sure - the taxpayer would be shelling out gargantuan litigation expenses!

[The views expressed are strictly personal.]

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² The obvious basis of the principle against retrospectivity is the principle of 'fairness', which must be the basis of every legal rule as was observed in the decision reported in L'Office Cherifien des Phosphates v. Yamashita-Shinnihon Steamship Co.Ltd (1994) 1 AC 486.  Thus, legislations which modified accrued rights or which impose obligations or impose new duties or attach a new disability have to be treated as prospective unless the legislative intent is clearly to give the enactment a retrospective effect; unless the legislation is for purpose of supplying an obvious omission in a former legislation or to explain a former legislation. See: Commissioner of Income tax v Vatika Township Private Limited [2015] 1 SCC 1; 2014-TIOL-78-SC-IT-CB - Constitution Bench judgment: 15.09.2014

³ Certainty is integral to rule of law. Certainty and stability form the basic foundation of any fiscal system. Tax policy certainty is crucial for taxpayers to make rational economic choices in the most efficient manner. Investors should know where they stand. It also helps the tax administration in enforcing the provisions of the taxing laws. See Vodafone International Holdings B.V. Vs. Union of India [2012] 341 ITR 1 (SC) Judgment dated 20.01.2021 [Per S.H. Kapadia, CJI Para 91] = 2012-TII-01-SC-LB-INTL

⁴ Insertion of Section 7(1)(aa) in CGST Act, Insertion of Proviso in section 50(1) of the CGST Act.

⁵ Avani Exports & Others v CIT Rajkot and others: [2012] 348 ITR 391 (Guj. HC):02.07.2012 = 2012-TIOL-745-HC-AHM-IT

⁶ CIT v Avani Exports reported at (2015) 58 taxmann.com 100(SC) = 2015-TIOL-46-SC-IT