Abhijeet Singh, 1264

INDIRACT TAX ASSIGNMENT- CA3

Fact Situation: Delayed payment of GST attracts interest under section 50 of the CGST Act,
2017, however, this interest should be calculated on the net output tax liability, that is, the
liability computed after setting off Input Tax Credit. However, department is charging interest
on the gross output tax liability, that is, the GST liability inclusive of Input Tax Credit.
Telengana High Court is of the view that the departmental view is correct, though the reasoning
giving is flawed. Delhi High Court on the other hand, has prima facie accepted the view of the
assesse and admitted a writ petition by giving interim stay, preventing the department from
collecting interest on the gross output tax liability. Although amendment has been worked to
clarify the situation in the finance bill no. 2 of 2019, however question still remains whether
such amendment will be applicable prospectively or retrospectively?

Issue: In the present case point of analysis is whether the amendment pertaining to
interest payment on merely unpaid GST is applicable prospectively or retrospectively.

APPLICATION OF THE AMENDMENT TO THE TAXATION STATUTE

The cogency of a retrospective enactment depends upon the following conditions:

Parliament / State legislature can make a retrospective amendment of the law in cases where
such legislation does not contravene other provisions of the Indian Constitution. A defect
noticed by judicial decision can be cured by legislature retrospectively, thereby rendering that
judgment ineffectual. However, it is a precept that the legislature cannot directly over-rule
judicial decision; it can retrospectively cure the defect noticed by the Judicial decision thereby
rendering the judgment ineffective, by way of a validating legislation1

In exercising legislative power, the legislature by mere declaration, without anything more,
cannot directly overrule, revise or override a judicial decision. It can render judicial decision
ineffective by enacting valid law on the topic within its legislative field fundamentally altering
or changing its character retrospectively. The changed or altered conditions are such that the
previous decision would not have been rendered by the court, if those conditions had existed
at the time of declaring the law as invalid. It is also empowered to give effect to retrospective
legislation with a deeming date or with effect from a particular date. The legislature can change

1
CIT v. Suresh N Gupta [2008] 4 SCC 362 (SC)
Abhijeet Singh, 1264

the character of the tax or duty from impermissible to permissible tax but the tax or levy should
answer such character and the legislature is competent to recover the invalid tax validating
such a tax on removing the invalid base for recovery from the subject or render the recovery
from the State ineffectual. It is competent for the legislature to enact the law with retrospective
effect and authorise its agencies to levy and collect the tax on that basis, make the imposition
of levy collected and recovery of the tax made valid, notwithstanding the declaration by the
court or the direction given for recovery thereof.2

The present fact situation has significant similarity with the matter decided Hon’ble Telengana
High Court and the Delhi High Court respectively.

In both the decisions of the both courts contention was whether the liability to pay interest
under Section 50 of the CGST Act, 2017 is confined only to the net tax liability or whether
interest is payable on the total tax liability including a portion of which is liable to be set-off
against ITC3?

The case which talked about the retrospective application was one of the landmark
observation of Supreme Court, i.e. Vodafone case. retrospective application happened after
the Vodafone case.4 The case originated after the revenue’s (tax department) notice to
Vodafone that the company has to pay a capital gains tax of nearly Rs 11000 crores from its
purchase of Hutchison Essar Telecom Company from Hutch.

The entire dispute centered on the question that whether an indirect transfer of property located
in India can be taxed under the relevant section 9(1)(i) of the Income-tax Act. The section
instructs imposition of capital gains tax when the capital assets are transferred directly from
one company to another.

Indirect transfer means when the shares of a company is transferred, the underlying asset is
also transferred to the buyer.

At the final stage of the dispute, the Supreme Court verdict that tax department doesn’t have
the right to tax the deal. This is because the relevant income tax Act (Section 9 (i) (i)) doesn’t

2
Assistant Commissioner of Agricultural Income Tax vs. Netley ‘B’ Estate [CIVIL APPEAL NOS. 8617-8635
OF 2003, Date Of Judgment: 17 March, 2015]
3
Megha Engineering & Infrastructures Ltd. v. The Commissioner of Central Tax, Hyderabad and Ors. 2019,
(4)ALD119, (2019) 73 GST 787 , 2019[26] G.S.T.L. 183, [2019]65GSTR164
4
Vodafone International Holdings BV v. UOI, [2012] 1 SCR 573.
Abhijeet Singh, 1264

instruct tax authorities when capital asset (machinery building etc) lying in India is transferred
indirectly by transferring the shares by foreign companies abroad. Both Vodafone and Hutch
were foreign companies and they made deal in another foreign company which held 67% of
shares of Hutchison Essar India Limited. Hence Vodafone need not pay tax for the said deal.5

After the setback in the Vodafone case, government has amended Section 9 (i) (i)).

CONCLUSION IS THE PRESENT CASE

The Telengana High Court in the given case ruled against the assesse who in the present
petition filed against demand made by the department for payment of interest on ITC portion
of tax paid for months of July, 2017 to May, 2018. The court held that the petitioner filed
returns belatedly as the Payment of tax liability, partly in cash and partly in form of claim for
ITC was made beyond period prescribed and therefore the liability to pay interest under Section
50(1) of CGST Act arose automatically.

However, the court in the 42nd paragraph of the judgement took note of the approval made in
principle by the GST Council for the amendment of the Act. The GST Council in its 31st
meeting held at New Delhi gave in principle approval to an amendment of Section 50.
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 recommendation of the Council will be made effective only after the necessary
amendments in the GST Acts are carried out, as the press release read6.

The court concluded that the recommendations of the GST Council are still on paper.
Therefore, we cannot interpret Section 50 in the light of the proposed amendment.

Delhi High Court on the other hand, has prima facie accepted the view of the assesse and
admitted a writ petition by giving interim stay, preventing the department from collecting
interest on the gross output tax liability7. The matter is now listed for hearing on September
30th. This is in light of the amendment coming into force in July of this year. Section 50

5
What is the controversy related to retrospective taxation in India?, February 20, 2016,
https://www.indianeconomy.net/splclassroom/what-is-the-controversy-related-to-retrospective-taxation-in-india/
6
Press Info Bureau, Ministry of Finance, In-Principle approval given for Law Amendments during 31 st Meeting
of the GST Council., available at https://pib.gov.in/newsite/PrintRelease.aspx?relid=186752, last visited on
September 25th, 2019.
7
Landmark Lifestyle v. Union of India and Ors., WP (C) No. 6055/2019, decided on 27.05.2019
Abhijeet Singh, 1264

subsection 1 (2) reads as:

“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.”

Additionally, the amendment does not impose any liability rather it confers benefit on the
subjects. In CIT v.Vatika Township P, Ltd.8, the apex court observed that legislations which
modified accrued rights or imposed disabilities were to be treated as prospective in nature
unless they were accounting for an obvious omission, or explaining a former legislation. The
doctrine of fairness is also a relevant factor when construing a statute that conferred a benefit
without inflicting a corresponding detriment. Accordingly, it had to be given a retrospective
operation.9 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 effector to supply an obvious
omission in a former legislation or to explain a former legislation. However, procedural
provisions may be given a purposive construction to be treated as retrospective, if the intention
of legislature is to confer a benefit on some person but without inflicting a corresponding
detriment on some others.

8
[2014] 49 taxmann.com 249.
9
Government of India & Ors v. Indian Tobacco Association [2005] 7 SCC 396 and Vijay v. State of Maharashtra
& Ors [2006] 6 SCC 286.