A large part of the increasing number of writ petitions filed in various High Courts and resultant orders has been confined to individual grievances like violation of principles of natural justice when submissions have not been considered by Appellate Advance Rulings Authority, technical glitches in GST portal and consequent loss of benefits, use of extreme powers of detention and seizure of vehicles and goods and the like. However, certain landmark orders have also been passed by High Courts which have far reaching ramifications. This 50th part is dedicated to analysing the issue of applicability of such orders of one High Court across India.

Refund of unutilized ITC - High Court quashes lapsing of credit

In the pre-GST regime, refund of Cenvat credit accumulated as a result of inverted duty structure i.e. when the rate of duty on inputs being higher than that of the final product, was not available. GST is meant to be more taxpayer friendly and, therefore, specific provision in the form of Section 54(3) of CGST Act has been incorporated whereby refund of unutilized input tax credit is available in such situation. As creating exception to beneficial provision is not unusual in tax laws, the second clause in the first proviso to the above section empowered the government to specify supplies in respect of which such refund of accumulated ITC will not be available. Exercising powers under this provision, Notification No. 5/2017-Central Tax (Rate) was issued whereby goods specified in the list therein are not covered under this benefit and it included various woven and knitted fabrics.

The textile industry voiced its concern over denial of such refund and the GST Council recommended relaxation whereby Notification No. 20/2018-Central Tax (Rate) was issued on 26-7-2018. This notification amended the original notification mentioned above to effectively lift the restriction on claiming refund of unutilized ITC by manufacturers of such specified textile goods. But the amending notification also provided for lapsing of accumulated credit lying in balance as on 31-7-2018 after payment of tax for July, 2018. The reason was obvious as the government did not wish to be burdened with huge amounts being claimed as refund though it was projected that the notification was prospective in effect and hence such lapsing provision.

The amending notification was challenged in Gujarat High Court. The High Court held that there is no inherent power under Section 54(3) to provide for lapsing of unutilised input tax credit and the relevant proviso was invalid. The same was struck down on the ground of having exceeded the power delegated under the parent provision. This article is not intended to discuss this order Shabnam Petrofils Ltd. v. UOI - 2019-TIOL-1656-HC-AHM-GST.

Will Gujarat HC order have applicability throughout India?

As per Article 226(1) of the Constitution, High Courts have territorial jurisdiction to issue writs to any person including government and the judgments and orders passed by them operate within such territorial limits. Article 226(2) provides that even if the seat of the government or authority is not within the territory in which jurisdiction of High Court extends, the High Court may issue orders, writs and directions to such government or authority. Reading these provisions together, it can be said that High Court can issue order or writ to any government or authority even if the same is not within its territorial jurisdiction provided cause of action has arisen within such jurisdiction. It is based on this premise High Courts in various States pass orders in writ petitions filed against Central Government departments and bodies like CBIC which are located in New Delhi.

It is common knowledge that the rules made by way of notifications and benefits extended or withdrawn by such notifications issued by bodies like CBIC are applicable throughout India. Writ petitions may be filed for many reasons but important among them is challenge to validity of a particular statutory provision. When an authority under the Central Government like CBIC in New Delhi issues a notification having pan-India applicability and when validity of the same is questioned before High Court in a particular State by the taxpayer who is impacted by such rule or notification and the High Court quashes/sets aside such rule or notification, can it be said that such rule or notification has become a dead letter? Can it be said that it does not exist anymore in the statute book and, therefore, all taxpayers across the country can consider the same as applicable to them as well? Can it be argued to the contrary that in respect of taxpayers located outside the territorial jurisdiction of the particular High Court, the rule or notification will continue to be applicable and they are bound to comply with the same?

Jurisprudence on pan-India applicability

To answer the above questions, one may refer to the landmark judgment of 3-Judges Bench of Supreme Court in the case of Kusum Ingots and Alloys Ltd. v. UOI - 2004-TIOL-117-SC-CX-LB. As per facts of the case, the appellant had registered office in Mumbai, it had taken loan from a bank in Bhopal and recovery proceedings were initiated under Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act). Writ petition was filed in Delhi High Court questioning the vires of SARFAESI Act which was dismissed on the ground of lack of territorial jurisdiction. Dwelling on both territorial jurisdiction and cause of action, the Supreme Court referred to Article 226(2) of the Constitution and Section 20(c) of Civil Procedure Code and dismissed the appeal on the ground that situs of law-making body by itself would not constitute cause of action. It held that a parliamentary legislation, unless specifically excluded, will apply to the entire territory of India and if passing of a legislation gives rise to a cause of action, a writ petition questioning the constitutionality thereof can be filed in any High Court but the same is not done because a cause of action will arise only when the provisions of the Act are implemented giving rise to civil or evil consequences. For the present discussion, this judgment is relevant for a different proposition. The Apex Court held that an order passed on writ petition questioning the constitutionality of a Parliamentary Act, whether interim or final, will have effect throughout the territory of India subject to the applicability of the Act.

The above leads us to the conclusion that based on cause of action, writ petition is filed in the jurisdictional High Court and if the order passed decides vires of a Central Act or provision therein, the same will be applicable throughout the country. Therefore, territoriality is with reference to moving the Court only and the order on constitutionality of a Parliamentary statute will cover within its sweep everyone across India. This judgment further reiterates that a legislation is not confined to a statute enacted by the Parliament or legislature of a State but would include delegated legislation or an executive order made by the Union of India, State or any other statutory authority. This leads us to the next conclusion that once an order is passed by a High Court on validity of a delegated legislation which covers rules and notifications issued by statutory authority like CBIC, such order is applicable throughout the territory of India. Therefore, the Gujarat High Court order quashing the clause on lapsing of accumulated ITC as provided in amending Notification No. 20/2018-Central Tax (Rate) will be applicable in the entire country and is not restricted to the respective State.

This brings us to the relevance of such an important legal question to the agenda of reforms in GST. Notifications in GST regime are issued based on recommendations of the GST Council. If such notification is quashed in full or in part, then it is desirable to include the same in the agenda of the meeting of GST Council. Such orders of High Court should be taken note of so that the GST Council may recommend appropriate amendments in the relevant rules and notifications. This will enable CBIC to refrain from filing appeal in such cases. After all, GST is all about one nation - one tax and this means one law as well. Therefore, tax administration cannot choose to implement a notification in certain States and keep the same in abeyance in other States because of adverse order of High Court.

…To be continued

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

See Part 49