Facts of the Case

M/s. Khoday India Limited approached the Karnataka High Court under Articles 226 and 227 of the Constitution of India challenging, among other matters, the constitutional validity and legality of provisions and notifications connected with the levy and recovery of service tax and the jurisdiction of tax authorities.

The petitioner sought a declaration that Section 66D(a)(iv) of the Finance Act, 1994 and Entry No. 6 of Notification No. 30/2012-ST dated 20.06.2012, as amended with effect from 01.04.2016, were unconstitutional as allegedly violative of Articles 14, 19(1)(g), 246, 265 and 289 of the Constitution of India.

The petitioner also sought quashing of Show Cause Notice Sl. No. 156/2018-19 BZU dated 30.11.2018, alleging that it was unreasonable, arbitrary, excessive, without jurisdiction and without authority of law.

Further challenges were raised against:

  • Notification No. 2/2017-CT dated 19.06.2017;
  • Notification No. 14/2017-CT dated 01.07.2017; and
  • Notification No. 22/2014-ST dated 16.09.2014,

to the extent stated in the writ petition concerning appointment and jurisdiction of officers under the CGST/service tax framework.

During consideration of the writ petition, the petitioner placed substantial reliance on the amendment introduced through the Finance (No. 2) Act, 2019, particularly Section 117, contending that retrospective exemption had been granted from service tax on services by way of grant of liquor licence.

The petitioner further relied upon a Notification dated 30.09.2019 and a Circular dated 11.10.2019, which, according to the petitioner, clarified the retrospective effect of the exemption.

The impugned show cause notice contained multiple proposed actions. The petitioner argued that Item Nos. 1 to 5 were directly covered by the retrospective exemption, while the liabilities concerning Item Nos. 6 to 14 had already been discharged.

Issues Involved

The principal issues before the Karnataka High Court were:

  • Whether Section 117 of the Finance (No. 2) Act, 2019 granted retrospective exemption from service tax in respect of service by way of grant of liquor licence.
  • Whether such retrospective exemption applied to and benefited M/s. Khoday India Limited.
  • Whether Item Nos. 1 to 5 of paragraph 14 of the impugned show cause notice dated 30.11.2018 could survive after the retrospective statutory amendment.
  • Whether the proposed service tax demand on fees/charges paid to the State Excise Department and other Government departments/agencies was liable to be set aside.
  • Whether the proposed service tax demand of ₹98,31,457 inclusive of cesses, computed on the alleged taxable value of ₹6,55,43,054, could survive in light of the retrospective exemption.
  • Whether the corresponding proposal for interest under Section 75 of the Finance Act, 1994 could survive.
  • What course should be adopted regarding Item Nos. 6 to 14 of the show cause notice when the petitioner asserted that the underlying liability and interest had already been discharged.
  • Whether the respondents were required to consider documentary proof and additional representations concerning discharge of liability.

Petitioner’s Arguments

The petitioner contended that Item Nos. 1 to 5 of the impugned show cause notice were directly covered by the amendment to the Finance (No. 2) Act, 2019, whereby Section 117 granted retrospective exemption from service tax on service by way of grant of liquor licence.

It was submitted that the retrospective benefit available to assessees under Section 117 of the Finance (No. 2) Act, 2019, enacted through Act No. 23 of 2019, was further clarified by:

  • Notification dated 30.09.2019; and
  • Circular dated 11.10.2019.

According to the petitioner, the statutory amendment fundamentally affected the basis of the proposed demand contained in Item Nos. 1 to 5 of the show cause notice.

Regarding Item Nos. 6 to 14, the petitioner specifically asserted that the relevant liability had already been discharged and, consequently, nothing further survived in respect of those items.

The petitioner therefore sought quashing of the impugned show cause notice and further proceedings arising therefrom.

Respondents’ Arguments

The respondents opposed the writ petition.

Learned counsel for the respondents submitted that there was no merit in the writ petition and that the petition was liable to be dismissed.

The respondents did not persuade the Court to sustain Item Nos. 1 to 5 of the show cause notice despite the retrospective statutory exemption introduced through the Finance (No. 2) Act, 2019.

Regarding the remaining items, the Court did not simply accept the petitioner’s assertion of payment as conclusively established. Instead, it directed the respondents to examine the petitioner’s claim of discharge of liability and interest on the basis of pleadings and documents.

Court’s Findings

The Karnataka High Court examined Item Nos. 1 to 5 of the impugned show cause notice in detail.

The Court noted that these items concerned, inter alia, the following proposals:

  • treating the activity of parting with or granting the exclusive privilege/right of the State to manufacture or distil liquor for human consumption, for consideration termed as “fee,” as a taxable service under Section 65B(44) read with Section 65B(51) of the Finance Act, 1994;
  • treating the petitioner, as recipient of services, as liable to pay service tax under Section 68(2) of the Finance Act, 1994 read with Rule 2(1)(d)(i)(E) of the Service Tax Rules, 1994;
  • treating fees/charges of ₹6,55,43,054, paid to the State Excise Department and other Government departments/agencies during April 2016 to June 2017, as taxable value under Section 67(1) of the Finance Act, 1994 read with the Service Tax (Determination of Value) Rules, 2006;
  • demanding service tax of ₹98,31,457 inclusive of cesses under the provisions referred to in the show cause notice; and
  • demanding applicable interest under Section 75 of the Finance Act, 1994.

The Court found that the amendment to the Finance (No. 2) Act, 2019 clearly granted retrospective exemption in favour of assessees, including the petitioner, from payment of service tax on service by way of grant of liquor licence.

The Court specifically observed that the amendment through Act No. 23 of 2019, which came into force with effect from 01.08.2019, enured to the benefit of the petitioner-assessee.

Consequently, the Court held that Item Nos. 1 to 5 in the operative portion of paragraph 14 of the impugned show cause notice deserved to be quashed.

Findings on Item Nos. 6 to 14 of the Show Cause Notice

Regarding Item Nos. 6 to 14, the petitioner had specifically asserted that the liability together with interest had already been discharged.

The High Court did not finally record that such discharge stood conclusively proved merely on the petitioner’s assertion.

Instead, the Court considered it just and proper to direct the respondents to:

  • consider the petitioner’s claim that liability and interest concerning Item Nos. 6 to 14 had been discharged;
  • provide an opportunity to the petitioner in that regard;
  • consider the pleadings and documents submitted by the petitioner; and
  • thereafter proceed to pass appropriate orders in accordance with law.

Court Order / Final Decision

The Karnataka High Court disposed of the writ petition with the following directions:

  1. The impugned show cause notice dated 30.11.2018, insofar as it related to Item Nos. 1 to 5 of paragraph 14, was set aside.
  2. Regarding Item Nos. 6 to 14, the respondents were directed to consider the petitioner’s claim concerning discharge of liability and interest.
  3. Such consideration was required to be undertaken bearing in mind:
    • the observations in the High Court’s order;
    • the pleadings submitted by the petitioner; and
    • the documents produced by the petitioner.
  4. The respondents were directed to act in accordance with law and as expeditiously as possible.
  5. Liberty was expressly reserved to the petitioner to submit:
    • additional representations;
    • further pleadings;
    • additional documents; and
    • other relevant material.
  6. The respondents were directed to consider such additional material and proceed further in accordance with law.

Important Clarification

This judgment is important because the High Court did not quash the entire show cause notice in one undifferentiated manner.

The relief was divided according to the nature of the items in the notice:

Item Nos. 1 to 5: These were set aside because the retrospective exemption introduced through the Finance (No. 2) Act, 2019 applied to service by way of grant of liquor licence and enured to the petitioner’s benefit.

Item Nos. 6 to 14: These were not automatically quashed merely because the petitioner claimed to have paid the liability and interest. Instead, the respondents were directed to verify and consider the petitioner’s claim on the basis of pleadings and documentary evidence.

Another important clarification is that although the writ petition originally contained broad constitutional challenges to Section 66D(a)(iv), various notifications and jurisdictional arrangements, the operative decision recorded by the High Court turned on the subsequent retrospective statutory exemption and the petitioner’s assertion of discharge of the remaining liabilities.

Accordingly, the judgment should not be described as a final ruling declaring all challenged statutory provisions or notifications unconstitutional.

Sections / Provisions Involved

Section 117 of the Finance (No. 2) Act, 2019 / Act No. 23 of 2019 – Central provision considered by the Court as granting retrospective exemption from service tax on service by way of grant of liquor licence.

Section 66D(a)(iv) of the Finance Act, 1994 – Constitutionality challenged by the petitioner in the writ petition.

Section 65B(44) of the Finance Act, 1994 – Referred to in the show cause notice concerning the concept of taxable service/service.

Section 65B(51) of the Finance Act, 1994 – Referred to in conjunction with the proposed tax treatment.

Section 68(2) of the Finance Act, 1994 – Relied upon in the show cause notice for proposed liability of the service recipient.

Section 67(1) of the Finance Act, 1994 – Relevant to the proposed taxable valuation of fees/charges.

Proviso to Section 73(1) of the Finance Act, 1994 – Referred to in the proposed demand and recovery of service tax.

Section 75 of the Finance Act, 1994 – Relating to proposed recovery of interest.

Rule 2(1)(d)(i)(E) of the Service Tax Rules, 1994 – Referred to regarding liability of the recipient of service.

Rule 7 of the Point of Taxation Rules, 2011 – Referred to in the proposed service tax demand.

Service Tax (Determination of Value) Rules, 2006 – Referred to regarding determination of taxable value.

Notification No. 30/2012-ST dated 20.06.2012 – Relevant to the reverse charge/service tax liability framework and specifically challenged in the writ proceedings.

Notification No. 2/2017-CT dated 19.06.2017 – Challenged regarding appointment of officers under the CGST Act.

Notification No. 14/2017-CT dated 01.07.2017 – Challenged concerning appointment/jurisdiction of DGGST officers as officers under CGST.

Notification No. 22/2014-ST dated 16.09.2014 – Challenged concerning appointment of DGCEI officers as Central Excise Officers with all-India jurisdiction.

Articles 14, 19(1)(g), 246, 246A, 265, 289 and 300A of the Constitution of India – Constitutional provisions invoked in the reliefs sought by the petitioner.

Articles 226 and 227 of the Constitution of India – Jurisdictional basis of the writ petition.

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