The Supreme Court of India has significantly influenced Indian taxation. The Court has clarified complex legal issues and interpreted tax laws through its many landmark judgments, ensuring consistent application of these laws. These decisions have significantly affected both individuals and businesses, influencing tax policies and practices throughout the country.
In the area of direct taxes, the Supreme Court has tackled important issues such as the reassessment of income tax, transfer pricing, deductions and allowances, as well as tax avoidance and evasion. These rulings have offered clear guidance and insight for both taxpayers and tax authorities.
The Court has also played a significant role in the area of indirect taxes, specifically concerning the Goods and Services Tax (GST), Central Excise Duty, and Customs Duty. Its rulings have contributed to a more streamlined implementation of these taxes and have resolved disputes related to their interpretation.
In addition to specific areas, the Supreme Court has examined the constitutional validity of tax laws, interpreted bilateral tax treaties, and addressed issues related to tax administration and procedures.
By examining key Supreme Court rulings on Indian taxation, taxpayers and businesses can better navigate the complex tax landscape and make informed decisions.
We can examine some landmark judgments and case studies from the Supreme Court of India and their impact on the economy below:
Vodafone International Holdings B.V. vs Union of India (2012)
Vodafone International Holdings (VIH), based in the Netherlands, acquired an Indian-based telecom company, Hutchison Essar Limited (HEL), through two-step transactions: offshore transfer and indirect acquisition.
The offshore transfer involved VIH acquiring shares of CGP Investment Holdings (a Cayman Islands company), which held shares in HEL.
Indirect acquisition is when VIH indirectly acquired a stake (shares) in the HEL company.
The Indian Income Tax Authorities contended that the transaction involved a transfer of Indian assets and was taxable under the Income Tax Act of 1961. They also argued that the indirect transfer of shares in CGP was subject to capital gains tax in India.
The argument made by VIH was that Indian tax laws do not apply to these transactions since they involve only non-resident entities. Therefore, the tax authorities lacked an understanding of the tax on such territorial jurisdiction.
The Supreme Court of India ruled the decision in favour of Vodafone International Holdings (VIH). It was held that the offshore transactions that took place were between two non-resident entities and were not directly associated with any asset in India. The court applied the principle of substance-over-form over its legal form.
This landmark judgement had a significant impact on India’s tax landscape with respect to cross-border transactions. Subsequently, there was a retrospective amendment to the Income Tax Act to clarify the applicability of tax on such transactions.
Internet and Mobile Association of India v. Reserve Bank of India (2020)
The Internet and Mobile Association of India (IAMAI) represents various technology companies and startups within the country. The Reserve Bank of India (RBI) issued a circular imposing restrictions on dealing with virtual currencies (cryptocurrencies).
The main argument was that the RBI’s circular represented an overreach of regulatory authority, constraining innovation and impeding the growth of the rapidly expanding cryptocurrency industry. As a result, IAMAI challenged the Reserve Bank of India’s (RBI) imposition.
The IAMAI argued that the RBI’s circular on virtual currencies violated the fundamental right to trade under Article 19(1)(g) of the Indian Constitution. The petitioners also questioned whether the RBI’s measures were proportional, arguing that the risks associated with virtual currencies did not justify them.
The Supreme Court of India issued an important judgment, overturning a circular from the Reserve Bank of India (RBI) on the grounds that it was disproportionate and unreasonable. The Court noted that the RBI had failed to conduct any empirical studies or risk assessments to support the imposition of such strict restrictions.
The Supreme Court’s ruling paved the way for the growth of the cryptocurrency industry in India. However, it also underscored the necessity of a comprehensive regulatory framework to tackle the unique challenges posed by this emerging technology. In response, the government began efforts to create a regulatory framework for cryptocurrencies, acknowledging the importance of balancing innovation with investor protection.
Chief Commissioner of Central Goods and Service Tax vs Safari Retreats Private Limited (2024)
This landmark judgement is significant in Indian tax law, particularly concerning Goods and Services Tax (GST).
Recently, the Supreme Court has opened the doors to claim Input Tax Credit (ITC) on GST paid on inputs used for the construction of commercial buildings like malls, offices and factories. This is a landmark verdict pertaining to the construction of an immovable property (shopping mall in this case) to let out premises in the mall to different tenants on which such GST output liability is to be paid. This was the most awaited decision by the Supreme Court.
The assessee (Safari Retreats Pvt Ltd) is engaged in the construction of a shopping mall and letting out premises in the mall to different tenants. Inputs such as cement, sand, steel, wires, lifts and other services are required for the construction of such malls. The ITC was not made available and was denied on such inputs in the construction of the shopping mall. But GST was levied on the rental income for such space given to tenants.
The expression “plant or machinery” used in Section 17(5)(d) cannot be given the same meaning as the expression “plant and machinery” defined by the explanation in Section 17. The Supreme Court observed that the word “plant” cannot be restricted to the definition of “plant and machinery”.
The question of whether a mall, warehouse or any building other than a hotel or a cinema theatre can be classified as a plant within the meaning of the expression “plant or machinery” used in Section 17(5)(d) is a factual question which has to be determined keeping in mind the business of the registered person and the role that building plays in the said business. A functionality test will have to be conducted to decide whether the construction of a building was essential to carry out the activity of supplying services such as renting or leasing or any other activity. It is to be closely looked into whether in the given case, a shopping mall would be considered as a “plant” in terms of Section 17(5)(d). Each case will have to be decided on its merit by applying the functionality test in terms of this judgment.
Directorate General of Goods and Services Tax Intelligence (DGGSTI) vs. Gameskraft Technologies Private Limited (2023)
This case study discusses the important legal battle regarding the implications for the online gaming industry in India.
The main issue at hand is whether the online games provided by Gameskraft, such as rummy and poker, are considered games of skill or games of chance. This distinction is important because games of skill are generally exempt from GST, while games of chance are subject to it.
The DGGSTI argued that Gameskraft’s activities are online gambling, which is subject to GST. They issued a show-cause notice demanding payment of GST amounting to Rs. 21,000 crores. Gameskraft contested the authority of the DGGSTI to issue the show-cause notice, arguing that the issue should be addressed by state tax authorities.
The Karnataka High Court has quashed the show-cause notice issued by the Directorate General of GST Intelligence (DGGSTI), declaring that the notice was issued without proper jurisdiction. The Court stated that the issue should be handled by the state tax authorities, as the games were offered within the state’s jurisdiction. The DGGSTI has filed a Special Leave Petition (SLP) in the Supreme Court, seeking to overturn the High Court’s decision. The Supreme Court has admitted the SLP and is currently hearing the case.
Techno Shares & Stocks Ltd. v. Commissioner of Income Tax (2009)
This case discusses the taxability of income earned by stock brokers through trading shares and securities on the stock exchange.
The main issue was whether the income earned from these activities should be classified as business income or capital gains.
The Supreme Court has ruled that the income generated by a stockbroker from buying and selling shares and securities on the stock exchange is primarily classified as business income. This classification is based on the fact that stockbrokers regularly and systematically engage in the activity of trading shares with the intention of earning profits. The income is mainly derived from business activities and is taxable under “Profits and Gains of Business or Profession.”
This ruling has important implications for the taxation of stockbrokers and others involved in trading shares and securities. It clarifies how this income is treated for tax purposes, ensuring that stockbrokers are taxed properly on their business earnings. It is essential to remember that the tax implications for individual stockbrokers can differ based on their unique circumstances and specific trading activities.
Assistant Commissioner of State Tax vs. Suncraft Energy Pvt. Ltd (2023)
This important case study examines the criteria for claiming input tax credit (ITC) under the CGST Act of 2017.
The GST tax authorities claimed a discrepancy between Suncraft’s ITC on its GSTR-3B returns and what was shown in its GSTR-2A returns. This discrepancy was due to Suncraft’s suppliers not filing their GSTR-3B.
A Show Cause Notice was issued to the Respondent, requiring the reversal of excess ITC claimed for the financial year 2017-18 due to an ITC mismatch between GSTR-3B and GSTR-2A.
The Adjudicating Authority issued an order demanding payment of Rs. 6,50,511 in taxes, along with applicable interest and penalties.
The Supreme Court ruled that a simple discrepancy between GSTR-2A and GSTR-3B is not sufficient grounds to deny Input Tax Credit (ITC) to a taxpayer. The Court emphasized that tax authorities are required to conduct a thorough investigation to verify whether the supplier has actually remitted the tax to the government. The responsibility to prove that the supplier hasn’t paid tax rests with the tax authorities.
This judgment emphasizes that taxpayers should not be penalized for their suppliers’ defaults. It underscores the necessity of a fair and reasonable approach to tax administration.
Yum! Restaurants (Marketing) Pvt. Ltd. v. Commissioner of Income Tax (2020)
This case is a significant milestone in Indian tax law, especially regarding the doctrine of
mutuality.
The main issue in this case was whether the doctrine of mutuality applied to the assessed company, which was a wholly-owned subsidiary of Yum! Restaurants India Pvt. Ltd. (YRIPL). The company provided advertising, marketing, and promotion services to YRIPL and its franchisees. The issue at hand was whether these services were offered in a mutual capacity or as a commercial service.
The Supreme Court ruled that the doctrine of mutuality did not apply to the assessee company. The services provided by the company were of a commercial nature and not merely a distribution of surplus funds among its members. There was no mutual relationship between the assessee company and its contributors, namely YRIPL and its franchisees. The contributions made by the franchisees were intended for specific services, and there was no sharing of profits or losses involved. Furthermore, the management and control of the assessee company were held by YRIPL, which indicated a commercial relationship rather than a mutual one.
This ruling has important implications for businesses serving their affiliates. It clarifies that the doctrine of mutuality cannot apply to commercial transactions, even within a related party relationship.
The case emphasizes the need to understand the nature of the services provided and the relationship between the parties involved. If the services are offered in a commercial capacity, the income generated from those services will be subject to taxation.
This case highlights that mutuality is a limited exception to general taxation rules and must be applied with caution.
The Supreme Court’s rulings have indeed had a substantial impact on India’s tax landscape. Through its interpretations and applications of tax laws with fairness and equity, the Court has fostered a stable and predictable tax regime, which is crucial for driving economic growth and development. As India progresses and adapts to new challenges, the Supreme Court is likely to remain instrumental in guiding the evolution of the country’s tax policies and frameworks