Cross-LoC trade is intra-state: HC: Dismisses pleas assailing GST showcase notices to traders

Srinagar, Nov 28: The High Court of J&K and Ladakh has dismissed a batch of petitions assailing show-cause notices issued under the GST Act against cross-LoC traders, holding that the transactions constitute intra-state trade.

Aggrieved traders in 35 petitions had assailed the show-cause notices issued to them by the Superintendent, CGST and CX Range-I, Srinagar, under Section 74(1) of the Central Goods and Services Tax Act, 2017, read with the J&K Goods and Services Tax Act, 2017.

In 2008, the Government of India and Pakistan established certain confidence-building measures allowing regulated barter trade across the LoC between designated routes.

The trade involved the exchange of certain permissible goods between persons on either side of the LoC, which was then part of the State of J&K.

Under the earlier tax regime (VAT), from 2012, cross-LoC trade under the SOP was treated as a zero-rated intra-state sale under the Jammu & Kashmir VAT Act, 2005.

With the implementation of GST in 2017 (Central GST Act and J&K GST Act), traders carried on cross-LoC supplies as before, without payment of tax, believing their trade remained intra-state.

On detection of such trade by the tax authorities, show-cause notices were issued for the financial years 2017–18 and 2018–19 under Section 74(1) of the GST Act, seeking tax on supplies.

The petitioners assailed the tax demands primarily on the ground that the cross-LoC transactions constituted intra-State trade and were not amenable to the provisions of the CGST Act, 2017, contending that no tax was payable on such supplies under the prevailing legal framework.

Petitioners submitted that the trade from Islamabad-Uri and from Rawalakot (PoK) to Chakkan-da-Bagh (Poonch) as mutually agreed by India and Pakistan, was a barter trade and there was no exchange of currency.

The cross-LoC trade regulated by SOP issued by the Government of India dated 20th October, 2008, is an intra-state trade between the two countries, therefore, not amenable to the provisions of CGST Act of 2017, they said.

On behalf of Government of India, DSGI Tahir Shamsi submitted that “that going by the provisions of CGST Act, 2017, the supplies to and from PoK in pursuance of cross-LoC trade conducted as per SOP 2008, are intra-state and taxable under CGST Act/SGST Act and that no exemption notification exists for cross-LoC barter trade.

“It is not disputed by learned counsel appearing on either side that the area of the State presently under de-facto control of Pakistan is part of territories of the State of J&K. Therefore, in the instant case the location of the suppliers and the place of supply of goods were within the then State of Jammu Kashmir (now Union Territory) and, therefore, the cross-LoC trade affected by the petitioners during the tax period in question was nothing but an intra-state trade,” a bench of Justice Sanjeev Kumar and Justice Sanjay Parihar said after hearing the parties.

The authorities had initiated investigations against the petitioners to probe as to whether they had paid GST on their outward supply of goods to PoK during cross-LoC trade and also on the inward supplies received from PoK upto 12th October, 2017.

Upon collection of the relevant material, the authorities said that it was found that there were huge outward and inward supplies affected by the petitioners and that the GST on such supplies had not been accounted for in the returns filed by them. Accordingly, the show cause notices were served to the petitioners in terms of Section 74(1) of the CGST Act, 2017. The petitioners chose not to reply to the show cause notices and decided to assail the same before the Court under Article 226 of the Constitution of India on the ground that the show cause notice was without jurisdiction and bad in the eyes of law.

“When we examine the show cause notices issued to the petitioners in the instant cases, we find that there is year-wise quantification of the liability and the allegations are prima facie, cogent and detailed one, giving fair opportunity to the assesses to respond and defend themselves,” the bench said. “We have also found that the show cause notices in respect of both the periods, i.e., Financial Years 2017-2018 and Financial Year 2018-2019, are not hit by the limitation prescribed under Section 74(2) read with Section 74(10) of the CGST Act, 2017.”

The court noted that it was trite law that "entertainability" and "maintainability" of writ petition under Article 226 of Constitution of India were two different concepts.

“Availability of an alternative remedy does not operate as an absolute bar to the maintainability of a writ petition and the rule which requires a party to pursue the alternative remedy provided by a statute is a rule of policy, convenience and discretion rather than a rule of law,” it said.

The court added: “The availability of alternative remedy under the statute, the court said, cannot operate as a bar to the maintainability of the petition, yet a Constitutional Court may decline to entertain the petition and relegate the justice seeker to the remedy provided under the statute”.

“In the face of availability of equally efficacious remedy provided under the statute, we are not inclined to entertain these petitions and rather would relegate the petitioners to the statutory remedies available under the CGST Act of 2017,” the court said and dismissed the petitions.

However, the court said that while it was dismissing the petitions either on the ground of being premature or the petitioners have equally efficacious alternative remedy under the statute.

“Where the petitioners have not filed reply to the show cause notices issued to them under Section 74(1) of the CGST Act of 2017, they shall do so within a period of four weeks from today and the proceedings initiated in terms of Section 74(1) shall be taken to logical end by the proper officer within a period of three months after the receipt of reply to the show cause notice, if any,” the court said.

It added: “Where the final order in terms of sub-section (9) of Section 74 confirming the demand has already been passed, the court said, the petitioners shall have three months from today to avail the remedy of appeal under Section 107 of the CGST Act of 2017”.