Opinion on provisions of recovery of Octroi when not paid on demand or short paid Octroi Rule 25 versus GST Section 73

 Following queries were raised  in a case for Octroi:-

  1. What is the time period for recovery of Octroi not paid or short paid? If adjudicatory proceedings are not completed within a reasonable period, the same are liable to be quashed?
    1. Is Municipal Corporation of Greater Mumbai bound to disclose how they have arrived at impugned arrears of octroi and penalty thereon?

We will here also discuss provisions of Central  Goods and Service Tax of 2017 ( GST) as today octroi is repealed.

First let us see provisions of Octroi

Facts of the case an example

  1. The “A Company” is listed in Bombay Stock Exchange and National Stock Exchange and Company is engaged in the business of manufacturing of garments and retail sale of garments and various other products having Brand name.
  • “A Company” paid octroi on all the articles which are imported by them within the vicinity of Municipal Corporation of Greater Mumbai (“MCGM”) for sale, use and consumption. Somewhere in the year 2014, the MCGM issued a letter for verification of payment of octroi on electronic goods imported / brought into Mumbai from outside Mumbai vide their letter and called upon the Company to furnish the details of import of mobile, laptop, computer from April 2013 to October 2014. By this letter, the MCGM further threatened the “A Company” that non-compliance of the above requisites warrants action as provided in Mumbai Municipal Corporation Act, 1888 (“the MMC Act”) and Octroi Rules framed thereunder including issuance of stop work notices and/or stopping import of material by the “A Company” into Mumbai. Thereafter once again by their letter the MCGM recorded that the Vigilance Cell is investigating verification of payment of octroi on import of goods into the Mumbai limit for use, sale and consumption. “A Company” was called upon to furnish invoices / octroi paid receipt for the relevant period for verification. Thereafter, “A Company” was threatened of legal action and called upon them to furnish necessary documents. “A Company” furnished the documents once again. The MCGM sent Reminder to “A Company” has not submitted receipt nor any relevant documents though the “A Company” has submitted Purchase List. The MCGM once again demanded Godown Register. Finally, by MCGM  issued a Demand Notice from the “A Company”

We now first deal with the provisions of Constitution of India, prior to 101 Amendment Act 2016 to the Constitution of India on introduction of Goods and Services Tax 2017. Please note that Octroi is now Repealed and Government has said that citizens should not be harassed by Tax department by opening old cases.

  • Article 14Equality before law – The State shall not deny to any person equality before the law or the equal protection of the law within the territory of India.

–    Article – 19 Protection of certain rights regarding freedom of speech, etc.

  • All citizens shall have the right-
    • To freedom of speech and expression;
    • To assemble peaceably and without arms;
    • To form associations or unions;
    • To move freely throughout the territory of India;
    • To reside and settle in any part of the territory of India; [and]
    • to practice any profession, or to carry on any occupation, trade or business.
  • Nothing is sub-clause (a) of clause (1) shall affect the operation of any existing law, or prevent the State from making any law, in so far as such law imposes reasonable restrictions on the exercise of the right conferred by the said sub-clause in the interests of [the sovereignty and integrity of India,] the security of the State friendly relations with Foreign States, public over, decency or morality or in relation to contempt of Court, defamation or incitement to an offence.]
  • Nothing in sub-clause (b) of the said clause shall affect the operation of any existing law in so far as it imposes, or prevent State from making any law imposing, in the interests of [the sovereignty and integrity of India or] public order, reasonable restrictions on the exercise of the right conferred by the said sub-clause.
  • Nothing in sub-clause (c) of the said clause shall affect the operation of any existing law in so far as it imposes, or prevent the State from making any law imposing, in the interests of [the sovereignty and integrity of India or] public order or morality, reasonable restrictions on the exercise of the right conferred by the said sub-clause.
  • Nothing in [sub-clauses (d) and (e)] of the said clause shall affect the operation of any existing law in so far as it imposes, or prevents the State from making any law imposing, reasonable restrictions on the exercise of any of the rights conferred by the said sub-clauses either in the interests of the general public or for the protection of the interests of any Scheduled Tribe.
  • Nothing in sub-clause (g) of the said clause shall affect the operation of any existing law in so far as it imposes, or prevent the State from making any law imposing, in the interests of the general public, reasonable restrictions on the exercise of the rights conferred by the said sub-clause, and, in particular, [nothing in the said sub-clause shall affect the operation of any existing law in so far as it relates to, or prevent the State from making any law relation to –
  • the professional or technical qualifications necessary for practicing any profession or carrying on any occupation, trade or business, or
  • the carrying on by the State or by a corporation owned or controlled by the State, of any trade, business, industry or service, whether to the exclusion, complete or partial, of citizens or otherwise].
    • Part IX (A) of Article 243X of the Constitution of India, provides for power to impose taxes by, and funds of the Municipality – The Legislature of a State may by law – (a) authorize a Municipality to levy, collect an appropriate such taxes, duties tolls and fees in accordance with such procedure and subject to such limits, (b) assign to Municipality such taxes duties tolls and free levied and collected by the State Government for such purpose and subject to such conditions and limits, (c) provide for making such grants in aid to the Municipality from the consolidated fund of the State and (d) provide for constitution of such funds for crediting all monies received respectively, by or on behalf of the Municipalities and also for the withdrawal of such monies therefrom.

As may be specified in the law.

–      Article 246 : of the Constitution deals with subject matter of laws  made by Parliament and by the Legislatures of States. Reads as under; (1) Notwithstanding anything in Clauses (2) and (3), Parliament has exclusive power to make  laws with respect to any of the matters enumerated in List I in the Seventh Schedule (in this Constitution referred to as the “Union List”).

        (2) Notwithstanding anything in Clause (3), Parliament, and, subject to Clause (1) the Legislature of any State (***) also, have power to make laws with respect  to any of the matters enumerated in List III in the Seventh Schedule (in this Constitution referred to as the “Concurrent List”).

        (3)     Subject to Clauses (1) and (2),  the Legislature of any State (***)  has  exclusive  powers to make laws for such State or any part thereof with respect to any of the matters enumerated in List II  in the Seventh Schedule (in this Constitution referred to as the “State list”). 

        (4)     Parliament has power to make laws with respect to any matter for any part of the territory of India not include (in a State) notwithstanding that such matter is a matter enumerated in the State List.

  • Article 286: Restrictions as to imposition of tax – On sale or purchase of goods (1) no law of a State shall impose or authorize the imposition of a tax on the sale or purchase of goods where such sale or purchase takes place – (a) outside the State or (b) in the course of import of the goods into, or export of the goods out of, the territory of India, (2) Parliament may by law formulate principles for determining when a sale or purchase of goods takes place in any of the ways mentioned in Clause (1), (3) any law of a State shall in so far as it imposes or authorizes the imposition of – (a) a tax on the sale or purchase of goods declared by Parliament by law to be a special importance in inter-state trade or commerce; or (b) a tax on the sale or purchase of goods, being a tax of the nature referred to in sub-clause (b), sub-clause (c) or sub-clause (d) of Clause (29A) of the Article 366, is subject to such restrictions and conditions in regard to the system of levy, rates and other incidents of the tax as parliament may by law specify.
    • Part XIII – Article 301 Freedom of trade commerce and inter-course – Subject to the other provisions of this part, trade, commerce and inter-course throughout the territory of India shall be free.
  • Article 304 restrictions on trade and commerce and inter-course amongst State – Notwithstanding anything in any Article 301 or Article 303, the Legislature of a State may by law – (a) impose on goods imported from other States (or the Union territories) any tax to which similar goods manufactured or produced in that State are subject, so however, as not to discriminate between goods so imported and goods so manufactured or produced; and (b) impose such reasonable restrictions on the freedom of trade, commerce or intercourse with or within that State as may be required in the public interest. Provided that no Bill or amendment for the purposes of clause (b) shall be introduced or moved in the Legislature of a Sale without the previous sanction of the President.
  • 7th Schedule of the Constitution of India, list out the items falling under Union List, as provided under Article 246, which is called List 1, in which Item No.42 is interstate trade and commerce. Item No.83 deals with duties of customs including export duty, Item No.84 deals with duties of excise on tobacco and other goods manufactured or produced in India, except (a) alcoholic liqours for human consumption, (b) Opium, Indian Hemp and other Narcotic drugs and Narcotic, but including the medicinal and toilet preparations containing alcohol or any substance including in sub-para (b) of this entry 84. Item No.89, terminal taxes on goods or passengers, carried by railway, sea or air, taxes on railway fairs and freights. The said entries fall within the purview of the Union List and they are 92(B). Taxes on the consignment of goods (whether consignment is to the person making it or to any other person), where such consignment takes place in the course of inter-state trade or commerce. List – 2is a State List an Item No.52 of the said List empowers the state to levy taxes on the entry of the goods into a local area for consumption use or sale therein. Item No.59 is tolls.

With this background, we have to state that prior to introduction of the Goods Services Tax Act, 2017 (“GST”), the State Government was empowered to levy Octroi on any of the goods entering into the vicinity of State Corporations for sale, use and or consumption thereof at the rate specified from time to time by notification. Each and every Corporation had its own rules however; the basic rules were in concurrence of the provisions of the Constitution of India which are set out hereinabove. As far as a rate of duties is concerned for levy of Octroi, varied from Corporation to Corporation and Council to Council. However, the provision of levy of Octroi was on ad-valorem basis. The Octroi Rules, prior to introduction of the GST, for the purpose of recovery of octroi when not paid on demand or short paid under Section (E) Chapter II Section B of General Procedure for Levy of Octroi Rules 25 and 26 read as under:-

“25.   Recovery of Octroi not Paid or Short Paid

When octroi has not been paid or has been paid short at the time of import or when such octroi after having been paid has been erroneously refunded through inadvertence, error, collusion, misconstruction or any other reasons on the part of the Municipal Octroi Staff or that of the Agents appointed by the Commissioner under Section 213 of the Bombay Municipal Corporation Act or through misstatement as to weight, value or description on the part of the importer, the person primarily liable to pay such tax or the difference of the tax shall pay the amount of tax or deficiency on receipt of a demand issued within three months of the date of the import or payment of tax as the case may be and the Commissioner or at his instance the agents referred to him may refuse to pass any article belonging to such person until the said amount of octroi or deficiency is paid.

26.     Repayment or refund of Octroi paid wrongly or in excess

When octroi has been wrongly recovered or has been recovered in excess through inadvertence, error, misconstruction, mis-interpretation or any other reason on the part of the Municipal Octroi Staff or that of the agents appointed by Commissioner under section 213 of the Bombay Municipal Corporation Act, such excess may be refunded to the importer provided that a claim for such refund accompanied by the original invoice, octroi import bill, octroi receipt if any is lodged in the office of the Deputy Assessor and Collector (Octroi) within a period of three months from the date of such recovery or within such longer period as the Commissioner may in any special case or class of cases allow. The said officer may, after being satisfied about the correctness and genuineness of the claim, grant refund of octroi wrongly recovered in excess.”

  • Section 478 of the MMC Act, deals with punishment of the offence relating to the Octroi which reads as under:-

“478. Punishment for offence relating to octroi.

Whoever brings within the limits of [Brihan Mumbai] any articles liable to octroi without the payment of such tax shall, on conviction, be punished with imprisonment for a term which may extend to six months, or with fine which may extent to one thousand rupees, or with both; and the Court trying an offence under this section may, on such conviction, also confiscate the articles in respect of which the offence has been committed.

478-1A.      Penalty for evasion of octroi.

Where any articles imported into [Brihan Mumbai] are liable to the payment of octroi, any person who, with the intention of evading payment of the tax introduces or attempts to introduce or causes or abets the introduction of any such articles within the limits of [Brihan Mumbai], upon which payment of octroi due on such introduction has neither been made nor tendered, shall, on conviction, be punished with fine [which shall not be less than five times but] which may extend to ten times the amount of the tax payable.

478-1B.      Penalty for breach of octroi rules.

Whoever contravenes any provisions of the rules made under section 195-1B or fails to comply with any requisition lawfully made under any such provision shall, on conviction, be punished, for each such offence, with fine which may extend to two hundred and fifty rupees.]”

Considering the provisions referred to herein, we are of the opinion that the Demand Letters are time barred under Rule 25 of the General Procedure for Levy of Octroi Section (E) provisions for recovery of octroi when not paid on demand or shot paid. The time period for demand of deficiency in payment of octroi is within 3 months of the date of import or payment of tax as the case may be. According to the instructions taken from the client, there is no seizure of any article by the MCGM of the “A Company”for non payment of Octroi. The “A Company” has paid all the octroi charges and have produced all the necessary papers, invoices, receipts and books of accounts. The Commissioner could have demanded at material time verification of documents three months prior to the date of notice. The demand letter itself is therefore, bad in law and in excess of jurisdiction. Despite of that the “A Company” furnished all the details. Moreover, the Demand Letter is very silent on how the Commissioner arrived at the figure of short paid octroi and penalty thereon of and issued a total demand notice. There is no detail how the Commissioner arrived at this figure. Moreover, Section 478 which is threatened to be implemented against the “A Company” is for non-payment of octroi and not for short payment of octroi. Short payment of octroi is a fiction which can be arrived at only upon verification search and seizure within 3 months of import of any article and not thereafter, otherwise the MMC Act would have provided penalty and prosecution even for short paid. In the given case, the demand notice is vague and the amount arrived at is not clarified. Moreover, the said demand is only for the period  May 2013 till  October 2013 in the year 2017 which itself is in violation of Rule 25 referred to hereinabove.

Judgments:

  1. Calcutta High Court in the matter of Simplex Infrastructures Ltd vs Commissioner Of Service Tax on 7 April, 2016 in which it is held that the time frame of one year within which adjudication proceedings must be completed has been prescribed by sub-Section (4B) under Section 73 of the Act, which was inserted by Finance (No. 2) Act, 2014. here can be no dispute that the question of limitation is a question of jurisdiction and that the Commissioner has no authority and / or jurisdiction to issue notice after the period of limitation prescribed in the Finance Act, 1994. Thus, where any service tax has not been paid, the Department is empowered to service a show cause notice on the assessee requiring him to show cause why he should not pay the amounts specified in the notice. Such notice has to be issued within 18 (Eighteen) months from the date when such service tax was payable. Any notice issued beyond such period would be barred by limitation
  • In Indian Oil Corporation Ltd Vs Nagpur Municipal Corporation & anr2012 (1) Bom.C.R. 526  it was held that “ Rule shows that the Municipal Commissioner first should be satisfied that material before him is legally sufficient to gather that the importer has not paid any octroi duty or has failed to pay full octroi duty. Looking to the drastic consequences which may follow, it is apparent that his comprehension about is legally justifiable and can,in any case, be reviewed judicially by this Court. This challenge or review is not possible, if Municipal Commissioner does not record reasons in support of satisfaction reached by him. Satisfaction is his conclusion, based on records, of need to proceed to recover ten times penal duty. Rule expressly permits recourse to recovery only after giving delinquent sufficient notice to show cause. It extends to such importer an opportunity to file his defense and obliges Commissioner to consider it. Rule making authority has put word “sufficient” before word “notice” and it is important in the scheme of Rule 44. It does not imply a notice of a particular duration but qualifies contents thereof. Show cause notice, to qualify to be “sufficient”, must communicate to importer the material on which it is based & reasons which weighed with Municipal Commissioner to reach satisfaction that a case to proceed further to recover such many-fold penal duty is made out. Then only it will be an effective opportunity to importer to submit his explanation to it. Thus these requirements, cardinal to exercise of jurisdiction under Rule 44, can be fulfilled only when the material on record & mind application to is communicated to the importer. There is one more reason. The explanation furnished by importer warrants “consideration” by Municipal Commissioner. According to Webster’s New World Dictionary, “consideration” means “act of considering; careful thought or attention; deliberation or meditation; something that is, or should be, considered, as in making a decision; a thought or opinion produced by considering; a reflection.” In Shorter Oxford English Dictionary the same word is defined as having the meaning “the action of looking at; beholding; the keeping of a subject before the mind; attentive thought, reflection, meditation; the action of taking into account”. Thus, it is not Commissioner’s conclusion, either way on the issue of recovery, which constitutes “consideration”, but it is the entire process of critical appreciation leading to a particular decision.”

The answer to query in nutshell is as under:

  1. What is the time period for recovery of Octroi not paid or short paid?

Ans.  As per Rule 25 of the General Procedure for Levy of Octroi Section (E) provisions for recovery of octroi as discussed hereinabove.

  • Is Municipal Corporation of Greater Mumbai bound to disclose how they have arrived at impugned arrears of octroi and penalty thereon?

Ans.  As per General Rule of Law Yes.

Now lets see provisions of GST

73. (1) Where it appears to the proper officer that any tax has not been paid or short paid or erroneously refunded, or where input tax credit has been wrongly availed or utilised for any reason, other than the reason of fraud or any wilful-misstatement or suppression of facts to evade tax, he shall serve notice on the person chargeable with tax which has not been so paid or which has been so short paid or to whom the refund has erroneously been made, or who has wrongly availed or utilised input tax credit, requiring him to show cause as to why he should not pay the amount specified in the notice along with interest payable thereon under section 50 and a penalty leviable under the provisions of this Act or the rules made thereunder. (2) The proper officer shall issue the notice under sub-section (1) at least three months prior to the time limit specified in sub-section (10) for issuance of order. (3) Where a notice has been issued for any period under sub-section (1), the proper officer may serve a statement, containing the details of tax not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilised for such periods other than those covered under sub-section (1), on the person chargeable with tax. (4) The service of such statement shall be deemed to be service of notice on such person under sub-section (1), subject to the condition that the grounds relied upon for such tax periods other than those covered under sub-section (1) are the same as are mentioned in the earlier notice. (5) The person chargeable with tax may, before service of notice under sub-section (1) or, as the case may be, the statement under sub-section (3), pay the amount of tax along with interest payable thereon under section 50 on the basis of his own ascertainment of such tax or the tax as ascertained by the proper officer and inform the proper officer in writing of such payment. (6) The proper officer, on receipt of such information, shall not serve any notice under sub-section (1) or, as the case may be, the statement under sub-section (3), in respect of the tax so paid or any penalty payable under the provisions of this Act or the rules made thereunder. (7) Where the proper officer is of the opinion that the amount paid under sub-section (5) falls short of the amount actually payable, he shall proceed to issue the notice as provided for in sub-section (1) in respect of such amount which falls short of the amount actually payable. (8) Where any person chargeable with tax under sub-section (1) or sub-section (3) pays the said tax along with interest payable under section 50 within thirty days of issue of show cause notice, no penalty shall be payable and all proceedings in respect of the said notice shall be deemed to be concluded. (9) The proper officer shall, after considering the representation, if any, made by person chargeable with tax, determine the amount of tax, interest and a penalty equivalent to ten per cent. of tax or ten thousand rupees, whichever is higher, due from such person and issue an order. (10) The proper officer shall issue the order under sub-section (9) within three years from the due date for furnishing of annual return for the financial year to which the tax not paid or short paid or input tax credit wrongly availed or utilised relates to or within three years from the date of erroneous refund. (11) Notwithstanding anything contained in sub-section (6) or sub-section (8), penalty under sub-section (9) shall be payable where any amount of self-assessed tax or any amount collected as tax has not been paid within a period of thirty days from the due date of payment of such tax.

74. (1) Where it appears to the proper officer that any tax has not been paid or short paid or erroneously refunded or where input tax credit has been wrongly availed or utilised by reason of fraud, or any wilful-misstatement or suppression of facts to evade tax, he shall serve notice on the person chargeable with tax which has not been so paid or which has been so short paid or to whom the refund has erroneously been made, or who has wrongly availed or utilised input tax credit, requiring him to show cause as to why he should not pay the amount specified in the notice along with interest payable thereon under section 50 and a penalty equivalent to the tax specified in the notice. (2) The proper officer shall issue the notice under sub-section (1) at least six months prior to the time limit specified in sub-section (10) for issuance of order. (3) Where a notice has been issued for any period under sub-section (1), the proper officer may serve a statement, containing the details of tax not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilised for such periods other than those covered under sub-section (1), on the person chargeable with tax. (4) The service of statement under sub-section (3) shall be deemed to be service of notice under sub-section (1) of section 73, subject to the condition that the grounds relied upon in the said statement, except the ground of fraud, or any wilful-misstatement or suppression of facts to evade tax, for periods other than those covered under sub-section (1) are the same as are mentioned in the earlier notice. (5) The person chargeable with tax may, before service of notice under sub-section (1), pay the amount of tax along with interest payable under section 50 and a penalty equivalent to fifteen per cent. of such tax on the basis of his own ascertainment of such tax or the tax as ascertained by the proper officer and inform the proper officer in writing of such payment. (6) The proper officer, on receipt of such information, shall not serve any notice under sub-section (1), in respect of the tax so paid or any penalty payable under the provisions of this Act or the rules made thereunder. (7) Where the proper officer is of the opinion that the amount paid under sub-section (5) falls short of the amount actually payable, he shall proceed to issue the notice as provided for in sub-section (1) in respect of such amount which falls short of the amount actually payable. (8) Where any person chargeable with tax under sub-section (1) pays the said tax along with interest payable under section 50 and a penalty equivalent to twenty-five per cent. of such tax within thirty days of issue of the notice, all proceedings in respect of the said notice shall be deemed to be concluded. (9) The proper officer shall, after considering the representation, if any, made by the person chargeable with tax, determine the amount of tax, interest and penalty due from such person and issue an order. (10) The proper officer shall issue the order under sub-section (9) within a period of five years from the due date for furnishing of annual return for the financial year to which the tax not paid or short paid or input tax credit wrongly availed or utilised relates to or within five years from the date of erroneous refund. (11) Where any person served with an order issued under sub-section (9) pays the tax along with interest payable thereon under section 50 and a penalty equivalent to fifty per cent. of such tax within thirty days of communication of the order, all proceedings in respect of the said notice shall be deemed to be concluded. Explanation 1.—For the purposes of section 73 and this section,— (i) the expression “all proceedings in respect of the said notice” shall not include proceedings under section 132;

(ii) where the notice under the same proceedings is issued to the main person liable to pay tax and some other persons, and such proceedings against the main person have been concluded under section 73 or section 74, the proceedings against all the persons liable to pay penalty under sections 122, 125, 129 and 130 are deemed to be concluded. Explanation 2.––For the purposes of this Act, the expression “suppression” shall mean non-declaration of facts or information which a taxable person is required to declare in the return, statement, report or any other document furnished under this Act or the rules made thereunder, or failure to furnish any information on being asked for, in writing, by the proper officer.

Judgments

Mahadeo Construction Co vs The Union Of India on 21 April, 2020

M/S. Jayachandran Alloys (P) Ltd vs 4 The Commissioner Of Gst And on 4 April, 2019 Madras High Court

Conclusion: Under GST the time period for issuance of Show Cause Notice under sub-section (1) is at least three months prior to the time limit specified in sub-section (10) for issuance of order and the proper officer shall issue the order under sub-section (9) within three years from the due date for furnishing of annual return for the financial year to which the tax not paid or short paid or input tax credit wrongly availed or utilised relates to or within three years from the date of erroneous refund.

While under Octroi it was mandatory for MCGM to issue demand  within three months of the date of the import or payment

Shruti Desai

29th July,2020

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