Will Supreme Court’s Ruling In Pepsi Foods Change The Game?
Global soft drink major Pepsi’s slogan once famously read ‘change the game’. Marketing claims aside, a ruling in the company’s case before the Supreme Court may very well have that effect on income tax appeals.
There’s been an ongoing tussle between the judiciary and legislature on tax tribunals’ powers to grant a stay on demands raised by the revenue department. This power — to pass orders necessary to meet the ends of justice — was granted to ITATs by the apex court in 1965 in Mohammed Kunhi’s case.
Since then, several amendments — via Finance Acts 2001, 2007, 2008 and 2020 — to the income tax law have sought to curtail this power. This has been done by introducing:
- A timeline of 180 days after which the stay on demand will get automatically vacated.
- Extending the stay beyond 180 days to 365 days only if the delay in disposal of the appeal is not attributable to the taxpayer.
- Automatic vacation after 365 days even if the delay is not attributable to the taxpayer.
- And finally, mandating a minimum deposit of 20% of the demand as a precondition before a stay.
It’s this automatic vacation of stay that has now been struck down by the Supreme Court as unconstitutional. The object of the amendment is automatic vacation of a stay after 365 days whether or not the taxpayers is responsible for the delay caused in hearing the appeal, the apex court has noted.
“Such object being itself discriminatory… is liable to be struck down as violating Article 14 of the Constitution of India.” - Supreme Court in Pepsi Food Ltd.’s Case
The apex court has further noted:
- Vacation of stay in favour of the revenue department would ensue even if the revenue department is itself responsible for the delay in hearing the appeal.
- The amendment is manifestly arbitrary being a provision which is capricious, irrational and disproportionate so far as the taxpayer is concerned.
- The amendment is violative of Right to Equality under Article 14 of the Constitution. Unequals are treated equally in that no differentiation is made by the amendment between taxpayers who are responsible for delaying the proceedings and those who are not.
- A taxing statute may contravene Article 14 of the Constitution of India if it seeks to impose upon the same class of property, persons, etc., something which leads to obvious inequality.
This apex court’s ruling addresses the ‘arbitrariness’ in the amendments up to 2008. It has amended the wording of the section to say that any ITAT order granting a stay will now stand vacated after the expiry of 365 days only if the delay in disposing of the appeal is attributable to the taxpayer.
Besides the apex court’s conclusion on stay, there are two important takeaways from this judgment, Ajay Rotti, partner at Dhruva Advisors, told BloombergQuint.
One, it’s well-accepted that equity and hardship have no role to play in taxation laws. This ruling clarifies that they don’t have a role in determining your liability but once you’ve got a relief [a stay in this case], then the provisions need to be equitable.
Two, usually the Supreme Court steers clear of amending the language of the statute. It tends to grant relief to the taxpayer before it, which then becomes a precedent for everyone. But here, the court has changed the language of the provision — introduced in 2008 — that talks about the powers of the ITAT to grant a stay.Ajay Rotti, Partner, Dhruva Advisors
The 2020 amendment, however, is yet to be tested in courts. To reiterate, the amendment said:
- The ITAT may grant stay only if the taxpayer deposits at least 20% of the amount of tax, interest, fee, or penalty.
- The period of stay cannot extend beyond 365 days in total even if the delay in hearing the appeal is not the taxpayer’s fault.
The Pepsi judgment goes on to hold that taxation policy has to be within the permissible constitutional remits, otherwise the policy itself maybe struck down, Sachit Jolly, partner at DMD Advocates, said.
Against this backdrop, the 2020 amendment requiring taxpayers to deposit at least 20% of the disputed demand for obtaining stay appears to be ex-facie arbitrary and discriminatory and is, therefore, susceptible to challenge.Sachit Jolly, Partner, DMD Advocates
He explained this with an illustration. Suppose, a taxpayer has won before the ITAT on a particular issue in a financial year, the department has filed an appeal and the case is pending before the high court.
What’s happening now is that for the subsequent year, when the appeals reach the ITAT on the same issue, the department is saying pay 20%. “How is this equitable? If I have won on an issue at the ITAT the previous year, why should I pay anything before I’m granted a stay?” Jolly pointed out.