Trade Between UT Of J&K And PoK Is Intra-State Under GST Act Since PoK Is Part Of J&K Territory: J&K And Ladakh High Court
The High Court held that the territories of Pakistan-occupied Kashmir continue to form part of the State of Jammu & Kashmir; accordingly, trade between the UT of Jammu & Kashmir and PoK effected under the 2008 SOP must be treated as intra-state supply under the GST law, and taxed under the CGST/SGST regime.
Justice Sanjeev Kumar, Justice Sanjay Parihar, Jammu & Kashmir and Ladakh High Court
The Jammu & Kashmir and Ladakh High Court has held that trade across the Line of Control (LoC) conducted between the UT of J&K and Pakistan-Occupied Kashmir qualifies as intra-state trade under the GST Act, because PoK is legally a part of the territory of Jammu & Kashmir.
The Court was hearing writ petitions filed by traders who had engaged in barter/supply transactions with persons across the LoC during 2017–2019. The petitioners challenged the show-cause notices issued by tax authorities demanding GST, challenging the territorial and supply classification on various grounds.
A Division Bench comprising Justice Sanjeev Kumar and Justice Sanjay Parihar considered the relevant definitions under the GST law, the historical territorial status of Jammu & Kashmir, the 2008 SOP governing LoC trade, and held: “the area of the State presently under de-facto control of Pakistan is part of territories of the State of Jammu & Kashmir. 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”.
Senior Advocate Syed Faisal Qadri appeared on behalf of the petitioners, while the respondents were represented by Tahir Majid Shamsi, DSGI.
Background
In 2008, the Government of India and Pakistan established certain confidence-building measures allowing regulated barter trade across the LoC between designated routes (Srinagar–Muzaffarabad; Poonch–Rawalakote), regulated by a Standard Operating Procedure (SOP) as issued by the Ministry of Home Affairs (J&K Division). 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 Jammu & Kashmir.
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, alleging suppression and 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.
They further argued that the impugned show-cause notices were barred by limitation; that issuing a consolidated notice for two distinct tax periods was procedurally impermissible; that barter exchange of goods should not be subjected to tax twice, once for outward supplies and again for inward supplies; and that the writ petitions were maintainable because the issues raised went beyond mere disputed facts, even though a statutory appellate remedy was available under Section 107 of the Act.
Court’s Observations
On Territorial Identity and PoK Being Part of J&K
The J&K and Ladakh High Court, at the outset, held that cross-LoC trade authorised under the SOP issued on 20 October 2008 was a barter trade between two parts of the State of Jammu & Kashmir, undertaken as a Confidence Building Measure between two different countries.
Relying on the definitions contained in Section 2(56) of the CGST Act, Section 8 of the IGST Act and Article 1 of the Constitution, the Court emphasised that the territory presently under de-facto control of Pakistan remains part of the territories of the State of Jammu & Kashmir, and therefore the location of the supplier and the place of supply were within the same State/Union Territory, rendering such transactions intra-state supplies and amenable to GST.
On this premise, the Court concluded that both the supplier (in UT of J&K) and the place of supply (in PoK) were within the same legal territory. Therefore, trade under the 2008 SOP qualifies as intra-state supply under Section 8 of the IGST Act (as read with corresponding provisions of the J&K GST Act), rather than inter-state or international supply.
On The Applicability of GST, Validity of Show-Cause Notices and Limitation
Since the supply was intra-state, the Court held that GST under the CGST/JK SGST Act is attracted. The show-cause notices under Section 74(1) of GST, based on alleged suppression and non-declaration, were therefore found to be within the jurisdiction of the tax authorities and validly issued.
The petitioners had contended that the notice should have been issued under Section 73(1) (for non-suppressed cases) and was barred by limitation. The Court disagreed. Given the factual pattern of alleged suppression and non-disclosure of outward supplies, the Court held that the Section 74 notice was applicable.
Once the proceedings were correctly classified under Section 74, the Bench held that the issuance of the show cause notices was within the statutorily prescribed time. The Bench further observed that limitation is a mixed question of law and fact, which could appropriately be examined by the authorities during adjudication and need not be decided at the threshold in writ jurisdiction.
On Bunching of Multiple Tax Periods, Double Taxation Argument, and Availability of Statutory Remedy
The Court also considered whether issuing a single show-cause notice covering two tax periods is permissible. It held that the GST law does not prohibit consolidation of periods for demand, and accordingly, bunching was upheld. “It is only in the cases where the show cause notice suffers from vagueness or non-specificity, that bunching may be impermissible”, the Court elaborated.
The petitioners had also argued that because the trade was barter (goods-for-goods), taxing both outward and inward supply would amount to double taxation. The Court, however, did not adjudicate upon this contention on merits and expressly left the issue open to be decided by the proper authorities under the CGST Act, 2017.
On the contention raised by the respondents that the petition was not maintainable under Article 226 as alternative remedies were available, the Court held that although the GST statute provides statutory appeal remedies under Section 107, the significant constitutional and statutory questions, particularly territorial identity and classification under GST, writ jurisdiction under Article 226 was not barred.
“The availability of alternative remedy under the statute cannot thus 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”, the Court concluded.
Conclusion
The J&K and Ladakh High Court declined to entertain the writ petitions, holding that those challenging only the show-cause notices were premature, while those challenging confirmed demands could avail the appellate mechanism provided under the Act.
The Court concluded that, in respect of the impugned show-cause notices, the petitioners are required to file their replies, place the requisite material on record, and contest the proceedings on merits before the proper officer under Section 74 of the CGST Act, and that any order confirming demand would be appealable under Section 107.
Cause Title: M/s New Gee Enn Sons and Others v. Union of India & Others