Service Tax Probe After GST: Jharkhand HC Grants Status Quo to NGO

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Case Name

M/s Sulabh International Social Service Organization (Jharkhand State Branch) Vs. The Union of India through the Commissioner, Central Goods & Services Tax and Central Excise, Ranchi and others

Court Name: High Court of Jharkhand at Ranchi

Case No: W. P. (T) No. 1599 of 2019

Order Date: 4th April, 2019

Coram: Hon’ble the Chief Justice (Aniruddha Bose, CJ) & Hon’ble Mr. Justice Ratnaker Bhengra

Key Takeaways

1. Service Tax was omitted (not just repealed) by Section 173 of the CGST Act, 2017 with effect from 1st July, 2017. However, a saving clause under Section 174(2) was included to protect ongoing proceedings.

2. The central legal debate is whether the saving clause in Section 174(2)(e) allows authorities to freshly institute new proceedings after the omission of the old law, or only continue proceedings that were already underway before GST came into force.

3. The Court’s prima facie view is that the word “instituted” in Section 174(2)(e) means proceedings that were already instituted at the time of omission — not new proceedings started after the old law was omitted.

4. Status quo was granted — meaning the tax department cannot proceed further against the NGO until the matter is fully heard.

5. The Jharkhand HC aligned itself with the Gujarat and Delhi High Courts, which had also granted interim protection in similar situations, rather than following the Guwahati and Calcutta High Courts which had refused such protection.

Issue

Can tax authorities freshly initiate Service Tax investigation/audit proceedings AFTER the Finance Act, 1994 (Service Tax law) was omitted by the CGST Act, 2017 — or does the saving clause only protect proceedings that were already underway before the omission?

In simpler terms: Can the government start a brand new Service Tax probe after GST replaced the old law?

Facts

• Sulabh International is a well-known NGO registered under the Societies Registration Act, 1860. It provides sanitation and cleaning services across India.

• The NGO was providing housekeeping and cleaning services to various State and Central Government authorities, and also manpower recruitment/supply services to business entities.

• The NGO had been claiming exemptions under:
• Notification No. 25/2012-ST dated 20.06.2012 (the “Mega Exemption Notification”) — for cleaning services to government/local/educational bodies
• Notification No. 30/2012-ST dated 20.06.2012, as amended by Notification No. 7/2015-ST dated 01.03.2015 — for Reverse Charge Mechanism on manpower services

• On 3rd April, 2018, the ADG, Directorate General of GST Intelligence, Delhi Zonal Unit issued a Show Cause Notice (SCN) to 22 SISCO units across the country (including the Jharkhand branch) for allegedly wrongly availing these exemptions for Financial Years 2012-13 to 2015-16.

• On 5th December, 2018, a continuation notice was issued asking the NGO to submit documents for FY 2016-17 and 2017-18 (up to 30.06.2017).

• This was followed by reminders and summons.

• On 23rd March, 2019, officers appointed under the CGST Act, 2017 actually visited the NGO’s premises and collected several documents.

• The NGO then filed this Writ Petition (W.P.(T) No. 1599 of 2019) challenging the legality of these notices, summons, and the premises visit.

Arguments

Petitioner’s Arguments (Sulabh International / NGO):

• The Finance Act, 1994 (Chapter V — Service Tax) was omitted by Section 173 of the CGST Act, 2017 from 1st July, 2017.

• The saving clause in Section 174(2) does not protect the Service Tax Rules, 1994. Therefore, any action taken under those Rules (specifically Rule 5A relating to audit/scrutiny) is without authority of law.

• Relied on the Constitutional Bench judgment of the Supreme Court in Kolhapur Canesugar Works Ltd. and another Vs. Union of India and others, (2000) 2 SCC 536 to argue that when a statute is omitted without adequate saving, proceedings under it cannot continue.

• Also relied on Air India Vs. Union of India and others, (1995) 4 SCC 734 on the same point.

Respondent’s Arguments (Union of India / Tax Department):

• The saving clause in Section 174(2)(e) is broad enough to protect not just ongoing proceedings but also proceedings to be initiated after the omission of the 1994 Act.

• Relied on the Guwahati High Court’s decision in W.P. © 2059/2018 — Laxmi Narayan Sahu Vs. Union of India and 2 Ors. (decided 12th October, 2018), which held that Section 174(2)(e) saves investigations/enquiries that were to be instituted under Chapter V of the Finance Act, 1994.

• Also relied on the Calcutta High Court’s order dated 15th January, 2019 in W.P. 380(W) of 2019 — M/s Gitanjali Vacationville Private Limited & Anr. Vs. The Union of India & Anr., which refused interim protection and held that enquiry/investigation under the 1994 Act is permissible even after the 2017 Act came into force.

Key Legal Precedents

Statutes & Rules:

Section 173, CGST Act, 2017

Omits Chapter V of the Finance Act, 1994 (Service Tax) from 1st July, 2017

Section 174(2), CGST Act, 2017

Saving clause — protects rights, liabilities, proceedings etc. from being affected by the omission

Section 174(2)(e), CGST Act, 2017

Specifically saves investigations, inquiries, audits, assessments, adjudications — and says they “may be instituted, continued or enforced”

Rule 5A, Service Tax Rules, 1994

Relates to audit/scrutiny/inspection powers of tax authorities

Notification No. 25/2012-ST dated 20.06.2012

Mega Exemption Notification for Service Tax

Notification No. 30/2012-ST dated 20.06.2012(amended by Notification No. 7/2015-ST dated 01.03.2015)

Reverse Charge Mechanism for manpower services

Case Laws:

1. Kolhapur Canesugar Works Ltd. and another Vs. Union of India and others, (2000) 2 SCC 536

• A Constitutional Bench Supreme Court judgment.
• The petitioner used this to argue that omission of a statute without proper saving renders subsequent proceedings invalid.
• The Guwahati HC (relied upon by the respondent) used paragraph 37 of this same case to argue the opposite — that a saving clause accompanying an omission does permit continuation/institution of proceedings.

2. Air India Vs. Union of India and others, (1995) 4 SCC 734

• Another Supreme Court judgment cited by the petitioner on the same point regarding the effect of omission of a statute.

3. Laxmi Narayan Sahu Vs. Union of India and 2 Ors., W.P. © 2059/2018 (Guwahati High Court, decided 12th October, 2018)

• Held that Section 174(2)(e) saves proceedings to be initiated under Chapter V of the Finance Act, 1994, even after its omission.
• Relied upon by the respondent (tax department).

4. M/s Gitanjali Vacationville Private Limited & Anr. Vs. The Union of India & Anr., W.P. 380(W) of 2019 (Calcutta High Court, 15th January, 2019)

• Refused interim protection; held that enquiry/investigation under the 1994 Act is permissible after the 2017 Act.
• Relied upon by the respondent (tax department).

5. OWS Warehouse Services LLP Versus Union of India, R/Special Civil Application No. 16226 of 2018 (Gujarat High Court)

• In a similar situation, the impugned order was stayed at the ad interim stage.
• Relied upon by the court to support granting status quo.

6. M/s T.R. Sawhney Motors Pvt. Ltd. Versus Union of India and another, W.P.© 2138/2019 & CM Appl. No. 10002/2019 (Delhi High Court)

• Also passed an interim order in favour of the writ petitioner in a similar situation.
• Relied upon by the court to support granting status quo.

Judgement

The Petitioner (Sulabh International NGO) won at the interim stage.

What the Court Decided:

1. The Court’s Prima Facie View: The word “instituted” in Section 174(2)(e) of the CGST Act, 2017 means proceedings that were already instituted at the time of omission of the Finance Act, 1994 — not fresh proceedings started after the omission.

2. The Court noted that the notices and summons challenged in the writ petition did not even specify the exact provision under which the action was being taken — making the legality even more questionable at this stage.

3. The Court chose to follow the Gujarat and Delhi High Courts (which had granted interim protection) rather than the Guwahati and Calcutta High Courts (which had refused it).

4. Orders passed:

• Status quo to be maintained — meaning the tax department cannot proceed with the investigation/audit against the NGO until the next hearing.
• Respondents (Union of India) to file counter-affidavit by 18th April, 2019
• Petitioner to file rejoinder by 29th April, 2019
• Matter listed for hearing on 7th May, 2019 at 2:15 p.m.

Important Note: This is only an interim order — the final decision on the merits of the case was yet to be made. The Court was only deciding whether to grant temporary protection at this stage.

FAQs

Q1. What is this case really about in simple terms?

The government’s tax department tried to investigate Sulabh International (the NGO) for Service Tax matters even after Service Tax was replaced by GST. The NGO said, “You can’t do that — the old law is gone!” The court said, “Hold on, let’s examine this properly” and temporarily stopped the investigation.

Q2. Why does it matter that Service Tax was “omitted” rather than “repealed”?

In law, “omission” and “repeal” can have different consequences. The petitioner argued that the saving clause in the CGST Act doesn’t adequately protect the Service Tax Rules (as opposed to the Act itself), so actions under those Rules are invalid. This is a technical but important legal distinction.

Q3. What does “status quo” mean in this context?

It means everything must remain as it is — the tax department cannot take any further steps in the investigation against the NGO until the court gives its final ruling. It’s like pressing the “pause” button.

Q4. Does this mean the NGO has won the case?

Not at all! This is only an interim order — a temporary measure. The court has not yet decided the final merits of the case. The full hearing was scheduled for 7th May, 2019.

Q5. What is the significance of Section 174(2)(e) of the CGST Act?

This is the key provision. It says that even after the old Service Tax law was omitted, investigations, audits, and proceedings can still be “instituted, continued or enforced.” The big question is: does “instituted” mean only proceedings that had already started before GST, or can the department freshly start new ones after GST? The court’s preliminary view is that it means only already-started proceedings.

Q6. Why did the court follow Gujarat and Delhi HCs rather than Guwahati and Calcutta HCs?

At the interim stage, courts often grant protection when there is a genuine legal question to be examined. Since the Gujarat and Delhi HCs had found merit in similar arguments and granted interim stays, the Jharkhand HC chose to follow the same cautious approach rather than allowing the investigation to proceed and potentially cause irreversible harm to the petitioner.

Q7. What exemptions was Sulabh International claiming?

The NGO was claiming:

• Exemption under Notification No. 25/2012-ST for cleaning/housekeeping services provided to government bodies
• Benefit of Reverse Charge Mechanism under Notification No. 30/2012-ST (as amended by Notification No. 7/2015-ST) for manpower supply services to business entities

In the present writ petition, the petitioner, a society registered under the Societies Registration Act, 1860 questions initiation of certain proceedings under Chapter V of the Finance Act, 1994 (the 1994 Act). The main content of that chapter has come to be known as service tax. The aforesaid statute stood omitted with effect from 1st July, 2017 upon introduction of Central Goods and Services Tax Act, 2017 (the 2017 Act). The omitting provision is contained in Section 173 of the 2017 Act. This provision stipulates:-

“173. Amendment of Act 32 of 1994.- Save as otherwise provided in this Act, Chapter V of the Finance Act, 1994 (32 of 1994) shall be omitted.”

2. Section 174 of the 2017 Act contains the saving clause in sub-section (2) thereof. This sub-section reads:-

“174. Repeal and saving.

(2) The repeal of the said Acts and the amendment of the Finance Act, 1994 (32 of 1994)(hereinafter referred to as “such amendment” or “amended Act”, as the case may be) to the extent mentioned in the sub-section (1) or section 173 shall not –

(a) revive anything not in force or existing at the time

of such amendment or repeal; or

(b) affect the previous operation of the amended Act or

repealed Acts and orders or anything duly done or

suffered thereunder; or

(c) affect any right, privilege, obligation, or liability

acquired, accrued or incurred under the amended Act

or repealed Acts or orders under such repealed or

amended Acts:

Provided that any tax exemption granted as an

incentive against investment through a notification shall

not continue as privilege if the said notification is

rescinded on or after the appointed day; or

(d) affect any duty, tax, surcharge, fine, penalty,

interest as are due or may become due or any

forfeiture or punishment incurred or inflicted in respect

of any offence or violation committed against the

provisions of the amended Act or repealed Acts; or

(e) affect any investigation, inquiry, verification

(including scrutiny and audit), assessment proceedings,

adjudication and any other legal proceedings or

recovery of arrears or remedy in respect of any such

duty, tax, surcharge, penalty, fine, interest, right,

privilege, obligation, liability, forfeiture or punishment,

as aforesaid, and any such investigation, inquiry,

verification (including scrutiny and audit), assessment

proceedings, adjudication and other legal proceedings

or recovery of arrears or remedy may be instituted,

continued or enforced, and any such tax, surcharge,

penalty, fine, interest, forfeiture or punishment may be

levied or imposed as if these Acts had not been so

amended or repealed;

(f) affect any proceedings including that relating to an

appeal, review or reference, instituted before on, or

after the appointed day under the said amended Act or

repealed Acts and such proceedings shall be continued

under the said amended Act or repealed Acts as if this

Act had not come into force and the said Acts had not

been amended or repealed.”

3. In the case of the writ petitioner, a notice was

issued on 5th December, 2018. The body of this notice reads:-

“This is in continuation to Show Cause Notice F. No.

DZU/INV/F/ST/201/2016/2446 dt. 03.04.2018 issued by

ADG, Directorate General of GST Intelligence, Delhi

Zonal Unit wherein 22 SISCO units (01 unit located at

Ashok Nagar, Ranchi Jharkhand STC-

AACTS0080NST001) located all across the country which

have been Show caused for wrong availment of

Notification No. 25/2012(ST dt. 20.06.2012 (Mega

Exemption Notification) and its various

clauses/provisions by taking exemptions for the work

accomplished/done (House keeping services, Cleaning

services) in various authorities of the State/Central

government during the Financial Year 2012-13 to 2015-

16 and also availing benefit of Notification No. 30/2012-

ST dt. 20.06.2012 amended vide Notification No.

7/2015-ST dt. 01.03.2015 (Reverse Charge Mechanism)

under Manpower recruitment/supply services to various

business entities across the country.

Further, in this connection, it is directed to submit the

under mentioned documents/returns/invoices in relation

to work performed during the financial year 2016-17 and

2017-18 untill 30.06.2018.

1. Audited Balance Sheet And Profit/Loss Account for the

Financial Year 2016-17 and 2017-18

2. ST-3 return copy for the Financial Year 2016-17 and

2017-18 (uptill 30.06.2017)

3. Quarter wise (2016-2017 and 2017-18 uptill

30.06.2017) total Value of Exempted services on

which service tax has not been paid i.e. availing

benefit of Notification No. 25/2012-ST dt. 20.06.2012

under clause 25(a) /9(b) (iii) (Cleaning Services

provide to Government/local entities and educational

entities).

4. Quarter wise (2016-2017 and 2017-18 uptill

30.06.2017) total taxable value and the abatement

claimed under Notification No. 30/2012-ST dt.

20.06.2012 amended vide Notification No.

7/2015-ST dt. 01.03.2015 for the services provided

to business entities, if any, under Manpower

recruitment/supply services.

5. Contracts/Letters related to claim of services provided

to Govt/Local Authority/Governmental Authority &

various business entities.”

4. We find from the text of the said notice that this was

in relation to an enquiry or audit as envisaged in Rule 5A of

the Service Tax Rules, 1994. The specific provision under

which the aforesaid notice was issued, however, has not been

spelt out therein. The said notice has been followed by other

reminders and summons. We are apprised by Mr. J.K. Mittal,

learned counsel appearing for the petitioner, that the officers

appointed under the 2017 Act have already visited the

premises of the writ petitioner on 23rd March, 2019 and have

collected several documents. Legality of such notices and

summons as well as the visit of the said officers in the

premises of the writ petitioner have been questioned in the

writ petition. The main ground on which the writ petition is

founded is that the saving clause which we have reproduced

above does not protect the Service Tax Rules and hence any

action taken in pursuance of the said Rules would be without

the authority of law. On this count, a Constitutional Bench

judgment of the Hon’ble Supreme Court in the case of

Kolhapur Canesugar Works Ltd. and another Vs. Union

of India and others reported in (2000) 2 SCC 536 has

been relied upon by Mr. Mittal. The other authority on the

same point relied upon by him is an earlier judgment of the

Hon’ble Supreme Court in the case of Air India Vs. Union of

India and others reported in (1995) 4 SCC 734.

5. Mr. Ratnesh Kumar, learned counsel appearing on

behalf of the Union of India, on the other hand has sought to

sustain the action of the authorities on the basis of sub-clause

(2) of Section 174 of the 1917 Act only. His argument is that

the acts sought to be protected by the saving clause contained

in sub-clause (e) of Section 174 (2) of the 1917 Act also

includes proceedings to be initiated subsequent to omission of

the 1994 Act. In this regard, he has relied upon a judgment of

the Hon’ble Guwahati High Court delivered in the case

registered as W.P. (C) 2059/2018 (Laxmi Narayan Sahu

Vs. Union of India and 2 Ors.) decided on 12th October,

2018. In that decision, demand-cum-show cause notices

issued by the Assistant Commissioner under the Central Goods

and Services Tax Act were under challenge. It was, inter-alia,

held by the Hon’ble High Court of Guwahati rejecting the plea

of the writ petitioner:-

“31. As the provisions of Section 174(2) also is clearly

applicable in respect of an omission of the enactment

under section 173, therefore, any such investigation,

enquiry, etc., that was instituted, continued or enforced

under Chapter V of the Finance Act of 1994, continues

to remain in place inspite of such omission of Chapter V

of the Finance Act. In other words, Section 174(2) (e)

is a savings clause in respect of any investigation,

enquiry etc., that was/to be instituted under Chapter V

of the Finance Act of 1994. A conjoint reading of

Section 173 and 174 (2) (e) would show that while

bringing an omission to the provision of Chapter V of

the Finance Act of 1994 a savings clause for continuing

with the proceedings initiated/to be initiated was also

duly provided. Existence of the savings clause in

respect of omission of Chapter V of the Finance Act of

1994 clearly brings it within the purview of the

provisions laid down by the Constitution Bench of the

Supreme Court in paragraph 37 of Kolhapur Canesugar

Works Ltd. (supra).

32. As already elucidated hereinabove, paragraph 37 of

Kolhapur Canesugar Works Ltd. (supra) provides that if

a statute stood omitted with a savings clause, the

savings clause would not render it impermissible for the

proceedings initiated/to be initiated under Chapter V of

the Finance Act of 1994, which stood omitted by

Section 173 of the CGST Act of 2017 to be continued.

33. A conjoint reading of the provisions laid down in

paragraph 37 of Kolhapur Canesugar Works Ltd.

(supra) and Section 173 and 174(2)(e) would lead to a

conclusion that although Chapter V of the Finance Act

of 1994 stood omitted under Section 173, but the

savings clause provided under Section 174(2)(e) will

enable the continuation of the investigation, enquiry,

verification etc., that were made/to be made under

Chapter V of the Finance Act of 1994.”

6. An order of the Hon’ble Calcutta High Court refusing

the interim protection passed on 15th January, 2019 in W.P.

380(W) of 2019 in the case of M/s Gitanjali Vacationville

Private Limited & Anr. Vs. The Union of India & Anr. has

also been relied upon by Mr. Kumar. He has drawn our

attention to the following passage from the said order:-

“Prima facie, reading Sections 173 and 174 of the Act of

2017 it appears that, an enquiry or an investigation or

even a legal proceeding under the Act of 1994 is

permissible notwithstanding the coming into effect of

the Act of 2017. The authorities are proposing

undertake an audit for the period when the Act of 1994

was applicable. The authorities are entitled to do so.

In such circumstances, I am not minded to grant

any interim order as prayed for.”

7. At the interim stage, we have to examine if any

fresh proceeding under the 1994 Act for scrutiny, inspection or

audit, if commenced after omission of the said Act is prima-

facie legally valid or not. Though Mr. Mittal has submitted that

the action complained against in this writ petition has been

undertaken in pursuance of the power under Rule 5A of the

1994 Rules, as we have already observed, the legality of the

instruments challenged in this writ petition do not specify the

provisions under which such actions have been taken by the

revenue authorities. The saving clause itself after omission of

the statute does not refer to any particular provision of the

Rules. Sub-clause (e) which we have quoted in the preceding

part of this order gives a list of actions which are saved.

8. On the question as to whether the fresh proceeding

is permissible or not upon omission of the said statute, the

controlling part appears under the said sub-clause in the

following phrase:

“....... may be instituted, continued or enforced.”

Of the three situations contemplated in that phrase,

the expression which comes for interpretation is “may be

instituted”. The question is whether such institution ought to

have taken place before the omission of the statute and

subsequent to introduction of the saving provision. There are

two interim orders passed by the Hon’ble High Courts of

Gujarat and Delhi. In the case of OWS Warehouse Services

LLP Versus Union of India [R/Special Civil Application

No. 16226 of 2018], in a similar situation, the order

impugned therein has been stayed at ad interim stage. The

Hon’ble Delhi High Court in the case of M/s T.R. Sawhney

Motors Pvt. Ltd. Versus Union of India and another

[W.P.(C) 2138/2019 & CM Appl. No. 10002/2019

(stay) has also passed an interim order in favour of writ

petitioner in a similar situation.

9. In our prima facie view, the expression “instituted”

in sub-clause(e) would imply the proceeding which stood

already instituted at the time of repeal or omission of the 1994

Act.

10. In such circumstances, we choose to follow the

course taken by the Hon’ble High Courts of Gujarat and Delhi

and direct status quo to be maintained till the next date of

hearing so far as the proceeding which form the subject

matter of the present writ petition is concerned.

11. Let counter-affidavit be filed by 18th April, 2019.

Rejoinder thereto may be filed by 29th April, 2019.

12. Matter shall be listed for hearing on 7th May, 2019 at

2:15 p.m.