Cross-LOC trade with Pak occupied Kashmir is intra-state trade as PoK is part of India: Jammu & Kashmir High Court

The Jammu & Kashmir and Ladakh High Court has ruled that the cross-LOC (Line of Control) trade between the divided parts of Jammu and Kashmir is intra-state trade as the areas presently under the de-facto control of Pakistan are a part of Jammu & Kashmir and, therefore, a part of India [M/S New Gee Enn & Sons v Union of India & Ors].

Cross-LOC trade was started as a confidence building measure between India and Pakistan on Srinagar-Muzaffarabad and Poonch-Rawalakote routes in October 2008.

This was essentially a barter trade where there was no exchange of currency from either side. This cross-LoC trade was carried out between people living across LOC in J&K and aimed at benefiting the local economy on both sides.

However, the trade was suspended in 2019 in the aftermath of the Pulwama attack over reports of trade routes being misused for "funnelling illegal weapons, narcotics and fake currency etc."

Dealing with a tax matter connected to the cross-LOC trade, a Division Bench of Justice Sanjeev Kumar and Justice Sanjay Parihar has ruled,

"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 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."

The petitioners had earlier made a contrary argument in the pleadings. However, their counsel during the hearing conceded that the nature of cross-LoC trade was clearly suggestive of the fact that it was intra-state and not a trade involving the import or export of goods between two countries.

The petitioners before the Court were traders who had participated in the cross-LOC trade. The Jammu and Kashmir Value Added Taxes Act, 2005, gave them an exemption from payment of the tax. However, the Central Goods and Services Tax Act and J&K Goods and Services Tax Act did not provide a similar exemption.

Considering the GST regime, the authorities decided to issue show-cause notices to the traders, considering that they had made huge outward and inward supplies while GST on such supplies had not been accounted for in their returns.

The traders then challenged the notices by way of writ petitions under Article 226 of the Constitution of India, stating that the cross-LoC trade was regulated by an SOP issued by the government of India and therefore, it was not amenable to the provisions of the GST Act.

It was also argued that the notices were barred by limitation and that there was no willful misrepresentation or fraud. They also submitted that the demand for tax would not be permissible unless they are paid by the traders based in Pakistan-occupied Kashmir (PoK).

The Court found that there was prima face suppression of material facts by the petitioners as they were well aware that there was no specific notification issued by the government under Section 11 of the CGST Act of 2017 exempting cross-LoC barter trade from payment of GST.

"They were also aware that these supplies whether inward or outward were intra-state supplies and subject to GST in terms of section 7 of the CGST Act 2017. It was the responsibility of the petitioners to self-assess and discharge their GST liability at the time of filing GST returns properly," it added.

The Court also found that the notices were issued to the petitioners at least six months prior to the expiry of five years from the date due for furnishing the annual return for the financial years in question.

"Viewed from any angle, the show cause notices issued under Section 74(1) of the CGST Act of 2017 cannot be said to be barred by limitation prescribed under the Section," it held.

The Court also found that a bunching of composite show cause notices issued in respect of tax periods falling in the years 2017-2018 and 2018-2019 was valid.

However, the Court went on to note that the petitioners have an equally efficacious statutory remedy of appeal against the notices issued to them.

"In view of the settled legal position, we are of the considered opinion that in respect of impugned show cause notices, the petitioners have a remedy to file their reply, submit requisite material and contest these on merits, and, if, after considering the representation/reply to the show cause notice tendered by the petitioners, the proper officer passes an order confirming the demand in terms of sub-section (9) of Section 74 of CGST Act of 2017, the petitioners shall have a remedy of appeal before the Appellate Authority under Section 107 of the CGST Act of 2017," it said.

Thus, the Court refrained from deciding the dispute and relegated the petitioners to avail statutory remedies available under the CGST Act of 2017.

In a partial relief to the traders, the Court passed the following directions:

1. 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 (November 27) 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.

2. Where the final order in terms of sub-section (9) of Section 74 confirming the demand has already been passed, the petitioners shall have three months' time from (November 27) to avail the remedy of appeal under Section 107 of the CGST Act of 2017.

Senior Advocate Faisal Qadri with advocates Numan Zargar, Snober Sameer and Sikander Hayat Khan represented the petitioners.

Deputy Solicitor General Tahir Majid Shamsi with advocate Rehana Qayoom appeared for the Central government.

Advocates Waseem Gul, Mohd Younus Hafiz and Nowhabar Khan appeared for other respondents.

[Read Judgment]