J&K High Court Upholds GST on Cross-LoC Barter Trade, Dismisses Traders' Petitions

Srinagar: The High Court of Jammu and Kashmir and Ladakh, in a significant ruling, has held that the cross-Line of Control (LoC) barter trade is an "intra-state supply" and therefore taxable under the Goods and Services Tax (GST) regime. A division bench of Justice Sanjeev Kumar and Justice Sanjay Parihar dismissed a batch of writ petitions filed by traders challenging show cause notices issued by the CGST authorities for non-payment of tax on such trade.

The court found the notices to be within jurisdiction and directed the petitioners to avail the statutory remedies available under the CGST Act, 2017.

Background of the Case

The case stems from the cross-LoC trade initiated in 2008 as a Confidence Building Measure between India and Pakistan. The trade, conducted on a barter system without currency exchange, was regulated by a Standard Operating Procedure (SOP). Under the erstwhile J&K VAT Act, 2005, this trade was treated as a "zero-rated sale," exempt from tax.

However, with the implementation of the GST regime in July 2017, no specific exemption was provided for this trade. The petitioners, a group of traders including M/s New Gee Enn & Sons, continued the trade without paying GST for the financial years 2017-18 and 2018-19. Following an investigation, the Superintendent of CGST issued show cause notices under Section 74(1) of the CGST Act, alleging tax evasion through willful suppression of facts. The traders challenged these notices directly in the High Court, arguing they were issued without jurisdiction.

Key Arguments in Court

Petitioners' Contentions: The traders, represented by Senior Counsel Mr. Faisal Qadri, raised several key arguments: * The show cause notices were without jurisdiction as the cross-LoC trade was not an intra-state supply. * The notices were barred by the limitation period prescribed under the GST Act. * The case, at best, should fall under Section 73 (for non-fraudulent tax evasion) which has a shorter limitation period, not Section 74 (for fraud, willful misstatement, or suppression). * Issuing a single "bunched" show cause notice for two different financial years is not permissible under the law.

Respondents' Stance: Mr. Tahir Majid Shamsi, learned DSGI appearing for the Union of India, countered that: * The trade between Jammu & Kashmir and Pakistan-occupied Kashmir (PoK) is legally an intra-state supply and taxable under GST. * The petitioners deliberately suppressed their taxable supplies in their GST returns, justifying the invocation of Section 74. * The notices were issued well within the five-year limitation period applicable under Section 74. * The petitioners should exhaust the statutory remedy of appeal under Section 107 of the CGST Act before approaching the High Court.

High Court's Analysis and Ruling

The High Court systematically addressed the legal questions raised by the petitioners and delivered a detailed judgment.

1. Cross-LoC Trade is Intra-State Supply The court unequivocally held that the cross-LoC trade is an intra-state supply. It reasoned that under Article 1 of the Constitution, the territory of India includes the entire State of Jammu and Kashmir.

> "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... and, therefore, the cross-LoC trade... was nothing but an intra-state trade."

2. Prima Facie Case of Suppression of Facts The court found that the show cause notices made a prima facie case for invoking Section 74. It noted that the petitioners were aware that no GST exemption existed, yet they failed to declare these transactions in their returns.

> "It is also coming out from the show cause notice that had the department not initiated inquiry and investigation, the evasion of GST by the petitioners by short payment of GST could not have been unearthed."

3. Notices Not Barred by Limitation The bench rejected the argument that the notices were time-barred. It calculated the five-year limitation period under Section 74(10) from the extended due dates for filing annual returns for FY 2017-18 and 2018-19, concluding that the notices issued in August 2024 were well within this timeframe.

4. Validity of Composite Show Cause Notices The court ruled that "bunching" or issuing a composite show cause notice for multiple financial years is permissible, provided it meets certain conditions.

> "We are thus of considered opinion that the composite show cause notice cannot be held invalid if there is year-wise breakup of tax, interest and penalty; the allegations are not vague; each period is within limitation and the notice is speaking and detailed one."

Final Decision and Directions

Having found no jurisdictional error in the show cause notices, the High Court dismissed the writ petitions, holding that the traders must resort to the remedies provided within the GST framework. The court issued the following directions: * Petitioners who have not yet replied to the show cause notices must do so within four weeks. * Petitioners against whom final demand orders have been passed have three months to file a statutory appeal under Section 107 of the CGST Act.

The court clarified that its observations on the merits of the tax demand are prima facie and the authorities must adjudicate the matter independently, though the legal questions determined in the judgment would be binding. The question of how to tax a barter trade where goods are exchanged for goods was left open for the GST authorities to determine.