APRIL 09, 2025

Lex Mercatoria - When Merchants Ruled and Taxes Didn't

By Vijay Kumar

HINDUSTAN Coca Cola Beverages was issued a GST Show Cause Notice dated 04.08.2024 which they challenged in a writ petition in the Bombay High Court. That Writ Petition had come up on board on 20th January 2025 and was adjourned to 27th January 2025 due to paucity of time.

Despite the matter being adjourned for a week Respondent No. 3, the Joint Commissioner, CGST passed an order on 23rd January 2025. It seems this order demanded tax to the tune of Rs. 2500 Crores!

Now Coca Cola challenged before the High Court the Show Cause Notice dated 04.08.2024 and the Order-in-Original dated 23rd January 2025.

Additionally, they have also challenged the constitutional validity of Section 15(3) (a) of the CGST Act, on the basis that if the revenue's interpretation of the said Section is accepted then the same will be ultra vires Section 15 (1) of the very same Act.

Let us see what these Sections are:

Section 15. Value of Taxable Supply. -

(1) The value of a supply of goods or services or both shall be the transaction value, which is the price actually paid or payable for the said supply of goods or services or both where the supplier and the recipient of the supply are not related, and the price is the sole consideration for the supply.

(3) The value of the supply shall not include any discount which is given-

(a) before or at the time of the supply if such discount has been duly recorded in the invoice issued in respect of such supply.

According to Hindustan Coca Cola, by the impugned order, the Revenue Authorities came to the erroneous conclusion that the Petitioner's distributor first extended the discount to the retailers and then the Petitioner, in turn, has given sales discount to the distributor in subsequent supplies on the basis of the discount passed on by him, and which is duly recorded in the Distributor Management System of the Petitioner.

According to the Revenue Authorities, the procedure adopted for offering a discount on the basis of past transactions is to circumvent, the provisions of the GST Act thereby under valuing the current supplies and evading the payment of GST.

The High Court found that a strong prima facie case is made out for staying the effect and implementation of the impugned order, because the Court did not find at least prima facie that the reasoning employed by the Joint Commissioner is correct.

In these circumstances, the High Court ordered that there will be ad-interim relief in terms of prayer clause (f) until further orders. 2025-TIOL-551-HC-MUM-GST

prayer clause (f) reads as:

f) Pending hearing and disposal of the instant Writ Petition, restrain the Respondents, their agents, their servants and anyone acting on their behalf or at their behest by an Order of Stay / Injunction / interim relief to take any action against the Petitioner, whether coercive or otherwise, whether directly or indirectly, pursuant to the impugned proceedings that is the impugned Show Cause Notice dated 04.08.2024 and the impugned Order-in-Original dated 23.01.2025 read with impugned Corrigendum dated 30.01.2025, during the pendency of the instant Writ Petition.

Okay, Coca Cola can perhaps afford to pay 2500 crores (or at least contest the case), or the government can afford to get the law amended retrospectively, but the difficult question is, why should the law be so difficult? This is a simple question of discount. If a trader wants to give a discount to his buyers/dealers obviously to attract better business, logically and legally that discount should not form part of the value for levying GST. Government gets into how the discount is given and as in this case refuses to deduct the discount alleging that the procedure followed by the merchant is to circumvent, the provisions of the GST Act thereby under valuing the current supplies and evading the payment of GST. Very serious harsh words, but then the case is worth 2500 crores. What does a few inappropriate words matter? Now should the assessee devise and follow a procedure to satisfy the officer or should the government allow a procedure suitable to the assessee? Should the government decide how the assessee should manage his accounts? Can't the discount be discovered from the records of the assessee? I am not on the merits of this case which will perhaps be ultimately decided by the Supreme Court and thereafter by an Under-secretary in the Government. I am on why such cases should arise at all - after seven years into GST? Are we on an incessant tarrific war?

Lex Mercatoria:

Lex Mercatoria, or the "Law Merchant," has a captivating history that traces back to the medieval era. It emerged as a set of customary laws and practices crafted by merchants to streamline cross-border trade. This informal and adaptable system catered specifically to the demands of commerce, championing principles such as contractual freedom and the transferability of property.

During the Middle Ages, Lex Mercatoria found its enforcement through merchant courts strategically positioned along major trade routes. These courts operated autonomously, free from the constraints of State laws, thereby creating an equitable environment for merchants of diverse origins. The system flourished due to its emphasis on practicality over legal formalities, efficiently resolving disputes and fostering mutual trust among traders.

As Nation-States began to rise, the informal Lex Mercatoria gradually merged with codified laws. While this integration brought about consistency and regulation, it also introduced rigidity that often clashed with the dynamic nature of commerce. Today, the principles of Lex Mercatoria continue to shape international trade law, particularly in areas like arbitration and standardized codes, underscoring its lasting influence.

Its evolution persists, striving to balance procedural independence with adherence to contemporary legal frameworks. Reviving its foundational principles could potentially address modern challenges in global commerce.

There used to be a time when merchants used to follow certain conventions to carry out business smoothly and settle disputes. Once societies developed and the need to manufacture GDP statistics, became an unavoidable governmental function, the "Law Merchant" had to give way to hastily and faultily legislated statutes, which had to be interpreted strictly against the wily merchant and in favour of the holy State, even when the mechanism created by the State fails. As Justice James Wilson remarked in 1793, "in almost every nation, which has been denominated free, the state has assumed a supercilious pre-eminence above the people who have formed it. Hence, the haughty notions of state independence, state sovereignty, and state supremacy."

The journey of Lex Mercatoria offers a compelling lens through which to view the adaptation of legal frameworks to commercial needs over centuries. Initially conceived as a self-regulated system among merchants, it facilitated seamless international trade and resolved disputes efficiently, relying on mutual trust and shared objectives. Its inherent flexibility allowed it to evolve organically, accommodating regional differences and shifting trade practices.

With the advent of nation-states, Lex Mercatoria gradually ceded its dominance to codified laws, as governments sought to regulate commerce for consistent taxation, oversight, and economic reporting. While this shift aimed to ensure fairness and order, it often resulted in rigid statutes that disregarded the practical realities of trade. For merchants, this loss of autonomy led to challenges, such as the procedural complexities faced by Hindustan Coca Cola Beverages, where interpretation issues overshadowed substantive matters.

The enduring legacy of Lex Mercatoria is evident in modern legal systems, particularly in international trade law. Mechanisms like arbitration agreements and uniform codes reflect its spirit, prioritizing resolution over bureaucracy. In today's context, a balanced approach-allowing businesses procedural independence akin to Lex Mercatoria while ensuring accountability-could mitigate disputes like the GST controversy involving Coca Cola, emphasizing practicality and fairness over rigid technicalities.

And, of course, the "tarrific tragedy" of Trump's tariffs brings its own dramatic twist-like a wrecking ball colliding with a fragile glass masterpiece, fracturing trade relations. Meanwhile, governments, akin to meticulous chess players, attempt to navigate the chaos, only to find themselves serving up a side dish of economic turmoil.

Throughout history, the relationship between rulers and merchants has often been symbiotic. Kings were there to protect the merchants. They safeguarded trade routes, established fair markets, and resolved disputes, while merchants contributed to the economy through taxes, trade, and wealth creation.

The evolution from the self-regulated Lex Mercatoria to the complexities of modern taxation systems like GST reveals a recurring tension between adaptability and regulation. While merchants once resolved disputes efficiently through shared conventions, today's rigid frameworks often leave businesses entangled in procedural complexities.

The ongoing GST controversies underscore the need for laws that balance fairness with practicality. Just as the "Law Merchant" catered to the dynamic nature of commerce, contemporary tax systems should evolve to foster economic growth while ensuring accountability. The metamorphosis from Lex Mercatoria to GST showcases humanity's genius for making life complicated. In a world where even soda can't escape red tape, the Law Merchant would likely ask: "Where's the customer's copy of a streamlined tax system?"

And let's not forget our own history-where merchants came to trade, stayed on to rule, and eventually laid the groundwork for the maze of taxes we grapple with today.

In a world tangled in Trump, tariffs and taxes, even Lex Mercatoria might throw up its hands and declare, 'Now that's confusing-even by GST standards!