Tax Vista Your weekly tax recap Edn. 28 - 28 December, 2020 By Dr. G. Gokul Kishore

New year wishes with amendments on ITC restriction and suspension of registration

Tax evasion is projected as if it never existed before. Tax administration also responds with nervousness as the amendments indicate. Last week, by Notification No. 94/2020-Central Tax dated 22-12-2020, CGST Rules have been amended. The most important change is insertion of new Rule 86B which seeks to restrict payment of tax by using credit ledger by capping the same to 99%. This means at least 1% of tax liability is required to be paid by cash. This is applicable to those whose value of taxable supplies (other than exempt and zero-rated supplies) exceeds Rs. 50 lakhs in a month. This is not applicable in certain other situations also.

Rule 9(1) has been amended to provide for issuance of GST registration certificate within 7 days from the date of submission of application. Such time-limit was 3 days before this amendment. Rule 21 has been amended to include few more grounds for cancellation of registration certificate (RC). If ITC is availed in violation of Section 16 or if there is mismatch between GSTR-1 and GSTR-3B or if the person violates Rule 86B, then RC can be cancelled. Rule 21A has been amended to remove the requirement to offer hearing before suspension of RC. This is how tax department respects principles of natural justice. New sub-rule (2A) has been inserted in Rule 21A to provide for suspension of RC in case of mismatch or anomalies in returns. Anomalies or mismatch in returns can be a ground to investigate and issue SCN but providing for precipitative action like suspension or cancellation of RC manifests over-reaction to suspected cases of tax evasion by tax administration.

Rule 36(4) is being amended from 1-1-2021 to reduce the percentage from 10% to 5% for availing ITC in respect of invoices which are not furnished in GSTR-1 by the seller. New sub-rule (5) has been inserted in Rule 59 whereby GSTR-1 will not be permitted to be filed if GSTR-3B has not been filed for 2 months / preceding period. This appears to be an intelligent move to tackle issues like filing of GSTR-1 regularly to satisfy recipients / customers even while filing of GSTR-3B is postponed till the time sufficient ITC is available or funds are in hand.

By Notification No. 92/2020-Central Tax dated 22-12-2020 (effective 1st January, 2021), certain provisions of Finance Act, 2020 (last year's Budget) relating to amendments in CGST Act have been notified as coming into force from 1-1-2021. Sub-section (4) of Section 16 has been amended to delink debit note from invoice for the purpose reckoning time-limit for availing Input Tax Credit (ITC). Section 29(1) (c) has been amended to enable those who have taken voluntary registration also to opt for cancellation of registration. In Section 30(1), proviso has been amended to empower officers to grant more time for revocation of cancellation of registration. Section 51 has been amended to remove the obligation of providing TDS certificate by deductors. It shall be issued in the form and manner as prescribed. Section 122 on penalties has been amended to provide for imposition of penalty on person retaining benefits in case of invoice being issued without supply of goods, goods supplied without issue of invoice, etc.

Provisional attachment of bank account not valid when other assets offered as security

Section 67 of CGST Act deals with inspection, search and seizure and Section 83 empowers the Commissioner to provisionally attach any property including bank account during the pendency of proceedings under various provisions including the one under Section 67. It is quite common these days for the tax authorities to attach provisionally bank account of the taxpayer whenever an investigation begins.

In a case involving classification of beverages / fruit-juice based drink, the department entertained the view that the taxpayer was misclassifying the same and paying lower rate of tax. Section 83 was invoked and bank accounts were attached. The High Court analysed the provision and noted that the impugned case was not one of suppression of taxable transaction or contravention of provisions to evade payment of tax. According to it, merely because proceeding is initiated under Section 67, recourse to drastic power under Section 83 cannot be an automatic consequence. The records were silent as to whether attempt was made to attach any property other than bank account.

In an observation which can well be considered a direction, the High Court said - "Being possessed of power is one thing and exercise of such power is altogether another thing. Because the Commissioner is conferred with the power of provisional attachment under Section 83 it would not ipso-facto mean that he can straight away proceed to provisionally attach any property including bank accounts of a taxable person merely on the ground of pendency of proceedings under Section 67."

Taking note of the counsel's averment that the petitioner had already offered land, building and machinery with value of Rs. 44 crore, the High Court held that provisional attachment of bank account was harsh, excessive and arbitrary. Stay of operation of such attachment order was granted [AJE India Pvt. Ltd. v. UOI - 2020-VIL-654-BOM].

Delay in constitution of GST Appellate Tribunal - High Court expresses displeasure

The case before High Court related to mistake in e-way bill wherein order was passed without any reason but the Court was annoyed over delay in constitution of GST Appellate Tribunal. It said - "We fail to understand that why the Tribunal has not been constituted till date although the CGST Act was enacted in the year 2017 and the afore-quoted Removal of Difficulties Order was issued on 03.12.2019. Years have passed but the situation has not changed so far. Prima facie, there is failure on the part of the Government to discharge its statutory function by not constituting the Tribunal and thus denying remedy to dealers. Consequently, they are approaching directly to the High Court under Article 226 of the Constitution of India." [D.R. Polymers Pvt. Ltd. v. State of UP - 2020-VIL-652-ALH].

Finance Minister as Chairman of GST Council has also been impleaded as a respondent in this case. Though Madras High Court struck down the provisions relating to composition of the Tribunal way back in September, 2019 [2019-VIL-466-MAD], the government opted for a temporary solution of extending the time-limit for filing appeals till it is constituted by way of ROD Order. An amendment to the relevant provisions to enable early constitution of the Tribunal is also elusive on the agenda of the GST Council. The outcome is conversion of writ court into an appellate court as parties cannot be left remediless, particularly against arbitrary and non-speaking orders.

Refund from cash ledger and mix-up with TDS provisions

For payment of tax, a taxpayer may use electronic cash ledger or electronic credit ledger. In the cash ledger, amounts may be kept in excess by the taxpayer and if there is no anticipated liability, then refund of the balance / excess amount is available as per Section 49(6) of CGST Act. Such balance is the amount remaining after payment of tax, interest, etc. For such refund of balance in cash ledger, Section 54 will be applicable. Proviso to Section 54(1) states that such refund can be claimed in the monthly return itself.

The petitioner before Kerala High Court was aggrieved over rejection of refund claim in respect of balance in electronic cash ledger. Substantial amount of supplies was made by the petitioner to PSUs and tax was being deducted at source by recipients (TDS). The said refund claim was rejected on the ground that there was no excess or erroneous deduction of tax at source apparently citing Section 51(8). The High Court said that the authority had misdirected himself and treated the refund claim as one filed under Section 51(8). The petition was allowed directing the authorities to grant refund after making provision for known and determined liabilities [Royale Edible Company v. The State Tax Officer - 2020-VIL-649-KER].

Refund of amount lying in cash ledger is not something new in GST. The tax authorities are aware of Section 11B of Central Excise Act, 1944 which provided for refund of unspent advance deposits lying in PLA. There is no material difference between such amount kept in PLA in Central Excise regime and the present cash ledger under GST except for the fact it is maintained in the electronic format. Taxpayers have to endure such capacity constraint in terms of understanding the provisions by the tax authorities and move the High Court to get their own money back.

Tender / bid document should contain correct HSN code

When supplies are made to Railways, the tender document places the responsibility of quoting correct classification (HSN Code) on the bidders. When there is lack of clarity on applicable GST rate on some of the items supplied to Railways, GST rate varies and the participant in the tendering process who quotes lower rate of GST generally emerges successful. Aggrieved over such process, the petitioner before Allahabad High Court argued that HSN code should be indicated for the procurement product as part of the tender document.

The High Court after highlighting the restraint required to be adopted in such cases which are essentially contractual disputes, held that if the process is flawed, then it can interfere. Holding the explanation of Railways as not satisfactory, the High Court held - "mentioning of HSN Code in the tender document itself shall resolve all disputes relating to fairness and transparency in the process of selection of bidder, by providing 'level playing field' to all bidders/tenderers in the true spirit of Article 19(1)(g) of the Constitution of India." It directed the Railways to obtain clarification from GST authorities, incorporate the applicable HSN code in the tender document as it impacts inter-se ranking of the bidders [Bharat Forge Ltd. v. Principal Chief Materials Manager - 2020-VIL-645-ALH].

The ambiguity arises partly from the fact that Chapter 86 dealing with railway goods has been provided with 5% GST rate whereas some of the items used by railways are classified under Chapter 84 or 85 attracting 18% GST. The solution lies in rationalizing the tariff entries by amending and unambiguously providing that all items supplied to railways will be classifiable under Chapter 86 only. It appears that one mightier Ministry (Railways) is not able to convince another mightier Ministry (Finance).

Power to block use of ITC not to be used to harass assessee

Rule 86A of CGST Rules is drastic in nature. It empowers the tax authorities to block use of input tax credit (ITC) ledger in suspected cases of fraud or evasion. In a recent case, Constitutional validity of Rule 86A was not challenged and therefore, the High Court confined itself to deal with justification for invoking Rule 86A pending inquiry relating to alleged fraudulent transactions. After discussing the landmark judgments on the issue, the High Court rejected the contention on availment of ITC being a vested right. Based on precedent rulings, it observed that the formation of opinion by the authority should reflect intense application of mind with reference to the materials available on record that it had become necessary to order blocking of the input tax credit pending the inquiry. It said - "In the absence of any cogent or credible material, if the subjective satisfaction is arrived at by the authority concerned for the purpose of blocking the ITC in exercise of power under Rule 86A of the Rules, then such action would definitely amount to malice in law."

On the question as to whether Rule 86A contemplates passing of a specific order with an obligation to communicate the same to the affected person, the Court said that it is silent on such issue and therefore, government should lay down appropriate guidelines to be followed while exercising such power. Holding that there was prima facie case for the department, the Court refused to interfere when the investigation is underway.

The High Court made a few observations on use of powers under Rule 86A - "The power conferred upon the authority under Rule 86A of the Rules for blocking the ITC could be termed as a very drastic and far-reaching power. Such power should be used sparingly and only on subjective weighty grounds and reasons". "The power under Rule 86A of the Rules should neither be used as a tool to harass the assessee nor should it be used in a manner which may have an irreversible detrimental effect on the business of the assessee." [S.S. Industries v. UOI - 2020-VIL-658-GUJ].

E-way bill applicability when consignments covered by multiple invoices

E-way bill is required if the value of the consignment transported is more than Rs. 50,000. If the consignor raises two invoices in the name of the same consignee for the same consignment and if the total value exceeds Rs. 50,000, then e-way bill is required. This is the ruling of Kerala High Court while confirming the Single Judge's order [2020-VIL-519-KER]. Consignment value has been defined in Rule 138 of CGST Rules and it refers to the value as determined under Section 15 of CGST Act. This means it is the transaction value as mentioned in the invoice. Therefore, the High Court has noted that consignment value has to be determined from the invoice and when same consignment is covered by multiple invoices, e-way bill should be generated as otherwise, the mandate will be defeated. The issue pertained to detention of vehicles. Having taken such view and since adjudication was under way, the High Court refused to interfere with the earlier order [Bon Cargos Pvt. Ltd. v. The Asst. Tax Officer - 2020-VIL-655-KER].

Input Tax Credit on sales promotion items - AAR rules

One of the most contentious issues on input tax credit (ITC) under GST pertains to sales promotion items. Companies use various items like advertisement material (hoardings, banners, danglers), carry bags, display items like racks, hangers and cupboards, uniform to sales staff, gifts like pens, diaries and calendars to promote their products and services. One such taxpayer opted for advance ruling seeking answer to the question of availability of ITC on such items used in own showroom, exclusive brand showrooms, at the place of distributors / dealers, franchisees and retailers and items given to customers. While all the items are used in the course or furtherance of business and therefore, should be eligible for ITC as per Section 16 of CGST Act, other provisions apparently create hurdles.

The Authority for Advance Rulings, Karnataka categorized such promotional items into two - non-distributable goods and distributable goods. The former relates to items delivered to distributors, franchisees and retailers and used in their premises even as the applicant retained ownership of such goods. The latter (distributable goods) comprised of those goods which are delivered free of cost to distributors, franchisees and retailers to be distributed to their employees and customers. The AAR notes that non-distributable goods are not transferred out of the books of account and they remain the assets of the applicant and they can be either returned to the applicant or disposed / destroyed after use. These goods are capitalized and depreciation is claimed and therefore, they should be treated as capital goods and not as inputs, as per the ruling. These non-distributable goods are used for the purpose of their business and at the time of writing off or loss or destruction, ITC claimed on such goods is required to be reversed. This means that ITC is eligible on such goods but if they are not returned to the applicant but are destroyed or written off, then reversal of ITC will arise.

Distributable goods are not retained in the books and they are transferred without consideration to distributors and retailers. The AAR holds that when such goods are given to franchisees, the same would be covered by Schedule-I of CGST Act since such franchisees would be treated as related persons and free supplies to them are taxable. Once tax is payable, ITC of tax paid on procurement of such items would be available. Such goods given to retailers and customers, who are not covered under "related person", would be treated as gifts and ITC is not available in this case [Page Industries Ltd. - 2020-VIL-332-AAR].

The issue is not so simple though the ruling has sought to adduce certain reasoning for holding ITC as available or otherwise. Whether franchisees are related persons of the taxpayer as per Section 15 of CGST Act is a question that requires deeper probe. Another issue is that of promotional materials given to retailers and customers as it is easier to cover them under Section 17(5)(h) as "gifts" but when there is a definite quid pro quo in terms of expectation of business, then such goods may not qualify as gifts. These and other related questions will have to wait for a few years before they reach higher judiciary.

Foreign company deputing engineers to Indian project site liable to GST

When a foreign company provides engineering consultancy to an Indian entity, there is always a doubt as to whether such company should take registration under GST law. The experts deputed from abroad visit the site, offer consultancy, stay in hotels and share space in client's project office. In a case of similar nature, the Odisha AAR has held that considering the contract period of 46 months indicating sufficient degree of permanence and consultancy provided during design and implementation stages of the project, the applicant can be said to maintain suitable structure in terms of human and technical resources at the site of the Indian entity and the same would be the fixed establishment. Such establishment will be the location of supplier of service and therefore, the foreign entity (Japanese company) will be liable to take registration and pay GST. The AAR did not accept the contention that the Indian service recipient will be liable under reverse charge [Tokyo Electric Power Co. - 2020-VIL-329-AAR].

(The author is an Advocate, Gokul & Subha Advocates, Chennai. The views expressed are personal)