Tax Vista Your weekly tax recap Edn. 35 - 15 February 2021 By Dr. G. Gokul Kishore

Pre-GST credit transitioned through GSTR-3B instead of TRAN-1 is valid

Transitional credit is now one of the most litigated issues since the introduction of GST. In a recent judgment, the Jammu & Kashmir High Court has held that such transitional credit availed through monthly return GSTR-3B instead of filing the prescribed form of TRAN-1 is valid. It held - "We are of the view that the petitioner cannot be deprived of the benefit of claiming the credit lying in its account on the stipulated date only on the basis of procedural or technical wrangles that one form TRAN-1 was not filled (sic) by the petitioner particularly when the petitioner has reflected the said credit in its return GSTR-3B."

The department had pointed out that there was no technical glitch in this case but the High Court notes that the department had not disputed entitlement to carrying forward such credit or the correctness of the credit amount. The High Court placed reliance on Adfert Technologies judgment [2019-VIL-537-P&H]. It directed the department to permit filing of TRAN-1 form either electronically or manually [2021-VIL-98-J&K].

Goods not cleared applying CAROTAR - HC directs release based on bond instead of BG

The new regime governing administration of FTAs / PTAs under the Customs Administration of Rules of Origin under Trade Agreement Rules, 2020 (CAROTAR) is being implemented by the Customs authorities with full force, as the recent High Court order reveals. Soyabean oil was imported from Bangladesh through Land Customs Station in Tripura and the Customs authorities warehoused the same and refused clearance. Mis-declaration was suspected as to country of origin and the petitioner-importer was directed to clear the goods on provisional assessment after furnishing bank guarantee for 100% of the duty amount. The petitioner argued that they had provided all information as per CAROTAR and value addition criteria has been met in the present case and there was no ground to direct provisional assessment and seek BG. The High Court observed that when verification under CAROTAR was ordered, the department was not in possession of any material and the petitioner was not informed of the fact of verification being undertaken under the new Country of Origin rules. The High Court directed submission of bond and ordered the authorities to release the goods and complete provisional assessment [2021-VIL-90-TRI-CU]

Parallel proceedings by Central and State GST Officers

GST has subsumed both specified Central and State taxes and therefore, taxpayers have been bifurcated among Central and State GST Administrations based on specific criteria. Conscious of possible overlap when both the tiers of government exercise their powers, Section 6(2)(b) of CGST Act states that if the State GST officer has initiated proceedings on a particular subject matter, CGST officer will not initiate proceedings on the same subject matter. Laws look pristine when they are in the statute book but at the field level, during implementation, the situation becomes painful for taxpayers. In a particular case, the petitioner pleaded before High Court that SGST officers have demanded interest for delayed payment of tax, passed order and appeal against such order has also been filed. The same issue for the same period has been taken up by CGST officers and the same was assailed by the petitioner. The High Court granted liberty to the petitioner to file reply to the show cause notice issued by CGST officer and objection as raised by the petitioner on bar on parallel proceedings shall be considered first by such officer [2021-VIL-78-MP].

This is not an isolated case. Instances of either officers of regular tax administration or intelligence machinery initiating parallel or simultaneous proceedings are reportedly on the rise. Added to such multiplicity of proceedings, DGGI officers of completely unrelated region have been issuing summons and investigating cases of taxpayers located in far-flung areas instead of requesting their counterparts where the taxpayer is located to conduct the investigation. Taxpayers are compelled to travel to such other States only because such revenue intelligence agencies have all-India jurisdiction. CBIC should issue appropriate instructions to avoid duplication or multiple proceedings being launched or conducted by different tiers of government or various agencies.

Search operations by GST Officers - CBIC issues instructions

Faced with flurry of petitions and adverse observations of High Courts, CBIC has issued ("reiterated") instructions in the nature of guidelines which "must" be followed during search proceedings initiated under Section 67 of CGST Act. Some of the important points emphasized are - the officer issuing search authorization should record valid and justifiable reasons in the file, premises cannot be searched based on search warrant issued for the premises of a different person, lady officer should be part of the team if residence is searched and videography of sensitive premises may be undertaken. A few oft-repeated directions like party should be allowed to take copies of documents, copy of the panchnama (mahazar) should be given to the party, search in the presence of independent witnesses who are respectable inhabitants of the locality, etc., are also part of this communique.

Entry into a business premises by an adversarial tax authority itself evokes lot of emotion and passion runs high in both the camps. The entire affair is sensitive with most of the cases witnessing allegations and counter-allegations, hospital admissions / FIRs and cross-FIRs, refusal to provide copies of both panchnama and documents citing sensitive nature of investigations and coercive recovery on the spot by the department but later claimed as voluntarily made by the party. The present instruction should have covered the entire gamut of issues instead of merely touching a few points relating to search [CBIC Instruction F. No. GST/INV/DGOV Reference/20-21 dated 2-2-2021].

System generated SCNs and non-speaking orders

When most of the processes is online, justice dispensation follows the template as fed into the system. In a recent case, as per the show cause notice, returns for six months were not filed and therefore, cancellation of registration was proposed. The taxpayer, it is stated, did not respond. However, the order, apparently system-generated, refers to consideration of reply filed by the taxpayer and therefore, registration was cancelled. The High Court notes that ingredients of a proper show cause notice were not present and cancellation of registration arising out of such proceeding does violate principles of natural justice. On such ground cancellation has been set aside.

The facts of this case appear to be intriguing. The taxpayer filed GSTR-1 return but did not file GSTR-3B and consequently failed to pay the tax on the ground of non-receipt of payment from buyers. The petitioner had also sought permission to pay the tax dues in installments. Non-receipt of consideration from buyers is not a ground for failure to pay tax on due dates as liability is not dependent on actual receipt of consideration or payment for the supplies made. No business will deliberately default in filing of returns and it appears that members of industry are facing difficult times [2021-VIL-89-JHR].

Registration - SOP on suspension and cancellation in cases of mismatch

The department arms itself with as many provisions as possible to take all kinds of measures against taxpayers whether based on suspicion or on prima facie evidence. Suspension and cancellation of registration has been the most used (or abused) provision in recent times. Not content with existing powers, Rule 21(2A) was inserted in CGST Rules to empower the department to immediately suspend registration with a notice to be issued subsequently proposing cancellation when there is a mismatch between GSTR-1 and GSTR-3B. As online administration is the order of the day, the necessary processes for using such powers have not yet been made in the GST portal. Therefore, CBIC has issued Circular No. 145/01/2021-GST dated 11-2-2021 in the form of SOP on implementing such provision. Available online forms like REG-17 (SCN for cancellation of registration) and REG-18 (reply to such notice) are required to be used till such time the separate functionality of GST REG-31 is made available.

Arrest and bail - Clubbing of supplies under GST

Clubbing of clearances used to be one of the important expressions in Central Excise regime in the context of availment of SSI exemption. Clubbing of supplies has arising in GST in a case involving arrest and bail. The petitioner argued that the four entities involved were distinct and separate while the department said that the petitioner controlled all the four. This became relevant as the department invoked Section 132 of CGST Act charging the petitioner with cognizable and non-bailable offence of fraudulent availment of input tax credit of more than Rs. 5 crore. To compute the threshold of Rs. 5 crore, clubbing became relevant. However, the High Court noted that two of the four firms were petitioner's firms and the other two were controlled by the petitioner as the investigations revealed. It dismissed the writ petition after observing that the modus operandi of creating fictitious entities to get around the rigours of law is not unknown [2021-VIL-85-BOM].

E-way bill errors - Unabated penalties

The clearing agent, by mistake, mentioned his name in the consignee column of e-way bill while transporting the imported machinery to client's place. Any mistake can be committed but not in e-way bill as per the department. Therefore, vehicle was detained and proceedings were initiated. IGST, though paid at the time of assessment of bill of entry, was demanded again which was paid along with equal amount as penalty to get the machinery released. The departmental appellate authority did not accept taxpayer's appeal. The High Court had to intervene by setting aside such orders and direct consideration the matter afresh in the light of petitioner's submission for imposing minor penalty as per the CBIC instructions in cases of clerical mistake. CBIC Circular No. 64/38/2018-GST dated 14-9-2018 on this issue requires reconsideration and issuance afresh even as Section 129 of CGST Act is being made more stringent as per Budget 2021 proposals [2021-VIL-86-MP].

Ice cream - High Court directs GST Council to reconsider decision to bar composition scheme

Ice cream is excluded from the benefit of composition levy / scheme under GST. The petitioner - an association of small-scale manufacturers of ice cream assailed such exclusion. It was argued that ice cream has been grouped along with pan masala and tobacco to bar composition benefit. The respondent - GST Council shared minutes of the relevant meeting. It appears that composition scheme was stated as having potential to cause huge revenue loss since milk, an exempted item, is a major constituent of ice cream. But the High Court observed that it appeared that there was no study conducted in respect of tax effect of extending such bar to similar goods and services. Being a policy decision, the Court refrained from interfering as such and instead, directed the GST Council to reconsider the exclusion of such small-scale manufacturers of ice cream from Section 10(1) of the CGST Act in the backdrop of similar goods having similar tax effect enjoying the composition benefit. The Finance Minister has reportedly stated that a possible rationalization of GST rates is likely to be discussed in the next meeting of the GST Council. One more item has been added to the agenda with the High Court order on this issue now [2021-VIL-96-DEL].

Electricity related services - HC quashes CBIC circular

Gujarat High Court had in Torrent Power [2019-VIL-18-GUJ] quashed relevant para of CBIC Circular No.34/8/2018-GST dated 1-3-2018 holding it as ultra vires Section 8 of CGST Act and Notification No. 12/2017-Central Tax (Rate). Exemption under the notification covers services of transmission and distribution of electricity. However, the circular said that services like application fee for releasing electricity connection, rental charges for the meter, testing of meters, labour charges for shifting of meter or service line and charges for duplicate bill would be liable to GST. The Gujarat HC had held that the services provided by distribution companies are in the nature of composite supply and the principal supply is transmission and distribution of electricity and such services being exempted, related services would also be exempt.

The above has been followed now by Rajasthan High Court also. According to it - "Attempt of chipping out some of the services, out of the complete package and treating them to be taxable is not only arbitrary and unreasonable but such exercise is also violative of provisions of Section 8 of the CGST Act." According to the High Court, there was no need for issuing the circular since there was no ambiguity or doubt. It has been stated by the department that SLP against Gujarat HC order is pending in Supreme Court. The present order will also get tagged. Instead of making discoms fight individual battles in various High Courts, the GST Council can intervene and resolve this issue by exempting the related services unequivocally [2021-VIL-95-RAJ].

GST Appellate Tribunal in dispute

GST Appellate Tribunal is to function as dispute settlement body under CGST Act. But disputes surrounding constitution of the GSTAT itself have been raised in multiple litigations. In Uttar Pradesh, the battle to locate the State Bench in Allahabad (Pragyaraj) appears to have succeeded over Lucknow as per the recent order of High Court. The GST Council had revised its decision a few times on locating such State Bench though there appears to be no major dispute with Area Benches. The High Court has quashed the proposal of UP government revising its earlier stand on such location of State Bench and also quashed agenda item of GST Council in the subsequent meeting whereby Lucknow was to be the seat of State Bench as against Allahabad earlier. The High Court has directed the GST Council to forward the earlier recommendation and the Central Government to notify State Bench in Allahabad along with four Area Benches in other cities. It has also said that the government should ensure that the GSTAT is functional from 1-4-2021 (as far as possible). The issue of composition is yet to be resolved and it appears that taxpayers may have to wait longer before they are able to file appeals before GSTAT [2021-VIL-88-ALH].

Appeal against best judgment assessment or recovery notice - High Court rejects petition

Returns were not filed and therefore, best judgment assessment as per Section 62 of CGST Act was undertaken. The assessment order is deemed as withdrawn if returns are filed within 30 days of service of such order but in the case before the High Court, returns were not filed. The department initiated recovery action. The appeals filed by the taxpayer were rejected by departmental appellate authority as hit by time-bar. The petitioner argued that assessment orders were not appealable orders but the summary order in DRC-07 is the appealable one. The High Court did not agree. It held that the appeals were filed against the best judgment assessment only and therefore, it cannot be considered as appeals against recovery notice. The appeals having been filed beyond the condonable period were held as rightly rejected [2021-VIL-83-KER].

Manufacture v. job work - Litigation is brewing

Both manufacture and job work are typically excise concepts with the former enriched by voluminous jurisprudence. GST law has also defined both. Job work has been defined since the same has been treated as supply of service. The multiple entries relating to job work services in Notification No. 11/2017-Central Tax (Rate) along with use of the words "manufacturing services on physical inputs (goods) owned by others" have been laying the foundation for a major litigation. Because the GST rate is 12% in respect of specified job work activities and 18% in the case of others, the issue is getting hotter.

The applicant is engaged in fabrication of oil tank (tank used underground in petrol pumps) for a major oil PSU. The PSU provides steel sheet free of cost to the applicant. Certain other materials are sourced by the job worker and the finished tank is supplied to the PSU. The applicant has been treating the transaction as manufacture and therefore, supply of goods, paying GST of 18% after classifying the same under HSN 7309. However, the PSU citing the amendments to job-work related entries, advised them to adopt 12% rate on the ground that the transaction would be supply of service. The applicant was before Authority for Advance Rulings.

Though certain factual inconsistences in submission are discernible, it appears that by weight and value, steel sheets are predominant. But because of factual issues, the AAR has held that the weight and volume of materials and components used by them on the steel sheets provided on FOC basis are substantial and therefore, the transaction would be supply of goods attracting 18% GST under HSN 7309. For not being covered under job-work, the AAR states that steel plates and tanks are distinct commodities and the activity is one of manufacture and the legislative intention was not to cover treatment or process resulting in distinct commodity under job-work.

Generally, pre-GST judgments favourable to taxpayers are held as not applicable in most of the advance rulings. In this case, excise case law holding such tanks as liable to excise duty has also been relied on to support the conclusion arrived at. The landmark ruling on this issue viz., Prestige Engineering [1994-VIL-03-SC-CE] has been cited by the applicant but has not been discussed by the AAR. This issue is not as simple as it has been made out in the ruling. It will require an authoritative pronouncement from the Supreme Court for finality, subject to retrospective amendment not being made to provisions, if the judgment is not in favour of the department [2021-VIL-135-AAR].

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