Tax Vista Your weekly tax recap Edn. 38 - 8 March 2021 By Dr. G. Gokul Kishore

Personal hearing is mandatory in all cases except when reply of noticee is accepted

Natural justice is the expression with highest instances of use in tax disputes mostly either because it is misused or not used at all. Section 73 and Section 74 of CGST Act dealing with issue of demand notice and adjudication of the same do not speak about offering any personal hearing to the noticee. These provisions only mandate the adjudicating authority to consider the representation, if any, made by the noticee. Such representation is typically the written reply usually submitted by the taxpayers. It is Section 75(4) which prescribes personal hearing if the taxpayer requests for the same or if an adverse order is proposed. The petitioner before Madras High Court was aggrieved that hearing was not granted before passing the impugned order. The department countered saying that only if the noticee requests, hearing is required but, in this case, there was no such request.

The High Court held that personal hearing shall be granted in all cases where a specific request is received or where adverse decision against the assessee is contemplated and it is only in cases where the explanation offered is accepted that there is no necessity for personal hearing and in all other cases, the department is required to extend the opportunity of personal hearing. The impugned order was set aside, date for personal hearing was fixed and the adjudicating authority was directed to consider the matter de novo [2021-VIL-181-MAD].

Rejection of appeal by endorsement - High Court intervenes

Execution of quasi-judicial functions is marked by ignorance and contempt in several cases. In a recent order, the Karnataka High Court has set aside the endorsement of Joint Commissioner (Appeals) rejecting taxpayer's appeal on the ground that the same is a non-speaking order made without application of mind and arbitrary. The High Court also notes that material placed by the taxpayer was not considered by such appellate authority. Such rejection of appeal was made on the premise that writ petition filed was pending.

The narration points to even more shocking facts. An order of detention, seizure and confiscation was made but later confiscation was withdrawn. However, appeal, apparently against tax demand, was rejected by the appellate authority by said endorsement. Numerous judgments on adjudication or appellate orders being non-speaking have been reported for decades but the present one stands out. Hardly anyone associated with tax laws would have heard of an order-in-appeal passed by way of endorsement. It is not clear as to what the endorsement was but it appears the appellate authority merely rejected by endorsing on the appeal itself. To save taxpayers from harassment, such officers should not be assigned quasi-judicial responsibilities [2021-VIL-170-KAR].

Bond and bank guarantee - High Court dismayed over ignorance of the officer

The application filed by the petitioner before High Court was for clarification that "bond" mentioned in the earlier order was not required to be accompanied by bank guarantee / security. By the said order, the Court had ordered release of goods on payment of part amount and for balance amount, execution of bond. It appears the department insisted on furnishing of bank guarantee also. The High Court was very disappointed at the ignorance of the GST officer. It said - "It is very sad to note that, the respondent No.2 being an officer of the GST Department has no idea as to what is a "bond" and what is a "bank guarantee". There is no good reason for the respondent No.2 to be wiser than what the Court has stated in para 5 of the order referred to above. We made ourselves very clear that the goods shall be released on deposit of an amount of Rs.18 Lakh and so far the balance amount of Rs.52 Lakh towards fine is concerned, the writ applicant shall execute a bond to the satisfaction of the respondent No.2. There is a fine distinction between the bond and bank guarantee. Our order in the main matter is dated 08.02.2021. Almost one month has passed, but the respondent No.2 has not given effect to our order only because of his misconception of law."

The High Court explained that the difference between a bank guarantee and a bond is that to obtain a bank guarantee, there is a requirement of collateral to satisfy the bank, while bonds do not need collateral to act as a surety. If adjudicating authorities are so ignorant, divesting them of the quasi-judicial powers is the only way to save the taxpayers [2021-VIL-180-GUJ].

System generated notice without mention of specific provision - High Court quashes

VIL has been reporting many orders where High Courts have been quashing action taken or proposed to be taken by the GST authorities for cancellation of registration. One of the major reasons is that the show cause notices are system-generated from the portal and therefore, there is no specific reason mentioned. They merely state the reason for proposed cancellation as "Non-compliance of any specified provisions in the GST Act or the Rules." Quashing the SCN, the Tripura High Court has held that granting hearing would be an empty formality when specific provision of the statute and the manner of violation have not been mentioned in the SCN and therefore, it was vague and imprecise. The SCN, as reproduced in the order, mentions suspension of registration also but the High Court has held that without resort to use of power to suspend, blocking of GST account is not correct as it would have the effect of preventing the taxpayer from doing business. It appears that access to portal was blocked because of suspension but such fact has not been brought before the Court. Suspension or cancellation of registration is theoretically considered as severe but, for the department, is has become a matter of routine [2021-VIL-157-TRI].

Pre-deposit by government owned defence factory - High Court grants waiver

The issue is not mentioned in the High Court order but the amounts involved as per the impugned order are staggering. The petitioner is a factory under Defence Ministry and it caters to transportation needs of armed forces. The High Court has observed that though appellate remedy is available, writ petition has been filed but considering the peculiar facts, it has directed the appellate authority to consider the appeal without insisting on pre-deposit. Ministry of Defence and Ministry of Finance can and should discuss mutually and sort any kind of tax issue instead of slapping notices and orders for astronomical sums and litigating before courts. While the Committee on Disputes approval was required for filing appeal before CESTAT in pre-GST regime, it appears that such system is required in the GST regime from the level of appellate authority in the department [2021-VIL-166-MP].

Provisional attachment not to be made in routine manner - CBIC issues guidelines

CBIC has issued guidelines on exercise of power of provisional attachment under Section 83 of CGST Act to emphasize that power of provisional attachment must not be exercised in a routine/mechanical manner and the Commissioner must exercise due diligence and the opinion formed should be recorded in the file. The guidelines require officers to ensure that such attachment does not hamper normal business activities of the taxable person and raw materials and inputs required for production or finished goods should not normally be attached.

The Gujarat High Court had requested the government to issue appropriate instructions or guidelines on exercise of power of provisional attachment under Section 83 of CGST Act [2021-VIL-34-GUJ]. In Tax Vista [18 January, 2021], it was specifically noted that invocation of such extreme powers should be restrained by CBIC through appropriate instructions. These guidelines are, it appears, in compliance with the High Court's directions.

Though the guidelines largely reiterate the statutory provisions, the tenor may have a little restraining effect on the authorities. A copy of such attachment should be provided to the taxpayer as early as possible. A few situations have been listed where the power can be exercised like supply of goods without invoice or issue of invoice without supply of goods, etc. More than one property may be attached if value of one property is not sufficient to cover the estimated amount of pending revenue and different properties of the taxpayer can be attached at different points of time provided conditions specified in Section 83 are fulfilled. Movable property should normally be attached only if the immovable property, available for attachment, is not sufficient to protect the interests of revenue. The guidelines indicate that movable property should be released if immovable property is offered. The present communication of CBIC notes the amendment proposed to Section 83 by Finance Bill, 2021 which will come into effect from a notified date and therefore, these guidelines shall stand modified according to the amended provisions when the amendment comes into force [CBIC Guidelines from File CBEC-20/16/05/2021-GST/359]

Sanitizer is not like Covaxin and not specific to Covid-19 - AAR rules out classification as medicament

In yet another advance ruling, hand sanitizer has been held as classifiable under Heading 3808 and liable to GST of 18%. The applicant was of the view that it would merit classification under Heading 3004 as medicament as it is manufactured under drug license and is used for killing germs. Prophylactic use of preventing spread of disease was cited by the applicant. However, the Authority for Advance Rulings (AAR) expressed the view that hand sanitizer cannot be said as having prophylactic use as it is not specific to Covid-19 infection and it cannot be compared to polio drops or covaxin which prevent polio or Covid-19. It noted that such sanitizer is not specific to any disease and therefore, cannot be classified under Heading 3004. This heading covers medicaments for therapeutic or prophylactic use.

According to the AAR, disinfectants are chemical agents designed to inactivate or destroy microorganisms and they kill more germs than sanitizers and Tariff Item 3808 94 00 being more specific to disinfectants, such sanitizers would be classifiable under this heading. Landmark judgments of Supreme Court on classification of products as medicaments or cosmetics have been distinguished in this ruling by holding that sanitizers are primarily used for care rather than cure of Covid-19 [2021-VIL-142-AAR].

The same decision has been rendered in another ruling also by the same AAR wherein the applicant's reliance on common parlance test of hand sanitizers being bought as drugs has been rejected on the ground that people buy sanitizer as alternative to soap for disinfecting purpose. Drug includes not only medicines but also substances for specific use and therefore, obtaining license under Drugs and Cosmetics Act, 1940 is in compliance of this statute and such factor is not relevant to determine classification for GST purpose. Even when Covid-19 pandemic becomes part of history, classification dispute will continue [2021-VIL-140-AAR].

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