Tax Vista Your weekly tax recap Edn. 40 - 22 March 2021 By Dr. G. Gokul Kishore

Transitional credit - TDS on works contract under VAT eligible for transition to GST

Tax deducted at source (TDS) as applicable to works contract under Section 13 of Tamil Nadu VAT Act would be eligible for transition to GST as input tax credit as per Section 140 of TNGST Act. The Madras High Court has held so after extensively discussing the nature of TDS as the department had argued that it was not a "tax". According to the Court, TDS, whether collected under the nomenclature of "amount" or "deposit" or "tax", is collected under the authority of law. After taking note of the relevant provisions including that on compounding, it has been held that TDS is only a tax and the difference in nomenclature is irrelevant in deciding this issue. It further held that any deduction made towards anticipated tax liability would assume the character of tax and will not change or fluctuate depending on whether it is held as credit or whether it is an adjustment against tax liability.

The department had also contended that Section 140 of the TNGST Act (CGST Act) only provides for transition of input tax credit and that TDS cannot be covered under ITC. The High Court held - "The purpose of such deduction is to facilitate advance payment of tax. This is clear from the fact that whatever is deducted is immediately credited to the account of deductee and is automatically reflected as tax credit." In so far as eligibility to transition is concerned, the Court said that since the amount deducted has been captured in the returns of turnover filed under the erstwhile TNVAT regime, such amounts would be eligible for transition under Section 140 of TNGST Act.

The department may further litigate this issue and may also consider bringing retrospective amendment if it considers the legislative intention is to deny transition of works contract TDS. If such step is not taken, then taxpayers should consider themselves fortunate but history shows otherwise [2021-VIL-208-MAD].

Investigation not completed in 60 days - Condition imposed for bail, not sustainable

Section 167(2) of Code of Criminal Procedure, 1973 (Cr. P.C.) provides for authorization by a Magistrate for detention of a person for maximum period of 60 days where the investigation relates to any offence other than those punishable with death and if the investigation is not completed within such period, the person concerned shall be released on bail if he furnishes bail. Bail becomes an indefeasible right if investigation is not completed within 60 days. Applying such provision and Supreme Court's ruling on this subject, the Gujarat High Court has held that the accused (in a GST case) is entitled to default bail once he applies and shows his willingness to furnish bail and if any other condition is imposed, the same is to be treated as beyond the jurisdiction of the Court. It set aside the condition of deposit of 50% of tax amount as imposed in the lower court's order.

While Section 69 of CGST Act makes provisions of Cr. P.C. applicable in respect of bail, it is not clear whether Section 167(2) of Cr. P.C. prescribing time-limit for completion of investigation by police officers can be applied to investigations under GST law. This will also mean that complaint by the department based on Commissioner's sanction for prosecution shall be filed within 60 days from the date of arrest, as a delay in this process will result in the accused being enlarged on bail [2021-VIL-218-GUJ].

Refund granted based on judgment declared per incuriam - Recovery not sustainable

Allowing a batch of petitions, the Gauhati High Court has, on 12-3-2021, has quashed show cause notices issued seeking recovery of refund of Education Cess and Secondary and Higher Education Cess granted earlier based on Supreme Court judgment in SRD Nutrients [2017-VIL-43-SC-CE] which has been subsequently held as per incuriam in Unicorn Industries judgment [2019-VIL-42-SC-CE] and therefore, the amounts were "erroneously refunded" and liable to be recovered under Section 11A of Central Excise Act, 1944. The issue involved in these judgments was admissibility of exemption in respect of such cesses when excise duty was exempt. The High Court held that SCNs have been issued without any jurisdiction and by wrong interpretation of the powers under Section 11A of Central Excise Act. The High Court held that a change of law subsequently would not make an action taken earlier by quasi-judicial authority in terms of law as it stood then, to be held to be erroneous so as to enable the departmental officer to invoke powers under Section 11A.

According to the Court - "the concerned departmental Officer exercising power under Section 11A of the Central Excise Act must arrive at finding that the earlier order/refunds as have been granted in the present proceedings, were contrary to the law and therefore, erroneous and that the same are required to be reopened or recovered by invoking the powers under Section 11A. The refunds were granted by the Department in terms of the Judgment in "M/S SRD Nutrients Private Limited" (supra). As discussed above, the Department accepted the Judgment of the Apex Court in "M/S SRD Nutrients Private Limited (supra)" and sanctioned the refunds. As such, the contention of the Department that the refunds granted earlier were erroneous and could be recovered under Section 11A cannot be accepted. The grounds urged by the Department supporting impugned show cause notices do not satisfy the requirements of Section 11A(4)."

The High Court order is quite eloquent wherein it has been further observed that a subsequent change in law arrived at by way of the separate judicial proceeding, wherein the earlier law laid down has been held to be not a good law or that the earlier law will cease to have precedential value, will not reverse the position of the party vis-a-vis their rights which were declared and concluded by way of an earlier judicial proceedings. The fact that appeal was not filed against orders granting refund was taken note of to emphasize that order passed by a quasi-judicial authority cannot be co-laterally revoked or reviewed. As the department sanctioned the refunds in terms of orders passed, the same having attained finality cannot be reopened except by way of the department taking recourse to available judicial remedies.

Such orders serve dual purpose - they enrich jurisprudence and also provide relief to taxpayers who had set up the units in remote areas and had to suffer because of poor drafting of the notifications. [2021-VIL-217-GAU-CE].

Rejection of refund claim without providing opportunity of hearing, not sustainable

The heading may appear to be a routine one as there is nothing new in department rejecting refund claims or passing orders without hearing the taxpayer. However, what is different in this case is that the refund claim was initially held as time-barred as it was filed beyond two years but later when the taxpayer relied on notifications extending the time-limit due to Covid-19, the same was accepted by the department. The claim was subsequently rejected apparently on merits but without hearing the taxpayer.

The J&K High Court held that despite the mandate of Rule 92(3) of CGST Rules on providing hearing before rejection of refund claim and the requirement to comply with principles of natural justice, no notice was given to the petitioner to explain as to why his claim may not be rejected on merits. It held that the unilateral decision taken and conveying such rejection of the claim, were not sustainable. The counter of the department on existence of alternative remedy of appeal was rejected in view of violation of natural justice. The department was directed to consider the matter afresh.

In most cases, refund claims are generally examined for rejection either on limitation or on the ground of unjust enrichment. Even if the taxpayer succeeds in getting an order of refund, the department is quick to issue another SCN proposing to reject citing unjust enrichment. The third arsenal is rejection on merits. After all this, if the taxpayer comes out victorious, at least in a few cases, the matter is litigated by way of appeal by the department. There is an element of truth in the common belief that what goes into government coffers cannot be taken out. [2021-VIL-216-J&K].

Refund of IGST - Exporter waiting since July 2017

The Gujarat High Court has issued directions to the department to sanction refund of IGST paid on exports pertaining to July, 2017 where due to technical error in the portal, the same was not granted. The case pertains to the category of mismatch in invoice details between GSTR-1 in GST portal and the data in ICEGATE and the petitioner was allowed to rectify in respect of certain invoices while the same was not allowed in certain other invoices. The government counsel submitted that the petitioner may furnish copies of GSTR-1, GSTR-3B and along with CA's certificate and after intra-departmental verification between Customs and GST authorities, the same will be processed for refund. This order is highlighted in this column for the fact that for the exports made during the first of month of implementation of GST - July 2017 - the exporter had to run from pillar to post and file writ petition in 2019 and after Covid-19 issues, relief has been granted by High Court now. If an exporter has to wait for nearly 4 years to obtain refund on exports, then the pre-GST regime appears to be far better [2021-VIL-219-GUJ]

Smart city projects - GST @ 12% applicable

The applicant before the Authority for Advance Rulings (AAR) is a service provider engaged by the entity created for implementation of smart city project. The entity is a special purpose vehicle formed as a company with equal participation by State Government and the local municipal body. The applicant as per the contract is tasked with various works which are in the nature of improving the infrastructure and landscaping of the city. The AAR held that the SPV is covered under government entity as used in Notification No. 11/2017-Central Tax (Rate). As the works involved are mostly in relation to immovable property, taking into account the definition in CGST Act, the AAR has held that the services supplied will be covered under composite supply of works contract. The activities being undertaken for non-business and non-commercial purpose, the conditions in the relevant entry in the notification are satisfied and GST applicable on such supply of services would be 12%. This ruling should be helpful to other such contractors / service providers engaged in making urban landscapes useful, beautiful and more livable [2021-VIL-175-AAR].

ITC on CSR activities available

In an important ruling delivered last year (but made available in public domain now by VIL), the Uttar Pradesh AAR has held that expenses incurred towards Corporate Social Responsibility (CSR) obligations under the Companies Act would be available as input tax credit. The AAR placed reliance on CESTAT decision in Essel Propack [2018-VIL-621-CESTAT-MUM-ST] and Karnataka High Court in Millipore India [2011-VIL-66-KAR-ST] wherein mandatory nature of CSR activities and being related to business were held to be factors to hold that Cenvat credit (under the erstwhile regime) was admissible. The ruling holds that the applicant is compulsorily required to undertake CSR activities in order to run its business and therefore, it becomes an essential part of his business and they are to be treated as incurred in the course of business.

The applicant had also sought ruling as to whether free supply of furniture / fittings such as tables, chairs, etc., and electrical goods to be used in school under CSR activity would be considered as gift and barred from credit. To this, the AAR held that while gift is voluntary and occasional, those provided as part of CSR is obligatory and regular in nature and therefore, ITC is not restricted under Section 17(5) of CGST Act.

On the question of entitlement to ITC on goods and services used for construction of school building which is not capitalized in the books of accounts, the AAR held that the same would be restricted under Section 17 (5) (c) / 17 (5) (d) of CGST Act to the extent of capitalization. This means, if the expenses are not capitalized, then credit would be available. As this ruling is by AAR, further course of action taken by the department may tell a different story. In particular, the view adopted by the AAR on free supply of furniture may not be considered as legally correct by the department [2021-VIL-168-AAR].

Recovery from employees towards lease of vehicle parking space - GST not payable

The Uttar Pradesh Appellate Authority for Advance Rulings (AAAR) has held that when the employer procures additional car parking space from the lessor of office space and provides the same to employees for which part amount is recovered from salary, GST would be liable to be paid but not actually payable as the employer would be treated as acting in the capacity of pure agent as per Rule 33 of CGST Rules. The value will be Nil in such case. It has been held that the activity will be covered as supply of service of easement facility under Schedule-II of CGST Act under the entry "any lease, tenancy, easement, licence to occupy land is a supply of services" provided under "Land and building". The conditions provided for being considered as pure agent have been held to be satisfied in this case.

Reliance was placed on advance ruling in DRS Marine Services Pvt. Ltd. [2018-VIL-320-AAR] wherein it was held that when the entire amount received as salary was disbursed to the crew and no amount was used by the applicant for his own interest, then applicant was to be treated as pure agent. It accepted the contention of the appellant in the present case that entire amount collected from their employees towards parking charges is transferred to the lessor.

Amidst overwhelming majority of rulings not in favour of taxpayers, such ruling from UP AAAR stands out providing some relief. As the ruling is from the appellate authority against which no appeal has been provided, at least the taxpayers in U.P. can breathe easy on such issues [2021-VIL-16-AAAR]

Extension of period for SCN to be informed before expiry of 6 months of seizure

Section 110(2) of Customs Act, 1962 provides for return of seized goods to the person concerned if notice is not issued within six months. The Principal Commissioner / Commissioner of Customs is empowered to extend such time for a further period upto six months but the same should be informed to the person concerned before expiry of the first six months period.

As per the facts in a recent judgment of Madras High Court, goods were seized on the suspicion of mis-declaration of country of origin. The goods were dates and the country of origin declared was Oman which attracted 20% BCD. The goods were suspected to have originated in Pakistan attracting 200% duty. The department extended the period for issuance of SCN after expiry of six months from the date of seizure and the same was communicated to the importer after issue of such extension order. The High Court held the same as not sustainable and directed release of the goods. It held that reasons as well as intimation should be communicated to the importer before expiry of the original period of six months and the fact of extension should be known to the importer before expiry of such period.

The department relied on the ordinance brought last year due to Covid-19 extending time-limit for various actions and compliances. But the High Court rejected such reliance on the ground that the extension intimation / order was received by the importer beyond the relaxation in date granted under this ordinance [2021-VIL-220-MAD-CU]

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