Tax Vista Your weekly tax recap Edn. 45 - 26 April 2021 By Dr. G. Gokul Kishore

Hearing mandatory before provisional attachment under GST - Supreme Court

In the first major judgment on provisional attachment under GST law, the Supreme Court has held that the power to order provisional attachment of property including bank account under Section 83 of relevant State GST Act / CGST Act is draconian in nature and the conditions prescribed for valid exercise of such power must be strictly fulfilled. It set aside the order of provisional attachment on the ground of non-application of mind by the officer concerned and therefore, the same is illegal. After dissecting Section 83 in great detail, the Apex Court held that formation of opinion by the Commissioner is necessary to exercise the power of provisional attachment to protect government revenue and such opinion must be based on tangible material that the assessee is likely to defeat the demand. According to it, the provision implies that interest of government revenue cannot be protected without ordering provisional attachment. In this case, hearing was not provided before ordering provisional attachment. Highlighting the mandate of Rule 159(5) of relevant State GST Rules / CGST Rules, the Court said that in addition filing an objection, the person whose property is attached is entitled to an opportunity of being heard. It rejected the argument that the only safeguard under sub-rule (5) is to submit an objection without an opportunity of a personal hearing and held that there is no discretion in offering hearing.

The Court held that the Commissioner is duty bound to pass reasoned order dealing with objections. In this case, adjudication order was also passed under Section 74 and therefore, the Court categorically held that provisional attachment must come to an end in such a situation and in particular, when the taxpayer has filed appeal against such adjudication order on payment of pre-deposit whereby balance amounts get stayed as per the provisions. The Himachal Pradesh High Court had refused to entertain the writ petition filed by the taxpayer against the order of provisional attachment and the Supreme Court held that the High Court erred in dismissing the petition on the ground of maintainability. In this case, the order was passed by Joint Commissioner as delegate of Commissioner and, it appears, the taxpayer had argued that such delegation itself is impermissible, but the Apex Court has not given any finding on the same. On use of the power, the Court said - "Necessity postulates that the interest of the revenue can be protected only by a provisional attachment without which the interest of the revenue would stand defeated. Necessity in other words postulates a more stringent requirement than a mere expediency...The exercise of unguided discretion cannot be permissible because it will leave citizens and their legitimate business activities to the peril of arbitrary power. Each of these ingredients must be strictly applied before a provisional attachment on the property of an assesses can be levied. The Commissioner must be alive to the fact that such provisions are not intended to authorize Commissioners to make pre-emptive strikes on the property of the assessee, merely because property is available for being attached. There must be a valid formation of the opinion that a provisional attachment is necessary for the purpose of protecting the interest of the government revenue." [2021-VIL-50-SC].

The provision on provisional attachment may be constitutionally valid but per se the concept is abhorrent and such provisions should ideally have no place in a taxpayer friendly regime of GST. Attachment can only be final as a mode of recovery of confirmed tax dues. Seeking to attach property during pendency of proceedings can be, if at all, justified when the proceeds are suspected as ill-gotten or as a result of subterfuge of fraudulent design of larger scale but for every non-payment of tax due to difference in interpretation or due to any such reason, the State has no business to encumber property of the taxpayer. The law provides for show cause notice and adjudication and before crystallization of any kind of liability, placing fetters on bank accounts cannot be a law in democratic polity. If a draconian provision is there in the statute-book, there will always be the urge and temptation to use the same at the slightest opportunity. The solution is to delete such provisions but that may be utopian.

Refund of ITC when drawback is also claimed

In a cryptic order, Madras High Court has held that refund of input tax credit is admissible even when drawback (higher rate) has been claimed. It appears, the petitioner had claimed higher rate of drawback on exports (during the initial period of GST) and requested for setting off the drawback against the refund claimed when such ITC refund was more as compared to drawback availed. The department argued that as per CBIC Circular No.37/2018-Customs dated 9-10-2018, when higher rate of drawback is claimed, refund / ITC claim is treated as relinquished by the exporter. The High Court held that circular cannot stand in the way of benefit under available under the statute and to the extent the circular is contrary to Section 54(3) of CGST Act, the same is bad in law. Reliance was placed on certain other judgments in favour of taxpayers [2021-VIL-315-MAD].

The circular mentioned above was issued in the context of exporters claiming higher rate of drawback and also refund of IGST as the same is expressly barred under proviso to Section 54(3). The statute does not allow both the benefits. The circular reiterated the statutory provision and it did not prohibit something which was otherwise allowed under the law. In this case, the petitioner had claimed higher drawback initially and later realizing that ITC refund worked out to be more beneficial, wanted the authority to permit adjustment and sanction the balance amount as refund. Such relief could not have been provided by departmental authorities and only writ court can provide such discretionary relief. The problem lies in not providing the mechanism for paying the differential drawback amount when higher amount is claimed and also drafting the proviso ambiguously.

Recovery action against buyer without involving supplier not sustainable

Proceedings conducted by tax authorities are, sometimes, strange. When the seller has collected tax amount from his buyer but not remitted such tax to the government, the department opted to recover the tax amount from the buyer. The High Court rejected such approach. It held that inquiry should have been conducted against the seller and recovery action should have been initiated against the seller. Due to such "fundamental flaws" the order demanding tax from buyer was set aside. The department was directed to conduct inquiry against the seller besides initiating recovery action against them. In this case, the High Court noted the provisions of Section 16 of CGST Act and in particular, clause (c) of sub-section (2) which mandates that tax charged on the supply should have been actually paid to the government. As per the Court if tax has not reached the kitty of the government, then the liability may have to be borne by one party, either the seller or the buyer but since seller was not proceeded against, the Court ordered as above [2021-VIL-308-MAD].

Generally, government machinery is considered as lax in pursuing defaulters. But, in this case, apparently due to misguided enthusiasm, leaving out the actual defaulter, the buyer has been taken to task. If the case of the department is that the buyer had availed credit without receipt of goods, then the inquiry and proceedings should have been comprehensive covering all the parties. Training in both substantive and procedural aspects of law is lacking at the cutting edge level of tax administration compelling taxpayers to enter into avoidable litigation using scarce resources.

Change in nature of supply and type of tax - High Court orders amendment to invoices from July, 2017 onwards

The petitioner was aggrieved over treatment of services supplied by port trust as intra-State. It appears that during the process of seeking clarification, filing writ petition, etc., CBIC clarified by Circular dated 28-6-2019 that the nature of various services provided by port trust is cargo handling and not related to immovable property and therefore, place of supply will be the location of the recipient (default rule). Now, Odisha High Court has directed the port trust to amend the invoices issued from July, 2017 to revise the levy as IGST instead of CGST and SGST as the same would be inter-State supply in the present case. The High Court has also ordered the GST Commissionerate to allow such correction manually and if required, GST portal shall be opened to facilitate the same [2021-VIL-307-ORI].

The order does not mention Section 77 of CGST Act which governs refund of wrong type of tax and non-charging of interest on right type of tax payable. Apparently, this provision does not provide for any time-limit which means such amendment can be made anytime. Issuance of credit note accompanied by fresh invoice may be the solution but such situation is not expressly covered under Section 31 of CGST Act.

Monetary limit for adjudication - Has it been revised?

Column writers are expected to suggest solution and avoid seeking answers. However, a recent order passed by Tripura High Court involves certain facts which compels us to raise this question. Order has been passed by Superintendent without considering the reply submitted by the taxpayer regarding demand of GST with interest and penalty and the High Court has ordered the Superintendent to consider the matter afresh. But the tax amount indicated is around Rs. 54 lakhs. As per the present instructions fixing monetary limits on powers to issue SCN and to adjudicate the same, Superintendents can exercise such power where tax involved is upto Rs. 10 lakhs. It is not clear whether the limits have been revised or such instructions were not brought to the knowledge of the authorities [2021-VIL-304-TRI].

Refund claim by importer pending for 7 years - HC provides relief

Customs duty was paid in advance before import of goods from China and when the goods arrived, it turned out to be different and of poor quality. The importer sought to relinquish title to the goods and applied for refund of duty paid. The refund claim was rejected as premature on the ground that the department proposed to book an offence case against the importer. Subsequently, after remand by Commissioner (Appeals), the Customs authorities initiated action to confiscate the goods and impose penalty. The High Court held that the petitioner appeared to be a victim of fraud committed by the exporter and they were entitled to abandon the goods. Considering the value of imported goods, the High Court ordered refund of balance amount and held that the Customs authorities may pass order on confiscation and adjust fine imposed, if any from the sale proceeds based on auction. Due to delay of almost 7 years, the Court ordered payment of interest to the petitioner [2021-VIL-309-MAD-CU].

It is really pathetic that the importer had to face two rounds of litigation to get back around Rs. 6 lakhs. Rejection of request for relinquishment of title to goods even when no offence case has been booked but only contemplated is clearly a case of misuse of powers. On relinquishment, CBIC should come out with fresh circular.

Input Tax Credit on sales promotion items not available

In Tax Vista dated 28 December, 2020, the ruling by Authority for Advance Rulings (AAR), Karnataka on the issue of input tax credit (ITC) on sales promotion items like hoardings, banners, danglers, carry bags, display items like racks, hangers and cupboards, uniform to sales staff, gifts like pens, diaries and calendars, was discussed. The AAR had categorized them into two into two - non-distributable goods and distributable goods and held that non-distributable items which were not transferred out of the books of account and ownership remained with the taxpayer are used for the purpose of their business and at the time of writing off or loss or destruction, ITC claimed on such goods would require reversal. Distributable goods being transferred without consideration when given to franchisees, 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. As tax is payable, ITC of tax paid on procurement of such items would be available. These goods when given to retailers and customers who are not "related persons", would be considered as gifts and ITC would not be available.

The ruling was apparently complicated as it seemed to hold ITC is available in certain situation but seeks to put the onerous condition of payment of tax when they are sent in distribution chain. Appeal was filed before Appellate Authority (AAAR), Karnataka arguing that there were factual errors in the ruling. The AAAR has held that the promotional items (termed as non-distributable goods by AAR) are used in the course or furtherance of business but the same would be covered under "non-taxable supply". It disagreed with AAR and held that these goods are not capital goods but inputs and the franchisees and distributors are not related persons but independent entities and therefore, there is no supply made when they are transferred to their premises. In respect of items given as gifts, the AAAR holds that they are supplied at will, free of cost and the same is also a non-taxable supply and as per Section 17(5)(h), ITC on such gifts would not be available [2021-VIL-21-AAAR].

If one thought that rulings by AAR are not clear when it comes to both conclusion and the reasoning adopted, the appellate ruling in this case adds a new twist by categorizing movement of promotional materials by the appellant as non-taxable supply. Even after holding that the items are used in the course or furtherance of business, the ruling gets tangential to arrive at the department's stand of no ITC to such items. Legal validity will be put to test once Appellate Tribunal starts functioning and Larger Bench is constituted if there is a divergent view among the Benches. The issue will attain finality only when Supreme Court pronounces on such issue but there is no guarantee of restraint on retrospective amendment if the judgment is adverse.

Reimbursement of credit card expenses by overseas company - Indian entity liable to GST

The appellant before AAAR, Tamil Nadu provides software development service to holding company in USA. Cost plus margin is recovered for such services supplied. For business use of credit card by the employees of appellant, the overseas entity settles the payment and then gets itself reimbursed from the appellant. Earlier, the AAR had held that the appellant would be liable to pay GST @ 18% under reverse charge mechanism. Aggrieved over this ruling, appeal was filed. The AAAR has held that such reimbursement represents part consideration for services supplied by the appellant because, such card payments are subsequently included when the overseas entity is invoiced by the appellant for the services supplied. The transaction has been held to be not an independent one but made for operational convenience and accounting purpose. Based on this rationale, the AAAR has held that time of supply would be the time of reimbursement triggering the liability to pay tax. The applicable rate would be same as charges for software development services [2021-VIL-22-AAAR].

The AAAR's ruling may appear strange but it is only an outcome of the not-so-efficient structuring of the transaction between the Indian entity and overseas holding company. If the conditions are satisfied, software development services provided in such cases would be export of service subject to the Indian entity not getting entangled in the controversy of intermediary. If the entire transaction is treated as export, then the complication created by reimbursement could have been avoided.

Right of access to pathway is license and liable to GST as toleration of act

The appellant is metro rail company and during land acquisition process, right to pathway was provided to the landowner whose land was acquired. Such right was provided by the metro rail company against a consideration from the landowner. The AAR had held that such activity would be covered under toleration of an act and liable to GST @ 18%.

The appellant argued before the AAAR, Tamil Nadu that the right to pathway is an easement of the landowner, appurtenant to the residential dwelling and it cannot be categorized with lease, tenancy, etc. which are treated as supply of services as per Schedule-II of CGST Act. Further, easement is ancillary to sale of land in the composite supply of land and therefore the present transaction would not be liable to GST.

The AAAR did not agree and upheld the earlier ruling. Ruling out coverage of the transaction under easement, the appellate ruling holds - "In respect of right-to-way as easement, it is the right of the landowner, held with him on account of sale of the land appurtenant to the pathway and such right flows automatically on sale. It is the right earned by the landowner and there appears to be no necessity for grant of such right vide an agreement." In this case there was an MOU granting shared access to pathway and the same cannot be treated as 'easement' as pe the ruling. After extracting definition of lease from Transfer of Property Act, 1882, the ruling holds that there is no transfer of right to enjoy the property freely as the pathway is used both by the landowner and by the appellant and therefore, the activity is not a lease. Based on definition of 'license' as provided in Indian Easement Act, 1882, the AAAR has held that in the absence of the right granted to landowner, usage of pathway by the landowner would not be legal and hence, it would be covered under 'license'.

Repelling the argument that the pathway is part of residential building and cannot be separately taxed, the AAAR has adopted the position that the land has been acquired for business purpose and therefore, it has become non-residential property. The transaction cannot be termed as composite supply as there are two different supplies involved - first involving supply of land by landowner to appellant and another where appellant grants right to pathway to landowner [2021-VIL-26-AAAR].

While the ruling has laboured to term the transaction as one of license and not easement and therefore, sought to uphold the earlier ruling on classifying the same as toleration of an act or situation, Schedule-II covers any lease, tenancy, easement, license to occupy land as supply of service. The legislative intention, it appears, is to tax the above transfer or grant of rights in immovable property. It may be alien to imagine that easement right is getting taxed under GST as it is traditionally understood as part and parcel of land and when immovable property is conveyed by way of sale, easement rights always get transferred along. The inextricable link that such rights have with land may lead to the argument that a right in land is land per se but considering the express language used in the statute, keeping such transactions out of GST may be difficult.

ITC on storage tanks available but not on pipelines

Section 17(5) of CGST Act is considered as very unfriendly to taxpayers as it restricts input tax credit on host of goods and services in various situations. One such restriction pertains to construction of immovable property and pipelines laid outside the factory. The applicant imports LPG and other gases and sells LPG. For such purpose, a new pipeline is proposed to be laid for transporting gas from jetty to terminal. The applicant has argued that the restriction under the above provision is only in respect of pipelines used for outward supply and in their case, it is meant for inward supply and the area where pipeline is laid should be treated as within factory. But the AAR has held that the definition / provisions are clear and ITC would not be available on goods and services used for laying pipeline and also on the foundation and structural support for such pipeline. The AAR has held that ITC would be available on refrigerated storage tanks and also the foundation for the same but in respect of pile foundation, the same being civil structure and being executed by another person under a different purchase order, ITC would not be available. Water tank as part of fire protection system has been held to be eligible for ITC [2021-VIL-218-AAR].

Barring of ITC on pipelines does not have any rationale as such. Reference to factory premises for such restriction is without any reason and may even be perceived as absurd. The sector is very important for the economy and the investments are substantial. Denial of ITC on such heavy expenditure will only push up the cost of goods and services provided by oil and gas sector which will ultimately impact adversely the end consumer. A serious rethink is required on such restrictions.

Printing of books overseas is import of service and liable to GST under RCM

The applicant publishes books by engaging a printer abroad and the printed books are warehoused (overseas location) and then shipped to buyers who are also located outside India. The AAR has held that supply of books from a location outside India to a recipient outside India without the goods entering India is not liable to GST as per Schedule-III of CGST Act. Shipping charges are collected by the applicant from the buyer but the ruling holds that shipping service is provided by the warehouse service provider and as per place of supply and other provisions of IGST Act, such shipping charges would be liable to GST in the hands of the applicant in India under reverse charge mechanism. The printer in USA prints the books using the content sent by the applicant and the AAR has adopted the same view of applicant being liable under RCM in respect printing charges paid to the printer. Warehousing service received alone has been held as not liable to GST [2021-VIL-217-AAR].

Shipping charges are collected as part of sale price of the books by the applicant. The applicant has argued that it is a composite supply where supply (sale) of books is the principal supply but this has not been accepted. This part of the ruling may not be held as sustainable if an appeal is filed.

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