Tax Vista Your weekly tax recap Edn. 48 - 17 May 2021 By Dr. G. Gokul Kishore

Labour cess not applicable to supply contracts - Supreme Court

The Supreme Court has held that labour cess under Building and Other Construction Workers' Welfare Cess Act, 1996 (Cess Act) is not applicable to supply contract involving supply of equipment and material. As per the judgment dated 12th May, 2021, the statutory scheme of Building and Other Construction Workers (Regulation of Employment and Condition of Service) Act, 1996 (BOCW Act) is clear and it excludes a supply contract from within its ambit. It took note of the "Statement of Objects and Reasons" that the necessity to enact BOCW Act arose from the necessity to levy cess on the cost of construction incurred on a building and on other construction works, in order to generate funds for the Welfare Boards to undertake social security schemes and welfare measures for building and construction workers.

In this case, the power transmission utility had sought payment of amount towards labour cess from the respondent who was awarded turnkey contract for design, engineering, installation, civil works and maintenance of electricity sub-station. The Apex Court has held that mere installation and/or erection of pipelines, equipment for generation or transmission or distribution of power, electric wires, transmission towers, etc., which do not involve construction work are not amenable to labour cess under the said enactment.

The High Court had earlier held that in the absence of order for levy and assessment under the Cess Act, recovery could not be made pursuant to an audit objection of C&AG. In this case, the power corporation was initially of the view that cess was not applicable but later based on audit objection from C&AG, demanded the same. The High Court's view was agreed by the Supreme Court to hold that the demand of cess on supply contract solely based on report of C&AG was impermissible in the absence of any adjudication.

According to the judgment, the action of the power corporation in forcibly extracting building cess in respect of the supply contract, solely on the basis of the CAG report, is in excess of power conferred on it by law or in terms of the contract and it has no power and authority or jurisdiction to realize such labour cess by withholding dues in respect of other contracts and/or invoking performance guarantee.

The Court accepted the contention of the respondent (company) that the four contracts had been treated as a singular contract for the purposes of responsibility regarding timely execution and for all other intents and purposes, including levy of any tax or fees, the contract for supply was understood by the parties as a separate and distinct contract. In this case, the power corporation had awarded four separate contracts. Interpreting the contracts, the Supreme Court observed that there was no provision in all the four contracts or in the Special Conditions of Contract or the General Conditions so as to enable the power corporation to withhold any amount from the bills raised by the company towards any taxes, cess or any other statutory dues of the contractor. As per the contract terms, prices shall be inclusive of all taxes and duties, legally payable and any such taxes and duties shall be on contractor's account and no separate claim shall be entertained by the purchaser and therefore, such clause did not authorize the power corporation to deduct taxes / cess from the bills.

The Apex Court further observed that there was no dispute between the parties as to the construction or meaning or intent of the conditions of contract or to the manner of execution or the quality or description or payment for the same.

The judgment of the Supreme Court has key takeaways - inapplicability of labour cess when construction is not involved, interpretation of terms of contract particularly tax clauses, availability of writ remedy under Article 226 of the Constitution in a case arising out of contract (except those involving adjudication of disputed questions of fact) and grant of monetary relief in a writ petition [2021-VIL-56-SC].

Goa Cess on fluid milk is not unconstitutional - GST Constitution Amendment not relevant

The Bombay High Court at Goa has held that the Goa Cess on Fluid Milk (Control) Act, 2000 is constitutionally valid and Rule 3 of the Goa Cess and Fluid Milk (Control) Rules, 2001 is not ultra vires the parent Act. The said cess is levied and collected on fluid milk for use of facilities, infrastructure or any other amenities belonging to or provided by the State for consumption. Validity of such provisions and the milk cess was challenged on the ground that the State Legislature lacked competence particularly after the 101st Amendment to the Constitution whereby GST has been implemented and Entry 52 in List II (State List) on entry tax and Entry 54 in List II on sales tax have been omitted. The challenge was also on the ground that cess on fluid milk brought into the State for sale was being collected irrespective of whether the facilities provided by the State are used for consumption.

The High Court held that Entry 52 is not invocable as the milk cess is not restricted only on entry of milk into the State but is also equally levied on the fluid milk meant for sale within the State, thus removing the discrimination between the milk brought in the State and milk produced in the State. Entry 54 being tax on sale or purchase of goods is also not invocable since the cess imposed is on utilization of the infrastructure. On legislative competence, the Court relied on List II. It held that Entry 14 pertaining to agriculture should be widely construed and in includes livestock and Entry 15 also relating to livestock, empowers the State legislature to enact a law dealing with the milk. According to the judgment, these entries along with Entry 66 pertaining to fees in respect of any of the listed matters would shut out the arguments on legislative competence. Though the judgment elaborately discusses the jurisprudence on what is a tax and fee, the question whether fee and cess are same or different is not part of such analysis.

The High Court further noted that there is always a presumption in favour of the constitutionality of the statute. It heavily relied on the judgment of the Constitution Bench of the Supreme Court in Jindal Stainless [2016-VIL-66-SC-CB] to emphasize that a non-discriminatory tax cannot be regarded as restriction on freedom of trade, commerce and intercourse under Article 301. Every State is empowered to impose taxes for compensating it for the services, benefits and facilities provided by it as per the High Court.

Holding the rules as not ultra vires, the Court said - "In this entire exercise of bringing the milk into the State of Goa and being sold for the purpose of its consumption, infrastructure of the State is being used and in the impugned Act aims at levying and collecting cess for users of these facilities, infrastructure and other amenities provided by the State. The Parent Act which proposes levy and collection of cess on fluid milk in the State of Goa for consumption, for using its infrastructure whereas the Rule determines the rate of levy on the milk brought in the State of Goa meant for sale which get subsequently consumed. Pertinent to note that after the amendment in the Rules, there is no distinction made between the levy on the milk brought into the State of Goa or the milk within the State of Goa meant for sale in the State. The sale of the milk being one step in the consumption of milk in the State of Goa and this is by way of use of infrastructure of the State, it cannot be said that the Rule is ultra vires to the provision in the Parent Act." [2021-VIL-387-BOM]

Though this judgment is detailed and pertains to milk cess under a specific enactment, it is relevant under GST also since the continuation of such levies even after implementation of GST has been held to be valid after discussing the effect of the amendment to the Constitution for the purpose of GST. The notion that almost all the taxes and levies are subsumed in GST is fallacious as this judgment proves. The issue is, however, not free from controversy as the flood cess of Kerala also raised much debate. Though multiplicity of levies is something which is avoidable, in this case, it can be said that the argument - the power to levy any impost by State Legislature stood completely eroded with the Constitution Amendment on GST - is only partly valid.

Recovery of customs duty when importer-company under insolvency process

The petitioner filed bill of entry in advance and then imported palm oil. Customs duty was paid as applicable on the date of filing bill of entry. Two days later, at the time of assessment, customs duty rate was increased and the department demanded higher amount of duty from the importer. The importer argued that the notification was not made available for sale on the date of assessment and therefore, as per the provisions during the relevant period, increased duty rate was not applicable. However, the High Court, taking note of Information Technology Act and amendment to relevant provision in Customs Act held that uploading of notification in the website of CBIC was sufficient and therefore, the rate change took effect on the date of issue of notification which would be applicable to the petitioner. This issue is not so important as compared to the sustainability of recovery of such customs duty when the petitioner is under Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code, 2016 (IBC).

The High Court posed the question whether customs duty is an operational debt as per Section 5(21) of IBC and whether Customs department is an operational creditor as per Section 5(20) of IBC. After analyzing the definitions of operational creditor, operational debt, claim and debt, the Court held that tax and duties levied and collected under can never be treated as operational debt as it does not arise out of claim in respect of provision of goods or services including employment. It reasoned - "For a "claim" to be an "Operational Debt", it should be in respect of the provision of "goods" or "service" including "employment" as is evident from reading first part of the definition of "operational debt" in Section 5(11) of IBC, 2016. To be a "debt" for the purpose of Section 5(21) of IBC, 2016, such a "debt" should in respect of payment of dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority..A tax once determined to be paid in accordance with law is a sovereign debt. Such sovereign debts cannot be altered whether increased or decreased by any authority, whether by the Court or under a private arrangement or as the case may be approved by creditor, shareholders or by the committee of creditors under the Companies Act, 2013 or Insolvency & Bankruptcy Code, 2016. Corporate re-structuring of financial debt under IBC, 2016 does not mean waiver of extinguishing of sovereign debts."

However, recently the Supreme Court in Ghanashyam Mishra and Sons v. Edelweiss Asset Reconstruction [2021-VIL-55-SC] has held that dues owed to State and Central Governments would be covered under "operational debt" in view of the amendments proposed to IBC in 2019 to clarify that the resolution plan shall also be binding on Central / State Government / local authority to whom debt in respect of payment of dues arising under any law such as authorities to whom statutory dues are owed including tax authorities. The statement of Finance Minister in the Parliament was also taken note of by the Supreme Court in the above case. The Apex Court further held that once resolution plan is approved, all claims / debts owed to Central / State Government including tax authorities which are not part of the resolution process, shall stand extinguished.

Though the High Court in this case has expressed a different view, it had to follow the Apex Court's ruling. It, therefore, remanded the matter to Customs authorities to wait for clarification as to whether the resolution plan included customs duty to be paid on the subject imports and recovery will be subject to such clarification. This means if customs duty was not factored as operational debt in the resolution plan, then the Customs department's right to recover separately would stand extinguished. Recovery of tax dues from companies under IBC will be a challenge to the department in view of such amendments to IBC and judgment of the Supreme Court. Companies acquiring entities through IBC route can ward off tax department for predecessor's dues only if such tax dues are not part of the resolution plan [2021-VIL-372-MAD-CU].

Detention of goods for discrepancy in one digit not sustainable

Readers may find that there are too many orders of High Court discussing detention of goods and vehicle for some infraction, whether real or imagined. This is a fact but facts of each case being different, sometimes, such orders merit a brief analysis. In a case before Andhra Pradesh High Court, the issue was discrepancy in mentioning tax invoice number in e-way bill and therefore, goods were detained by the GST authorities. One digit in invoice number was typed incorrectly and this is the basis for the litigation. The High Court accepting reliance placed by the petitioner on CBIC's circular on non-initiation of proceedings under Section 129 of CGST Act (detention) for minor mistakes in e-way bills, ordered release of amounts collected as tax and penalty.

The department instead of accepting the frivolous nature of the proceedings initiated, argued before the High Court that since the petitioner had paid tax and penalty, they cannot now agitate such issue. The High Court did not agree. When the mistake is so trivial, when the proceedings are vexatious, when the amounts involved are minimal, the department cannot be allowed to raise such baseless argument. A taxpayer whose goods are detained, for business exigencies, pays the amounts demanded so that the goods are released and used in business immediately and subsequently, challenges the same. In this case, the Court could have imposed costs on the officer concerned for initiating such vexatious proceeding in contravention of departmental instructions [2021-VIL-383-AP].

Pre-deposit not required for filing appeal when dues already recovered by department

The Calcutta High Court has directed the department to refund 10% of dues paid as pre-deposit as per Section 107 of CGST Act / respective SGST Act since 100% of the dues has been recovered already by the department. The Court said such payment of pre-deposit amounts to payment of 110% of the dues. The Court has mentioned recovery as initiated under Section 78. This provision provides for initiation of recovery of amount payable as per order passed after expiry of three months. Recovery can be undertaken within 3 months only if reasons are recorded in writing. The time-limit for filing appeal under Section 107 is three months.

It is not clear how the department recovered the entire dues even before the taxpayer filed appeal within 3 months. It has to be presumed that amounts were paid during investigation or when proceedings were pending which were confirmed / appropriated in the adjudication order. In such circumstances why pre-deposit was paid at the time of filing is not known. If the system did not support filing of appeal without pre-deposit, the matter should have been brought to the notice of the jurisdictional Commissioner. May be, the petitioner thought order from High Court will be more effective than pleading with the department [2021-VIL-385-CAL].

Pre-deposit quantum for filing first appeal - HC refuses to waive

The Orissa High Court has held that the nature of Section 107 of CGST Act dealing with appeals with appellate authority (first appeal) is mandatory and there is no discretion with the appellate authority to waive the requirement of pre-deposit. The petitioner pleaded financial hardship and sought waiver of pre-deposit. The High Court also noted that on payment of 10% amount as pre-deposit, there is an automatic stay of the balance amount of 90% and the same cannot be said to unfair or unreasonable. Though a precedent judgment was relied on by the petitioner, the same was not accepted by the Court.

While the appellate authority has no discretion to reduce or waive pre-deposit amount, the High Court can allow such reduction or waiver in appropriate cases in exercise of writ jurisdiction. In this case, the Court did not entertain such prayer considering the quantum of pre-deposit to be low. It is not clear as to the evidence produced by the petitioner to substantiate the plea of financial hardship [2021-VIL-380-ORI].

Middleman engaged in procuring GSTIN of defunct entities - HC refuses bail

The arguments of the petitioner in this case will surprise everyone. It is stated as a fact that he acted as middleman procuring credentials (GSTIN etc.) of defunct companies and gave the same to another person (for a commission) who raised tax invoices using such credentials. The department has alleged that the petitioner subsequently filed statutory returns using such invoices. It appears to be a case of paper transaction involving raising of invoices using credentials of fictitious entities without supply of goods to enable fraudulent availment of input tax credit by recipients of such invoices. While the petitioner has refuted the allegation that he raised invoices, he has admitted that he acted "only" as a middleman and sought bail. The petitioner had further contended that he was under illegal detention for a few days and giving credentials of non-existent companies would not attract Section 132(5) of CGST Act. This provision specifies the offences under clauses (a) to (d) of sub-section (1) as cognizable and non-bailable.

The High Court was not impressed. It took note of the fact that the petitioner himself has admitted procurement of credentials and giving the same to others for creating fake transactions and he was aware of the same and therefore, he cannot absolve himself by stating that he was only a middleman. The Court relied on the counter filed by the department particularly regarding WhatsApp chats on filing of GST returns relating to fake transactions. Observing that the amount of tax evaded was around Rs. 55 crores, the Court said that enlargement of the petitioner on bail would have detrimental effect on investigation and it dismissed the petition seeking bail.

Applicability or otherwise of Section 132(5) in this case was not examined in full by the High Court as it was guided more by facts relating to admission by the petitioner himself. The role of middleman appears to be not covered expressly under the said clauses of sub-section (1) which means the offence is bailable. But, the Court has the discretion when it comes to matters of bail as facts and circumstances play a major role while deciding such petitions [2021-VIL-371-MAD].

Goods not prohibited for import but not meeting food safety standards - Confiscation not sustainable

Seafood, at the time of export from foreign country, was certified as complying with Indian Food Safety Standards (FSSAI) as applicable to such goods. After import, the imported goods did not satisfy two out of eighteen safety parameters and therefore, the same were confiscated. After obtaining permission, the goods were re-exported but the importer agitated the issue of confiscation, penalty and redemption fine. CESTAT has noted that confiscation under Section 111(d) of Customs Act, 1962 can be resorted to only when import of the goods is prohibited while in the present case, there is no such prohibition. Further, the importer had taken adequate care as, at the time of export, the goods conformed to safety standards and after import, in the two weeks before clearance, they might have been contaminated. According to the Tribunal, Section 125 on redemption fine is applicable only when import is contrary to prohibition and Section 112(a) providing for penalty is invocable only when goods are liable for confiscation. The appeal was allowed setting aside imposition of redemption fine and penalty [2021-VIL-190-CESTAT-BLR-CU].

The case appears to be one of harassment. Re-export is not an easy task, and the importer has managed to undertake the same. Knowing well that import of such goods is not prohibited, Customs authorities have forced the importer to cough up fine and penalty and also enter into litigation upto Tribunal. Till the time there is a statutory mechanism to recover litigation cost from the department in appropriate cases, such disputes will not cease.

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