Tax Vista Your weekly tax recap Edn. 53 - 21 June 2021 By Dr. G. Gokul Kishore

Intermediary Service - Bombay High Court delivers split verdict on constitutional validity

Intermediary service reflects the anxiety of the tax administration as place of supply as per IGST Act for such service is the location of the supplier instead of the general rule of location of recipient. This effectively means that even if all conditions for export of service are satisfied, no intermediary will be able to come out of the quagmire of place of supply and in almost all cases, they will be compelled to pay GST. The power to legislate in such manner has been agitated again but this time before the Bombay High Court. The petitioner is a provider of marketing and promotion services to customers located outside India in respect of the goods manufactured by such overseas customers and for such services, consideration is received in foreign exchange. Constitutionality of Section 13(8)(b) and Section 8(2) of IGST Act was challenged before Bombay High Court but the Judges differed in their opinion.

The first Judge held that Section 13(8)(b) of IGST Act is ultra vires such statute and also unconstitutional. According to him, Article 246A of the Constitution deals with special provision with respect to GST and Article 269A provides for levy and collection of GST in the course of inter-state trade or commerce and a conjoint reading of these two provisions indicate that the Constitution has only empowered Parliament to frame law for levy and collection of GST in the course of inter-state trade or commerce, besides laying down principles for determining place of supply and when such supply of goods or services or both takes place in the course of inter-state trade or commerce. According to him, the Constitution does not empower imposition of tax on export of services out of the territory of India by treating the same as a local supply. Reliance was placed on Article 286 placing bar on State Legislatures on imposing tax on supply outside the State or import into or export out of India.

The deeming fiction created by Section 13(8)(b) has been held to be contrary to the scheme of the CGST Act as well as the IGST Act besides being beyond the charging sections of both the Acts. The order holds - "the extra-territorial effect given by way of Section 13(8)(b) of the IGST Act has no real connection or nexus with the taxing regime in India introduced by the GST system; rather it runs completely counter to the very fundamental principle on which GST is based i.e., it is a destination-based consumption tax as against the principle of origin-based taxation." Gujarat High Court decision in Metal Recycling Association [2020-VIL-341-GUJ] was not agreed with [2021-VIL-458-BOM].

The dissenting Judge commences with discussion on landmark judgments on presumption in favour of constitutionality of a statute. Interpreting Article 269A of the Constitution empowering the Parliament to levy and collect GST on supplies in the course of inter-state trade or commerce, it has been held in the dissenting opinion that the power of Parliament to stipulate any other type of supply to be supply in the course of inter-State trade or commerce is not taken away. Reading the above along with Article 246A, it has been that such exclusive power includes power to define what is intra-State. Taking the view that the provision is valid, it holds - "There is no doubt that the power to stipulate the place of supply as contained in Sections 13 (8)(b) of the IGST Act is pursuant to the provisions of Article 269A (5) read with Article 246A and Article 286 of the Constitution. The impugned provisions are in my view constitutional and are not in any way ultra vires the Constitution. If the Parliament pursuant to powers invested in it by the Constitution has in its wisdom dealt with Intermediary Services as that rendered by Petitioner, that is a matter within the Parliament's domain." Argument on extra-territorial operation of the provision, violation of Articles 14 and 19(1)(g) have also not been accepted [2021-VIL-472-BOM].

The earlier order of Gujarat High Court on this issue is pending before Supreme Court as noted in the above orders. After Majority Opinion is rendered in the above case, matter may get tagged in the Apex Court. If the Apex Court upholds the validity of the provision on intermediary service, then it will be end of the road. However, if the top court holds the provision as not valid, then retrospective amendment may come to haunt the intermediaries. Either way, it appears to be not very prudent to challenge the vires of the provision when the legislative intention is unambiguous. The pragmatic solution can be to persuade the GST Council to consider amendment to the provision itself.

Restricted goods - Imports liable to absolute confiscation - Supreme Court imposes costs on importers

Import of certain beans, peas and pulses was restricted as per DGFT notification and the same was subject to quantity ceiling as well. Import of such goods were made without license and the Customs department initiated proceedings. The importers went to High Court and armed with interim orders providing relief, got part quantity of such goods released. The dispute shows the tenacity of certain importers who could engage in multiple rounds of litigation, particularly invoking writ jurisdiction of High Court repeatedly despite, apparently knowing that the goods were under restricted category. The department was before Supreme Court and in an elaborate and scathing order, the Apex Court not only disapproved High Court's approach in granting interim relief of releasing such goods but also allowed the appeals of the department and held the goods were liable to absolute confiscation and costs of Rs. 2 lakhs was imposed on each of the importers after holding the imports were not bona fide. The only solace was that the importers were allowed to re-export, on payment of redemption fine and subject to discharging other statutory obligations.

The government side argued that the directions by the High Court for release of goods were not compatible with the purpose of adjudication by the Appellate Authority and that the subject goods, being covered by Section 3(2) of the Foreign Trade (Development & Regulation) Act [FTDR Act] and having been imported without license and also in excess of the cap of 1.5 lakh MTs, became prohibited goods under Section 11 of the Customs. It was contended that such goods could not have been released to mingle in the Indian market. Order of the Supreme Court in UOI v. Agricas LLP [2020-VIL-26-SC-CU] was relied on by the department.

The respondent-importers contended that the notifications placed quantitative restrictions and there was no order or notification prohibiting import of the goods and hence, they could not have been treated as absolutely prohibited goods but were only restricted goods. Even if the subject goods are to be treated as prohibited, discretion was available with the Adjudicating Authority to allow redemption on payment of fine. It was further argued that re-export was not a feasible option.

The arguments of importers were rejected by the Supreme Court, and it held that any import within the cap under a license is import of restricted goods but, every import of goods in excess of the cap as provided in the notifications, is not that of restricted goods but is an import of prohibited goods. It referred to its precedent judgment wherein it was held that any restriction on import or export is to an extent a prohibition and the expression "any prohibition" in Section 111(d) of the Customs Act includes restrictions and restriction is also a type of prohibition. Based on this interpretation, it held that once the goods are improperly imported and fall in the category of prohibited goods, they are liable to confiscation.

Though the Supreme Court held that the High Court was right in questioning the fact that the Commissioner opted to pass order allowing reexport on payment of redemption fine when the matter was sub-judice, yet it missed out the relevant feature that the importers had preferred the writ petitions to pre-empt further proceedings by the statutory authority concerned under the Customs Act. The Apex Court noted that when the Appellate Authority ultimately passed the orders in setting aside the orders-in-original, one of the importers, despite being aware of the remedy of further appeal being available, chose to invoke, again, the writ jurisdiction of the High Court.

Disapproving the approach of High Court, the Apex Court held that when the matter was left for decision by Commissioner (Appeals), High Court was not justified in passing order for release of the goods and it committed a serious error. It said that interest of domestic agricultural sector / market economy and Supreme Court's judgment in Agricas escaped the attention of the High Court.

This judgment discusses at length exercise of statutory discretion by an authority and when the same can be challenged. It will certainly be useful as binding precedent whenever the authorities exercising discretion substitute personal opinion without any basis. The order notes - "the requirements of reasonableness, rationality, impartiality, fairness and equity are inherent in any exercise of discretion; such an exercise can never be according to the private opinion." The order contains good exposition of Section 125 on release of confiscated goods against redemption fine.

Though the order contains several important observations the following is worth highlighting - "The sum and substance of the matter is that as regards the imports in question, the personal interests of the importers who made improper imports are pitted against the interests of national economy and more particularly, the interests of farmers. This factor alone is sufficient to find the direction in which discretion ought to be exercised in these matters. When personal business interests of importers clash with public interest, the former has to, obviously, give way to the latter. Further, not a lengthy discussion is required to say that, if excessive improperly imported peas/pulses are allowed to enter the country's market, the entire purpose of the notifications would be defeated. The discretion in the cases of present nature, involving far-reaching impact on national economy, cannot be exercised only with reference to the hardship suggested by the importers, who had made such improper imports only for personal gains. The imports in question suffer from the vices of breach of law as also lack of bona fide and the only proper exercise of discretion would be of absolute confiscation and ensuring that these tainted goods do not enter Indian markets. Imposition of penalty on such importers; and rather heavier penalty on those who have been able to get some part of goods released is, obviously, warranted." [2021-VIL-63-SC-CU]

IGST on ocean freight - High Court directs refund with interest

IGST levy on ocean freight was declared as unconstitutional and the relevant entries in notification were struck down by Gujarat High Court in Mohit Minerals case [2020-VIL-36-GUJ]. One of the parties involved in this case sought refund of IGST paid but the department promptly issued deficiency memo on the ground of limitation. Relying on its earlier orders as reported by VIL in 2020-VIL-717-GUJ and in 2020-VIL-397-GUJ wherein the Court had directed GST authority to consider refund claim in respect of amount paid as IGST on ocean freight, in the present case, the deficiency memo has been quashed. The department has been directed to process refund claim along with interest. The appellant had relied on precedent judgments on inapplicability of limitation under special enactment (CGST Act in this case) when the amount is paid as tax by mistake of law and the State cannot retain such amount and time-limit as per Limitation Act would apply in such cases [2021-VIL-477-GUJ].

Construction of flats - AAR rejects contention on works contract attracting 18% GST

The case before Authority for Advance Rulings (AAR) does not vary much on facts as it is typical construction of flats in a residential real estate project by a promoter involving sale of undivided share of land (UDS) by landowner. The applicant entertained a view that construction is in the nature of works contract as per CGST Act and the construction is undertaken for the buyer of UDS and therefore it is "not intended for sale" and therefore, it would be covered under residual entry in Notification No. 11/2017-Central Tax (Rate) attracting 18% GST. Certain extracts from agreement for sale of UDS, construction agreement, etc., have been reproduced in the advance ruling and apparently, there is no use of "intended for sale". However, the AAR has held that all the agreements should be read together and the applicant is a developer engaged in construction of units in RREP which are intended for sale to buyers and therefore, it will be covered under the GST rate of 5%. The argument of the applicant has not been effectively dealt with in the ruling in so far as the words "intended for sale" are concerned [2021-VIL-232-AAR].

Municipality supplying right of collection of fee liable to GST

Before the AAR, services performed by municipality were involved - whether fees collected for the same would be liable to GST or not. Services by Panchayat under Article 243G of the Constitution are covered under Notification No. 14/2017-Central Tax (Rate) whereby such services are considered as neither supply of goods nor supply of services. This was amended from 26-7-2018 to cover services by municipality under Article 243W. The AAR has held that fees from park would be covered under the above notification and GST is not payable on the same. Market fee on entry into market collected from farmers and merchants, slaughter house fee, fees on use and pay toilets, fees for bays in bus-stand and fees from cycle-stand / scooter-stand have also been held as covered under Article 243G / Article 243W and the applicant acts as public authority and therefore, GST is not payable. Locker rent collected in bus-stand has, however, been held as not covered under the above notification and is liable to GST.

More important issue raised before the AAR pertains to GST liability in respect of the above services when tenders are awarded to contractors. The applicant raised a very relevant argument that contractors are deemed as public servants as per Tamil Nadu District Municipalities Act and this has been taken note of by the AAR but the contention on contractors acting in the capacity of agent of the municipality as per CGST Act has not been accepted by holding that the municipality supplies the right of collection of fees and receives a fixed consideration, which is independent of the fees collected by the said contractor from the users of amenities. For this conclusion, the AAR has observed that in principal-agent transaction, entire control over the transaction remains with the principal and the agent acts merely as an intermediary but in the present case, it is not so. Based on such reasoning, as per this ruling, most of the services for which contractors are appointed have been held as supply of rights by municipality to contractors who are entities engaged in furtherance of their business. All amounts received from successful contractors will be liable to tax.

If the contractors have been found to collect more than the fees fixed by the municipality, then this conclusion would have been more convincing. Test of control over the transaction is not the conclusive criterion for principal-agency relationship as per Contract Act. Because contractors are not considered as agents, the ruling has gone against the municipality. The amount collected by contractors is the fees fixed by the municipality and they are authorized only to collect such amount on behalf of the municipality. Representing municipality and collecting the fee as per authorization / contract are the factors for determination of agency. The fee amount is different from user charges collected by agencies like those involved in toll. Such differences in business models have not been considered in this ruling.

Another question relevant to various infrastructure companies answered by the AAR is that permission granted by the municipality to cut the road for laying optic fibre cable which is a one-time affair and rent collected periodically for use of road for such purpose have been held as not a composite supply. Renting of immovable property by the municipality to cooperative societies and banks is not exempted as per this ruling. [2021-VIL-233-AAR - similar ruling in 2021-VIL-236-AAR].

This ruling is discussed in this column for the reason that services supplied by municipal corporations are in the nature of public utility services. These days, most of these services are performed through contractors only. Exemption entries in GST notifications do not cater to situations when such persons come in between the local body and the general public. The result is pushing such local bodies and contractors to seek advance ruling or enter into litigation, eventually increasing the deficit of local bodies or fees payable by the end users. For the past 2 - 3 decades, various tiers of government - central, state or local - are executing essential public functions through other agencies involving various models. GST notifications drafted in as recently as 2017 seem to be ancient and out of sync with the present day business practices.

Renting of buses to State Transport Undertaking liable to 12% GST

Among the services which have most entries in GST notifications are construction services and renting of motor vehicle service. Tax administration has been clueless on the practices, jurisprudence and purpose behind taxation. The outcome is multiple entries with multiple amendments. The entity which sought advance ruling had given buses on rent to State Transport Undertaking (STU) and question was applicable rate of GST. The applicant was of the view that the activity is one of renting and not hire since effective control and possession was with the STU and therefore liable to 12% GST. Cost of fuel was included in the consideration charged by the applicant. As there is a specific entry, residual entry in Notification No. 11/2017-Central Tax (Rate) was contended as not applicable. However, STU was of the view that the activity would be covered under exemption under Notification No. 12/2017-Central Tax (Rate) relating to "services by way of giving on hire to a state transport undertaking, a motor vehicle meant to carry more than twelve passengers". The AAR upheld that stand taken by the applicant and held that since the relevant entry was amended from 13-10-2017, the services are liable to 12% GST from this date and before that, 18% GST was the rate [2021-VIL-235-AAR].

The exemption provided to transactions when vehicles are given on hire to State Transport Undertakings is intended to ensure that being a public transport service, passengers are not saddled with higher fare. Because the notification, by mistake, uses the word "hire", such exemption has been ruled out in the above case. Ideally, the exemption should have covered renting as well. This would have meant the amount charged by the service provider was lesser by 12% and resultantly, bus fare would have been lesser or the subsidy burden on the State would have got reduced, if otherwise GST of 12% is absorbed by the State. The State Transport Undertaking in the above case should have represented to GST Council instead of compelling the service provider to opt for advance ruling.

GST Council Meeting - CBIC issues clarificatory circulars

Consequent to recommendations in the GST Council meeting, CBIC has issued seven circulars clarifying various issues. Circular No. 149 seeks to clarify that catering service including mid-day meals provided to an educational institution including anganwadi (though typed with error in the circular) is exempt from GST irrespective of its funding from government grants or corporate donations. The entry in exemption notification could have been amended with more clarity but such exercise will result in denial of exemption for the past period. It appears there was a decision of GST Council to exempt, from GST, deferred payments (annuity) received for construction of roads but the notification entries were drafted to provide such exemption only to access to road or bridge. By Circular No. 150, CBIC has clarified that construction of roads where payment is received in the form of annuity would not be covered under such exemption entry. When infrastructure projects are thrust areas for development, the confusion and delayed clarification do not further the objective not do they help those who opt the PPP route.

Another clarification as provided by Circular No. 153 relates to applicable rate of GST for milling of wheat into flour or paddy into rice for public distribution system. Exemption has been clarified as available for such composite supply (milling plus fortification) if value of goods does not exceed 25% of the total value. Otherwise, GST of 5% will be applicable as per job work related entries. When the supplies (whether goods or services) are made to government, there appears to be no rationale for prescribing 25% cap for value of goods for entitlement to exemption. These are typically bureaucratic ventures to exercise control over the industry.

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