Tax Vista Your weekly tax recap Edn. 50 - 31 May 2021 By Dr. G. Gokul Kishore

GST Council Meeting - No major measures but only a few relaxations

The GST Council meeting after a long time, on 28 May, 2021, has recommended a few relief measures but no major decisions have been taken despite the marathon discussions. In Tax Vista dated 10 May, 2021, it was observed that restricting IGST exemption for import of goods like oxygen concentrators, medical oxygen and other Covid-19 relief related goods only when they are supplied by foreign party free of cost (even those meant for free distribution) indicated complete absence of tax policy. This has been rectified now by recommending exemption even if such goods are imported by Indian parties on payment basis. This exemption will have an extended sunset date of 31-8-2021. Amphotericin B meant for treatment of black fungus disease will also be covered under such exemption.

Prior to this meeting of the GST Council, there have been demands for full tax exemption for all goods and services meant for Covid-19 relief. However, it appears bureaucracy has succeeded in putting brakes for the time-being by highlighting blockage of input tax credit and other hyper-technical arguments and therefore, a Group of Ministers (GoM) is being constituted to examine this issue. While pandemic rages, tax administration argues. Matters either go to Fitment Committee or Law Committee or some other committee. Committee system enables endless discussion on the issues only to be eventually forgotten and buried. Since the GoM has been tasked to revert by 8-6-2021, one can only hope Covid-19 related exemptions do not get entangled in academic objections and they are, in fact, granted soon.

The press release issued after the meeting highlights "clarificatory amendment" in respect of IGST on "repair value of goods" re-imported after repairs. Clarificatory amendment means it may be retrospective in effect and since it has been covered under relief provided to goods, notification needs to be seen. Certain clarifications have been recommended to be issued. Exemption to catering service under mid-day meals scheme provided to educational institutions will be available even if the funds are sourced from corporate donations. It appears that somewhere department has taken objection to availment of the exemption when such government-sponsored programme is funded by private entities. Landowners will be allowed to utilize ITC of GST charged by promoters in respect of construction of apartments which are subsequently sold by such owners on payment of GST. MRO services for ships / vessels, milling of paddy / wheat into flour for PDS purpose and exemption to government guarantee to loan taken by PSUs will be covered under clarifications to be issued.

A cosmetic change often resorted to these days without benefitting anyone is reduction in late fee for delay in filing of GSTR-3B returns. As usual, in this round also, so-called amnesty scheme providing such "relief" covering the period from July, 2017 to April, 2021 has been announced. If returns have not been filed for so long, registration would have been cancelled long ago. If registration has not been cancelled, disciplinary action would have been initiated against the jurisdictional officer charging him / her with dereliction.

Capping of late fee i.e. fixing maximum quantum of late fee for delayed filing of GSTR-3B and GSTR-1 based on turnover has been recommended. For those with NIL tax liability, late fee will be Rs. 500 per return, taxpayers having turnover upto Rs. 1.5 crore, it will be Rs. 2000, for those between Rs. 1.5 crore and Rs. 5 crore, late fee will be Rs. 5000 and if turnover is more than Rs. 5 crore, it will be Rs. 10,000. Similar caps have been recommended for various other returns and all these changes are applicable for returns to be filed in future. Due to the series of changes, computation of late fee may be more complicated than arriving at tax liability itself.

Other major compliance-related relaxation pertains to grant of 15 more days for filing GSTR-1/ IFF for the month of May, 2021, cumulative application of restriction under Rule 36(4) on ITC for the months of April to June, 2021 in June, 2021 return, filing of returns using EVC instead of DSC till 31-8-2021 and extension of time-limit for completion of any action or compliance (excluding specified compliances) falling between 15-4-2021 to 29-6-2021 to 30-6-2021. Reconciliation Statement in GSTR-9C relating to Annual Return for 2020-21 can be self-certified as per amendments made this year. Charging of interest only net cash tax liability (after adjusting ITC) in case of delayed payment of tax as per amendment in Section 50 of CGST Act will be notified "at the earliest". It appears that corresponding amendments in some of the State GST Acts are yet to be made.

Credit of Education Cess, SHE Cess and KKC reversed - Refund admissible

Following its earlier decision in the case of Bharat Heavy Electricals v. Commissioner [2020-VIL-402-CESTAT-DEL-CE], CESTAT has held that refund of Education Cess, Secondary and Higher Education Cess and Krishi Kalyan Cess would be admissible. The appellant had transitioned Cenvat credit of such cesses to GST regime but subsequent to retrospective amendment to Section 140 of CGST Act, the credit was reversed, and refund claim was filed. The Tribunal held that the amendment having been made on 30-8-2018 (though with retrospective effect) the limitation or time-limit for filing the refund claim will be reckoned from such date. The contention of the department that such credit is a GST credit and the refund claim will be governed by CGST Act was rejected on the ground that such credit cannot be transferred to GST regime as per amendments and it remained Cenvat credit. Such issues will attain finality only when they are decided by the Supreme Court as these orders touch upon important principles on credit being vested right or otherwise, admissibility of refund of credit when lapsing provision was absent, etc. [2021-VIL-218-CESTAT-CHD-ST]

Provisional attachment of future receivables not sustainable

The Madras High Court has held that provisional attachment of bank account under Section 83 of CGST Act cannot be resorted to against future receivables. The amount lying in the bank account on the date of such attachment was already appropriated by the GST authorities and they agreed to pay certain amount more as well. Taking note of the same, the Court held that attachment need not continue. It directed the department to complete adjudication expeditiously. The High Court categorically held that attachment proceedings cannot be at the cost of the right to carry on profession or business under Article 19(1)(g) of the Constitution. This case pertains to allegation of availment of ITC on fake invoices and officers of the company were arrested but later released on bail [2021-VIL-424-MAD].

Order permitting manual filing of returns not sustainable

The petitioner was permitted to file GSTR-3B returns manually as per interim order of Single Judge of Karnataka High Court and stay was granted against order of cancellation of registration. The department filed writ appeal and, in its order, the Division Bench has held that GST law does not permit manual filing of returns and there is no facility under the law to accept such returns and the interim order of Single Judge was liable to set aside. It took note of the fact that registration was cancelled as returns were not filed for more than two years and by the interim order the petitioner (before Single Judge) was permitted to continue its business even though person not filing returns for 6 months is liable to de-registered. The Court further held that the tax liability was, prima facie, more than Rs. 16 crores and unless the same is satisfied, such interim relief should not have been granted [2021-VIL-426-KAR].

The allegations in this case are very serious as the modus operandi, according to the department, is filing of GSTR-1 alone without filing GSTR-3B for more than two years. It is to curb such practice, amendment has been brought to restrict filing of GSTR-1 if GSTR-3B is not filed for two months.

Customs Valuation - Amounts paid by exporter to recoup losses by importer not includible

In a rather interesting case involving Customs Valuation, CESTAT has upheld the original order whereby it was held that though the appellant-importer as subsidiary and the foreign holding company as exporter were related persons, payment of "True Up" amounts by the foreign company to the Indian importer did not influence the invoice value and therefore, the same were not liable to be included in the declared value. The appellant is engaged in sale of motor vehicles as completely built units on import from the foreign parent and acts as the distributor in India. When the appellant suffers any loss, the foreign parent pays the appellant to make up for the losses which are called True Up payments.

The appellant argued that the said payment was in the nature of capital subvention by the parent company and the same was not related to invoice value of the imported cars. The department contended that these were in the nature of transfer of funds from the parent company to the appellant and the adjudicating authority should have examined as to how much loss was incurred by the appellant and how much was paid by the foreign supplier as True Up payments and if these payments affected the invoice price of the imported goods.

The Tribunal held that such payments were flowing not from the appellant to the foreign supplier but the other way round and therefore, if these were reckoned to arrive at the transaction value, the invoice value would have to be lowered which would be against the department's case. According to the order, the losses incurred by the appellant had no bearing on the invoice value whether the losses were recouped by the parent company in the form of True Up payments or not. On the argument of applicability of Rule 10 (1) (e) which requires that any payment made as a condition for sale to either the seller or to a third party to satisfy the obligations of the seller is to be included in the value, the Tribunal has held that if the appellant was responsible for certain activities like distribution and sales promotion including advertising and marketing for its business in India, the same cannot be treated as payment to foreign supplier as it would be related to own business. For this purpose, it noted that the appellant being a distributor, in the business of selling cars, had to promote sales and the same cannot be termed as expenses incurred on behalf of the foreign supplier although the foreign supplier would also indirectly benefit if the appellant's business improved [Volvo Auto India Pvt. Ltd. v. CC - 2021-VIL-209-CESTAT-DEL-CU].

To allege that invoice price is influenced by relationship is easy but to substantiate the same, in-depth examination of books and records is required. In this case, Commissioner (Appeals) did not agree with the adjudication order but did not decide the issue either himself or remand the matter. Suspecting every payment made without even examining whether payment is made by importer to exporter or otherwise does not advance the cause of Revenue.

Customs duty not payable on notional transportation cost on remnant Aviation Turbine Fuel

Larger Bench of CESTAT has held that an amount towards transportation cost is not required to be included on notional basis for the purpose of paying customs duty on Aviation Turbine Fuel (ATF) remaining in aircraft after return from international journey. According to it, the airlines are not transporting ATF for delivery to India and ATF which is filled in the fuel tank of the aircraft is actually required to fly the aircraft and is a consumable for the airlines.

Section 14(1) of Customs Act, 1962 reckons transaction value of imported goods as the basis which means the price actually paid or payable for the goods when sold for export to India for delivery at the time and place of importation. First proviso to Section 14(1) provides for inclusion of cost of transportation to the place of importation as per the rules. Rule 10(2) of the Customs Valuation Rules, 2007 provides for inclusion of the cost of transportation of the imported goods but where such cost is not ascertainable, the same shall be 20% of the FOB value of the goods. Interpreting these provisions, the Tribunal has held that if no amount is paid or payable for transportation of goods, the cost of transportation would be considered as nil and this will be not covered under the situation where cost of transport is not ascertainable. It is only when some cost of transportation is actually incurred, but it is not ascertainable that the cost of transportation should be taken to be 20% of the FOB value of the goods for addition to transaction value. It dwelt at length on "payable" whereby liability is created for payment whereas in the present case, the airlines is not liable to pay any amount towards transportation of ATF.

Carrying sufficient quantity of fuel is as per the statutory regulation under Civil Aviation Requirement dated July 8, 2011, and the Tribunal took note of the same. There is no provision to add imputed cost of transportation when actually no cost is incurred by the airlines for carrying its own fuel, as per the order [2021-VIL-203-CESTAT-MUM-CU].

Though these days, CBIC has been accepting several orders not in favour of the department, orders passed by the Tribunal in earlier cases on this issue should have been accepted instead of half-heartedly litigating the same. Inclusion of expenses on notional basis should cease and there should be a categorical clarification from the CBIC on this issue instead of compelling Commissioners to issue public notices at local level.

Seizure and confiscation - Notices and orders within 3 months

These are days of seizure and confiscation under GST in almost all cases. In a typical case of this nature, goods and vehicle were seized, order was passed under Section 129 of CGST Act demanding tax and penalty, notice was issued for confiscation and order on confiscation was passed - all within 3 months. In this "expeditious" disposal, when the order demanding tax was passed, time-limit of 14 days given for deposit of tax from the date of detention had lapsed leaving the petitioner with no time to pay and contest. The High Court has directed the authorities to provisionally release the goods after complying with requirements like bank guarantee. This order has been mentioned in this column to highlight the haste in wrapping entire proceedings without providing sufficient time to deposit the tax demanded and confiscating goods and vehicle in a casual manner. Confiscation is a power which deprives the taxpayer of not only goods but also future orders as buyers will hesitate and transporter will be reluctant to lease the truck to such person. Such power is required to be exercised with great circumspection but unfortunately, such observations remain confined to columns and articles [2021-VIL-414-RAJ].

Liaison office is intermediary and liable to GST

The issue is relatively settled even at the level of Authority for Advance Rulings (AAR) and that too, in favour of the applicants. Liaison offices are established as per FEMA regulations relating to such LOs based on permission granted by Reserve Bank of India are not required to obtain GST registration as they are merely extension of their foreign entity / body, they do not have any independent existence, they are not permitted to engage in commercial activities and they meet their expenditure out of remittances received from the foreign entity. There is no supply involved in such cases. However, AAR, Maharashtra has misdirected itself by noting that the applicant connects businesses in India with business partners in Dubai "which is nothing but supply of services" and therefore, has proceeded to examine coverage under intermediary service.

It has held that by connecting such business entities in India and Dubai, the applicant is actually arranging or facilitating supply of goods or services and it is covered under "intermediary". By browsing the applicant's website, the AAR has found that they are providing certain services for a fee and they are not a non-profit organization. Liaison offices are mandated to act as communication channel and established to represent foreign entity in India. When RBI has granted permission to applicant to operate as LO, the AAR has arrived at the conclusion of such LO being an intermediary without thoroughly examining whether such fee can be treated as consideration and if yes, whether they are supplying services beyond what is permitted as LO. An appeal will provide more insights on this facet of the issue [2021-VIL-224-AAR]

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