Tax Vista Your weekly tax recap Edn. 54 - 28 June 2021 By Dr. G. Gokul Kishore

Inputs lost during manufacturing - ITC reversal not required under GST

Input tax credit attributable to the quantity of inputs lost during manufacturing process is not required to be reversed, according to Madras High Court. Section 17(5)(h) of CGST Act barring ITC on goods lost, destroyed, written off, etc., is not applicable in such situations. As per this order, loss occasioned by the process of manufacture cannot be equated to the instances specified in the above provision. The Court says - "The situations as set out above in clause (h) indicate loss of inputs that are quantifiable and involve external factors or compulsions. A loss that is occasioned by consumption in the process of manufacture is one which is inherent to the process of manufacture itself." It relied on its judgment in the case of Rupa & Co. [2015-VIL-373-MAD-CE] wherein it was held that inputs need not be contained in the final product by exact weight / measure and every manufacturing process would involve loss by evaporation, by-products, etc. [2021-VIL-484-MAD].

These are very early days of GST litigation. Though same disputes as they were raised in pre-GST regime are again given fresh lease of life under GST and precedent judgments are helpful to an extent in resolving such issues when the provisions are more or less similar, GST department will find it difficult to digest the same. If history is an indicator, ITC will stoke major controversies and Section 17(5)(h) will have a significant contribution.

DGGSTI Officers are proper officers empowered to issue summons under GST

In an important order, Gujarat High Court has held that officers of DGGSTI (also referred as DGGI) are "proper officers" empowered to issue summons to compel attendance of persons and production of documents under Section 70 of CGST Act. As readers are aware, the issue of revenue intelligence / investigation officers being proper officer or not for initiating various proceedings under Customs Act has twice travelled upto Supreme Court including in the recent case of Canon India [2021-VIL-34-SC-CU]. Deriving support from such judgment, summons issued under CGST Act by DGGI officers were challenged along with the validity of Circular dated 5-7-2017 relating to assignment of particular functions to certain officers specifying them as proper officers.

The High Court felt that the arguments advanced by the petitioner lacked substance and held that the DGGI officer is an officer of Central Tax and Superintendent as per Notification No.14 of 2017-Central Tax and he was assigned powers of proper officer by the CBIC by Circular dated 5-7-2017 issued under Section 2(91) [defining "proper officer"]. Therefore, such officer was entitled to issue summons. The Court held that Section 167 dealing with delegation of powers by way of notification is not applicable to the present situation and there was no need to issue a notification for the present issue of considering certain officers as proper officers. It is clear that the Court sought to distinguish between appointment of an officer as "proper officer" and authorizing an officer to exercise powers as delegated to him.

The petitioner has argued that parallel proceedings have been initiated. But the High Court noted that DRI, Kolkata had initiated inquiry on availment of refund of IGST paid on exported goods as well as exemption on imported materials whereas the DGGI officers have initiated proceedings in respect of refund of ITC [2021-VIL-483-GUJ].

The issue is certain to be agitated in the Supreme Court, if not in this case, in another case. Considering the spate of investigations initiated by DGGI, such question will reach the Apex Court very soon and the final word from the top court will drive away the ghost of the old controversy coming to haunt in GST regime now.

Prosecution under GST - Why should State GST Officers lodge FIR?

In a few cases, it is noticed that State GST Officers lodge FIR in local police station when investigations are launched and inquiry is initiated in cases of alleged evasion of GST or fraudulent availment of ITC. This is completely unheard of in Central Excise. As per the scheme of Section 132 of CGST Act / SGST Act read with Section 134, investigations are undertaken, documents and records are seized and evidence is collected based on which complaint is drafted and filed in a court of First Class Magistrate for taking cognizance. Commissioner is the authority to accord sanction / permission for launching prosecution. GST officers have also been empowered to arrest persons who are alleged to be involved in evasion. There is no role for police except to take assistance if the situation demands. Without Commissioner's sanction, prosecution cannot be launched - launching of prosecution is understood as initiation of trial in criminal court on filing of complaint by the GST department and taking cognizance of the same by the court.

In a recent case, without Commissioner's sanction it appears prosecution has been launched in a case of alleged ITC fraud. The State GST authority has lodged FIR and the petition was filed under Section 482 of Cr. P. C. (inherent powers of High Court) to quash the FIR. The High Court noted that prosecution can be launched only with the previous sanction of Commissioner but in this case, prosecution cannot be said to have commenced. According to it, prosecution commences when the court takes cognizance on presentation of formal charge-sheet and in the present case, investigation is underway and charge-sheet under Section 173 of Cr. P.C. is yet to be filed. Therefore, the Court has declined to quash the FIR as lodging of FIR itself does not amount to prosecution. Section 173 deals with report of police officer on completion of investigation and such provision is not applicable to prosecution under GST law. The complaint filed by the tax department in prosecution cases is not treated as filed by "State" but it is considered as private complaint. Even otherwise, FIR route itself is not provided for in GST law. These are arguments that appearing Advocates are expected to raise [2021-VIL-485-P&H].

Can show cause notice be revised?

In an otherwise routine order where the department violates principles of natural justice and passes order without hearing the taxpayer, the High Court has set aside such order and directed the GST authority to provide personal hearing. However, the department has stated that hearing was extended when first show cause notice was issued and petitioner did not insist on hearing after revised SCN was issued. The High Court has observed that as per records, there was a request for hearing. This order is mentioned in this column for the reason that second SCN for the same issue is not permissible and there cannot be a revised SCN when hearing has been completed initially. May be, in this case, there was a corrigendum to the SCN for correcting certain mistakes. But, the order does not mention about any corrigendum [2021-VIL-479-AP].

Recovery of customs duty when company under insolvency process - Karnataka HC adopts independent reasoning vis-à-vis Madras HC

In Tax Vista dated 17 May, 2021, Madras High Court's judgment in Ruchi Soya Industries Ltd. v. UOI [2021-VIL-372-MAD-CU] was elaborately discussed. The same party was before Karnataka High Court on the same issue. Bills of entry were filed a day before customs duty rate was increased by notification and the vessel also arrived on such date of issue of notification. The Single Judge had held that increased rate of customs duty was not appliable to the subject imports. While Customs authorities had filed appeal against such order, the importer had filed application on the ground of such statutory dues not being part of resolution plan as per Insolvency and Bankruptcy Code (IBC). The Madras HC had held that with the advancement of information technology, the argument on notification being effective from the date when it is published and offered for sale was not acceptable. However, the Karnataka HC has disagreed. According to it, the proposition that any information being made available on the website of the Department would comply with Section 25(4)(b) of the Customs Act, cannot be accepted as the provision was in the statute book during the material period. It also observed that view of the Madras High Court is contrary to the dictum of the Supreme Court in Param Industries Ltd. [2015-VIL-164-SC-CU].

The order holds - "The issuance of the Notification must be followed by its publication in the Official Gazette and on such publication being offered for sale on the date of its issue. If for any reason, the Notification issued by the Central Government is published and offered for sale on the date of its issue, but offered for sale on a later date, then it is only with effect from the date of which it is offered for sale, such a Notification would become enforceable." As the Single Judge's order was upheld, appeal by the Customs authorities was dismissed on merits.

As the importer had argued against recovery in view of IBC, the High Court held that Section 238 of IBC has overriding effect and crown debts do not take precedence even over secured creditors and if the departments of Central or State Governments do not file an application or participate in the resolution process, their claims automatically get extinguished. It relied on the judgment of the Supreme Court in the case of Ghanashyam Mishra [2021-VIL-55-SC]. On this issue, it adopted the same conclusion as Madras High Court. However, Madras HC had remanded the matter to NCLT to verify whether customs dues were included in operational debt whereas in the present case, Karnataka HC took note of the facts that the appeal of the department has been dismissed on merits and also the department did not produce any material to show that customs dues were part of the resolution plan [2021-VIL-478-KAR-CU].

As noted by us in this column earlier, recovery of tax dues from companies under IBC will be a challenge to the tax department in view of the amendments to IBC and the above noted judgment of the Supreme Court. New owners of the companies coming out of resolution process under IBC can keep tax department at bay for the predecessor's dues only if such tax dues are not part of the resolution plan.

Customs dispute of 1987 - Consequential refund now ordered by Tribunal

Shocking is a term which cannot express our feelings when the facts of this case are seen. The initial dispute arose in 1987 and the appeal on merits was decided in favour of the importer. Refund of the pre-deposit amount was sought but rejected on the ground of unjust enrichment. The Tribunal has now directed the department to comply with CBIC's instructions issued in 2014 on inapplicability of unjust enrichment to refund of pre-deposit amount. This appeal itself was filed with the Tribunal in 2006 but orders have been passed now. The amounts involved are not huge but the department's resistance to such refund and inexplicable reasons for pendency are either depressing or evokes anger over the system. If a person has to wait for 34 years to get refund from Customs authorities, no one can venture to do business. The present order of the Tribunal is eloquent in terms of language used but there is no mention about interest for the delay of so many years [2021-VIL-257-CESTAT-MUM-CU].

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