Tax Vista Your weekly tax recap Edn. 56 - 12 July 2021 By Dr. G. Gokul Kishore

Suspension of registration under GST worse than cancellation

Suspension of registration under GST is worse than cancellation, according to Rajasthan High Court. Notice was issued by GST authorities proposing cancellation of registration. The registration was also suspended. The taxpayer was given time to file reply within seven days but it was filed after some delay. The notice on cancellation was kept pending. The taxpayer had to seek relief from the High Court. The Court held that as per the relevant rules, the authority is required to pass order on cancellation within 30 days of receipt of reply to notice which was not done in this case and further, asking the taxpayer to file reply within 7 days is contrary to the provisions. Taking a very pragmatic view, the Court said that suspension brings the entire business to standstill and is worse than cancellation. In the words of the Court - "Against cancellation, an assessee can take legal remedies but against suspension pending an enquiry, even if the assessee chooses to take remedies, the authorities or the Court(s) the authorities and Courts would normally show reluctance." It directed the petitioner to file submissions before the authorities and directed them to pass order within the date specified (by the Court) [2021-VIL-511-RAJ].

The frequency with which the power to suspend and cancel registration is being used in GST regime is alarming and such invocation, in most cases, is mechanical without realizing the crippling effect on business. These provisions need to be amended by incorporating sufficient safeguards so that such en masse use is halted.

Revision of TRAN-1 - Madras HC allows relief

As noted in this column before, transitional credit disputes will continue to be fought for many years considering the manner of drafting and re-drafting of provisions, litigation-oriented attitude of the tax department towards tax credit and inflexible approach of the policy-makers. In a recent case, the petitioner had revised the TRAN-1 but did not rectify a major error relating to the actual credit being transitioned. The department, when approached, gave the standard reply that period for revision is over and the same would not be possible at a later date. The High Court accepted the argument of the petitioner that the last date for filing TRAN-1 and its revision was one and the same and it was not correct, and bona fide human error can be allowed to be rectified. It noted that the error committed is inadvertent and there is no basis for providing the opportunity of revision of TRAN-1 form only once. The department was directed to open the portal for filing the revised form. In this case, the petitioner had taken the credit amount in GSTR-3B and when this was objected by the department, writ petition was filed in the High Court. The law could have been made much simpler by providing for revision in such cases and availment of the credit through GSTR-3B returns subject to verification by the tax authorities [2021-VIL-510-MAD].

Shifting of factory to a different State - Admissibility of transfer of credit

A recent order of Madras High Court has all the hallmarks of either lack of guidance to the assessee or assessee's manner of complying with the provisions. Production was stopped a year before implementation of GST and the factory was shifted from Tamil Nadu to Andhra Pradesh where it started functioning after the advent of GST. At the time of closure in Tamil Nadu, Cenvat credit on inputs and input services was lying unutilized besides VAT ITC. Using the GST registration of the closed unit, credits were transitioned through TRAN-1 form. In the meanwhile, the department imposed penalty as proper procedures on bond / LUT were not followed for export. The credit accumulation apparently was due to exports.

The High Court has observed that it is not known why proper application under Rule 10 of Cenvat Credit Rules was not filed for transferring credit to new location before introduction of GST, why the credits were not used to pay duty on export goods whereby rebate could have been claimed or why refund under Rule 5 was not claimed. Taking note of the provisions under CGST Act, it has held that registration in different States means they are distinct persons and as per Section 18(3), shifting of factory is not covered for transfer of ITC. The petitioner had assailed the provisions restricting transfer of credit from one unit in a State to another unit in a different State as arbitrary and unreasonable but the facts of this case have heavily weighed down such argument. The writ petition was dismissed by the Court which means the taxpayer is back to square one as far as credits which were in the books are concerned [2021-VIL-507-MAD].

Minimum purchase obligation is a consideration - Transaction involving such obligation liable to GST

An obligation of the unrelated customer to purchase minimum quantity of certain items when providing certain items free of cost for use for limited period is a supply liable to GST. This is the de novo ruling of AAR. In its earlier ruling [2018-VIL-196-AAR], the AAR had held that placement of medical instruments to unrelated customers like hospitals, labs, etc., for their use without any consideration under an agreement containing minimum purchase obligation of products like reagents, calibrators, disposables, etc., for a specified period constituted composite supply and the principal supply was transfer of right to use of any goods for any purpose and the same was liable to GST. This was upheld by Appellate Authority for Advance Rulings (AAAR) [2019-VIL-13-AAAR]. The applicant filed petition in Kerala High Court and the Court quashed the ruling on the ground that the findings regarding composite supply were without jurisdiction as it went beyond the terms of reference without considering the real issue of whether supply of instruments was a taxable supply [2020-VIL-08-KER]. The High Court also held that supplies were made by two different persons - instruments by applicant and reagents by distributors - and therefore, the same was not naturally bundled. It directed the AAR to pass ruling afresh.

The applicant advanced the argument that any and every obligation will not be a consideration where the statute requires that the consideration should be either money or in money's worth and in the present case also, the CGST Act requires that there should be monetary value of act or forbearance. The crux of the arguments was - for a thing to be treated as a consideration for a supply, it must have some economic value and independent identity. Based on such contention, the applicant stated that the obligation of the hospitals/labs to purchase minimum quantity of products is not a consideration for the purposes of the CGST Act. It was also highlighted that there must be a link or nexus between the supply of goods or services by a person and the consideration paid by another person while in this case, the hospitals/ labs place order for the purchase of reagents and GST is being paid on the same and therefore, the consideration paid by the hospital / labs is for supply of reagent. According to the applicant, there is no nexus between the placement of instrument by them and the consideration paid (or obligation undertaken) by the hospitals/labs and in the absence of consideration, the transaction would not be covered under supply. Schedule-I was also pointed out as there was no permanent transfer or disposal of business assets.

Elaborate arguments could not find favour with the AAR. Forming the view that the primary motivation for the applicant to enter into the agreement to place the instrument at the premises of the customer is the agreement of the customer to purchase the products only from the applicant, it held that such agreement of the customer to purchase the reagents, calibrators and disposables for use in the instrument exclusively from the applicant for a minimum value every month with obligation to pay the deficit amount in case the purchase in a month falls short of the minimum agreed value constitutes a valid consideration as per CGST Act. There is no need to refer to Australian GST law as the language in CGST Act is clear, as per the AAR. The transaction was held as amounting to supply and transfer of right to use for specified period would be supply of service [2021-VIL-242-AAR].

Even a business law like GST is not in sync with business practices and commercial realities. Minimum purchase obligation can be viewed as a condition of contract and not consideration for the contract. The right to recover certain amount if such condition is breached amounts to damages. On damages, GST law is not unambiguous though liquidated damages payable to government in certain cases have been exempted. Persons who draft tax laws take inputs from the members of industry but lack of knowledge of the peculiarities gets manifested in ambiguities leading to disputes and litigation.

Branch office in India providing services to overseas customers of HO - Export of service benefit not available

The advance ruling discussed in this portion is sequel to Kerala High Court's ruling reported in 2020-VIL-102-KER wherein the Court had remanded the matter to Authority for Advance Rulings (AAR) after quashing the ruling in which AAR had refrained from entertaining the application on the ground of lack of jurisdiction when the question involved was related to export of service and place of supply. The High Court had held that AAR has jurisdiction to consider such question. In the fresh ruling now delivered, the AAR has held that export of service benefit will not be available to the applicant.

The applicant is involved in providing IT-enabled services such as mortgage orientation and related services. The status of the applicant is branch (established as per RBI's permission under FEMA) of the parent entity in USA. The applicant argued that services were provided by them to customers in USA and not to the parent company / head office. Reimbursement of cost was made based on cost plus 10% mark up to comply with the transfer pricing regulations. They also relied on the fact that commercial invoice was issued to their head office and payment was received in foreign exchange but the service recipient is not such HO. As the services are provided to overseas customers, the transaction amounted to export.

The AAR relied on intra-company agreement wherein it was stated that service provider is the branch of the parent company in USA, services were defined to mean tasks that service provider agreed to provide to company and the service provider will invoice the company. Reading the clauses in this agreement, the AAR concluded that services are provided by applicant to parent company and not to customers of such parent company and consideration is liable to be paid by parent company to the applicant and the applicant can be considered as providing services on behalf of the parent company. It held that recipient of service is the parent company in USA and applicant being branch office of the US-based company (head office), they are distinct persons as per Explanation 1 of Section 8 of IGST Act and the condition to qualify as export of service that supplier and recipient of service are not merely establishments of distinct person is not satisfied. However, for the period from 27-7-2018, the applicant has been held to be entitled to exemption under entry no. 10F of Notification No. 9/2017-Integrated Tax (Rate) as amended by Notification No. 15/2018-Integrated Tax (Rate) [2021-VIL-244-AAR].

The condition relating to distinct person was apparently brought in the law to implement the legislative intention that export should be between independent parties or legal entities and a transaction between head office and branch office of the same company, though located in different geographies, cannot be the export that the legislature contemplated it to be. It may be argued that, after all, receipt of foreign exchange is the key and once it is satisfied, such condition is artificial and should not be imposed to deny the benefit of export. Cross-border transactions within the same company are always doubted from valuation angle and such additional fetters are placed to safeguard revenue.

Refund of Cenvat credit under GST provisions

The assessee filed revised return under service tax as they had missed out some amount of Cenvat credit and then refund claim was filed under Section 142(9)(b) of CGST Act. The claim was rejected by adjudicating authority on the ground of delay in filing beyond the time-limit under Section 11B of Central Excise Act and after holding that TRAN-1 facility was not used. This was upheld by appellate authority and the assessee was before CESTAT. After dissecting Section 142(9)(b), the Tribunal has held that except unjust enrichment, Section 142(9)(b) has overriding effect vis-à-vis Section 11B and the appellant having fulfilled conditions as per such CGST provisions is entitled to refund. It noted that when two options are available, assessee may choose the beneficial one and in this case, they opted to claim cash refund instead of transitioning the credit. The matter was remanded only to verify invoices [2021-VIL-289-CESTAT-BLR-ST]

No service tax liability on amount received for deficiency in service - Agreeing to obligation of toleration of an act not applicable

When taxability of damages, penalties, compensation, etc., received for breach or deficiency in quality of service remains a grey area in GST, under service tax, orders passed by CESTAT are almost unanimous that such amounts are not liable to service tax under agreeing to the obligation to tolerate an act. This position has been reiterated in a recent order as well. The service provider was engaged in operating, managing and maintaining wind farms for generation of wind energy by using wind operated turbine generator of the appellant. Based on the machine availability clause in the agreement, the appellant raised claims on the service provider for the period of break-down of machinery and service provider issued credit notes to compensate. Department took the view that the same was covered as declared service under Finance Act, 1994 relating to agreeing to the obligation to tolerate an act.

The Tribunal relied on Section 67 relating to valuation highlighting the use of the words "for such service provided" as per which nexus between the amount charged and the taxable service is required. It further relied on Supreme Court ruling reported in 2018-VIL-08-SC-ST to distinguish conditions and consideration involved in a contract. As per the Tribunal, credit note issued by the service provider was for refund of excess amount paid by the appellant and it did not represent any service from the appellant to the service provider and such compensation for defect in service cannot be called as toleration as he was not inclined to tolerate the loss. It held - "Payment of compensation to service recipient in case of lacunae on the part of the service provider for providing the requisite services, from any stretch of imagination cannot be called as act of tolerance on the part of service recipient. The impugned clauses rather conveys that service provider has agreed to provide maintenance service of as good as of 92-95% accuracy and any downfall therefrom shall not be tolerable to the service recipient instead the service provider shall be liable to compensate the recipient." The Tribunal observed that there is no service element while receiving amount by the appellant from the service provider on failure to provide the desired quality of service [2021-VIL-292-CESTAT-DEL-ST]

Legacy of disputes has been left for GST heirs as they have to fight both legacy law cases as well as litigation on this issue under GST. Revenue department will not take any pro-active steps to contain the same nor will hasten to amend the law in favour of the taxpayers. It may sound pessimistic but experience shows this is realistic.

Wading through the turbulent intermediary waters by MNCs

This week also, an advance ruling on intermediary is briefly analysed for the reason that reasoning adopted is worth taking note. The applicant is a subsidiary of holding company engaged in manufacture of aircraft and also related services. Based on "Intra-Group Services Level Agreement", the applicant conducts onsite assessments and monitors performance of various suppliers (suppliers to holding company), provides support to various suppliers under supplier development program and renders technical advisory support to improve supply chain facility of the supplier and also performs various services related to business development. The applicant contended that the activities are essentially providing technical expertise, advisory support and operational assistance and they are not facilitating or arranging any service and they do not mediate. It was further argued that they have no authority to conclude contracts on behalf of the holding company, accept suppliers, activities relating to issuance of purchase order or receive payments from suppliers and they are remunerated with service fees computed on a cost-plus markup basis. Based on such arguments, the applicant expressed the view that they are not covered under intermediary service and therefore, export of service benefit will be admissible.

The facts may be alluringly distinct but the AAR remains consistent. Based on the description of activities covered, it ruled that the services are not covered under "other professional, technical and business services". According to it in the case of an agent or broker, activity is undertaken on another's behalf which is not necessary in the case of an intermediary and therefore, the reliance on principal to principal relationship or calling oneself as an independent contractor is not relevant for the purpose of determining an intermediary. It held that the applicant plays an important part in identifying the vendors, making them understand the product requirement, advising and guiding them not merely on technical aspect of the product but also the ethical aspect in relation to such activities, without which, the holding company will not be able to procure the goods from the vendors and therefore, this activity is facilitation of supplies to the holding company. Payment to intermediary need not necessarily be commission always and cost plus mark-up can also be one of the ways, as per the ruling. Based on such reasoning, the applicant has been held to be intermediary which means the activities will not be covered under export of service [2021-VIL-241-AAR].

The ruling, more than anything else, indicates gaps in structuring of transactions particularly when new laws are introduced and consequential changes are not made in contracts and agreements. Such re-visiting the agreements became necessary so that tax efficiency is taken into account even while remaining fully compliant. One may argue that businesses should not be compelled to change their practices only because of change in law but being pragmatic is preferable to being dogmatic.

Repair along with replacement of spares is composite supply - No single rule on tax treatment

Rendering repair along with supply of spares is composite supply as they are naturally bundled, according to AAR. The reasoning is that there is no transfer of title in goods when parts / spares are provided and therefore, such supplies are ancillary to repair and maintenance of the main goods (fishing vessels in this case) and the entire transaction would be liable to GST @ 18%. The ruling takes note of CBIC Circular No. 47/21/2018-GST wherein it was clarified that such issue should be determined on case to case basis but if value of goods and services are shown separately, then applicable rates should be charged. It is not clear as to why sale of parts when repair is undertaken does not amount to transfer of title. Non-identification of separate consideration for goods is not the test. A composite billing cannot point to absence of sale of goods involved. These are observations reserved for columns like the present one as advance rulings are bereft of elaborate reasons.

Another issue decided in this ruling is whether GST is applicable for supply of materials and labour charges incurred during warranty period at free of cost on fishing vessels presented for repair work. According to the AAR, the consideration received for original supply includes the consideration for promise to repair or replace and separate consideration is not charged for repairs / replacement during warranty. Supply of replacements and repair service during warranty period are incidental to original supply and value of such original supply includes charges for warranty supply also and such supply without consideration in discharge of the warranty obligation is not liable to GST. The ruling adds that if any additional consideration is received in respect of such warranty supplies, GST will be payable [2021-VIL-245-AAR].

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