Tax Vista Your weekly tax recap Edn. 58 - 26 July 2021 By Dr. G. Gokul Kishore

Independent application of mind absent - Search & seizure unlawful

The Delhi High Court has held the search and seizure as unlawful and has set aside the prohibition placed by the department in a case where the GST authorities suspected tax evasion. The taxpayer argued that the authorization issued for search and seizure was invalid. In this case, a particular Commissionerate requested the other to find out whether an entity existed. This communication did not show any goods liable to confiscation, or any documents or things or books useful or relevant for proceedings under the CGST Act, were secreted in any place. This is the prerequisite for forming the belief before search and seizure as per Section 67(2) of CGST Act. The Court held that the authorization merely reproduced the provision and the essential jurisdictional element or ingredient to form such belief was absent and therefore, exercise of powers by the Additional Commissioner in issuing the authorization for search and seizure was flawed and not sustainable. It specifically noted that there was no independent application of mind by the officer while issuing the authorization. The Court said - "The officers concerned should bear in mind that the search and seizure power conferred upon them, is an intrusive power, which needs to be wielded with utmost care and caution. The legislature has, therefore, consciously ringfenced this power by inserting the controlling provision, i.e., "reasons to believe"." The department did not rebut the contention that stock details were maintained in electronic form as per Section 35 and as per the Court, bald assertions were made without discussing as to why documents produced / seized were not relevant.

As "reasons to believe" is the key for invocation of such powers, based on jurisprudence, the High Court noted that the expression does not carry the same connotation as "reason to suspect" and the standard of belief is that of a reasonable and honest person and not one based on surmises and conjectures, or mere suspicion. The belief of the authority should be based on some actionable material that he has had an opportunity to peruse, and the material placed before the proper officer should have nexus with the formation of the belief [2021-VIL-541-DEL].

Extension of time by Supreme Court - Investigations and inquiry under GST not covered

CBIC has issued Circular No. 157/13/2021-GST dated 20-7-2021 clarifying extension of time-limit for various actions consequent to notifications issued as well as Supreme Court's order in this regard. According to this circular, extension of time as per Apex Court's order is only with reference to judicial and quasi-judicial proceedings in the nature of appeals, petitions, etc., and the same has not been extended to every action or proceeding under the CGST Act. Therefore, the circular states that scrutiny of returns, issuance of summons, search, inquiry or investigations and consequential arrest in accordance with GST law would not be covered by such order. Such extension will not apply to original adjudication also and hence, issuance of show cause notice and filing of reply to SCN will not be covered by such extension. The circular places reliance on legal opinion obtained for this purpose. Seeking legal opinion indicates that the tax administration is averse to extension of time-limit for various actions even though the reason for extension is the same whether for filing appeal or for filing reply to SCN. It cannot be argued that due to Covid-19, filing of appeals online within the time-limit will be difficult but persons can give evidence by being present physically before the officers pursuant to summons.

Best judgment assessment - Order to be withdrawn when returns filed as per Court's order

Section 62(1) of CGST Act / Karnataka GST Act provides for assessment by the GST officer based on his best judgment if a registered person fails to file returns despite notice. If valid return is filed within 30 days of passing such assessment order, then such order is deemed as withdrawn as per Section 62(2). In a case before the Karnataka High Court, best judgment assessment orders were passed for various periods. The taxpayer had approached the High Court earlier and time was granted to file returns by the Court and the returns were filed. However, such compliance was not made within 30 days of the assessment order as per Section 62(2). The Court noted that in the facts of the case, as per its orders, if returns were filed within the time permitted by it, then the same should be construed as filed within time. The department was directed to proceed as per law by taking the return as filed under Section 62(2). In this case, initially attachment of bank account was ordered to be lifted, then payment of tax was appropriated towards wrong type of tax, then the same was sought to be adjusted, etc. An endorsement made by the department has also been set aside by the Court. Even if the provisions are simple, the proceedings initiated tend to complicate them as this case reveals [2021-VIL-535-KAR].

Medical store run by charitable trust liable to registration - Sale of medicines at lower price liable to GST

Registration under GST law is required for medical store run by charitable trust and sale of medicines by such store at a lower rate is supply of goods. This is the ruling by both AAR and AAAR and the same has been upheld by High Court now. It held that sale may be at a cheaper rate but for consideration in the course of their business and therefore, registration is required. The petitioner argued that there is no profit motive and the activity cannot be considered as covered under "business". However, the Court was hardly impressed. It held that definition of business in Section 2(17) of CGST Act clearly points to inclusion of any trade or commerce whether or not for a pecuniary benefit. The petitioner was not able to point out how such activity of selling medicines for consideration could not be said to be trade or commerce. The trust could have filed a representation with the GST Council / CBIC seeking exemption advancing certain grounds instead of filing a writ petition. The High Court has been magnanimous to admit and pass an order on merits even though writ jurisdiction was invoked [2021-VIL-534-GUJ].

Matching of ITC not relevant when credit reversed voluntarily

Section 42 of CGST Act deals with matching of inward and outward supplies and reversal of credit through the system (portal). The system was expected to generate a mismatch report, communicate the same and if the same is not rectified, such amount was to be added to output liability of the recipient. This process has not been operationalized. In a case apparently involving wrong availment of ITC, the same was voluntarily reversed. But, the taxpayer went to High Court on the ground that notice was not issued as per Section 42. The Court held that Section 42 is not applicable in the present case as it is one wrong availment of ITC which was paid back voluntarily. The order also relates to interest on net cash tax liability and as such, the issue is not clear. However, it is surprising to find Section 42 being relied on [2021-VIL-543-MAD].

Inquiry proceedings closed - Issue cannot be adjudicated

Parallel proceedings are order of the day whereby irrespective of the allocation of taxpayers to either Central or State jurisdiction, both CGST and SGST officers besides DGGSTI officers conduct inquiry and investigations against the same person simultaneously. Writ petition was filed assailing initiation of inquiry and issuance of summons by CGST officers on the ground that the taxpayer was allocated to the jurisdiction of SGST officers. In the meanwhile, taking note of payment of the dues, the proceedings were withdrawn / closed. However, the taxpayer insisted that the issue should be decided. The Court said that the issue sought to be adjudicated cannot be decided in a vacuum since the inquiry proceedings have been closed by the tax authorities. It disposed the writ petition leaving the question of law open. Writ petition is filed against an action considered as arbitrary or discriminatory or not legal or in taken or proposed to be taken in the absence of jurisdiction or in excess of jurisdiction. When the action alleged as lacking jurisdiction itself has abated, then the writ proceedings cannot continue though the petitioner prayed for an armour to defend, possibly, against a similar action in the future [2021-VIL-545-DEL].

E-way bills, detention of vehicles and the agony

There is no change in the script. In yet another case, because the e-way bills did not carry the temporary registration number of the trucks, they were detained. The GST officer issued notice without proper grounds and followed up with another. It appears the demand of tax was made against the consignee and the notice was not served on the transporter. All the new trucks were under detention for more two months. The only solace is writ remedy and the High Court intervened to direct release of the vehicles on furnishing of bank guarantee and bond. The Court was of the view that the procedure adopted by the department was "wholly irregular". This is the humane face of the tax authorities when the second wave of Covid-19 was causing great misery across the country. The power to detain goods and conveyances on frivolous grounds or for minor breaches should be abolished by appropriately amending Section 129 of CGST Act. It may not happen today but the frequency of misuse of such powers will compel the government to amend in the near future [2021-VIL-542-TRI].

Interest payment in installments - High Court directs but relief seems elusive

Registration was cancelled for non-payment of tax. It appears the same was paid and the taxpayer was before the High Court aggrieved over non-restoration of registration along with the prayer to permit payment of interest in instalments. Taking note of the Covid-19 induced difficulties and parties refusing to make payment in the absence of registration, the High Court has directed the GST authorities to consider the request of the petitioner for payment of interest in instalments. The Court has, however, said that registration shall be restored once all dues are paid by the petitioner. If payment of dues is the condition for restoration of registration, may be, the petitioner would not have come to the Court [2021-VIL-544-GAU].

Intra-company transfer of goods on lease and facilitation - GST implications

GST law has the distinction of creating the fiction of distinct persons whereby branch or unit of the same company but located in a different State "B" and the company as such located in State "A" are treated as different persons. Registration being State-specific under GST law, such fiction of distinct person enables taxing of intra-company but inter-State transactions. Ruling was sought from AAR on various questions involving such transactions. The AAR ruled that leasing of assets (pallets, crates, etc.) by the company in one State to its unit in another State would be a supply of service liable to GST. Being a supply between distinct persons, taxable value will be governed by Rule 28 of CGST Rules and therefore, the recipient unit being eligible for full input tax credit, value declared in the invoice will be the value on which GST would be payable. The ruling does not elaborate the reasoning for holding that the recipient is eligible for full ITC or as to what is meant by "full ITC". As to the document to be used for transporting the goods under lease, it has been held that in this case, movement of goods without supply is involved as the goods are given on lease and therefore, delivery challan is required to be issued along with compliance with e-way bill provisions. Market value of the goods will be relevant for such documents.

When the lease period is over, similar documents should be used for return of goods. Another question posed was the implication in respect of goods transferred to unit in State "C" by unit in State "B" on the instructions of the company in State "A". In this case, while GST would be payable on fresh lease from the company to the unit in State "C", for facilitation of such transaction (applicant also stated the same), GST would be payable on service charges recovered by unit in State "B". Sub-lease has also been addressed as another scenario in this ruling. This ruling, though answers obvious questions, may be helpful to at least a few in the industry for the purpose of guidance [2021-VIL-269-AAR].

Coal cinder - Classification sans sufficient reasoning

Coal dust or cinder which is unburnt or half-burnt coal with low calorific value and no capacity to produce flame, emerging during the manufacture of sponge iron, is classifiable under tariff item 2619 00 90. This ruling of Authority for Advance Rulings (AAR) relies on the judgment of the Supreme Court in UOI v. Ahmedabad Electricity Co. Ltd. [2003-VIL-10-SC-CE] and CESTAT decision reported in 2017-VIL-1220-CESTAT-HYD-CE. This waste is also termed as Char-Dolachar. In the Apex Court judgment, cinder was held as not excisable because it was not a marketable commodity. However, the Supreme Court expressly notes that "for the sake of deciding this issue, we will assume cinder is ash and therefore, is liable to be covered under entry 26.21". Classification of cinder was not actually decided in this judgment and placing reliance on the same is incorrect. Even otherwise, heading 2621 is available in GST Notification No. 1/2017-Central Tax (Rate) but the AAR has not discussed inapplicability of this heading.

The dust particles which are separated using electrostatic separator has been held as classifiable under the same heading as above. By virtue of such classification, these products would attract GST @ 18%. The ruling is rather abrupt as there is no discussion but it has been held in the order portion that GST Compensation Cess would not be applicable to cinder / half-burnt coal. It is a fact that such cess is applicable only if the said product is classifiable as coal under the heading 2701. Considering the ruling on classification, it is obvious that cess is not applicable but a line or two in the discussion would have made the order more speaking. If one were to look at the landmark judgments on classification under Central Excise, both the arguments advanced and the judgment of the Court used to be so eloquent and they are treasure-house of knowledge. But, these days, one can only reminisce those classic orders [2021-VIL-268-AAR]. Readers may see another advance ruling which is detailed in terms of processes, jurisprudence relied on, etc., in so far as classification of pappad is concerned whereby exemption has been held as admissible after classifying the same under tariff item 1905 90 40 [2021-VIL-266-AAR]

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