Tax Vista Your weekly tax recap Edn. 59 - 2 August 2021 By Dr. G. Gokul Kishore

Rule 86A to block use of ITC ledger invocable even if there is no balance

In a brief but well-written order, Allahabad High Court has held that Rule 86A of CGST Rules is not a recovery provision as it does not contemplate any recovery of tax due from an assessee and it only provides, in certain situations and on fulfillment of certain conditions, specified amount may be held back and not allowed to be utilized by the assessee towards discharge of its liabilities. The petitioner had challenged invocation of Rule 86A in their case on various grounds but none of them found acceptance and the writ petition has been dismissed. According to the Court, this provision creates a lien without actual recovery being made.

Negating the contention of the petitioner, the High Court has held that the words 'input tax available' used in sub-rule (1) of Rule 86A cannot be read as actual input tax available on the date of the order passed under that rule and it would relate back in time when the assessee allegedly availed input tax credit either fraudulently or which he was not eligible to avail. Differentiating restriction on debiting the ledger from appropriation, the order reads - "To not allow debit and to appropriate the same are two different things in the context of the Statute. They lead to different consequences. While the first only creates a lien in favour of the revenue by blocking utilization of that amount, appropriation of an amount would necessarily involve transfer of title over the money with the revenue. Plainly, the Rule does not contemplate or speak of such a consequence."

The words "has been fraudulently availed or is ineligible" have been used in the rule which seem to indicate that only if there is some amount of ITC in the credit ledger and if the same is fraudulently availed, then the rule is invocable. However, the High Court has held that even if there is no positive credit available in the ledger on the date of the order, such order would be read as creating lien upto limit specified in the order passed as per Rule 86A and as and when the credit entries arise, the lien would attach to those credit entries upto such limit. We need to wait and see whether such view stands the scrutiny of Apex Court. The objective of Rule 86A itself is to bar debit of what is available in the ledger and it does not contemplate restricting debit of what will be available in future [2021-VIL-553-ALH].

ITC based on provisional registration

The term 'provisional registration' was in vogue during the initial year when migration to GST was being effected. A taxpayer could not migrate finally to GST due to technical glitches in the GST portal. In the first round of litigation, the High Court granted relief by directing grant of fresh registration based on new application and the department was directed to make changes in the GST portal to facilitate compliance by the petitioner for the past period. In this second round of this dispute, the taxpayer has highlighted that the department has not taken action to enable it to comply with the provisions for the past period and purchasers have been directed to reverse input tax credit. The High Court has observed that the petitioner ought to be provided an opportunity to comply with the provisions for the prior period but it will be technically impossible to make changes in the GST portal now. Therefore, it has directed the petitioner to pay the tax with interest through Form GST DRC-03 and recipients of the petitioner may take ITC using the provisional registration number. The Court has specifically directed that ITC shall not be denied on the ground that the transaction is not reflected in GSTR-2A.

Four years of implementation of GST is being celebrated or discussed everywhere. For an issue pertaining to the initial years, taxpayers are still struggling though some have approached High Courts. CBIC can seek information from field formations on registration related issues which are still unresolved and put an end to such issues by providing for appropriate solution [2021-VIL-550-KER].

GST Annual Returns - Amendments notified

CBIC has issued certain notifications on 30th July, 2021. As per Notification No. 29/2021 - Central Tax, 1st August, 2021 has been specified as the effective date from which Sections 110 and 111 of Finance Act, 2021 will come into force. Section 110 of Finance Act, 2021 omits Section 35(5) of CGST Act and therefore, GST Annual Return in GSTR 9 and Reconciliation Statement in GSTR 9C are not required to be audited / certified by Chartered Accountant / Cost Accountant from FY 2020-21. Section 111 of Finance Act, 2021 substitutes Section 44 of CGST Act. As per new Section 44 of CGST Act, self-certified reconciliation statement is required to be filed by specified persons. Rule 80 of CGST Rules relating to annual return has been substituted from 1-8-2021 by Notification No. 30/2021 - Central Tax. If turnover is more than Rs. 5 crores, then self-certified reconciliation statement in GSTR 9C is mandatory. Notification No. 31/2021 - Central Tax provides exemption to those having turnover upto Rs. 2 crores from filing annual return for FY 2020-21.

E-way bill not required for transport of vehicle after purchase - Distance run not relevant

In a judgment following a precedent decision, the Kerala High Court has dismissed the appeal by the department against Single Judge order releasing vehicle detained for not being accompanied by e-way bill when the same was being transported after purchase by the buyer. S. No. 7 in Annexure to Rule 138(14) of CGST Rules covers "used personal and household effects" and therefore, e-way bill is not required when such used goods are transported. In the relied upon decision, the Court had held that even if the vehicle had run negligible distance, the same would be covered under "used personal effect". In this case, the vehicle had run 43 kilometres. The relied upon decision was rendered in 2018. It is not clear why the department filed appeal in 2021 when there is a judgment of the jurisdictional court directly applicable to the issue [2021-VIL-558-KER]

Pre-SCN consultation drama - High Court comes down heavily

In a service tax case, the departmental officer visited the premises of the taxpayer around 2 pm and informed that pre show cause notice consultation will be held at 4 pm on the same day. The taxpayer sought some time but the department issued SCN on the same day. The High Court was completely disappointed at the manner in which such procedure was adopted by the department and imposed costs. The order reads - ".such an action on the part of the respondent No.2 in issuing the illusory preshow- cause notice for consultation only two hours before the hearing is not only arbitrary, but is in utter disregard and in contravention of the very object and purpose of the circular dated 10.3.2017, which mandated such consultation with the assessee as an important step towards trade facilitation, for promoting voluntary compliance and for reducing necessity of issuing show-cause notice. The action of the respondent authority in not taking timely action after the audit report and in issuing the impugned notice in contravention of the mandatory instructions given by the Board, therefore, is required to be seriously viewed. The present petition, therefore, is allowed, subject to the payment of cost of Rs.20,000/-."

The urgency to issue SCN was expiry of time-limit within the next two days. Two months before such expiry, audit report was available. The High Court noted that the department knew that time-limit was to expire but did not take any steps and pre-SCN consultation on the last date was eye-wash. Assessee's request for more time cannot be seen as an attempt to prevent the authorities from issuing SCN before the time-limit expired. The High Court quashed the pre-SCN consultation notice and SCN as being in contravention of CBIC''s instructions. The department was directed to provide effective opportunity of pre-SCN consultation and issue notice only if the same is required [2021-VIL-547-GUJ-ST].

In GST, Rule 142 of CGST Rules provides for such pre-SCN consultation. The proper officer may communicate the details of tax payable before issuing SCN in Part A of DRC-01A. This rule was amended last year to substitute "shall" with "may" thus making such consultation discretionary and not mandatory. Even otherwise, experience shows that the assessee's arguments are not accepted and SCN is invariably issued in all the cases. All such processes were designed to make the tax administration less adversarial but, in a society where lack of trust is ingrained, every member of industry is looked at with suspicion and the confrontationist approach remains intact.

Amendment by way of substitution has retrospective effect

After a subsequent Act amends an earlier one in such a way as it incorporates itself or a part of itself into the earlier, the Act must be construed as retrospective. This is the dictum of precedent judgments and the Madras High Court has followed the same in a recent case. In respect of procurement of machinery by EOU and availment of exemption, installation of machinery was made mandatory by amending notification. The Court has held that since such amendment is by way of substitution, the notification would be retrospective in operation. Principles evolved over a period of time have eternal value and in GST litigation also, such principles will play a major role [2021-VIL-555-MAD-CU].

Liquidated damages not liable to service tax

In yet another order, CESTAT has reiterated its position that liquidated damages recovered for delay in completion of the tasks as per the contract would not be liable to service tax. It did not accept the department's argument that the damages would be consideration for the declared service of agreeing to the obligation to tolerate an act or a situation. The Tribunal has relied on orders passed earlier including South Eastern Coalfields v. CCE & ST [2020-VIL-559-CESTAT-DEL-ST]. This order has been mentioned in this column for the reason that with more or less identical provisions, re-enactment of the same litigation drama will begin under GST unless CBIC pro-actively intervenes and clarifies or the law itself is amended whether in favour of taxpayers or otherwise [2021-VIL-338-CESTAT-CHE-ST].

Purified sewage water supplied for industrial use liable to 18% GST

Tertiary Treated Water (TTW) is purified water after treatment of sewage water and such water was supplied to power generation company by the entity which has been awarded contract by municipal corporation for management of sewage system in the city. The entity was charging 18% GST but the buyer was of the view that TTW was an exempted item since the same was not "purified water". Exemption under Notification No. 2/2017-Central Tax (Rate) covers water other than aerated, mineral, purified, distilled, medicinal, ionic, battery, demineralized and water sold in sealed containers. Drinking water packed in 20 litre bottles attracts 12% GST and other waters are liable to 18% GST. The Authority for Advance Rulings (AAR) noted that sewage water is purified and therefore, it is called TTW and the same is supplied to power plants for use in cooling towers. As per the ruling, exemption is only to simple and natural type of water and other types of water have been kept out of exemption and therefore, purified sewage water would not be covered by such exemption. The impugned item being not potable drinking water, it would be liable to GST of 18% [2021-VIL-270-AAR]. Generally, the applicant argues against the view of the department but in this case, the applicant was of the view the product attracts GST of 18%. The AAR could not have obviously disagreed.

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