Tax Vista Your weekly tax recap Edn. 63 - 30 August 2021 By Dr. G. Gokul Kishore

Re-credit in ITC ledger after 3 years - HC allows filing of claim for interest

If refund of input tax credit is claimed, then corresponding amount is required to be debited. For some reason, if the refund is not granted, then order in Form PMT-03 is issued to re-credit the ITC initially debited. In a case before the High Court, the above said form was issued three years ago but re-credit was not made. It was finally re-credited after filing of writ petition. The petitioner sought interest for delay in such re-credit. The department argued that such objection should have been raised in Form PMT-04. The High Court rejected such argument and held that the petitioner cannot be made to suffer for the laches of the department. It noted that no reasonable explanation was offered for the delay. It directed the petitioner to file claim for interest and the department to consider the same as per law. For obtaining re-credit of own ITC debited only for getting refund, taxpayers have to wait for 3 years and also file writ petitions. GST is a new tax system but the methods of tax administration have remained the same as it were decades ago [2021-VIL-600-JHR]

Denial of transitional credit - High Court terms department's approach as reprehensible

In one of the thousands of disputes relating to transitional credit, TRAN-1 form was filed by due date and the same was acknowledged by way of communication of ARN and an automated mail was also received confirming successful filing. As usual, due to technical glitches such credit amount was not reflected in the electronic credit ledger. The next course of action is obvious - prayers and petitions followed but nothing yielded any result to the taxpayer. After 3 years the taxpayer was informed that there was no technical issue as per the log maintained in the system. The only remedy was filing writ petition in which it was contended that similar issue in their case was resolved by GST authorities in other States and Bombay High Court had granted to relief to the petitioner.

Before the High Court, the department filed a lengthy counter without answering the specific grievance of the petitioner. The High Court held that the counter was self-contradictory as it noted successful filing of TRAN-1 by many taxpayers even while highlighting formation of IT Grievance Redressal Mechanism. The Court held that transition to GST was not smooth and it was chaotic due to failure of the network and there was no negligence on the part of the petitioner as ARN and e-mail were received. The High Court had strong words for the department - "In the facts of the present case, even though the petitioner is in receipt of an acknowledgment number and also an email confirming successful submission of the Form GST TRAN-1 electronically, the information furnished thereunder is not transitioned into online electronic credit ledger of the petitioner maintained on the portal, which admittedly is in the control of the respondents. The respondents instead of taking steps to set-right their house in order, are alleging negligence on the part of the petitioner. The said action of the respondents is a highly reprehensible and only goes to show the high-handed attitude and approach of the respondents in dealing with the taxpayers, forgetting the fact that no tax can be collected without authority of law, which implies that the respondents grant the benefit / concession to which a tax payer is entitled to otherwise. By denying the transitional credit as in the present case, the respondents are compelling the tax payer like petitioner to pay tax in full without availing the benefit of adjustment / debit from its credit ledger." The petition was allowed and the department was directed to transition the credit amount to electronic credit ledger [2021-VIL-607-TEL].

Unless there is a GST Council meeting with the single-point agenda of addressing all transitional credit issues and unless a decision is taken to grant such credit in all pending cases, this issue will continue to drain the resources of taxpayers, tax administration and the judiciary for years to come. CBIC and GST Council Secretariat should brainstorm to offload this unnecessary baggage weighing down everyone from day one.

E-way bill expiry - High Court provides well-reasoned relief

Tripura High Court has passed a very well-reasoned order which should be taken as the basis for issuing fresh circular / instructions on e-way bill related issues by the CBIC. As per the facts, the trailer carrying excavator was detained in the check-post on the ground that the excavator was not registered with Transport Department. The petitioner paid the fine imposed by the Transport Department but by that time, validity of e-way bill had expired and therefore, the vehicle was detained. A new e-way bill was generated but the same was not accepted by GST authorities. The High Court ordered release of the vehicle and held that the fault (if at all) was only technical and the present case is an ideal one for the authorities to exercise power to provisionally release the vehicle / excavator. It specifically emphasized that the tax authorities must make a clear distinction between deliberate tax evasion and technical or minor defects where intention to evade tax is absent. In the present case, when the IGST liability has been fully discharged, no intention can be attributed on part of the petitioner to evade tax, as per the order.

Taking business realities into consideration, the Court pointed out - "The machinery costs nearly half a crore of rupees on which the Government revenue has already earned substantial tax. Detaining such machinery at the check post would expose it to deterioration particularly in the present season of heavy rainfall. The purchaser of the vehicle would also suffer gross inconvenience because having paid more than fifty lakhs of rupees for purchase of the machinery he would not get the delivery of it for an indefinite period of time. His projects and works which must be in pipeline would also suffer."

Such approach should ideally govern the tax administration. If the officers pause for a moment and think about the losses that would be suffered if vehicles and goods are detained when there is no intent to evade tax, then instances of such harassment will come down significantly. Till the time the tax authorities develop such sensitivity to the issues faced by taxpayers, the only hope is the judiciary. The High Court was so genuinely concerned with the plight of the petitioner that it not only heard the petition and passed the order within a short period, but also directed the department's counsel to inform the department over phone to enable release, swiftly ending the agony and uncertainty of the petitioner and his buyer [2021-VIL-611-TRI].

Taxpayers alleged of GST violation - Are they anti-social elements?

When it comes to invocation of extreme powers of arrest, prosecution, etc., SGST authorities have no clue on the circumspection and restraint required. In a case relating to prosecution under GST law, complaint was filed in the court but the taxpayer apprehended detention under Prevention of Anti-Social Activities Act (PASA). The High Court noted that the State GST department has submitted that no proposal has been "so far" to detain the taxpayer / petitioner under PASA. Highlighting the words "so far" used by the department, the Court held that the sword cannot be left hanging over the taxpayer particularly when economy is trying to recover after Covid. It held that in such cases State authorities cannot be permitted to resort to stringent provisions like detention under PASA [2021-VIL-609-GUJ].

While it may be a mere apprehension of the taxpayer on invocation of PASA, the department did not rule out the same categorically before the High Court. This Act was passed in 1985 in Gujarat and the objective as per preamble is to provide for preventive detention of bootleggers, dangerous persons, drug offenders, immoral traffic offenders and property grabbers for preventing their anti-social and dangerous activities prejudicial to the maintenance of public order. Many States have such statutes commonly termed as Goondas Act and such laws provide for preventive detention of rowdy and anti-social elements. Obviously, such an Act cannot be invoked for alleged tax offences. The SGST department should have been more clear before the High Court.

Coal is a raw material for manufacture of cement

Clinker cannot be produced without coal and the cement cannot be produced without clinker. This makes coal a vital and necessary raw material for manufacturing cement. These lines contained in a recent order of High Court essentially decides the dispute when the tax authorities denied set off of entry tax paid on coal used in the manufacture of cement on the ground that the same was not a raw material. The tribunal had held that coal ash was the raw material and coal was not. Relying on various precedent decisions, the Court rejected the argument of the department and held that coal used in the manufacture of cement is an input as per the relevant entry tax statute and tax credit of the same was available. Though this judgment is under a pre-GST law, there is no guarantee that similar disputes will not be raised in GST regime as well. The GST authorities may well adopt a similar stand on coal or other items which are not contained in the final product but without which the final product cannot be manufactured [2021-VIL-602-ORI].

Renting of buses to companies not covered under GST exemption

Passenger transportation by non-AC contract carriage (bus) is exempted under GST. It is a normal practice for companies to take buses from vehicle owners for bringing employees to factory and dropping them back in the residential colony or other point of disembarkation. One such service provider sought advance ruling on applicability of the exemption to the above activity of transportation of employees. The AAR held that the vehicle cannot be treated as contract carriage and therefore, exemption is not admissible and the service would be renting of motor vehicle attracting 5% GST without ITC (excluding ITC on input service of same line of business) and 12% GST in other cases. The ruling discusses the fact that the charges for use are paid by the company and not the employees and therefore, this is not a case of passenger transportation but renting of vehicle. Without independent finding on "hire" and "renting", the ruling also holds that even if the vehicle is a contract carriage, the exemption entry excludes hired vehicles and hence, exemption would not be admissible. After so many amendments, it appears that the dust is settling in so far as this sector is concerned. One hopes that the rulings do not unsettle [2021-VIL-340-AAR].

ITC not available on lift, AC plant, fire extinguisher and services related to construction even when not capitalized

Adopting the same position held earlier in another ruling discussed in Tax Vista dated 23-8-2021, the Authority for Advance Rulings (AAR) has held air-conditioning plant is a system comprising of compressors, ducting, insulators, etc., and they in the nature of system and are not machines as a whole. The ruling goes on to hold that such "AC unit" is liable to GST but not the "AC plant" and the same is not covered under "machinery"; such plant fitted in the building cannot be taken as such to the market for sale and cannot be shifted and therefore, it cannot be treated as movable property and supply and installation of such AC unit is works contract and ITC will be restricted as per Section 17(5)(c) of CGST Act. According to the AAR, lift is an immovable property and it does not have an identity when dismantled and it cannot be covered under plant and machinery. Lift is part of the building in which it is installed and therefore, ITC will not be available. The ruling appears to indicate that what is not "goods" under Central Excise will be immovable property under GST law. Electrical fittings, cables, etc., once fitted in the wall, cannot be shifted without cutting the wire, etc., and therefore, these are also covered under immovable property inviting the bar on ITC. Roof Solar plant attached to the roof on concrete base cannot be sold as such and therefore, they are also immovable property. Similar conclusion has been arrived at in respect of fire extinguisher.

Generator and locker cabinet are the only two items for which the applicant could get the blessings of AAR. Architect service and interior decorator service have also been held as not entitled to ITC as per Section 17(5)(d) which is patently incorrect. The AAR simply states that whether it is treated as capital or revenue expenditure, ITC will not be available when the construction is new one [2021-VIL-338-AAR].

Part relief can be expected if appeal is filed but the advice given to such taxpayers to seek advance ruling, particularly on ITC related issues, appears to be not very prudent. On lifts, a few other rulings have ruled out ITC. It will require a judgment of the Apex Court to lift the credit embargo imposed by the department on lifts. Ignoring the ground on expenses which are not capitalized is certainly not a legally sustainable position in so far services related to construction are concerned.

Construction of residential flats - Other charges liable to GST of 18%

Developers and builders of flats collect various charges for utilities / facilities like electricity meter installation, water connection, advance maintenance, club house, etc. Such "other charges" are liable to GST of 18% and will be treated as towards independent services as per a recent advance ruling. The applicant, engaged in construction of residential apartments, has been following the same practice but it appears, wanted an authoritative pronouncement on this issue. The alternative view on this issue is that all these or some of these are naturally bundled with construction service and will be treated as composite service where construction is treated as the principal supply. This would mean such charges will also get covered under the effective rate meant for construction service. One of the main grounds is that the ancillary services are not provided independently, and they are part of the agreement for construction of apartment only.

There is no clarity about the document relied on by the AAR as it has been mentioned as "Sale deed agreement". Normally, sale agreement is different from sale deed as the latter represents conveyance while the former is merely an agreement. After citing certain clauses in this document, the AAR has held that the applicant has collected basic price for sale of flat separately and "other charges" separately and merely having a common agreement will not make the transaction supply of bundled services. Two important points that can be gleaned from the ruling are (a) for electricity meter and water connection, the deposit amount could have been covered under "pure agent" but the same have not been raised by the applicant as noted by the AAR (b) the consideration taken as the basis for stamp duty will be a determining factor [2021-VIL-342-AAR].

Supporting of liaison office by head office is not supply under GST

Quite a few advance rulings have been delivered on this issue - liaison office in India of a foreign entity is not permitted to do business and earn income as per the permission to establish such office granted by RBI under FEMA regulations applicable to such office and therefore, such LO is not liable to take registration and pay GST. Providing the same answer but to a differently phrased question, the AAR has held that the head office and the LO are related persons and as per Schedule I of CGST Act, the same would be a supply of service as per the entry "Import of services by a person from a related person or from any of his other establishments outside India, in the course or furtherance of business". It then ruled that such entry will be attracted when the services are imported in the course or furtherance of business whereas LO undertakes only liaisoning activities acting merely as a communication channel without being involved in business or commercial activities and therefore, services provided by HO to LO are not covered under supply. Consequentially, LO has been held to be not liable to obtain registration. This ruling has been mentioned in this column as the questions have been worded differently. HO and LO may not be considered as related persons as they are establishments of the same entity but this does not materially change the position [2021-VIL-341-AAR].

GST relaxations - Extension of due date for availing certain relief measures

Many taxpayers will be surprised to know that there is an amnesty scheme in GST termed by CBIC as "Form GSTR-3B Late Fee Amnesty Scheme". Earlier, late fee was reduced in case of failure to file GSTR-3B return from day one of GST till April, 2021 and to avail such "benefit", returns should be filed by 31-8-2021. Now, it has been extended till 30 November, 2021 by Notification No. 33/2021 - Central Tax dated 29-8-2021. In Tax Vista dated 31-5-2021, the GST Council's recommendation was mentioned wherein the utility of such "amnesty" was doubted since registration would have been cancelled if returns have not been filed for so long.

By another Notification No. 32/2021 - Central Tax issued on Sunday (29-8-2021), CGST Rules have been amended. Rule 26 on method of authentication provides for authentication of GSTR-1 and GSTR-3B through electronic verification code (EVC) for specified persons till the end of this month and now this facility stands extended till 31 October, 2021. As this rule contains various provisos relevant only for specified period, all these will stand omitted from November. Rule 138E restricts e-way bill generation if returns are not filed for two months and this has been kept in abeyance since 1-5-2021 but only till 18-8-2021. This is relevant in situations where GSTR-3B or GSTR-1 have not been filed in March, April and May, 2021.

As per the press release issued, the timeline for filing of application for revocation of cancellation of registration has been extended to 30-9-2021, where the due date of filing of application for revocation of cancellation of registration falls between 1-3-2020 and 31-8-2021. This extension, made by Notification No. 34/2021 - Central Tax, covers those whose registration has been cancelled for not filing returns for six months or three periods by composition taxpayer. The period effectively covers both the waves of Covid-19 and post-Covid phase when businesses have been crippled.

(The author is an Advocate, Gokul & Subha Advocates, Chennai. The views expressed are personal. Two books authored by him have been published recently - Cross-border Transactions under Tax Laws & FEMA (July 2021) and GST - Investigation, Demands, Appeals & Prosecution (August 2021))