Tax Vista Your weekly tax recap Edn. 61 - 16 August 2021 By Dr. G. Gokul Kishore

Detention charges and demurrage during lockdown period - High Court rejects petitions on waiver

Numerous writ petitions were filed by importers and exporters against levy of penal charges (ground rent at a higher rate) by ICDs/CFSs for keeping the goods beyond the permitted period and detention charges levied by shipping lines when containers have not been returned to them within the permitted free period. The ground advanced was difficulties faced due to lockdown and inability to move cargo consequent to Covid-19 pandemic. The High Court noted that during the lockdown there was no restriction on movement of cargo and the "order" issued by Directorate General of Shipping was only advisory in nature. Ministry of Shipping issued guidelines whereby major ports were asked to refrain from levying penal charges like demurrage, ground rent, etc., for which powers were found to be absent by the Court.

According to the detailed order, the Central Government is empowered under Major Port Trusts Act to issue directions to Board of Trustees and the Tariff Authority for Major Ports (TAMP) but is not empowered to issue direction to CFSs, ICDs and shipping lines. Here too, neither such Board or TAMP is empowered to regulate levy, collection and recovery of penal charges by CFSs, ICDs or shipping lines and the directive issued by Shipping Ministry is impossible to comply with.

After observing that except in specified situation, there is no provision on the levy, charging or collection of charges, penal or otherwise by CFSs and ICDs, the directives have been held as ineffective ab initio. It notes - "Save and except in the cases of goods which are detained, seized or confiscated (which may attract Regulation 6(1)(l) of the HCCAR), there is no other statutory control, in any parliamentary enactment or subordinate legislation, on the levying, charging or collection of charges, penal or otherwise, by CFSs or ICDs from importers or exporters. There is no other statutory control, in any Parliamentary enactment or subordinate legislation, on the levy, charging or collection of charges, penal of otherwise, by CFSs or ICDs, from importers or exporters. No provision, for regulating such levy and collection is to be found in the Major Port Trusts Act, the Merchant Shipping Act or the Customs Act (including the HCCAR). The direction to the "Port" to ensure implementation of the Circular dated 21st April, 2020 of the MOS, as contained in para 10 of the Circular was, therefore, abortive and ineffective ab initio. The port could not have ensured such implementation, for the simple reason that the levying and collection of charges by the concessionaires from the importers or exporters are not regulated by the port, i.e. by the Board of Trustees of the Port or by the TAMP."

The High Court has also held that even under Disaster Management Act, directions could not have been issued by the Shipping Ministry and the Court cannot direct enforcement of the same. Similar position has been taken on advisories of Directorate General of Shipping. It also observes that before the Court, CBIC has adopted the stand that its own circular was only an intra-departmental communication, and it was neither mandatory nor directory and such move has been termed as wise by the Court. The order is eloquent on the difficulties faced by CFSs and ICDs to hold that equity was not in favour of importers and exporters [2021-VIL-581-DEL-CU]

Registration cancelled for non-specified reason - High Court orders restoration

Section 29(2) of CGST Act, 2017 deals with cancellation of registration if any one of the specified grounds is attracted. In a particular case, registration was cancelled and request to revoke the same was also rejected. Show cause notice was issued on the ground that the place of business was located in a partially completed structure and no building number has been affixed by the local authority and the cancellation order was also passed for such reason. The High Court held that Section 29(2) does not provide for cancellation due to such reason. It noted that as per Section 29(2) of CGST Act, registration can be cancelled if statutory provisions have been contravened and such allegation was absent in the notice or order. It further noted that other contraventions like failure to file returns for six months, non-commencement of business despite taking voluntary registration, fraud, etc., have also not been alleged.

The High Court has gone to the root of the matter by analyzing Rule 25 as well which empowers the officer concerned to conduct verification of premises at the time of granting registration. In this case, such officer did not conduct inspection but relied on the report of intelligence wing counterpart. Building tax receipt was produced but registration was cancelled without considering the same and application for revocation was also held as rejected without proper enquiry. The Court directed restoration of registration. It appears the department suspected whether the person was undertaking business in the said premises but the investigation was not thorough and the process adopted was not as provided in law. This is again another area where the department needs to initiate capacity-building programmes for its officers [2021-VIL-576-KER].

Provisional attachment gets terminated once adjudication order is passed

The Bombay High Court has held that once proceedings initiated under Section 73 of CGST Act have come to an end with the passing of adjudication order, the life of provisional attachment order passed under Section 83 gets terminated. Judgment of the Supreme Court in Radha Kishan Industries v. State of Himachal Pradesh [2021-VIL-50-SC] has been followed. In this case, the department, apparently to justify the continued attachment, stated that proceedings under Section 74 are being contemplated. To this, the Court noted that provisional attachment was not ordered during pendency of proceedings under specified provisions since action was initiated under Section 73 later and therefore, such attachment order suffering from error of jurisdictional fact, was not valid ab initio. The provisional attachment order was set aside. But, the Court was approached by the petitioner earlier and in March, 2021 they were directed to pre-deposit 10% as required for filing appeal against adjudication order and the balance 90% was ordered to be under freeze. The Supreme Court judgment followed in this order was passed in April, 2021 and may be, benefit of such binding precedent was not available earlier. But the jurisdictional error was always there as adjudication order was passed in February, 2021 and no proceedings were pending in March, 2021 [2021-VIL-585-BOM].

Writ jurisdiction not invocable on violation of natural justice when efficacious statutory remedy available

It is more or less settled law that writ jurisdiction of High Courts can be invoked when there is a violation of principles of natural justice particularly when order has been passed without providing sufficient opportunities of hearing. What if the special enactment itself empowers an authority to consider such violation' The Madras High Court has said that in such cases, writ jurisdiction cannot be invoked. The factual backdrop pertains to writ petition filed against adjudication order passed on the ground that time was given to produce evidence on realization of export proceeds but before expiry of such time, order was passed and without hearing the exporter. The High Court observed that appeal against such order can be filed before Commissioner (Appeals) and Section 128A of Customs Act empowers such authority to remand the matter back for fresh consideration if an order has been passed without following the principles of natural justice. The writ petition was dismissed after holding that appeal is required to be filed under Section 128 against the order-in-original.

The Court noted that the statutory remedy being efficacious, writ petition cannot be entertained - "The practice of filing writ petitions on the ground of violation of principles of natural justice is in ascending mode. The aggrieved persons are attempting to thwart the provisions of law by approaching the High Court and with an idea to protract and prolong the issues. High Court cannot encourage such practices of prolonging the issue at the instance of the litigations. Once the remedy provided under the statute is efficacious and capable of dealing with various circumstances including the violation of principles of natural justice, then there is no ground for entertaining a writ petition under Article 226 of the Constitution of India." [2021-VIL-584-MAD-CU]

Refund after 15 years - High Court orders with interest

In a case relating to refund of input tax credit corresponding to export sales was claimed under VAT provisions in the year 2005-06. The same was rejected on the ground that customs clearance certificate was not submitted though other evidence were filed. The first appellate authority remanded the matter directing that alternative documentary evidence should be taken into consideration. However, the original authority rejected the refund claim again. It seems against such rejection, writ petition was filed in the year 2007 and it has been decided now. The High Court termed the action of rejection as one of contempt and perverse. It noted that substantial amounts were sanctioned as refund in respective financial years without insisting on such certificate in other cases which indicated that the petitioner's claim was rejected in a discriminatory manner. The petition was allowed and the department was directed to credit the refund amount along with interest from the date of filing claim till the date of credit. Costs of Rs. 25,000 was also imposed on the department and the same was directed to be paid to the petitioner. It is not clear as to the reason for the delay in disposal of this writ petition. For refund of around Rs. 5 lakhs, the petitioner had to wait for 15 years [2021-VIL-580-TEL]

Sale of business without transfer of liabilities - GST is not exempt

"Services by way of transfer of a going concern, as a whole or an independent part thereof" is an entry in Notification No. 12/2017 - Central Tax (Rate). This means when a running entity is sold to another person with the intention of continuing it, GST is exempted. The only key word which determines the eligibility to exemption is "going concern" and such term has not been defined in GST law. Therefore, Authority for Advance Rulings (AAR) has relied on certain judgments to hold that transaction of "transfer of business" is not covered in the definition of "going concern" when liabilities are excluded. The precedent judgments are to the effect that a company is said to be transferred as going concern when both assets and liabilities are transferred so that the business activity is capable of being run independently in the foreseeable future. In the case before it, while business was proposed to be transferred by way of sale, liabilities and employees were kept out of such transaction. Based on the reasoning as above, exemption was held as not admissible [2021-VIL-294-AAR].

Though leaving out a superfluous or defunct asset or settling of liabilities before the transfer may not work against the characterization as going concern, it is necessary that the business must be capable of being continued with what is transferred. It appears that in the instant case, only certain assets were transferred leaving one of the most important assets i.e., employees and this must have weighed against the applicant.

Construction overseas liable to GST if both supplier and recipients are in India

The title may appear to be strange but when the laws are drafted in a manner to only maximize revenue without considering business realities, then the result cannot be different. India supports development programmes in other developing countries including by funding various projects. One such project is construction of an institute for Maldives Government by India based on MOU between the governments. The work was awarded to a company in India which in turn sub-contracted the same to another. This "another" company is the actual construction service provider. GST applicability or otherwise was the question posed before AAR. The Authority ruled that the company which was awarded the contract is in India and the applicant is also located in India and therefore, Section 12 of IGST will be applicable. The applicant is the supplier of service and the Indian company is the service recipient. As per Section 12(3), when both the parties are in India, if the immovable property is outside India, place of supply will be the location of recipient i.e. in India. This effectively means, the applicant constructing a building in Maldives is liable to GST. At least projects undertaken based on government funds can be kept out of GST as the exercise is otherwise meaningless [2021-VIL-290-AAR].

Minimum purchase obligation - Compensation is not part of composite supply

Applicants before AAR sometimes raise questions which surprise many. Failure to purchase minimum quantity i.e., not complying with contract terms on the obligation of purchase of minimum committed quantity is considered as a breach of contract and the amount paid towards such breach is in the nature of damages. Being part of conditions of the contract, the same is not treated as consideration. However, the applicant in a particular case has taken the position that such amount is liable to GST and therefore, sought ruling on whether the same would be treated as composite supply along with the principal supply of sale of LPG and rental for maintaining infrastructure at customer's premises. The AAR held that "Take or Pay Charges" constitute compensation for breach of contract and they come into existence only when there is no supply of LPG and they are mutually exclusive. Therefore, the same is not covered under composite supply. The ruling appears to be legally grounded in so far as the question posed is concerned but the larger question of GST applicability on such pay or take charges has not been raised and the ruling's applicability to others having similar contracts / recoveries is restricted [2021-VIL-289-AAR].

ITC on cranes, excavators, etc., available to sub-contractor engaged in road construction

The applicant is a sub-contractor to the contractor who has been awarded construction of highways, bridges, etc., by National Highways Authority of India (NHAI). S. No. 3(iv) of Notification No. 11/2017 - Central Tax (Rate) provides 6% CGST rate (total GST rate of 12%) in respect of works contract of construction of roads, bridges, etc., for road transportation for use by general public. Consequent to GST Council's decision to reduce GST rate from 18% to 12% to works contract services provided by sub-contractors to main contractors when services are provided to government / governmental authority, certain entries were amended but the above mentioned entry was not amended. Interpreting the residuary entry providing 18% GST whereby the above entry is also excluded, the AAR has held that the applicant will be covered by the entry providing for 12% GST since the service provided is to a body set up by statute working under a particular ministry.

In a rare ruling in favour of the taxpayer on both the questions raised, the AAR has further held that input tax credit will be available to the applicant on inward supply of excavators, road rollers, cranes, generators, etc. As per the ruling, the applicant receives goods as inward supply and therefore, the restriction under Section 17(5)(c) if works contract service is used for construction of immovable property, is not applicable to the applicant. Bar of Section 17(5)(d) on inward supplies received for construction of immovable property on own account is also not applicable since the applicant is a sub-contractor. It is most certain this ruling will be cited and relied on in several cases though it is only an advance ruling having restricted applicability [2021-VIL-306-AAR].

Supply of food to employees - The question and the ruling

Since 2017, the issue of GST liability on canteen services whereby employers provide subsidized food to employees in factory canteen is being debated analyzing various scenarios like implications when recovery is made by employer, when recovery is part made or recovery is not made at all. An applicant has sought ruling on this issue. As per facts contained in the earlier part of the advance ruling, the contractor is charging GST of 5% in the bill raised on the applicant (employer) and the applicant as employer is also charging GST of 5% on the amount recovered from employees. However, in the order portion, the AAR has held that contractor collects from employees which appears to be factually not correct. Based on such observation, it has been held that there is no supply as per GST law when applicant pays part of the canteen bill on behalf of the employees. It appears that the amount recovered from employees is subjected to GST by the employer and the question may be whether when such amount is paid to the contractor by the employer, GST is required to be paid. But these are confusing and it is better this ruling is left at this point [2021-VIL-285-AAR].

Original works - AAR defines the scope

The AAR has held that all repairs made to buildings do not constitute "original works" and only those services executed to make an unusable building usable again is covered. Such ruling has been rendered where the contractor, engaged in construction of both new buildings and repair and maintenance of old buildings, was of the view that all of them would be covered under "original works" and 12% GST would be applicable. The term "original works" has not been defined in Notification No. 11/2017-Central Tax (Rate) providing the GST rates on services but the same as defined in Notification No. 12/2017-Central Tax (Rate) on exemption. This has been noted by the AAR to hold that only additions or alterations made to abandoned or damaged structures on land that are made to make them workable are treated as original works and all repairs and maintenance services are not covered. As per the ruling, construction of new structures where nothing existed before would fall under "original works". Repair of already existing structures which are in working condition and construction services not on land would not be covered which will attract GST of 18% [2021-VIL-291-AAR].

Safe drinking water supply is not exempt from GST

Water overflows through various advance rulings and the CBIC is not getting wet. Though there is a clarification, the same does not solve the issue. A charitable trust installs RO plant in villages and supplies safe drinking water in unsealed containers. A nominal amount is collected for the same. The Authority for Advance Rulings has held that the exemption under Notification No. 2/2017-Central Tax (Rate) does not cover "purified water" and since RO water is purified one, such water supplied for public consumption is not exempted from GST. It appears there is a major anomaly and it should be rectified expeditiously. If exemption is ruled out, tax payment as such may not be a major issue but the hassle of compliances including raising invoices, filing returns, etc., along with show cause notices, etc., will follow. These are not intended for those involved in such public work [2021-VIL-303-AAR].

(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))