Tax Vista Your weekly tax recap Edn. 62 - 23 August 2021 By Dr. G. Gokul Kishore

Provisional attachment beyond one year - Enforcing statutory right through courts

Provisional attachment as per Section 83 of CGST Act, 2017 ceases to have effect after expiry of one year from the date of order. Taxpayers are compelled to file writ petitions in large number of cases seeking High Court's intervention to lift such attachment which continue beyond one year. The officer who passes such order is expected to communicate to the bank after one year that the attachment stands lifted. If taxpayers suffer because of inaction of such officers, then action should be taken against them though loss of business cannot be compensated. This problem becomes acute when show cause notice is issued, adjudication order is passed and the taxpayer files appeal also. Even after all these, the department by maintaining stoic silence, permits illegality of attachment beyond one year to continue. Unless Section 83 is amended whereby the officer is statutorily required to issue an order lifting the attachment after one year, things will not improve.

In a recent case, the taxpayer obtained relief through High Court where attachment was continuing well beyond one year and that too, after filing appeal against adjudication order. The Court further granted relief against recovery of balance amounts since pre-deposit has already been paid. It is unfortunate that even the statutory right of automatic stay of recovery of balance amounts as per Section 107(7) requires writ court's order for enforcement [2021-VIL-593-BOM].

Refund when assessment not challenged in appeal - High Court orders amendment to BoEs

The issue is perennial - whether an importer can claim refund of excess duty paid when the self-assessed bill of entry is not challenged by way of filing appeal. The recent landmark judgment on this issue is ITC Ltd. v. CCE [2019-VIL-32-SC-CU] and this has been interpreted by Telangana High Court in a recent case. In the case before it, Customs authorities had rejected refund claim on the ground of absence of challenge by way of filing appeal and also because amendment to bill of entry under Section 149 can be allowed only based on documentary evidence which was in existence at the time of clearance of goods whereas the Apex Court judgment in the above case was not available at that time. The High Court has held that the term "documentary evidence" used in Section 149, in the context of amendment to BoEs or like documents, cannot include decisions of courts. According to it, the Supreme Court has clearly indicated in the said judgment that the modification of the assessment order can be either under Section 128 of Customs Act, 1962 (appellate remedy) or under other relevant provisions of the Act i.e., Section 149. Another principle reiterated by the High Court is that the law declared by the Supreme Court, unless made prospective in operation in its judgment, is always deemed to be the law of the land and it cannot be construed as applicable only after the date of pronouncement of the judgment. The High Court directed amendment of bills of entry to enable the petitioner to seek refund of excess CVD paid on the imported mobile phones. In all likelihood, the department will file appeal in Supreme Court seeking clarification on the interpretation of its judgment in ITC case as adopted by the High Court in this case [2021-VIL-594-TEL-CU].

ITC of GST charged by canteen contractor, not available but GST not leviable on amount recovered from employee and paid to service provider

An advance ruling serving the delicacy of interpretation of language and punctuation marks is being extensively relished in social media. The questions are old as GST itself - whether ITC is available on GST charged by canteen contractor and whether GST is applicable on nominal recovery from employees by the company. It is not clear as to the trigger for the applicant to seek advance ruling now. Interpreting the colon and semi-colon in Section 17(5)(b) of CGST Act and relying on jurisprudence, the ruling is rather abrupt in reaching the conclusion - ITC of GST paid to canteen contractor is not admissible. But the ruling also holds that GST is not applicable on the amount representing employees' portion, collected and paid to the contractor. This portion of the ruling will raise eyebrows and encourage others to seek ruling on this issue before this AAR. Legally nuanced position has been taken on this issue by many taxpayers since 2017-18. Availing ITC or not and charging GST from employees or not, option of using advance ruling mechanism is not generally perceived as an efficient strategy [2021-VIL-316-AAR].

The above ruling is subsequent to the ruling by the same AAR in another case wherein also the same position has been adopted in so far as liability of employer on amount recovered from employees is concerned. In this previous case, the AAR had held that the part amount collected by employer is paid to the canteen service provider, no profit is retained by the employer and such activity is carried out without consideration and therefore, on the amount recovered from employees towards canteen facility, GST is not leviable. To rule out any kind of doubt, the ruling uses "not" in bold font besides underlining the same. It will be interesting to see the position adopted by Appellate Authority when the department files appeal [2021-VIL-334-AAR].

ITC computation on demerger of entities - Non-GST items also to be considered

Not every day an entity opts for demerger and gets tangled in input tax credit issues. The applicant - an IT major had a demerger plan whereby one business segment was to be hived off to a new / separate company. Section 18(3) of CGST Act, 2017 is a benevolent provision as ITC can be transferred to the new unit in such cases if liabilities are also transferred. Rule 41 of CGST Rules provides that in the case of demerger, ITC shall be apportioned in the ratio of value of assets of the new unit(s) specified in the demerger scheme. The question was whether assets which are not within the ambit of GST (trade receivables, cash / bank balances, security deposit, etc.) would also be covered when such ratio and value of assets are worked out; whether assets created to comply with Accounting Standards should be considered or not and whether value of those assets which are not being transferred should be included in value of assets or not. Explanation in the rule clarifies that value of assets means the value of entire assets of the business whether or not ITC has been availed. Because of reference to ITC, the applicant was of the view that only those assets which are under GST are covered under this provision.

After reproducing the provisions and CBIC Circular No. 133 on this issue, the Authority for Advance Rulings (AAR) has held that "entire assets" means all assets are to be taken into account for calculation of ITC to be apportioned between the demerged entities and therefore, those which are outside GST should also be considered. This circular is also relied on to answer the question as to assets not attributable to any particular registration (GSTIN) can be considered as part of head office. This circular, though clarifies certain issues, does not as such clarify the questions posed in this advance ruling. To this extent, departmental clarification has not foreseen the commercial realities. Understanding the nature and classification of assets in terms of accounting requirements are areas requiring specialized training and the members holding the office of AAR sans such training cannot be expected to appreciate the nuances [2021-VIL-310-AAR]

ITC of GST on obtaining leasehold rights of land not available

Plant and machinery have been defined in Section 17(5) of CGST Act and it excludes land. If a person obtains leasehold rights of a land and puts up a factory on that land, then GST paid on such transfer of rights should be available as input tax credit. GST is not paid on land per se but on a supply of service relating to land. ITC is not claimed in this case on plant and machinery but on the services received. Therefore, definition of plant and machinery is not relevant. The question is not related to any construction and therefore, Section 17(5)(c) or Section 17(5)(d) does not come into picture. These are arguments which might have been taken but not found in the advance ruling holding that ITC of GST on obtaining leasehold right in land is not available. The ruling is manifestly erroneous, and an appeal may result in a different outcome [2021-VIL-315-AAR].

Amount received for parting with interest in land, liable to GST

A ruling related to the above issue was sought by the party who was lessor of the land. The question posed was whether transfer of leasehold right in land would amount to supply, liable to GST. The lessor was the originally allottee of the industrial land and the leasehold right in a part of such land was transferred to another person (the applicant who sought ruling on ITC as discussed above). Absence of an agreement, transfer being effected based on conditions imposed by the government entity (owner of the land), amount received not being covered under consideration, etc., were all argued by the applicant. The MOU between the parties has been interpreted by the AAR as bringing out service provider and service recipient relationship and the compensation for parting with interest held by the applicant would be a consideration as per GST law. The transaction has been held to a supply liable to GST. Compared to the ITC part discussed above, this ruling seems to be legally sustainable [2021-VIL-317-AAR].

ITC on goods & services procured by sub-contractor not available

Section 17(5) of CGST Act restricting input tax credit will be one of the key provisions of GST litigation in future. In particular, provisions like Section 17(5)(d) barring ITC on goods or services procured for construction of immovable property on own account will be heavily contested. On this provision, in a ruling without reasoning, the AAR has held that a sub-contractor purchasing various goods for use in construction of immovable property will not be entitled to avail ITC of GST paid. Answer to this question lies in interpretation of "own account" - whether it covers the person for whom the construction is made or it also includes all the service providers like sub-contractors. It is generally viewed as barring ITC only when the taxpayer who gets an immovable property like factory building constructed purchases goods on own account and in respect of sub-contractors, effectively purchases are not made on "own account" and therefore, they are not covered. These are views and interpretation which need to wait for many years to come [2021-VIL-333-AAR].

ITC on air-conditioning and ventilation system not available

Input tax credit is not admissible on air-conditioning and cooling system and ventilation system in terms of Section 17(5)(c) of CGST Act as per an advance ruling. To come to this conclusion, the AAR has noted that the parts of the air-conditioning and cooling system get assembled at the site and fitted on the wall, roof and floor of the building and these parts lose their identity after becoming a system and it is not a machine. The system cannot be taken as such to the market for sale and cannot be shifted from one place to another as such and it can be shifted only after dismantling the plant which cannot be called air conditioning system after it is dismantled. The system, after installation involves transfer of property and the entire system is not treatable as movable property. Based on such reasoning, it has been ruled that the supply and erection of immovable property in this case is classifiable under works contract service. Similar finding and conclusion have been provided in respect of ventilation system also. These are heavily disputed issues right from excise days and no amount of jurisprudence or departmental clarification [Section 37B Circular dated 15-1-2002 issued by CBIC under Central Excise] could stem the litigation. GST will bring another flood of litigation on such issues as long as ITC is determined based on the fact whether something is movable or immovable [2021-VIL-337-AAR].

Leasing of goods without option of purchase is supply of service

A recent ruling involves interpretation / applicability of entry 1(c) of Schedule II of CGST Act. This entry reads "any transfer of title in goods under an agreement which stipulates that property in goods shall pass at a future date upon payment of full consideration as agreed, is a supply of goods." This may indicate that hire-purchase transactions will be treated as supply of goods as the property in goods passes at the end of the term where an option is provided to the hirer to purchase the goods. The applicant, engaged in taking containers on lease from foreign parties, argued that such containers are certainly purchased at the end of the lease term and they are recognized as asset in their books in the initial stage itself. The AAR has held that the entry does not provide an option of purchase because it uses "shall" and therefore, agreement should reflect such position. Reading the specific clauses in the contract, it has been held that the agreement is for lease and it is for minimum lease period without fixed term and without any binding obligation on the lessee to purchase.

The transaction has been termed as supply of leasing service and liable to IGST. As the ruling holds it to be a supply of service, the fact of containers not entering India has been considered as not relevant. Because the contract in this case had clause on return of the goods, etc., the ruling went against the taxpayer. But then, contracts cannot be drafted only with GST in mind as commercial considerations other than tax are equally important [2021-VIL-332-AAR].

Testing of goods sent from abroad not covered under export

These days, it appears, encouraged by a few rulings in favour of taxpayers in certain cases, several applications for advance ruling are being filed seeking answer to issues which relate to routine transactions and not something new. Testing of goods sent by foreign parties and sending results to such parties is considered as not amounting to export since the situation is specifically covered by Section 13(3)(a) of IGST Act. As per this provision, the location where services are actually performed is the place of supply when such services are supplied in respect of goods which are required to be made physically available by the recipient of services. Those goods which are temporarily imported and exported after repair or any other treatment or process are not covered under this provision. In the case before AAR, the applicant engaged in the manufacture of diamond cutting tools also provides services of testing and R&D on goods sent by foreign parties and provides the results. Though not categorically asserted, it appears the goods are not sent back. Therefore, the AAR has relied on the above provision in IGST Act to hold that GST would be payable on the transaction. One or two rulings in favour of taxpayers in certain cases is no guarantee that in other cases also, rulings will provide some relief [2021-VIL-321-AAR].

Subsidy for rooftop solar system not includible in taxable value

Advance Rulings Authority sometimes remains a departmental authority as a recent ruling reveals. The question was whether subsidy provided by government through power distribution companies for installation of rooftop solar panels in residential buildings can be excluded from transaction value / taxable value. As this subsidy is given by the government and the agencies involved are only for facilitation in implementation and as Section 15 of CGST Act is clear, the AAR has held that such subsidy is to be excluded while arriving at the taxable value. However, taking note of the fact that the tender / EOI documents contain the price as inclusive of GST, the AAR has interpreted that the applicant has already collected GST on subsidy amount also and such tax contained in subsidy portion is required to be paid to the government. This was obviously not the question posed and cannot be treated as covered as within the jurisdiction of AAR. As the present transaction is one of taxable supply alone, implications under Section 17(2) do not arise, as per the ruling. The doubt that the applicant had regarding treatment of a supply involving subsidy - whether as exempted entailing any proportionate ITC reversal - cannot be said as unjustified. Adoption of such position by the department cannot be ruled out and this part of the ruling will be beneficial [2021-VIL-327-AAR].

Incentive given by government to cooperative bank is liable to GST

For motivating cooperative banks to implement welfare schemes better, the State Government provides incentive for better performance in loan disbursement. According to AAR, such incentive is liable to GST as it cannot be equated to subsidy and in GST law, no special treatment has been to incentives provided by government. The ruling notes - "The said incentive @ 4% on the disbursed loan amount to the applicant has not lessened the burden of the customers, for the customers of the loan are still required to pay their share of 2% interest on the loan amount. We find this incentive amount falls under the meaning of consideration and income received by the applicant... We are not satisfied to equate this incentive as subsidy granted by the Government. We hold that subsidy is granted in public interest, related with welfare of the public or provided to a person/business by Governments, to rationalise the cost impact directly/indirectly on the public. We find that the said incentive has no such bearing on reducing the interest burden of 2% on the customers of the applicant, but incentivising the applicant for its performance of business in said scheme." The ruling is detailed and well-reasoned and rightly rejects the argument on actionable claim as well though the applicant's view of such incentive taking the colour of subsidy cannot be said as without any merit [2021-VIL-329-AAR].

Transportation company under municipal corporation liable to GST

Municipal corporations run bus transport services in urban areas through SPV - mostly incorporated as a separate company. In the case of one such company, the applicant argued that they are covered under "local authority" as it is functioning like a department of the municipal corporation. The AAR states that the funds of the applicant have not been notified as local fund and therefore, since definition of local authority mentions those bodies which are entrusted with the control or management of municipal or local fund, the applicant is not covered thereunder. The applicant has not been set up by an Act of the Legislature nor established by the State Government and therefore, the argument that it should be considered as government entity or governmental authority has been rejected. Once such decision has been taken, the obvious conclusions are that the applicant would be liable to pay GST on security services under reverse charge mechanism (wherever applicable) and on advertisement service and TDS (under GST law) is not required to be deducted. For the past two decades, numerous SPVs have been floated where some of them are owned by government alone and they discharge specific functions for the public at large. This is an area which requires re-look and for possible amendments wherever required so that tax cost is not loaded in cost of public services [2021-VIL-324-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))