Tax Vista Your weekly tax recap Edn. 67 - 27 September 2021 By Dr. G. Gokul Kishore

Transitional credit - High Court orders providing of opportunity to all taxpayers in UP

Allahabad High Court has ordered one-time opportunity to be provided to all registered taxpayers under GST in Uttar Pradesh to file TRAN-1 or TRAN-2 physically with jurisdictional officer. Though this order is consequent to several writ petitions filed between the period 2018 and 2021, the High Court has taken note of the issue of technical glitches and difficulties faced in filing the forms for transitional credit and termed the same as "generic in nature" and therefore, applicable to all registered persons. While numerous orders from various High Courts are now available on the issue of transitional credit and technical glitches, this order extending relief to persons not before the Court and providing detailed directions should bring smiles back on the face of taxpayers. Failure to provide a reliable online platform would render the time-limit prescribed in Section 140 of CGST Act read with Rule 117 of CGST Rules arbitrary and violative of Article 14 of the Constitution, as per the Court. The department will, most likely, challenge this order in the Supreme Court, but, as repeatedly pointed out in this column, GST Council should intervene and provide one-time relief to all taxpayers on this issue subject to reasonable safeguards.

The order pertains to three categories of persons - those who filed the form online but with errors and could not rectify due to technical glitches in the GST portal and armed with evidence (screenshot), those who could not file due to such glitches but having evidence of their attempt to file and those who could neither file nor have evidence. One of the factors which went in favour of taxpayers is the CBIC's recognition of technical glitches in the circular dated 3-4-2018 and also by orders of other High Courts. The Court observed that the petitioners and registered persons were unreasonably obstructed on account of technical glitches and errors in the GST portal during the limited time available for filing and revising the forms online. Enforcement of strict timeline prescribed in the CGST Act and CGST Rules would be arbitrary, according to it. Input tax credit has been held as not a vested right but a statutory entitlement in so far as transitional credit is concerned. The Court said - "It is true, no ITC may arise under the GST regime unless a "registered person" fulfils the conditions therefor, so also, the administration of tax law that is in the hands of the GST Council, GST Commissioner (Central), GST Commissioner (UP), GST Network and all other State or statutory authorities, must allow all "registered persons"/taxpayers, reasonable opportunity to exercise their rights and make their claims, in the manner contemplated by law."

Such obstruction was unintentional but it was attributable to the conduct of the authorities and the responsibility to run such system seamlessly was on them. Importantly, it held that petitioners and registered persons whose rights were adversely impacted by the lack of smooth operation of the GST Portal, could not be saddled with civil consequences arising from non-functioning or improper or irregular functioning of the GST portal.

The attempt by the department to seek evidence in the form of screenshot, etc., has been completely disapproved by the High Court on the ground that the same is not provided for in the law. It has held - "In absence of any enabling law, that burden cast on the "registered persons"/tax payers - to lead evidence of difficulty faced, is wholly arbitrary and unreasonable and therefore unenforceable. The injury caused being attributable to the State authorities, even if unintentional, the "registered persons"/taxpayers cannot be burdened today, to bring home evidence to establish the extent of the injury caused that too with respect to transition provision newly introduced, especially when the injury sprung from a generic event/cause."

The order pertaining to evidence of filing having no statutory basis will be helpful in other cases where refund claims are being rejected on the ground of such absence of evidence. This order of Allahabad High Court should be analysed by CBIC and GST Council Secretariat so that useful guidance can be obtained for the future as well besides remedying the blunder of transitional credit [2021-VIL-672-ALH].

System generated SCNS and mechanical orders - Taxpayers continue to suffer

Taxpayers continue to suffer with online system of GST. Such system was expected to reduce taxpayer-officer interface and reduce opportunities for harassment and corruption. But the electronic administration is more harassing as the numerous system generated show cause notices reveal. In a recent case before the Madras High Court, the SCN was generated by the GST portal fixing Gandhi Jayanthi day for personal hearing and the adjudication order was passed without hearing the noticee and with contradictory statements like the taxpayer did not file reply to SCN and the adjudicating authority had examined the reply filed. The High Court quashed both the order and the SCN and directed the authorities to issue SCN afresh.

The case pertains to 2019 when registration was cancelled. The taxpayer did not notice the SCN uploaded in the portal, as per the facts stated. Time-limit for seeking revocation had lapsed and appeal was filed but the same was dismissed on limitation. They are before the authorities in September, 2021 - after almost two years. It is not known how business is undertaken in the absence of registration. May be, a new entity is floated or business is conducted in the name of other members of the family. Cancellation of registration is a draconian power and it should be reserved only for extreme cases. Routine invocation reveals arbitrariness and the same has no role in GST, if GST is to be believed as a modern tax system [2021-VIL-675-MAD].

In the midst of such mechanical SCNs, CBIC has found meagre number of cases have been booked and therefore, instructed officers [Instruction No. 02/2021-22 dated 22-9-2021] to issue SCNs and complete adjudication in time-bound manner as per the time-limit prescribed under Section 73 and Section 74 of CGST Act. The Board should also instruct that SCNs should not be issued without application of mind.

Clarification on intermediary service, export of service and other issues

CBIC has issued three circulars to clarify certain issues as mentioned in the press release issued after the GST Council meeting. Circular No. 159 dated 20-9-2021 seeks to clarify issues as identified by the authorities in respect of intermediary service. The role of intermediary is only supportive and it does not provide the main supply; scope of intermediary does not cover the situation where main supply itself is supplied and sub-contracting is not an intermediary service are the clarifications in a nutshell. The key takeaway is for BPO entities undertaking outsourced work whereby they interact with customers of the companies which engage such BPO entities as this circular categorically says that such BPO entities are not covered under intermediary. This is an area of concern after certain advance rulings went against BPO entities.

A much-needed clarification on export of service comes in the form of Circular No. 161 covering services provided by subsidiaries incorporated in India to their foreign group / parent company outside India. A company incorporated in India and a body corporate incorporated by or under the laws of a country outside India (also referred to as foreign company under the Companies Act) are separate persons under the CGST Act, and therefore, they are separate legal entities and they will not be considered as establishments of a distinct person as per explanation 1 in Section 8 of IGST Act. This means such services will qualify as export.

Circular No. 160 seeks to clarify the amendment made to Section 16(4) of CGST Act from 1-1-2021 whereby date of issuance of debit note has been delinked from the date of issuance of underlying invoice. For availment of input tax credit on or after 1-1-2021 based on debit notes, amended provision will apply irrespective of date of issue of debit notes. ITC availed before such amendment will be governed by unamended provision. It has taken almost two years to come out with such clarification. This circular clarifies certain other issues as well.

During the first two years of GST, place of supply was a grey area for many taxpayers and therefore, incorrect type of tax was paid in many instances - CGST and SGST instead of IGST and vice versa. Section 77 of CGST Act provides for refund of the wrong type of tax paid. Circular No. 162 dated 25-9-2021 clarifies that the provision covers both the cases where either the taxpayer has himself subsequently found out the mistake or held as incorrect in any proceeding. A new sub-rule is being inserted in the CGST Rules to stipulate time-limit of two years from the date of payment of tax under the correct head. Because this Notification No. 35/2021 - Central Tax is dated 24-9-2021, those taxpayers who had paid the right type of tax before, can apply for refund of the wrong type of tax paid within two years from 24-9-2021. However, such refund will not be available if adjustment of tax has been made through credit notes. Though belated, the amendment to the rules and the clarification are benevolent to taxpayers.

Appeals dismissed on time-bar despite extension by Apex Court - Tripura HC restores

Appeals dismissed on the ground of time-bar have been restored by the Tripura High Court and directed to be heard on merits. These appeals have been held to be covered by the immunity on limitation granted by the Supreme Court due to Covid-19. Despite such order(s) of the Apex Court, dismissal of appeals on time-bar indicates casual approach adopted by the appellate authorities. Unfortunately, the victory of taxpayers who went to High Court may be short-lived. Considering the inherent revenue bias of quasi-judicial authorities, the merits may be held as in favour of the revenue in the de novo proceedings [2021-VIL-679-TRI].

Classification by others not relevant while refusing to lift attachment

A recent order of Bombay High Court reported by VIL last week is highly critical of the manner in which Commissioner had passed order refusing to lift provisional attachment. The issue was alleged misclassification wherein the department sought differential tax and during this process, provisional attachment of bank account was made. The High Court had directed that the plea to lift attachment be considered afresh by Commissioner because of lack of application of mind and violation of principles of natural justice in the impugned order. The Commissioner had stated that the taxpayer had assured that tax would be paid and instead, writ petition was filed to delay the deposit and the same has been held as not relevant. Reasons on classification were absent in the order. Though the factory was functional and GST was paid, the same was not taken into account and on the contrary, the order of the Commissioner noted that investigations revealed that business activity was not undertaken by the taxpayer.

A significant ruling by the Court is that other taxpayers classifying a product under a particular heading is not relevant for alleging misclassification. It said - "The Commissioner was not required to cite instances of other local manufacturers to insist that the petitioner ought to follow suit. This, in our opinion, is a glaring mistake in the decision-making process." Rejecting expert opinion without obtaining counter opinion has been heavily criticized by the Court. Every order relating to provisional attachment reveals the urge and urgency to somehow attach the bank account instead of taking a moment to follow the prescribed procedure. Instead of safeguarding revenue, the end-result is harassment of the taxpayer [2021-VIL-680-BOM].

Managerial and leadership services to units in different States liable to GST

Popularly known as cross-charge, companies charge their own units in different States for the head office and corporate office expenses. The idea is that such HO provides corporate support, HR, administration, IT support, etc., to branches / units / establishments in different States and cost of running such HO should be shared. As GST registration is State-specific, different registrations of the same company are treated as distinct persons, a fiction created under GST law. Coupled with entries in various schedules and rules, the intra-company services between own registrations are viewed as supply liable to GST. This issue has been answered on similar lines by the Authority for Advance Rulings (AAR).

The applicant, from their registered office / corporate office has been held to be supplying managerial and leadership services to its branch offices. The AAR has also agreed with the applicant that Rule 28 providing for valuation of supplies between distinct persons or related persons will be applicable where the recipient is eligible for availing full ITC. In this case, group companies were also involved besides own branches. In an apparent reference to absence of any exclusion on account of salary or other such heads, the ruling also holds that GST would be payable on the lumpsum amount charged by the corporate office.

The AAR reasoned that the site offices / group companies cannot be treated as persons employed by the applicant and these offices are independent offices separately registered under the GST law as also the group companies. On this basis, it has been held that the applicant cannot get the benefit of entry 1 of Schedule III relating to supply of services by employee to his employer. As per the ruling, such supply of services will be covered under entry 2 of Schedule I. The issue is complicated, particularly in respect of valuation where salary cost is also treated as part of the taxable value. It will take several years for arriving at some kind of finality as the tax authorities seem to have definite views on this issue [2021-VIL-363-AAR].

CGST Rules amended

Aadhaar is being made the "basis" for claiming refund or seeking revocation of cancellation of registration. Notification No. 35/2021-Central Tax dated 24-9-2021 mandates authentication of the Aadhaar number of taxpayers from a date to be specified. As decided by the GST Council, Rule 59 is being amended from next year to restrict filing of GSTR-1 if GSTR-3B has not been filed for the preceding month as against two months now. Prescription of time-limit of two years for refund of incorrect type of tax paid as mentioned above is another amendment made. While responsiveness and administrative exigencies require such amendments, the frequency and scale make the provisions cumbersome with insertions, substitutions and omissions.

(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))