Tax Vista Your weekly tax recap Edn. 73 - 8 November 2021 By Dr. G. Gokul Kishore

GST exemption - CBIC Circular set aside as overriding notification

The item involved may not be one of mass consumption - fish meal. But the CBIC's circular on such item could not stand the scrutiny of judiciary. The department investigated and initiated proceedings against taxpayers who were supplying fish meal as finished product and also to industries who are manufacturers of animal / poultry feed. The case of the department was that exemption from GST to fish meal is confined only when it is meant for use as finished product and not as raw material for manufacture of cattle feed or poultry feed as per the circular. The Court could not find any such condition in the exemption entry and the natural consequence followed - the circular [No. 80/54/2018-GST dated 31-12-2018] to this extent has been set aside.

According to the Court, Section 168(1) of CGST Act empowering CBIC to issue clarification is for the purpose of uniformity in implementation and it is mostly procedural in nature and not substantive whereas exemption granted under Section 11(1) is a substantive right and such exemption cannot be taken away or done away by issuing clarificatory circular by CBIC. Such circular cannot override exemption provided under notification, as per the order. The circular relied on Supreme Court judgment in Dilip Kumar [2018-VIL-23-SC-CU-CB] stating that inputs for animal feed is different from animal feed but the High Court said it was a larger bench decision on question of law and this issue was not involved and the reason cited in the circular is not tenable [2021-VIL-763-MAD].

While the petitioners may at last be relieved, the pains they must have undergone cannot be ameliorated. Only because of misinterpretation of a notification by certain officers in CBIC, the case was investigated by DGGI and summons, statements, etc., must have followed. Even when end-use based exemptions which were part of Central Excise legacy have been largely done away with in GST, the officers are yet to unlearn such pre-GST concepts.

Refund of tax paid under wrong head - High Court provides relief

CGST and SGST were paid on certain transactions and later, they were found to be inter-State transactions. Refund of such tax paid under wrong heads was sought but the department insisted that tax under the correct head (IGST) should be paid first which was complied with. The first appellate authority rejected the refund on the ground that Section 77 of CGST Act dealing with this issue uses the words "subsequently held" and therefore, such change in type of tax should be as a result of adjudication or other proceedings. This means if the taxpayer himself found out such mistake, then benefit of Section 77 would not be applicable. The taxpayer had no option but to approach the High Court. CBIC issued clarification recently to clarify exactly this issue to the effect that Section 77 covers those mistakes also which are found out by taxpayers. This has been pointed out by the petitioner and taken note of by the High Court. The High Court has allowed the petition on the ground that there was no dispute about tax payment and the amount was paid again only because the department insisted.

The amount involved was Rs. 108 crores and the period pertained to 2018. Facts are not clear as to how such a mistake involving substantial sum happened at the end of the taxpayer. But rejection of refund on a hyper-technical ground and compelling the taxpayer to fork out such a huge amount again are reprehensible. For the amount withheld for more than 2 years, the High Court has ordered payment of interest as well [2021-VIL-775-P&H].

ITC blockage - Can lifting of restriction be automatic'

One of the several provisions revealing the true face of GST law is Rule 86A of CGST Rules empowering the GST authorities to block utilization of input tax credit for one year in suspected cases of fraudulent ITC, evasion of tax, fake documents, etc. Sub-rule(3) provides for cessation of such restriction on expiry of one year but there are several orders of High Courts wherein taxpayers had sought the intervention of Courts to lift such restriction after one year. A similar case has been reported by VIL last week and High Court has set aside such blockage beyond one year [2021-VIL-767-KAR]. When almost every process has been made online under GST, it should be possible to modify the software / program in the GST portal to lift such blockage automatically on expiry of one year. The rule does not have any provision for further extension and it expressly prescribes the sunset period. If such change is made in the system, precious time of High Courts besides the resources of harassed taxpayers, can be saved.

Taking note of various High Court orders, CBIC has also issued guidelines on 2nd November, 2021 on exercise of circumspection while invoking this rule. Proper application of mind, careful examination, avoiding mechanical exercise of such power, objective determination instead of subjective suspicion and reasons to believe to be formed based on material evidence are some of the points emphasised in these guidelines to officers. Monetary limits have also been prescribed and capping the blocked amount to ITC believed as fraudulently availed has been stressed. But the guidelines are not forthcoming when such blockage is not lifted after one year or the safeguards available to taxpayers if such powers are exercised without discretion.

Tax reimbursement by supplier - Contractual disputes continue

Contracts entered into in the pre-GST regime, in certain transactions, continue well after implementation of GST. Considering the uncertainty prevalent on introduction of GST before 2016, such contracts or agreements, in most cases, contained VAT and service tax and the natural fall-out is contractual dispute when the service provider seeks reimbursement of GST at a higher rate. In a litigation of this nature, the Karnataka High Court has ordered the service recipient to pay / reimburse such GST amount where the contract had initially specified VAT of 5%. The contractor got relief on the strength of various clarifications by the government on calculation of amount payable towards tax after introduction of GST when the terms of the contract included pre-GST taxes. The noteworthy point in this order is about the methodology cited from a government communication wherein input tax credit has also been specified. For most of such works, the department may not extend ITC citing the bar in respect of construction of immovable property as contained in Section 17(5) of CGST Act [2021-VIL-771-KAR].

ITC on repairs available to RWA when expenses are not capitalized

Cooperative housing society or resident welfare association can claim input tax credit of GST paid on repair service received if the expenses are not capitalized. Though this is obvious as per Section 17(5)(c) of CGST Act, because advance rulings often labour to invent grounds to deny ITC, a ruling which follows the law is worth taking note of. In this ruling, the AAR has also held that construction related work in respect of immovable property can be done as works contract and therefore, the bar on ITC is only when it is capitalized. The applicant had stated as part of facts that on property tax, etc., GST is not charged and the exemption available for monthly subscription upto Rs. 7500 is not being availed in respect of commercial premises. While the former may attract the eyes of the department, the latter is in line with the provisions. Another question answered in this ruling pertains to availment of proportionate ITC on generators, taps, etc., and repair / maintenance services since the applicant was claiming exemption in respect of subscription upto Rs. 7500/- [2021-VIL-399-AAR].

Manpower supply - Pure agent principle not applicable to exclude salary from taxable value

Rule 33 of CGST Rules defines pure agent and if there is an agreement containing clauses to satisfy the conditions prescribed, then the person concerned will be treated as pure agent. The department may dispute the same, finding fault with the clauses but at least one will have sufficient defence. But this is a fact, and it cannot be taken before AAR seeking to know whether as per their agreement, they are acting as pure agent. However, taxpayers do approach AAR because such issue is the basis for determination of the question as to whether the amount received towards salary for the manpower provided to service recipient is liable to be excluded from taxable value.

In a ruling with strange reasoning, the AAR has held that such wages / salary cannot be excluded since the applicant is not covered by pure agent provision. According to this ruling, for pure agent provision, the person should be providing certain service on his own besides procuring other service from third party whereas in this case, the applicant is the employer as per employment agreement and his only service is manpower supply and there are no two services involved. The ruling seems to miss the point that in such cases, the service provider facilitates availability of manpower and also procures employment service from such manpower to provide the same to the service recipient. By showing his service charges and the salary separately in the invoice, the condition of pure agent can be argued as satisfied. But these are arguments to be tested in court of law and AAR may not be the forum meant for the same [2021-VIL-398-AAR]

Renting of hostel for under-privileged girls is not exempt from GST

Almost every week, in this column, the need to re-visit and rejig exemption entries relating to services provided to or on behalf of government has been highlighted in view of various adverse advance rulings. A recent ruling further strengthens such plea. The applicant has leased property to government which was meant to serve as residential accommodation for under-privileged girls. It is a pure service to government and the same is covered by GST exemption under Notification No. 12/2017-Central Tax (Rate) if the same is in relation to panchayat or municipal function as per the Constitution of India. The Authority for Advance Rulings (AAR) has held that exemption is not available because sufficient evidence on such panchayat / municipal function was not presented by the applicant.

The ruling may be perceived as flawed for two reasons - first, welfare of weaker sections is mentioned in the relevant provisions in the Constitution as panchayat / municipal function and when the property is rented to serve as hostel for girls from backward classes, the same is squarely covered and no further evidence is required. Secondly, if evidence is not sufficient, then exemption cannot be held as not admissible but ruling should not be given and application should be rejected. Based on insufficient evidence, one cannot be held as liable to tax in the same manner as one cannot be held as not entitled to exemption. There were other questions involved in this case, but they become academic when the ruling starts with no-exemption theory [2021-VIL-400-AAR].

GST registration not required in place of import if goods are supplied before Customs clearance

In the case of import of goods, as per Section 11 of IGST Act, place of supply will be the location of the importer. As imports are treated as inter-State supplies, IGST will be payable. When the imported goods are sold from CFS or on DPD basis before they are cleared for home consumption, place of supply will be the place from where the goods are supplied. Based on such reasoning, AAR has held that the importer registered under GST in Maharashtra is not required to obtain GST registration in a different State where the port is located. The importer can use such Maharashtra GST registration to issue IGST invoice for supply (sale) of the imported goods. It appears that the transaction is not sale of goods when they remain warehoused but one of sale after clearance for home consumption because the importer files bill of entry, clears the goods and then supplies the goods to domestic recipients.

The applicant had raised another question of subsequent sale from a warehouse and it has been indirectly held that registration would be required in the State in which such warehouse is located as it is this State from where sale would be made. However, the AAR has declined to answer it categorically due to lack of jurisdiction since the same pertains to a different State [2021-VIL-396-AAR].

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