Tax Vista Your weekly tax recap Edn. 77 - 6th December 2021 By Dr. G. Gokul Kishore

Pendency of confiscation proceedings - Goods can be released on payment of fine

The Kerala High Court has held that goods can be released during pendency of proceedings relating to adjudication of confiscation and other issues. In an eloquent order, noting that the power to confiscate is drastic and penal in nature, the Court has said that the objective of GST law is not to appropriate the goods. Analysing the provisions of Section 130 exhaustively and minutely, the Court noted that the option to pay fine in lieu of confiscation is mentioned twice in Section 130 - in Section 130(7) and in Section 130(2). Section 130(7) deals with post-adjudicatory situation as the words "confiscated goods" are used whereas Section 130(2) uses the words "officer adjudging it" and "owner of the goods" which shows that the intent is to provide option to owner to redeem the goods before he is divested of his ownership and while process of adjudication is underway.

The order also holds that taxpayer cannot be compelled to pay tax and penalty before adjudication and therefore, fine alone is payable to get the goods released when the proceedings are pending. Quantum of redemption fine cannot exceed market value and MRP cannot be such price but the sale price agreed between unrelated parties [2021-VIL-828-KER].

The order may be susceptible to challenge since the High Court went by ownership of the goods - before and after confiscation. But the provision uses "officer adjudging" in Section 130(2) which means even under this provision, at the time of adjudication, option is required to be given to get the goods redeemed. Section 130(7) deals with disposal of confiscated goods after giving time of three months to pay redemption fine. The provision does not use the words like provisional release, release or even redemption.

Custodial interrogation not provided in GST law - High Court

In a significant ruling adding new dimension to bail jurisprudence, the Delhi High Court has held that custodial interrogation is not provided for in CGST Act and offences specified under GST law are not grave to an extent where custody of accused is sine qua non. Anticipatory bail was held as a statutory right and the Court opted to follow the dictum - bail is the rule while jail is an exception. Factors like prescription of maximum punishment as 5 years imprisonment and offences being compoundable have weighed in the mind of the Court. According to the Court, detaining the petitioner in judicial custody would adversely affect his business. The petitioner could be considered as fortunate as they failed to appear before the authorities on being summoned several times citing various reasons including apprehension of arrest. The Court was satisfied with the reasons and evidence produced. The allegation related to fraudulently availing input tax credit as sourced from non-existent firms. While bail orders are mostly factual and depends on the conduct of the person concerned, this one may serve as a precedent in so far as custodial interrogation is concerned [2021-VIL-826-DEL].

Liquidator running from pillar to post for GST registration - High Court takes a stern view

An entity was in distress and went through the resolution process under IBC. The Resolution Professional after meeting with creditors concluded that revival is not possible and liquidation process was set in motion as per NCLT order. The RP became the liquidator. For sale of assets during liquidation process, GST registration is required, and the liquidator applied. The department exhibited absolute indifference raising hyper-technical objections and making the liquidator run from pillar to post. The application for registration was rejected on frivolous grounds and the liquidator filed appeal. As the process of liquidation was required to be completed as per time granted by NCLT, the liquidator had no option but to approach the High Court and the Court directed the authorities to grant GST registration. Such direction came after expressing dismay and some strong words over the approach of the department in dealing with appointee (liquidator) of NCLT. Readers may see the kind of objections in this order [2021-VIL-843-GUJ].

In this case, the notification relating to GST registration for IRP / RP was relied on while the petitioner pointed out the same as not applicable since he was a liquidator. Tax department has a big hierarchy of numerous senior officers who are expected to guide subordinate officers and sort out such issues in implementation instead of being either nonchalant or adopting play-safe approach. This order shows that if taxman decides, even a company in deathbed and those who attend to it at such juncture will not be spared of harassment. CBIC should take note of this order and put in place some mechanism so that at least companies in distress and undergoing IBC process are not humiliated and their agony prolonged.

Manual filing v. online filing - Feeding frivolous litigation

Rule 97A of CGST Rules provides for manual filing of applications, claims, etc. as otherwise the prescribed mode of filing in GST regime is online / electronic. A statement with refund claim could not be uploaded and therefore, was filed manually but the same was not accepted by the GST officer on the ground that CBIC Circular No. 125 prescribed the only mode of filing of refund applications as online. The taxpayer was before High Court and the Court said that GST officer is equally bound by statutory provisions (referring to Rule 97A) as he is bound by CBIC circulars / instructions. Taking note of the non-obstante clause in Rule 97A, the Court said that it will be rendered redundant if online mode is argued as the only mode of filing applications. CBIC circular cannot control or derogate statutory rule, as per the order. It permitted the petitioner to file fresh application and directed the department to take action on the same. A similar order was passed by Allahabad High Court [2021-VIL-713-ALH] as highlighted in Tax Vista dated 11-10-2021 as the first item [2021-VIL-833-BOM].

Investigations under GST - Refusal to consider request for copy of statement not valid

When a person is summoned under Section 70 of CGST Act, statement is recorded in most cases though summons can be issued for production of documents alone. In several instances, copy of statement is not provided to the person who tendered such statement. Writ petitions were filed in Kerala High Court seeking copy of statements and also transfer of files to the GST authorities nearer to their place of business in view of pandemic. But with the pandemic situation waning to an extent, this was not pressed and the High Court has noted that petitioners cannot claim any right to have investigation transferred to jurisdiction of their choice. After discussing Section 67(5) requiring the department to provide copy of documents seized, the Court has held that the officer concerned has refused to consider the request of the petitioners which is not correct. The request should have been either considered or if sharing of copies is perceived as prejudicially affecting the investigation, proper order rejecting the request should be passed. To this effect, directions have been given by the Court [2021-VIL-832-KER].

Refusal to give copy of statements, not passing any order on request of taxpayers, etc., are not new. The law provides further safeguard to the authorities to reject the request for providing copies if there is likelihood of investigation being affected. These are statutory provisions where taxpayers should also have sufficient safeguards, but Indian tax laws seldom have any.

Confiscation without serving notice - High Court quashes order

GST authorities find the person in-charge of the conveyance i.e. the driver as the key person and therefore, show cause notice and order are served on him to the exclusion of owner of goods or vehicle. In one such recent case, the allegation was mis-match between invoice and e-way bill which the taxpayer explained but the same was not accepted. Detention and then, it appears, confiscation under Section 130 of CGST Act followed. Detention order, notice in respect of confiscation, etc., all were served on the driver but not to the owners. The High Court held that there is complete breach of principles of natural justice of not only not issuing SCN but also not providing opportunity of hearing. The authority has been directed to decide afresh. All this pain for an amount of around Rs. 2 lakhs which was the redemption fine imposed. The Court directed release of goods and the vehicle as tax and penalty were already paid [2021-VIL-842-GUJ].

Mis-match in document leads to confiscation - this means the State deems it proper to appropriate taxpayer's assets for explainable error in a document. Unless such confiscatory provision and attitude change, GST will continue to be yet another tax with all usual failings.

Deputy Commissioner is proper officer for adjudication - High Court rejects petition

It is rare for courts to accept challenge to proceedings on the ground of lack of jurisdiction. Arguments may appear imaginative and inventive but courts are hardly swayed. Deriving inspiration from Sayed Ali [2011-VIL-25-SC-CU] and Canon [2021-VIL-34-SC-CU] judgments, adjudication proceedings under GST were challenged before Allahabad High Court. The petitioner contended that the Deputy Commissioner of State Tax has no jurisdiction in the absence of delegation of such power by the Commissioner as per Section 5(3) of UPGST Act authorizing him to be the proper officer. A few office orders were issued by the Commissioner and the High Court examined these and found they provided for valid functional delegation besides prescribing pecuniary limits for adjudication. The Court noted that Section 5(3) does not stipulate procedure on how such delegation should be made by Commissioner. Not mentioning the source of power in the office orders was held to be inconsequential. Judgments in Syed Ali and Canon were held as not applicable to SGST officers who can derive jurisdiction from "simple sub-delegation under an administrative order issued by the Commissioner with reference to his powers to sub-delegate granted under Section 5 of the Act, without any gazette notification of such order." [2021-VIL-836-ALH].

Search, summons, provisional attachment, prosecution - High Court not impressed

In a typical case rivalling revenue intelligence type investigations, the GST authorities searched the premises of the petitioner - both office and residential, seized documents (it appears), recorded statements, provisionally attached movable and immovable properties with direction to debtors not to make payment, blocked ITC, etc. Besides the above, prosecution has also been launched by filing criminal complaint and anticipatory bail was rejected earlier. The allegation was fraudulent availment of ITC of around Rs. 137 crores based on invoices issued by those with cancelled GSTINs (which means non-existent) and this has been denied by the taxpayer on the ground that at the time of supply, they were all existing.

The High Court was not impressed and held that though writ petition is maintainable in cases of provisional attachment, in the present case, proceedings were initiated before attachment and therefore, it is valid. The Court directed the department to conclude investigation in eight weeks and also pass order on provisional attachment as hearing was completed before. By way of interim equitable relief, it permitted the taxpayer to use the finished goods for fulfilling contractual obligations with overseas and PSU buyers. It is not clear as to how such a huge amount of ITC came to be availed without proper due diligence of worthiness of buyers if the allegation of the department is true. This case also reveals certain gaps since investigations were initiated in 2019 also and it appears they were not taken to any conclusion but another round of operations has been undertaken in 2021 [2021-VIL-841-GUJ].

SCN is completely vague and order without reason - High Court quashes

Readers will recall that on several occasions, in this column, it has been pointed out that officers performing quasi-judicial functions from issuance of SCN, passing adjudication orders and then appellate orders require thorough training in basics of justice dispensation in view of large number of faulty notices, unreasoned orders and orders passed without hearing. The Gujarat High Court has also made similar observation on training of officers in a recent order. In this case, the show cause notice which proposed to reject refund mentioned the reason as "Other" and in remark "error in adjusted total turnover". The petitioner requested for specific reason and could not file proper reply and attend hearing in the absence of the same. But the department went ahead and passed equally cryptic order without reasons. The High Court held that the SCN was completely vague lacking fundamental details and such SCN cannot be defended by the department. Both the SCN and impugned order have been held as in violation of settled law and therefore, the order has been set aside [2021-VIL-840-GUJ].

Compared to Central Excise and Service Tax disputes, in GST era, may be because the notices are templated as per software or otherwise, numerous SCNs are bereft of any specific allegations or reason. Orders-in-Original in those days, in certain cases, used to stand upto the rigorous scrutiny of the Supreme Court in regular appellate proceedings whereas in GST regime, they do not even survive writ proceedings.

ITC fire on canteen service to consume factories

Last week VIL has reported a few more advance rulings and they are not discussed in detail. However, in a significant ruling, Madhya Pradesh AAR has held that GST is liable to be paid on notice pay, premium towards group medical insurance policy for non-dependent parents and retired employees, canteen facility to employees and telephone charges recovered from employees. ITC will be admissible in respect of insurance premium and telephone charges while ITC is barred in respect of canteen service. The crucial issue is valuation - Rule 28 of CGST Rules on open market value will be applicable in both the cases of (a) nominal recovery and (b) free supply of food [2021-VIL-429-AAR].

GST Council should step in with appropriate amendments before the canteen fire consumes many in the industry. CBIC should also, in the meanwhile, rein in field formations from applying such rulings to issue SCNs by instructing them to wait till such amendments are made. Absence of recovery is also not a sufficient defence to stop the demand of GST and amending employment terms to include everything in salary may not be practically feasible in all the cases. Therefore, industry may also consider closing down canteens, stop providing insurance to employees and other perquisites till the time the law is amended.

ITC available on special vessels used in oil transportation

The advance ruling mentioned here may not be applicable to a majority of members of industry but the same being in favour of taxpayer, will certainly be of interest to everyone. Diving Support Vessel (DSV) is used to connect the oil cargo carrying vessels with the single point moorings (SPM) which are located mid-sea so that oil is transported through sub-sea pipelines to the tanks in shore. Such DSV being used for transportation of goods so as to provide port and terminal handling services, input tax credit of GST paid on operation and maintenance of the same would be admissible. Security Patrol Vessels (SPVs) are used to provide security to SPMs located mid-sea and also monitor oil spill and therefore, O&M services relating to SPVs would be input service for providing the above said output service and therefore, ITC would be available. Though renting / hiring of SPVs is also involved, the Advance Rulings Authority (AAR) has held that the contracts are essentially for O&M services or security services and hence, there is no bar on ITC [2021-VIL-437-AAR].

GST not applicable on sale of developed plots

Another taxpayer-friendly ruling can be seen in 2021-VIL-428-AAR. In this case relating to smart city project, sale of developed plot has been held to be not covered under supply and not liable to GST. The caveat is that development work is limited to providing common amenities (common drainage, water supply, electricity, lighting, etc.) and no further development work will be undertaken after sale of such land and no advance is received for undertaking development activities. This ruling is at variance on this issue vis-à-vis other AARs and may take a longer time to settle down as anything related to immovable property refuses to simply move.

(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))