Tax Vista Your weekly tax recap Edn. 78 - 13th December 2021 By Dr. G. Gokul Kishore

Transitional credit - TRAN-1 revision can be allowed by Commissioner by specific order

Rule 120A of CGST Rules provides for revision of TRAN-1 form once within the time as may be permitted by Commissioner. This rule has been interpreted by Meghalaya High Court in a case involving rectification of TRAN-1 form by holding that there is a possibility of extension of the time for filing revised declaration by the Commissioner by a general or specific order. Such specific extension can be made based on the request of the taxpayer. The petitioner had not availed such opportunity and they were permitted to make such specific request under Rule 120A. The Commissioner was directed to consider the same and if the request is to be rejected, reasons for the same should be provided [2021-VIL-860-MEG].

The above order should provide much-need relief to a large number of taxpayers whose request for filing revised TRAN-1 form was rejected as hit by time-limit. Based on this order, they may be able to approach jurisdictional Commissioner to allow time for revision. Commissioners in other States may take the stand that Meghalaya High Court's order is not binding on them in which case, the issue can be agitated before jurisdictional High Courts with similar plea. It seems all is not lost in respect of transitional credit.

Service tax on interchange fee - Supreme Court delivers split verdict

In an exhaustive judgment, the Supreme Court has delivered split verdict on the issue of service tax liability in respect of interchange fee or charges relating to credit card service. The department had demanded tax from the issuing bank on such fee while the Tribunal had set aside the same. According to the first view (of the Apex Court), issuing bank and acquiring bank are different in the case before it and they are rendering separate and different services. Highlighting the role of issuing bank, it has been noted that funds of issuing bank are utilized to effect payment and risk is undertaken by issuing bank besides approval of the transaction being given by such issuing bank. Based on such reasoning, it has been held that gross amount charged cannot be the aggregate of value of services provided by different service providers and therefore, issuing bank was liable to service tax on interchange fee in both the periods - before and after negative list regime. It also rejected the contention that such fee is in the nature of interest and transaction in money. However, since the tax was paid on such fee by the acquiring bank as part of merchant discount rate (MDR), demanding the same from issuing bank would amount to double taxation.

This point on double taxation has been agreed with by the dissenting Judge while holding that issuing bank and acquiring bank provide service to another person in relation to settlement of credit card transaction jointly and MDR comprises both acquiring bank's fees and issuing bank's charge. Disagreeing with the first view, the dissenting judgment notes that role of issuing bank is part of single unified service provided by acquiring bank to merchant establishment and it cannot be considered as a separate service. According to it, MDR is the consideration for such unified service which includes interchange fee and it cannot be taxed again separately [2021-VIL-91-SC-ST].

The judgment may be of academic interest to a large extent since the customer holding credit card pays the entire amount as per purchase price billed by the merchant establishment and as reflected in credit card statement. This is essentially an inter-bank issue though a higher tax cost may push the cost of services provided by such banks to the customers.

Time-limit for filing appeal starts from service of order by e-mail and not from date of uploading in portal

In general, taxpayers argue that they are not aware of the notice or order uploaded in the GST portal and therefore, the same ought to have been communicated through email or by post. In a converse case, the taxpayer contended that order against which appeal was filed was not uploaded in the portal and hence, the same was delayed. The appeal was filed manually on the ground that existence of such order came to light when recovery proceedings commenced. The appeal was dismissed by the Appellate Authority as time-barred and hence, the taxpayer was before High Court. The department contended that a scanned copy of the order was sent by e-mail but the officer concerned in the company did not inform the management. The Bombay High Court has held that date of communication of order was to be taken as the date on which it was sent by e-mail and the date of uploading in the GST portal cannot be taken into account for computing the time-limit. It said that the petitioner had lost the statutory remedy of appeal by the time they applied for certified copy well beyond even the extended time-limit for filing appeal [2021-VIL-861-BOM].

In the above case, the taxpayer did not deny receipt of e-mail or that it was found in spam folder later. The officer concerned in the company would have been taken to task by the management if the failure on his part is proved. However, the case involved imposition of penalty more than the tax amount and it is not clear how such quantum was arrived at. When an order fastens huge liability on a person, it is imperative that there is a proper service of such order on the person which means under acknowledgement of having received the same. Such instances call for an amendment to the relevant provisions so that the taxpayer does not perceive the procedures as hampering business.

Refund not sanctioned due to software limitation - HC asks department to consider outsourced assistance

'Technical glitches' has become a common term and can well be drafted into GST law. For every process, this is now used. After four years, certain functionalities are still in the stage of work-in-progress. In a particular case, refund was ordered in August, 2020 whereby around Rs. 50 crores was sanctioned to the petitioner and around Rs. 39 lakhs was ordered to be credited to Consumer Welfare Fund. However, till October this year, refund amount was not credited to the account of the petitioner for the reason of non-availability of option on bifurcation (amount to be credited to taxpayer and amount to be credited in the Fund) in the GST portal for the officers. The Systems Directorate acknowledged the software limitation and technical glitch and advised to keep such refunds pending till the time functionality for crediting in Consumer Welfare Fund is created. The High Court noted that provisional refund of 90% is not possible as there was no such order passed. It directed the department to resolve the issue in four weeks and outsource the work, if required. It further gave the option to refund the entire amount taking advance from the taxpayer, of the amount to be credited in CWF. The amount was ordered to be paid with interest after four weeks [2021-VIL-847-GUJ].

For getting refund of around Rs. 50 crores, a taxpayer is compelled to wait for more than one year only because of the shortcomings in the GST portal. There are several similar glitches relating to refund at the field level. Everyone cannot avail writ remedy and such taxpayers file representations with jurisdictional officers and patiently wait for solution. Unless very manifest and concrete measures are taken to identify and resolve such issues, GST regime will be despised more than the previous tax regime.

Refund applications - Availability of extended time-limit due to pandemic

The petitioner had filed refund applications in April, 2021 for the period June and August, 2018 but the same were rejected as filed beyond the time limit of two years. The Madras High Court has held that benefit of extension of time-limit by the Supreme Court in all the cases due to Covid-19 pandemic is available to the petitioner and rejection is not correct. However, the High Court set aside the orders on the ground that reasons for rejection were not given in the orders and directed the matter to be examined afresh. This order is briefly covered in this column so that taxpayers who are similarly situated may also rely on the Supreme Court order on extension of time for filing applications, appeals, etc. and wherever the same has been dismissed as time-barred, restoration can be sought, if the period is covered by the Apex Court order [2021-VIL-856-MAD].

Exemption for contribution to housing society - AAR differs from High Court

There is a general perception that the Authority for Advance Rulings (AAR) in various States has been biased towards the department. Such perception gets fortified by a recent ruling by Maharashtra AAR. Contribution upto Rs. 7500 per month per member is exempted in respect of housing societies. Madras High Court had held that if the contribution is more than Rs. 7500, then only the amount exceeding Rs. 7500 will be taxable and not the entire amount [2021-VIL-523-MAD]. However, according to AAR this order is by Single Judge Bench and it has been stayed by the Division Bench and therefore, not applicable. By adopting such stand, it holds that in such cases, entire amount will be subject to GST and not just the differential amount over and above Rs. 7500. The basis for confusion is CBIC Circular No. 109 which was quashed by Madras High Court. This circular in respect of this issue should be withdrawn before litigation balloons. If the intention is to tax the entire amount, then exemption entry in the notification should be amended appropriately.

This ruling has other surprises also for the taxpayers - amounts collected towards sinking fund / repair fund will be liable to GST since the applicant did not produce evidence to show that it is treated as deposit and interest is earned on the same or it is returned to members in certain cases. As the amount will be used for expenditure to be incurred in future, it is not clear as to what is the time of supply according to the AAR. The only issue decided in favour of the applicant is that amounts collected towards property tax and electricity charges will be excluded while calculating the exemption limit of Rs. 7500. Readers may see this ruling for more interesting discussion on water supply by RWAs [2021-VIL-450-AAR].

Another ruling on similar lines can be seen in 2021-VIL-448-AAR where ITC has been held as not available on various activities like building works, electrical works, fire protection system, etc. The questions have been raised by the applicant constructing new factory building. In the absence of good amount of discussion in the ruling, the same is not analysed here in detail.

ESI, EPF & labour cess liable to GST

In this column, the need for an amendment to Section 15 of CGST Act on taxable value has been highlighted a few times. In a ruling treading along familiar lines, the AAR has held that ESI and EPF amounts reimbursed to contractor providing manpower will be liable to GST. The amounts are reimbursed to the contractor after they are actually paid by the contractor. But this does not make any difference to the conclusion. According to the AAR, the intention of Section 15 of CGST Act is to include even all taxes and duties and therefore, there can be no exception to ESI and EPF amounts. Labour contractor cannot be treated as pure agent also as provided manpower supply alone is provided and he is not providing any additional service and contract does not have terms to act as pure agent and incur expenditure [2021-VIL-449-AAR]. Even if contract is drafted to make the service provider as pure agent in respect of such statutory payments as per Rule 33 of CGST Rules, an interpretation that the conditions are not fulfilled can always be taken to deny the benefit.

Another ruling by the same AAR on same lines may be read from 2021-VIL-447-AAR. In this case also, it has been held that centage and labour cess will be includible in taxable value and liable to GST. Centage has been stated as amount paid by PWD department to the service provider to meet administrative expenses. While there may not be any issue with this finding of AAR, the ruling in respect of cess under Building & Other Construction Workers Welfare Cess (BOCWW Cess) adopts the same reasoning as mentioned in the ruling in the previous para.

Leasing of residential land liable to GST

Renting of residential dwelling for use as residence is exempted under GST. Such exemption has been held as not applicable to cases where residential land is leased. Therefore, the AAR holds that lease rent and maintenance charges are liable to GST. The reasoning is - exemption entry does not refer to land whether as part of residential dwelling or otherwise; in many cases "building and land appurtenant thereto" is used but not in this case; it is lease of land which is renewed even if building is constructed [2021-VIL-441-AAR]. The ruling is not clear on facts and terms of lease. Since leasing of land is treated as a supply of service and it is not sale but only one of the rights that is transferred, the ruling may be legally sustainable.

Works contract - ITC available to mining company

The title may not convey the ruling fully. ITC provisions in CGST Act allow credit when works contract service is received and the same is provided as output service as well. This arises typically in the case of sub-contracts. In a case of this nature, the mining company was required to undertake rehabilitation and resettlement of displaced persons and it received works contract service for such colony. Invoice was raised on the entity which owned the land and superstructure and the amount was got reimbursed on actuals. The applicant-mining company was procuring works contract service from sub-contractor and provided the same to the above said entity and therefore, as per Section 17(5)(c) of CGST Act, ITC would be admissible. The AAR has further held that such ITC should be utilized only for providing works contract service and not for payment of GST on any other service including mining service. In respect of another query, payment for such colony construction has been held as not having any correlation with mining service and such works contract service is not naturally bundled with mining service and therefore, they are not covered under composite supply [2021-VIL-451-AAR].

Though the exceptions carved in Section 17(5) in respect of works contract service and plant and machinery are the beneficial provisions in the otherwise anti-taxpayer regime of ITC restrictions, it may be practically not possible to structure all the transactions only to derive benefit out of them.

Advance rulings on obvious questions

Renting of residential rooms on temporary basis for by a charitable religious institution is exempt from GST if the room tariff is less than Rs. 1000 per day. Renting of space for shops and stalls by such body will be taxable if the rent is Rs. 10,000 or more per month. These are part of the advance ruling applying entry in S. No. 13 of Notification No. 12/2017-Central Tax (Rate). It is not clear as to why on such obvious issues, advance ruling was sought [2021-VIL-455-AAR].

Another obvious issue on which advance ruling has been sought is availability of input tax credit in respect of construction of factory. The questions involved both the cases - material supply by applicant and only labour / services is by contractor and in the second case, both material and services are provided by contractor. The items / works involved are chillers, boilers, internal roads, electrical poles, internal drainage, etc. The AAR has held that ITC is not available on works contract services for construction of immovable property except plant and machinery and ITC cannot be availed on goods or services received by the taxpayer on his own account of such construction. It has been held that ITC is available only on foundation for machinery [2021-VIL-453-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))