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Tax Vista Your weekly tax recap Edn. 80 - 27th December 2021 By Dr. G. Gokul Kishore |
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Canteen recovery and notice pay recovery not liable to GST
Notice pay recovery is not liable to GST as per a recent ruling by the Appellate Authority for Advance Ruling (AAAR). It has relied on CBIC's guidance note issued under service tax and Madras High Court order reported in 2020-VIL-39-MAD-ST. The ruling holds that services by employee to employer in the course of employment is under Schedule-III and not taxable and the compensation accruing to employer is in relation to services provided by employee as the employer is compensated for sudden exit. As per the ruling - "Merely because the employer is being compensated does not mean that any services have been provided by him or that he has tolerated any act of the employee for premature exit."
On canteen recovery also, the ruling has gone in taxpayer's favour. It has been held that food is not supplied by the appellant-company against the amount recovered from employees and the same is part of the consolidated amount paid to the canteen contractor. The activity is collection of a portion of the amount from employees for which no consideration is received by the employer and the same is not a supply. Being obligatory for employer to provide canteen facility, ITC will be admissible in respect of GST charged by the contractor. The ruling further notes that provision of canteen facility to all employees without charging any amount (free of cost) will not be covered under Schedule - III of CGST Act and the same being part of wage structure was not shown. However, it reiterates that the employer is a mere facilitator for canteen service and the same is mandatory in the present case. This implies that the same is not liable to GST.
In respect of recovery towards premium for group medical insurance for non-dependent parents and retired employees, the AAAR has held the same as not liable to GST. Such transaction is not covered under supply as per Section 7 of CGST Act and it is not covered under the term 'business' and therefore, facilitation of such insurance service is not a supply of service, as per the ruling. Similar view has been adopted in the case of telephone charges also. In both these cases, input tax credit would also be not admissible [2021-VIL-73-AAAR].
This ruling is certain to be discussed in every forum, relied on by taxpayers only to be distinguished / differed by authorities. CBIC is certain to be provoked into issuing a circular. Whether the circular will be helpful to the taxpayers or not can hardly be guessed.
Onerous bail conditions - Petitioner languishes in jail
Certain cases appear to be routine but the impact they have on personal liberty compels us to think about the might of the State against citizens. In a case of alleged GST evasion of around Rs. 16 crores, the alleged wrongdoer has been languishing in jail for almost one year. Bail was granted in February, 2021 but the conditions like bond for Rs. 1.10 crores and sureties for like sum and security by way of bank guarantee or fixed deposit of Rs. 60 lakhs were too onerous to comply with by the person concerned - the result - he continued to be behind the bars. Such order was modified later but still the conditions were perceived as stringent and he could not come out. Taking note of the fact that complaint is yet to be filed and following the dictum of bail is the general rule, the High Court has now further relaxed the conditions for bail. If a person has indulged in fraud of around Rs. 16 crores, then fulfilment of bail conditions should not be so difficult. Not being able to fulfill the same appears to indicate certain weakness in the case of the department. This is for the courts to decide but such cases do point to necessity of certain safeguards when personal liberty is curtailed for so long even before the trial has commenced [2021-VIL-888-P&H].
Rejection of request to revoke cancelled registration - Who gains?
Cancellation of registration has been more litigated than several other issues because of the frequency with which such power is invoked. Registration of primary agricultural cooperative society was cancelled for non-compliance with provisions. Application seeking revocation was filed after the government granted relaxation on multiple occasions extending the timeline for seeking revocation of cancellation. However, the portal did not accept such request and the taxpayer was before the High Court. Taking note of the extensions granted and filing of revocation request by the extended due date, the Court ordered acceptance of returns to facilitate payment of tax and pass orders on restoring registration [2021-VIL-886-MAD]. A similar order can also be seen at 2021-VIL-883-MAD.
Providing for extreme powers like cancellation of registration is to deter persons from committing the specified offence or infraction. The threat of use is the intention behind such provisions rather than actual use itself since actual use causes loss to both the parties - taxpayer is deprived of business and government loses revenue. GST authorities need to be sensitized on how to invoke such powers without causing such loss to all concerned.
Pre-empting High Court - Adjudication orders set aside
When writ petition against show cause notice is pending, the adjudicating authority passed orders wherein he dealt with the averments contained in the writ petition. The High Court found this to be extraordinary as the averments are pending examination by the Court. According to the High Court, such order reflects the anxiety of the officer to dispose the SCNs hurriedly and pre-empt the hearing before it. It set aside the orders and directed the adjudicating authority to hear and then pass orders afresh. The petitioner's plea for adjudication by a different officer was, however, not accepted by the Court [2021-VIL-879-ORI].
In the quasi-judicial drama all kinds of scenes can be witnessed. Passing order without hearing, deciding without agreeing for adjournment, fixing hearing on three consecutive dates, refusal to allow cross-examination, order without reasons or not dealing with all the submissions - the list is endless. Passing orders when the matter is sub-judice, as in the above case, is an act of defiance of judicial discipline and the Court could have passed strictures but did not choose to. Revenue bias can be condoned but prejudice as manifested by such order calls for in-depth examination of working of quasi-judicial machinery.
ITC not available when vehicle is used to provide service and not supplied as such
An argument was advanced before AAR that input tax credit on vehicles would be available when such vehicles are given on hire / rentals which are used by recipients for transportation of employees or associates since the vehicles are used for further supply and definition of supply includes renting. The AAR did not agree. The vehicles involved are those with seating capacity of less than 13 persons. Section 17(5) of CGST Act bars ITC on such motor vehicles except when they are used for specified purposes like supply of such vehicles or passenger transportation or for driving classes. Reading the entire agreement, the AAR has held that renting / hiring of vehicles with operator and that "such motor vehicles" are not supplied but service of renting / hiring is only supplied. It noted that this is not a case of further supply of vehicle per se and therefore, ITC would not be available. The service is not transportation of passengers but only renting to the company which decides on how to use the vehicle and hence, ITC bar will be applicable. Further, ITC is not available when such services are provided to SEZ [2021-VIL-480-AAR].
The bar is obvious but the taxpayer opted for ruling, may be, based on the reasoning that the vehicles are used for further supply. This is despite use of "such" in the relevant portion of the provision and the common understanding that ITC is restricted in such cases. When the business itself is renting of vehicles, then impact of ITC blockage will be significant. The solution lies in requesting for removal of the restriction but considering the well-known attitude of tax administration towards ITC in such cases, any relief can hardly be expected.
Erection of plant and maintenance is not a composite supply
Setting up of a plant to control emission from thermal power station and operation and maintenance constitute composite supply or not - this was the question before AAR. According to it, the concept of naturally bundled seeks to emphasize that different elements in a composite supply are integral to overall supply and if one is removed, the nature of supply will be affected. Based on such criterion, the AAR has held that different activities are separately identified and specified in the contract and scope of each cost centre is independent and work of a particular cost centre commences only after completion of the other. Clauses on payment schedule, performance guarantee, liquidated damages, etc., have been highlighted to conclude that the two supplies - erection of the plant and O&M services are independent supplies and not naturally bundled. It is for convenience of the parties that both the activities are being executed by the same person. Work relating to setting up of the plant has been held as liable to 12% GST and O&M services taxable at 18% GST [2021-VIL-477-AAR].
In this case, the appellant advanced a strange argument that if the work of setting up and O&M are awarded to two different persons then they may blame each other. This itself has been relied on by the AAR to hold that the contract can be awarded to / executed by two different persons. It may be an industry practice to award both erection and maintenance to the same person for operational convenience and for enforcement of guarantees but to be blessed under GST law as composite supply, the tests appear to be much more stringent. Contract may be drafted even keeping in mind the conditions relating to composite supply under GST but ultimately, it is the perception of the authority / court which determines such issue that prevails.
Turmeric is not an agricultural produce - GST payable by commission agent
Last week, in Tax Vista, an advance ruling holding that rice is not an agricultural produce was discussed. This week, VIL has reported a ruling in which the AAR has taken the view that turmeric is not an agricultural produce. The processes carried out are by the farmers (cultivators) and the same appear to be essential for making the item marketable in the primary market. However, AAR is consistent - the farmer adopts specialized process using machine (highlighted in bold in the ruling) and evidence has not been produced to show such process was carried out on his own in his land. Further, such process adds to marketability and make them fit for sale directly to consumer and therefore, exemption to commission agent under Notification No. 12/2017-Central Tax (Rate) would not be available. The ruling goes on to state that turmeric is a spice and not an agricultural produce. The ruling uses "dried and polished turmeric" to refer to this item but chooses to ignore that such processes do not alter the essential character and such process makes them marketable for the primary market which are the factors specified in the definition / notification. By adopting tests or criteria not provided for in the notification, the ruling clearly erroneous [2021-VIL-485-AAR].
Renting of electric buses - GST rate and ITC eligibility
When buses are rented to the transport undertaking, the applicable GST rate is 5% without ITC and 12% with ITC. The issue is otherwise simple but the condition in the notification states that cost of fuel shall be included in the consideration charged from the service recipient. When the fuel is diesel or petrol, the task is much easier. In a recent case before the AAR, the applicant stated that they are engaged in providing electric buses and it is their responsibility to keep the battery charged and therefore, fuel cost is borne by them. The AAR agreed and ruled as noted in the first line. This case is mentioned here because the ruling considered keeping the battery charged as satisfying the condition in the notification as otherwise, it would have led to strange result. This may indicate that the exemption entry requires amendment to reflect the current technology in mobility [2021-VIL-484-AAR].
CGST Act as amended by Finance Act, 2021 - Amendments in force from New Year
Several amendments in CGST Act as made by Finance Act, 2021 will come into effect from New Year's Day - 1-1-2022 as per Notification No. 39/2021 - Central Tax. Important amendments include inclusion of provision with retrospective effect in Section 7 on supply to deem transactions between clubs / associations and its members as supply, inclusion of new condition for availing ITC whereby filing of GSTR-1 by supplier and reflection of such details in GSTR-2B of recipient as mandatory, making provisional attachment provision invocable when proceedings are pending under specified chapters instead of specified sections and increase in penalty in detention & seizure cases. Goodness and simplicity in the Good and Simple Tax will be remembered as a declaration of objective without being implemented.
(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))