Tax Vista Your weekly tax recap Edn. 82 - 10th January 2022 By Dr. G. Gokul Kishore

SGST reimbursement to cement units - High Court sets aside retrospective denial

Industrial Policy (in Odisha) of 2007 was amended in 2020 but with retrospective effect from 1-7-2017. Such amendment was challenged in the High Court since VAT and SGST reimbursement was rejected on the ground that cement grinding unit was covered under negative list of sectors which are not eligible for incentives under the policy. The government contended that the withdrawal of benefit was for the entire cement industry and it was based on the computation of huge loss of SGST revenue if such reimbursement is given. It further argued that promissory estoppel is not applicable as there was never a promise to reimburse SGST. The petitioner argued that having made substantial investments based on the promise held out in the policy, the right to reimbursement has become vested and denial of the same would be against policy objectives and would be illegal and arbitrary.

The High Court considered the question in the backdrop of revenue loss v. accrued / vested right and also promissory estoppel. It noted that inspection of petitioner's manufacturing unit was caried out earlier and it was concluded that the unit was eligible after detailed verification. The argument of the government that the petitioner was only a mixing unit has been held as contrary to the fact of sophisticated and elaborate manufacturing process adopted. Another contention that the cement grinding / mixing units were covered under negative list and not eligible for incentive was not accepted by the Court on the ground that it was intended to cover only certain other units with low value addition and low employment generation. The petitioner unit was specifically covered as downstream thrust sector industrial unit and no proper justification or reasons were adduced as to why cement manufacturers were chosen for denial of SGST reimbursement and that too with retrospective effect. According to the High Court, such denial was, therefore, irrational, arbitrary and discriminatory. Doctrine of promissory estoppel has been held as applicable and impugned decisions were quashed and retrospective effect to amendment was set aside [2022-VIL-08-ODI].

In the recent years, promissory estoppel has not been generally accepted by the courts and the above decision is an exception. One of the major factors which went in favour of the taxpayer is the manifest lack of any reason or rationale for denial of the benefit with retro effect. The only major reason cited is revenue loss which can be read as supervening public interest but arbitrariness and discrimination have been too strong to be swept away by public interest argument. The State will likely appeal in the Supreme Court considering the stakes involved.

Rejection of refund more than amount in notice - Adjudication skills scale new heights

One should learn lessons from GST authorities as to how to encourage exporters. Refund of Rs. 2.84 crores towards unutilized input tax credit was claimed by an exporter and show cause notice was issued proposing rejection of refund of Rs. 36.85 lakhs. The adjudicating authority who heard the claimant was transferred, another officer took charge but as expected, passed order without offering fresh personal hearing. But what was unexpected was the authority rejected the entire amount of Rs. 2.84 crores claimed as refund whereas the SCN had proposed to reject refund of only Rs. 36.85 lakhs. The taxpayer sought rectification and then filed appeal. Later the appeal was withdrawn as they had moved High Court. The Court held the act as gross and apparent mistake by the authority by travelling beyond the scope of show cause notice. Not providing hearing opportunity has also been taken note of. Quashing the order, the Court directed fresh hearing by the authority concerned [2022-VIL-16-GUJ].

The period for which refund claimed was from February, 2019 to March, 2020. It has been almost 3 years for part of the claim and 2 years for the balance portion. The taxpayer may get interest for delay in sanction of refund as and when it is granted. But in business, time is money. The funds required during a particular period are crucial to business and depriving business from use of such funds by posting incompetent officers and empowering them to pass orders affecting the valuable rights of taxpayers is an act of absolute indifference and harassment by top echelons of tax administration. GST cannot reform bureaucracy and therefore, taxpayers have to suffer.

Rejection of refund without hearing the taxpayer is not valid

Readers may get bored with the sickening frequency of such titles. It has become a routine - orders being passed without offering hearing and taxpayers approaching High Courts and the matter getting remanded for fresh decision. If this is the template of quasi-judicial system compelling High Courts to exercise extraordinary jurisdiction under Article 226 of the Constitution, then the title for covering such orders cannot be different. But in the case briefly mentioned here relates to an Indian IT behemoth with global operations whose refund of unutilized ITC arising out of export of software and IT services was rejected on the ground that hard copy of documents was not submitted. The High Court held that application for refund can be rejected only after giving opportunity of hearing; hearing is central to decision making process as per settled law; breach is a ground for judicial review and hearing cannot be substituted by conversations over telephone and exchange of emails. It directed the authorities to decide afresh the refund claim [2022-VIL-07-TEL]

While size of the taxpayer is not relevant before law, the casualness with which refund claims of exporters is being rejected is something the GST Council should consider and issue instructions. But instructions hardly mean anything to taxpayers unless the tax administration changes its methods.

Harassment from the point of entry in GST - High Court imposes costs on officer

Rejection of application for registration for flimsy reasons is quite common in GST and one of the factors is obviously corruption. Though documents are uploaded at the time of registration, some justification is created to inspect the premises and if the applicant does not budge, application itself is rejected. An applicant had to undergo such harassment in the hands of UP GST officer concerned. She was the owner of the premises and provided PAN, Aadhaar and property tax receipt. The department demanded electricity bill copy. Law requires only PAN and Aadhaar copy. In this case, after field visit, the department sought copy of either electricity bill or property tax receipt. The applicant submitted property tax receipt. Both adjudication and appellate orders without discussing anything simply rejected her plea on the ground that electricity bill copy was not produced. The Allahabad High Court has quashed such orders and directed the authorities to consider the application afresh. It has also imposed costs on the officer concerned. The Court has noted that the authorities have acted only with a view to harass the petitioner and it cannot be tolerated [2022-VIL-02-ALH].

Confiscation notice with hearing before notice date

Notice for confiscation of conveyance was issued in GST MOV-10 alleging that the vehicle was being used to transport undeclared goods. The owner had given the vehicle on hire and the entity which took it on hire was alleged to have indulged in such acts. The owner had issued legal notices and contended that he had no knowledge of such acts and sought relief of release of the vehicle. The department directed the owner to do the impossible. The High Court noted that the notice was dated 23-12-2020 whereas the petitioner (owner of vehicle) was directed to appear on 28-11-2020 and such notice was defective. It was of the view that the petitioner was not provided opportunity of hearing before passing order prejudicial to him. Seriousness of confiscation has been highlighted by the Court. Also, that the owner had no knowledge and the defence taken under Section 130(1)(v) of CGST Act was not effectively rebutted by the department. Impugned orders were quashed. [2022-VIL-04-ALH].

Mechanical issuance of SCN is quite common. However, fixing hearing date even before the date of notice is weird and indicates complete non-application of mind. Such notice is not a routine one demanding tax short paid but proposing to appropriate the property of another person by way of confiscation. For the tax authorities, issuing such notices may not have any effect on their salary or increments but for the taxpayers / persons undertaking business, they cause immense damage.

Detention for mere change of route and for alleged under-valuation, not sustainable

If a vehicle carrying taxable goods proceeds in the direction opposite to destination, then the conclusion is they are being transported with intent to evade payment of tax. Further if the value of goods as shown in the documents is less than market value, then the goods and vehicle are liable for detention. This was the belief of the GST authorities which has been held as not correct by the High Court. It said undervaluation (suspicion of) cannot be a ground for seizure of goods in transit. Notice initiating confiscation proceedings was quashed by the Court. Drawing inference on evasion merely based on direction preferred for delivery of goods has been held as not sustainable. The High Court has taken note of precedent orders also. Detention of goods and vehicle in transit is a power which is becoming infamous for misuse [2022-VIL-19-GUJ].

GST not payable on canteen & bus transportation facilities - No GST on notice pay also

The Authority for Advance Ruling in Maharashtra has held that GST is not liable to be paid in respect of canteen and bus transportation facilities provided by employer to employees where part amount is recovered from salary as these services are not provided in the course or furtherance of business and cannot be treated as supply under GST law. In this case, the question posed by the applicant was whether by deduction of some amount, the transaction would amount to supply. Input tax credit of GST charged by the service providers is not being availed as per the facts in the ruling and this was not a question before the AAR. The ruling is based on the reasoning that canteen facility is mandatory for the employer to provide to employees as per Factories Act and is a welfare measure. It has been further held that the applicant is not a provider but recipient of canteen service as provided by third party vendors. Total amount paid to service provider having been subject to GST has been noted to hold that part amount recovered from employees cannot be taxed again.

Bus transportation facility has been held to be a welfare, security and safety measure and not connected to the business of the applicant. As the definition of business includes incidental or ancillary activities, it has further held that arranging bus facility is not an activity incidental or ancillary to manufacturing and marketing of pharmaceutical products which is the main business of the applicant. One of the important reasonings is that business would continue to function without such transportation activity.

On notice pay, the ruling holds that the employee opting to resign by paying notice pay acts in accordance with the contract and therefore, there is no breach and consequently, there is no forbearance or toleration in such cases. The employer has been held as not performing any activity nor any passive role as the employee is free to tender his resignation by making payment of notice period salary. Therefore, recovery of notice pay from employees when they quit without serving the notice period is not covered under supply and hence, is not liable to GST [2022-VIL-04-AAR].

The department is certain to appeal before Appellate AAR. The decision is not unanimous among such authorities. The stand of the department is obvious and it does not accept that service tax jurisprudence is not applicable in GST. Taxpayers have to face high pitched demands and uncertain litigation for a fairly longer period.

Recovery in case of mis-matches between GSTR-1 and GSTR-3B - CBIC issues guidelines

By Finance Act, 2021 an amendment to Section 79 of CGST Act relating to recovery of amounts has been made which has come into effect from 1st of this year. The explanation inserted provides for initiation of recovery action if tax as per supplies declared in GSTR-1 is not paid as per GSTR-3B or interest is not paid, without pursuing the normal route of show cause notice and adjudication under section 73 or section 74. This is a drastic amendment. To soften the impact, CBIC has clarified by Instruction No. 01/2022-GST dated 7-1-2022 that action should not be initiated under this provision without obtaining justification / reasons for difference between such returns. The instruction mentions certain illustrations as well. CBIC's circulars and instructions are more followed in breach in general. Instead of instructions, such safeguards should be provided in the statute, may be even in the rules so that taxpayers who are victims of misuse of such power can invoke appropriate legal remedy.

(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))