Tax Vista Your weekly tax recap Edn. 87 - 14th February 2022 By Dr. G. Gokul Kishore

Indefinite confinement during investigations - Supreme Court grants bail

GST law prescribes maximum sentence of 5 years when a person is convicted of specified offence. In a case where the petitioner had spent 25 months in jail, the Supreme Court, taking note of such fact, has allowed appeal seeking bail after holding that a person cannot be detained indefinitely. The Apex Court has observed that such detention amounts to almost 50% of the maximum sentence of 5 years. In this case, complaint has already been filed but the department stated that investigation was pending and that the petitioner was a habitual offender. This case has a history of harassment where the officers who entered the house for search operation occupied it for more than a week though ladies were present. It appears that the petitioner had initiated separate legal proceedings against the officers and the present conduct of the department was coloured by the same [2022-VIL-11-SC]. This order has been noted in another recent order by P&H High Court to grant similar relief. In this case, the petitioner has been in custody for 2 years and 8 months. It appears that in this case, tax has been paid as well [2022-VIL-109-P&H]

Compared to pre-GST period, under GST, cases of arrest, bail and prosecution are being reported at an alarmingly large number. GST authorities with the new weapon of data derived from the GST portal are invoking such powers more frequently. In this process, during investigations and trial, the persons concerned are treated as condemned convicts. With a democratic Constitution guaranteeing certain rights to everyone, such incidents of crossing the Lakshman Rekha project even well-intentioned anti-evasion measures as prejudiced, coloured and motivated.

ITC blockage - Rule 86A does not empower placing blanket prohibition

Electronic credit ledger under GST cannot be blocked in entirety but only to the extent of input tax credit alleged as fraudulently availed. In a well-reasoned order, the Bombay High Court has held that the power under Rule 86A of CGST Rules to block credit ledger does not enable the authority to impose a blanket prohibition on utilization of credit available in the ECL. In the case before it, it has quashed the order on blockage on the grounds that the order was bereft of reasons and therefore, the requirement of satisfaction of authority passing the order was not satisfied. According to the Court, the impugned was bad in law since the requirement of "having reasons to believe" has not been complied with and neither reasons were not recorded nor the amount of blockage was specified.

An order invoking powers under Rule 86A of CGST Rules to block use of credit ledger cannot be treated as an order amounting to provisional attachment under Section 83 of CGST Act. While these two provisions operate in different spheres, the above was held by the High Court in this case since the petitioner had argued that by credit blockage, ITC which is in the nature of property gets provisionally attached. For provisional attachment, pendency of proceedings under specified sections is a pre-condition whereas for credit blockage, such condition has not been prescribed. The High Court order differentiates these two in these words - "While amount of credit lying in the ECL could be considered to be the property of the taxpayer, if viewed from perspective of ownership or entitlement of the taxpayer over the same, not allowing use of such property for discharging liability to pay tax, penalty etc. under Section 49 of the Central GST or not permitting its refund to the taxpayer cannot (sic - be) seen as seizure or attachment of the property. In attachment of property, the custody of the property is, actually or symbolically, taken over by the department with a view to protect the property from being transferred or altered in character, so that it can be appropriated, if the need arises, for realising tax dues. But, in case of blocking of ECL under rule 86-A, the custody of the property remains with the taxpayer but disability is created on his capacity to utilise it or receive the refund of unutilised credit." [2022-VIL-113-BOM].

This order clearly manifests the extent of capacity issues with departmental officers. The Deputy Commissioner who passed the order did not mention anything but simply said that ECL is blocked and that too, based on directions of DGGI received through superior officer. This has been termed as "abdication of authority" by the Court. Even if the case of the department that the petitioner was involved in fraud had some merit, ignorance on how to use the lawfully conferred powers fails the same.

Renting of hostel for students and working professionals is exempted

Karnataka High Court has held that renting of hostel rooms to students and working professionals is covered by exemption from GST. The petitioner had assailed ruling by Appellate AAR holding that the property is not residential dwelling. The property is stated as having rooms which are leased as hostel on long term basis for students and working professionals. The High Court has held that CBIC's service tax clarification on residential dwelling (does not include hotels, etc.) is binding on GST authorities. It noted that as per local body plan, hostel for students and working women is classified in residential category. It relied on Supreme Court's judgment holding that residence means a person eats, drinks and sleeps in that place and it is not necessary he should own it. Further, relying on common parlance as per dictionaries, such accommodation has been held as residential. It observed that what is rented is hostel which is covered under residential dwelling and the purpose for which it is used is as residence and it is not necessary that the lessee himself should use the premises [2022-VIL-110-KAR].

It seems the department did not raise the usual preliminary objection on admissibility of writ petition filed against advance ruling challenging the same on merits and not on the manner of arriving at the ruling. While absence of appellate remedy against such appellate advance ruling is one issue and only writ court can intervene, delay in establishment of GST Appellate Tribunal is compelling taxpayers to seek such rulings and then seek writ remedy.

Rejection of order-in-appeal by Assistant Commissioner - HC disapproves

Tax stories are never boring. An Assistant Commissioner rejects refund of GST as claimed by the taxpayer. The taxpayer files appeal before Additional Commissioner (Appeals) who allows the appeal. The taxpayer requests for refund again on the strength of favourable appellate order. The Assistant Commissioner says the order-in-appeal is erroneous and refuses to sanction refund. He also notes that GST Appellate Tribunal is yet to be constituted and department will file appeal against such "erroneous" order. In the above factual background, the taxpayer has no option but to approach High Court. The High Court is surprised over non-compliance of order of a superior quasi-judicial authority by the Assistant Commissioner. Setting aside such second rejection order, the High Court has now directed him to pass orders as per appellate order [2022-VIL-99-BOM].

Those who have some familiarity with indirect tax department will not have any surprise over such orders. When an order is not favourable to the department, implementing such order may land the officer in trouble but defying such order is not perceived as an act of disobedience or against terms of service. In fact, it is the Appellate Authority whose action will be viewed with suspicion for passing order in favour of the taxpayer. But such authority cannot be given any punishment posting as the appellate post itself is considered as one.

Power to issue summons is valid

When the tax authority issues summons and the taxpayer wishes to assail it, challenging validity of power to issue summons at least serves the purpose of an academic discussion. Before Rajasthan High Court, the ground taken for challenging the vires of Section 70 of CGST Act is that it violates separation of powers as the officer issuing summons himself is interested in the case. The Court was not impressed as it said the power is "not unguided or uncanalised" and the procedures as per Civil Procedure Code are required to be followed. It held that such power is not beyond legislative competence or violate fundamental rights or the Indian Constitution. Further, the High Court declined to quash the summons after noting that documents to be carried by the person during appearance were mentioned in the summons and if unreasonably short time is given, extension of the same can be sought [2022-VIL-98-RAJ].

Except in cases of outright harassment, it is advisable to comply with summons instead of litigating the same. High Courts generally refrain from exercising writ jurisdiction when investigations are underway, and the prayer is merely to quash summons. Even otherwise, Courts can hardly tell someone not to comply with summons when the power is validly exercised. There are cases where summons issued more than once have been unsuccessfully challenged in multiple writ petitions. Such litigation may help in buying time but cannot stop the investigations.

Goods warehoused beyond permitted period - Tribunal allows re-export

It is not uncommon to seek extension of warehousing period and the same is generally granted as well. But the problem arises when such request is sent after expiry of warehousing period. As per Section 69 of Customs Act, 1962, duty is not required to be paid when the bonded goods are exported from warehouse. CBIC by Circular No. 3/2003-Cus., had clarified that even in cases where the permitted period had expired, request for re-export warehoused goods may be considered after extending the period of warehousing. This is subject to the caveat that the goods have not been put up for auction by the department. Relying on this circular and appellant's request, CESTAT has held that the same is required to be considered by extending the warehousing period so that re-export can take place. The order also takes note of Section 72(1)(d) empowering the department to demand customs duty or sell the goods by auction. This has been held as inapplicable in the present case as the request for re-export was pending and the department did not intend to auction the goods. The Tribunal allowed re-export and directed extension of warehousing period [2022-VIL-104-CESTAT-AHM-CU].

The above case is being discussed for two reasons. First, there must be similarly placed persons where warehousing period has expired and request for re-export is also pending. Secondly, the facts of this case will shock everyone since the appellant had imported the goods in 1995-1996, became sick later and the request to re-export has been rejected once but a subsequent request was pending for more than 10 years. There is a serious issue with tax laws - a sick company is compelled to wait indefinitely only because permission to re-export the imported goods is not forthcoming.

Proforma invoices cannot be the basis for rejecting declared value

When the tax authorities allege something, it is their duty to substantiate the same with evidence. In a case relating to alleged under-valuation of imported goods, the adjudicating authority had held that when the charge is serious, the onus to prove shifts to the importer. This has been specifically noted and rejected by CESTAT holding that this is not only specious but also legally not tenable since it runs contrary to settled law on onus being on the department when allegations are levelled by it. A major evidence relied on by the department is proforma invoice wherein there was variation in model number of the imported machinery and such an invoice cannot be an evidence as per the order. Rejection of transaction value requires payment of additional consideration over and above the price declared and this has been held as not proved. Reliance placed on WhatsApp chats has been rejected on the ground that procedure under Section 138C of Customs Act was not followed [2022-VIL-113-CESTAT-DEL-CU].

The strange part of the above case on Customs Valuation is that investigations were conducted by DRI which is a premier investigating agency. The department can refrain from booking a case relying on such weak evidence only because the adjudicating authority will favour it by an order with strange findings.

Tunnel work covered under composite supply

The work involved drilling and blasting for tunnel and the question before Authority for Advance Rulings (AAR) was whether it will be treated as composite supply or otherwise. The applicant was a sub-contractor engaged for construction of tunnels forming part of expressway project wherein the applicant's role was blasting and drilling using explosives, tools and various other materials. The AAR noted that goods are used in the process even while supply of service in the form of drilling, blasting and clearing the rubble was involved. As the service cannot be performed without use of goods like explosives, the activity was held as involving both goods and services and therefore, covered under composite supply. Tunnel construction being part of immovable property, the same was held as works contract with the applicable rate of GST being 12%. Considering several rulings which tend to deviate from the main issue and endeavour to invent grounds to confirm the department's stand, this ruling is reasonable [2022-VIL-27-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))