Tax Vista Your weekly tax recap Edn. 85 - 31st January 2022 By Dr. G. Gokul Kishore

Interest and penalty not applicable under GST law when ITC availed but not utilised

In an order which is set to be relied on by taxpayers, the Madras High Court has held that though proceedings under Sections 73 and 74 of TNGST / CGST Act can be initiated for mere wrong availment of input tax credit, such provisions will be applicable only if the credit amount is also utilized for discharging tax liability. In this case, transitional credit was held as ineligible as the taxpayer being a hotel was held as not entitled to ITC under VAT law and order was passed imposing penalty and seeking to recover interest as the taxpayer had reversed the credit amount.

As per show cause notice, documents to prove admissibility of ITC were not available and therefore, Section 74 of Tamil Nadu GST Act was referred but the High Court held that the ingredients thereunder were not invoked in the show cause notice and such SCN is not valid. It further held that penalty under Section 122 can be the proper method in such case. As per facts the credit amount was intended to be set off against future liability and the same did not materialize. Based on such fact, the Court held that petitioner is liable for only a token penalty of Rs. 10,000. The impugned order was thus partly set aside [2022-VIL-72-MAD].

Considering the question of law involved, the department is likely to appeal before Division Bench as the present order is by Single Judge Bench. Whether in this appeal the issue is carried further or not, the issue is certain to be taken to the Supreme Court sooner or later. An authoritative pronouncement by the Apex Court may settle the issue. "May" is used here because a judgment not in favour of the department has the potential of triggering retrospective amendment against the taxpayers.

Notice pending for 23 years quashed - High Court orders return of amount with interest

The Bombay High Court has set aside the show cause notice issued in April, 1997 and not adjudicated (orders not passed) for 23 years. It also ordered return of amount of Rs. 2 crores deposited during investigations before issuance of SCN along with interest. The case relates to allegation of fraud in claiming export benefit. The Court followed precedent judgment holding that Courts may not allow further proceedings if they are not concluded within a reasonable period. It seems hearing was granted and then the notice was lying dormant for 14 years. The counsel for Customs Department sought liberty to conclude proceedings but the High Court refused. It said - "It is the petitioners who have approached the Court to have the impugned show cause notice set aside. Had the petitioners not invoked the writ jurisdiction of this Court, the show cause notice would have continued to gather dust. The petitioners, in such circumstances, cannot possibly be worse off for seeking a Constitutional remedy and thereby suffer an order to facilitate conclusion of the proceedings which, because of the inordinate delay in its conclusion, is most likely to work out prejudice to them."

Article 14 of the Constitution has been interpreted beautifully in these words - "Article 14 of the Constitution of India is an admonition to the State against arbitrary action. The State action in this case is such that arbitrariness is writ large, thereby incurring the wrath of such article. It is a settled principle of law that when there is violation of a Fundamental Right, no prejudice even is required to be demonstrated."

Customs authorities should be happy that the Court refrained from imposing costs since in this case, the exporter-petitioner was deprived of funds of Rs. 2 crores for 23 years only because of inaction of the department. CBIC should examine such cases and issue instructions for disposal without further delay and initiate follow-up to check whether such instructions have been actually implemented [2022-VIL-55-BOM-CU].

Proceedings under GST law cannot continue when moratorium under IBC is in force

Proceedings cannot continue under GST law when moratorium has been declared by National Company Law Tribunal and corporate insolvency resolution process (CIRP) has been initiated. Section 14 of Insolvency and Bankruptcy Code (IBC) is categorical that institution or continuation of proceedings against the corporate debtor in any court or tribunal or authority shall stand prohibited when moratorium is declared. This has been highlighted by the High Court to note that the bar is complete one as the said provision is all pervasive and proceedings before GST authorities also cannot be continued till moratorium is lifted. The Court relied on judgments on this issue under Income Tax law and Negotiable Instruments Act. It also noted that since moratorium period is excluded as per IBC for limitation, the contention of the department that the proceedings under GST law will be hit by time-bar if they are initiated later, is not acceptable. The department has been permitted to initiate or continue the proceedings after completion of CIRP [2022-VIL-66-KAR].

It is settled law that there is no equity or fairness in taxation. But, implementation of tax law can be tempered with reasonableness particularly when the taxpayer is facing losses, closure of business and insolvency proceedings. Even after the era of Crown debt is long over and even after new laws placing the government at a distant position like the waterfall mechanism under IBC, tax department entertains the wrong notion that it will have priority in recovery.

Abducted vessel is not imported vessel - HC sets aside confiscation and customs duty

Will import under Customs Act cover bringing into India of a fishing vessel based on false distress call by crew members (which means the vessel was abducted by the crew), without the knowledge of the owner - whether an abducted vessel can be treated as imported into India' - This was the question before Kerala High Court. The Customs authorities had confiscated the vessel and the owner argued that the act was carried out with mala fide intention by the crew members. The Court highlighted the distinction between vessel imported into India as goods and vessel brought into India as conveyance carrying goods or passengers since customs duty would be leviable only when it is imported as goods. The Court held that the act of bringing the vessel into India not being a voluntary action on the part of the owner, confiscating it is arbitrary and illegal. Since the vessel has not been used in India, based on precedent judgments, it was held that bringing of such abducted vessel is not import. The vessel and goods can be regarded as in-transit and on this ground also, duty would not be leviable and confiscation was not the proper course of action. The Customs authorities were directed to hand over custody of the vessel and goods in it in "as is where is" condition to the owner-petitioner of the vessel [2022-VIL-45-KER-CU].

Though the Court is not concerned, it is not known why such drama was enacted by the crew members who are stated to be Indians. It appears that they were not paid wages and probably they wanted to "teach" their master a lesson. But they would have lost their job by such ill-conceived plan.

Customs valuation - Enhancement of value without cross-examination is not correct

In a well-written order on Customs Valuation, CESTAT has held that enhancement of transaction value as declared by the importer without examining and cross-examining the Chartered Engineer whose second report was the basis for loading of value, is not correct. An accommodation barge was imported and based on Chartered Engineer's certificate, customs duty was paid. Subsequently, the Customs authorities felt that there was under-valuation and based on re-inspection and second report of the same expert, value was enhanced and differential customs duty was demanded besides imposing penalties and confiscation with option to pay redemption fine. The Tribunal noted that the same barge was earlier imported (and later re-exported) by another party for a value lesser than the value declared in the present case. Value of certain equipment was stated as left out in the first inspection report. The Tribunal held that the department ought to have recorded statement from the Chartered Engineer and permitted cross-examination of him. In the absence of such requirements, the second report of the expert cannot be relied on, as per the order. The order passed to enhance value was set aside based on such grounds [2022-VIL-58-CESTAT-MUM-CU].

While rejecting transaction value, the onus on the department is heavy as per settled law. Flow of additional consideration, value of contemporaneous imports, sufficient reasons for rejection of declared value and such other factors have been emphasized by large volume of jurisprudence on this subject. However, Customs authorities consider themselves as not bound by any judgments and therefore, importers have to face such lengthy proceedings. One only hopes that the department does not file appeal further and prolong the agony of the importer.

Input tax credit - No one-to-one correlation required

In Tax Vista dated 19th April, 2021, an advance ruling as reported in 2021-VIL-199-AAR was discussed and it was specifically noted that there is no requirement under GST on to one-to-one correlation and there is no express stipulation that cross-availment i.e. credit accruing from procurements relating to a particular goods cannot be used to offset liability in respect of certain other goods supplied by the same person. This view has been fortified by the ruling of Appellate Authority for Advance Rulings (AAAR) by unambiguously holding that payment of GST on outward supply of castor oil seeds by utilizing ITC taken on gold and silver dore bars cannot be denied merely on the ground that inputs have no nexus with output supply. As per facts, the appellant intended to engage in bullion (gold and silver) manufacturing and trading and also trading of castor oil seeds. The AAAR has noted that Section 16(1) of CGST Act does not prescribe that ITC available in electronic credit ledger is to be utlised only for specific outward supply on whose inputs such ITC was availed. The credit availed on inputs merges in the common pool and electronic credit ledger is not maintained commodity-wise [2022-VIL-09-AAAR].

Sale of developed plot is construction service and liable to 18% GST

GST is applicable on sale of plot with basic amenities like roads and drainage which are mandatory as per plan approval by the local authority. This is the conclusion of Appellate AAR in a recent case. In this case, the appellant stated that such amenities will be created by an association to be formed by buyers and what is sold is land only but this submission has been termed as contrary to plan approval which requires the appellant to develop the same before sale. The facts are not clear as the ruling at one place states that as per sale deed, cost of construction of common facilities is not recovered from buyers. The appellant has argued that even if it is considered that two supplies are involved, it would be composite supply with sale of land being the principal supply with no GST implication. The AAAR has noted that the agreement is not mere sale of land but conditional sale requiring buyers to do several acts and evidence as to development of common facilities by buyers has not been produced. The ruling holds that the transaction is one of sale of developed land and as per valuation and other provisions, even if buyers incur such expenditure, the same would be included in the value of supply.

The ruling appears to go off tangent when it seeks to classify sale of developed plot under construction service and further hold that sale of land is not taxable but development activity is liable to GST and therefore, this is not a composite supply as only one supply is involved. However, it also holds that sale of developed plot is not sale of land but the same would be rendering of service [2022-VIL-08-AAAR].

Facts differ, interpretations differ and conclusions in various rulings differ. But what is constant is confusion and CBIC's inaction in opting to maintain silence without clarifying such vital issues. But then, department is also benefitted by litigation as creation of AARs and AAARs also needs to be justified.

Re-development for existing owners - Service tax not applicable

Relying on precedent decision and departmental clarification, CESTAT has upheld adjudication order holding that service tax demand was not sustainable in re-development model where the developer was required to give fixed percentage of carpet area to existing owners (housing society members) free of cost since the basic requirement of sale was not met. The demand was made under construction of residential complex service. As per the facts, owners of flats in existing housing societies entered into re-development agreement with developer to demolish the existing flats by granting development rights to the developer and to construct new flats which will be given to owners free and the developer will be entitled to remaining flats and parking area as agreed.

The adjudicating authority had relied on CBIC Circular No. 151 dated 10-2-2012 wherein the issue was clarified in taxpayer's favour and also another clarification adopting the same circular for subsequent period and this has been approved by the Tribunal. The department argued that developer is a construction contractor vis-à-vis such existing owners but this was not accepted. These issues are certain to explode in GST regime as well and given the grey area surrounding taxing of development rights, grand litigation battles can be witnessed in the next few years [2022-VIL-70-CESTAT-MUM-ST].

(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))