Tax Vista Your weekly tax recap Edn. 86 - 7th February 2022 By Dr. G. Gokul Kishore

Budget 2022 - Keeping the spirit alive

Union Budget is an important event in the professional life of all stake-holders - taxmen, taxpayers and tax advisors / attorneys. After the advent of GST, the general perception is that Budget has lost its aura or charm as rate changes are implemented anytime during the year as recommended by the GST Council. However, the amendments to GST law as suggested by the GST Council are considered mostly as part of Finance Bill and therefore, Budget 2022 with good amount of proposed changes in Income Tax Act and Customs Act besides a few in CGST Act has kept the spirit of the annual fiscal exercise alive.

On the income tax front no changes have been introduced on personal taxation though every Budget is hoped to be a rate reduction exercise. On the other hand, a number of measures are proposed to plug revenue leakage, overcome judgements to deny deduction of business expenditure and tax Virtual Digital Assets (VDA) or crypto currencies and the like.

Assessees would be given an opportunity to file "updated" return of income if they would like to offer more income to tax than what was declared in a return or even where no return was furnished within time allowed under Section 139 of the Income Tax Act, 1961 (IT Act). This option would not be available to assessees where assessment is completed or proceedings are pending, search has been initiated etc. Tax is payable at higher rates but assessees who choose to furnish such return may do so within 24 months from the end of the relevant assessment year.

Transfer of VDAs will be liable to 30% tax without any deduction except cost of acquisition and loss cannot be carried forward. Even gift of such VDA would be taxable. Reopening of assessments the time limit for which was reduced to 3 years from 6 years in the last budget is proposed to be tweaked to widen the scope and rather than audit objections alone being the information which triggers issue of notice, it could also be information obtained under information exchange, faceless collection of information besides information under the Risk Management Strategy. An important amendment proposed in Section 37 of the IT Act is that denial of deduction of expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law would extend to various concessions, sponsoring of conferences, study tour, travel and gifts to doctors. A number of judgements allowing such deduction to pharma companies reasoning that the prohibition is on acceptance of gifts by doctors and not on pharma companies who commit no offence in incurring such sales promotion expenses would be nullified by the proposed Explanation 3 which states that such expenditure would be treated as being in violation of law.

By way of amendments as proposed to Sections 3 and 5 and insertion of new Section 110AA in Customs Act relating to DRI officers being treated as proper officers for issuance of SCN and adjudication for the past period and keeping them confined to investigation for the future, this Budget will be remembered for containing the damage caused due to the faux pas in drafting by the tax administration which made the Apex Court strike down the action of DRI in several cases. The Budget DO letter uses "tariffisation" to highlight moving entries relating to concessional rate of duty in exemption notifications to the First Schedule to Customs Tariff Act itself. This will make the notifications more readable. Publishing import and export data is being made a punishable offence by inserting new Section 135AA which is being defended by the Government in media as intended to criminalise illicit publication of personalized, transaction-level information by private parties compromising data privacy. A few more changes have been briefly analysed in the article "Union Budget 2022 - Certain progressive measures in Customs" published in this portal on 3-2-2022. Extending the time available for availing input tax credit to 30^th November and making ITC conditional on not availing credit restricted as per GSTR-2B are perceived as major changes proposed in CGST Act.

Confiscation proceedings cannot be initiated for contravention by any other person in supply chain

In an order with remarkable clarity, the P&H High Court has held that if the goods in transit are accompanied with prescribed documents, GST authorities need not detain the goods under Section 129 of CGST Act and the opinion of the officer on confiscation under Section 130 must have reasonable nexus with the action of the taxpayer against whom proceedings are initiated. Confiscation proceedings cannot be initiated against a dealer for alleged contravention by any other person in the supply chain. A bona fide issue which is subject matter of assessment (adjudication) cannot be a ground to initiate confiscation proceedings unless the ingredients of Section 130 are satisfied. In this backdrop, it held that the detention and proceedings initiated in the case before it were not valid as the taxpayer had produced invoice and e-way bill when the vehicle was stopped in transit. The authorities have been directed to release the goods and the vehicle.

The order contains another important observation - the Counsel for GST department agreed that even if trader is prudent, there is no system to check whether his predecessors in the supply chain have paid tax. The Court did not accept that dealers down the supply chain are guilty of availing input tax credit wrongfully because one of the predecessor-dealers in the supply chain was alleged as raising invoice without actually supplying goods.

The order explains scope of Section 130 on confiscation in these words - "A person can be attributed intent to evade payment of tax only if the contravention of the provisions of the Act or the rules made thereunder has some direct nexus with his action. He cannot be held liable under Section 130 for contravention of the provision of law by any other person in the supply chain. Wrongful claim of input tax credit may be a result of bonafide claim as well and does not necessarily involve intent to evade payment of tax. Moreover, wrongful claim of input tax credit is not one of the conditions enumerated under Section 130(1) of the 2017 Act that could entail confiscation of the goods....The alleged 'intent to evade tax' must have direct nexus with the activity of trader. The opinion formed by the authorities must reflect such nexus before proceeding under Section 130 of 2017 Act." [2022-VIL-93-P&H].

This case appears to be one of unadulterated harassment patent from the absence of any evidence with the department. There is no whisper on grounds to invoke Section 130 and no discrepancy has been pointed out in the documents. The Court refrained from expressing its anger and imposing costs - this does not mean that the GST authorities can consider their action as justifiable. So long as such draconian provisions are in the rule book without any safeguards for taxpayers, such misuse will continue.

Bank guarantee for release of goods not required when tax & penalty paid and bond executed

Whenever a truck loaded with taxable goods starts movement from the place of origin, it is advisable to pray God for hassle-free journey as there is every likelihood of highway detention, seizure and initiation of confiscation proceedings by GST authorities for any minor infraction, real or imaginary. Because, once the taxpayer is caught in the whirlpool of detention and seizure, then department is highly unlikely to release the goods and the vehicle unless High Court directs. This will be both expensive and time-consuming as both goods and vehicle are required on day-to-day basis in business.

In a case before Gujarat High Court, the events reveal a sad story as the taxpayer had to approach the Court multiple times. The department had insisted on furnishing of security by way of bank guarantee for value of goods though tax and penalty were paid and the petitioner was ready to submit bond. Rule 140 of CGST Rules is unambiguous on provisional release of seized goods - it requires execution of bond for value of goods and furnishing of bank guarantee as security towards tax, interest and penalty payable. The Court has held that such insistence by the department is not correct when bond has been filed and tax and penalty have been paid. It directed the department to release the vehicle and goods. One only hopes that the taxpayer continues to do business despite such "measures on ease of doing business" by the GST authorities [2022-VIL-79-GUJ].

IGST refund - High Court comes down heavily on the department

In this column, it has been noted several times that, for minor or settled issues, taxpayers are being unnecessarily pushed to High Courts by action or inaction of GST authorities. The Gujarat High Court has observed on similar lines in a recent judgment following earlier orders relating to IGST refund on export of goods. According to it - "It is unthinkable as to how every assessee needs to be driven to this Court to ask for the IGST (sic "IGST refund") when the issue is squarely covered and there is nothing further to be adjudicated. This tendency on the part of the respondents authorities is something which has been deprecated by this Court.The respondent has chosen to follow this circular when the Court has already interpreted the same and finally decided the matter on 27.06.2019, there could not have been any other conclusion in that respect nor could the respondent go on taking the very stand obstinately, being finally aware of the challenge made to the decision of Amit Cotton Industries (supra) before the Apex Court also." [2022-VIL-84-GUJ].

These are cases where initially issues on mismatch between shipping bills and GST invoices were faced by exporters in 2017 and 2018 and procedure was prescribed by way of concordance table by CBIC. However, when the rate of higher and lower rate of drawback was same, rejection of refund on the ground of claiming higher rate of drawback is baseless. It appears that there are several cases of this nature. CBIC should instruct field formations not to withhold refunds and release the same as otherwise public money is spent in paying interest on such delayed refunds.

Reasons for increase in duty rate not required to be disclosed in notification

Statutory provisions including notifications hardly reveal the reason for their entry into statute book. Except a few cases like Budget related clarification or notes on clauses accompanying a bill, everyone is guaranteed absolute freedom to interpret and presume reasons or justification for any new rule or amendment. While government can grant exemption or reduce tax rates through notifications, Parliamentary nod is required if tax rate is required to be hiked. However, to cater to emergency situations, Section 8A of Customs Tariff Act, 1975 empowers the Central Government to increase customs duty rates. Such power can be exercised if circumstances exist requiring immediate action. On import of cotton duty was increased from 5% to 10% and the notification was challenged as not disclosing the reasons. Satisfied with the arguments, Single Judge of Madras High Court had quashed the same. The Division Bench has now allowed department's appeal by setting aside such Single Judge's order.

Relying on precedent judgments, the DB has held that once notification is issued, a presumption would arise that the necessary conditions for issuance have been satisfied and satisfaction of such conditions need not be recited in the notification itself. The burden of proof is on the person challenging the validity. Therefore, a notification cannot be held as invalid for not elaborating reasons / circumstances for issuance of the same.

Another ground of appeal in this case was regarding sufficiency of material before the government to satisfy itself as to import duty should be increased. The Single Judge had noted that the department failed to produce the file and such sufficiency of material was not demonstrated. The DB has noted that the file could not be traced and therefore, it was not produced. Parliamentary debates are considered as one of the aids in statutory interpretation and in this case, the High Court relied on reply to question in the Parliament on the need to increase import duty to restrain undesired import and protect the interest of cotton farmers. The DB further noted the limitations of judicial review of any legislation - parent or subordinate to highlight that it may not be permissible for the Court to look at the adequacy of material which necessitated issuance of the notification [2022-VIL-86-MAD-CU].

There are other questions answered by the High Court but the above mentioned are more relevant, in our view. Jurisprudence on the heavy onus cast on the person challenging vires of any legislation or notification gets strengthened by such judgments. Generally, the principle as to presumption of Constitutional validity of laws made by the legislature is often emphasized. These days, in the GST regime, because decisions are taken by GST Council and most of the recommendations are available in public domain, finding out reasons has become rather easier and a challenge on this ground may not be available in most cases under GST.

Dispute over settlement of disputes - Department keeps litigation alive

A scheme is implemented for settlement of tax disputes but the tax department ensures that option exercised under such scheme itself is disputed and litigated. After all the scheme is for the taxpayers and not for the department - may be this is the reason for rejecting applications filed under Sabka Vishwas (Legacy Dispute Resolution) Scheme [SVLDRS] under some pretext. In a recent case before Bombay High Court, the dispute pertained to the treatment of application by the department under litigation category whereas the petitioner argued it should be under arrears category. Also, the department treated service tax dues and Cenvat credit issue separately while the petitioner argued it should be treated as one. The Court has to remind the department that the intention of SVLDRS was to offload the baggage - to settle disputes from default under legacy laws. It said - "It may be stated here that a statutory scheme like the Scheme, 2019 is remedial in nature. It has two dimensions of opportunity and amnesty; opportunity to settle the dispute once and for all, and amnesty to past sins in a regulated manner. It enables a defaulter to off-load burden of his past by paying unpaid taxes with a view to starting afresh with a clean slate. ..a liberal interpretation of the provisions of the Scheme is required to be made."

In the present case, adjudication order was passed when SVLDRS was in force and the taxpayer filed application for settlement instead of filing appeal and therefore, the Court held that it would be covered under arrears category. The amount determined under SVLDRS was much more than the amount held as payable in the adjudication order - the Court noted that an assessee cannot be worse off by opting for such scheme. It appears that the amount payable under SVLDRS as per the department was 50% of around Rs. 88.97 crores while the amount confirmed in the adjudication order was Rs. 43.62 crores and after adjusting the service tax amount paid already, the amount payable was held as Rs. 65 lakhs. The figures are mind-boggling and it appears to be a case of harassment of hapless assessee only to be rescued by the Court [2022-VIL-94-BOM-ST]

VIL has reported another order of Bombay High Court relating to SVLDRS. It follows precedent judgments to hold that if investigation / audit was initiated on or before the cut-off date of 30th June, 2019, then option under SVLDRS cannot be exercised and this means, if inquiry or audit or investigation has been initiated after such date, the same would not bar a person from opting for the amnesty scheme. In this case, summons were issued after 30th June, 2019 and this was held against the applicant by the department. The Court directed passing of fresh orders [2022-VIL-92-BOM-ST].

Advance ruling application cannot be withdrawn after conclusion of hearing

Hearing was completed before Authority for Advance Ruling (AAR) and the applicant filed additional submissions but subsequently, they requested for withdrawal of the application. The AAR held that such withdrawal request cannot be accepted after conclusion of final hearing. The request for withdrawal, it seems, was because of applicant's own argument that the applicable rate of GST on supply of RO plant to Indian Navy / Coast Guard is 18% whereas the buyer was of the view that it should be 5%. The entry relied on by buyer relates to parts of warships. After discussing landmark judgments on what is a part / component, the Authority for Advance Rulings (AAR) has held that RO plant's function is to purify water and without such plant also, ship can sail though the same is a necessity for crew members, and absence of such plant does not affect functionality of the ship. Therefore, RO part is not a part of ship and is not entitled to 5% rate but liable to 18% rate. AAR's task became rather easier since the applicant themselves argued that anything and everything on board cannot be considered as a part of the warship [2022-VIL-23-AAR].

Taxing defence supplies at a higher rate is not in sync with the tax policy of exempting them in general or at least, subjecting them to concessional rate. Equating defence supplies with commercial supplies is fundamentally flawed for many reasons including the oft-repeated ITC argument - whatever amount is paid as tax is available as credit to the buyer. Defence procurements are substantially higher and the government does not gain anything by taxing them at higher rate since ultimately it is the government which incurs such tax expenses and then the same government shows them as part of higher GST collections. The urge to tax everything should be contained and calibrated.

(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))