Tax Vista Your weekly tax recap Edn. 88 - 21st February 2022 By Dr. G. Gokul Kishore

ITC ledger cannot be blocked when balance is NIL

In an important order, Gujarat High Court has held that electronic credit ledger (ECL) without any balance cannot be blocked under Rule 86A of CGST Rules. One may wonder - if there is no balance what is there to be blocked. However, in this case, the department inserted negative balance in the ledger of the petitioner thus effectively blocking ITC to be availed in future as well. Such action has been held as illegal and without jurisdiction. It appears that the GST portal which does not normally work in taxpayer's favour has been programmed to facilitate such arbitrary action by departmental officers. Credit available in the ledger and that too, to the extent of amount of ITC suspected as fraudulent alone can be blocked and entire credit cannot be barred. This was highlighted in Tax Vista last week also while discussing another case on this issue.

As per the order, Rule 86A allows GST authorities to disallow debit from the credit ledger for limited period and not to make debit entries in it. Interpreting the objective behind the provision, the High Court held that Rule 86A has not been framed to recover ITC alleged as fraudulently availed because for such fraudulently availed and utilised credit, proceeding under Section 73 or 74 of CGST Act can be initiated but Rule 86A is not invocable. It directed the department to withdraw negative blockage of ECL [2022-VIL-125-GUJ].

The general perception is, in most quarters, officers are yet to be trained in interpretation and implementation of GST law. But, a few of them, are knowledgeable enough and go beyond what is written in the law, particularly when the GST portal supports such illegal and arbitrary action. Placing of restrictions through GST portal without being backed by statute is something serious and whoever is responsible should be advised to roll them back.

Readers may also see another order by the same High Court directing the authorities to allow ISD credit which apparently got stuck in technical glitches. In this case, the Court has reiterated the view that credit of tax already paid is a vested right and the same "cannot be defeated on account of irregularity in the system evolved by the Government." It seems even after a decade, when most of the taxpayers would have forgotten transitional credit, litigation will continue [2022-VIL-124-GUJ].

Keeping persons out of GST will lead to revenue leakage - HC quashes cancellation of registration

Cancellation of registration by the authorities is a routine affair in GST regime. The request for revocation is generally rejected by the department. In this column, it has been observed before that such rejection will only lead to loss of revenue to the exchequer. The Madras High Court, in an elaborate order, has held on similar lines in a recent case where it has allowed a batch of writ petitions filed against such rejection of request for revocation. According to it, purpose of registration is to ensure tax gets collected on supplies and the same is paid to the exchequer and keeping petitioners outside the bounds of GST regime is a self-defeating move as no tax will get paid. It has held - "In my view, no useful purpose will be served by keeping these petitioners out of the bounds of GST regime under the respective GST enactments other than to allow further leakage of the revenue and isolate these petitioners from the mainstream contrary to the objects of the respective GST enactments."

In this case, most of the petitioners did not respond to the notices and also failed to avail the amnesty or relaxation of time granted from time to time for seeking restoration of registration. Though a few of them filed appeal, the same was hit by limitation and this has been upheld as per binding precedents. However, the High Court emphasized the importance of Constitutional guarantee on right to carry on business under Article 19(1)(g) which according to it is unconditional and must be enforced regardless of the defect in GST scheme. Such right to carry on trade or profession cannot be curtailed but only reasonable restriction can be imposed. As per the order, GST law cannot be interpreted in a manner so as to debar a person either from obtaining registration or reviving the lapsed or cancelled registration [2022-VIL-119-MAD]. The order is by Single Judge Bench. It is hoped the department will not litigate such issues further before the Division Bench.

Refund of Cenvat credit of service tax - HC rejects petition

In another case caught in the whirlpool of transition, the petitioner before High Court sought to quash orders rejecting refund of Cenvat credit of service tax paid on port service availed by them but could not be transitioned to GST regime as the invoice was received much later after implementation of GST. Para 24 of this order states that the petitioner was registered under service tax only for discharging liability under reverse charge mechanism and therefore, service tax paid on port service under forward charge could not have been part of ST-3 return. However, as manufacturer, they were entitled to take credit of the same in ER-1 return which could not be followed in the absence of invoice copy in May, 2017. Because of such confusion, the credit amount was not reflected in TRAN-1 form also. Later, it was claimed through ST-3 return filed in September, 2017. According to the High Court, the petitioner missed exercising the right to avail Cenvat credit of service tax paid through TRAN-1 form also and lost the same. The order specifically takes note of the fact that refund under Rule 5 of Cenvat Credit Rules was not available as the petitioner did not use the input service for exports. The order is quite exhaustive and discusses the jurisprudence on this subject besides the scope of various transitional provisions [2022-VIL-123-JHR].

The situation was beyond the control of the petitioner as invoice was not received in time (as per the claim) but the method adopted to take the benefit was not as sanctioned by law. Law seldom provides for difficulties in particular fact situations and is perceived as stringent or confiscatory when a right is lost due to unintentional lapses.

ITC is based on supply date and not on invoice date

In a curious case, single invoice was raised by the service provider on 1-4-2020 for renting services supplied for the period from April 2018 to March 2019. The recipient availed input tax credit in FY 2020-21 but sought advance ruling as to whether input tax credit can be availed in FY 2020-21 for which the Authority for Advance Rulings (AAR) had held in the negative. Now Appellate AAR has affirmed the same. The AAR had earlier held tax invoice was issued beyond time limit prescribed while the appellant argued that there is no condition in Section 16 that only invoices issued within time-limit are eligible for ITC. An interesting question was posed - Whether ITC can be denied at recipient's end for delay in issuance of invoice by supplier?

Another ground taken in the earlier ruling was that the invoice did not pertain to FY 2020-21 but FY 2018-19. The appellant contended that the supplies made during a particular financial year would not be relevant but documents issued would be relevant. In the present ruling, AAAR holds that ITC is available only based on valid documents and the invoice pertains to 2018-19 and therefore, ITC cannot be claimed in FY 2020-21 [2022-VIL-11-AAAR].

The issue is not free from doubt as the wordings used in Section 16(4) of CGST Act indicate. As per this provision, ITC will not be available in respect of invoice (or debit note) for supply after the due date of furnishing GSTR-3B of September following the end of the financial year to which such invoice (or debit note) pertains or furnishing of annual return, whichever is earlier. ITC is availed for the supplies received based on invoice - it could have been drafted more unambiguously. If invoice date is the test, then in the above case, the taxpayer should have got ITC. If the underlying supply is considered as the determinant, then the ruling may be correct. Legal interpretations apart, it is prudent for the taxpayers to educate and follow-up with suppliers so that invoices are received on time and reported on time in GSTR-1 so that they are reflected in GSTR-2B. Providing for sufficient safeguards in contract clauses / purchase orders is also important.

Defending the defender - AAAR holds submarine decoy system is liable to 5%

The issue involved was submarine fired decoy system (SFDS) is to be treated as part of submarine under heading 8906 attracting 5%. AAR in the earlier ruling had held that the item would be taxable at 18% as the same is classifiable under heading 9306. The appellant argued that the item has no independent use but for the submarine and it is tailor-made fitted permanently with the submarine. The Appellate AAR has allowed appeal by the taxpayer and held that the same is liable to 5% since submarines are warships equipped with torpedo launching system and also decoy system which is an essential part of such submarines. Though advance rulings delivered by such authorities in other States are not binding on a particular AAR or AAAR, in this ruling, the AAAR has opted to follow the spirit of similar rulings [2022-VIL-13-AAAR].

GST on electricity charges, deposits & damages - Advance rulings are consistent

At the time of development of property, GST related issues are not considered as a priority and agreements are somehow drafted and deeds entered into between parties. After the residents occupy and start living in the property, alongwith routine maintenance issues, GST issues also start. In a case of this nature, residential apartments for use by senior citizens have been let out on lease and charges are recovered by lessor towards expenses like security, maintenance, etc. This includes electricity charges billed in the name of applicant on behalf of residents besides common area electricity charges. Recovery is on actuals based on sub-meters installed for every resident. The GST officer pointed out that as per the agreement for maintenance, agency relationship is absent between the parties. The AAR agreed and noted that lessee has no option to opt out of the services other than electricity and the lessee cannot also engage a different service provider for electricity. Conditions for applicability of pure agent exemption have been held as not satisfied. Electricity charges are, therefore, liable to GST.

Non-refundable deposits for asset replacement and similar capital expenditure are to be treated as consideration for services to be provided in future since the same is non-refundable. Time of supply would be receipt of the amount and hence, these amounts are not deposits but advances liable to GST at the time of issuing debit notes (as in this case). While rulings rendered by AARs of other jurisdictions in favour of taxpayers are generally distinguished and held as not applicable, in this case, this AAR has relied on other rulings as they are in favour of the department [2022-VIL-35-AAR].

The above ruling is not very different from similar rulings rendered earlier. However, this has been analysed for the reason that taxpayers are able to take a lesson out of it and consider insertion of appropriate terms in agreements and also be prepared for contingencies like audit objection or show cause notice on such issues. Another familiar issue and more familiar ruling on GST liability on liquidated damages can be seen at 2022-VIL-34-AAR. This ruling is not discussed as the ruling does not discuss the issue in detail but merely holds that the same is covered under entry relating to agreeing to the obligation to tolerate an act and therefore, GST would be payable.

Seed is not an agricultural produce

Seed is not an agricultural produce under GST - this is an advance ruling rendered recently. The ruling refers to Seed Act and labours to differentiate grain and seed and then goes on to apply the principle of noscitur a sociis to interpret the definition of agricultural produce as provided in Notification No. 12/2017-Central Tax (Rate) to come to the above conclusion. The AAR further holds that the processing undertaken by the applicant to convert grain to seed quality goods is different from the processing done by cultivator to make the goods marketable in primary market. Therefore, storage, loading, unloading and packaging on job work basis would not be eligible for any GST exemption [2022-VIL-33-AAR]. A similar ruling can be seen at 2022-VIL-32-AAR. As noted earlier in this column while analysing similar rulings, exemption relating to agricultural sector either needs to be widened or all such activities should be clarified as not exempted.

Supply & installation of equipment in train is not works contract

Generally, works contract is understood as composite contracts involving both goods and services. GST law, however, restricts it to immovable property. Train collision avoidance system for Railways is designed, installed and commissioning on board trains by the applicant. The question before AAR was whether it would amount to works contract and the treatment of AMC services. As the equipment is installed in moving locomotives and as GST law considers supplies relating to immovable property alone as works contract, the AAR holds that the present supply is not a works contract. As per the ruling, the system is naturally bundled supply of various goods and therefore, it is covered under composite supply with the principal supply being electrical signalling equipment attracting 18% GST. Mere mentioning of AMC in the supply contract does not mean future AMCs are part of the original contract and AMC is enforceable separately according to the ruling. It further holds that the same will be a composite supply involving goods and services and GST will be payable at 18% with the principal supply being maintenance of such signalling equipment. The key point in this ruling which has not been discussed clearly is GST implications of sub-contractors will be the same as the joint venture which has been awarded the contract [2022-VIL-31-AAR].

Readers may also see the ruling in 2022-VIL-36-AAR wherein the AAR has noted that the contracts for supply and services have crossfall breach clause to hold that transportation undertaken as part of EPC contract would not be a separate activity but forms part of indivisible works contract and liable to GST. One of the earliest advices provided to companies during 2017-18 is avoiding crossfall breach in contracts but this could not be implemented by some owing to commitments sought by parties awarding big contracts. In such contracts, parties are more concerned about performance and avoiding delays and defaults and tax is something which is not considered as a priority.

Guest lectures liable to GST

A professor of law has been given a brief lecture on GST law by AAR. Guest lectures by such professor of law are liable to GST as per the advance ruling. The applicant strangely placed reliance on entry in exemption notification pertaining to training or coaching in recreational activities relating to arts or culture. However, the AAR disagreed and held that the applicant is delivering lectures on law and legal awareness and not on arts or culture and the same would be classifiable under "Other professional, technical and business services" and liable to 18% GST. Based on evidence submitted whereby applicant was not involved in the contract between the government and the law school and also in view of absence of information as to other recipients, exemption under relevant entry has been held as not admissible in respect of research projects undertaken. The applicant had claimed exemption based on funding by government [2022-VIL-30-AAR]. Another ruling related to educational training has also been reported by VIL last week [2022-VIL-29-AAR] wherein the AAR has held that services provided to healthcare professionals (doctors) to maintain professional standards as per law / statutory guidelines, is not exempted under healthcare service. The training does not lead to any recognized degree nor is the applicant a clinical establishment.

The perception is activities relating to education and teaching are mostly exempted from tax while the law has been drafted to be very selective. Like agriculture, education as a sector is not seen as philanthropic in nature considering the commercial motive involved. Gone are those days when teachers were revered almost like God with the society placing utmost respect on them and the profession. Tax law cannot be any different when the activity and profession have undergone fundamental change.

(The author is an Advocate, Gokul & Subha Advocates, Chennai. The views expressed are personal. The author has published books on cross-border taxation and investigations & appeals under GST. He has edited R.K. Jain's GST Law Manual - 15th Edition - Feb., 2022. E-mail - gokulkishore@gmail.com)