Tax Vista Your weekly tax recap Edn. 89 - 28th February 2022 By Dr. G. Gokul Kishore

Property of partner cannot be provisionally attached under GST law

Provisional attachment of property under Section 83 of CGST Act is mostly seen as a revenue recovery measure even before crystallization of liability by way of adjudication / assessment. In the eagerness to use such power in full measure, in a recent case, the GST authorities had provisionally attached everything - goods, stock, receivables and immovable property of one of the partners of the firm. Taking note of the fact that the entire stock has been pledged / mortgaged with bank, the Gujarat High Court has held that such attachment is not valid since a floating charge has been created in favour of the bank for availing cash credit facility. As per the order, firm is the taxable person under GST law and not the partners and therefore, property of partners cannot be provisionally attached, particularly when tax liability of the firm has not yet been determined and when such liability is determined, the authorities are empowered to proceed against the partner. CBIC's guidelines dated 23-2-2021 on provisional attachment was emphasized by the High Court by highlighting the instruction that provisional attachment should not hamper normal activities of taxable person and inputs / raw materials required for production should not be normally attached.

The case pertains to search of the premises of the petitioner suspecting availment of ITC based on fake invoices. The department had invoked Section 90 dealing with liability of partners to pay tax, interest and penalty in respect of such amounts payable by the firm. The High Court noted that the department was aware that Section 83 cannot be invoked against partners and therefore, invoked Section 90 along with Section 137 dealing with liability of partners when offence has been committed by the firm. The order makes a comparison between such provisions and Section 25 of Partnership Act and such analysis makes this judgment a good precedent for the future. Use of Section 90 has been termed as a serious error committed by the department and Section 137 has been held as having no applicability. The Court was conscious of the pains of the taxpayer as it felt that business of the taxable person would come to standstill if such attachment is made [2022-VIL-143-GUJ].

The power to provisionally attach property even before assessment / adjudication is drastic. It has been provided only to prevent fraudsters and habitual evaders from parting with property which may be used to secure public revenue after adjudication. Use of such powers frequently without being sensitive to survival of business and simultaneous use of other powers like summons, recording of statements and arrest create an atmosphere of great adversity for business entities. Separating grain from chaff is an art which is not part of the lessons of tax administration and therefore, everyone suffers. Punishment before and during trial is something which should be eschewed as otherwise neither deterrence nor reformation is achieved.

Excise dues will not have priority over secured creditors even after insertion of Section 11E

The issue is not new as it relates to recovery of Central Excise dues wherein the bank which has advanced loan is also equally interested in recovery. It is settled that there is no priority for Crown debts or government dues over secured creditors like banks and financial institutions. The same has been reaffirmed by the Supreme Court in a recent judgment. The period in dispute was before insertion of Section 11E in Central Excise Act, 1944 providing for first charge on the property of the assessee but the top Court has held that excise dues will not take precedence in both the periods - before such provision was introduced and later as well. In this context, it held that Section 35 of SARFAESI Act will have overriding effect on all other laws and such effect will prevail even after insertion of Section 11E.

This judgment also deals with another issue which is more important. The Apex Court has held that the order confiscating land, building, plant and machinery is not sustainable as Rule 173Q of Central Excise Rules, 1944 relied on by the adjudicating authority stood omitted at the time of passing such order. On this issue, the judgment provides good jurisprudence as it discusses protection of action taken under repealed provisions. Section 6 of General Clauses Act provides for saving of certain acts relating to repeal of "enactment" and this provision has been held as not applicable to omission of "rule". Section 38A of Central Excise Act has also been held as not providing any relief to the department in this situation. The Court took note of the fact that subsequent Central Excise Rules provided for confiscation of goods alone as compared to the old rule covering anything [2022-VIL-14-SC-CE].

Cess on manufacture of cement is unconstitutional - High Court orders refund

Readers are requested to go through an important order as reported in VIL last week. This order has been passed by Meghalaya High Court whereby Meghalaya Cement Cess Act, 2010 has been held as ultra vires the Constitution and portion of the amount collected has been directed to be refunded to petitioners. The Act was repealed after GST was enacted but the challenge was made in 2016 as the petition indicates. The Court took note of the entries in the relevant schedule to the Constitution and held that the State had no authority to impose any tax or cess on the manufacture or production of cement. The State had relied on unjust enrichment as the buyers of cement had borne the tax incidence but the Court said that the manufacturers of cement "may have taken a hit as a direct consequence of such illegal impost for which they ought to be compensated". It ordered part amount to be refunded as a deterrent measure "from acting in such high-handed manner and extorting money without authority" [2022-VIL-126-MEG]. As noted in this column, it is because of the Constitutional Courts, taxpayers get some relief against the mighty State and its mightier officers.

Templates of natural justice - High Court quashes vague SCN

GST regime takes pride in e-governance where every process is online. One of the compulsions of making law as part of computer program is provision of format or template for everything - whether it is returns or refund claims or show cause notices or orders. The result - principles of natural justice have become templates of natural justice. The online system of issuance of show cause notice, offering personal hearing, etc., has forced taxpayers to rush to High Courts to seek relief from templated show cause notices in several cases.

In one such case, the department has issued, for the second time, show cause notice in the format in GST portal without striking out the irrelevant portions and without specifying the grounds. The SCN itself appears to be a summary but the department had issued summary of SCN in Form DRC-01 which cannot be anything but equally vague as the SCN. The High Court has quashed both after holding that the SCN does not fulfill the ingredients of a proper SCN and the same amounts to violation of natural justice. It has also held that summary of SCN in DRC-01 is not a substitute to the requirement of proper SCN. The irony of this case is that the petitioner is before the High Court for the second time as a similar vague SCN was earlier issued and the same was quashed. GST Council Secretariat should consider inclusion of de-templatisation of essential legal requirements in the agenda of the GST Council meeting to save the taxpayers from entering into repeated and expensive litigation on routine issues [2022-VIL-139-JHR].

VIL has reported another order last week where the Madras High Court has set aside orders rejecting part amount of refund without issuance of any notice. Though the department has made an attempt to assail the petitions on the ground of delay (filed after 3 years), the High Court did not accept considering the scope of Article 226 of the Constitution [2022-VIL-144-MAD].

Refund of ITC - Applicability of correct rule

Applicability of the correct rule for refund of ITC accumulated due to exports was the issue before the High Court. The department had rejected the refund claim on the ground that it should have been filed under Rule 89(4B) and not as per formula provided under Rule 89(4) of CGST Rules. The taxpayer's version was Rule 89(4B) does not provide for any formula whereas Rule 89 prescribes a formula and therefore, the claim was in order. The department in its reply before Court had stated that a manufacturer must be aware of input-output ratio of raw materials used in exported goods and ITC availed on such procurements and therefore, identification of input supplies used in exports was possible. Since the matter was remanded by Appellate Authority, the High Court said the Assistant Commissioner may determine the refund claim as per the principle stated by the department before the Court. It also quashed the impugned order whereby the around Rs. 85 crores which was sanctioned as refund was sought to be recovered along with equivalent amount as penalty [2022-VIL-133-GUJ].

Refund, in general, has always been a heartburn for the tax department as such outgo is seen as denting the revenue collections. Added to this is the internal scrutiny of action sanctioning refund and possibility of even disciplinary action. This compels the officers to play safe whereby all claims are meant to be rejected and once in a while, one or two may be sanctioned, particularly when the amount involved is low. In GST regime, this issue has become more pronounced since refund of unutilized ITC is available not only for exports but also for inverted tax structure. The rule and formula have been drafted in such a manner that one gets the perception of exporting goods by finding overseas buyer and negotiating with him is easier than obtaining refund through complex formula and more complex attitude of the authorities.

Demand of interest - Adjudication necessary when taxpayer disputes quantum

In yet another order, the High Court has reiterated that while interest liability under Section 50 of CGST Act is automatic, computation of the same requires adjudication particularly when the taxpayer disputes the amount of interest to be paid. In this case, department sought to recover interest for delayed filing of GSTR-3B and therefore, tax was paid belatedly. The taxpayer contended that adjudication proceedings under Section 73 or 74 is necessary before fastening such interest liability. The Court ordered initiation of adjudication proceedings [2022-VIL-142-JHR].

There are judgments holding that for demand of interest, show cause notice is not necessary. But when the taxpayer disputes the amount of interest payable and does not pay the amount as demanded by the department, then show cause notice will be required and adjudication has to follow. Invocation of recovery proceedings under Section 79 straightaway without going through the route of adjudication was also not approved in the case of Asst. Commissioner v. Daejung Moparts Pvt. Ltd. [2020-VIL-67-MAD].

Using precious time of Constitutional Courts for procedural issues

High Courts are Constitutional Courts meant for dealing with important issues. However, GST regime has created a situation where such Courts are compelled to deal with lot of procedural or routine issues. Service of notices and orders is one such issue where taxpayers have complained that they did not receive SCN or adjudication order while the department contends that the same was uploaded in GST portal. In one such case, the Madras High Court has instructed the department to continue sending notices through speed or registered post or courier till technical issues in the GST portal are resolved.

Even if the provision approves uploading in the portal, when such notice or order affects a person prejudicially, then real, substantial and effective compliance would be required. Such level of compliance cannot be achieved through sending by email or simply placing something in the portal and expect the taxpayer to check daily whether some notice has come. Purpose of the department will also not get served by such method as the taxpayer, at the time of recovery, will challenge and the entire proceedings will be vulnerable as to validity and the authorities may have to deal with the same afresh [2022-VIL-146-MAD].

Another order on such procedural issue can be seen in the case of rejection of refund claim by department on the ground of not being filed electronically. The High Court has held that manual filing of application is also to be allowed. The claim was filed by buyer of apartment who had paid GST to developer but later the deal was cancelled [2022-VIL-150-BOM]. The petitioner may realize that buying an immovable property without encumbrances or issues is far easier than obtaining refund from the tax department.

Pawns in jail - High Court asks department to catch upstream evaders

GST authorities should try to catch the actual "upstream" evaders instead of putting mere pawns behind the bars while launching prosecution. Making such observation, Orissa High Court has granted bail to two persons who are stated to be an employee of the entity alleged as indulged in GST evasion and his brother who is a paan shop owner. The facts, if true, are saddening as the two brothers have been in jail for more than a year leaving the family to starvation. The High Court has clearly said that there is no serious objection from the department that the petitioners would tamper with evidence if bail is granted. According to it, bail should not be invariably refused in cases of serious economic offences. There have been a series of cases where punishment is being indirectly given even before trial in GST cases as the alleged offenders spend almost half of the maximum term even before complaint is filed. In Tax Vista, two such orders have been analysed in the last two weeks. It is time for the GST Council Secretariat to ensure that appropriate guidelines are issued on use of power to arrest and grant of bail [2022-VIL-137-ORI].

Providing access to legal database is not exempted from GST

Utility of advance rulings is often questioned in certain quarters. It is certainly useful when vendors / buyers / counter-parties hold divergent view over the GST rate adopted by the supplier. Some of the suppliers obtain such rulings which is binding on them and serve the purpose of silencing or convincing the other party. In a case of this nature, the service provider was adopting applicable GST rate of 18% on the subscription fees collected for providing access to data through their website containing judgments, statutes, rules, notifications, etc. It appears educational institutions subscribing to such resource were of the view that exemption is admissible to such supply. The Authority for Advance Rulings (AAR) has held that exemption as per Notification No. 12/2017-Central Tax (Rate) is in respect of supply of online educational journals or periodicals whereas the present supply relates to non-educational material. It further noted that database is different from journals and periodicals and therefore, applicant providing access to database containing non-educational material is not covered under exemption [2022-VIL-43-AAR]. It seems law schools objecting to collection of tax need to take a lesson or two in GST.

(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)