Tax Vista Your weekly tax recap Edn. 93 - 28th March 2022 By Dr. G. Gokul Kishore

ITC blockage without reasons is arbitrary - High Court sets aside order

Blocking of input tax credit is one of several draconian powers vested with GST authorities. Most of these powers are invocable based on mere suspicion as they are intended to prevent evasion. However, the law provides certain minimal safeguards to the taxpayer by placing conditions like the officer exercising the power should have reasons to believe on commission of alleged contravention / offence and the reasons should be recorded in writing. Rule 86A of CGST Rules is one such piece empowering the officer to block electronic credit ledger of the taxpayer for maximum period of one year when he has reasons to believe that ITC has been availed fraudulently.

In a recent order, Gujarat High Court has held the order blocking credit as arbitrary since the records did not reveal that the order was passed after the officer was satisfied to do the same. It held that both the pre-requisites for invoking power under Rule 86A were not satisfied - the first is satisfaction of the officer based on material available as to the necessity to take such action. The second pre-requisite is recording reasons in writing for exercise of such power. The order says -"From the language used in rule 86-A it becomes very clear that unless both these pre-requisites are fulfilled, the authority cannot disallow the debit of the determined amount to the ECL or cannot block the ECL even to the extent of amount found to be fraudulently or wrongly availed of."

Laying down the principles unambiguously, the High Court has held that the power under Rule 86A has civil consequences for taxpayer and therefore, it cannot be exercised unless there is subjective satisfaction of the authority based on objective material. A major jurisprudential point enunciated in this order is about hearing while blocking ITC. According to the order, though it has not been expressly stated under Rule 86A, post-decisional or remedial hearing would have to be granted to the person affected by blocking of credit ledger. Such hearing shall be granted within two weeks from the date of the order blocking ITC and the officer may confirm or revoke the order blocking credit after such post-decisional hearing [2022-VIL-217-GUJ].

There has been steady stream of High Court orders and some of them are laying down balanced jurisprudence based on rational interpretation of the provisions. GST Council Secretariat and CBIC should take note of such important judgments and consider codifying them - incorporating them in law wherever feasible. This is not new as similar exercise used to be adopted in Central Excise regime - cum-duty price was made part of Section 4 of Central Excise Act and onus to prove influence being on the department if notional interest on deposits is to be included was made part of the rules, all based on judgments.

ITC refund due to inverted tax structure not deniable when input and output are same

In a significant ruling which will help many taxpayers, Calcutta High Court has held that refund arising out of inverted tax structure is not deniable on the ground that input and output supplies are not different. In this case, LPG in bulk carried through tankers was purchased and after bottling in various capacities, the same was sold in retail. While LPG supplied for commercial purpose attracts GST of 18%, for domestic use, it is 5% and because of such 5% outward supply, ITC got accumulated. The taxpayer sought refund of the same but it was rejected citing CBIC's Circular No. 135 which clarified that refund cannot be claimed when input and output supplies remain one and the same (in this case LPG).

The High Court held that Section 54(3) of CGST Act is clear as it does not provide for refund only when input and output are different and refund is available in all cases where tax rate on input is higher than that of output. Further, circular can be issued only for bringing uniformity in implementation of GST law and 'uniformity in implementation' does not mean curbing benefits available under the CGST Act. It held that the circular is trying to restrict refund to particular set of supplies and it is trying to create a class inside the class which is impermissible. It reiterated the principle that a circular cannot supplant or implant any provision which is not there in the Act. Refund has been held as admissible in this case [2022-VIL-209-CAL].

Refund due to inverted tax structure is an area which is replete with grey areas - one of the issues which has travelled upto the Supreme Court which prima facie found that the formula has anomalies. CBIC's circulars on this issue are not entirely in favour of taxpayers and are ambiguous. Field formations are interpreting the same according to their understanding and to the detriment of taxpayer's interest. Though this issue is fashionably mentioned as part of agenda for discussion before GST Council, solutions for the practical problems faced by taxpayers are hard to come by. Orders where such refunds have been rejected by first appellate authority also are waiting for the Tribunal to be constituted as many do not have the muscle to approach High Courts through writ petitions.

Transitional credit is indefeasible - High Court orders direct credit

The Madras High Court has directed that Cenvat credit on inputs and capital goods which could have been transitioned if Form TRAN-1 was filed properly shall be credited directly into electronic credit ledger of the petitioner without insisting on filing TRAN-1 again. This is subject to availability of the credit amount as on 30-6-2017. It held that GST law does not provide for lapsing of Cenvat credit earned under legacy laws and such credits are indefeasible. The petitioner had sought Court's intervention to direct the department to either open the GST portal to enable them to file TRAN-1 again or to accept the same manually. The Court noted that uploading of TRAN-1 may be a challenge at this distant point of time due to technicality involved. It directed the GST authorities to examine the credit in earlier returns which the petitioner had claimed they attempted to transition [2022-VIL-220-MAD]. One more judgment in favour of the taxpayer on transitional credit should help the taxpayers who have been left to fight an expensive and harassing battle with the department only because the credits available in Cenvat Register vanished as GST came in and portal became unresponsive during those difficult months.

Serious lacunae in proceedings - High Court asks adjudicating authority to appear

Every week, performance of SGST officers in quasi-judicial realm has been noted with the suggestion that rigorous training is required. Such suggestion arises out of the conduct on reading the orders. The situation has reached alarming levels - Jharkhand High Court has directed the SGST officers to appear before it with records after observing that the adjudication proceedings had serious lacunae. It specifically ordered the author of adjudication order to be present in the Court even if he has been transferred to some other jurisdiction. The lapses are - (a) show cause notice was not issued before passing adjudication order under Section 74 of Jharkhand GST Act (b) summary of order in DRC-07 showed date of order as 11-9-2020 whereas the adjudication order was passed on 13-8-2020; (c) order sheet placed before the Court did not refer to adjudication order passed on 13-8-2020. The High Court has directed the order to be shared with Commissioner of State Tax so that the matter can be looked into at his level [2022-VIL-206-JHR].

The order mentions tax demanded as Rs. 182 crores and Rs. 216 crores. It is not understandable as to how such huge demands arose at the first place and secondly, for such high-pitched demand, why the department did not even issue proper notice. The only solution to such problems appears to be divesting officers of quasi-judicial responsibilities and investing such powers in separate hierarchy of officers tasked with such responsibilities.

Notice and adjudication necessary if interest liability is disputed

In another judgment, two important questions were posed by the High Court - can interest be recovered without adjudication process and whether recovery proceeding under Section 79 can be initiated without conclusion of adjudication' However, the Court did not answer the second one but relying on precedent decision, it held that the department has no option but to issue show cause notice for adjudication of liability if the taxpayer disputes calculation or leviability of interest. The case involved the same modus operandi by the department - summary of order in DRC-07 was issued but no SCN was issued. Though liability was intimated in DRC-01A and the same was responded, order was passed without SCN. The High Court allowed the writ petition on the ground of violation of principles of natural justice [2022-VIL-210-JHR].

Recovery action cannot be initiated when investigation is in progress

GST regime is never boring as the allegations, counter-allegations, arrest, bail, statements, amount sought during investigation, etc., provide an engrossing thriller at the cost of taxpayers. The ingenuity of the GST authorities in so far as methods adopted for revenue recovery are also equally riveting. In a suspected case of evasion where the proprietor was arrested and later released on bail, statement was obtained which was later retracted. According to the petitioner, the department coerced his customer to pay certain amount to his account (electronic cash ledger) which was then frozen pre-empting the taxpayer from using the same for discharging liabilities. The petitioner argued that Section 79 of CGST Act on recovery can be pressed into service only after determination of liability by way of adjudication and order and the method adopted by the department was illegal.

The High Court observed the disputed question of fact as to whether such amount was paid by the customer voluntarily or due to coercion cannot be decided in writ proceedings. It held that Section 54 provides for refund of balance amount in electronic cash ledger but the petitioner can utilize the same to discharge liability against future supplies. Though it agreed with the petitioner that invocation of Section 79 regarding recovery is pre-mature, since the amount has not been debited or appropriated by the department, the Court told the petitioner to seek remedy under Section 54 (refund) [2022-VIL-218-MAD].

Certain facts like ledger being frozen, use of electronic liability ledger, etc., are not clear in this order but the Court has noted there is no bar in using the amount available in the ledger(s) while investigation is in progress and recovery action cannot be taken at investigation stage. It appears Section 83 on provisional attachment was not invoked in this case which means there are no fetters on use of amounts available in the ledgers.

Tax cannot be collected twice on same goods - High Court orders refund

These are days when one finds several cases of non-payment of tax. In these times, a taxpayer had to pay tax and penalty as the goods were confiscated owing to error in mentioning place of dispatch in e-way bill. The error was rectified and new e-way bill was generated and this time too, tax was paid. The High Court held that on the same goods, tax cannot be collected by the tax authorities for the second time and ordered refund. However, it ordered refund of penalty paid also. This portion of the order is not clear as the Court did not decide on sustainability of confiscation and payment of penalty at the first instance. While payment of tax for the second time is not correct and such amount cannot be retained by the department and it needs to be refunded, returning penalty amount is doubtful [2022-VIL-213-CAL].

Exam conducted on outsourced basis - High Court holds exemption as admissible

For facts, readers may refer to Tax Vista dated 15-11-2021 wherein a ruling by Appellate AAR has been discussed [2021-VIL-62-AAAR]. Advance ruling was in favour of the taxpayer but appellate ruling went against them. Now High Court has held that exemption under Notification No. 12/2017-Central Tax (Rate) would be available to the petitioner. The issue relates to exemption to agency which conducts examination for schools on outsourced basis. The High Court has held that the word "education" should be given a wider meaning - "We are of the view that the word 'education' cannot be given a natural meaning by restricting it to the actual imparting of education to the students but should be given a wider meaning which would take within its sweep all the matters relating to imparting and controlling education. Examination is an essential component of education as it is one of the major means to assess and evaluate the skills of a candidate and the knowledge, be it a school test, university examination, professional entrance examination or any other examination."

The High Court has upheld the contention of the petitioner that the appellate authority misdirected itself while formulating the question, whether the examination conducted by the petitioner could be said to be conducted by schools or otherwise without going into the question whether it is examination or assessment. As per the order, the basic nature of the service is that it is an examination to be conducted by the schools but outsourced to the petitioner. An exemption provision should be liberally construed in accordance with the object sought to be achieved if such provision is to grant incentive for promoting education, as per the Court [2022-VIL-214-GUJ]. It appears that the High Court entertained the writ petition as it found the argument on method adopted to arrive the ruling faulty as otherwise, in such cases, appellate ruling is final with no further judicial remedy.

ITC not deniable when a constituent of mixed supply is exempt if supplied separately

A recent ruling by Appellate AAR has two key takeaways. In a few cases, the lower-level AAR has held that in the absence of agreement, advance ruling cannot be given. The Appellate AAR has noted that the body has been created to help taxpayers in bringing certainty in tax liability and therefore, applicant may provide details and seek advance ruling before signing any agreement. The second takeaway is that when a particular transaction is held as mixed supply wherein one of the supplies is exempted if provided separately, input tax credit is not deniable. The primary question sought in this case pertains to providing transportation service along with other services like loading and unloading, clearing and forwarding, etc. for a single consolidated rate. As per AAAR, these services are not naturally bundled as they are treated as different services and bundling by the appellant does not make it composite supply. Being offered for single price, it has been held to be mixed supply attracting tax at the highest rate of 18% [2022-VIL-23-AAAR].

Notice pay - Appellate AAR delivers split ruling

Notice pay recovery is an issue being litigated from service tax regime and duly transitioned to GST regime as well. Such recovery is not liable to GST is the predominant view by tribunal / court / authorities. The taxpayer filed appeal before Appellate Authority for Advance Rulings (AAAR) against the earlier ruling holding that GST is payable on notice pay recovery. Now, in appeal, the Members have expressed divergent views and hence, ruling has not been given. This means the departmental officers are also divided on this issue.

According to the first Member, the employer has rendered taxable supply of tolerating the act of employee who leaves the job without giving notice for prescribed period and the consideration is the amount equivalent to salary for unserved notice period. Notice pay being part of the conditions of the employment contract is in the nature of liquidated damages and therefore, the exemption entry in Notification No. 12/2017-Central Tax (Rate) pertaining to such damages is not applicable to the appellant being a private limited company. Schedule-III on services by employee to employer is not applicable as it is the employer who tolerates and therefore, GST is payable.

The dissenting Member has noted that all the conditions of Section 7 of CGST Act defining supply should be satisfied and in this case, the purpose of employment contract is not recovery of notice pay. Interpreting the words "made or agreed to be made", the second Member has expressed the view that it suggests certain degree of voluntary act on the part of the service provider. Notice pay recovery arising out of breach of condition is not covered under supply. The act of employer is not toleration also as it is not a voluntary act. Notice pay recovery is compensation for injury and not a benefit. There is no consideration since it is not linked to any voluntary act of the supplier. The act is also not in the course or furtherance of business [2022-VIL-22-AAAR].

CBIC may come out with a circular clarifying the position of law as it understands. Considering the difference between damages / compensation and consideration, the issue may have to be clarified in favour of taxpayers. If the circular holds to the contrary, it will be vulnerable when the same is challenged in courts. Treating the entry in Schedule-II on agreeing to the toleration of an act or situation as NES (not elsewhere specified) to tax every activity reveals the revenue urge than any nuanced interpretation of law.

(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)