Tax Vista Your weekly tax recap Edn. 90 - 7th March 2022 By Dr. G. Gokul Kishore

Payment during investigation - Onus on taxpayer to prove coercion

There is a tendency to rush to High Court with writ petition challenging summons issued for appearance or making payment during investigations and then seeking return of the amount through such writ petition. While challenge to summons is not generally accepted by the Courts, return of amount deposited is also not guaranteed in most of the cases. Threat, use of force, etc., are required to be proved which may be difficult in certain cases.

In a case of this nature, the Calcutta High Court has clearly held that an order of seizure or summons cannot be challenged in a writ petition. This statement should be understood in the general sense as an order which is without jurisdiction or authority is always vulnerable. It has also held that onus is on the taxpayer to establish that payment was extracted by undue force or threat. When payment is made through Form DRC-03, it appears that High Court has drawn a presumption of payment being made voluntarily or at least not because of coercion by the department. The High Court has directed the department to hold the amount to the credit of the taxpayer and not appropriate the same against any dues and adjudicate the case expeditiously [2022-VIL-155-CAL].

The lesson which taxpayers should take from such cases is that if there is a tax liability which has not been discharged only because of divergent interpretation, then depositing part amount may help. When liability is completely absent but the department entertains contrary view, then buckling under pressure and depositing amounts during investigation will not be a prudent exercise.

Refund of amount paid during investigation - High Court dismissed department's appeal

In an action-packed case by GST authorities, a food delivery major petitioned High Court for refund of Rs. 27 crores paid during investigations (at odd hours) and Single Judge Bench had allowed the same in September, 2021. This order was discussed in Tax Vista dated 25th October, 2021. The department filed appeal against this order and now the Division Bench has dismissed the same. It did not accept the contention that amount is deposit subject to outcome of pending investigation and held that the amount is liable to be returned.

The Division Bench has held that the payment was not made voluntarily since there was no communication on self-ascertainment or admission of liability. The High Court has observed that the question as to whether the payment was made under coercion and threat of arrest is factual and cannot be decided in writ proceedings. Similar view has been expressed on whether DGGI officers were acting arbitrarily or otherwise but it has called for caution and circumspection while exercising powers. However, it said - "A statutory power has to be exercised within a system of controls and has to be exercised by relevance and reason. It needs reiteration that a statutory power should not be exercised in a manner, so as to instill fear in the mind of a person." [2022-VIL-165-KAR].

As noted earlier while discussing Single Judge Bench order, instructions and judgments cannot rein in indiscretion or arrogance of power. GST law requires significant amendments so that sufficient safeguards are provided for taxpayers even while conferring such police powers on tax officers which is also required to safeguard public revenue.

Notice mandatory before best judgment assessment

A taxpayer has not made any outward supply and has also not purchased anything during a particular period. For some reason, NIL return was not filed. The GST authorities resorted to best judgment assessment without issuing any notice, passed order blocking huge amount of ITC lying in the credit ledger, imposed penalties, etc. The Appellate Authority rejected the appeal filed by the taxpayer without any discussion on how, in the absence of any supply and for not filing return, crores of rupees came to be assessed as tax liability. The High Court held that assessment without issuance of notice is a serious error and therefore, the orders are not sustainable. It also directed unblocking of ITC. In this case, the taxpayer had filed NIL returns later but the same was not accepted by the authorities on the ground of delay. It appears to be a case of harassment and the Court might have imposed costs on the officers but it did not do so. This order is briefly discussed here to emphasize the need to file NIL return by taxpayers if there is no supply and failure to file such return may lead to serious consequences - even beyond what is provided in law [2022-VIL-157-JHR].

Parallel proceedings & harassment of doctor - High Court grants relief

Those who feel bored with Bollywood can start reading orders / judgments/ rulings under GST. Though taxpayers suffer, some of these orders do not disappoint readers with thrill as well as lighter moments. DGGI from two States issued summons to a taxpayer. The taxpayer requested that investigations may be undertaken from one of these two offices. The agency did not accept. Medical certificate from doctor is a normal routine when taxpayer is not able to attend in response to summons. In this case, it was produced. The officers got angry and issued summons to the doctor also. The High Court was obviously not pleased. It quashed the summons and said - "So far as the summons issued to the doctor is concerned, we are of the view that it is in a bad taste. The doctor who certified the health condition of the respondent no. 2, has done so as a medical professional and in discharge of his duties as per the relevant statute. The medical certificate was produced to justify the request for adjournment..In any event, the authorities are wholly unjustified in issuing summons to the doctor."

Section 6 of CGST Act deals with cross-empowerment and parallel proceedings. The Single Judge Bench had held that parallel proceedings by two offices of DGGI cannot be permitted. But the Division Bench did not accept applicability of this provision when both the investigations were launched by Central agency. However, it directed that one of these offices may undertake investigations so that the process is consistent and unnecessary hardship is avoided [2022-VIL-160-CAL].

Multiple investigations and proceedings have different dimensions. Generally, when DGGI, jurisdictional CGST officers and SGST officers proceed against the taxpayer simultaneously, Section 6 is relied on and relief is sought from courts. In some of the cases, relief has been granted while in some, the High Courts did not. But the case discussed above is different as it involves the same agency but different branches. While Single Judge Bench appears to have found Section 6 as applicable and such parallel proceedings cannot be undertaken, the Division Bench has taken a different view since the agency is one and the same. This may well indicate the need to even amend Section 6 so that parallel proceedings of this nature are also avoided.

ITC on health insurance of employees not available to employer

The issue affects the industry as a whole throughout the country but CBIC chooses to watch. Based on Ministry of Home Affairs order and SOP due to Covid-19, providing medical / health insurance for employees is considered as obligatory. Input tax credit of GST paid on such insurance is considered as not available by the department in view of express restriction on such insurance under Section 17(5) of CGST Act. However, as per the clause relating to restricting the restriction whereby if something is obligatory under law for the employers to provide for employees, then ITC would be admissible. Placement of this clause in the provisions is a major irritant but the Authority for Advance Rulings (AAR) has ignored such provision and without discussing the same, it has held that ITC is not admissible in respect of GST paid on medical / health insurance of employees. The applicant pleaded and highlighted about Covid-19 waves, government orders, etc., but the AAR did not prefer to listen. Unless GST Council Secretariat places a clarification on the agenda of the GST Council to provide for ITC in respect of Covid related expenses, this issue will be fought even after GST Appellate Tribunal is established in the next one or two decades [2022-VIL-63-AAR.

Property of partner let out to own firm - GST payable

Property of partner is used by the partnership firm for business purpose and it is stated that no consideration is involved as partner does not receive any rent and such use by the firm is on free basis. The applicant argued that letting out own properties to his firm is not in furtherance of business. However, AAR has observed that the applicant as partner enjoys 2/3 share of profit or loss and the properties even if rented free would ease the burden of rent to be paid by the firm and will indirectly reduce the expenditure towards rent and consequently increased profit for the firm which is enjoyed by the applicant as partner. Because such economic benefit accrues to the partner, the supply is in the course of business. Further, partner and the firm are separate persons and such letting out is for commercial purpose. As the partner controls the firm with majority share, he and his firm are related persons as per GST law. On facts, it appears there is lack of clarity in the ruling since rental income has also been stated as reflected in the books of accounts and rent is being recovered on notional basis after implementation of GST. The AAR apparently went by Schedule-I to treat the transaction as supply between related persons even if consideration is absent. For valuation, the obvious conclusion is adoption of Rule 28 of CGST Rules [2022-VIL-60-AAR].

The applicant seems to have no impactful ground on merits. When there are only two partners of the firm and the property of the dominant partner is used by the firm, the tax consequences are too obvious to discuss. The issue may be more of lack of avenues to utilize ITC accruing from such GST on rentals to the firm as outward liability may not be proportionately higher. Advance ruling can hardly provide practical solution to the issue of credit accumulation.

EPC contract relating to oil exploration liable to 18% GST

Support services in respect of exploration, mining or drilling of petroleum crude or natural gas is liable to 12% GST. The same rate is applicable to professional, technical and business services relating to exploration, mining or drilling of petroleum crude or natural gas. Reading together these entries in Notification No. 11/2017-Central Tax (Rate) points to most of the services pertaining to oil exploration will attract 12% GST. This is the question posed before Authority for Advance Ruling (AAR). However, AAR generally holds a different view. After taking note of the scope of the work in the nature of EPC contract where the applicant is involved in end-to-end execution from design stage to implementation, the AAR has held that the transaction would be composite supply of works contract subject to 18% GST. According to the ruling, the relevant entry on support service will apply once the infrastructure / facility is built for exploration whereas in this case, the applicant it to undertake design work also. The other entry on professional services has been held as applicable to pure services and not to the services provided under EPC contract [2022-VIL-58-AAR].

The ruling has been rendered in the case of an engineering major and the project, it appears, involves huge stakes. The applicant might have entertained the view that in respect of such big project, certainty on tax front is required. It is not clear how costing will be done if the contract has already been entered into. Considering the importance of such services relating to oil and gas sector, an appropriate representation to the GST Council to clarify that GST rate of 12% would be applicable to such contracts might have been an option.

Electricity charges reimbursed from tenant includible in taxable value

As noted in the column before, certain advance rulings are consistent. One such issue is inclusion of electricity charges recovered / reimbursed from tenants in the taxable value of renting of immovable property. In general, the rulings find that the lease / rental agreement does not provide for lessor acting as pure agent and such incidental charges are includible as per Section 15 of CGST Act. This is the conclusion in a recent ruling also reported by VIL last week. Rental agreement has been held as not an authorization for incurring expenditure as reimbursement was not mentioned, as per the ruling. One of the weaker defence adopted by applicants is that sub-meters are installed and recovery is made on actuals. But such arguments do not cut any ice before pro-revenue authorities. Even if the agreement satisfies all the conditions for applicability of pure agent rule, electricity connection being in the name of lessor is held as against the applicant. The conclusion is there is no solution to such issue unless Section 15 itself is amended or pure agent rule which is useless in general is amended [2022-VIL-59-AAR].

Pharma pellets and granules liable to 12% GST

In a benevolent ruling holding that pharmaceutical pellets and granules are classifiable as medicaments liable to GST of 12%, the AAR has held that obesity is not a disease and reduction of weight cannot be considered as treatment of any disease. Reliance has not been placed on any authoritative text which will enlighten the readers to understand this issue. It may be seen as disorder and WHO says it is abnormal or excessive fat accumulation that may impair health. The benevolent part of the ruling is welcome as there are rulings holding APIs are not medicaments and concessional rate of tax is not applicable to such items [2022-VIL-67-AAR].

(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)