Tax Vista Your weekly tax recap Edn. 91 - 14th March 2022 By Dr. G. Gokul Kishore

Transitional credit - High Court holds alternative route as adoptable

All shades of disputes paint a rich canvas of litigation on transitional credit under GST. The Madras High Court has held that credit that has accrued after 1-7-2017 in respect of service tax payable for the period before GST, cannot be denied merely because the basic transitional provision - Section 140(1) provides filing of Form TRAN-1 only in respect of credit that has already accrued as on 30-6-2017. It held that doctrine of necessity is required to be invoked and the taxpayer would be rendered remediless if Section 142(3) is not permitted to be invoked.

Section 142(3) of CGST Act deals with refund claim filed before or after implementation of GST, for refund of Cenvat credit under the pre-GST law. Such claim shall be disposed as per the pre-GST law (existing law) and amount accruing to taxpayer shall be paid in cash. In the case before the High Court, service tax was paid in December, 2017 or later under reverse charge based on audit objection and therefore, TRAN-1 route was closed by that time. The petitioners claimed refund which was rejected by the department and they were before the High Court. The High Court held - "The petitioners' application at least could have been considered by the respondents under Section 142(3) of the Act for the purpose of taking the credit and such credit could have been considered and allowed for carrying forward in the electronic credit ledger of the GST regime which is nothing but a different route than Section 140 and that is the only possibility for dealing with these kind of applications. Hence, this Court has no hesitation to hold that, the reasons stated by the respondents in these cases in passing the orders impugned to reject the claim made by the petitioners are not tenable or these reasons would not stand in the legal scrutiny." The matter was remanded back with the direction to consider the same under Section 142(3) [2022-VIL-176-MAD].

In this case, the High Court has noted that Section 140(1) is anyway not available to the petitioners. The argument on applicability of Section 142(3) when Section 140(1) is not available, needs to be tested. The department may appeal before Division Bench and even if such appeal is not filed, aggrieved party may file an appeal against the de novo order. To see jurisprudence evolving on such issues is beneficial to similarly placed taxpayers. Interpretation of Section 142(3) and dissection of various expressions like "notwithstanding anything to the contrary" and "other than the provisions of sub-section (2) of Section 11B of the Central Excise Act, 1944" will be interesting to watch.

Order without show cause notice - Taxpayers continue to suffer

Capacity issues have been repeatedly highlighted in this column - GST officers, in particular State level officers need to be trained on various aspects of quasi-judicial process, procedure and dispensation of justice. Lack of such training compels taxpayers to enter into avoidable litigation and use resources to seek writ remedy. In one such case, DRC-01A which is merely an intimation of tax ascertained by the officer as payable, was issued to the taxpayer. The taxpayer did not accept the liability as intimated. This is a new procedure under GST. But pre-GST or GST, show cause notice under the relevant provision is the starting point when the department disputes taxpayer's position on liability or exemption or ITC or on any other issue. The format is DRC-01. Such SCN in DRC-01 was not issued to this taxpayer but order was passed based on the response submitted to DRC-01A. Obviously, the High Court was not pleased and held that assessment is vitiated in the absence of such notice in DRC-01. It directed the department to issue the same, offer hearing and then pass orders. After all these years of thousands of orders on issuance of notice before passing order and enormous jurisprudence on following principles of natural justice, even today such cases are coming up before High Courts [2022-VIL-177-MAD].

Bailable GST offence - Anticipatory bail not applicable

Among the several cases of arrest and bail petitions, one recent case stands out for enunciating an important proposition. The case involves allegation of fraudulent availment of ITC of less than Rs. 5 crores and the taxpayer argued that where amount involved is less than Rs. 5 crores, the offences are bailable. But the taxpayer was not arrested but filed an application seeking anticipatory bail. The High Court framed for itself the question as to whether Section 438 of Cr. P. C. providing for anticipatory bail to a person apprehending arrest would be applicable when the offence has been declared as bailable under the specified statute. Relying on precedent decisions wherein such question was adequately answered by holding that for entertaining an application seeking anticipatory bail, the offence should be non-bailable, the High Court held that anticipatory bail is not applicable in the present case where the offence as per CGST Act is bailable [2022-VIL-183-ALH].

Considering the fact that most of the cases of alleged fraud investigated by the GST authorities involve huge amounts, most of them will fall under non-bailable category and therefore, anticipatory bail provision may be applicable. However, since it is within the discretionary realm of the court, the alleged offenders are less likely to be successful if they seek such protection.

ITC on demo vehicles not available - Appellate Authority confirms ruling

One of the restrictions under Section 17(5) of CGST Act is motor vehicles with seating capacity upto 13 persons. GST paid on such vehicles is not available as input tax credit (ITC) except in specified situations. "Further supply of such motor vehicles" is one of the exceptions. When cars are used for demonstration purpose for some time and later sold, they will not be covered under this exception as per the ruling of Appellate Authority for Advance Rulings (AAAR). This means ITC of GST paid on demo cars will not be available for utilization to discharge liability at the time when they are sold later. Inserting words in law is not permitted but in this ruling, the Authority has re-phrased "further supply of such vehicles" as "further supply as such". While use of "such" refers to the previously mentioned item, "as such" means "as it is" and excise law jurisprudence is replete with such interpretation. Section 17(5) does not indicate that use of the vehicle for some time deprives the same being called "such vehicle". However, the ruling appears to have another good reasoning. It notes that allowing ITC in such cases will defeat the legislative intention of providing exception / relaxation to only dealers of motor vehicle and everyone will anyway sell the vehicle at a later point of time and therefore, ITC will be available in every case [2022-VIL-17-AAAR].

Encashment of bank guarantee not liable to service tax

Port authority provides priority berthing of vessels to those who opt for the specified scheme under which minimum guarantee tonnage is to be confirmed by users. Failure to adhere to such minimum guarantee will entail imposition of penalty by way of encashment of bank guarantee. In the adjudication order it was held that the same would be covered under toleration of / refraining from an act as declared service and liable to service tax. However, the appellant relied on several orders of the Tribunal holding that penalty for non-fulfilment of contractual obligations is not covered under this heading and not liable to tax as service itself was absent in such cases and there is no intention to breach and suffer loss. The Tribunal accepted the same and allowed the appeal by the taxpayer - this means demand of service tax on amount received by way of encashment of BG is not sustainable [2022-VIL-176-CESTAT-KOL-ST].

This issue is squarely applicable in GST as well as the entry relating to toleration is continued in GST law also. The issue of taxability of compensation, damages, penalties, BG encashment, etc., will take a long time to find clarity. While contract law is clear on these, tax law does not keep pace or is not harmoniously drafted and such conflict is the one of the root causes for such litigation. Absence of understanding of the essentials of contract law is also a contributing factor as otherwise declared service of toleration would not have been in the statute book.

Job work under GST - Inventing grounds to deny benefit

Job work is evergreen as a concept in indirect tax laws. From those days of landmark judgments of Ujagar Prints and Prestige Engineering of excise era, the present day GST law provides definition, multiple entries and rates for job work transactions. Numerous advance rulings can be seen on such issues. In job work, agreement is the key but the same may turn against the taxpayer as a recent case reveals. In this case, the agreement was for construction of hydrogen and nitrogen gas plant inside the premises of the applicant and the plant was to be run by another entity ("job worker"). However, the plant was leased to the applicant and therefore, the other entity was recovering lease charges, O&M charges, etc. Though this other entity has been manufacturing industrial gases using the material supplied by applicant, the AAR noted that there was no specific job work agreement providing for job charges or processing charges. The ruling notes that such activity was not being undertaken in the plant of the other entity and the concept of job work itself will not arise [2022-VIL-71-AAR].

There is no statutory restriction that job worker should not work inside principal's premises. There is no bar as to recovery of lease charges by job worker from the principal. What is relevant is whether raw materials are supplied by the principal and the processed material is sent back to the principal so as to satisfy the definition of carrying out treatment or process. The ruling appears to be not clear on facts since tax invoice for such job work will generally contain processing charges.

Evasion prone goods / sectors and test purchase

Section 67 of CGST Act (and respective SGST Acts) is an important provision as it empowers the officers to inspect, search and seize goods, documents or things. Commissioner or an officer authorized by him has the power, under sub-section (12) to cause purchase of any goods or services to check whether invoice or bill of supply is issued as per law. This is termed as test purchase with the departmental officer acting as decoy customer / buyer. Tamil Nadu Government has issued Standard Operating Procedure (SOP) for such test purchase. Joint Commissioners (Intelligence) will be the authorizing officer for conducting test purchase whose prior approval will be required. As expenses are involved, the circular instructs that test purchase should be made only on rare occasions where there is a strong proof of evasion. In excise regime, certain sectors / commodities are perceived as evasion prone. This circular expands this list. Cement, tiles, granite, hardware, paints, electrical goods, electronic goods, iron and steel, timber, jewellery, household articles, furniture, automobile spare parts, edible oil, construction materials, FMCG, groceries, bakery products, medical shops, hotels, educational institutions, sweet shops, amusement parks, personal grooming services and rental services are listed as evasion prone items / services / sectors. The list leaves out only a very few like textiles, chemicals, paper and motor vehicles. It appears the list is drawn based on proportion of retail sales. It is learnt that test purchases are made by officers in Kerala from 2019 itself.

Adjudication of DGGI notices

CBIC has issued Notification No. 2/2022-CT whereby Additional/ Joint Commissioners of certain Commissionerates have been vested with the powers to adjudicate and pass orders in respect of show cause notices issued by DGGSTI. Circular No. 169 has also been issued amending the previous Circular 31 on proper officer for adjudication. The Circular deals with both SCNs issued by DGGSTI as well as Audit Commissionerates. Cases spread over multiple CGST Commissionerates or where multiple SCNs are issued on the same matter to different taxpayers have been clarified for the purpose of adjudication. While the premier investigating agency has good reputation of booking complicated cases, the administrative issue of powers as proper officer has got entangled in litigation and amendments.

(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)