Tax Vista Your weekly tax recap Edn. 97 - 25th April 2022 By Dr. G. Gokul Kishore

 

 

Interest for delay in refund under GST - SC caps at 6%

Gujarat High Court had ordered interest of 9% on delayed payment of refund of IGST paid on export goods. Section 56 of CGST Act provides for interest upto 6% but the actual rate will be as per notification issued for this purpose. GST department being aggrieved over direction to pay excess interest went to the Supreme Court and was successful. This order discusses important judgments on the question of award of interest and also rate of interest to emphasise that where the law prescribes interest payment, it will be governed by such law. If the law is silent, then interest payable will be at a reasonable rate on equitable grounds. The Supreme Court held that in the case before it, the delay was in the region of 94 to 290 days and it was not inordinate (unlike in a cited case) and therefore, it will be governed by Section 56 of CGST Act. High Court's order was held as erroneous in awarding interest in excess of 6% [2022-VIL-26-SC]

 

Provisional attachment should not hamper normal running of business - Gujarat HC

Invocation of the power to provisionally attach goods is now a monotonous routine for the department while for the taxpayer, the heartbeat stops as business comes to a grinding halt. From the initial days of attaching goods or machinery, these days, GST authorities are attached to everything that the taxpayer has. In an alleged case of bogus billing and transactions with ghost firms, provisional attachment order was passed in respect of properties, demat accounts, current account, stock of goods besides seizure of mobile phone, laptop and documents. When the fundamental right to carry on business is completely curtailed, the affected taxpayer has no option but to turn to High Court. The High Court has held that current account and demat accounts are valuable assets required for routine business and in particular, raw material and finished goods are valuables necessary for running the business. The Court referred to its own directions and also of the department that such action should not hamper normal business activities of the taxpayer. It set aside the attachment in respect of stock, demat accounts and current account. It also directed release of mobile phone and laptop subject to the undertaking that they will be retained in original form [2022-VIL-274-GUJ].

 

Taxpayers' woes can be partly mitigated by amending Section 83 of CGST Act. The words "any property, including bank account" should be revisited so that current account, raw materials, receivables, etc., are excluded. As the power to provisionally attach is to safeguard revenue in the event of demand being raised and confirmed, balance has to be achieved vis-à-vis survival of business activity.

 

Order passed without issue of show cause notice - High Court quashes

Last week, in Tax Vista, it was remarked that vesting quasi-judicial powers with administrative authorities is a failure in so far indirect taxes are concerned. An order passed by Jharkhand High Court appears to vindicate such remark. In this case, first only summary of show cause notice was issued and proper SCN was not issued. Then, summary of order was issued though adjudication order copy was not provided to the taxpayer. Further, the Court noted that the department was not able to explain as to the difference in dates - date of adjudication order mentioned in summary of order being different from date of adjudication order as such. The department before the High Court accepted that SCN was not issued in this case and no separate communication was sent for personal hearing. The Court relying on its own order passed recently on similar blunder by the department held that the adjudication order is non est in the eyes of law as the same was passed without issuance of proper show cause notice, in contravention of principles of natural justice.

 

The Court took a serious view of the state of affairs in adjudication particularly with SGST authorities by observing -"The original records produced before us leave no iota of doubt that the present adjudication proceedings have been carried out by the authorities of the State Tax Department in stark disregard to the mandatory provisions of GST Act and the well-known procedures for conduct of proceedings have been completely disregarded. We refrain ourselves from saying any further, but we direct the Commissioner of State Tax Department to issue appropriate guidelines/circular/notification elaborating therein the procedure which is to be adopted by the State Tax authorities regarding the manner of issuance of Show Cause Notice, adjudication and recovery proceedings, so that proper procedure is followed by the State Tax authorities in conduct of the adjudication proceedings, as huge revenue of the State is involved." [2022-VIL-279-JHR].

 

Now, Commissioner will issue instructions which will be dutifully printed and shared among all offices, then filed in respective Instructions File only to be dusted and cleaned once in a while. Adjudication will go on as per the process known or method convenient to the authorities and not as per what the law says. The day is not far when either quasi-judicial functions are taken away from the bureaucrats or separate cadre / hierarchy independent of routine tax administration is constituted for such functions.

 

Summons and statements under GST - HC directs installation of CCTV and recording

The order is brief and does not accept the argument to quash summons but it is important as it directs the GST authorities to follow the procedure as laid down by the Supreme Court in Paramvir Singh v. Baljit Singh [(2021) 1 SCC 184]. It has extracted para 19 of this judgment relating to installation of CCTV and recording of the same. The question posed in the petition was whether the person summoned is entitled to be represented through authorized representative. The High Court held that Section 116 of CGST Act is not applicable when a person is required to appear personally for examination on oath or affirmation. Section 116 provides for appearance by authorized representative before an officer or appellate authority or tribunal and it expressly excludes cases requiring personal appearance for examination on oath [2022-VIL-270-RAJ].

 

Summons necessarily involve compulsory attendance and this creates the apprehension that the person summoned, if he appears before the GST officer, will be arrested. Otherwise also, issuance of summons indicates that the department has some intelligence or information about non-payment of tax or any other contravention and to extract more information from the taxpayer, he is being called to appear. The tax officer is seen as acting more like a police officer by the person summoned. The power has been there in indirect tax statutes for ages and has withstood judicial scrutiny in numerous judgments.

 

Multiplicity of proceedings on same issue - Supreme Court directs decision by single authority

It appears that DGCEI had issued a show cause notice on a particular issue. Subsequently, SCN was issued by the jurisdictional Commissioner also on the same issue and adjudication order was passed. The High Court had set aside such adjudication order and directed transfer of the proceedings to ADG, DGCEI for decision in respect of both the SCNs. The Supreme Court has now disposed department's SLP by upholding High Court's order. It has directed both the SCNs be adjudicated by one authority - whether ADG, DGCEI or any other equivalent authority. These are days of parallel proceedings under GST but this dispute is pre-GST as the period of first SCN indicates. Also, adjudication by DGCEI officers is something which the CBIC has decided against [2022-VIL-27-SC]. 

 

Diagnostic imaging is not diagnostic service - Exemption from GST not available

Healthcare service is apparently exempted under GST - apparently because except certain specified services, everything else related to healthcare is taxable under GST. Entertaining a notion to the contrary, some of the taxpayers opt for advance ruling. The taxpayer permits hospitals to use their machines for imaging and technicians to operate are also sourced by them. MRI, CT scan, X-ray, etc., are the tests for which images are taken and provided. Such service was held as not covered under healthcare service for the purpose of GST exemption under Notification No. 12/2017-Central Tax (Rate) as per advance ruling. The Appellate Authority for Advance Ruling (AAAR) has affirmed this ruling on the ground that providing diagnostic images is not equivalent to providing diagnosis and exemption would not be available when services are provided by being part of hospitals and not as an independent establishment. The ruling holds that appellant is not providing diagnostic service to patients directly and appellant's activity is an input service for diagnosis and not diagnosis per se. The appellant had relied on CBIC's clarification to the effect that services provided by technicians hired by hospitals are also covered under this exemption but the AAAR said that activity of technicians should amount to healthcare service and not all technicians are covered [2022-VIL-34-AAAR].

 

Healthcare sector is among the few areas which have lot of peculiar or particular arrangements involving multiple agencies / persons. Payments / reimbursement and type of engagement are also very many. CBIC's circulars try to clarify sometimes taking into account such factual issues but they do not go the extra mile to capture business or commercial realities. The result is taxpayers are at the mercy of such authorities. Cost of healthcare services gets pushed when the sectoral issues are not comprehensively clarified.

 

ITC on construction of warehouse not available even if it is meant for leasing

Construction is not very constructive for taxpayers - input tax credit has always been a taboo since Cenvat credit days. Section 17(5) of CGST Act contains two clauses to expressly bar ITC on good or services received and used for construction of immovable property. Cost of construction is significant for factories when expansion is undertaken or additional storage facilities are created. If such cost is not offset through credit, the taxpayer will have no option but to load the same in the price of goods or services supplied. Ultimately, end consumers pay more what could have been otherwise a dime cheaper.

 

The Appellate Authority for Advance Ruling (AAAR) has held that ITC would not be available to logistics service provider in respect of inputs and capital goods used for construction of warehouse / use in warehouse. The appellant argued that the space is meant for renting and it is being constructed as per lessee's requirement and not on own account. However, the AAAR did not agree and held that there is a break on admissibility of ITC when immovable property comes into existence unless the same is constructed for prospective buyer and construction service is involved. It said that construction is on own account in this case as ownership is with the appellant and only leasing is to be made. Reliance placed on Orissa High Court's judgment in Safari Retreats [2019-VIL-223-ORI] was not accepted on the ground that SLP has been filed against it in the Supreme Court [2019-VIL-50-SC] and it has not attained finality [2022-VIL-36-AAAR].

 

ITC on construction of structure for operating crane not available

The title may be read along with the brief analysis below and the ruling as published by VIL as it is based on certain facts. Advance ruling was sought on availability of input tax credit to the extent steel, cement and other items are used in works contract of construction of factory building including pillars, gantry beams and structure required to operate overhead crane along with rails. The applicant relied on provision relating to works contract service supplied for construction of foundation or structural support for apparatus, equipment and machinery fixed to earth by such foundation or structural support and capitalization of such expenses as part of plant and machinery and not as immovable property. The applicant also claimed that ITC will not be availed on construction of sidewalls and roof for the factory and that the fact of such foundation and structural support bearing the load of factory walls and roof also will not be detrimental to their claim of ITC. However, AAR based on description in the inward invoices held that they pertain to construction of factory which is a civil structure and documentary proof was not provided for purchase of pre-cast supports or rails as such for which ITC is sought. It held that the incremental foundation is not the foundation for plant and machinery fixed to earth. As per the ruling, ITC would not be available on steel and cement, and in respect of structure, beams, etc., ruling was not given as proof was not provided [2022-VIL-116-AAR].

 

If Appellate Authority denies ITC on goods or services used for construction of warehouse (as discussed in the previous case), the lower AAR can hardly adopt a divergent practice when it comes to factory construction. The applicant in this case has produced documents to show proportionate utilization, etc., as sought by the AAR itself but a ground has to be invented to deny ITC and in this endeavour, GST authorities are unrivalled.

 

Road tax and insurance taxable at 28% GST as part of leasing service - Pure agent not applicable

In this column, it has been observed a few times that Rule 33 of CGST Rules on pure agent can well be omitted as it is generally not useful to any taxpayer. GST authorities are convinced that such rule is incapable of being complied with - no person can be treated as pure agent to keep certain expenses out of taxable value. Another vain attempt by the taxpayer is reported by VIL last week. The ruling seems to point to the requirement of supplementing in-house capacity of companies with appropriate external expertise in having safeguards against adverse impact of provisions like Rule 33.

 

The applicant is an NBFC engaged also in leasing of vehicles which is typically purchase of vehicles for a particular customer who pays lease rentals periodically while the registration certificate has name of the customer along with the applicant-company as lessor. The vehicle dealer raised invoice with 28% GST along with 14% compensation cess on the applicant-lessor and separate debit note towards registration charges, road, RTO charges, insurance, fast tag, TCS, etc. The applicant argued that since these charges are paid on actuals and reimbursed from the lessee, they should be treated as pure agent and such charges should be excluded from taxable value. The applicant probably was aware of the AAR's stand on such issue - they further sought to know, if pure agent is not applicable, whether GST of 18% can be paid on such charges considering the same as towards separate service.

 

The AAR held that the case is one of operational lease, EMI is calculated taking value inclusive of such charges / expenses, applicant is the owner of the vehicle and such charges are not paid by the applicant on behalf of the lessee but by themselves on own account before leasing and for the purpose of leasing of such vehicles. The ruling also finds fault with the applicant on failure to establish through separate contractual arrangement on procurement of such other services and therefore, they are not treatable as pure agent. These "on-road components" are incidental charges and part of transaction value [2022-VIL-111-AAR].

 

Supply of goods and services through separate orders is not a composite supply

The question before AAR was whether coal handling and distribution services would be liable to GST of 18% separately or it will be treated as part of composite supply of coal attracting GST of 5%. The answer by AAR is obvious but reasoning is something readers would like to know. The applicant informed that customers opt for such services at the eleventh hour based on competitive rates and initially orders are placed for supply of coal alone. Such work order is issued separately by customers and invoices are also raised separately for supply of coal and supply of services by the applicant. The AAR has held that when supply is undertaken for delivery at buyer's doorstep, it would be composite supply with principal supply being that of coal whereas two different supplies are involved in the present case. Purchase order, invoicing, time-lag between these two, etc., have been relied on to hold that services are not supplied in conjunction with the goods supplied already and therefore, it would not be a composite supply [2022-VIL-113-AAR].

 

Separate contracts or work orders and separate invoicing are interpreted as artificial splitting to avoid tax and held as against taxpayers when the department seeks to tax the entire transaction at a higher rate holding it is a composite supply adopting the one with higher tax rate as the principal supply. The same situation can act against taxpayers as evidenced by this ruling. From the time GST Model Law was introduced, it is often emphasized that documentation is one of the key factors in transactions vis-à-vis GST implications. However, even the best of contracts may not stand the scrutiny of the authorities as the provisions are interpreted against the taxpayers in most cases.

 

Merger of two GST registrations of same company is not exempted

Transfer of business by way of merger of two GST registrations of the same company (distinct persons) will not be treated as supply of services but will be treated as supply of goods and the same will not be covered under exemption relating to transfer of going concern. This is the ruling by AAR in a recent case. The AAR has placed reliance on Section 18 of CGST Act which deals with change in the constitution of a registered person on account of merger to hold that such change in constitution is essential for a particular transfer to be considered as that of a going concern. As the applicant having two GST registration is merely distinct person having same PAN, there being no change in the constitution of business, the transfer is not one of going concern which means it would not be a supply of service and consequently, transfer of ITC has also been denied. While AARs generally distinguish all decisions, this ruling by Maharashtra AAR relies on AP AAAR ruling in another case to arrive at this conclusion [2022-VIL-118-AAR]. It appears that for availing certain incentive separate registration was opted which later became redundant. Deriving support from Section 18 to understand the concept of going concern may be doubtful.

 

 

(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)