Tax Vista Your weekly tax recap Edn. 98 - 2nd May 2022 By Dr. G. Gokul Kishore

 

 

Multiple proceedings - High Court quashes audit memos

Parallel proceedings by CGST officers and SGST officers is a subject matter having a solution in the form of provision for cross-empowerment of officers which seeks to bar such simultaneous onslaught by both the authorities. However, there is no solution for the issue of multiple proceedings initiated by different wings of the same department like audit wing and investigation agency like DGGI. In a case of this nature, the taxpayer has been summoned repeatedly (by DGGI) which were all responded and spot memos were issued by Audit Officers as well on the same issue of transitional credit. The High Court said - ".the appellants appears to have been dealt with in a most unfair manner in the sense that from the year 2018 for the very same TRAN - 1 issue the appellants have repeatedly been summoned, issued notices etc. The spot memos, which have been communicated to the appellants along with the communications dated 22nd March, 2021 is also for the very same purpose. Thus it is not clear why different wings of the very same department have been issuing notices and summons to the appellants without taking any of the earlier proceedings to the logical end."

 

The Court quashed the spot memos of Audit and directed the DGGI to consider the reply. Though the taxpayer has got some relief, it is not clear whether DGGI will be able to proceed with adjudication considering the fact that CBIC has directed them to issue notice only and not adjudicate [2022-VIL-290-CAL].

 

Transitional credit - High Court directs direct credit in credit ledger

Madras High Court in Avatar Petro Chemicals Ltd. [2022-VIL-220-MAD] had directed credit of pre-GST credit in electronic credit ledger after verification of the claim on attempt to file TRAN-1 form. It specifically held that credits are indefeasible and GST law does not have provision whereby legitimately earned pre-GST credits would lapse. Relying on this, the same Bench has, in another case, directed the department to either permit manual filing of TRAN-1 form or allow direct credit in electronic credit ledger. In this case, it appears there was difficulty in filing the form and the taxpayer had sent a representation for not filing TRAN-1 form [2022-VIL-281-MAD]. A similar order can be seen in 2022-VIL-288-MAD.

 

It may be longer route for the taxpayers as the department is unlikely to refrain from filing appeal before Division Bench of the High Court and then take the matter to Supreme Court, if the DB also upholds such Single Judge Bench's orders. Taxpayers should have foreseen the date of implementation of GST and utilized as much as possible Cenvat credit or VAT ITC before 1st July, 2017 itself. This may be seen as practically impossible but considering the transitional credit blunders by way of drafting defective piece of legislation and then the attempt to rectify it through back-dated amendments and then litigating the issue in almost all the High Courts and now in the Apex Court, the issue has become inextricably complicated, such speculative strategising could have been one of the options at that time.

 

TRAN-1 not filed due to fire accident - High Court orders cash refund as an alternative

A statement as to the transitional credit provision being defective as made above can be said as vindicated by an order of Madras High Court. The lawmakers did not foresee contingencies or situations whereby taxpayers are prevented from filing TRAN-1 form. There was fire accident in the factory, lives were lost and factory was ordered to be closed - all these happened in 2016. When the taxpayer was able to reopen in 2018, GST had come. They could not obviously file TRAN-1 form in the interim period and the department contended that only in case of attempt to file the form and technical glitches, request could have been considered. The High Court directed the department to verify the credit availability on the date of accident and check monthly returns of October and November, 2016 for quantum of unutilized credit of service tax / excise duty. It ordered credit to be taken in electronic credit ledger or by way of cash refund to the taxpayer. Writ court is the only forum where one can see justice being actually delivered. For a taxpayer who went through harrowing times due to accident, such order should provide some succour [2022-VIL-292-MAD]

 

SEZ unit entitled to refund of unutilized ITC

The Madras High Court has held that SEZ unit is entitled to refund of unutilized input tax credit and the stand of the department that supplier to SEZ unit alone can claim such refund is not correct since such supply by the supplier was not a zero-rated supply but only the export made by SEZ unit is treated as zero-rated supply. It held that there is no restriction under Rule 89 of CGST Rules for refund of such unutilized ITC and refund under Section 16(3) of IGST Act read with proviso to Section 54(3) of CGST Act would be available. The fact is somewhat peculiar in this case as the credit got accumulated due to distribution of credit by head office of the taxpayer through Input Service Distributor (ISD) mechanism. The Court was of the view that suppliers of such common input services could not have availed refund under Section 54 of CGST Act or claimed any exemption [2022-VIL-295-MAD]. This is an issue which was already decided by the same Court in Platinum Holdings v. Additional Commissioner [2021-VIL-719-MAD] as analysed in Tax Vista dated 18th October, 2021. In this case, refund was allowed to SEZ developer. The dispute arises again due to bad drafting as noted earlier in this column and at least by taking note of such judgments, the law should be amended.

 

Concessional GST rate not applicable to merchant exporter in bill-to-ship-to model

The Appellate Authority for Advance Rulings considered the question as to whether concessional rate of 0.1% GST under Notification No. 41/2017-Integrated Tax (Rate) is applicable in bill-to-ship-to model where goods are billed on merchant exporter but shipped to the manufacturer. In this case the goods involved were used for packaging. The impugned advance ruling denied the benefit on the rationale that goods should move directly from the appellant's premises to port or warehouse for export. The appellant argued that the manufacturer's factory is to be considered as warehouse. The notification uses the word "directly" while stipulating the condition of movement from recipient to port or warehouse. The Appellate AAR has held that this condition is not fulfilled in the present case as the HDPE drums are sent to the factory and the export goods after being packaged in such drums are moved to port. Discussing the meaning of warehouse, the AAAR has said that factory and warehouse are "distinctly different" and the factory cannot be said as providing warehousing facility for storage of such drums. The contention on merchant exporter aggregating the supplies has also not been accepted after some decent discussion [2022-VIL-38-AAAR].

 

When it comes to export and concessions, the tax authorities fear diversion and misuse. Statutory provisions, conditions, etc., are all intended to allay such fears. In this exercise, taxpayers sometimes with genuine issues inadvertently suffer. The case discussed above seems to be an outcome of gaps in strategizing operations. Instead of hitting the head before the walls of dispute resolution machinery, negotiating with parties to obtain favourable terms may be more productive.

 

ITC on pile foundation for storage tank - Members differ

Input tax credit on pipelines was held as not admissible in advance ruling and the taxpayer was in appeal before Appellate AAR. For facts of the case, readers may refer to Tax Vista dated 26th April, 2021 and the ruling in 2021-VIL-218-AAR. The argument that the term "pipelines" refers to long distance pipelines and not pipes running for short distances was not accepted by the AAAR after adopting literal interpretation of the provision in Section 17 of CGST Act. It pointed to the specific exclusion of pipelines laid outside factory premises. The Authority rejected the contention that pipelines meant for outward supply are alone excluded for ITC and said that the bar covers pipelines meant for inward and outward supplies.

 

The CGST Member has affirmed the advance ruling as to denial of ITC of GST paid on works contract service used for pile foundation for storage tanks on the ground that the pile foundation is not the "foundation" included as plant and machinery. However, SGST Member has held that ITC would be admissible on such services used for pile foundation since it is on such foundation that plant and machinery viz., storage tanks and water reservoir tanks are erected and the load of such tanks is transmitted to the ground only through such foundation [2022-VIL-40-AAAR].

 

The comments from Tax Vista dated 26th April, 2021 are reproduced as they are equally relevant after this ruling as well - "Barring of ITC on pipelines does not have any rationale as such. Reference to factory premises for such restriction is without any reason and may even be perceived as absurd. The sector is very important for the economy and the investments are substantial. Denial of ITC on such heavy expenditure will only push up the cost of goods and services provided by oil and gas sector which will ultimately impact adversely the end consumer. A serious rethink is required on such restrictions."

 

License to use packaged software is supply of goods

Software taxation continues to be an issue despite Schedule II of CGST Act and notifications under both goods and services. In a recent advance ruling the question posed was whether supply of software licenses is treatable as supply of computer software in the form of goods classifiable under tariff item 8523 80 20. The question arose because the taxpayer was charging 18% GST while customers being research institutions argued that concessional rate of 5% GST would be applicable. The software was packaged software sold without customization and the applicant relied on terms of end user license agreement (EULA). The AAR held that the software has to be loaded in the computer and to be activated and it will be application software. It referred to explanatory notes to scheme of classification of services to note that limited end-user license as part of packaged software is excluded from licensing services to conclude that the impugned supply would be supply of goods. In a rare case of adoption of purposive interpretation, it also held that benefit of lower rate of 5% would be available [2022-VIL-120-AAR].

 

Marketing service to company abroad is not export of service

If incentives for achieving target are received from a person other than the supplier of goods, then exclusion under GST will not be available, as per a recent ruling. The applicant is a reseller of computer processors and other items and they received target incentive. They sought to know whether it would be considered as a trade discount. However, the AAR has held that the applicant purchases the goods from distributors and not the company which gives the discount and therefore, it will not be covered under Section 15(3) of CGST Act for the purpose of exclusion. It further said that since the applicant is providing marketing services to the company intended to promote sales, there is a supply of service. Beyond this, the ruling takes a different but expected tangent. As the marketing service is in respect of goods made available by the company and since the goods are in India, place of supply would be in India and therefore, export of service benefit would not be admissible, as per the AAR. The officers assisting AARs deserve commendation for innovating grounds to deny what is otherwise an available benefit. Marketing or business promotion is a service provided to the company abroad and in respect of product marketing, goods will always be involved. To tag such goods with services and to deny export benefit appears to be not the correct course [2022-VIL-128-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)