Tax Vista Your weekly tax recap Edn. 99 - 9th May 2022 By Dr. G. Gokul Kishore

 

 

Construction service - Mandatory fixed deduction towards land value is not valid

The Gujarat High Court has held that artificial deeming fiction of one third deduction towards land value in respect of construction service as provided in Notification No. 11/2017-Central Tax (Rate) is ultra vires the provisions of CGST Act and the Constitution of India. It has held that notification cannot provide for fixed deduction towards land when value of land is separately available. The Court has further held that uniform application of the deeming fiction irrespective of size of the plot of land and construction therein is arbitrary and discriminatory and violative of Article 14 of the Constitution.

 

According to the judgment which has created much interest among the stake-holders, Section 15 requires valuation as per actual price paid or payable for the service and when the actual price is available, then tax has to be imposed on such actual value and deeming fiction can be applied only when actual value is not ascertainable. After relying on landmark judgments, the High Court has held - "Thus, mandatory application of deeming fiction of 1/3rd of total agreement value towards land even though the actual value of land is ascertainable is clearly contrary to the provisions and scheme of the CGST Act and therefore ultra-vires the statutory provisions."

 

It examined the 14th GST Council Meeting minutes and said abatement was contemplated only in the context of flats where it would be difficult to ascertain the value of undivided share of land whereas the notification provided for deduction in transaction whether involving land itself or UDS in land. Measure of tax has no nexus with the charge which is on construction, as per the judgment. On the apprehension of the department as to artificial inflation of land value and under-valuation of construction service, the Court has noted valuation rules and said that the department is not remediless when value is doubted. Amendment to Section 7 of CGST Act was also taken into account and entry in Schedule II was held as not relevant to determine validity of the relevant paragraph in the notification.

 

Though the paragraph in the notification on one third deduction towards land value was held as ultra vires, the Court said such deduction can be permitted where value of land or UDS of land is not ascertainable. The paragraph has been read down to the effect that deeming fiction will not be mandatory and it will be optional.

 

In case of developed plots, the judgment holds that sale of land as mentioned in Schedule III includes sale of developed land as per Notification No. 11/2017-Central Tax (Rate) and when the land is already developed and then buyer enters the scene in which case development is not undertaken at the behest of another person, there is no service involved. The order reads -"In a given case there may be tax liability if the development of land is undertaken pursuant to contract with buyer. However, if the land is already developed and thereafter agreement is entered into with the buyer for sale of such developed land, then it would not involve any service." [2022-VIL-319-GUJ].

 

While there is much euphoria and elation over this judgment, fine print needs to be seen before jumping in joy. First, the High Court has not struck down the provisions - the deeming provision remains in the notification. Therefore, the department can well dispute when there is a deviation. The basis for use of deeming provision is factual - if the land value is ascertainable, then actual value may be deducted. It is obvious that in cases where land value is not clearly coming out in the agreement / documents, one third deduction will be argued as applicable and not the actual value. Third, in respect of developed land, the Court has held that in the case before it, development had already taken place and only later the petitioner entered the scene and therefore, developed land was held as covered under the entry in Schedule III excluding sale of land from GST levy. The judgment itself indicates that if the development is undertaken at the behest of a person who will be the prospective buyer of the land, then there could be GST implication. The above coupled with uncertainty till Supreme Court decides the appeal by the department, if and when filed, and the amendments to nullify the impact of such rulings, either through retrospective amendment or otherwise - all these should be considered when a judgment favourable to taxpayer is celebrated.

 

This judgment apart, land is something which is not in the ambit of GST and a transaction in land cannot be taxed under GST. Levy precedes exemption or abatement and if there is no power to levy, there cannot be exemption either.

 

Payment of amount as condition for bail - ITC can be used

The controversy over debiting credit ledger for payment of pre-deposit in case of appeals is well-known as the same erupted in pre-GST regime, then subsided and again has arisen in GST regime. This has a new dimension now. In suspected case of fraudulent availment of input tax credit, when court grants bail subject to payment of certain amount, can part of such amount be paid using electronic credit ledger? This was the question before the High Court in a recent case. The alleged fraudulently availed ITC was around Rs. 27 crores and the amount payable for bail was Rs. 2.70 crores. It seems the total ITC available was Rs. 260 crores. The department argued that when the case is related to ITC fraud, the entire amount is under cloud and the taxpayer cannot use credit ledger to pay the amount ordered for bail. However, the Court held that as per investigations, beyond Rs. 42 crores, ITC available did not appear to be fraudulent and therefore, part amount paid through ITC cannot be faulted. It set aside the impugned order cancelling bail [2022-VIL-307-DEL].

 

Since 1980s, everyone associated with indirect tax is trying to figure out the true nature of tax credit - the quest continues even today. Till the time it is understood, controversies over use of ITC will remain.

 

Collection of advertisement tax by municipalities after GST is valid

Municipalities collect tax on advertisements (hoardings etc) under the law made by State Legislature. A notice demanding such tax was challenged before Karnataka High Court on the ground that after implementation of GST, there is no power to levy the same. But such petition was dismissed by the Court after holding that incidence of tax in respect advertisement tax and GST is different and the transactions are distinct and independent. As per the order, advertisement tax is levied based on the license granted by the municipality and it is not related to supply of goods or services under GST. The Court has specifically noted that in the petition before it, the validity of the statutory provisions has not been challenged but only the notice was assailed. Though the order notes there is no double taxation, the reasoning may be perceived as not well-grounded and argument on aspect theory whether relevant or otherwise, is absent. Precedent judgment on identical issue delivered by Gujarat High Court has been relied on to emphasize that there is quid pro quo in the case of advertisement tax by way of permission to put up hoarding and therefore, it is more in the nature of fee [2022-VIL-310-KAR].

 

Abuse of power and harassment of taxpayer - High Court orders interest on delayed refund

A High Court order reported by VIL reveals the agony of taxpayer and the anger of the Court over the conduct of Uttar Pradesh GST authorities. Goods were detained and the taxpayer was asked to pay tax and penalty. The GST officer created temporary id on his own and deposited the amount paid by the taxpayer. The order was set aside in appeal and refund was sought and eight reminders were sent but there was no response from the department. Later the department said there was technical glitch and the same was being looked into. Based on High Court's order, refund was granted later. Earlier orders by High Court bordered on strictures against the department with the Court using "high handedness, abuse of power and harassment of dealers". The present order holds that the GST officer in UP created the temporary id for the taxpayer located in Gujarat mischievously though he was aware that IGST Act was applicable. Further the password was never shared with the taxpayer. As per the order, refund was not granted on one pretext or the other. The Court has also said that one of the letters was "procured by the department" from the taxpayer and the same amounted to interference in court proceedings. It appears that the department's counsel pleaded for non-initiation of contempt proceedings and tendered apology. The Court ordered interest to be paid from 2018 to 2022 for the delay in granting refund [2022-VIL-321-ALH].

 

Many taxpayers will have similar stories to share and not all of them would have the time or resources or even interest in approaching the High Court for appropriate remedy. Law, court orders and other factors cannot reform the department if the officers themselves do not feel the pain and stress of taxpayers particularly when the amounts involved are not significant and the taxpayer is made to run from pillar to post for refund of such amounts.

 

Tax disputes are civil suits?

In civil suits, when decree is passed, the matter does not end. The decree-holder has to apply for execution of the decree to recover from the judgment-debtor and this is consequently a separate proceeding. It appears that tax disputes also belong to this category now. For obtaining discharge certificate under the amnesty scheme (Sabka Vishwas - SVLDRS), the taxpayer had to petition the High Court because the designated committee refused to issue such certificate even after payment of the amount determined as payable. The ground was that such request for certificate cannot be processed manually and court orders have to be obtained. The High Court was not impressed as it said that this is an internal matter (manual processing) and the authorities need not wait for order from the Court. The Court directed the committee to issue discharge certificate and also set aside show cause notice issued as such certificate was not issued earlier. As noted in this column before, amnesty schemes brought for closure of pending cases give rise to fresh set of litigation as the department implements the same in letter without fully comprehending the spirit of the same [2022-VIL-323-MAD-ST]

 

Transfer of business as going concern - Prescribing non-statutory conditions

Advance rulings are peculiar in many ways. Transfer of business as going concern is exempted under Notification No. 12/2017 - Central Tax (Rate). Most of the rulings are in favour of taxpayers while some of them are against citing non-transfer of one or the other liability. Because the term 'going concern' is not defined in GST law, jurisprudence is relied on which emphasizes the ability to continue the business in the foreseeable future. In a recent ruling, the Authority for Advance Ruling (AAR) perused the business transfer agreement and noticed that liabilities are also transferred. The ruling states that exemption would be available subject to fulfilment of condition of going concern. Having analyzed the terms, the AAR should have given clear-cut ruling instead of using such caveat. The primary reason for the same is Delhi High Court's judgment mentioning ICAI's Standard Auditing Practices 16. This is relied on by the AAR to hold that the applicant has not furnished documentary evidence from the auditor on the entity's ability to continue operation for foreseeable future. ICAI's prescription is not part of GST notification and placing reliance on the same seems to be unwarranted, particularly when the clauses in the agreement are unambiguous [2022-VIL-131-AAR].

 

Medicament or food supplement - Ruling on the difference

A very specific advance ruling involving classification of goods may not be of interest to many considering the limited applicability. However, when the ruling contains interesting arguments and observations, the same deserves a mention, particularly when the issue pertains to classic dispute of whether a product is medicament or food (sometimes medicament or cosmetic).

 

The issue involved was classification of dry powder containing protein powder with vitamins and minerals - whether as medicament under heading 3004 or not. The item has been stated as manufactured as fixed dose combination based on license issued under Drugs and Cosmetics Act. In the advance ruling it was held that the product being food supplement, would be classifiable under the heading 2106. Before the Appellate Authority for Advance Ruling (AAAR), the department argued that the product does not satisfy fixed dose combination criterion and predominant constituent is protein. The AAAR noted that the product is stated as meant for 'prophylactic use' but the disease or ailment which can be cured or prevented has not been indicated. The label on the product pointed to the fact that the thrust is on food value as flavour is mentioned as chocolate and image of beverage is shown. More importantly, the ruling observes medicines are consumed in the form as they are available in the market and no preparation is left to be undertaken by the patient and such preparations are only in relation to food items. More discussion on the word 'prophylactic'' can be seen in the ruling. Notes to Chapter 30 on exclusion of food and beverages besides FSSAI license was relied on to classify the goods under heading 2106 [2022-VIL-20-AAR].

 

Advance ruling to resolve commercial differences

In a few cases, the service provider entertains the view that GST of 18% is applicable while the service recipient disagrees and believes either exemption is available or lower rate is applicable. To resolve such commercial differences, advance ruling is sought and invariably, the stand of the service provider is upheld in such rulings. In a case of this nature, the service provider as O&M contractor was responsible for operating the coal mine and excavation and delivery of coal. The service recipient / company felt it would be supply of coal liable to 5% GST while applicant as contractor was of the view that it is mining support service. Reading the terms of the agreement, the AAR held that the same is not for supply of coal but various services are to be provided by the applicant and the applicant is not the owner of coal but the service recipient is the owner based on allotment of mines by the government. The applicant's stand was affirmed and GST of 18% was held as payable. This case appears to be not complicated but the service recipient, might have been under the bona fide belief of admissibility of lower rate of 5% for supply of coal while the agreement itself is for rendering of various services. Another issue decided is that royalty and certain other amounts will not be includible in taxable value as the same were payable by the service recipient / company to the government and not the mining service provider [2022-VIL-133-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)