Tax Vista Your weekly tax recap Edn. 60 - 9 August 2021 By Dr. G. Gokul Kishore

GST authorities not empowered to "advise" payment during investigation - HC orders refund with interest

It is not uncommon to see taxpayers being "advised" to pay an amount as tax viewed as payable by the department during investigations. The Telangana High Court has held that no advisory jurisdiction has been conferred on the GST authorities whereby taxpayers can be "advised" to pay tax / reverse ITC before SCN. In the case before it, investigations were underway and show cause has not been issued yet but department sent a communication of "ascertained tax liability" and asked the taxpayer to pay. To buy peace and avoid coercion, some amount was paid. The High Court noted that the tenor of submissions of the department indicated that conclusion appears to have been drawn on the basis of the incomplete investigation that the petitioner had availed input tax credit based on invoices by certain fictitious suppliers without actual receipt of goods. It held that sub-section (5) of Section 74 of CGST Act gives a choice to the taxpayer to make payment but it does not confer any power on the department to make a demand as if there has been a determination of liability and no advisory jurisdiction has been conferred on the GST authorities The Court directed the department not to coerce the petitioner to make payment without issuing SCN and refund of amount paid with interest was ordered [2021-VIL-572-TEL]

Completion of adjudication not necessary before arrest for alleged GST evasion

Before arresting a person, completion of adjudication and determination of tax liability are not required, according to Gauhati High Court. Though such position of law has been held in other cases by various courts earlier, the latest order comes in the context of Covid-19 pandemic which was taken as a ground for seeking bail. In this case, the department alleged that the petitioner had supplied goods without issuance of invoice and the GST amount evaded was more than Rs. 5 crore and therefore, he was arrested. The petitioner was before the High Court seeking bail. The main contention of petitioner was that due to prevailing pandemic situation, bail should be granted and Supreme Court order on decongestion of prisons in the current situation was relied on. It was also argued that for arrest under Section 69 of Assam GST Act / CGST Act, officer concerned should have reasons to believe that specified provisions were contravened and in the absence of completion of assessment (adjudication) and determination of tax liability, arrest is illegal. This has been held by the High Court as without any logic as Section 69 is independent of Section 132. According to the Court, reference to Section 132(5) in sub-section (2) of section 69 of the AGST Act is made so as to differentiate between the person in respect of whom the Commissioner has reason to believe that such person has committed cognizable and non-bailable offences or non-cognizable and bailable offences as provided in Section 132.

Analysing the interplay of Sections 69 and 132, the High Court notes - "It is necessary to keep in mind that section 69 of the AGST Act falls under the Chapter XII which provides for inspection, search, seizure and arrest which are in nature of measures prescribed under the provisions of the AGST Act to find out the evasion of tax, if any, by any person. On the other hand, section 132 of the AGST Act prescribes punishment for certain offences falling under Chapter XIX which provides for the offences and penalties. Thus, Section 132 of the AGST Act is enacted by the legislature prescribing punishment for the offences committed by an assessee either upon adjudication and assessment proceedings having been completed or otherwise as per the clauses (a) to (l) of the sub-section (1) of the section 132 of the ACGST Act. Therefore, section 69 and section 132 of the AGST Act operate in totally different fields and the attempt on the part of the petitioners to canvass that unless and until adjudication proceedings of the assessment determining the tax and penalty liability is completed by the department as provided under Chapter VIII of the AGST Act, the Commissioner cannot form any opinion to "reason to believe" that the assesse has committed any offence, is contrary to the entire scheme of the AGST Act."

The Court held that there was rightful application of mind by the officer concerned while issuing the arrest warrant and exercising powers under Section 69. Based on the materials and prima facie evidences and the pendency of investigations, the Court refused the entertain the bail plea [2021-VIL-573-GAU]

No restraint on issuance of summons by CGST officers on mere pendency of proceedings before SGST officers - Subject matter being same to be established

In several writ petitions, initiation of proceedings by both CGST and SGST officers has been or is being assailed and results have not been uniform. Section 6(2)(b) of CGST Act bars initiation of proceedings if SGST officer has already initiated proceedings on the same subject matter. In a recent case where writ petition was filed challenging summons issued by CGST authorities, the Madras High Court has held that the purpose and object of Section 6(2)(b) is to ensure that on the same subject, the parallel proceedings are to be avoided but such benefit cannot be claimed in all circumstances. The Court emphasized that the fact that the subject matter is one and the same should be established. In this case, the petitioner had challenged issuance of summons by CGST officers but the Court noted that the SGST officers had issued notice intimating certain discrepancies after scrutiny of returns whereas CGST officers are conducting investigations consequent to certain allegations and such facts require adjudication. Keeping summons at abeyance would paralyze the entire proceedings and therefore, the CGST authorities have been directed to proceed as per law. The Court has observed that the writ petitioner has approached it at every stage which indicated that they are attempting to prolong the proceedings. It said - ".such a conduct of filing writ petition after writ petition, challenging the summons and proceedings intermittently cannot be appreciated by this Court." [2021-VIL-567-MAD].

Three adjudication orders for same period and dispute

There is a grievance in certain quarters that notices are issued routinely but orders are passed after some delay. Motivated by the urge to cut down delay, in UP, the GST authorities issued notices and passed three adjudication orders where the period was overlapping and the issue was one and the same. The department's counsel accepted that bona fide mistake was committed. The High Court quashed two orders and remanded the matter back to the adjudicating authority after setting aside the impugned order. Appropriate training and capacity building in quasi-judicial functions have been repeatedly pointed out in this column. If the officer concerned is not trained, then taxpayers have to put up with such unnecessary, multiple and overlapping litigation. [2021-VIL-563-ALH].

ITC available on solar power plant used captively by manufacturer

One of the few advance rulings wherein taxpayer's stand has been accepted has been reported by VIL last week. The AAR has held that input tax credit is available in respect of GST paid on the items used as per contract involving design, engineering, supply and execution of solar power plant. The applicant is engaged in extracting edible oils and the solar power is used fully for captive use to generate electricity for manufacturing operations. The position adopted by the department in its reply and also the ruling holds that though electric energy is exempted under GST, the same is captively consumed in full by the applicant for manufacture and supply of taxable goods and there was no wheeling arrangement with State electricity body for supply of surplus power and therefore, ITC would be available. The AAR satisfied itself on capitalization of the goods in the fixed assets register. However, it refused to answer the question as to whether the applicant is eligible to take input tax credit for inputs and services for running the solar plant since list of such items was not provided [2021-VIL-274-AAR].

Two factors went in favour of the applicant in this case. First, on facts, there was no surplus electricity generated which had to be wheeled out to the grid. Had the fact been different, then reversal of proportionate ITC would have arisen and the issue could have got complicated. Secondly, though the AAR observed that the solar power plant has been erected as works contract which means it is an immovable property, the same has been viewed as plant and machinery and therefore, the curse of immovable property got lifted.

Vouchers, when supplied, liable to GST of 18%

Normally, companies wish to know GST liability or time of supply in respect of gift vouchers or redemption coupons. But such promotional schemes are implemented through third parties / specified entities and for them, GST liability takes a slightly different colour. In a case of this nature, the AAR was posed with the question of taxability of various types of vouchers. Gift vouchers are purchased from entities like e-commerce operators and supplied to recipient-entities by the applicant. They are also involved in purchase and sale of cash back vouchers which are scratch cards and e-vouchers with multiple options to redeem taxi bill or use salon service or buy movie ticket.

As per GST law, voucher means an instrument where there is an obligation to accept it as consideration and, if supply is identifiable at the point of time of issue, then date of issue of voucher will be the time of supply as otherwise, liability will arise at the time of redemption. The applicant argued that such vouchers are treatable as "actionable claim" or "money" and not liable to GST.

In a fairly detailed order, the AAR has held that payment instruments in the present case are covered under voucher as per CGST Act. After analysing the agreements, the AAR has noted that trading / sale of gift vouchers is undertaken where price is negotiated. It also took note of the Payment and Settlement Systems Act and RBI's instructions on pre-paid instruments (PPIs) and held that gift vouchers are classifiable as closed PPI and others under semi-closed PPIs. According to the ruling, the applicant is supplying the payment instrument to various clients and they are not settling any obligation treating this as consideration and only at a later stage, some other person, viz. the client of the client who is the end-user, uses them to settle their obligation of payment of consideration, using the said vouchers instead of cash. Based on such reasoning, it held that the payment instrument supplied by the applicant to their clients, is not covered under the definition of money at the time of supplying them and the same is not an actionable claim also.

The applicant has been held to be involved in trading of vouchers which is covered under supply. An important point ruled by AAR is that both paper vouchers and e-vouchers are goods. Transfer of title in goods is supply of goods as per Schedule - II of CGST Act and therefore, the applicant is liable to pay GST on such vouchers as supply of goods. They would be taxable under residuary entry in Notification No. 1/2017-Central Tax (Rate) and liable to GST of 18%. The face value of such voucher is the taxable value and time of supply would be due date of filing return [2021-VIL-283-AAR].

This ruling is certain to be discussed through articles and social media groups. The issue is evergreen because the transactions are multi-layered involving several parties, multiple agreements, interplay of other statutes with GST law. One of the key or nuanced point to be noted is that while voucher is defined or treated as consideration, in this case, based on the fact of applicant being involved in trading of voucher, the same has been held to be goods. For companies supplying vouchers to their customers, this ruling may not apply as such.

Diesel cost reimbursed includible in value of renting service of generator

These days, in a few rulings, it is found that the taxpayers / applicants themselves are of the view that something is liable to GST or some item should be included in taxable value. Compelled by big-brother recipients, they opt for advance rulings and the rulings can obviously be no different than the view held by such taxpayers. In a recent case, the applicant informed the AAR that they have been charging GST on reimbursement of cost towards diesel used for running diesel generator set (DG set) but one of the recipients expressed the view that diesel is out of the purview of GST and the practice adopted is not correct. The AAR did not refer to Section 15 of CGST Act in full but rushed to hold, in a very brief order, that incidental expenses are part of the consideration, the contract was for supplying DG set on hire and the invoice issued for reimbursement of diesel cost was only a supplementary invoice for supply of rental service. In the ruling portion, it has been held that diesel cost was an additional consideration and therefore, GST of 18% is payable. The recipient is the largest insurance major and the contract could have been drafted better if the intention was to keep diesel cost out of the transaction. With such not so efficient structuring, one cannot find fault with AAR though the ruling could have been more legally well-grounded [2021-VIL-282-AAR].

Battery-operated electric vehicle without battery at the time of sale classifiable as such vehicle and liable to 5% GST

An interesting question was raised by the Authority for Advance Rulings (AAR) - fitting of battery whether mandatory in battery-powered electric vehicles at the time of sale to dealers for being eligible to GST of 5%. Notification No. 1/2017-Central Tax (Rate) defines electrically operated vehicles as those which are solely run on electrical energy derived from an external source or from one or more electrical batteries fitted to such road vehicles. The applicant contended that a motor vehicle with empty fuel tank at the time of sale does not lose the character of being such vehicle and therefore, the battery-operated vehicle is electrically operated vehicle even if battery is not fitted at the time of sale. The AAR agreed and held that fitting of battery in the vehicle, at or before the time of supply, is not a precondition for the same to be classified as electrically operated vehicle. It relied on Revisional Authority's ruling in Reva Electric Car Co. [2011-VIL-01-MISC] wherein it was held that if electrically operated cars were exported not fitted with batteries at the time of export, the same would still be classifiable as battery powered road vehicles. The AAR noted that such vehicles should run using battery when put to use [2021-VIL-280-AAR].

Though the applicant has not relied on nor AAR has referred to, the General Rules for Interpretation of Customs Tariff could have been used for assistance. As per Rule 2(a), incomplete or unfinished article is also included under the heading for a particular article provided such incomplete one has the essential character of the complete or finished article. For interpretation of GST rate notification, such rules are applicable and with a discussion on such rules, the advance ruling could have been on a more stronger footing.

Labour welfare board liable to GST on renting to both government and business entities

Labour Welfare Board is constituted under law to promote welfare of employees and their family members and the schemes are applicable only to those having income upto the specified limit. Contribution from employees, employers and State Government is received and income by way of rent, fines, etc., is also received. The issue was whether such board is covered under "local authority" so as to push GST liability on rental amount to recipients under reverse charge basis when property is leased to private entities and covered under exemption when leased to government. Definition of "local authority" covers "any other authority" legally entitled or entrusted by government with the control or management of municipal or local fund. The AAR has noted that the labour welfare board is required to execute the measures as specified by the government and therefore, such board does not have autonomy and they are required to manage the labour welfare fund to be utilized for welfare projects. These are not functions usually performed by municipal bodies. Based on precedent judgment, it has been held that the applicant does not satisfy the tests to be considered as local authority and it does not have the power to compulsorily exact fees and therefore, it is not a "local authority". The ruling holds that exemption is not available on renting of commercial properties to government and neither exemption nor RCM is appliable on renting to business entities and the applicant is liable to pay GST in both the cases [2021-VIL-278-AAR].

Unlike two more rulings discussed in this column, the above ruling has analysed the issue in the backdrop of jurisprudence in a fairly detailed manner. However, as observed before, the exemption entries relating to government and government entities or bodies established by law need to be re-visited so that where the intention was not to tax, liability is not fastened. Otherwise, the entries need to be made more unambiguous to convey the intention.

Drilling of borewell service for agriculture not exempted from GST

The advance ruling rendered earlier was that drilling of borewells for supply of water for agricultural operations and letting out compressors for pumping water from borewells to agricultural fields are not covered under "support service for agriculture". This has been affirmed by Appellate Authority as well. Services classifiable under heading 9986 relating to agriculture are exempted from GST. Operation of irrigation system and services necessary for crop production are mentioned in explanatory notes to heading 9986. Renting or leasing of agro machinery is covered under the notification. The appellate ruling says that without going into merits of the main arguments, no two classification can be adopted for a single activity based on end use or where it is rendered. Services of borewell drilling for industries is classifiable under a different heading and therefore, if such services are used for agricultural purpose, then classification cannot change as the ruling seems to indicate. If one reads such ruling, then the chorus that such authorities do not serve the intended purpose may get louder. The department's inability to verify actual use is also cited in this ruling. For such inability, the taxpayer should bear the cross. The only clear finding in this ruling pertains to certain discussions in GST Council on requirement of further study on exemption to drilling of borewells for agriculture and this has been relied on deny such exemption [2021-VIL-39-AAAR].

Dosa mix, idli mix, health mixes, etc., liable to GST of 18%

The products involved are meant to prepare delicious dishes but the advance rulings on classification and applicable GST rate are delicious only to the exchequer. Various products like dosa mix, idli mix, health mix, porridge mix, etc., were taken before AAR for classification. The applicant was of the view they are either classifiable under Chapter 11 or 23 and liable to GST of 5%. The ruling cites HSN explanatory notes to state that Chapter 11 covers flours of dried leguminous vegetables and lentils if they are obtained only by milling of such raw materials and no further processing is undertaken and if other substances are added, they would be classifiable under heading 1901. It is not clear whether such notes contain "only" and also addition of other substances entailing classification under Chapter 19 as the reproduced extracts in the ruling do not contain the same.

By placing reliance on HSN notes for headings 1901, the ruling notes that the impugned products are not usable by simply mixing with or boiling in water but require to be further processed for consumption and therefore, they are not classifiable under heading 1901. For ruling out classification under heading 2302, the AAR has held that test reports have not been furnished and evidence has not been produced. Residuary entry under heading 2106 covering food preparations not elsewhere specified or included has been held to be applicable to all the products and GST of 18% would be applicable. GST rate of 5% is applicable to idli / dosa batter and in the present case, the products are required to be mixed with water to make them batter and therefore, such lower rate would not be applicable. Probably, after this ruling, the applicant will change the form in which it is supplied / sold. The products, the issues and the disputes on their classification never go stale [2021-VIL-277-AAR].

GST compelling businesses to change models

GST as a modern tax system was expected to be less disruptive in terms of business models and processes. However, a recent ruling in the case of common effluent treatment plant of dyeing units in a textile hub reveals a rather unfortunate story. The applicant has been rendering effluent treatment service charging GST of 12%. It appears that they represented / sought reduction in GST rate for such pollution control activity but the same has not been favourably considered by the government. Therefore, before the AAR, questions were posed on GST implications if the model is changed from one of service provision to supply of goods whereby the applicant will purchase the raw effluents and then sell the treated effluents in different components like RO water, sodium sulphate, brine solution and sodium chloride to members. The AAR has held that classification of supply of output as sale of goods is correct. Water obtained after three stage RO process is sold for industrial application and the same would attract 18% GST. It is not clear as to the applicable GST rate on other products obtained after treatment as the ruling indicates the SGST officers have a different view. But these products are not part of the question on which ruling was sought [2021-VIL-276-AAR].

Bakery with option to consume products in its premises is not a restaurant

The department filed appeal against the advance ruling wherein it was held that supply of bakery items and other edible products at the premises of the applicant with the facility to consume the same in air-conditioned premises is covered under restaurant service. The department argued that the appellant was running a bakery and the items are sold on take away basis and most of the items are not prepared in the premises. In a very cryptic ruling, the AAAR has held that as per dictionary meaning of restaurant, meals should be prepared and served to the customer and since the establishment / premises / outlet of the applicant cannot be treated as a restaurant, the supply cannot be classified under restaurant service. Like entries in the notification, catering / restaurant service has been historically litigative for several decades and such rulings can hardly contain the disputes in this sector [2021-VIL-36-AAAR].

Business entity and RCM liability for legal service - Ruling sans reasons

Advance rulings in many cases do not contain reasons for the ruling or decision. Though such rulings elaborately cover the arguments of the applicant, notification entries, etc., findings or reasoning of the AAR are sparse. National Institute of Technology (NIT - previously called Regional Engineering College or REC) has been held as a government entity since it has been set up by the Parliament and it has been receiving funds from the Central Government and therefore, liable to deduct tax (TDS under GST). The applicant had sought answer to the query whether GST is payable under reverse charge basis on security services and legal services received by them. For security services, the AAR has noted that the invoice provided was in respect of services received from private limited company and therefore, the same is not covered under RCM. The applicant has been held as liable to pay GST under RCM on legal service also without discussion as to whether they are covered under business entity. The definition may be wide to include everyone but one or two paragraphs on coverage under such term is essential for the order to be speaking [2021-VIL-281-AAR].

GST liability on certain amounts collected by housing society - Another ruling without reasoning

In yet another ruling, question raised by cooperative housing society on GST liability / exemption in respect of amount collected from members has been answered without any discussion. Para 5.7 of this advance ruling states that as per the provisions of GST laws, repair and maintenance fund and sinking fund are covered under services and hence, such services provided by the applicant to its members would be liable to tax subject to crossing the threshold turnover limit and as per the provisions of Notification No.12/2017-Central Tax (Rate). This is the only discussion but the ruling portion at the end cites "for the reasons discussed in the body of the order". CBIC's circular has been reproduced and sample bills have been tabulated but the finding "funds are covered under services" is without any reason. As per this ruling, if the gross amounts collected exceeds Rs.7500, then exemption limit of 7500/- is not applicable on two components of maintenance bills - repair and maintenance fund and sinking fund. But these are otherwise obvious and why the society opted for advance ruling is not known [2021-VIL-279-AAR].

(The author is an Advocate, Gokul & Subha Advocates, Chennai. The views expressed are personal. Two books authored by him have been published recently - Cross-border Transactions under Tax Laws & FEMA (July 2021) and GST - Investigation, Demands, Appeals & Prosecution (August 2021))