Tax Vista Your weekly tax recap Edn. 64 - 6 September 2021 By Dr. G. Gokul Kishore

Revision without records, reasons & hearing - High Court sets aside order

Rule 86A of CGST Rules / SGST Rules is being invoked in a good number of cases these days. As reports of fake invoicing and fraudulent availment of input tax credit flood the media, blocking of ITC under the strength of Rule 86A is often resorted to. A recent case involved an appellate order which was subjected to revision under Section 108 of CGST Act. Against the order blocking ITC, first appellate authority allowed appeal of the taxpayer on the ground that "reasons to believe" were not recorded in the order. This appellate order was revised by Commissioner under Section 108 which empowers him to stay an order passed by an officer subordinate to him and revise (pass revision order) if the earlier order is found to be erroneous. Erroneous here means the order being prejudicial to the interest of revenue and is illegal or improper or has not taken into account material facts. After giving opportunity of hearing, Commissioner shall pass such revision order.

In the case reported by VIL, the High Court noted that neither notice was given nor hearing opportunity was granted before passing revision order. The records were not called for from the appellate authority and the Court disapproved assumption of jurisdiction by Commissioner merely on the ground of inquiry being conducted. Perusing the internal exchange of notes, the Court held that though the power of revision and options were discussed, there was no independent application of mind when the power was exercised. It held that two pre-conditions viz., order being erroneous and prejudicial to the interest of revenue shall be satisfied before invoking revisionary power and hearing shall be granted before passing order after examining the records. Revision order was held as not containing any reason and set aside.

Though this order is more on power of revision, the High Court had an important observation on invocation of power to block ITC - "The power conferred upon the authority under Rule 86A of the Rules for blocking the ITC could be termed as a very drastic and far-reaching power. Such power should be used sparingly and only on subjective weighty grounds and reasons. The power under Rule 86A of the Rules should neither be used as a tool to harass the assessee nor should it be used in a manner, which may have an irreversible detrimental effect on the business of the assessee."

The power of revision has come up for closer examination and interpretation by the High Court probably for the first time in GST regime. Though further jurisprudence will provide more guidance, exercising powers at the apex level of Commissioner without even going through the records and merely signing on the note file as put up by subordinate officers shows gaps in understanding of the bare minimum procedures in the quasi-judicial realm. Administration and judiciousness may be strangers as the huge volume of judgments on violation of natural justice shows but when clothed with judicial powers, administrators cannot ignore basic principles while determining rights and liabilities of taxpayers [2021-VIL-621-ALH].

Adjudication orders for different years based on SCN for one year, not sustainable

In this column, almost every week, the need to build capacity among GST authorities in general and particularly when they execute quasi-judicial functions, is being emphasized. Tripura High Court has passed an order the facts of which exhibit complete ignorance on the part of the Superintendent regarding the basic procedures of justice dispensation. Show cause notice proposing to demand tax and impose penalty was issued for one year - 2018-19 but five adjudication orders were passed covering the period 2017-18 to 2020-21. The High Court notes that the belief of the officer that once notice is issued for a particular period, no notice is required for other periods stems from utter ignorance of law. This is termed as fundamental breach sufficient to vitiate the adjudication orders.

The High Court was also disappointed to note that the order ran to 150 pages discussing Constitution, Transfer of Property Act, IPC, Company law, etc., and quoting from various books and internet without showing relevance to the issue being considered. Finding out the reason is very difficult, as per the Court as it says - "The task of the reader of this order to fish out the reasons in support of the demand is more difficult than finding a needle from a haystack. Howsoever hard we may try, it is difficult to separate the grain from the chaff."

Bordering on strictures, the Court has certain harsh words for the Superintendent - "The order passed by the Superintendent and the approach that he has adopted is totally unsatisfactory. To begin with, the order reads more like a thesis in several fields of law in which he has tried to exhibit his half-baked, incomplete and internet acquired knowledge, in the process completely losing sight of the focal issue. He has made his order needlessly verbose, in the process not deciding the vital issues at all. More importantly he has referred to materials, documents and judgments and there is no evidence that he ever shared the same with the petitioner before relying upon them. In the age of internet and availability of information through technology, the Superintendent of Taxes was not precluded from doing his own homework and finding out material which was useful for the purpose of the case that he was deciding. However, any use of such material must precede sharing of it with the person likely to be adversely affected by his order. The basic requirement of principle of natural justice for sharing adverse material before utilising the same against a person must be observed with greater rigour in the times of availability of information on internet, all of which need not necessarily be accurate at all times. Accurate or otherwise the noticee must have a chance to meet with such adverse material before it is used against him. For each individual reason namely the order being unintelligible, the action failing the test of principles of natural justice and the Superintendent of Taxes exceeding the show-cause notice, the impugned orders must be set aside. For sheer verbosity the orders must go."

Both CBIC and GST Council Secretariat should either consider separation of quasi-judicial hierarchy from regular administration so that the former can specialize in that function or should implement capacity building measures for all adjudicating and appellate authorities in the department [2021-VIL-623-TRI].

A related order has also been passed by the High Court whereby order cancelling registration of the above petitioner has been set aside. The Court has followed an earlier order since such cancellation was proposed by using the template / format without mentioning the specific provision, contravention and grounds. The High Court has come down heavily on the authority for passing such cancellation order which can be seen at 2021-VIL-625-TRI.

Pre-deposit not required when tax amount already deducted

The order of High Court mentions that tax amount was "deducted" from the cash ledger. This conveys the impression that the department has debited taxpayer's electronic cash ledger and this fact is not clear. However, it is clear that tax amount stood paid to the exchequer. But the First Appellate Authority dismissed the appeal for non-payment of pre-deposit of 10% of the tax amount. Section 107 of CGST Act seeks pre-deposit of such part of tax, interest, fee and penalty as admitted by the taxpayer. Along with such amount, 10% of remaining amount of tax in dispute shall be paid as pre-deposit. If no amount is admitted, then 10% is payable. The High Court noted that the taxpayer had sought condonation of delay in filing appeal but the same has not been considered. After taking note that entire tax amount has been paid / deducted, the Court directed that appellate authority to consider condonation application and if the same is allowed, hear the appeal on merits. The order mentions that show cause notice was issued to the taxpayer on non-payment of pre-deposit. While such unnatural natural justice is rarely seen, ignoring tax payment and seeking separate pre-deposit also appear quite unnatural [2021-VIL-619-CHG].

Advance rulings and challenge in High Court - Is GST an issue'

Sometimes, orders do not lend themselves to proper understanding. The ruling of the Authority for Advance Rulings which was upheld by the Appellate AAR was that the applicant (before it) - a registered society with charitable objectives - was not an "educational institution" because education is imparted not by the society itself but through a medical college run by the society. The rulings were assailed in High Court as they did not address the question posed whether the society would be covered under "educational institution" in its own right without reference to the medical college. The High Court notes that the question was answered but reasons given were not related to the activities of the society. However, it further observes that the submission of the society (petitioner before HC) that, to the extent it is engaged in educational activity through the medical college, it would also be an "educational institution", was not answered by the AAR and AAAR. The Court also states that authorities ought to have considered the same independent of the activity of medical college. The rulings have been set aside and direction issued to pass fresh ruling. While the High Court order is apparently not clear, the de novo ruling cannot be any different. The actual issue is less of GST liability but more of the advice given to such societies / entities to seek rulings [2021-VIL-622-BOM].

GST registration cancelled in 2019 - Recent amnesty scheme cannot be availed

The title is our own and it has not been said so by the High Court. In this case, registration was cancelled for failure to file returns. Such cancellation was made in January, 2019. An application seeking revocation was filed after the time-limit for the same expired. Long after, now, writ petition has been filed in the High Court citing recent amnesty scheme. The Court did not accept this plea and it held that cancellation of registration was not challenged by way of appeal and such cancellation order had attained finality. Undue delay in filing application for revocation and also in approaching it has also been viewed adversely by the Court. The recent so-called amnesty scheme covers only those whose registration was cancelled for which the period for filing application seeking revocation is during the pandemic period and does not cover those whose registration was cancelled in 2019 [2021-VIL-630-KER].

Hostel is not a residential dwelling but exemption available if charges below specified limit

Two entries are available in the exemption Notification No. 12/2017-Central Tax (Rate) - one in respect of renting of residential dwelling for use as residence and another for supply of accommodation service where declared tariff is less than Rs. 1000 per day. In these cases, GST is exempt. The applicant runs commercial coaching centre and provides hostel facilities to students on optional basis. Though the amount is collected on lumpsum basis for the full year, per day rent or charge comes to Rs. 95. Therefore, the Authority for Advance Rulings (AAR) has held that exemption would be admissible under this entry based on per day charges.

Residential dwelling has not been defined in the notification and therefore, AAR has adopted common parlance test. It noted that guests are not allowed to stay in the hostel and such hostel is without any kitchen and the same is meant for temporary purpose only whereas in the case of residential dwelling, generally restriction regarding stay of family members or guests is not placed and the residents can prepare own food in the kitchen and anyone can visit them as well. As these features are absent, hostel is not a "residential dwelling", as per the ruling.

Exemption has been held as available under the other entry relating to accommodation service supplied by hotels, guest houses, etc., by interpreting the expression "by whatever name called" as covering hostel also. An important caveat in this ruling is that the AAR has stated that hostel fees is not part of package of commercial coaching and hostel facility itself is optional. It appears that if the fact has been different, the ruling might have ventured into mixed supply and composite supply placing the applicant in a difficult situation [2021-VIL-343-AAR]

TDS under Income Tax law is not a consideration and not liable to service tax

CESTAT has held that activity of deducting tax at source is an obligation under Income Tax Act, 1961 and when the TDS amount is grossed up and borne by the assessee and the service provider receives only the actual consideration agreed between parties, the TDS amount cannot be included in the taxable value. The case pertained to import of services and the appellant before Tribunal was otherwise liable as service recipient. Though the Tribunal has relied on earlier decisions on this issue, it has given certain independent views as well.

According to the order, deducting the tax at source, being a legal obligation, the amount so deducted cannot be taken as consideration for services rendered and the amount on which the parties have reached a consensus ad idem can only be the consideration for the services. It noted that there is no agreement with regard to the amount of TDS to be deducted and it depends on direct tax law. It further holds that compliance with statutory provisions cannot be considered as rendering of service. The legal obligation to gross up the value under Section 195A of IT Act has also been highlighted.

This order has been passed under service tax law but has been mentioned in this column considering the relevance to GST. CBIC by Circular No. 76, which was amended by a Corrigendum later, clarified that TCS under Income Tax Act is not liable to be included while calculating taxable value for payment of GST. The reasoning given was that TCS would be treated as an interim levy not having the character of tax. CBIC should issue a circular providing similar clarification on non-inclusion of TDS under IT Act for GST purpose. For this purpose, Section 15 of CGST Act itself may need an amendment as all taxes, duties, cessses and fees are liable to be included in taxable value and the only exclusion is GST itself. On this issue, in the absence of statutory exclusion or departmental clarification, the practice is bound to be divergent [2021-VIL-412-CESTAT-CHE-ST]

(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))