Tax Vista Your weekly tax recap Edn. 130 - 12th Dec 2022 By Dr. G. Gokul Kishore

 

 

No GST on notice pay - Circular applicable retrospectively - HC orders refund

CBIC by Circular No. 178 dated 3-8-2022 clarified that forfeiture of salary or bond amount when the employee prematurely leaves the job is not liable to GST. This essentially means notice pay recovery is not liable to GST. The taxpayer sought refund of tax paid on such recoveries before issuance of this circular and argued that this circular is applicable retrospectively. The High Court agreed with the petitioner that such recovery (notice pay) will not attract GST and the circular is binding on the department. It further held that since the circular only clarifies the existing law, question of retrospectivity need not be considered, however, as per precedent judgment, such circular will be deemed as retrospectively applicable. It directed the authority to consider refund claim [2022-VIL-807-KER].

 

The above order should gladden the hearts of many taxpayers. The first question that is raised by taxpayers whenever a taxpayer-friendly clarification is issued or judgment is delivered pertains to whether it will be applicable for the past period and if yes, whether amount paid by them as tax will be available as refund. The above order should be helpful for placing reliance and claiming refund though the same is by Kerala High Court. It is unlikely that the authorities will ignore such circular and judgment but ruling out refund on the ground of unjust enrichment or other grounds is possible, as always.

 

Demanding tax and imposing penalty under Section 129 not valid when option to pay specified penalty not exercised

It is quite common to see GST authorities demanding tax and imposing penalty when proceedings are initiated after detention of vehicle and goods for e-way bill related issues converting such proceedings into regular adjudication proceedings. Detention / seizure proceedings are under Section 129 of CGST Act which provides an option to pay the penalty to seek release of detained / seized goods / vehicle. Allahabad High Court has held that determination of tax liability and imposition of penalty under Section 129 alone is not sustainable as Section 129 does not provide for the same. Determination of tax due can be done only under Section 73 or 74. In the case before it, since the entire proceedings were initiated only under Section 129, the impugned orders were set aside by the Court. It directed refund of the amount paid by the taxpayer for release of goods. In this case, the department had issued show cause notice before release of goods under Section 129 and order confirming the demand was passed based on such SCN. The taxpayer had also argued that determination of penalty has to be made under Section 122 which was not made in this case [2022-VIL-805-ALH].

 

Making provisional attachment as eternal attachment, cancelling registration without hearing the taxpayer, converting detention into regular adjudication proceedings, initiating recovery process without adjudication, etc., are the usual modus operandi of tax administration. Few of the unfortunate taxpayers afford to incur legal expenses in pursuing writ remedy while others suffer in silence.

 

Risky exporter tag - High Court expresses displeasure over delay in considering representation

Many exporters suffer because of wrong application of instructions relating to branding them as risky and then freezing all export benefits like refund of ITC, drawback, etc. Though CBIC instructions provide for verification process and time-lines, they are more observed in breach as usual. In a case of this nature, the taxpayer was aggrieved over delay in completing investigation and denial of export benefits or export clearances getting delayed. The High Court noted that risky exporter tag cannot be indefinitely put and for this reason, CBIC had prescribed strict timelines and it provided for escalation matrix also. It held that such timelines have been ignored in the case before it and representation by the taxpayer was not considered. According to it, perpetual affixing of the risky exporter tag means interfering with the right to carry on business based on suspicion. The Court directed the department to consider the representation and pass order on merits [2022-VIL-797-CAL].

 

Though CBIC has reportedly issued instructions in the last week of November on this issue, the situation on the ground is pathetic. Small-scale exporters run from pillar to post - to Customs, to jurisdictional GST officers, etc., and get the answer that the system does not show anything. In a few cases, the departmental officers themselves advise the taxpayers to write directly to CBIC or go to High Court. There should be a serious review of the system and process of terming persons as risky exporters and the adverse effect it has on genuine exporters also.

 

State Legislature competent to enact Section 174(2) of State GST Act

An eloquent judgment on validity of Section 174 of CGST Act / Kerala GST Act and the issues relating to repeal and savings has been reported by VIL last week. The order is consequent to writ appeal upholding the order of Single Judge Bench. VAT notices were challenged by dealers on the ground that the State Legislature lacked legislative competence to enact Section 174(2). The Court further framed the question as whether Section 174(2) confers a right or a vested right or accrued right to reopen assessments for enforcing the legal obligation/liability arising before 16-9-2016 or not.

 

Interpreting Section 19 of Constitution Amendment Act, the Court held -" The Section permits State laws inconsistent with the amended provision to be in force only for one year. With the completion of one year, the power to levy tax on the supply of goods or services or both is traceable to Article 246A of the Constitution. The other implication of Section 19 on a plain interpretation is that the Section calls upon the State legislatures to amend or repeal laws inconsistent with the amended Articles through CAA 2016. To amend or repeal inconsistent laws provided by the Parliament presupposes that such amendment or repeal again, as has been held by the Gujarat High Court in the Reliance Industries Ltd, is in the competence enjoined on the State legislature by Section 19. The limitation is that the legislative measure taken by the State legislature must not, in any way, beyond 16.09.2017, revive or continue to levy tax on the sale or purchase of goods or any other indirect tax that the State legislature was empowered to enact under pre-amended Entry 54 read with Article 246 of the Constitution. There is, however, no prohibition under Section 19 of CAA 2016 to effect repeal in such a way as to save past rights, obligations and transactions arising under the VAT regime."

 

The Court held that the State Legislature is competent to enact Section 174(2) and the clauses in Section 174(2) are within the competence of the State Legislature. It further held that rolling over to the GST regime does not automatically liquidate the obligations fastened on the dealers and rights and functions conferred on the machinery to enforce the obligation or liability the KVAT Act. The order holds that migration to GST is not an amnesty given to defaulting dealers from paying the tax due under the KVAT Act [2022-VIL-806-KER]. Similar challenge in other High Courts has not been successful and the present order also follows the same. It will be prudent to contest the notices on merits instead of engaging in grand arguments of legislative competence and constitutional validity of provisions.

 

Cancellation of registration on verification without taxpayer being present, is not valid

Physical verification of premises is one of the new weapons in the hands of tax administration in the GST regime. Rule 25 of CGST Rules requires presence of the taxpayer in the premises when such verification is undertaken and uploading of verification report along with documents including photos taken at the spot. But this is only a rule which need not necessarily be followed. Therefore, registration was cancelled on the ground that business was not carried out in the premises covered under GST registration. Neither taxpayer was present during verification nor photos were taken. The High Court set aside the impugned notice and order [2022-VIL-796-DEL]. A similar order was discussed briefly in Tax Vista dated 21-11-2022. The department routinely conducts training programmes and the lessons learnt during such training do not travel beyond the lecture hall.

 

High sea sale - Can there be a service on high sea sale?

High sea sale is not liable to GST as per amended Schedule III of CGST Act. The buyer in such high sea sales who will eventually import the goods into India will be liable to pay applicable IGST. There can hardly be any doubt on such transaction but for unknown reasons, the taxpayer sought advance ruling. The Authority for Advance Ruling (AAR) had rejected the application on the ground that such question would involve determination of place of supply which is outside the jurisdiction of AAR. However, on appeal, the Appellate AAR has held that the question does not involve place of supply and the same can be covered under advance ruling. It noted the amendment to Schedule-III to exclude expressly high sea sale transactions from GST. However, after analysing the contract / agreement, it concluded that there were many clauses in the agreement on provision of services subsequent to import. It then held that high sea sale is not treated as supply of goods but supply of services in relation to such sale will be treated as supply liable to GST as the entry in Schedule III covers only supply of goods and not services [2022-VIL-93-AAAR].

 

If the person making high sea sale is providing services after importation, it will be liable to GST and the terms of the agreement in the above case also tell the same. Provision of services at the time of high sea sale can hardly be imagined. It is not clear as to what the AAAR intended to convey by holding that supply of services relating to high sea sale will be liable to GST. There is no bar in law that the seller of a high sea sale transaction should not provide services at a later stage after the goods have been imported and cleared for home consumption. Answering question which is not before the AAAR has resulted in such avoidable confusion.

 

Reimbursement of expenses on actuals to employees not liable to GST

Right from Model GST law days, one question which begs for an answer is - whether reimbursement of expenses incurred by employee while undertaking employment related activities like travel, hotel stay, use of cab, use of mobile phone, stationery, etc., is liable to GST. The answer is not one - depending upon which side one is - whether on the side of the department or the taxpayer, it differs. A taxpayer thought it fit to seek advance ruling on such questions including whether reverse charge is applicable when whole-time director is given reimbursement of expenses. The AAR noted that invoices are received in company's name and GSTIN. The AAR relied on Schedule III of CGST Act and held that the amount reimbursed to the employee would not amount to consideration for the supplies received as the services of the employee to his employer in the course of his employment is not a supply of goods or supply of services and hence the same is not liable to GST. Relying on CBIC Circular No. 140 dated 10-6-2020, the AAR has held that reverse charge mechanism is not applicable on reimbursement of expenses on actuals, to whole-time director who is also an employee of the company [2022-VIL-303-AAR].

 

A common business practice does not have a straight forward answer in GST law. Because the employee pays first for the goods or services received and later gets reimbursement, the transaction becomes layered. Exclusion of expenses incurred as pure agent is statutorily provided but the same is not applicable to such cases. Instead of such issues impacting almost everyone in the industry being clarified through circulars, it may be helpful if some of them are codified - made part of law. The rules can well be amended to provide for exclusion of reimbursement of expenses incurred on actuals when they are incurred by employees on the job.

 

Repatriation of money to parent company - Indian arm liable to tax for support received

Taxpayers sometimes argue something which cannot be an argument at all. The applicant, an Indian arm of Swedish parent company is engaged in providing project management consultancy to municipal corporation. The Indian entity was incorporated by Swedish parent company to comply with tender conditions as per the advance ruling. It argued that it does not receive any service from Swedish parent and it does not have any expertise and the contract was awarded based on the experience and credentials of Swedish company. Based on such argument, the applicant was of the view that the money transferred to Swedish company was not for any services and therefore, there was no import of services attracting GST under reverse charge. The AAR said that without transfer of expertise from Sweden to the applicant, execution of the project is not possible and the statements made by the applicant were contradictory. It highlighted the various activities performed / services provided by the applicant who is supported by Swedish entity and without receiving such support services from Sweden, the applicant cannot perform such services. It held that it is for such receipt of services, money is sent to Swedish entity and therefore, the applicant is liable to GST for import of services under RCM [2022-VIL-305-AAR].

 

There are several rulings where similar arguments as above have been taken. The fact that the Indian company is present in the transaction chain and the fact that money is received and sent abroad speak more about the role of the Indian entity. In terms of business realities, it may be a fact that the foreign company is the de facto supplier of services but de jure it is not. This goes against the taxpayers in such cases.

 

 

(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 edits R.K. Jain's GST Law Manual. E-mail - gokulkishore@gmail.com)