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Tax Vista Your weekly tax recap Edn. 103 - 6th June 2022 By Dr. G. Gokul Kishore |
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Investigation in progress is not sufficient to freeze ITC
Orders passed under Rule 86A of CGST Rules continue unabated. Freezing of credit ledger / barring use of ITC during pendency of proceedings is draconian. However, such orders are passed without proper due diligence, as it appears from a recent order. The reason for invoking Rule 86A in this case is investigations initiated against supplier of the taxpayer on the alleged ground of passing input tax credit in a fraudulent manner. The High Court held that merely because some investigation is in progress, action under Rule 86A which is drastic and far-reaching, is not sustainable. Further, independent application of mind with reasons to believe is required and the order should contain reasons which cannot be supplied through additional affidavits. Finding no reason in the order on ITC freeze in so far petitioner is concerned, the Court set aside the order [2022-VIL-378-P&H].
The facts in this case are not very clear. The amounts mentioned as ITC are substantial. If there is prima facie evidence to link petitioner to the alleged fraud, then the department should have presented the same before the Court. At least such move would have convinced the Court of the gravity of the issue. Passing orders on debit freeze without application of mind or without records showing availability of some material is not new but effective presentation on involvement of petitioner might have resulted in a different outcome.
Detention of goods and vehicle - Allahabad High Court directs department to inform taxpayers on filing of appeal
A rather complicated legal question has been resolved by Allahabad High Court but it may raise eyebrows of many. In the past, against detention orders, the High Court had passed interim orders in several cases proving relief to the taxpayers. The department went to Supreme Court and the Apex Court did not take kindly of the manner of disposal by the High Court and passed order under Article 142 of the Constitution to dispose all pending petitions before the High Court [2019-VIL-39-SC]. The Supreme Court emphasized on completion of statutory formalities for release of goods like furnishing of security / bond, etc. One of the parties affected by such order, appealed to the Appellate Authority after all such courtroom battles which was dismissed as time-barred. Against this order, the taxpayer was before the High Court again. The Court noted that when the Supreme Court dismissed appeals en masse, the petitioner was not heard and they were not aware of such order. It held that the intention of the Apex Court was not to render taxpayers remediless or take away their right of appeal. It directed the Appellate Authority to consider the appeal without raising objection as to limitation.
This order is important because the High Court has directed the department to issue notices to all the taxpayers impacted by Apex Court order and give them opportunity to file appeal. It is not clear whether the department will accept such interpretation of the Supreme Court's order and refrain from further contesting the same [2022-VIL-375-ALH].
Donation collected from outgoing resident by housing society is liable to GST
Housing societies, in certain areas, collect an amount when a member / resident sells his flat and this is termed as gratuitous payment to indicate that the same is given as donation for general welfare and the same is voluntary. This means there is no quid pro quo and the same is not meant for any particular service by the society to the outgoing member. This was the issue before Authority for Advance Ruling (AAR) - whether such gratuitous payment is liable to GST. The society argued that besides absence of any supply of service, such collection is not related to formalities like issuance of NOC to the seller of the flat.
The AAR, in an interesting detour, has examined the model bye-laws which restricts collection of any amount towards donation or contribution or under any other pretext from the transferor or transferee. Taking note of this, the ruling holds that society cannot accept such gratuitous payment at all and such amount cannot be considered as voluntary donation. It held that such payment is treatable as consideration for the services rendered by the society to such outgoing member during his stay in the premises. It further reasoned that a different view could be taken if such donations are collected from outsiders also which is not the case. It also took into account the fact that such payment is made by all the transferors without any exception. The amounts are to be used for major repairs to be carried out in future as per the affidavit submitted by the society. Relying on income tax jurisprudence, the AAR has held that though collection of such amount may be illegal under some other law, it would be liable to GST as the ingredients of supply are satisfied [2022-VIL-153-AAR].
It is a fact that in most cases, such payments are compulsory and the same is collected when NOC is issued. The amounts are also sometimes negotiated. While all the amounts collected by housing society are meant for welfare - repair and maintenance or improving infrastructure or facilities, nomenclature of some of these amounts as donation does not change the actual character. Many taxpayers raise the query as to whether tax is not payable if the amount or activity is called by a name which denotes absence of liability. Such adventure is not legally sound since the settled law is that if liability is otherwise absent, the same cannot be fastened only because of a particular nomenclature.
Insurance ombudsman is liable to GST for funds received from insurers
Insurance Ombudsman is the grievance resolution machinery in so far as insurance sector is concerned. The office of such ombudsman is maintained using the funds received from insurance companies and not complainants. This body was before AAR seeking clarify on tax liability under GST and it argued that it is a quasi-judicial body and the activities are not commercial in nature. The AAR has held that the body decides based on complaints filed by those having grievance against insurer and the same would be a supply and further it would be supply of service. Insurance companies are also party to such disputes and they can be said to be availing the services of such ombudsman. Though fees are not received from complainants, funds are received from insurers and therefore, the same would amount to consideration. Definition of consideration including payment by any person other than recipient has been relied on. Definition of business is wide and activities without pecuniary benefit are also covered under the same and hence, the test of providing service in the course or furtherance of business as per supply definition stands satisfied. As there is no exemption granted for this particular activity, the AAR has held that the amounts received by the ombudsman will be liable to GST [2022-VIL-154-AAR].
Considering the status of the body and nature of functions, the GST Council may recommend exemption to such body in future. Absence of exemption appears to be a lacuna and the typical belief as to absence of liability to dispute settlement bodies appears to be reason for rushing to AAR for a ruling. The body should have approached GST Council directly instead of AAR. Even dispute settlement bodies need proper advice on whether they have immunity from taxation or not.
Exemption to residential renting - Inventing illogical grounds
Renting of residential dwelling for use as residence is a service which is exempted from GST under Notification No. 12/2017-Central Tax (Rate). Companies take on lease residential flats for use by its employees. These are too obvious but admissibility of such exemption is doubted by the GST authorities. The apartments were taken on lease by an insurance major for use as residence (quarters) by staff members. The AAR has held that exemption would be admissible and the argument to deny exemption advanced by the department "defies all logic". The department had argued that such residential flats help in employee to sit late in office thus increasing productivity and profit of the company and therefore, there is a commercial angle involved. It requires extraordinary brilliance to invent such grounds. The AAR has noted that it is the purpose for which the property is put to use which is relevant and the exemption is qua the supply of service and not the recipient [2022-VIL-155-AAR].
Lack of jurisdiction - Customs blunder continues
A strange case of alleged smuggling has been reported by VIL last week. The case is strange because the person who came from abroad was not intercepted or detained in the airport (in Ahmedabad) but in Jaipur where he arrived by train subsequently. The person was initially caught by police officers and then handed over to customs officers in Jaipur. Relying on precedent judgments, the CESTAT held that the preventive officers in Jaipur did not have jurisdiction to conduct proceedings as the same was with the Customs officers in Ahmedabad. Further, it held that seizure by police and then shifting of possession to customs officers is not a valid seizure. Based on such grounds, the appeal by the individual has been allowed and the confiscated goods have been ordered to be returned [2022-VIL-388-CESTAT-DEL-CU]. This order is mentioned in this column to highlight the manner in which tax department is losing only because of procedural issues like jurisdiction whether it is by DRI or Audit officers or in this case by Preventive officers of another Commissionerate. After decades of administrating tax laws, being caught on the wrong side based on such trivial grounds does not bring any laurel to the department or CBIC.
(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)