Tax Vista Your weekly tax recap Edn. 106 - 27th June 2022 By Dr. G. Gokul Kishore

 

 

Section 7 on supply under GST is constitutionally valid

Section 7 of CGST Act / UPGST Act was challenged recently as ultra vires the Constitution to the extent it includes sale within the scope of supply. The petitioner argued that Article 246A of the Constitution does not confer power to impose tax on sale of goods and enactment of Section 7 lacked legislative competence. It was further argued that the word "supply" does not mean sale and therefore, sale could not fall within the meaning of the word "supply". The High Court did not accept the arguments and held the provision as valid after taking note of various provisions. It relied on the judgments of Supreme Court in Mohit Minerals [2018-VIL-27-SC] wherein 101st Amendment to the Constitution to bring GST including the Statement of Objects and Reasons were considered to hold that "with respect to" used in Article 246A are words of expansion. It held that scope of supply as provided in Section 7 which includes sale is within the legislative powers of the Parliament conferred under Article 246A. The High Court took note of the recent judgment in Mohit Minerals also [2022-VIL-30-SC]. It also opted to rely on the presumption in favour of constitutional validity [2022-VIL-425-ALH].

 

In the backdrop of at least three landmark judgments of the Apex Court now wherein various provisions of GST law have been subjected to elaborate analysis and in view of the presumption on constitutional validity, such plea requires extraordinary grounds to be taken seriously. In this case, it appears that the taxpayer was apparently unhappy with certain proceedings and therefore, along with the challenge to the same, vires has also been assailed.

 

Demand based on mismatch between GSTR-2A and GSTR-3B - High Court rejects petition

A very relevant issue affecting large number of taxpayers was brought before Madras High Court recently but the same was not decided on merits on the ground of existence of alternate remedy of appeal. The petitioner was directed to file appeal before appellate authority. The issue was the typical demand of the tax department seeking reversal of input tax credit on the ground of mismatch between GSTR-2A and GSTR-3B return. The High Court noted the provisions relating to mis-match, correction by recipient in GSTR-1A and acceptance by supplier. These are provisions which never came into force and have been eventually omitted as well. In this case, the allegation was that ITC was availed based on certain invoices which are not declared in GSTR-1 by supplier and therefore, not reflecting in GSTR-2A at the end of the recipient-petitioner while credit claimed in GSTR-3B was more. Circulars and press releases relied on by the petitioner have not been accepted by the High Court. The government had sought to reassure the industry that GSTR-2A is in the nature of facilitation only and credit availment can be based on reconciliation between the returns at a later date. This was half-hearted and the same could not save the taxpayers. During the relevant period, GSTR-2A was not statutorily prescribed. When non-statutory requirements are camouflaged as statutory and demands are raised, it is the Constitutional Courts which are perceived as the saviour to quash such illegal demands [2022-VIL-421-MAD].

 

NAA holds Rs. 186 crores as profiteered by FMCG major

National Anti-profiteering Authority (NAA) has held the FMCG major involved in manufacture and sale of shampoo, hair colour, skin cream, make-up items and luxury products has profiteered by Rs. 186 crores by not reducing the sale price of its products consequent to GST rate reduction from 28% to 18% with effect from 15-11-2017. The investigation involved 12000 SKUs (stock keeping units) involving 55 lakh transactions. The taxpayer contended that benefit amounting to Rs. 276 crores was passed on which is more than the amount of Rs. 186 crores alleged as profiteered which was originally pegged at Rs. 216 crores. Time-limits as prescribed was contended by the taxpayer as not followed but the NAA held that it was competent to order further investigation based on reasonable grounds and the consequential report of DGAP would be considered as fresh report and the NAA would have six months time-limit afresh / again. It also held that such time-limit is directory and not mandatory since consequence for failure to adhere to the same has not been provided.

 

The methodology to compute profiteered amount has been justified by NAA on the ground that method was not required to be prescribed as the taxpayer is required to only maintain the same base price after rate reduction also and the rate of tax alone is required to be changed in the billing software. It held that when the taxpayer could change entries to increase base price after GST rate reduction, the above could have been easily done. As in similar orders, NAA has held that revised MRP stickers were required to be affixed as per Legal Metrology (Packaged Commodities) Rules, 2011 but the same was not done. It reiterated that reduction in price is the only method to pass on the benefit of tax rate reduction under Section 171. Such benefit is to be passed on to each and every buyer and cannot be passed on at the entity level or HSN level. It rejected the argument on taking into account cost factors while revising prices. In the absence of any statutory provision on period of investigation, the NAA has held that it can order investigation till the time the prices are reduced after GST rate reduction.

 

Comparison of average price during pre-rate reduction period with actual price after rate reduction was assailed by the taxpayer but this was also not accepted. Price reduction through post supply discounts by issuing credit notes to distributors has been discarded by NAA holding that they relate to sales promotion schemes / discounts and there was no correlation between such schemes and GST rate reduction. Invoices raised by distributors for services rendered for sales promotion were held against the taxpayer. Increase in grammage / quantity after GST rate reduction has been held as not acceptable since the products are not sold by weight or volume and further, such grammage increase is not equivalent or similar to commensurate reduction in price as prescribed under Section 171. While the taxpayer had contended that they had increased the quantity more than what is required, the NAA has observed that no reason was adduced for the same and the reason appeared to be the demand in the market and not GST rate reduction benefit. Additional GST on the excess base price has also been demanded though such GST is paid to the exchequer. Zeroing / netting off whereby excess benefit passed on in some SKUs is adjusted against certain other SKUs has been held as against Section 171.

 

While the validity of the provisions relating to anti-profiteering are under challenge, absence of methodology is something which the NAA has been consistently holding as not required even while demanding huge amounts and rejecting all the contentions of the taxpayers. It is also surprising that NAA has held that Section 171 and the rules are constitutional while it has no jurisdiction to determine such validity. As the period of investigation in the above case was till 2018, the NAA has directed DGAP to examine whether rate reduction benefit was passed on after such date and if not, amount of profiteering is required to be quantified. This means companies may not be able to increase prices eternally or they have to reduce to comply with the anti-profiteering provision as interpreted by NAA and then increase after a few months taking cost factors into account [2022-VIL-07-NAA].

 

Investigation by GST authorities - HC refuses to interfere

Investigation by tax authorities by conducting search in taxpayer's premises is an emotional affair. The taxpayer gets incensed over the suspicion and intrusion into their routine business activities. The tax authorities have all the powers under the law and objections from taxpayers are seen as a routine reaction only to be brushed aside. Some of the taxpayers challenge such action in High Court which in most cases yield result not in their favour as Constitutional Courts generally refrain from interfering with investigations unless the same is prejudiced and coercive measures are used. A taxpayer met with similar fate by assailing search operation. During such operation, it appears that witnesses were present while drawing panchnama / mahazar and around Rs. 38 lakhs was paid on the spot. But, before the High Court, the taxpayer argued that witnesses were not present and sought direction to re-measure the stock. The High Court on going through the panchnama noted that signature of independent witnesses has been appended along with a relative of the taxpayer. It also said that if stock is re-measured, quantity may not remain the same and such plea was an after-thought. It rejected the petition [2022-VIL-413-MP].

 

It is not clear why the taxpayer argued that witnesses were not present. Generally, the witnesses are not really independent since two unknown persons on the street are simply asked to be present and signatures are obtained. These witnesses are not found when cross-examination is sought at a later stage. Secondly, amount paid on the spot, though written as voluntary in the panchnama, could have been obtained by gentle pressure. It appears that in this case, the taxpayer had some issue regarding compliance and therefore, the department was relatively successful.

 

Orders without SCN - High Court quashes and directs fresh notice

In this column, almost every week, the need to train SGST Officers on issuance of show cause notice, conducting personal hearing, appreciating evidence and issuing reasoned adjudication order, is stressed. In several cases, orders are passed without issuing show cause notice as per Section 73 / Section 74 of CGST Act / relevant SGST Act. This compels taxpayers to approach the High Court only to get the proceedings quashed and the issue is back to square one. In a typical case of this nature, upto DRC-01A, the department had patience. The representative of taxpayer also appeared and explained their side of the story. The officers probably misunderstood this as the personal hearing, did not issue show cause notice as per the provisions but went on to pass adjudication / assessment order. Further, directions were also issued to bank for recovery of dues under Section 79. The High Court quashed the assessment orders and directed the GST authorities to issue proper SCN and pass orders after affording reasonable opportunity to taxpayer to defend themselves [2022-VIL-422-MAD]. While violation of principles of natural justice is not something new to the tax department, the fact that a vast majority is ignorant of the same needs to be addressed on priority.

 

DRI officers are proper officers for issuance of SCN

Officers of Directorate of Revenue Intelligence (DRI) are not "proper officers" to issue show cause notice under Section 28 of Customs Act, 1962 - this is the ruling of the Supreme Court in Canon India [2021-VIL-34-SC-CU]. Review petition filed against such order is pending before the Apex Court. This year, law has been amended by Finance Act, 2022 to cure the defects pointed out by the Apex Court and to make such officers proper officers and it is learnt that vires of such amendments is also under challenge. Taking note of these amendments, the Madras High Court has held that challenge to show cause notices issued, and orders passed by, DRI officers on the ground that such officers are not "proper officers" vested with such powers, is not sustainable. The Court noted that attention of the Supreme Court appears to have not been brought to Section 4 of the Customs Act and the notification issued thereunder whereby DRI officers have already been appointed as "Officer of Customs" and it is the "Officers of Customs" who are appointed as "proper officers". It also said -"the fundamental changes brought to the manner of the assessment under the Customs Act, 1962 with effect from 08.04.2011 appear to have not been brought to the attention of the Hon'ble Supreme Court and therefore the assumption in the paragraph Nos.12 to 15 in the case of Canon India Private Limited Vs. Commissioner of Customs, may require a re-consideration insofar as pending cases before the Hon'ble Supreme Court and other Courts." [2022-VIL-411-MAD-CU].

 

This issue revolves around an apparent error in conferment of powers on officers. The issue rages with almost all the Courts being flooded with litigation on this issue - whether after the judgment in 2011 or in 2022 or post amendments by Finance Act, 2022. The only beneficiaries are practitioners as otherwise, the government will always have the last laugh.

 

Education cesses taken through TRAN-1 but reversed - Refund admissible

CESTAT has been consistently taking the stand that refund of Education Cess, Secondary & Higher Education Cess and Krishi Kalyan Cess is permissible. VIL has reported yet another order of the Tribunal last week wherein following the earlier decisions, appeal by the taxpayer has been allowed which was filed against orders rejecting refund of such cesses. In this case, the taxpayer had transitioned the credit balance of cesses through TRAN-1 but later reversed the same owing to objection by the GST authorities. Consequent to Madras High Court decision in Sutherland Global Services [2019-VIL-536-MAD], refund claim for such cesses was filed [2022-VIL-447-CESTAT-CHE-ST].

 

It is highly unlikely that the department will not file appeal against such orders and such litigation is likely to continue upto the Supreme Court. The government's only objective is maximization of revenue and therefore, according to tax administration, imposing cess is fine but credit or refund of the same cannot be permitted. Taxpayers may argue that provision for lapsing the credit is absent in the statute, tax credit is a vested right, credit cannot be taken away without statutory backing, etc. But taxpayers can only get those benefits which the government wants them to enjoy - as to what are those benefits or who can enjoy or when or how it can be taken back - it is the tax administration which decides.

 

Affiliation and renting services by Universities are also exempted from Service Tax

In yet another order following its own earlier decision, the Madras High Court has held that Universities rendering affiliation services and also renting of immovable property are also covered under the exemption relating to education services. The department argued that appeal has been filed against the relied on decision but the High Court proceeded to allow the appeals filed by the Universities in this case. The impugned notices and orders demanding service tax were set aside. Renting of immovable property to banks, post office, canteen, etc., was contended as not related to education but the High Court noted that the exemption covers services provided not only to students but also faculty and staff and these are allied services related to educational activities undertaken by the Universities and therefore, exemption would be admissible for renting as well [2022-VIL-418-MAD-ST].

 

The case booked by DGCEI cannot be said as weak but the judiciary has been adopting liberal interpretation when it comes to laws or provisions relating to education. As noted before in this column, the entry under service tax continues in GST regime also and therefore, all these service tax disputes are likely to be re-enacted under GST also. A mature tax administration takes cue and takes appropriate steps to contain such repetitive litigation. Whether Indian tax administration has such a maturity can be said only based on future developments.

 

TCS not includible in assessable value for excise duty payment

Another potential litigation area is inclusion of TCS (tax collected at source) collected and paid under Income Tax Act, in the taxable value. In an excise case, CESTAT has held that TCS is a tax collected from buyer of scrap (in this case, scrap was involved) and deposited with the government and as per Section 4 of Central Excise Act, 1944, tax is not includible in assessable value. Further the department had relied on Rule 6 of Central Excise Valuation Rules and the Tribunal held that only additional consideration flowing from buyer to seller can be included in the assessable value whereas in this case, TCS is not an additional consideration but it is a tax deposited with the income tax department [2022-VIL-453-CESTAT-AHM-CE].

 

From the earlier regime to the present day GST regime, inclusion or exclusion of TDS and TCS from taxable value has been a grey area. A circular issued by either CBDT or CBEC talks about it but the law is ambiguous. In particular, Section 15 of CGST Act expressly seeks to include all taxes other than GST. Nothing can be more avaricious than collecting tax on tax. CBIC and GST Council Secretariat should consider amending Section 15 before unnecessary litigation proliferates.

 

 

(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)