Tax Vista Your weekly tax recap Edn. 112 - 8th Aug 2022 By Dr. G. Gokul Kishore

 

 

Liquidated damages are not liable to GST - CBIC clarifies

Liquidated damages are not liable to GST. CBIC has issued Circular No. 178/10/2022-GST dated 3-8-2022 clarifying that where such damages are paid as an amount to compensate for injury, loss or damage suffered by one of the parties due to breach of contract and where there is no express or implied agreement to refrain from or tolerate an act or do anything for the party paying such LD, then such amount is mere flow of money. This is not consideration as per GST law and therefore, not subject to GST. The circular is taxpayer friendly if it is interpreted in the right spirit. The issue has been subject of litigation from service tax period and when it is about to balloon into big dispute in GST regime, this clarification has been issued and it may contain the same to an extent. Many taxpayers have adopted conservative approach and paid GST on LD which are nomenclatured differently like penalty, compensation, etc. Practitioners and industry have been arguing that damages are part of conditions of contract and the same is different from consideration for the contract and there is no agreement to breach the contract or default in supplying goods or services. This view has been now accepted by the department through this circular.

 

The circular cites examples for damages which are not liable to GST - damages resulting from damage to property, negligence, piracy, unauthorized use of trade name, copyright and penalty stipulated in contract for delay in providing supply. Forfeiture of earnest money deposit (EMD) has also been clarified as not subject to GST.

 

A short coming in this circular is that it harps on the entry in Schedule - II of CGST Act relating to agreeing to the obligation to tolerate an act and it confines itself to characterizing damages as not consideration. Schedule-II merely categorises transactions as supply of goods or supply of services and it cannot cast liability if the same is otherwise absent. Consideration is one of the prerequisites for an activity to be treated as supply. The primary question as to the activity not being supply under GST law has not been unequivocally answered. It, however provides some ammunition to the department by holding that if payments constitute consideration for another independent contract on tolerating an act or situation or refraining from doing any act or situation or doing an act, then it would be supply (and liable to GST).

 

The circular further arms the authorities by taking the position that the amount paid for late payment, early termination of lease or for pre-payment of loan or amounts forfeited on cancellation of service by the customer, constitute consideration. This is for the supply of a facility - acceptance of late payment, early termination of lease agreement, pre-payment of loan and making arrangements for the intended supply, etc. The circular goes off the track by holding such payments as towards ancillary supply to the principal supply for which contract has been entered. Similar view has been adopted for surcharge or late fee collected for any supply. Late fee or penalty for delay in payment of consideration is includible in taxable value as per Section 15 of CGST Act and by bracketing such late fee with pre-closure penalty, the circular treads the familiar path of confusion.

 

Compensation paid by government to allottees of coal blocks which were cancelled by order of the Supreme Court has also been clarified as not liable to GST. This is liable to be interpreted as amounts paid based on orders of the court are not subject to GST. Cheque dishonour fine / penalty and penalty imposed for violation of law will not attract GST, as per the circular. Amounts recovered by employer whereby employee forfeits salary or bond amount due to premature resignation in violation of employment terms will also not attract GST. The circular avoids use of the words "notice pay" and therefore, GST authorities are likely to argue that this circular is not applicable to GST demand on notice pay.

 

A circular from tax administration cannot be completely taxpayer friendly. Cancellation fee or retention or forfeiture of part/ whole of the consideration will be liable to GST as the same is for "facilitation supply of allowing cancellation of intended supply". This needs to go through the scrutiny of judiciary. CBIC should contemplate use of better illustrations as the ones used in the initial portion of this circular are likely to be treated as humorous pieces.

 

GST rates & exemptions on certain goods / services - Circulars clarify

CBIC has issued two more circulars - No. 177/09/2022-GST dated 3-8-2022 clarifying the applicable GST rate and availability (or otherwise) of exemptions in respect of certain services and No. 179/11/2022-GST dated 3-8-2022 providing similar clarification in respect of goods as recommended by GST Council in its recent meeting. An important clarification pertains to sale of land after undertaking certain development activities like levelling, laying of drainage lines, water lines, electricity lines, etc. Sale of such developed land is also "sale of land" as mentioned in Schedule III of CGST Act and therefore, not liable to GST. If the developers receive such services from service providers, then they (these services - not sale of developed land) would attract GST. Another issue as to whether engagement of non-AC contract carriages by companies for transportation of employees to and from work is exempt, the circular clarifies that the relevant exemption entry will be applicable if passenger transportation services are provided over pre-determined route on pre-determined schedule. If the contract carriage is placed at the disposal of service recipient who is free to use as per his requirements, then exemption would not be available. It appears that CBIC intends to deny exemption in respect of the transportation facility provided by companies to employees though this could have been spelt out clearly.

 

Supreme Court seeks implementation of DIN system in all States

The Supreme Court has directed the Central Government / GST Council to issue advisory / recommendations to States to implement the system of Document Identification Number (DIN) to be used in all communication. This order was passed while considering a public interest litigation (PIL) which sought directions to States and GST Council to take steps to implement DIN for all communication sent by SGST Officers to taxpayers. Currently the system in CGST administration is in vogue as per instructions of CBIC and a few States like Karnataka and Kerala have also implemented the same. The Apex Court said that implementation of such system for electronic (digital) generation of DIN for all communication sent by SGST officers to taxpayers would be in larger public interest and enhance good governance as it will bring transparency and accountability in the indirect tax administration [2022-VIL-42-SC].

 

The requirement of mentioning the unique number (DIN) in all letters, summons, orders, etc., issued by the tax authorities is necessary. In several instances, registration is cancelled without notice and when taxpayer approaches the officer, the same is revoked after seeking certain favours. The entire exercise goes without any check by senior officers. Making DIN mandatory will at least ensure that there is a trail for pulling up the officer concerned, if the same is actuated by any mala fide or extraneous considerations.

 

Payment of tax to get goods released does not deprive right to appeal

Section 129 of CGST Act / respective SGST Act empowers the GST authorities to detain and seize goods and vehicle for alleged contravention of provisions as specified. Section 129(1)(a) provides that on payment of tax and specified quantum of penalty, the goods and vehicle may be provisionally released. Section 129(3) mandates that a notice specifying the tax and penalty amount shall be issued and thereafter, order shall be passed. Section 129(5) states that on payment of the amounts referred in Section 129(1), "all proceedings in respect of the notice" shall be deemed to be concluded. A taxpayer came forward and paid tax and penalty to get the detained goods released. Subsequently, no notice or order was issued. The taxpayer intended to file appeal but there was no order. Before the High Court, the department argued that once tax and penalty have been paid, proceedings are deemed as concluded as per Section 129(5).

 

The High Court did not agree. It held that Section 129(5) contemplates that the procedure for detention or seizure comes to an end and it is always open to the aggrieved person to challenge the proceedings. It said that Section 107 on appeals is widely worded and whether a person comes forward to pay certain amounts or not, the right to challenge such proceedings before appellate authority cannot be denied. The department, it appears, informed the Court that once such payments have been made, the system does not permit generation of notice / order for which the Court said that right to appeal cannot be deprived on such ground. The Court allowed the petition filed by the taxpayer and also instructed the State Government to issue circular so that such issues do not recur [2022-VIL-547-KER].

 

 It appears that the provisions are not worded better and require re-drafting. The intention could not be that if someone pays the prescribed amount for release of goods and then opts to litigate, he should not be allowed to litigate. While sub-section (5) of Section 129 seeks to put quietus to the dispute if there is a voluntary payment, it should be made subject to taxpayer's right to file appeal which is an independent statutory right. Getting goods released does not mean acceptance of the demand and opting to forego right to appeal.

 

Service tax not applicable on sale of canned software along with updates

Software coding is sometimes very challenging and tax on software will rival this challenge. The issue of levy of service tax on software when VAT has been paid has been decisively put to rest by the Supreme Court in a recent judgment. The assessee is a developer of anti-virus software and sales tax / VAT was paid on sale of CDs/ DVDs containing such software along with license code / key and the transaction included provision of updates as well. The department demanded service tax under IT software service. While the initial demand was around Rs. 62 crores, the adjudicating authority had confirmed Rs. 56 crores as service tax payable. The assessee appealed to the Tribunal and it allowed the same. One of the primary arguments centered around the software being non-interactive in nature. The Tribunal had relied on Supreme Court ruling in Tata Consultancy Services [2004-VIL-06-SC-LB] on canned software supplied in CDs would amount to sale of goods chargeable to VAT. It also took note of End User License Agreement (EULA) providing right to use the software and the conditions do not interfere with free enjoyment by licensee and right to use is deemed sale.

 

The department was before the Supreme Court assailing CESTAT's order. The Apex Court traced the jurisprudence, the provisions, the impugned order, EULA, etc., and held that once lumpsum amount has been charged for sale of CD and sales tax has been paid, there cannot be service tax levy again on the ground that updates are being provided. It held - "We are of the view that the artificial segregation of the transaction, as in the case on hand, into two parts is not tenable in law. It is, in substance, one transaction of sale of software and once it is accepted that the software put in the CD is "goods", then there cannot be any separate service element in the transaction. We are saying so because even otherwise the user is put in possession and full control of the software. It amounts to "deemed sale" which would not attract service tax." [2022-VIL-45-SC-ST]. Such issues may not arise in GST as Schedule-II categorizes development, design, etc., of IT software, temporary transfer or permitting the use or enjoyment of any IPR and transfer of right to use goods as supply of service.

 

Unjust enrichment as a tool of harassment

The general perception is that tax department harasses taxpayers. If there is any doubt, order reported by VIL last week on refund relating to Central Excise may be seen. For refund of around Rs. 6 lakhs, the taxpayer has been compelled to go through three rounds of litigation - first, on the issue as such, second time when consequential refund was rejected and third time when department invoked absolutely new ground to reject refund again. A senior officer of the rank of Principal Commissioner is stated as having reviewed the order sanctioning refund, finding fault with the same that unjust enrichment was not examined and directing department to file appeal. It appears that there is clear non-application of mind since such a new ground cannot be introduced in the third round of proceedings only because someone was suddenly innovative.

 

The Tribunal directed refund on the ground that the amount was paid during investigation which means under protest and the same was paid 5 years after the goods were cleared - the demand pertained to 2009-10 while the amount was paid in 2016 and hence, it is impossible to pass on duty burden. Unjust enrichment has been held as not applicable even otherwise when amount is paid under protest, following series of precedents. This case is highlighted in this column for two reasons - first, harassment by tax authorities continues and secondly, lack of due diligence by senior officers reviewing orders. The finding by Tribunal on unjust enrichment not being applicable when the amount has been paid 5 years after clearance of goods is noteworthy [2022-VIL-549-CESTAT-DEL-CE].

 

Sale of wig along with fitment services - Service tax not applicable  

Composite supplies involving both goods and services are evergreen - whether they pertain to pre-GST laws or GST law. On manufacture of wigs, Central Excise duty was paid and on sale, VAT was paid. The dispute arose because the petitioner was also engaged in providing service of hair replacement involving use of wig and incidental services and therefore, there was a demand from Service Tax authorities. The dominant nature of the transaction - is it sale or provision of service - was the question involved. The High Court held that without the wig, the transaction cannot happen and therefore, wig is the main component and fitment related services are incidental to it. It noted that purchase of wig without opting for fitment services was possible. The order is rather brief though the issue is weighty considering the jurisprudence on this subject. This case is related to service tax but the same can arise in GST regime also depending on the GST rate applicable to wig - if it attracts the same rate as services, then dispute may not arise. But, if an argument that hair replacement is part of health care services which is far-fetched, is raised, then the issue may become more interesting [2022-VIL-540-MAD-ST]

 

Handheld computers are classifiable as ADP machine under Heading 8471 and not as smartphones under Heading 8517

Classification of particular goods may not of interest to many. However, a recent Customs advance ruling on classification of hand-held computers / mobile computers / touch computers requires a mention. While the Customs Authority for Advance Rulings has accepted the arguments of the applicant and has held that these products having bar code reading / scanning facility are used in inventory management, stores, tracking packages, etc., and are classifiable as automatic data processing machines i.e. computers under heading 8471. It ruled out classification under heading 8517 relating to cellular phones / smartphones though they run based on mobile phone operating system. The confusion arose because some of these products have SIM card and they have supplementary features for voice communication as well though this is not the primary purpose for which the product is made. The advance ruling distinguishes the opinion of World Customs Organization (WCO) relating to RFID / barcode readers with mobile operating system capable of scanning and cellular connectivity being classifiable under heading 8517 as smartphones. The ruling has gone in favour of applicant in this case also because many of the products / models do not have SIM facility and do not have cellular network functionality. It appears that both WCO and CBIC lag when it comes to new technology and innovative products [2022-VIL-64-AAR-CU].

 

 

(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)