Tax Vista Your weekly tax recap Edn. 114 - 22nd Aug 2022 By Dr. G. Gokul Kishore

 

 

Government not obliged to specify correct HSN code and GST rate in tender

Indian Railways, operating through various zonal railways and production units, occupies a peculiar position as it is under the Railway Board which is part of Ministry of Railways under Government of India. "Peculiar" because it is engaged in commercial activities primarily in terms of freight operations while it works in public interest in so far as passenger transportation is concerned. It is considered as "State" and it is one of the largest purchasers of goods and services. As the procurement is through tender system, right from the day of implementation of GST, suppliers either based on bona fide belief or to somehow get the tender, started quoting mostly 5% GST rate for the goods. Some in the industry believed that either 28% or 18% rate would be applicable and such persons were naturally out of the race when the price offered could not match those adopting 5% GST. The matter reached the Supreme Court as the department appealed against High Court order which held that Railways should mention the applicable HSN (classification) code and GST rate when tenders are floated. The Apex Court held that the State i.e. Indian Railways as purchaser cannot be said to be under public duty to indicate HSN code and applicable GST rate in the tender floated by it because, as per GST law, it is the supplier who is liable to pay GST and file GST returns.

 

As per the tender conditions, bidder (supplier) is required to indicate rate of appliable duties and taxes which are included in prices quoted and Railways will not be liable for taxes and duties paid by supplier if the same is based on misclassification. This has been taken note of by the Apex Court in this judgment. It held that GST is an indirect tax and therefore, it is the responsibility of the supplier to quote the correct HSN code and corresponding GST rate. It said that Railways is not legally obliged to find out and specify correct HSN code and GST rate for goods to be purchased by it. The argument that Railways is required to ensure level playing field by quoting HSN code and GST rate for procurements was not accepted as the lowest bid can be rejected only based on reasons which are fair and legal. The top court also held that Railways cannot be compelled to undergo cumbersome procedure of seeking advance ruling for clarifying/classifying HSN code with GST authorities. The only relief that the respondent (supplier) got was the direction to forward copy of contract documents to concerned jurisdictional GST officers of successful bidder so as to prevent revenue loss by ensuring quoting of correct HSN code and tax rate.

 

Though this judgment pertains to a particular organization, a few take-aways can be highlighted. According to the Supreme Court, writ of mandamus cannot be issued to purchaser to get clarification on correct HSN code and applicable GST rate from GST authorities. It approved the High Court order in so far as scope of judicial review of contracts matters is concerned. The court cannot examine details of terms of contract unless they are wholly arbitrary, discriminatory or actuated by malice [2022-VIL-52-SC].

 

Proceedings initiated and order passed same day - High Court quashes orders 

Bureaucracy is generally charged with lethargy and inaction. But this stands disproved when it comes to detention of goods, passing order, etc., or cancelling registration under GST. In a particular case of rapid action, for alleged e-way bill expiry, the GST authorities detained the vehicle, issued show cause notice and passed adjudication order - all on the same day (20th September, 2021). One of the strange arguments taken by the department before the High Court was that the taxpayer paid all the amounts and proceedings were expedited on his request. The High Court noted that there is no evidence to prove such contention. It held that both the adjudication order and the appellate order suffered from procedural infirmities and proper opportunity was not provided to the taxpayer to defend himself. The orders were set aside and the department was permitted to decide afresh after providing opportunity to the taxpayer [2022-VIL-566-JHR].

 

Several orders discussed in this column before pertain to not issuing notice or passing order without hearing or issuing only summary of order without serving the actual adjudication order. But the above order is different as the entire proceedings have been commenced and completed on the same day. The cost of litigation thrust on the taxpayer should be recovered from the officers concerned. Otherwise, such practice will go undeterred. Further, CBIC should issue circular clarifying that payment of amounts to get the goods and vehicle released does not mean liabilities are accepted and order need not be issued. It should instruct officers to issue proper notice and order even if amounts are paid. There are contrary rulings on this issue and this should also be addressed by way of amendment as noted in Tax Vista dated 8th August, 2022.

 

Quantum of pre-deposit during writ proceedings - HC reduces

While admitting writ petition in tax matters, sometimes, High Courts direct payment of pre-deposit of certain amount or furnishing security to safeguard the interest of revenue. In an interim order, Single Judge Bench of High Court had directed deposit of 10% of demand amount. The taxpayers argued before Division Bench that as per Section 107 of CGST Act, for filing appeal before first appellate authority, pre-deposit required to be made is 10% of tax amount only and not on the entire demand amount. The Division Bench saw merit and modified the earlier order by directing 10% of tax amount as pre-deposit. One of the provisions that came before the Court was Rule 51 of the High Court Rules (Calcutta). As per this provision, if assessment is already completed, Court shall not stay realization of dues unless the taxpayer gives security as deemed sufficient by the Court. While this is within the discretionary realm of the High Court, the department argued that the Single Judge Bench had exercised such discretion and the same should not be disturbed. The Division Bench felt that while discretion has been rightly exercised, the condition of payment of 10% of the entire demand is onerous particularly when using appellate remedy does not require such payment [2022-VIL-573-CAL].

 

Pre-deposit provisions have come a long way. While fixed quantum as specified in the statute gives some peace of mind to taxpayers during pendency of litigation as recovery of balance amount stands stayed, seeking higher amount as pre-deposit before High Courts should not be encouraged by CBIC itself. The above case appears to have been booked by the revenue intelligence and it is surprising as to how the taxpayers withstood the pressure of not paying on the spot during investigations. Tax disputes in most cases often lead to multiple litigation - in demand, it is unjust enrichment with respect to consequential refund and in other cases, deposits during pendency of proceedings. Despite all these, a vast majority of taxpayers being law-abiding, taxes get paid for the government.

 

Detention is sustainable if description of goods in documents is fraudulently different

Some taxpayers perceive High Courts as amenable to any kind of argument. In a case of apparent evasion, goods and vehicle were detained. The charge was that the goods were described as aluminium scrap while they were actually brand new sections of aluminium and not scrap. The taxpayer challenged detention by filing writ petition but the High Court held that by portraying goods as scrap, the taxpayer was indulging in blatant evasion of GST and the description was fraudulent. It held that detention was justified and the SCN / order being appealable, writ petition was not maintainable. This case is briefly mentioned here because the general tendency is to place reliance on orders which hold that for alleged mis-classification in e-way bills or invoices, vehicles cannot be detained but proper SCN should be issued. In this case also, an order of Kerala High Court [2022-VIL-30-KER] was relied on but the same was distinguished after finding the present case as pertaining to evasion and fraud and not mere mis-classification [2022-VIL-576-RAJ].

 

Tuition centre not exempted from GST

Educational institutions are mostly commercial now, but they intend to explore tax exemptions wherever possible. In GST, as in service tax, schools are exempted but Notification No. 12/2017-Central Tax (Rate) uses "educational institution providing services by way of pre-school education and education upto higher secondary school or equivalent". The applicant, an organization engaged in taking tuitions online, argued that educational institution need not be a school to be covered under such exemption. Observing that the applicant is not a formal school, the Authority for Advance Ruling (AAR) opted to use classification scheme to hold that while educational services by schools are covered under particular headings relating to education per se, the applicant's activity is classifiable as commercial training or coaching. It also held that education should be part of curriculum for obtaining qualification recognized by law and the training / tuition provided does not lead to the same. Based on the above, exemption was held as not available [2022-VIL-210-AAR].

 

The application for advance ruling was probably filed based on incorrect advice or misunderstanding by the taxpayer himself. Private tuition centres / entities are not covered by such exemption and there has never been a doubt. AARs are perceived as pro-revenue but in these types of applications, they can only be viewed as adopting the correct position.

 

Go-kart is classifiable under heading 9508 and liable to 18% GST

Compared to the above case, in another ruling reported by VIL, the department has pushed the taxpayer to rush to AAR. The argument of the department was "Go-Kart" - the vehicle used for joy rides in amusement / theme parks is classifiable as motor vehicle under heading 8703 and GST of 28% would be payable. The applicant was of the view that the same is classifiable under heading 9508 which specifically covers such rides used in amusement parks. The AAR has noted that the goods are not road-worthy, cannot be registered with Road Transport Authority (RTO) and are not designed for transport of persons but only meant for entertainment / amusement purpose for use in a fixed / restricted course. Holding that they are not classifiable under heading 8703, it has held that heading 9508 covers such go-karts. It reasoned that these goods are solely meant for joy riding / amusement purpose and designed to run only on "extremely smooth specially designed surface tracks or closed circuits" [2022-VIL-215-AAR]. The stand of the department was patently absurd in this case and the taxpayer had to undergo the trouble of seeking the intervention of AAR.

 

Summons and arrest under GST - CBIC issues instructions

CBIC has issued two sets of instructions. Instruction No. 3 dated 17-8-2022 deals with summons. Officers have been advised to explore issuing letter to request for documents instead of resorting to summons. While the power to issue summons is generally exercised by Superintendents, CBIC has mandated prior written permission from Deputy / Assistant Commissioner. Summons should indicate in what capacity the person is called - as accused, as co-accused or as witness. It reiterates senior officials and officials of PSUs should not be generally summoned at the first instance and only if there is evidence as their involvement in decision-making, they may be summoned. DIN should be mandatorily mentioned in the summons. These are instructions which are generally issued from time to time and generally ignored always. On arrest and bail, Instruction No. 2 dated 17-8-2022 emphasises even if all the conditions precedent for arrest as per Section 132 of CGST Act are present, it does not mean arrest should be made. Commissioners should sanction arrest only if intent to evade and mens rea are "palpable". Arrest should not be made where there is a difference in interpretation of law. Officers should be fully familiar with provisions of Code of Criminal Procedure (Cr. P. C.). Release of the person on bail if bond is furnished in case of bailable offences, filing of complaint in prosecution case within 60 days of arrest, etc., are also part of these instructions. State Commissioners should issue similar instructions and conduct classes for SGST officers as they prefer to file FIR in local police station not knowing their own arrest powers. But ignorance of power is sometimes welcome as otherwise, harassment may know no bounds.

 

CAROTAR vs. Rules of Origin - Rules of Origin will prevail

Customs (Administration of Rules of Origin under Trade Agreements) Rules, 2000 popularly known as CAROTAR brought after new Section 28DA was inserted in Customs Act casts various obligations on importer who claims preferential tariff and empowers the officer to go behind the certificate of origin produced. CAROTAR is in addition to the rules of origin as provided in respective trade agreements - CEPA, FTA, PTA, etc. CBIC has said that in case of conflict between CAROTAR and respective Rules of Origin, the latter shall prevail. It has also asked the field formations to be sensitive while applying CAROTAR. It is time that CBIC conducts a quick evaluation of working of CAROTAR as there are several instances of indiscriminate application of these rules and denial of concessional rate, suspecting and asking importers to do the impossible in so far as the certificates are concerned.

 

 

(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 Ed. (Feb 2022) and 16th Ed. (Aug 2022). E-mail - gokulkishore@gmail.com)