Tax Vista Your weekly tax recap Edn. 115 - 29th Aug 2022 By Dr. G. Gokul Kishore

 

 

Advance ruling application can be admitted when investigation or inquiry is underway

The Authority for Advance Ruling (AAR) under GST cannot admit an application seeking advance ruling if the question raised is already pending or decided in any proceedings in the case of the applicant. Most often, DGGSTI initiates investigation and the taxpayers are told by AAR that since proceedings are already underway, advance ruling application cannot be entertained. Even Appellate AARs have held that such inquiry or investigation would be covered under the term "proceedings" thus incurring the bar of availing the facility. A taxpayer whose application was rejected on such ground filed writ petition against the ruling. The High Court has held that the provision means the proceedings where the question raised in the application has already been decided or pending and therefore, inquiry or investigation would not come within the ambit of "proceedings". It appears the High Court sought to rule that the bar of admission of application would not be applicable when general inquiry or investigations are undertaken where specific question or issue is yet to crystallize. The Court further held that the application was filed long before initiation of investigation by DGGSTI in this case and therefore, the bar will not apply even otherwise in this case [2022-VIL-588-TEL].

 

The above order is taxpayer-friendly but it is not certain that this view will be adopted by other High Courts. As pointed out in this column before, advance ruling is a mechanism intended to help taxpayers and hence, the provision should be amended to restrict application only in cases where investigations have culminated in show cause notice containing the specific allegations / issues / questions. The investigating agency may have specific intelligence but that does not mean that the probe is on the same question or issue on which advance ruling is sought by the taxpayer. A provision which apparently intends to pre-empt taxpayers from using the forum of AAR once the scent of some wrongdoing is felt by the department should be unambiguous.

 

E-way bill expiry - Demand of tax and imposition of major penalty not sustainable

In Tax Visa dated 15 August, 2022, a judgment of Madhya Pradesh High Court holding that penalty is not imposable for mere e-way bill expiry when evasion is not alleged or proved, was briefly analysed [2022-VIL-562-MP]. A similar order has been passed by Kerala High Court recently. The Single Judge Bench has opted to rely on Telangana High Court judgment in Satyam Shivam Papers case [2021-VIL-448-TEL] in which costs were imposed on the officer in a similar case and such order was upheld by the Supreme Court which increased the costs imposed. Kerala High Court's Division Bench order in Ranjilal Damodaran [2020-VIL-559-KER] has been noted in this case but not followed.

 

The High Court, in this case, has held that though the department charged the petitioner with failure to re-validate the e-way bill and no evidence of repair of the vehicle was produced, there is no finding on attempt to evade tax. Holding that the Telangana High Court order had merged with the order of the Supreme Court in Satyam Shivam case, the same would be the binding precedent, according to the well-reasoned order. The High Court could have set aside order but chose to direct the authority to consider the matter afresh after taking note of the judgments [2022-VIL-585-KER]. It is time for CBIC to issue another circular instructing officers to follow the principle laid down in the above judgments.

 

Rejection of refund without granting time to file reply during peak period of Covid - High Court quashes orders  

A rather routine order whereby writ petition against refund rejection is allowed by directing fresh consideration merits a mention in this column. The object is to highlight the ignorance and lack of reason on the part of the adjudicating and appellate authorities. Refund claim was filed in January, 2020 but the same was rejected by an order issued in April, 2020 when the first wave of Covid was creating great havoc and the entire country was under lockdown. This order was passed rejecting the request of the taxpayer seeking extension of time for filing reply. Appeal filed against such order was ceremoniously rejected by the appellate authority as is mostly done. The High Court took note of notification issued during the relevant period extending time-limit for various compliances and held that the same would be applicable but the appellate authority did not give any finding on the same. Argument by department on inapplicability of notification to the present case was rejected by the Court. It said that the authorities were under obligation to grant extension of time during such period and the orders passed are not sustainable [2022-VIL-582-P&H].

 

Despite the total chaos all around due to Covid, on rejection of refund, the department has been consistent - but in this case, such consistency is without legal sanction. If such orders by departmental officers can be passed during the times of great calamity, then no wonder, during normal times, every second order is against the taxpayer.

 

Interest liability when ITC availed twice is reversed

An amount of around Rs. 3 crores was transitioned as ITC to GST regime through TRAN-1 form by the taxpayer. The same amount was also availed as ITC in the monthly return GSTR-3B filed for July, 2017. The taxpayer attributed the error to the accountant who was not familiar with the new system of GST. It was also contended that the said amount was reversed through GSTR-3B for the month of July, 2018 and the credit amount was never utilized. Before the High Court, it was also argued that interest is not payable as ITC was not availed twice since the amount availed second time was reversed. However, the Court opted to address the issue focusing on interest demand. It relied on its own judgment in Mahadeo Construction [2020-VIL-185-JHR] wherein it was held that if the taxpayer disputes liability to interest, then proceedings under Section 73 or Section 74 should be initiated to adjudicate the same. In this case, the Court found that while notice was issued, the department chose to address the taxpayer through letters without following the adjudication procedure. The letter was set aside and the department was directed to initiate fresh proceeding [2022-VIL-579-JHR].

 

It is not clear why the argument on retrospective amendment relating to interest liability on net cash liability has not been taken since the taxpayer has argued that the ITC has never been utilized. The order also does not indicate whether the point that ITC availed was reversed which means there was no revenue loss, was pressed. A judgment on these points would have helped other taxpayers as well.

 

Composite supply involving installation of lift in single residential unit attracts 18% GST

Composite supply of works contract supplied by way of construction of original works pertaining to a single residential unit attracts 12% GST under Notification No. 11/2017-Central Tax (Rate). The taxpayer sought advance ruling to get a confirmation on the above rate when lift is installed at customer's premises. The applicant specifically highlighted the fact of single residential unit for which such installation is undertaken. The Authority for Advance Ruling (AAR) agreed that supply and installation of lift would be a composite supply of works contract, However, it proceeded to answer the question from scheme of classification and in particular, the entry relating to installation service of lifts, escalators, etc. It ruled that the transaction would be covered under this entry and therefore, GST of 18% would be applicable whether it is intended for single residential unit or multi-storied complex or industrial or commercial buildings. This ruling is patently erroneous and the same is liable to be set aside if appealed. Inapplicability of the entry in the notification providing for 12% GST to such supplies made to single residential unit has not been discussed or answered at all. A ruling which does not negate the directly applicable entry and opting to tangentially answer the question is legally vulnerable [2022-VIL-226-AAR].

 

ITC on lease premium available as construction is not involved

Anything related to immovable property is seen with suspicion under GST. In particular, ITC on construction of immovable property is restricted and therefore, the fear of revenue loss multiplies. In a case of payment of upfront lease premium for lease of a property for office use, the AAR has held that since the lease allotment letter does not mention any construction activity, the same would not be hit by Section 17(5)(d) of CGST Act and therefore, ITC of GST paid on such amount would be available. The AAR said that the space is used for business purpose and the amount paid is lease rental for service of renting of immovable property. While the definition of construction includes everything, fortunately, for the taxpayer, it does not include mere use of immovable property [2022-VIL-223-AAR].

 

Cross-charging and cost-centres - Ruling on the obvious question

CBIC Chairman has in a press interview recently said that the issue of cross-charging will be clarified soon. GST law with the requirement of State-specific registration and Schedule-I deeming transactions without consideration between units of the same company in different States, has created the huge Frankenstein of cross-charge. While there are not many takers for the argument that cross-charge and GST payment thereon is not required, valuation of the same is something on which the trade needs clarity. In such a scenario, before the AAR, the applicant contended that transfer of right to integrate, test, install and market software by one GST registration (cost centre) to another in a different State will not be a supply and GST is not payable. Surprisingly, it was stated that to maintain profitability of cost centre, certain amount is paid by one unit to another. Analysing the transaction through the requirements of Section 7 on supply and Schedule-I of CGST Act, the AAR held that services between distinct persons is treated as supply and such transfer of right would be liable to GST [2022-VIL-222-AAR].

 

Though the above ruing is on supply of particular service by one unit to another of the same company, the rationale as to non-liability stems from lack of clarity on cross-charging. Entire industry and the tax authorities are keeping their fingers crossed when it comes to cross-charging issue. There is also confusion about adopting the route of input service distributor (ISD) in such situations. While CBIC has been pro-active in addressing many important issues, it is time that cross-charging is also clarified. Even if it is pro-revenue, at least, taxpayers will have some peace and certainty.

 

Seeking advance ruling on transactions perceived as tax inefficient

A typical case of ITC not being available and GST becoming cost and thus the transaction being tax inefficient, is worth a representation to the government. But the taxpayer opted to go for advance ruling. The applicant is a government body and it procures services from two other government entities. These two entities are not eligible to avail input tax credit as per the submission in the application. When they charge the applicant, the said two entities mention the price of goods / services procured from various vendors, GST charged by them, include various charges like contingency charges, labour cess, etc., and then charge GST on the entire amount. The applicant felt that GST is being charged twice in such transaction. The AAR relied on Section 15 of CGST Act and ruled that inclusion of GST charged by vendors in costing by the entities and then charging GST after including various heads including labour cess is as per the provisions [2022-VIL-224-AAR].

 

Advance ruling not available when activity is not covered under supply

Strange are the ways of decision-making by AARs. When a person raises the question as to whether receipt of donation without any quid pro quo is liable to GST, the AAR holds that there is no supply involved in such case. The question stands answered but the AAR ventures further to hold that since there is no supply at all, application for advance ruling itself is not admissible. It is not known whether such ruling will be taken as binding or not. If the transaction is not covered under supply, then GST payment does not arise. The AAR has said the former but did not mention the latter. Section 97 of CGST Act lists the questions on which ruling can be sought and it includes determination of liability and whether a particular act amounts to supply or not. While AAR has relied on definition of advance ruling in Section 95, the core provisions have been ignored resulting in such defective ruling [2022-VIL-217-KAR].

 

 

(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)