Tax Vista Your weekly tax recap Edn. 118 - 19th Sep 2022 By Dr. G. Gokul Kishore

 

 

Confiscation proceedings are illegal when detention proceedings are initiated under GST

In an otherwise routine issue of highway detention of goods and vehicle and consequent order on confiscation, the Karnataka High Court has approached it by framing the question -"whether the officer detaining goods in transit under Section 129 of CGST Act has the power to initiate confiscation proceedings under Section 130?" The order is exhaustive and reads like a treatise on law relating to detention and confiscation. The Court noted that as per the provisions, when the goods are seized, if the person concerned comes forward to pay tax with interest and penalty, officer is bound to release the goods. The officer does not have the power to refuse release of detained goods and conveyance in such case as the owner or a person other than the owner gets the statutory right to obtain release subject to compliance with the conditions.

 

The order holds that the true intent of detention is to facilitate recovery of tax and the objective of GST law is not to confiscate but to realise tax, interest and penalty. The power to confiscate would be available only when applicable tax is not paid with penalty. On redemption fine, the order holds that the power of the officer is not unlimited as upper and lower limits of fine have been fixed by law. Power to confiscate can be invoked only when detention / seizure is not involved. If detention is made under Section 129, then power to confiscate under Section 130 will not be available to the department.

 

Based on such discussion, the Court has held that since proceedings under Section 129 (detention) have been initiated in the case before it, confiscation proceedings initiated are not sustainable. Such action of the officer renders the confiscation proceedings illegal, as per the Court. It rejected the arguments on sustainability of such proceedings for mis-declaration of weight, under-valuation, etc. As the goods were sold in auction, the Court ordered payment of sale proceeds after deducting applicable penalty and release of vehicle.

 

The order contains several authoritative pronouncements as above. It emphatically holds that the positive obligation on the part of the department to release detained goods on fulfilment of conditions cannot be bypassed by initiating confiscation proceedings. There is a vested right in the taxpayer to get the goods and conveyance released and such right cannot be nullified by initiating confiscation proceedings. A circular was relied on by the department but the Court did not accept the same expressing the view that the Commissioner / CBIC has no power to issue such clarification contrary to provisions. Misdeclaration of weight is an offence as per Section 122 for which penalty can be imposed but this does not confer power to confiscate.

 

In the words of the Court -"It is to be kept in mind the predominant principle under the Act is to ensure that the registered person is given a chance to rectify his wrongdoing whenever the wrongdoing is noticed and pay the applicable tax and penalty or interest as the case may be. The proper officer cannot snatch away that right conferred on the registered person by invoking proceedings to confiscate the goods itself. The power of confiscation being the ultimate and the most extreme punishment can only be invoked. in extraordinary circumstances, and definitely not when the goods are detained in transit, given the design of the statutory framework. It is to be noticed here that the statute consciously leans towards giving an opportunity to the wrongdoer to rectify his wrongs voluntarily."

 

The order contains beautiful exposition on Section 73 and Section 74, it says -"What is to be discerned from this statutory framework is that the law showers a certain amount of leniency even if there is a wrongdoing. If the wrongdoing is on account of error and is acknowledged and immediate amends are made by paying the tax even before a show cause notice is served, the person does not suffer a penalty. If the wrongdoing is on account of an immoral conduct, even then, if the wrongdoer acknowledges his error and makes amends before receipt of a show cause notice, he is saddled with a penalty of just 15% and if he chooses not to pay the actual tax payable, he is saddled with a larger penalty of 25%. If he desists further and contests the proceedings and forces a determination of the tax payable, he is saddled with a penalty of 50% of the applicable tax. In both the above-mentioned cases, it is to be observed that the law does not intend to confiscate the goods itself as a penal measure and the law only ensures that the applicable tax with interest and penalty is recovered from the wrongdoer."

 

The order provides significant takeaway on the power to detain, power to confiscate, right of taxpayer to get the goods / vehicle released, etc., and it will be helpful to countless taxpayers as such cases of detention have become a monotonous routine. Appellate and adjudicating authorities should examine such orders to not only learn interpretation of law but also on how to write orders. In almost all the cases, orders passed by authorities are either cryptic and non-speaking or full of grammar mistakes or the language itself suffers from seizures. While High Courts may embark on erudite exposition of law and the quasi-judicial authorities may not have much room on interpretation, at least the worst quality drafting can be avoided [2022-VIL-639-KAR].

 

Refund of amount lying in electronic cash ledger - Illegal endorsement set aside

When taxpayers pay certain amount in electronic cash ledger, they should exercise great amount of caution. Though the law provides for refund of balance lying in such ledger, the authorities who implement the law hold a different view and therefore, refund claim gets rejected. A taxpayer who had to suffer the ordeal of such rejection, prayed to High Court for relief and the Court set aside such orders and directed the authority to consider the refund claim filed in the year 2020. It also said that interest, if any, will run from the date of filing of claim in 2020. SGST officers, in several quarters, lack essential understanding of adjudication as is again evident in this order also. The sanctioning / adjudicating authority rejected the claim for want of documents as per first page of the order and in the last page of the same order, he held refund as admissible. GST portal was showing that refund has been sanctioned. It seems there was no appellate order but another officer simply put an endorsement that refund has been rejected. The Court held that such endorsement has no legal basis and the same was quashed. Taxpayers should structure their operations in such a manner that there is no excess amount in the electronic cash ledger and refund of own money is not stuck in the hands of the officer [2022-VIL-634-AP].

 

GST paid to Railways instead of paying to exchequer - High Court orders return by Railways and payment by taxpayer

High Courts are courts of equity and justice. In an order true to realization of such objective, the Bombay High Court has ordered Railways to refund the amount paid by the service provider by mistake to it (to Railways) as GST when such tax was liable to be paid under reverse charge mechanism to the government through GST returns. Railways accepted that such amount was received but could not find out such lapses by service providers due to its size and operations. The Court directed Railways to pay the tax amount to respective government account and directed authorities to grant input tax credit to the taxpayer (petitioner). When it was pointed out that such payments are not accepted by GST portal, the Court ordered Railways to refund it to the taxpayer who would pay the same to the exchequer after portal is opened for such purpose. A fairly simple procedural mistake has been resolved through a modest order as such issues are otherwise seen as a major attempt at evasion of tax and lengthy proceedings with proposal to impose penalty equal to tax are initiated [2022-VIL-635-BOM].

 

ITC on vouchers procured from third party is not available

Vouchers and loyalty programmes are generally not understood by most of the tax authorities. It is no surprise that Authority for Advance Ruling (AAR) has made the issue look simpler as the issue is mostly pre-decided by departmental officers. The case before it was involving e-commerce platform providing vouchers based on loyalty points to customers who purchase regularly and who opt to be part of such programme. The applicant purchases such vouchers and subscription packages (related to loyalty programme) from third party vendor. The question raised was whether input tax credit of GST charged by such third party vendor is available to the applicant. The answer by AAR is in the negative. The applicant argued that classification of vouchers as goods or services in this case is not relevant, they are used for business purpose, etc. The AAR said it is supply of goods, no consideration is received from customers for giving vouchers, Section 17(5) of CGST Act bars ITC on goods given as gift and therefore, ITC is not available [2022-VIL-253-AAR].

 

It is settled law that classification of goods / services at the end of the recipient cannot be revised. In this case, the applicant is a recipient and classification of vouchers as goods or services is not within the jurisdiction of AAR. Because Section 17(5) bars ITC on goods in certain situations and does not cover services, the ruling rushes to classify the vouchers as goods. Voucher is, strictly speaking. neither goods nor services but treatable as consideration as per definition in Section 2(118) of CGST Act. However, such definition is applicable when the parties involved as giver of voucher (company / seller) and recipient of voucher (customer / buyer). Third party vendors who run the loyalty programme for the actual giver of vouchers may print the same but the programme itself is generally administered / implemented by them and it is in the nature of service between the third party vendor and the giver of voucher. Various models are also followed in the industry and without appreciating nuances of such complex transactions, advance rulings touching the periphery of the issue may not help anyone.

 

Development rights - Transfer liable to GST even if made before implementation of GST

The questions posed before AAR were on GST liability on transfer of development rights (TDR) by land owner to developer and time of supply - whether GST is payable by developer immediately on receipt of development rights or at the time of conveyance of flats by way of allotment letter issued by developer to land owner (area-sharing model). The AAR ruled that TDR is the consideration received by developer for construction service (provided to land owner) and therefore, liable to GST. Liability to pay GST will arise at the time of transfer of possession or right in the constructed flats. The AAR relied on Notification No. 4/2018-Central Tax (Rate) to arrive at such conclusion. The questions and answers may be obvious but the fact in this case is transfer of development rights took place before implementation of GST. This point has not been particularly discussed in the ruling - whether such fact will change the conclusion or not. The AAR has ventured to answer questions not posed - liability on constructed portion handed to land owner and ITC eligibility of land owner [2022-VIL-250-AAR].

 

ITC on construction services - AAR refrains from ruling

Admissibility of input tax credit on goods and services used in construction of warehouse which will be leased has not been answered by AAR on the ground that the issue is sub judice. The ruling points to the pendency of appeal against High Court order in the Supreme Court in Safari Retreats [2019-VIL-50-SC]. The ruling refers to Section 17(5)(c) and Section 17(5)(d) of CGST Act on restrictions on ITC relating to construction to hold that ITC on construction of immovable property is available to only those taxpayers who are engaged in supply of construction service and not to beneficiaries of such service. It is not known who assists AAR in drafting - this advance ruling contains opinion on whether Section 17(5)(c) and Section 17(5)(d) are violative of Article 14 of the Constitution and whether they are discriminatory, etc. The AAR has no jurisdiction to "opine" on Constitutional validity of GST provisions. At least, the conclusion on refraining from ruling on the issue is understandable [2022-VIL-243-AAR].

 

 

(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)