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Tax Vista Your weekly tax recap Edn. 126 - 14th Nov. 2022 By Dr. G. Gokul Kishore |
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GST Audit - Issuance of both draft and final reports on the same day is not valid
Audit Reports (both draft and final) issued by GST authorities were challenged on the ground that both the reports were issued on the same day as against the statutory requirement of 30 days time to be given to the taxpayer to file reply on the draft objections. Rule 101 of CGST Rules mandate that audit report may be finalized after informing the objections and considering taxpayer's reply. The High Court accepted the argument and the final audit report was set aside. As the time-limits prescribed were getting breached, the High Court directed the Commissioner to extend the period for completion of audit and the taxpayer was directed to file reply to draft audit report [2022-VIL-747-ORI].
Despite prescription of various time-lines relating to audit process in GST law, almost in no case the same is followed. Taxpayers hesitate in raising such issues as otherwise audit officers may get furious and raise objections involving huge amounts. Even in the above case, the department may go ahead and issue the same draft audit report as the final report after stating that the reply of the taxpayer has been considered. By seeking writ remedy, the taxpayer has got an opportunity to file response to draft audit objections but it is an unwritten rule that reply of taxpayers till or at show cause notice stage is to be considered and then to be dismissed as not relevant. There are several fundamental issues in the manner in which tax law is implemented and audit process is no exception. One such issue pertains to rent seeking as in many cases taxpayers are threatened with huge demands if they do not budge. Taxpayers do not realise that by submitting to such demands, show cause notices with astronomical demands will not cease.
BPO service provided to clients of foreign principal is not intermediary service
Satisfying the conditions for "export of service" in an arrangement having elements of sub-contract from a foreign party (principal) is a tricky task for the taxpayer. From the recent judgment of Punjab & Haryana High Court it appears that establishing the three way transaction chain can be difficult for the department too. The taxpayer provided BPO services to the clients of foreign entity, located outside India. It claimed and was sanctioned refund of GST on account of export of services. However, subsequently the department took the stand that it was an intermediary and was not eligible for refund. The petitioner-taxpayer contended that actual service is being performed by it under the subcontract and it does not "arrange" or "facilitate" the service, it cannot be regarded as an "intermediary" and that its turnover is the entire charge for the service which is the main service itself whereas in the case of an "intermediary" the turnover is a mere commission or a facilitation fee. However, the department stated that there were two services - main service by the foreign entity to its clients and ancillary service by the petitioner to facilitate the main service between two principals - foreign entity and its clients. The department also countered the claim of "service on own account" by arguing that the foreign entity had the authority to direct/take decisions in day to day management.
The High Court held that the clauses of the Master Service Agreement containing modalities of how work should be carried out does not establish a principal agent relationship and since the risk related to performance of service was with the petitioner, he could be said to be rendering them on "own account". Also the petitioner himself rendered the main service and did not arrange or facilitate the rendering of such service. Therefore, it held that the petitioner was not an intermediary and was eligible to claim refund of tax for export of services [2022-VIL-751-P&H].
Intermediary is a powerful weapon for revenue optimisation. It can be used by the GST authorities on anyone at anytime by placing interpretation on the transaction which can hardly be imagined. The fundamental issue is creation of exception to the default rule in place of supply provisions for intermediary service only to deny benefits conferred by law. Despite clarifications, the issue is often raised, particularly when the amount involved is high. A serious thought is required on the law and issues relating to intermediary service so that those who are not even remotely connected to it, are deliberately brought within its ambit.
GST Tribunal not yet constituted - High Court directs non-invocation of guarantee
Issues relating to constitution of GST Appellate Tribunal is still under examination by Group of Ministers constituted by GST Council. After five years of implementation of GST, this dispute resolution body is yet to be set up. There are several cases waiting to be filed in the GST Tribunal as writ petitions against appellate orders are allowed by High Courts only in a few cases. Seizure of goods and vehicle is an issue which disrupts business and taxpayers are compelled to furnish bank guarantee to get the same released provisionally. As GST Tribunal is not in sight, taxpayers apprehend invocation / encashment of BG by the department. In one such case, the High Court has directed that BG shall not be invoked till the lapse of two months from the date of constitution of GST Tribunal. It has ordered the taxpayer to keep the same alive till such time. While cost of keeping the BG live may significantly go up considering the uncertainty in constituting the Tribunal, at least, the taxpayer may have some relief till such time [2022-VIL-749-KER].
Payment into cash ledger is not discharge of tax liability - High Court upholds interest demand
It appears that certain taxpayers would like to have a stamp of approval from the judiciary on questions which are obvious. When some amount is paid in electronic cash ledger, it is common knowledge it remains in the ledger till it is debited towards payment of GST at the time of filing GSTR-3B return. The amount remaining in the ledger can be obtained as refund also if all the liabilities have been discharged and therefore, amount lying in the ledger in the GST portal does not get credited into government account till the time debit is made by the taxpayer. The taxpayer in a particular case sought to know whether interest is payable when GSTR-3B is filed belatedly while tax amount has been paid by way of challan into electronic cash ledger. The High Court held that as per the statutory provisions, the amount paid in cash ledger is only a deposit and the same does not mean the same is appropriated to government account. It further held that payment into cash ledger does not amount to payment of tax liability. It highlighted that in the GST scheme of things, tax cannot be paid before filing monthly return and liability gets discharged only on filing of such return. Demand of interest was upheld by the High Court by dismissing the writ petition [2022-VIL-745-JHR].
Show cause notice issued to driver is not sufficient
There have been orders before that service of show cause notice on the driver of the vehicle when it is intercepted and then detention proceedings are initiated, is not sufficient. However, the GST authorities continue to commit such blunders as the system does not penalize them for such lapses. Drivers may be happy as they are deemed as owners by the tax authorities but taxpayers certainly feel harassed. The Madras High Court has held that petitioner-taxpayer was not provided adequate opportunity as he did not receive the show cause notice and SCN issued to driver is not adequate. The order demanding tax and penalty was set aside. The government counsel has argued that notice given to driver is sufficient. In this case, order has also been passed on the same day of issuance of notice. Doing business despite such blunders of tax administration deserves gallantry award [2022-VIL-741-MAD].
Erroneous ruling by AAAR on liquidated damages
Readers may wonder about the title as many rulings are erroneous. But this one is patently erroneous. The issue involved is whether GST is liable to be paid on cost of arbitration and on liquidated damages for delay in completion of work. It is not clear as to whether the question to be answered was taxability of amount received as per arbitral award or the cost incurred in conducting arbitration proceedings. Presuming that it relates to cost, the Appellate Authority for Advance Ruling (AAAR) has upheld the advance ruling holding the same as liable to GST under reverse charge mechanism.
The AAAR has further affirmed the advance ruling that liquidated damages are liable to GST as consideration paid for agreeing to tolerate an act or situation as per Schedule - II of CGST Act. This ruling is dated 19-10-2022. CBIC has clarified this issue as not liable to GST by Circular No. 178 dated 3-8-2022. This circular has not been referred by the AAAR in the ruling though it has been delivered after issuance of this circular. This indicates that either the officer who assisted the AAAR in drafting is not aware of this circular or the AAAR has not read the draft ruling before signing the same. The third possibility could be that the ruling was drafted before issuance of this circular but released later. The taxpayer could not have cited this circular as hearing was over well before issuance of the same. Such erroneous rulings are passed by officers of the rank of Chief Commissioner and Commissioner. It is no wonder that quasi-judicial mechanism is poor in terms of quality of orders and display of fairness even if the position adopted is pro-revenue [2022-VIL-85-AAAR]
ITC on CSR expenditure is available
The Authority for Advance Ruling (AAR) has held that running of business will be affected if expenditure towards corporate social responsibility is not incurred since as per Companies Act, specified companies are obliged to incur certain percentage of profit towards CSR and default will invite penalty. The ruling holds that such expenditure is made in furtherance of business and therefore, tax paid on purchases to meet CSR obligations will be available as input tax credit. The taxpayer argued that such expense is not incurred voluntarily as it is mandated by statute and therefore, it is not gift to be disqualified for ITC under Sectio 17(5) of CGST Act. However, the AAR has not discussed applicability of argument on gift. In this case the taxpayer had spent the amount to provide oxygen plant to hospital during Covid. The ruling is very brief and does not contain much of reasoning but it is mentioned here considering the wide-spread interest on such issue [2022-VIL-293-AAR].
Housing society not eligible for ITC on works contract service received for repair of apartments
Housing societies opting for re-development or major repair work is common these days when the apartment complex is older. As such societies are liable to GST consequent to amendment to Section 7 of CGST Act with retrospective effect, the focus has shifted to exploration of avenues for availing input tax credit. In one such case, the housing society sought ruling on ITC availability on works contract service received by it for repairs. The society was of the view that both inward and outward supplies are works contract service and therefore, ITC should be available. The AAR did not agree as it classified the repair activity undertaken by the society under club or association service and the society was before Appellate AAR.
The AAAR upheld the advance ruling after observing that the society has been charging on all taxable components of underlying services under "services of membership organization" and the repair services provided will not get any differential treatment. Authorities who generally sideline contracts use them when it favours revenue. In this ruling, bye-laws of the society have been relied on to state that core function of the society is to manage and maintain society's property for which fund is created by charging members. The ruling further holds that the society provides security service, cleaning service, etc., but it does not claim it is a provider of such services and the stand on works contract service has been taken by the housing society only to avail ITC [2022-VIL-83-AAAR].
If bye-laws are relied on, then benefit should go to the society as it receives works contract service for fulfillment of objectives which includes maintenance of the property. It does receive works contract service but the same does not become club or association service merely because it is provided by an association. Activity is characterized by its nature and not by who performs it. Because the stand taken is to deny ITC, such reasoning seems to have been adopted.
(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)