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Tax Vista Your weekly tax recap Edn. 170 - 18th Sept 2023 By Dr. G. Gokul Kishore |
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Time-limit for availing ITC under GST is constitutionally valid
Section 16(4) of the CGST Act / Bihar GST Act restricting input tax credit in respect of invoice or debit note after the due date for filing GSTR-3B for the month of September (amended as 30th November) of the following financial year is constitutionally valid. The Patna High Court has rejected the challenge without elaborate oration but relying on settled principles like presumption of constitutional validity of statute and reading down is not required when the provision is unambiguous and clear. The taxpayers had challenged the provision as violative of Articles 14 and 300A of the Constitution of India. It was argued that ITC is a vested right under Article 300A, the provision of Section 16(4) is confiscatory. They also wanted the Court to read down the provision as applicable only to restrict ITC in respect of only such invoices or debit notes received after the prescribed date and not such claims in a belated return filed after such date and the conditions are procedural in nature.
The High Court held that the right of a registered person to take ITC under Section 16(1) becomes a vested right only if the conditions to take it are fulfilled, free of restrictions prescribed under sub-section (2) of Section 16. It said that to invoke Article 300-A of the Constitution, deprivation of property without sanction of law must be present and "by no means sub-section (4) can be said to be violative of Article 300-A". The Court was not impressed by other arguments on condition being procedural, etc. It is too late in the day to challenge time-limit for availing tax credit considering the settled jurisprudence. Though time-limit is considered as procedural, pitted against the issue of credit being vested right or property right, the argument becomes weak [2023-VIL-623-PAT].
Budgetary support scheme not applicable when ownership changes
Area-based exemption under Central Excise to manufacturing units in certain States got guillotined before expiry of 10 years when GST was introduced. To provide some succour for the remaining period, certain portion of CGST / IGST is refunded through Budgetary Support Scheme. Benefit of such scheme is not available if the ownership / constitution of the unit which was enjoying excise exemption changes, as per Sikkim High Court. In this case, one of the petitioners got converted into company while the other changed hands. The High Court held that a combined reading of the scheme along with the exemption Notification No.20/2007-CE indicated that the government had decided to provide budgetary support to the existing manufacturing units operating in Sikkim under different industrial promotional schemes for the "residual period for which each of the unit is eligible". The support was meant for existing manufacturing units as such units had not been able to enjoy the full benefit of exemption under excise for the entire period. As per the order, such scheme is a measure of goodwill only to the units which were eligible for drawing benefits under the earlier excise duty exemption/refund schemes and the intention of the government of India was to support 'eligible units' for the 'residual period'. The Court specifically pointed out that excise exemption was meant for those manufacturers who had made investments in Sikkim and not to those who have not made any investment so as to enjoy any benefit for residual period. The order holds that the petitioners cannot claim they were entitled to such excise exemption as they were not existing then. The petitions filed by the companies were dismissed.
The Court has taken note of CBIC and DIPP clarification on this issue which is against the taxpayers. It appears that mere change in constitution does not affect production status of the unit and the objective was to promote industrial development which continues to be achieved irrespective of ownership change. The view of CBIC may not be in furtherance of such objective but when exemption itself is at the mercy of government, one cannot expect too much in so far as residual period is concerned [2023-VIL-618-SIK].
Refund due to inverted tax structure - High Court frowns at hyper-technical approach
Refund of unutilized input tax credit due to inverted tax structure is a minefield as whoever steps on it, has to face a lot of shocking consequences. Either the figure relating to turnover of inverted rated supply is disputed or the computation as such is suspected and somehow the refund is rejected by the department. In a case before Gujarat High Court, the petitioner had claimed depreciation on GST portion on capital goods and therefore, ITC was incorrectly availed and the same was reversed through GSTR-3B. Due to portal computation, refund got proportionately reduced and the taxpayer was told to file refund claim again under "Any other" category for the balance amount based on clarification issued by CBIC. The adjudicating authority held that refund claim for the same period cannot be split into two as the SCN was issued citing lack of provision for filing second refund application. The High Court noted that as per the rules, the petitioner was entitled to the refund and there was no dispute in this case over the figures used in the formula. It held that refund of balance amount could not have been rejected taking hyper-technical ground of portal not allowing second application, etc. It ordered grant of refund of balance amount along with interest since the same has been pending for almost four years. While GST regime has brought a taxpayer friendly provision of refund of ITC due to inverted tax structure, at the ground level, the same gets frustrated completely by the revenue bias and the aversion or hesitation in granting refund by the authorities [2023-VIL-624-GUJ].
Recovery of GST dues more than pre-deposit - High Court orders refund
GST authorities, SGST authorities in particular, are excessively obsessed with recovery action. Every time, an apparently absurd assessment / adjudication order is passed, recovery under Section 78 of CGST Act / respective SGST Act is immediately initiated by threatening to attach bank account, etc. The taxpayer is compelled to file appeal within a few days though law gives time of three months for filing appeal. But when it comes to filing appeal before Tribunal against the order of first appellate authority, since the GST Tribunal is not yet in existence, the SGST authorities go about recovery mindlessly. In a case of this nature, the taxpayer pleaded that the authorities have recovered more than 20% of tax demand which is the pre-deposit to be paid if appeal before Tribunal is filed. The Calcutta High Court has directed the authorities to refund the excess recovered amount. In Tax Vista published last week, High Court's observations on use of Section 78 for recovery under GST were analysed. As noted in this column before, unless Section 78 is amended to abolish the power to recover even before expiry of appeal period, blatant misuse of the provision and harassment of taxpayers will continue unabated. The industry should represent through chambers of commerce so that such amendment is made, and the misuse is curbed [2023-VIL-613-CAL].
Refund on export of service - Department using obsolete ground on intermediary
The petitioner is an EOU engaged in exporting IT services. As per inter-company agreement with holding company for such export, petitioner was remunerated for such services with 15% markup. Refund of IGST was rejected on the ground that the transaction is not covered under export of service since the condition on petitioner and holding company "are not merely establishments of distinct person" was not satisfied. Department adopted the obsolete argument that the petitioner and holding are single person and the services are not covered under export of service. The High Court held that the petitioner is a separate entity and subsidiary of foreign holding company is not hit by the condition in export of service provision. The issue has also been noted as settled by CBIC Circular dated 20-9-2022 wherein it was clarified that entities incorporated in India and outside India are not covered by the said provision (restriction) on export of service - The Court noted that the order holding petitioner as intermediary was passed without application of mind and without adducing grounds ignoring CBIC clarification. The fact of services being provided on principal-to-principal basis without facilitating services from third party was highlighted by the Court. It ordered refund along with interest after conveying its displeasure - "We also express our displeasure in respect to the cavalier manner in which respondent no.1 has passed the impugned order without considering the settled law and the Circular dated 20.09.2021 issued by the department despite the same being brought to its notice. Such orders, apart from unnecessarily increasing the burden of tax litigation, have a debilitating effect on the confidence of taxpayers in the tax department." The department should start innovating new grounds for rejection of refund due to export of service. The ground on intermediary has become very weak and outdated also [2023-VIL-619-DEL].
Interest on refund under Customs Act - Moratorium under IBC not applicable when proceeding is in favour of corporate debtor
When a company is undergoing resolution process Insolvency and Bankruptcy Code (IBC) and when a proceeding pending before it is in favour of it, moratorium under IBC does not apply and the proceeding can be continued. This is the decision of CESTAT in a recent case claiming interest on refund which was but rejected on the ground that refund was sanctioned within three months from the date of order of appellate authority though the proceedings were more than 10 years old. The appellant sought interest from date of filing of refund claim (almost 10 years before). The Tribunal relied on Delhi High Court judgment in Power Grid Corporation v. Jyoti Structures (Order dated 11-12-2017) wherein it was held that moratorium under Section 14 of IBC would not apply to "all proceedings" and therefore, proceedings which are in the benefit of the corporate debtor will not be covered as the same are not debt recovery action and such action would not diminish or impact the assets of corporate debtor. The purpose behind moratorium is to ensure avoiding additional stress on the assets. Following the same, the Tribunal has held that the present proceeding before it is for interest on refund and hence, it can be continued.
On merits, the Tribunal held the stand of Commissioner (Appeals) as "absolutely absurd and contrary to Section 27A" (of Customs Act) and directed payment of interest from the period after 3 months from date of filing the application. The intersection between tax laws and IBC in so far as recovery is concerned has given rise to certain important and interesting jurisprudence where the judiciary has laid stress on purpose interpretation to advance the objectives of IBC instead of being tied to literal interpretation. Such jurisprudence will provide some relief to the corporate debtor who is already in deep distress and make the resolution process an inch smoother [2023-VIL-893-CESTAT-AHM-CU].
Customs Valuation - Employee cost, rent, repairs, etc., to be deducted in arriving at deductive value
Customs Valuation is an evergreen issue as rejection of transaction value and loading of declared value are the norms. However, application of Rule 7 of Customs Valuation Rules on deductive value is not something resorted to routinely but only in exceptional cases. The Tribunal dealt with such an exceptional case recently. The adjudicating authority had rejected deduction of employee cost, rent, repairs and maintenance, office and miscellaneous expenses and order was passed loading declared value by 62.5% which was upheld by Commissioner (Appeals). According to the department, the deductions claimed are in the nature of post-importation expenses which are internal expenses of the importer and therefore, cannot be deducted in arriving at transaction value using deductive method. The appellant-importer argued that Rule 7 of CV Rules provides for deduction of general expenses in connection with sales in India and direct and indirect costs of marketing the goods are included in such general expenses as per Interpretative Notes. The Tribunal agreed with such contention and further held that the department accepted the value between related parties for more than 12 years and it could have undertaken cost audit so that Cost Accounting Standards could have been examined. The order enhancing the value was set aside by the Tribunal. Though SVB orders were in vogue and the same was periodically reviewed, it is not clear as to the factor triggering suspicion after all these years. Even otherwise, loading of more than 60% and rejection of usual expenses for computation of deductive value can hardly sustain [2023-VIL-887-CESTAT-CHE-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 edits R.K. Jain's GST Law Manual. E-mail - gokulkishore@gmail.com)