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Tax Vista Your weekly tax recap Edn. 175 - 23rd Oct. 2023 By Dr. G. Gokul Kishore |
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Supreme Court holds State amendments to VAT law invalid
Constitutional issues on GST continue to be fought at the apex level i.e., in the Supreme Court as the ghost of pre-GST laws continue to haunt taxpayers. In a significant judgment, the Supreme Court has held that amendments to Telangana VAT Act and Gujarat VAT Act after 1-7-2017 were correctly held as void for lack of legislative competence. It also held Bombay High Court order against the taxpayer was erroneous on this issue. Section 19 of Constitution (101st Amendment) Act, 2016 on GST provides for continuation of provisions of VAT law in State which are inconsistent with the Constitution as amended till the same they are repealed or amended or one year, whichever is earlier. Telangana passed ordinance 13 days before one year period expired so as to extend limitation and empowered officers to reopen assessment. The High Court had struck down the amendment on the ground that such amendment to VAT could have been done only to bring consistency with the amended Constitution and State did not have powers after 1-7-2017.
The Supreme Court has held that Section 19 constitutes incidental and transitory provisions which have limited life, but it was enacted as part of constituent power and has the same force as constitutional amendment and not as mere Parliamentary enactment. Repelling Telangana's arguments, the Court held - "the ordinance's validity and effect might not have been suspect on the date of its promulgation; yet, the issue is that on the date when it was in fact, approved and given shape as an amendment, the State legislature had ceased to possess the power. By that time, the State GST and the Central GST Acts had come into force (on 01.07.2017). Therefore, Section 19 ceased to be effective. The original entry (Entry 54 of the State List) ceased to exist. In the circumstances, the state legislature had no legislative competence to enact the amendment, which approved the ordinance, which consequently was rendered void." Similar ruling was given in respect of Gujarat and Maharashtra amendments by holding that the same vice that attaches itself to the Gujarat amendment, i.e., lack of competence on the date the amendment was enacted i.e., in this case, 9-7-2019, the Maharashtra legislature ceased to have any authority over the subject matter, because the original entry 54 had undergone a substantial change, and the power to change the VAT Act, ceased, on 1-7-2017. The judgment provides significant insights on the jurisprudence on the powers of amendment, effect of ordinances, etc. [2023-VIL-93-SC].
ITC under GST - GSTR-2A is only facilitative - HC orders refund of over Rs. 230 crores
It is not only revenue intelligence agencies that have a penchant for high-pitched demands. State GST authorities also wish to experience this thrill of suffocating the taxpayer. Rs. 110 crores alleged as irregularly availed ITC - with equivalent penalty total demand was Rs. 235 crores. The recovery was also equally extraordinary as it appears during pendency of stay application, the taxpayer was made to deposit almost Rs. 220 crores despite pre-deposit of 10% amount. The High Court had a limited role initially as it had only interest amount to be stayed.
The case is built on the usual meritless issue of ITC mismatch between GSTR-3B and GSTR-2A by taking the period February, 2020 to August, 2020 for month to month reconciliation instead of cumulatively taking the entire period. Rule 36(4) of CGST Rules provided for 10% ITC in respect of purchases which are not reflected in GSTR-2A. The High Court characterised ITC as a substantive right created by the statute and it may be claimed provisionally subject to payment to the supplier in 180 days and it reiterated that the role of GSTR-2A is that of facilitator. It held that the impugned order was not based on fraud in obtaining tax invoices, probably this was in the context of invocation of Section 74 of CGST Act in this case. Rule 36(4), according to the Court is required to be interpreted cumulatively and GSTR-3B for September, 2020 filed after cumulative adjustment of ITC for the past months.
The order reads - "The only purpose for which the proviso to the Rule appears to have been incorporated is to grant benefit of ITC late accrued, to transactions completed in the past, by treating the entire period during which transactions may have been completed to be one i.e., beginning 01.02.2020 and ending 31.08.2020 against which all ITC that may have stood accumulated as on the date of filing of return for the period September 2020. It is that deeming fiction in law that the first proviso to Rule 36(4) of the Rules creates. It dissolves the preexisting monthly partitions of tax periods from February 2020 to August 2020 and deems the entire period as one tax period for the limited purpose of applicability of Rule 36(4) of the Rules..There is something in the period February 2020 to August 2020 for which the legislature relaxed the rigour of the law arising under Rule 36(4). That appears to be the sole purpose to introduce the first proviso to Rule 36(4). Therefore, the legislature relaxed the condition of the month-to-month reconciliation of the eligible ITC availed to a much longer period such that it allowed that period of one month to be practically enlarged to eight months. Hence it used the word "cumulatively" - to create a deeming fiction in law." On recovery during proceedings, it is better this portion of the order is not discussed. The amount deposited was ordered to be refunded with interest. The whole process of availing ITC through online mechanism is in trial and error phase even today and making taxpayers bear the cross for all the administrative failings including GSTR-2A fiasco and the complete ignorance of tax authorities can only portray India as really backward when it comes to tax reforms [2023-VIL-717-ALH].
Affiliation fee and inspection charges paid to university liable to GST
GST is an indirect tax, collected and paid by the supplier. Parties to the dispute were a university seeking to collect GST and the affiliated colleges opposing the same. The university sent a letter stating that GST was to be paid on inspection fees for the inspection conducted as also the affiliation fees - both being services offered by the university. The affiliated colleges relied on Notification No.12/2017-Central Tax (Rate) contending that educational services were not subject to GST and since conduct of entrance examination and collection of entrance fees also have been brought within the exempted category, it would include affiliation and inspection fees as well. They argued that since the object of the University also is to ensure uniform curriculum and standards among the different affiliated colleges imparting education on the same course, it was an educational institution.
One of the respondents - the tax department contended that as per Circular dated 17-6-2021, services provided by the Board or University so far as accreditation to education institutions are taxable and that cited juridical decisions were based on service tax law were inapplicable to the present case. Adopting strict interpretation of relevant provisions that the High Court held that education services were taxable as per Notification No.11/2017-Central Tax (Rate) and exemption has been provided to specified cases like the services rendered by the educational institutions to the students, faculty and staff. Thus, effectively it was held that GST is payable on the inspection and affiliation fees. A finer point made is that exemption may apply after affiliation when students get admission, services are provided to faculty etc. The other point made that the university did not seem aggrieved by the imposition of GST is difficult to understand since the burden would fall on the recipient petitioner and later on the students [2023-VIL-738-TEL].
Transitional credit cannot be denied seeking evidence not required
Transitional credit is eternal as noted in this column before as credit alone is transitional and litigation on this issue will continue for many years. The taxpayer had transitioned input tax credit (ITC) under VAT as per return filed in June, 2017 and also in respect of stock. Such credit was sought to be denied through summary of SCN and summary of order without issuing actual show cause notice and order. The appellate authority partly upheld taxpayer's claim and post such order, the GST authorities promptly wrote to bank initiating recovery action. The High Court found the blunder of non-issuance of actual SCN as bad in law. It also held that insisting on documents for substantiating transitional credit when invoices have been produced, was not correct. The Court also held against the impugned order deciding transitional credit based on factors which are subject matter of assessment was not valid as it observed - "Under the garb of disallowing transitional credit, assessing officer cannot conduct assessment of VAT returns." The impugned order was also held as perverse as assessment order (under VAT law) found no discrepancy in respect of purchases. As per the Court, there is no provision to hold amount in bank in such cases and even if Section 83 is relied on, provisional attachment having exceeded one year, the same is required to be released.
When the department insists on evidence which is not required as per law, it does not consider it necessary to share even SCN or order with the taxpayer. It is anarchy in tax administration as the tax authorities may reject any benefit on illusory grounds and yet, the taxpayer has to fight. Every claim, every benefit has to be litigated and fought in a hard way in GST. The reformist GST is becoming authoritarian and stifling to say the least [2023-VIL-713-JHR].
Summons for appearance - Parallel proceedings argument not applicable
Parallel proceeding is an area which comes before the Courts very often. The words "subject matter" and "proceedings" used in Section 6 of CGST Act on cross-empowerment has been a subject matter of interpretation in several proceedings. The departmental circular on this subject that intelligence-based enforcement action can be taken by CGST officer or SGST officer and whoever takes such action, should take the same to logical conclusion, has also been debated. In a recent case, the High Court found that both Section 6 and the said circular do not cover all situations which would arise in the course of investigation. The petitioner was issued summons by both CGST officer in Maharashtra and SGST officer in Bihar and he assailed the same as multiplicity of proceedings in violation of Section 6. The High Court noted that the investigation in the case was not against the petitioner but was against two entities allegedly engaged in fictitious transactions and petitioner is only an intermediary between these two entities and he has been directed to appear as witness under Section 70. It granted limited relief of time for submission of documents before different authorities. In this case, a surprising argument taken by the department is that summons issued under Section 70 cannot be strictly construed as a proceeding for investigation. The order only highlights the fact that such proceedings will never cease [2023-VIL-724-PAT].
Penalty even after mistake is rectified - High Court quashes order
If vehicle number is not filled up in a form and penalty is imposed for such mistake, one has to get relief from High Court - this is "Simple and Good Tax". In a typical case of e-way bill related infraction, vehicle number was not filled up but the same was subsequently updated and filled. The goods were being sent on stock transfer by the taxpayer within the same State from one unit to another and it was contended that there was no liability and there could not be any evasion. The tax authorities do not consider any reason cited by the taxpayers as somehow penalty should be imposed. The High Court noted that there was no discrepancy in respect of consignment note and delivery challan and the goods were accompanied by e-way bill. Further, the goods were raw material and not final products attracting GST. According to the Court, the authorities have "utterly" failed to show intention to evade payment of tax and once evasion is absent, entire proceedings are not sustainable. Order imposing penalty was set aside. It is not known what role the appellate authority performs in GST other than simply upholding the lower authority's order. If a senior officer is given appellate power, he is expected to think as to the trivial nature of the dispute and also the fact that the mistake has been rectified as well. Such officer mechanically confirms the penalty order - this means such officers are not fit for performing quasi-judicial functions. The day is not far when tax administration will be deprived of such powers [2023-VIL-720-ALH].
Mere entry in ITC ledger is not utilisation of credit
Even calculation simpler than application of Rule 42 of CGST Rules gets complicated when department seeks recovery. The taxpayer had made an error while updating the portal and the ITC credit ledger showed excess of more than Rs 12 lakhs. However, the actual balance available was sufficient for discharge of tax and when the taxpayer discovered the same later he approached the department for assistance in reversal. He did not receive any and later the error was corrected at the time of filing return after about six months. The department duly served notice on taxpayer for wrongful availment of ITC and demand interest as well as penalty. It refused to take into account the fact that though the balance reflected was erroneous there was no utilisation of the same. The High Court relying on precedents held that the legislative intention of Section 50 of CGST Act is that where an ITC is wrongfully reflected in electronic ledger, the same itself is not sufficient to draw penal proceedings until the same or any part of such ITC is put to use so as to become recoverable and if such credit is reversed before utilization, then even the demand of interest and penalty cannot be said to be tenable. This order should be helpful to taxpayers because despite the amendment to relevant provision on non-liability to interest when ITC has not been utilised, in certain quarters, such issues continue to be agitated [2023-VIL-733-P&H].
Physical movement of goods to be proved to avail ITC
The difference at times the chasm between what the law says and what appears just has been the subject of many a tale and movies. Another petitioner was before the High Court pleading the for the default by supplier in not paying tax to the government or uploading the details on the portal, he - scrap dealer who purchased the goods should not be punished by denial of ITC and initiation of proceeding for irregular availment of ITC. However, once again relying on the statutory provision and in the face of lack of documents to actually prove movement of goods, the scales tipped against the petitioner. The onus of proving eligibility to ITC is clearly on the person seeking to avail it and since the largesse is ITC, mere payment through banking channels, or production of e-way bills is insufficient [2023-VIL-731-ALH].
Telecommunication service rendered to foreign telcos is export of service
ITC, refund, e-way bills, all vie for the top spot when it comes to GST disputes. Of course, credit and refund have transitioned from the earlier regimes. The petitioner was denied refund of IGST on export of the connectivity services rendered by it to inbound subscribers of Foreign Telecom Operators (FTOs). The department claimed that 'export of services' was not satisfied and that the claims were time barred. The High Court held that the provisions for ascertaining the place of supply of services under Rule 6A of Service Tax Rules are similar to Section 2(6) of the IGST Act inasmuch as the services will be treated as export of services when the conditions are satisfied. and the judgement in Verizon Communication [2017-VIL-469-DEL-ST] would apply. The argument of the petitioner was that FTOs were recipient of services in question and since they were located outside India, the place of supply of services is outside India in terms of Section 13 of the IGST Act. The contention of the GST department that the subscribers to FTO's were recipients of the service while in India was not accepted. [2023-VIL-728-DEL].
Aluminium foil used for packing food stuff to be classified under Heading 7615 - Purpose test is important
An interesting dispute over classification was before the High Court of Madras. The taxpayer classified his goods - aluminium foil under heading 7615 liable to GST at 12% while the department opined that the goods are classifiable under heading 7607 as "Aluminium foil (whether or not printed or backed with paper, paperboard, plastics or similar backing materials) of a thickness (excluding any backing) not exceeding 0.2 mm)" attracting 18% GST. The argument of the taxpayer was that the nature of goods and purpose of which such goods are supplied would be the basis for determining the classification of goods and since the Aluminium Foil Container is supplied by the petitioner unit are used for packing / serving the food stuff, it is classifiable under 7615. Relying on Commissioner of Central Excise v. Hindalco Industries Limited [2023-VIL-11-SC-CE], the High Court held that the test of common parlance would apply and use of the foil for storing of food would make it appropriately classifiable under heading 7615. While classification was settled in its favour the petitioner was not fortunate to have a direction for refund and it was held that GST at 18% paid by the petitioner for July 2017 to November 2017 would be left to be decided as per due procedure [2023-VIL-736-MAD].
(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)