Tax Vista

Your weekly tax recap

Edn. 179 - 20th Nov. 2023

By Dr. G. Gokul Kishore




Refund of ITC due to inverted tax structure not deniable holding rates of inputs and outputs as "more or less same"

Refund of accumulated input tax credit due to inverted tax structure cannot be denied on grounds like multiple inputs and multiple output supplies are involved and output sales to the extent of 80% attract 5% GST and most of the inputs also attract 5% GST and thus concluding that the rates are "more or less the same". As long as the rate of tax on inputs is higher than the rate of tax on output supplies, refund cannot be denied. This is the crux of well-reasoned judgment of Rajasthan High Court. The Court has held that the order rejecting refund proceeded on erroneous presumptions and the approach of "rate is more or less the same" is contrary to the statutory scheme. As per the order -"Once all the inputs and output supplies on comparative basis lead to a situation where the rate of tax on inputs is higher than the rate of tax on output supplies, the scheme of refund is required to be given full effect to and it cannot be denied on such considerations that rate of tax, on comparative analysis, is more or less the same. This, at the same time, perilously borders perversity because the rate of tax on many inputs is much higher than the rate of tax on output supplies. While rate of tax on certain inputs is 18% and 28%, none of the output supplies attracts rate of tax beyond 12%. Then, how the rate of tax could be said to be more or less the same." There were factual discrepancies also in the order which have been highlighted by the Court and orders have been set aside with the direction to consider the claim afresh. One of the significant rulings in this order is that even if the overall rate of all inputs is marginally higher than rate of tax on output supplies, accumulation of ITC will be covered under inverted tax structure.


The Court further rejected another ground taken for denial of refund - refund being claimed mainly due to more purchase of raw materials and such goods were in stock. The determining factor for applicability of Section 54(3) of CGST Act is rate of tax and quantum of ITC and not the value / quantum of individual inputs and the output and stock-based approach was not as per law. Use of plural in "inputs" and "output supplies" and interpretation of the provision have been dealt with in greater detail in this order [2023-VIL-790-RAJ].


Refund of unutilised ITC due to inversion in tax structure was proclaimed as a major progressive and taxpayer-friendly measure of GST which was not available before. However, at the implementation level, the measure is a miserable failure as either most of the claims are outrightly rejected adopting illusory and illegal grounds or partly sanctioned applying the formula erroneously. Though refund in general is illusory in many cases, at least, the propaganda can be tempered.


Refund of IGST paid on supplies to SEZ not deniable for delay in endorsement  

The time-limit for claiming refund within two years is directory in nature and not mandatory since Section 54(1) of CGST Act uses "may" and even if refund is claimed after two years, it cannot be denied in appropriate cases. This is one of the takeaways of a recent judgment of Madras High Court. In this case, refund of IGST paid on supplies to SEZ units was claimed but the same was rejected on grounds like endorsement of SEZ officer having been obtained after delay and hence, time-barred, proof of receipt of consideration was furnished along with reply after two years and mismatch in Statement-4 which cannot be relied on. The taxpayer-petitioner argued that time-limit of 45 days for obtaining endorsement as per SEZ Rules is not applicable in their case where refund was sought on payment of tax and delay is a technical irregularity for which refund could not be denied and non-filing of documents at the time of filing claim is not fatal.


The High Court held that once tax has been paid and the goods have entered SEZ and endorsement has been obtained, refund cannot be denied and the failure to endorse within 45 days was the fault of the SEZ officer and refund cannot be denied to the taxpayer-petitioner on such ground. The charge of inappropriate endorsement has been rejected holding that the same is a technical irregularity and when the signature is not doubted, the taxpayer cannot be penalised. It specifically said that the department should have assisted the taxpayer in rectifying the defects instead of rejecting the refund claim. On the allegation of endorsement not stating that the goods were meant for authorized operations, the Court said that the condition on use of goods in SEZ for authorized operation has been inserted in Section 16 of IGST Act from 1-10-2023 and the same being prospective, it cannot be applied in the present case. Failure to issue deficiency memo was also noted by the Court to reject the ground of delay in submission of supporting documents as the applications were accepted and acknowledged and later, only SCN was issued. Refund was directed to be granted after setting aside the original and appellate orders. The High Court order cites CBDT circular (which is not applicable in this case) and refers to the respondent as income tax department which should be taken note of by readers. The order is well-reasoned and should be useful to several taxpayers as rejection of refund on technical issues is the usual modus operandi of the GST authorities [2023-VIL-799-MAD].


IGST to be charged when supplier and buyer of goods are in different States though goods are delivered to job worker in supplier's State

The seller was in Kerala, buyer in Tamil Nadu and the buyer had directed the seller to deliver the goods to job worker in Kerala. Buyer's name in customer column and job worker's name in name of consignee column were mentioned in the invoice. Goods were detained while in transit alleging that since place of delivery of goods was in the same State (Kerala), CGST and SGST should have been charged with such SGST being credited to Kerala whereas IGST has been charged in the invoice with the SGST component going to Tamil Nadu Government. The goods were released only after payment of the amount demanded. These proceedings were challenged in High Court where the taxpayer-petitioner argued that as per Section 10(1)(b) of IGST Act, when goods are delivered to job worker, the principal is deemed to have received the same and place of delivery is not relevant but place of supply should be considered to treat the transaction as inter-State supply.


The High Court considered the relevant provisions and held that where supply is made on the directions of third party, then place of the principal / third party shall be the place of supply as per Section 10(1)(b) and in the present case, the supply would be inter-State supply liable to IGST and not intra-State supply. According to the Court, the invoice raised in this case was in compliance with the job work procedure as provided in Section 143 of CGST Act which is appliable to IGST Act also. Writ petition was held as entertainable since the proceedings were initiated when the SGST authorities did not have jurisdiction in this matter and the orders were set aside by the High Court [2023-VIL-798-KER].


SGST Authorities, in general, are not very familiar with job work procedures as the same was part of Central Excise regime with appropriate notifications, procedures, jurisprudence, etc. Secondly, place of supply provisions are also not easily understood by many as the provisions are very many catering to different situations. However, the officers implementing the law are expected to have understood the basics of these provisions particularly Section 10(1)(b). The issue was raised in 2018 in the above case and the amount was paid under protest at that time. Now, after five years, the taxpayer will file refund claim which will most likely be challenged on unjust enrichment or limitation by the department, setting in motion the second round of litigation.


Section 16(2)(c) of CGST Act and Rule 36(4) of CGST Rules valid

When it comes to ITC, a taxpayer would definitely throw every challenge against denial and validity of Section 16(2)(c) of CGST Act cannot be omitted as it has always been under cloud. Making the recipient bear the burden to ensure compliances by the supplier is something that is practically difficult, but law is not concerned with such difficulties. Tax law has the primary objective of revenue maximisation for the exchequer and therefore, every provision is drafted to achieve the same.


The petitioner was aggrieved by restriction of ITC to 20% (prior to amendment) on account of default of supplier in uploading details of sales and challenged the constitutional validity of Section 16(2)(c) of CGST Act and Rule 36(4) of CGST Rules contending that it discriminated against purchasing dealers. The petitioner urged that to insist that the purchasing dealer must ensure the compliance of the statutory provisions by the supplying dealer was arbitrary and illegal and violative of Article 14 of the Constitution. However, the High Court reiterated that input tax credit is in the nature of a benefit/concession and not a right extended to the dealer under the statutory scheme. The Court noted that the challenge was not based on legislative competence but the provision being vague. It said that the provision does not discriminate between purchasing and selling dealers and prescription of conditions cannot be considered as discriminatory. Also, in so far as the provisions are concerned, it held that there was nothing manifestly arbitrary or the enactment being drastically unreasonable, capricious, irrational, or without adequate determining principle as laid down in precedent judgment [2023-VIL-793-KER].


Tax Research Unit not empowered to issue circular clarifying classification

The High Court was confronted with classification dispute on polypropylene woven and non-woven bags including those laminated with Biaxially Oriented Polypropylene [BOPP], as to whether they merit classification under Chapter 39 and more particularly heading 3923 of Customs Tariff or heading 5603 comprised in Chapter 56 titled as "Wadding, Felt and Nonwovens; Special Yarns; Twine, Cordage, Ropes and Cables and Articles Thereof". Circular No. 80/54/2018-GST dated 31.12.2018 was issued by Tax Research Unit (TRU) classifying the same under heading 3923. Both the classification and the power of TRU to issue such a circular were challenged by way of writ petition. There are advance rulings both for and against the classification and also certain rulings classifying the said goods under heading 6305. However, without opining on the classification, the High Court held that TRU was not empowered to issue circular and even if a clarification pertaining to classification were to be issued under the CGST Act, the same could have been achieved only by way of a directive issued by the Board and none other [2023-VIL-795-DEL].


Section 168 of CGST Act empowers the Board to issue instructions or directions. While most of the circulars issued by CBIC do not quote this provision in the preamble, circulars issued after GST Council's recommendations on rate changes or clarification on rates are generally issued by TRU. TRU is housed in North Block and it is shown as a wing or unit of CBIC as per RTI information hosted in CBIC portal. However, the variance in practice of issuing circulars by CBIC itself (as shown in most of them) and a few by TRU is not clear. The above order may compel the CBIC to take action providing clarity on the status and powers of TRU.


Tax collected not paid - Non-mention of specific section in SCN not fatal

In Tax Vista dated 30-10-2023, the order of Single Judge Bench wherein imposition of penalty though differential tax was paid within 30 days of issuance of SCN was upheld, was covered [2023-VIL-754-KER]. This was a case of tax collected but not paid and hence it was held that penalty was imposable. The taxpayer made another argument before the Division Bench that the specific provision viz., Section 73(11) of CGST Act was not mentioned in the show case notice and that only Section 73(9) was mentioned, and the order had travelled beyond the show cause notice. The infraction of collection of tax but failure to pay the same to the exchequer, committed by the taxpayer being apparent on record, the High Court upheld the order of the Single Judge reasoning that merely because the show cause notice did not refer to a particular statutory provision, the appellant cannot be said to have been prejudiced when the facts leading to the invocation of the statutory provision concerned were admitted by them. There are precedents for both - absence of specific provision in the SCN vitiates the same as against those holding that as long as the charges are clear, not quoting sub-section or sub-rule is not fatal [2023-VIL-792-KER].


Blocking of ITC - Order necessary and letter not sufficient

Rule 86A of CGST Rules provides for blocking of input tax credit as a pre-emptive measure in certain situations like invoice issued by non-existent person and issuance of invoice without supply which means the recipient has availed ITC based on paper without receiving goods. The electronic credit ledger of the petitioner was blocked in the course of investigation stating that the transactions were bogus and his suppliers were non-existent. The petitioner had earlier furnished details of invoice and his grievance was that without considering the same and without issuing a show cause notice, a non-speaking order was passed. The High Court granted relief to the petitioner holding that since neither the notice nor the letter made any mention of being proceedings in terms of Section 74 of SGST Act, it was not sustainable. However, it stated that since relief was on account of technicalities, the department may proceed as per law in the matter. Surprisingly the department argued that the notice issued was in the nature of an SCN and the impugned order was an assessment order. Rule 86A requires recording of reasons in writing and does not mention issue of SCN or hearing prior to blocking of ITC. The order of High Court is not clear on the reasoning or arguments. It appears the Court considered the letter issued by the department as not sufficient for the purpose of Rule 86A as it notes there was no order issued [2023-VIL-796-TEL].


Previous edition, dated 13th Oct 2023


(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 -