Tax Vista Your weekly tax recap Edn. 145 - 27th March 2023 By Dr. G. Gokul Kishore

 

 

Finance Bill on the verge of becoming Act - GST Tribunal at last

GST Appellate Tribunal was thought as "lost" but "at last" establishment of the same is in sight. Finance Bill, 2023 as passed by Lok Sabha makes drastic amendments - no two tier body at national level - only one Principal Bench and similarly, in States, only State Benches. The issue which made Tribunal a non-starter - Judicial Member being in minority has been addressed by providing for equal number of Judicial Members as Technical Members. But the issue which is likely to balloon is non-inclusion of Advocates for being considered as appointment to the post of Judicial Member. Almost every other Tribunal has such window - even the High Courts and Supreme Court appoints members from the Bar as Judges - a Tribunal cannot be different. Leaving this aside for the moment, let us hope the new Tribunal is established without any further delay so that taxpayers are saved from engaging in writ litigation in High Courts.

 

Section 16(2)(c) - High Court calls for mechanism to address the issue

Section 16(2)(c) of CGST Act which mandates actual payment of tax for the purchaser to avail input tax credit is thorn in the flesh of taxpayers. It is obvious that neither GST law nor tax administration has prescribed any method or facility to enable the purchaser to ensure that the tax paid by him to his supplier is actually paid into government account. The issue has been recognized by Madras High Court in a recent order where it held that a mechanism must be put in place to address the issue of casting substantive liability on the supplier and protective liability on the purchaser. It said -"An additional factor is that where the tax liability has been met by way of reversal of ITC and similarly recovery is effected from the supplier as well, this would amount to a double benefit to the revenue. Thus, while the Department may reverse credit in the hands of the purchaser, this has to be a protective move, to be reversed and credit restored if the liability is made good by the supplier. Thus, the substantive liability falls on the supplier and the protective liability upon the purchaser. A mechanism must be put in place to address this situation." However, in this case, the matter was remanded as the petitioner had assailed the order on the ground that relied upon case law were not considered and Section 161 on rectification would be applicable [2023-VIL-188-MAD].

 

The extremely restrictive Modvat or Cenvat credit scheme (except service providers) did not have such non-implementable condition. Everyone admits that purchaser cannot be blamed when supplier vanishes with the money. However, purchaser is expected to join the nation in protecting public revenue by sacrificing ITC when his supplier is at large. The seamless ITC will never be seamless. It will take decades for Section 16 of CGST Act to get settled.

 

Refund of ITC - Purchaser not required to examine supplier's affairs

Compared to the above, at least in respect of refund, taxpayers are fortunate. The taxpayer was denied refund of unutilised ITC accumulated due on export of goods. There was no charge that the goods were not exported, amount was not paid, etc. The only ground for rejection was apprehension of the department that the supplier of the petitioner had procured goods from persons issuing fake invoices. There was no evidence but mere suspicion in this case. The High Court accepted the contention that purchaser is not required to examine the affairs of supplying dealers. It held that unless it is proved that goods were not received or the amount was not paid, refund cannot be denied. The Court directed the department to process refund of ITC [2023-VIL-181-DEL]. The issue of suspecting someone in the supply chain and charging everyone down the line is becoming rampant. Though it is settled that ITC cannot be denied if there is a suspicion over supplier's supplier, there are conflicting views on this subject. CBIC will address this issue when it goes out of hand and thousands of taxpayers have already suffered the costly process of reversal, rejection and litigation cost.

 

Supply of services on behalf of another without facilitating is not intermediary service

While the establishment of GST Tribunal may end many woes, the Delhi High Court entertained the plea of the assessee who was aggrieved by the order denying refund of ITC. The department was of the view that provision of legal and professional services on behalf of /to group entities would not amount of export of service since the person had rendered services on behalf of group entities and not on its own account. Interpreting Section 2(13) of the IGST Act the High court held that in order to hold a service as that of intermediary, three parties would be required and even if had rendered services on behalf of overseas entity, still it would not amount as intermediary services as it had neither arranged nor facilitated supply between overseas entity and third party. It did not agree with the interpretation of the adjudicating authority that the last limb of the definition of 'intermediary' under Section 2(13) of the IGST Act controlled the definition of the term and held that the limb "provision of services on own account" only restricted the definition. Also, the Court held that there may be services, which may entail outsourcing some constituent part to a third party but that would not be construed as intermediary services [2023-VIL-190-DEL].

 

It is surprising that in this case, for the period subsequent to the disputed period, refund appears to have been granted. On intermediary services, the department is clueless. First, it charged BPOs, call centres, etc. Later, all subsidiary companies were alleged as acting as intermediaries. The special carve out on place of supply for intermediary service is a revenue generating provision and it must go. If GST is truly destination based tax, then even if intermediary is located in India, place of supply should be treated as outside India when the foreign service recipient consumes the same. But this will be like asking for the moon. The only way out is to structure the transactions after reading all the judgments, rulings, circulars on such issue but even this is no guarantee that SCN will not be issued.

 

Vague SCN and reckless exercise of power in cancelling registration

Show cause notice being vague and order being arbitrary are not new. However, when the taxpayer has been filing income tax returns, the presumption is that business is carried on. The department instead of rebutting such presumption, simply cancelled registration, rejected application seeking revocation of cancellation and dismissed appeal as well. If the tax officers want to book cases, some home-work is necessary. In this case, there are bald allegations that goods were received in e-rickshaw and the premises was opened very rarely. It is not clear whether there was anything suspicious in this case but the manner of handling such issues leave the department red-faced before the High Court. The Court held that the SCN was reckless and vague and the order was not only arbitrary but also reckless exercise of power leading to violation of Article 19(1)(g) of the Constitution. The Court directed copy of the order to be sent to Ministry of Finance to ensure such SCNs are not issued in future [2023-VIL-189-ALH].

 

The intention of the Court is noble but such directions are rarely followed. Even orders with strictures or imposing costs are not taken seriously by the tax department. Such orders again point to the need for amending provisions relating to cancellation like vesting of the power with Commissioner, prescribing situations which are extreme in nature as grounds for proposing cancellation and issuance of notice for cancellation based on mahazar with local witnesses that business was indeed not being carried on.

 

Sums received from outgoing member by housing society are taxable

In respect of gratuitous & voluntary payment to the society by the outgoing member of a society, the AAAR has held that the society was barred by its byelaw to collect any voluntary contribution and hence any such sum received cannot be said to be gratuitous. Therefore, the funds which are used for providing further services to members under repairs or maintenance would qualify as consideration. That is the amount will only be utilized as and when need of repair to society building arises when the applicant finalizes the bids received for such repairs to be carried out. Since it is for services agreed to be supplied by society in the near future is an advance, it is exigible to tax at the time of receipt of the amount from members [2023-VIL-15-AAAR]. The appellate ruling confirms the advance ruling holding the same as above. It is not known why advance ruling is sought when majority of them is adverse to taxpayers. While in certain cases, advisors can be blamed, taxpayers are ultimately responsible for such decisions and consequences.

 

Transfer of an independent running division would be a supply of financial service

The title will shock many readers. The applicant, providing/supplying engineering services primarily relating to semi-conductor services in terms of a business transfer agreement intended to sell the independent running business or rather the staffing division along with all the assets and liabilities as a whole as a going concern, on as is where is basis. The lump sum consideration was not vivisected by reference to any movable or immovable assets or intangible and tangible assets and services and it contended that the same was a slump sale. The AAR held that transfer of an independent running division would be a supply of service and classifiable as financial service. It did not agree that the same would be a slump sale and hence exempt stating that the applicant had not provided any details of the staffing division being an independent going concern and only subject to the satisfaction of conditions it may avail the exemption. As regards the applicant's query on whether the transferee can avail ITC, it ruled that such query being not related to the applicant, was beyond its jurisdiction. [2023-VIL-47-AAR]. Merely because auditor's certificate was not furnished when all other documents have been submitted, the ruling puts an "IF" before concluding on entitlement to exemption. Such ambivalent rulings hardly help taxpayers and the mechanism itself was not created for such purpose. During the hearing, the authority could have sought additional documents and examined the same before finding fault with the taxpayer and giving a ruling with caveat.

 

 

(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)