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Tax Vista Your weekly tax recap Edn. 149 - 24th April 2023 By Dr. G. Gokul Kishore |
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Intermediary service - Place of supply provision is valid
Due to difference of opinion between the Judges of the Division Bench, the issue of constitutional validity of Section 13(8)(b) of IGST Act was referred to Third Judge. Now, the Third Judge has held that the provisions are valid and constitutional. The order itself speaks about independent reasoning given as compared to the views expressed by the Division Bench earlier. In fact, the latest order does not discuss elaborately constitutionality per se as it prefers to give weightage to legislative wisdom in enacting such provision whereby intermediary in India earning foreign exchange from foreign service recipient for marketing service is denied the benefit of export of service by deeming his location as the place of supply which is India. The present order labours elaborately to hold that both Section 13(8)(b) deeming location of intermediary as place of supply and Section 8(2) treating supply as intra-State when location of supplier and place of supply are in the same State are legal and valid on the ground that their operation is confined to IGST Act and the same cannot be made applicable for levy of tax under CGST Act / SGST Act.
For arriving at the above conclusion, the order reads -"It may be observed that the legislative wisdom to have the provisions of Section 2(6), Section 7, Section 8(2), Section 12 and Section 13 under the IGST Act and the consequence of any such transaction of export of service being scrutinized for the benefit under Section 16 of a Zero Rated Tax, need not be gone into, suffice it to observe that the mechanism for Section 13(8)(b) to operate is confined only to the provisions of the IGST Act. It also cannot be overlooked that there is likelihood that there are categories of transactions in relation to the intermediaries which may stricto sensu fall under the provisions of the IGST Act only and hence, to dislodge the provisions of Section 13(8)(b) from the IGST Act merely because it is deemed to have an application under the CGST Act and the MGST Act qua the export of service, in regard to such categories of person who can also be classified as intermediaries, would be a fatal proposition. It is for such reason, in my opinion, insofar as the provisions of Section 13(8)(b) is concerned, the same are required to be read to confined only to the provisions of the IGST Act. Constitutionally and for the reasons as discussed in the forgoing paragraphs, it is not permissible for such provision to operate under the CGST Act and the MGST Act."
The order deals with the tricky question of why something which is intra-State (supply) should be defined in IGST Act when the statute itself is for inter-State supply. It makes specific note of 139th Report on GST impact on exports of the Parliamentary Standing Committee on Commerce wherein amendment to Section 13(8)9B) was emphasized as required so that benefit of export of service is made available to intermediary services. The Third Judge has rejected the argument that there is no extra-territorial operation of law involved in this case as the subject-matter was only inter-State trade and commerce [2023-VIL-240-BOM].
Readers may see "Intermediary Service - Bombay High Court delivers split verdict on Constitutional validity" Tax Vista dated 21-6-2021. After all such exhaustive orders, taxpayers are back to square one - the provision on intermediary is valid and they will not be eligible for export of service benefit. The position may not continue in the longer run and amendment may have to be effected some day so that such artificial revenue generation measures are eschewed.
Rejection of refund to service exporter for potential use of document in various ports
Rejection of refund by GST authorities, in most cases, has amusing reasons which laymen can hardly think of. The claimant / taxpayer is an exporter of software. Refund was rejected for a particular period and for other periods, show cause notice was issued. The ground alleged was that the e-BRC / FIRC belonged to another office and it could not be correlated with the local office of the petitioner which has sought refund. The amusement part is that it alleged that the same document can be used for refund claim across other ports in the country. The High Court remarked that it would be incongruous to hold that the petitioner being exporter of software, the FIRC / e-BRC could be used in "other ports" and the certificates are specific to invoices and subject to detailed procedures. The order rejecting refund was quashed and the authority was directed to reconsider the issue after deciding SCN [2023-VIL-237-KAR].
Rejecting refund - Neither substance nor form
The draftsman makes every effort to ensure that refund application, processing, grant of refund, etc., pass through legally sound process. However, the implementing officers are quite clear on non-adherence and we get orders from High Courts detailing the provisions and ensuring that procedure/natural justice is followed. The petitioner's claim for refund of IGST paid was rejected without communicating the defects through Form GST RFD-03 (deficiency memo) and instead SCN (RFD-08) was issued proposing rejection of claim. Deficiencies were uploaded as a separate file and not in the prescribed form. No opportunity of hearing was granted and the department also advanced a weak excuse that the form did not have sufficient space to record deficiency. One must applaud the assessees who are using the portal which is difficult for officers and running businesses as well. The High Court held that non-intimation of deficiency and attaching such defects in a file along with SCN in Form GST RFD-08 deprived the assessee of opportunity to file a fresh application and caused prejudice to the assessee besides giving rise to needless litigation. The order of rejection was set aside and the authority was directed to consider the claim afresh [2023-VIL-238-BOM].
In another case of a petitioner before High Court of Orissa, natural justice was observed in full to reject the refund claim on account of inverted duty structure, in full though it appears from the order that amount actually disputed was about INR 5 lakhs and eligible claim was in about INR 2 crores. The deficiencies in the application were pointed out, books of account and explanations were called for and since the petitioner failed to produce documents in respect of the disputed amount, the entire claim was rejected. The Orissa High Court provided relief to the petitioner by directing sanction of refund of the undisputed amount though it did observe that when the statute seeks submission of certain documents, it should be complied with by the assessee. The disputed amount was directed to be adjudicated as per statutory mandate [2023-VIL-243-ORI].
Renting of property by non-resident is not import of service by recipient
In an application for advance ruling where reasoning appears to be influenced by direct tax concepts, the applicant, a non-resident Indian contended that he was ordinarily resident outside India and renting of commercial property would be import of services by the recipient and that he (the owner/supplier) need not take GST registration. The applicant had appointed his mother as a GPA holder. The AAR held that in case of services related to immovable property, place of supply would be Bengaluru where property is situated and not California where the supplier resided. Also, as agent was covered under the term "Supplier" in Section 2(105) of CGST Act, the GPA holder residing in Bengaluru was liable to take registration. It took note of terms contained in GPA which included the power to create tenancy, execute necessary deeds, received rent, etc. [2023-VIL-78-AAR]. This ruling should be useful to many though NRIs having let out their property in India may not be aware of tax liabilities, advance rulings and resources like VIL. But in several cases, GPA will not be there and the rent is simply credited to the Indian bank account of such NRI and even agreements are signed when such NRI visits India.
Transfer of all assets and liabilities not required for going concern exemption
The question involved is transfer of development, operation and management of airport by the applicant to SPV floated by the successful bidder (concessionaire) and entire airport operations which were run by the applicant would be given to the concessionaire for 50 years for agreed consideration. The consideration was stated as comprising of payment towards aeronautical assets and on-aeronautical assets at depreciated value, payment towards contract works in progress, reimbursement of salaries towards employees who will be on deputation and monthly concession fee. Liabilities before commercial operation date will continue with the applicant as per the agreement. Testing the transaction on parameters like continuing the business for foreseeable future, ability to carry out business independently with assets and liabilities transferred, etc., the AAR has held that the business is proposed to be continued in the present case as the agreement mentions 50 years and contracts have been novated. As per the ruling, it is not essential to transfer all the assets and liabilities to qualify as transfer of business but even if some assets are retained, if the concessionaire is able to carry out business, then it will quality as transfer. On non-transfer of all liabilities vis-à-vis going concern concept, it holds the same as above. Placing reliance on Gujarat and UP AAR's ruling on this issue, the transaction has been held to be transfer of going concern and covered under exemption as per Notification No. 12/2017-Central Tax (Rate) [2023-VIL-80-AAR]. The ruling may not be seen as a surprise when one notices the concessionaire's name but this column being apolitical, we are more concerned with the so-called ratio that transfer of all assets and all liabilities is not required to treat the transfer of business or part of business as transfer as going concern.
Manufacture means supply of goods and not supply of service
For unreasoned conclusions, advance rulings can be seen. In a recent ruling, the question posed was whether the activity of manufacture of pre-cast manholes using cement and steel provided by recipient is supply of goods or supply of service. The Authority for Advance Ruling (AAR) has concluded in one para that what is not goods will alone be service and in the present case, the applicant himself has stated that they are manufacturing precast manholes which are goods and therefore, the transaction is supply of goods. Ownership of the item being with the applicant has also been pointed out for such conclusion. Entire activity is carried out by the applicant and it is not a mere case of treatment or activity on principal's goods and therefore, it will not be covered under job work. It has also abruptly held that it would not be manufacturing service. Further, value of FOC items are includible in the taxable value as per the ruling. Section 15 of CGST Act is well-defined and therefore, rulings under other statutes (service tax) are not required to be referred or relied on, as per the ruling. CBIC Circular on inclusion of value of moulds and dies which is directly applicable to this issue has been distinguished artificially. The arguments advanced by the applicant seem to be good but the advice to seek advance ruling is not understandable [2023-VIL-79-AAR].
Ice cream sticks are articles of tableware classifiable under HSN 4419.90.90
The applicant engaged in supply wooden ice cream sticks and wooden ice cream spoons to dairy industry and for use in consumption of ice cream sought classification of the goods supplied by it. The applicant imported semi-finished wooden sticks and wooden spoons made of European Birch. The applicant contended that it was classifiable under tariff item 4421 91 90 attracting 12% GST. However the AAR opined that while Chapter 44 of Customs Tariff which covers wood and articles of wood, heading 4421 pertains to other articles of wood such as cloth hangers; articles such as spools, cops, bobbins etc., for cotton machinery, jute machinery and other machinery. It held that the appropriate heading would be 4419 which covers tableware and kitchenware of wood and specifically 4419 90 covers table ware and kitchenware of other wood i.e. other than bamboo wood. Further as per HSN explanatory notes Heading 4419 covers spoons, crumb-scoops in addition to other articles and the impugned products being the wooden spoon and wooden stick qualify to be covered under spoons and crumb-scoops respectively would merit classification under 4419 90 90 as tableware made up of wood other than bamboo which is more specific [2023-VIL-76-AAR]. The GST rate for the tariff item as per ruling is also 12%. Fortunately, the tax temperature did not rise for a summer-friendly item as it would have been unbearable in this extreme heat.
(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)