Tax Vista Your weekly tax recap Edn. 153 - 22nd May 2023 By Dr. G. Gokul Kishore

 

 

Sales tax liability on warranty replacement - Supreme Court lays down the law

It is fairly well settled that free service and maintenance is not actually free and is a selling point where both seller and buyer are happy in believing that something is "free". However, from the tax angle the issue is not free from doubt nor free from taxation. A Larger Bench of the Supreme Court examined whether there is a taxable sale when a dealer replaced a defective part and gets a "recompense" in the form of a credit note from the manufacturer. The most immediate answer would be that such recompense is part of the agreement between the manufacturer and dealer and in fact the dealer is only acting on behalf of the manufacturer and that sale has already taken place between manufacturer and buyer and the dealer is not selling spare parts to the manufacturer. In Mohd. Ekram Khan & Sons v. CTT [2004-VIL-08-SC], it was held that credit note issued by a manufacturer to a dealer of automobiles in consideration of the replacement of a defective part in the automobile sold pursuant to a warranty agreement being collateral to the sale of the automobile is exigible to sales tax. This transaction was equated with a case where the dealer would buy such spare part from the open market and sell it to a customer or the manufacturer would buy it and sell it to a customer. However there can be variations to the transaction where a dealer issues such part out of his own stock which may be bought earlier from the manufacturer or in open market. Also the dealer could be acting in terms of the dealership agreement and would be entitled for a commission or other remuneration for his services.

 

After examining the meaning of warranty, sale and elements of sale, it was concluded that though transfer of property does not take place between the dealer and manufacturer, there is a transfer between dealer and customer made on behalf of the manufacturer to fulfil warranty obligation. Also, the recompense in the form of credit note to the dealer is because the dealer would not receive any price from the customer for the replacement of the defective part, using his own stock or parts bought by him which is entitled to profit from. Credit note was held to be "valuable consideration" under Section 2(g) of the Central Sales Tax Act or the Sales Tax Act of the respective States since sale is "any transfer of property in goods by one person to another for cash or deferred payment or for any other valuable consideration."

 

The Apex Court clarified that if the transaction is covered under the dealership agreement and remuneration is received for the same, it would be service and not sale. That is where the dealer has simply received a spare part from the manufacturer of the automobile so as to replace a defective part therein under a warranty collateral to the sale of the automobile.

 

Interestingly the Supreme Court also held that for sale, it is immaterial who pays consideration so long as consideration is paid and the dealer is acting under directions of the manufacturer. The field is yet to be tested in GST which also rests on "consideration", supply covering all forms of transfer. The bifurcation between sale and service is not there in GST so as to exclude one type of transaction from another. Another question would be whether a dealer would be expected to charge GST on such sum if the same interpretation (credit note being a valuable consideration) is adopted in GST [2023-VIL-57-SC].

 

Attachment of assets of taxpayer in different jurisdiction is not valid

Quite akin to repeated battles by rulers of yesteryears, the taxpayer relentlessly ran from department to the High Court and back and again seeking relief from attachment of his bank account. The attachment was the result of investigation by the department against one of his buyers. The petitioner's principal place of business was in Haryana and had another place of business in UP. The attachment order was passed by GST authority in UP who did not have territorial jurisdiction over the petitioner's place of business. The department contended that the petitioner was in fact a dummy entity of the buyer and ITC was being fraudulently passed on by supply of invoice without goods. The High Court held that assets of a person falling under sub-section (1A) of Section 122 of the CGST Act can be attached as per Section 83 only by Commissioner who exercises jurisdiction in respect of the said taxable person.

 

While it opined that this reason was sufficient to hold against the attachment, it also proceeded to hold that mere assumptions and statements not backed by evidence would not establish a live nexus between the material and the formation of belief that the attachment is essential to protect revenue interest. In the instant case, there was no proof that the contraventions alleged were carried out under the instructions/control of the petitioner [2023-VIL-306-DEL]. Attachment can only be detached through writ courts as the officers hardly renounce arbitrariness. A senior officer like Commissioner, it appears, is not even aware of his territorial jurisdiction or being aware thought his power to attach extends to taxpayers in others part of the country also. Attachment is a draconian power and is given to senior officers only to ensure that it is not misused but the cases like the one above belie such belief.

 

Review of audit report cannot be sought as rectification under Section 161

Perhaps inspired by revenue officers who issue attachment orders and search for justification later or seek excuses before lifting of attachment, the taxpayer sought rectification / review of audit report and had requested that SCN may not be proceeded with till the rectification application under Section 161 of CGST Act is decided. The officer concluded that there was no error apparent on record in the report and issued Show Cause Notice. The assessee assailed the same by way of writ petition. The department argued that by rectification application, the taxpayer sought re-examination of audit report which is not allowed under Section 161.

 

The High Court held that there was no flaw in the procedure followed before issue of show cause notice - intimation of audit, hearing offered to assessee prior to finalising audit report and then issuance of show cause notice and hence there was no case for interference by the High Court. The Court directed the taxpayer to file objections before the adjudicating authority [2023-VIL-302-PAT]. Taxpayers hesitate to move High Court in cases where there is blatant violation of procedures and adverse order is passed since writ jurisdiction is discretionary and the Court may not grant the relief sought. In this case, filing rectification application before the department and then writ petition before the High Court could have been avoided.

 

Extension of time limit to file appeal - Four months not to be counted as 120 days

The Allahabad High Court held that the appellate authority should examine whether assessee was prevented by sufficient cause from filing appeal on time. In the case of the petitioner, the appeal was dismissed since it was not filed within 120 days taking four months as 4 x 30 days. The High Court also opined that four months could be 122 or 121 days and directed the appellate authority to decide the appeal which was filed on the 121st day, on merits [2023-VIL-300-ALH]. It would be advisable to use days while prescribing limitation instead of using the term "month". It should also be expressly provided that in computing such limitation, the commencement date should be excluded. In the absence of such clarity, petitions are being filed even for interpretation of limitation period and in certain cases, Limitation Act is referred though special enactments provide for separate time-limits.

 

Assessee should be given "sufficient" time to respond to notice

Relying on inter alia Circular No.12/2022 dated 26-9-2022, the petitioner contended that he had not been given sufficient time to respond to show cause notice and the order issued without considering all issues/documents was not legally valid. From the facts it appears that one opportunity was given but time was not given to provide reply to subsequent queries and the order was issued. The High Court held that in terms of the above said circular, the officer is obliged to provide sufficient time, communicate to the assessee in case time is refused such decision cannot be taken in in an arbitrary manner and since no reason was communicated to the assessee, fresh orders were to be passed after providing another hearing to the assessee [2023-VIL-303-MAD]. The undue haste to complete adjudication proceedings and pass orders which are invariably pro-revenue is one more reason for divesting adjudication function from regular executive machinery and to create a separate hierarchy for quasi-judicial functions within the tax administration.

 

Open parking space not bundled with apartment and taxable as a separate service

The appellant was of the view that open parking space provided along with construction services of the apartment will be a bundled service. The AAR had held that it would not be so and that the service of providing parking space would attract GST at 18%. The Appellate AAR noted that as per facts the open car parking space can be opted for by a buyer even after purchase of flat and hence it is not a composite supply. Also, the common area cannot be transferred to any allottee or third person by the applicant, engaged in construction of residential apartments. As regards valuation, the AAAR held that it will not qualify for one-third abatement of valuation of land for open parking space since the abatement was already reckoned in valuation of apartment [2023-VIL-21-AAAR]. Tax treatment of various amenities continues to be a grey area from service tax regime and the issue has come to haunt GST regime as well. Clarification may come once the war is over and sacrifices have been made.

 

Access to common facilities provided on developed plots exigible to GST

Though land is tangible and finite, issues continue to develop and arise infinitely. Post clarification in Circular No. 177 dated 3-8-2022 also, the applicant sought a ruling on taxability of sale of plot, basic infrastructure charges and charges towards common facilities. It also wanted to know whether charging of a single price and time of collection whether before registration of sale deed or after would make a difference to taxability. The Authority for Advance Ruling (AAR) perused various clauses in the draft agreement of sale and concluded that sale of land and developed land with basic infrastructure would not be exigible to GST and the consideration for the sale whether paid before or after registration would not be taxable. However as regards common amenities, it noted that the ownership of such facilities like club house continued to be with the applicant-promoter and hence charges collected for use of the facilities would qualify as a service and would be taxable. The ruling terms it as provision of access rights for a consideration and would constitute a separate supply. The ruling also speaks about estimated other charges, corpus fund, etc. If the sale price is consolidated i.e. single price for sale of plot and for such amenities, then charges proportionate to common facilities would be liable to GST [2023-VIL-87-AAR]. The ruling appears to be reasoned though one may argue it is not reasonable.

 

(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)