Tax Vista Your weekly tax recap Edn. 154 - 29th May 2023 By Dr. G. Gokul Kishore

 

 

Rendering service "on behalf of" is not in nature of intermediary

The issue of intermediary always provides a medley of spices and flavours.  In a recent case, the Delhi High Court analysed the provisions of IGST Act to reiterate that in order to decide the question, the service provider and recipient have to be identifiable and their location must be determined. The taxpayer-petitioner contended that the order rejecting refund was the outcome of confusion between the Master License Agreement (MLA) whereby the petitioner was granted non-exclusive rights to certain intellectual property of an American food major including the right to sub-license the same and the Service Agreement between the Indian and US entity which involved research, customisation, screening services in connection with potential joint venture partners, developing modifications of food formulae, training programs at various local sites besides making periodic visits to existing and prospective suppliers on behalf of the US entity.

 

The taxpayer paid tax on royalty in respect of the MLA and claimed refund in respect of the services under service agreement which were stated to be independent services and did not involve any third-party supplier. The department was of the view that assessee was an intermediary between the US entity and the franchisees and since periodic visits were made to local sites/franchisees, place of supply was in India. The SCN stated in broad terms that refund was not admissible since place of supply appears to be in India, without spelling out reasons for the same. Referring to precedent decision in Ernst & Young [2023-VIL-190-DEL] and others,  the High Court reiterated that rendering service on behalf of another person does not render the service provider an intermediary and the matter was remanded for fresh decision [2023-VIL-319-DEL]. VIL has reported another similar order by Delhi High Court on this issue [2023-VIL-309-DEL].

 

Inadvertent error in entering value of goods - High Court rescues

There used to be a TV commercial in which a boy asserts that the difference between a bicycle and a car is only of 2 wheels. Of course, in reality the difference is huge and very obvious, except to tax authorities. An error by the supplier relating to addition of two digits converting the value of goods (382 bicycles) from Rs 10 lakhs to Rs 10 crores catapulted the taxpayer from a bicycle dealer to a car dealer and made him run all the way to the High Court to get relief. May be good for fitness but bad for business.  The High Court noted that e-way bill recorded the invoice number and the vehicle number and it was impossible to transport goods of greater quantity (almost 100 times more) if indeed the value was in crores. It was held that this was a fit case where the extraordinary remedy can be invoked under Article 226 (writ jurisdiction) and the order of the assessment and as well as the rejection of the appeal were quashed. [2023-VIL-317-PAT]

 

Penalty adjudicated under Section 122 - High Court rejects plea against DRI's powers

The case before Delhi High Court involved under-valuation wherein it was alleged that two invoices were issued by the foreign exporter and extra consideration paid to overseas exporter through agents / representatives using hawala route. The case was investigated by DRI and it found parallel invoices showing higher value than the invoice used for customs purpose which were alleged as false. Penalty was imposed on the overseas entity (exporter) for abetment of evasion of customs duty. The contention on DRI not having jurisdiction to issue SCN was rejected on the ground that SCN was not issued under Section 28 but penalty was proposed under Section 112(a) of Customs Act in the present case and it was adjudicated under Section 122. The Tribunal had also distinguished the present case from the Canon judgment as the latter did not involve any fraud and assessment was on first check basis.

 

Some of the co-noticees had settled the case before Settlement Commission while foreign exporter did not use this opportunity. The Court held that there is no provision whereby benefit of settlement would automatically extend to other noticees as well and therefore, the contention that once main noticees got the case settled, abetment charge cannot lie, was not acceptable. The High Court further held that finding of fact that the appellant had participated in conspiracy with importers to enable them to pay lower customs duty was upheld by Commissioner (Appeals) and CESTAT and therefore, such concurrent findings cannot be disturbed. The Court held that offence was committed in India and therefore, the argument against non-applicability of Customs provisions on overseas entity was not acceptable. Finding of the Tribunal that the appellant was very much present through representatives was taken note of, by the Court [2023-VIL-323-DEL-CU].

 

The above order provides three important propositions - Question of DRI not having jurisdiction does not extend to all cases under Customs Act, no automatic benefit of settlement for co-noticee who opted to litigate and presence through representative is sufficient to proceed against foreign exporter.

 

Hearing without adequate opportunity to rebut is an empty formality

The mechanism of advance ruling aims at certainty and settlement of issues so that litigation can be avoided, but in GST law, the mechanism is mostly used to convince supplier or recipients who quarrel over GST rate or valuation. Like most of the quasi-judicial authorities, the AAR is also oblivious of procedures and due process in deciding an application. The petitioner-applicant was aggrieved by the order of the AAR which was passed after giving an opportunity of hearing but without informing the applicant of the reason for rejection of application thus depriving him the opportunity to contest the same. The application pertained to a supply which was completed on date of application and hence the AAR opined the as the transaction was neither "being undertaken" not "proposed to be undertaken," no ruling could be given. The petitioner also submitted that the petition must be heard by a Division Bench but the High Court held that since the issue pertained to denial of natural justice, it need not be placed before a Division Bench. As regards the rejection of application, it held that application was to be restored for reconsideration by AAR with due opportunity to the petitioner [2023-VIL-314-KAR].

 

Enhancement of value by notional amount of additional freight not valid

The department sought to enhance declared value by including additional freight alleging that the goods from UAE / Oman were routed through port in Iran but such fact was concealed and therefore additional customs duty was payable. Penalties and confiscation along with redemption fine were also part of the proceedings. The allegation of concealment of place of origin has not been accepted by the Tribunal on the ground that evidence through official channels was not produced on movement of vessels and reliance was solely placed on statement of masters of the vessels and the appellant (importer) did not have commercial arrangement with the vessels. Terming the evidence as "tenuous", the Tribunal held that invoice price should be considered as the transaction value and the attempt by adjudicating authority in computing freight was not related to payment made to carrier and such "freight ascertained does not even pretend to be the representative of the actual payment made, either by exporter or by importer, to the carrier." Enhancement was thus set aside. The Tribunal highlighted that it has rendered the decision only based on facts without considering the case law cited by the parties probably to reject the contention of the department that the importer cannot be compelled to prove the trail when declared value was not questioned under Rule 12 of Customs Valuation Rules [2023-VIL-458-CESTAT-MUM-CU].

 

The above order is yet another in the long line of cases holding that when payment of additional consideration is not proved, then rejection of declared value and enhancement of certain components to transaction value are not sustainable.

 

Fuel cost is liable for inclusion in value - Travelling through the potholes

Fuel cost is liable to be included in the taxable value adopted for renting of vehicle - this is the advance ruling. However, the reasoning does not match with facts, at least as it appears from the ruling as recorded. Two parties provide such service to applicant. The applicant is a service recipient. There is no objection on maintainability of application by such recipient. While one party (service provider) includes fuel cost in the bill / invoice, such practice is not followed by the second supplier. The applicant sought to know - out of these two practices, which one is correct. The Authority for Advance Rulings (AAR) has held that without fuel, transportation service cannot be provided and fuel charges are reimbursement of expenses incurred for providing such service and hence, the same is liable to be included in taxable value for payment of GST. The ruling speaks about the provision in Section 15 of CGST Act on inclusion of amount which the supplier is liable to pay but which has been incurred by the recipient. In this case, it appears, the recipient was not incurring fuel expenses. Irrespective of such potholes in reasoning, the applicant can now instruct the suppliers to adopt what the AAR has said [2023-VIL-91-AAR]

 

 

(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)