Tax Vista Your weekly tax recap Edn. 157 - 19th June 2023 By Dr. G. Gokul Kishore

 

 

ITC cannot be denied on account of retrospective cancellation of supplier's registration

Caveat Emptor or let buyer beware has acquired new dimensions under GST. In olden days seller would be concerned about receiving consideration and buyer about receiving quality goods. GST law asks the buyer to be more aware of the supplier and his bonafides if he seeks to avail ITC. It is quite onerous and more so when the supplier's registration is cancelled with retrospective effect. In a case before Calcutta High Court, at the time of the transaction, supplier had a valid registration, goods were actually received and payment was made through banking channel yet the department denied ITC since the supplier's registration had been cancelled in proceedings for issuance of fake invoice. The High Court directed the department to consider the documents and evidence afresh and decide on the ITC claim of the taxpayer. It would seem ITC denial rather than ITC is quite seamless and well-structured in GST [2023-VIL-360-CAL]

 

Refund rejection order communicated after 30 months non-est in law

The permutations and combinations in refund rejection would be a challenge for the brightest minds. A PSU seeking refund of compensation cess paid, was before the Jharkhand High Court - it had received intimation that refund was sanctioned and payment advice in RFD-05 was awaited. After follow-ups and representation including approach to writ court, the taxpayer received neither the payment advice, nor order of rejection, only a weak counter that he could avail remedy of appeal. This was despite the order of the High Court on 30-1-2023 asking the department to process the claim. The taxpayer debited the amount which had been credited to his account by the department.

 

The taxpayer was before the High Court again. The department claimed that order of rejection - without adducing what the grounds were - was passed on 18-10-2019 though the intimation of sanction was dated 27-10-2019. Wiser by experience of colleagues in transitional credit perhaps, the taxpayer produced screenshot of the communication of sanction. The department contended that the taxpayer should file the refund application afresh and it would be processed. The High Court was not inclined to listen to the department and stated emphatically that the department cannot hold on to money which is not due citing Union of India v. Tata Chemicals, reported in (2014) 6 SCC 335. It also held that the department had faulted on many counts by not giving opportunity to the taxpayer before denying refunds, not producing the order of rejection and seeking a fresh application which meant that the taxpayer would lose interest he is entitled to. The taxpayer deserves to be complimented for his faith in the writ court and relentless follow-up but it is appalling to think of the fate of smaller taxpayers who may not be able to put up a similar crusade [2023-VIL-367-JHR].

 

Appeal filed belatedly - Taxpayer cannot claim refund of fund attached as recovery

In a departure from the usual cases of laxity by the department, the taxpayer filed appeal belatedly against the order of adjudication. After the intervening time period of 3 months, the department proceeded to attach the bank account of the taxpayer in terms of Section 78 of CGST Act and withdrew about 90% of the outstanding demand. The taxpayer filed appeal against the order alongwith condonation of delay and sought refund of the amount excluding 10% which is the amount of pre-deposit. While the taxpayer-petitioner's claim may appear to be just, the High Court held that the taxpayer cannot seek refund of the amount in excess of 10% (pre-deposit) in view of the provisions contained in Section 73(9) read with Sections 78 and 107 of CGST Act. It held that if appeal filed by the petitioner is allowed by the Appellate Authority, it is always open for the petitioner to make such request before the Appellate Authority for refund of the amount [2023-VIL-374-GUJ].

 

The restlessness and indiscretion shown by tax authorities, particularly, SGST authorities, to initiate recovery proceedings the moment adjudication / assessment order is passed, should be reined in. The trend is assuming alarming proportions and the assessment orders themselves carry the threat that even before expiry of appeal period, recovery will be made. Such behaviour will further deepen the mistrust between the taxpayer and tax administration.

 

Movement of demo car should be accompanied by E-way bill

In an earlier issue of Tax Vista a case of simple error in E-way bill was covered wherein a bicycle manufacturer was visited with valuation of goods in crores. In a case before Madhya Pradesh High Court, a car manufacturer committed a simple error of not raising e-way bill at all. It was contended that the vehicle being transported was a demo vehicle and absence of consideration took it out of the ambit of supply and e-way bill was not required to be raised. However the department rightly contended that as per Rule 138, causing of movement of goods exceeding the value of Rs.50,000/- even for the reasons other than supply, makes it incumbent on the supplier to inform about the supply of goods in Part A of e-way bill in GST portal alongwith other information as required. A transaction such as transport of demo car would be quite common place in the course of business of car manufacturer and it is not known how after 5 years of GST studded with e-way bill litigations, no e-way bill was raised [2023-VIL-366-MP]

 

Refusal of provide information - High Court refuses to interfere with assessment order

Taxpayers are anguished over repeated requests for voluminous and various types of data from the GST authorities. Instead of statutorily filed returns and other information available online, officers seek data in formats designed by them which consume considerable amount of time and resources of taxpayers. However, filing writ petition against such request for data appears to be a move not in the right direction. The Madras High Court has rejected the petition holding that the taxpayer had not cooperated with the department when information was sought as to type of tax when input tax credit has been claimed. The reply of the taxpayer was found to be not convincing by the High Court - the required information might be available in the returns and officer may use the same. The petition was filed against assessment order and order rejecting request for rectification of order but the Court held that information was not provided by the taxpayer (petitioner) and therefore, assessment order passed based on available materials cannot be faulted. Taxpayers may have to build a strong case if mere information or document request by department is alleged as harassment or not within the powers of the authorities. Lack of diligence will entail unnecessary litigation expenses as this case shows [2023-VIL-361-MAD].

 

Provisional attachment - Representation before Commissioner should precede writ petition

Provisional attachment spree continues unabated and many cases witness allegations of bogus billing - issuance of invoice without supply of goods and consequential availment of input tax credit based on such fake documents. In a case of this nature, provisional attachment of bank account and immovable property was assailed by the petitioner but the High Court held that remedy of representing before Commissioner to lift provisional attachment under Rule 159(5) of CGST Rules, 2017 should be exhausted first and in the absence of the same, writ petition cannot be entertained. The Court held that it appeared that petitioner had indulged in fraudulent activities based on perusal of documents submitted by department and therefore, invocation of Section 83 of CGST Act, 2017 was sustainable. Contention on absence of power was rejected taking note of delegation of powers under Sections 3 & 5 of CGST Act. Such cases clearly demonstrate that even when the power used is draconian, writ court will not be swayed to quash exercise of such power when statutory remedy is available. Existence of statutory remedy has to be demonstrated as less effective (better term as compared to "useless") if writ jurisdiction is sought to be invoked [2023-VIL-362-KER].

 

Return of refunded amount during search - HC orders refund with interest

VIL has reported yet another case of "voluntary payment" during search by GST authorities. Almost every week an order on such deposit gets reported The case appears to be plain harassment since refund of input tax credit was granted on the ground that the services supplied amounted to export. Subsequently, during search, the taxpayer was compelled to pay the same amount with the assurance that it would be restored. All these happened in 2021 and neither such assurance was honoured nor were proceedings by way of issuance of show cause notice initiated. The amount involved being Rs. 83 lakhs, the taxpayer had no option but to seek High Court's interference. The Court held that the department failed to prove that they got the amount deposited with the authority of law i.e. the deposit was without legal sanction. It ordered refund of the amount along with interest. Giving assurance on refund is something unknown to tax law. Retaining such amount without issuing notice for two years deprives the taxpayer of both money and peace [2023-VIL-363-P&H].

 

Cancellation of registration without proper reason and offering hearing is not valid

If not principles of natural justice, officers must at least adhere to the statute and if that is difficult they can endeavour to apply mind to the orders passed even if it is wrong. The petitioner's premises were subject to physical verification and straightway the department came to a conclusion that the registration had been obtained by fraud, wilful misstatement or suppression of facts. Of course a mechanical reproduction of the provisions without any supporting material or detail on what was the allegation against the taxpayer. The order of rejection of request for revocation of cancellation stated the reply was received but further stated "whereas no reply to show cause notice has been submitted", cancellation is being done. Also dates were entered erroneously and it appears except the fact of cancellation of registration and rejection of revocation nothing was discernible. The appeal against the order was also dismissed. The High Court held that it was quite plain that no proper opportunity was given to the taxpayer before cancellation of registration or rejection of revocation application and appellate order was also vague and therefore impugned orders were quashed [2023-VIL-364-MP].

 

Incentive flowing from manufacturer when goods are bought from distributor, is not trade discount for exclusion from taxable value

Will the incentive flowing from original equipment manufacturer (OEM) while the goods are purchased from distributors be eligible for abatement from taxable value as trade discount' Is it required that trade discount should be received from the immediate vendor only for exclusion from taxable value' These questions were answered against the taxpayer by AAR - now AAAR has also held the same. The taxpayer is a component supplier of goods manufactured by US major but such goods have to be bought from distributors for onward retail sale. However, the US major grants incentives on achievement of target to the taxpayer. The taxpayer (appellant) argued that target based discount agreement cannot be considered as a service agreement and in their case, the contract does not provide for any service. An alternative argument was also advanced - it would be export of service since the AAR had earlier held that in respect of marketing service, place of supply being in India, such benefit would not be available.

 

The Appellate AAR has held that there is no agreement between buyer and supplier in this case as incentive is directly received from US company (and not from the distributors) and discount is not specifically linked to invoices. Absence of reversal of ITC has also been pointed out. As per the AAAR, the incentive received is separate from the transaction with the distributors. It also agreed with the AAR that for marketing service where goods are made physically available by recipient of services, place of supply would be in India and therefore, it would not be covered under export of service [2023-VIL-26-AAAR].

 

Inter-State branch transfers and valuation

Readers may refer to Tax Vista dated 26-7-2021 for detailed facts relating to the advance ruling as this brief analysis is about appellate ruling. When goods are moved, for the purpose of leasing, from the branch office in State B to branch office in State C on the instructions of head office in State A, then two services are supplied - (1) supply of leasing service by HO in State A to branch office in State C and (2) supply of facilitation service by branch office in State B to branch office in State C. For valuation of the first transaction, second proviso to Rule 28 of CGST Rules on valuation of supply between distinct persons will apply - this means value declared in the invoice will be deemed as open market value since recipient unit (branch office) will be entitled "full input tax credit". This is the slightly modified ruling by Appellate AAR. It appears the branch office in State B recovers some amount from branch office in State C for "arranging or facilitating". If this is not the case, whether in the absence of consideration, Schedule I of CGST Act will apply to hold the transaction as amounting to supply - this is hypothetical. All this fiction because of State-wise registration in GST - first it has to be deemed as supply, then a value has to be assigned - all such exercises only for bringing the chain on record as otherwise exchequer gains nothing at the end of the day [2023-VIL-25-AAAR].

 

Subsidiary liable to GST under RCM for transfer of proceeds to parent company

Another ruling of Appellate AAR upholding the advance ruling discussed in Tax Vista dated 12-12-2022 has also been reported by VIL. The title is derived from the question which appears to be faulty since the taxpayer has been held as liable to pay GST under RCM on import of service in respect of transfer of monetary proceeds from India to parent company abroad. While the taxpayer may be liable for receiving support services from the parent, the taxable value cannot be the proceeds arising out of contract related payments received in India. For such support services, value has to be determined independently as per Rule 28 of CGST Rules. Tax-compliant and tax-efficient structuring remain after-thought for many and the consequences are huge [2023-VIL-27-AAAR].

 

Wrong supply by exporter - Burden on importer to prove with evidence

When show cause notice is voluntarily waived and the importer participates in personal hearing, there is no violation of natural justice. If importer states goods were wrongly supplied by foreign party (leading to allegation of misdeclaration), then burden is on the importer to produce evidence like e-mail from the supplier admitting to such fact and if the same is not produced, then the claim cannot be accepted. The request for re-export is not credible since clearance was also sought. This is the crux of a recent CESTAT ruling allowing department's appeal and tearing apart the Order-in-Appeal. It would have been a case of customs valuation but the goods were from China and the declaration of description had the effect of levy of anti-dumping duty. In this background, the claim by importer that goods were wrongly supplied became very weak. It is surprising that quantity and other details did not match and the importer attempted to justify the same [2023-VIL-517-CESTAT-CHE-CU]

 

 

(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)