Tax Vista Your weekly tax recap Edn. 161 - 17th July 2023 By Dr. G. Gokul Kishore

 

 

Refund cannot be rejected after order in favour of taxpayer in appeal

Refund of ITC was claimed consequent to exports. While the same was rejected by the original authority, the appellate authority allowed it with minor reduction. As refund was, as usual, not being sanctioned, the taxpayer filed a claim based on order-in-appeal. This time, the department issued deficiency memo citing absence of undertaking etc. The taxpayer was before High Court. The Court noted that there was no particular deficiency pointed out in the memo and there was no requirement to submit any document. The High Court held that the petitioner was not required to file refund applications repeatedly after it was successful in appeal and the appellate order should be implemented. It further said that refund cannot be put on hold only because the order-in-appeal is under review for the purpose of filing appeal by the department. Refund was directed to be granted with interest. The facts of the case are pathetic - not only the claims are routinely rejected but even when the taxpayers are successful in appeal, such appellate or court orders are ignored by the tax authorities and refund is eternally denied. More than protecting government revenue, in several cases, corruption is a factor and this is incurable [2023-VIL-431-DEL].

 

Recovery of GST dues from new management after IBC resolution is not valid

In a very clear order, Jharkhand High Court has held that while the new management of the company after resolution under IBC cannot be saddled with liability of earlier management since it was not a taxpayer when resolution plan was approved and management was changed, the benefits like tax credits available to the earlier management will not be available to the current management. The High Court quashed the order confirming GST demand against the present management holding that the order had misdirected itself as to recovery with interest and penalties. This is against the ratio laid down by the Supreme Court in landmark judgment of Ghanshyam Mishra [2021-VIL-55-SC]. The order included rejection of transitional credit on capital goods which was claimed through TRAN-1 filed after Filco judgment opening the portal last year [2023-VIL-436-JHR]

 

License fee paid on commissioning not a condition of sale for import of parts and not includible

A change in license agreement prompted a change in view of the department and the issue of inclusion of license fee in customs value was reopened. The assessee imported the parts for manufacture of wind turbine generator (WTG) from its foreign related party and subsequent to investigation by the Special Valuation Branch, the non-inclusion of licensee fee for valuation was accepted. Later the order was taken up in review and order was passed by Commissioner (Appeals) in favour of the assessee. This came to be challenged by the department. However, from the terms of the agreement it was quite clear that the import of parts and components was not linked to the use of technology/transfer or the license fee. The department argued that since the payment was based on commissioning of the WTG, such process happening after import was covered by explanation to Rule 10(1)(c) of Customs Valuation Rules. The Tribunal however held that the essential ingredient from inclusion as per the provisions is that the payment should be a condition of sale and this was not satisfied [2023-VIL-648-CESTAT-CHE-CU].

 

All terrain vehicles are not "Principally designed for transport of persons"

The classification of All Terrain Vehicles (ATVs) as vehicles for purpose of carrying goods was in question. The department opined that since the vehicles come with two-seater, three-seater capacities and are also used for a number of purposes other than carrying goods, the correct classification was TI 87031010 or 87031090 and not under heading 8704 or 8709 as declared by the importer. The importer furnished a comparison of the various features which are essential in a vehicle designed for persons like seating comfort, carpeting, rear windows, less space for cargo which were absent in the ATVs which were designed to operate off the road, in muddy areas, forests with facility to load, dump cargo, providing bench like seats for passengers compromising on comfort for ability to carry goods. Relying on various precedent decisions, it was held that the design and features of the vehicle would determine if it was for transport of goods or for people and incidental other uses would not convert it from one to another. Appeal by importer was allowed upholding the classification adopted under heading 8704 / 8709 [2023-VIL-642-CESTAT-DEL-CU].

 

When communication is a decision

Everyone is familiar with usages like a word being a command, silence being assent etc. The question before the Tribunal was whether a letter or communication by a customs officer was a "decision" or "order" against which appeal could be filed. In the impugned order the Commissioner (Appeals) dismissed the appeal filed by the assessee on the ground that there was no order or decision and the officer had merely sought clarification during assessment. It appears that according to the Commissioner (Appeals) an assessment would have been appealable. However, the assessee contended that the "communication" was a conclusive decision for denial of exemption Notification No. 19/2015-Cus dated 01.04.2015 issued under DFIA Scheme. From the extract reproduced in the order it appears that the officer raised a query and stated that the claim for BCD exemption cannot be extended to the importer. The Tribunal held that the communication which clearly concluded that the appellant's claim for basic customs duty exemption under the said notification DFIA cannot be extended and it was also directed that the bills of entry may be assessed on merits was a decision by the officer and the appellant had no choice but to forgo the claim. Therefore, if the opportunity to appeal against this decision is not provided the importer would be prejudiced as the assessment on merits would be against him. The Tribunal opined that the legislators consciously used the word "decision" in addition to "order" in Section 128 of Customs Act, 1962 to meet the situation as existing in this case. It also stated that adjudication is not restricted to confiscation and levy of penalty and that the communication was challengeable in appeal. It remanded the matter to decision on merits by the Commissioner (Appeals) [2023-VIL-654-CESTAT-AHM-CU]

 

ITC admissible on portion used for support structure of overhead cranes

Though the AAR knocked the wind out of the sails for ITC, the Appellate AAR put some spark back in holding that ITC would be admissible in respect of support structure for overhead cranes. The applicant-appellant was engaged in manufacture and supply generators for wind operated electricity generators (WOEG) and sought to know if ITC would be admissible on works contract services (using cement, steel, gantry bars etc) used to establish an integrated factory building. The applicant claimed that the factory building was unique and was in itself a plant and not merely a conventional roofed factory building to protect the men, machineries and materials from rain and shine. It was argued that since the incrementally strong foundation gantry beams with support mountings across the length and breadth, rails over the floor and beams for facilitating the overhead cranes to handle, move and operate heavy parts of the generators from one work-station to another and upto loading them on trucks, the entire building would qualify as plant and machinery. The AAR denied credit on consumables like cement and declined to rule on structures citing insufficient documents.

 

On appeal the AAAR held that the applicant would be entitled to input tax credit proportionate to the extent of structural support erected in relation to overhead crane alone but not in respect of construction of other civil structure like side walls, roof of the integrated factory building. The case law under earlier regime, relied upon by the applicant was held inapplicable. The issue of ITC under GST is likely to see many more battles before the meaning of plant and machinery, support etc. is settled by jurisprudence at the level of High Courts and the Supreme Court [2023-VIL-29-AAAR].

 

Employer serving food at subsidised rate charged from employee is a supplier

Before discussing the details of the ruling by AAAR one may read the following line in the ruling which shows why AAR as a mechanism is not perceived as fair. Regarding the contention of the applicant that it was only a pass through, the AAR held "In that case, the appellant would not be a supplier of service and hence the appellant ought to have not applied for advance ruling under section 95(a) of the CGST Act, 2017." The applicant who provided canteen facility to the employees as mandated under the Factories Act, 1948 through a third party vendor collected a certain amount as part of cost sharing from the employees. The AAR held that GST would apply on such amount since it was for service provided by the employer to employee. The taxpayer approached the Appellate AAR relying on CBIC Circular no. 172/04/2022-GST dated 6-7-2022 that since the service was in nature of a perquisite and also mentioned in the employment contract, GST would not be leviable. It also relied on a number of rulings including that of AARs.

 

The AAAR found that there was a vague reference in the contract that the employee would be eligible for benefits of his cadre and there was no mention of canteen. Also, it could not be a perquisite since it was not as per terms of contract and in any case, even if it covers cost met by the employer, amount collected from the employee would not be covered. The AAAR quoted Schedule II wherein composite supply of supply of food or other articles of human consumption as part of service or in any other manner is declared to be a service. There can be many interpretations on whether it could cover the transaction in question but that is beyond the scope of this column. Taxpayers may be advised to have detailed contracts (including menu?) on supply of food - fortunately a wider and easier term than "snack" or "substantial meal" which witnessed court battles in service tax era. Also, according to the AAAR, the Factories Act which mandates provision of canteen does not specifically grant exemption from taxes (GST). Trying to find tax exemption in an allied welfare legislation is the expertise of such authorities [2023-VIL-30-AAAR]

 

Settlement of debt through book adjustment is valid mode of payment - ITC admissible

It is a normal commercial practice for manufacturers to outsource part of the production process which is generally referred as job work. For carrying out process under job work, the job worker is provided with raw materials or semi-finished goods by the manufacturer (principal) and he uses such goods along with bought out goods or consumables, as agreed with the principal. If it is pure job work, then the job worker charges processing or conversion charges but the issue gets complicated when the manufacturer "sells" the raw materials to such person and the other person after processing, "sells" the finished goods to the manufacturer. In this factual background, the taxpayer sought advance ruling and it was ruled in his favour.

 

The Authority for Advance Ruling (AAR) held that input tax credit would admissible even if the consideration is paid through book adjustment. It is the net amount which is paid after reduction of debt liability which gets paid actually but reduction in debt is a valid mode of payment of consideration. The AAR, after taking note of the definition of consideration and time of supply provisions, held that settlement of mutual debts through book adjustment is a valid mode of payment of consideration and it satisfies the requirement of Section 16(2) of CGST Act which requires payment of consideration for availing ITC. The jargon used in the ruling is "sale and buy back transaction" though what is sold and what is bought are two different things. It is a great relief to see a ruling in favour of taxpayer after good amount of reasoning and interpretation of the provisions [2023-VIL-128-AAR].

 

Gold in any form cannot be second-hand goods - Margin scheme not applicable

Margin scheme or facility to pay GST on the difference between purchase price and sale price in respect of sale of second-hand goods poses challenges for certain taxpayers. The applicant in the business of buying and selling old / used gold jewellery sought advance ruling as to whether they can avail the benefit of the above scheme as other wise they are paying GST on the entire sale consideration when used jewellery is sold. The item is sold as such with minor processing like cleaning, etc. Because the used jewellery is purchased from unregistered persons, availing ITC on purchase does not arise. It appeared that the applicant had satisfied the conditions of Rule 32(5) of CGST Rules. However, the AAR was having a different view perhaps not legally sound. After discussing the nature of gold as a commodity and expressing the view that gold never depreciates in value, the AAR has held that exchange of gold cannot be treated as dealing in second hand goods. It is not known who actually drafted the order - it appears scholarly but without legal basis.

 

The ruling reads "The intention of Sub rule (5) to Rule 32 of the CGST Rules,2017 is to reduce the tax burden on such goods, which have already suffered taxon its highest value, when supplied at a reduced price in the secondary market after usage. But this is not the case with goods such as gold and gold ornaments, where the value is determined primarily by the content, purity and fineness of the material contained therein. With the passage of time, not only does the value of gold decrease but moves upwards, showing a trend opposite to what sub rule (5) envisages. Because of the aforesaid reason and other similar factors, the term 'second hand' does not hold any meaning when it comes to items such as gold, land, currency etc." The applicant can try his luck with the Appellate AAR and mostly the ruling will be in their favour. An innovative but legally unsustainable order [2023-VIL-132-AAR].

 

Villas are also covered under GST rate as applicable to residential apartments

Villas are getting more traction these days. Distance is becoming a relatively non-issue with the increasing ownership of cars and public transport like metro connectivity. All these mean, while on the one hand high-rise apartments are on the rise, independent villas and duplex houses are also preferred. Whether villa construction will be covered under effective GST rate of 1% and 5% for affordable and non-affordable categories respectively' This has been answered in the affirmative by the AAR. While arriving at the conclusion, the ruling has taken into account the definition of "apartment" in Section 2 of Real Estate (Regulation and Development) Act, 2016. This definition covers any dwelling unit (called by any other name) which is a separate and self-contained immovable property located in a plot of land also (not necessarily in a building). The reason for seeking advance ruling is not clear and it may be due to the fact villas are commonly not seen as on par with flats or apartments (in buildings) [2023-VIL-133-AAR].

 

ITC is not available on goods used for electricity distribution

Electricity is not a critical component for industry and consumers. The inputs, capital goods and input services used to create infrastructure of transmission and distribution of electricity are not very important and therefore, input tax credit on the same will not be available. This is how an advance ruling can be interpreted. Otherwise, the ruling is without any reasons except stating that these are used for services other than the principal supply of electricity distribution. The services are charges for new connection, load enhancement, pole shifting, etc. It is not known how electricity can be distributed without poles or connections. The ruling unnecessarily uses the term "consumer funded jobs" which has no bearing to determine eligibility to ITC. Because the ruling is abrupt in conclusion, further discussion on the same is not feasible. It appears to rely on another ruling which tends to take the route of Section 17(5) on ITC restrictions on immovable property. Even such reasoning is absent in this ruling. Denial of ITC is irrational and the same without reasons is unsustainable [2023-VIL-134-AAR].

 

Conversion of land type by government is not exempted from GST

Activity of changing classification of land in government records against receipt of fee from the land-owner is not a municipal or panchayat function and the same is not eligible for GST exemption. This is the advance ruling. The effect of this ruling is that the land-owner who seeks such change will be liable to pay GST under reverse charge mechanism. Article 243G of the Constitution read with Eleventh Schedule covers agriculture, land improvement, etc., and the applicant argued that by conversion of wetland into dryland for construction purpose, land use is affected and the same is sought to be compensated by levying a fee and therefore, the same would be exempted under Notification No. 14/2017-Central Tax (Rate). The AAR did not agree. The applicant also unsuccessfully argued on the amount being fee and not consideration for supply of any service. The only ground adduced by AAR is that the action is taken for the benefit of the person applying for such conversion and the same cannot be considered as activity relating to functions entrusted to panchayat. Litigation in the longer run on these issues is guaranteed as divergence of views is always bound to exist on what is supplied in such case, whether fee is treatable as consideration, etc. [2023-VIL-136-AAR].

 

GST Council Meeting - Major recommendations

Recommendations of GST Council has been included as the last item in this column as the meeting was held on 11th July, 2023 and much time has lapsed. In these days of information overflow, a few days translate to years. Several issues are set to be clarified through circulars and most important one would be the clarification on ISD versus cross-charge. After six years, the for the first time, this issue is being acknowledged though it has been raging since day one. On interest liability when ITC is irregularly availed and utilised, if IGST credit is not available, then CGST and SGST credits will be taken into account to check whether balance of total ITC was available in the ledger as per Rule 88B of CGST Rules. The limited amnesty for filing annual returns and for seeking revocation of cancelled registration has been extended till 31st August, 2023 and this will be immensely helpful to many. Circular No. 183 will be made appliable to FY 2019-20 and for the period till 31-12-2021 to verify and allow ITC in cases of mismatch between ITC reflected in GSTR-2A and GSTR-3B. System generated intimation for alerting and seeking explanation in cases of mismatch of ITC between GSTR-2B and GSTR-3B will be implemented. GSTR-2B will become the sole basis for ITC for all purposes. New rule is being inserted to provide for recovery in cases of difference in data on outward supplies reported in GSTR-1 and GSTR-3B. Rules on appointment to GST Appellate Tribunal will be notified. After six years, Tribunal is not functional yet causing great hardship to several taxpayers and bureaucratic obstinacy and bungling are the sole reasons.

 

 

(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)