Tax Vista Your weekly tax recap Edn. 163 - 31st July 2023 By Dr. G. Gokul Kishore

 

 

Input tax credit under GST is not admissible beyond prescribed time-limit

Input tax credit has the distinction of being the most litigated issue across all indirect taxes before and after GST. Like the eternal revenue v. capital debate in income tax law, taxpayers always argue that tax credit is a right while the tax department holds it is a mere concession. Because of such fundamental divergence, judiciary has time and again interpreted the nature of ITC adopting both the positions. In a recent judgment having significant implications, the Andhra Pradesh High Court has held that the time-limit prescribed for availing ITC under GST law is constitutionally valid i.e., Section 16(4) of CGST Act /APGST Act prescribing time-limit is not violative of Articles 14, 19(1)(g) and 300-A of the Constitution of India.

 

The practical impact is on the second point wherein the High Court has held that Section 16(2) has no overriding effect on Section 16(4) and both the provisions are not contradictory to each other and they will operate independently. The Court rejected the argument that the non-obstante clause "Notwithstanding" used in Section 16(2) restricts the operation of the enabling provision of Section 16(1) and it does not restrict the other restricting provision like Section 16(3) or Section 16(4). The taxpayer had argued that because of such clause, ITC should be available once conditions prescribed in Section 16(2) like receipt of goods or service, possession of invoice, etc., are satisfied even if the same is availed beyond the time-limit provided in Section 16(4). As per the order, Section 16(4) being a non-contradictory provision and capable of clear interpretation, will not be overridden by non obstante provision under Section 16(2).

 

The judgment unambiguously holds -"Thus in substance Section 16(1) is an enabling clause for ITC; 16(2) subjects such entitlement to certain conditions; Section 16(3) and (4) further restrict the entitlement given U/s 16(1). That being the scheme of the provision, it is out of context to contend that one of the restricting provisions overrides other two restrictions. The issue can be looked into otherwise also. If really the legislature has no intention to impose time limitation for availing ITC, there was no necessity to insert a specific provision U/s 16(4) and to further intend to override it through Section 16(2) which is a futile exercise."

 

 Another argument that because the department accepts filing of return on payment of late fee, ITC should also be consequently available when return is filed has also been discarded by the High Court. It accepted the department's contention that collection of late fee is only for accepting the returns and the same is not for relevant for allowing ITC. The order says -"..mere filing of the return with a delay fee will not act as a springboard for claiming ITC....Such a statutory limitation cannot be stifled by collecting late fee."

 

The order has been written in a "perspicuous" manner and contains several rarely used English words particularly in judgments (primogeniture, perspicuous, oppugnation, jurimetrical). The elaboration on the effect of non-obstante clause confers much authority to this order. The order is likely to be clutched to the heart by departmental officers in the years to come as ITC litigation in GST regime will assume incredible proportion in the near future [2023-VIL-472-AP].

 

GST registration cannot be cancelled for past period for which returns were filed

Cancellation of registration is a favourite play for tax authorities, it seems. While so many cases are being reported on this issue, in a recent order, the Delhi High Court has held that while Section 29 of CGST Act provides discretion to tax authorities to cancel registration but such power cannot be exercised arbitrarily. It held that retrospective cancellation cannot extend to the period for which returns have been filed by the taxpayer. In this case, the taxpayer had sought cancellation of registration as he had closed the business but the department sought documents for taking further action and such step was repeated again. Finally, when registration was cancelled, it included the past period when business was running and returns were being filed. The taxpayer sought the intervention of High Court and the Court was alive to the fact that such back-dated cancellation will affect input tax credit claimed by purchasers. The Court further noted that when business has been closed, the taxpayer cannot be asked to file returns and orders have been passed without application of mind in a mechanical manner. It directed the authorities to process cancellation request from the date mentioned in the application [2023-VIL-476-DEL].

 

Transitional credit allowed by department - Interest and penalty not payable

Transitional credit aftershocks continue to be felt though the effects of the massive quake was neutralised by timely intervention of the Apex Court in Filco case [2022-VIL-38-SC]. Apparently, based on Filco ruling, the taxpayer filed revised TRAN-1 and the credit was also allowed by the departmental officer. But the department persisted with interest and penalty as payable by the taxpayer. The High Court held that when the tax officer has held that the petitioner is entitled to transitional credit and difficulty in claiming arose during the initial period of GST implementation, order levying interest and imposing penalty is not sustainable. It appears that the proceedings were initiated when the taxpayer availed the credit through returns due to technical issues in the GST portal. It further seems that the notice was decided after filing of revised TRAN-1 form and order by department allowing the same. The writ petition has been filed in 2023 and this indicates the department prolonged the battle for interest and penalty [2023-VIL-469-MAD].

 

Illegal SCN and non-sustainable order - High Court expresses deep anguish

In an otherwise routine episode of blatant violation of principles of natural justice and fairplay, the Bombay High Court has taken a serious note of the conduct of the officers on the issue of cancellation of registration. First, the Court has condemned the action of Superintendent in issuing show cause notice which is the usual template given to all taxpayers in the country without striking out inapplicable portions and without placing reliance on any evidence. Secondly, the action of Assistant Commissioner in cancelling registration which is equally non-speaking and arbitrary has been perceived to be erroneous by the High Court. Thirdly, the Joint Commissioner (Appeals) who upheld the adjudication order by relying on material which were not supplied to the taxpayer has been visited with strong words bordering on strictures. The High Court has directed service of copy of its order on the officers concerned and to the Ministry. By now, CBIC and State GST Authorities must have hundreds of such orders in their files.

 

The entire system of adjudication and appeals has crumbled in GST and needs to be abolished and replaced with separate hierarchy of officers only for such work and who are trained in law and who are not posted in executive formations. For the past 4 years or so, template SCNs are being issued and registration cancellation is being made with retrospective effect going back to 2017 itself. It will be too naïve to believe that CBIC and State GST Authorities at the level of Secretary are not aware of such practices. In several GST offices, taxpayers are openly taunted by stating that they may go to High Court if they want to complain about such illegal and irrational actions. The SCNs contain insane amounts in several cases and the officers issuing notices or passing orders do not bother to understand the basic issues [2023-VIL-463-BOM].

 

Visit by taxpayer to tax office is not equal to personal hearing

Natural justice can be taken to any extent by tax authorities. When Section 74 of CGST Act alleging suppression of facts is invoked, equivalent penalty is also imposable. When such order is contemplated, hearing the taxpayer is mandatory. However, the department argued that visit by taxpayer to GST office and the telephone call with proprietor by departmental officer are equal to personal hearing. The authority passed the order after holding that request for hearing is part of dilatory tactics The High Court held that telephonic conversation cannot be construed as hearing and offering hearing opportunity is not an empty formality. It said -"We also fail to understand why and how any person with a reasonable understanding of the law could observe that a telephonic conversation and the visit of the representative of a party can be considered as a personal hearing." The Court set aside the order passed the very next day of hearing after observing that the officer was in a hurry to conclude before end of financial year.

 

The department sought time to file counter several times and finally did not file any such counter. Taking note of the same, the High Court rejected the objection on entertaining writ petition instead of directing the taxpayer to seek appellate remedy as such objection was not raised for two years. It had certain strong words for the department and the conduct was termed improper as two years of time was wasted. On this ground, costs were imposed [2023-VIL-467-DEL].

 

Test report for 6 out of 21 parameters of imported goods is not reliable

When the prescribed standards like IS provides for 21 parameters for concluding a product as high diesel oil (HSD), testing of imported goods declared as "Mineral Spirit" for 6 parameters to hold that the same "may be" diesel oil and not mineral spirit has been held as not correct by the Tribunal. DRI had booked the case suspecting import of prohibited goods under the guise of freely importable goods but the evidences gathered have been found to be either defective or not sufficient. One of the main evidences was the test report of CRCL but three out of six parameters also matched for mineral spirit. Further, as per CBIC communication, CRCL Chennai got the resources to test for this product only subsequent to testing of the goods in the present case and therefore, the test report was held as unreliable. Use of "may be" was highlighted by the Tribunal to note that the test report was inconclusive and cannot be relied on to cast duty liability on the importer. The other evidence relied on was retracted statements which also did not find favour with the Tribunal. It is unfortunate that the importer was arrested and had to come out on bail. If there is a serious doubt or apprehension that the imported goods are mis-declared and under-valued, then investigation should be thorough to justify such curtailment of personal liberty. It is not known why arrest is made by DRI when the department can provisionally release goods taking bond and bank guarantee [2023-VIL-705-CESTAT-MUM-CU].

 

Unilateral reduction of drawback based on Valuation Committee report is not valid

In a case relating to alleged over-valuation of export goods and therefore, reduction in drawback amount, the Tribunal has held that non-communication of reason for reducing the transaction value and mere mention about re-fixation being undertaken as per Valuation Committee report are not sufficient in the absence of evidence of contemporaneous exports / value. The Tribunal did not accept the position adopted by the authorities in rejecting the argument of receipt of foreign exchange for the exported goods. Unilateral reduction by Valuation Committee without sharing the basis with the exporter and without giving reasons has been held to be non-sustainable by the Tribunal. The order reducing drawback was set aside. The differential amount involved is around Rs. 2 lakhs and proceeds have also been received and yet, the department compels exporters to litigate upto Tribunal [2023-VIL-685-CESTAT-CHE-CU].

 

Netting off receivables is a mode of payment and not a supply

Examining various transactions undertaken by the applicant engaged in manufacture and sale of jewellery, the Authority for Advance Ruling (AAR) held that transactions which took place inter se, between various branches of the applicant holding separate GSTIN or same GSTIN would not be supply. For instance, the applicant or it's branches sold bullion to various vendors and bought jewellery. The sale and purchase were undertaken based on need of various branches and hence purchase would be effected by one unit and sale by another. Another transaction mentioned is advertisement services were paid for by the head office and used by various branches. In yet another situation, the applicant bought old gold from franchisee showrooms and the purchases were settled either in cash or by other modes of settlement like an issue of gold ornaments of equal value. The applicant argued that though payment in cash is made ultimately by the head office, the recipient of the supply was the unit/branch as it was liable to pay consideration. Further, by making a book adjustment- accounting entry to reduce receivable, or adjust credit and debit balance as required, the consideration was being paid.

 

The AAR held that net off of receivables of one GSTIN by another GSTIN of the same company or net-off of receivables with payables of supplier of goods/service would amount to payment to the vendor meeting the compliance requirements of Section 16(4) of CGST Act, 2017 and input tax credit is admissible when consideration is paid through book adjustment. It also held that such netting off of balances is not a supply by itself and only mere flow of money. A similar ruling was analysed in Tax Vista dated 17 July 2023.

 

However, where there is supply of old gold by franchisee to applicant and supply of new ornaments by distinct person (branch of applicant) it was held that there are two distinct supplies. The supply by the branch/distinct person to the franchisee was held to be as per directions of the applicant and hence it was inter-state supply in terms of Section 7 of the CGST Act read with Section 10 of the IGST Act and accordingly taxable as per IGST Act [2023-VIL-151-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)