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Tax Vista Your weekly tax recap Edn. 164 - 7th Aug. 2023 By Dr. G. Gokul Kishore |
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ITC blockage under Rule 86A - Post-decisional hearing mandatory
Two prerequisites are required to be fulfilled before invoking Rule 86A of CGST Rules, as per Karnataka High Court. Rule 86A empowers the GST officer to block utilisation of input tax credit when fraud is suspected. Material should be available with the officer and subjective satisfaction of the officer should be based on such material. Secondly, recording of reasons is a must before blocking electronic credit ledger. In the case before it, the Court held that both the conditions were satisfied as the credit blockage was based on field visit based on which it was found that the suppliers were non-existent and ITC availed based on purchases from such suppliers has been recorded in the order. However, it said that the power under Rule 86A is drastic and entails serious civil consequences, particularly when order is passed without holding thorough investigation.
Another point considered in this order is requirement of offering personal hearing. Though the provision does not require offering of hearing before passing order, post-decisional or remedial hearing should be granted. It specifically noted that pre-decisional hearing may not be feasible when order under Rule 86A is provisional in nature and such hearing may also frustrate the very object of the provision. A major takeaway is hearing should be granted before issuing show cause notice under Section 73 or Section 74 of CGST Act. The Court directed the department to offer post-decisional hearing and pass order. The order provides for certain safeguard to taxpayers when extreme powers are exercised and it seeks to balance the interest of both the State and the taxpayer [2023-VIL-484-KAR].
Requiring ITC reversal without proceedings against defaulting supplier is arbitrary
Even though the pain of the taxpayer in approaching a writ court to quash demand which emerges from fault of another is palpable, the tax administration's penchant for nostalgia and repeating mistakes was all too visible in a recent case. Based on mismatch of ITC between GSTR-2A and GSTR-3B, the department served an order of demand requiring the taxpayer to reverse the ITC. The plea of the taxpayer that the department ought to proceed against the supplier who failed to deposit tax and recovery from them (recipient) could be made only in exceptional circumstances as clarified in press release issued by CBIC. Reliance was placed in Union of India (UOI) v. Bharti Airtel Ltd. [2021-VIL-87-SC] contending that GSTR-2A was only a facilitator for self-assessment and having fulfilled the conditions in Section 16(2) of CGST Act, the taxpayer cannot be denied ITC. The petitioner also relied on Arise India Limited v. Commissioner of Trade and Taxes, Delhi [2017-VIL-544-DEL] in which a similar scheme under Delhi VAT laws was held that if purchasing dealer is made to bear the consequences of denying the ITC, it would be in the violation of Article 14 of the Constitution and the provision was read down. Also, it was held in the said case that if there was collusion between seller and the purchaser, the department could proceed under other provisions of the VAT law. In the instant case, the Calcutta High Court held that proceeding against the petitioner without any action against the supplier was arbitrary and set aside the order with further direction to proceed against the petitioner only in exceptional circumstances as per press release of CBIC [2023-VIL-487-CAL]
Availment of ITC manually due to portal issues - Not reason to reject claim
The department has infinite faith in itself and the ability to provide solutions to the taxpayer though the waiting period may be uncertain. The taxpayer who had acquired a business and was entitled to credit of about INR 3 crores was not able to use form ITC-02 in 2017 since the utility was not functional and faced with working capital issues, opted to accept and avail it manually using a different form. It had informed the jurisdictional authority about the difficulties but did not receive any response. Of course. alerted by the mismatch between the amount and GSTR-2A, the department in 2023 issued SCN and also passed an order against the illegal availment of INR 2.88 crores. According to the department, the order was legally sound because the taxpayer ought to have waited for the functionality to go live and he had also not availed personal hearing. The High Court held that rejecting the claim of the petitioner in the wake of the admitted fact that the GST common portal was not online cannot be justified and directed passing of fresh order after giving a proper opportunity of hearing. [2023-VIL-494-ALH].
Bank account frozen by letter without any authority or order of Commissioner is not valid
The title may convey that justice prevailed and the taxpayer was able to get relief. Costs were also imposed on the officer concerned. But the right to conduct business operations was certainly infringed by provisional attachment without any order /satisfaction of the Commissioner as is statutorily required. Similar to a case reported in Tax Vista last week, the taxpayer deduced that the communication was an order of provisional attachment and assailed it before the tax authorities. The best defence the department could offer was that since one year had lapsed after the so called attachment or pseudo attachment, it was automatically lifted. The High Court aside the impugned communication (it was not even an order under Section 83) to the extent that it sought to place a debit freeze on the petitioner's account and reprimanded the department for acting with impunity in disregard of statutory provisions [2023-VIL-493-DEL].
Opportunity to rectify defects must be provided before rejecting appeal
An exporter claimed refund, and the rest is history. The department contended that the taxpayer-exporter-petitioner had devised a web of transactions by purchase from non-existent dealer (through another firm) and the goods were sold to him which were exported. It is not understood how ITC of about INR 1 crore can be claimed by this method if export at least was genuine. The department passed an order under Section 74 of the CGST Act demanding the same amount alongwith interest and penalty and also cancelled the registration. The appeal against this order was rejected by the Commissioner (Appeals) since pre-deposit was not paid, appeal was not signed and certified copy was not submitted but the Commissioner went on to hold that the taxpayer had created a syndicate with intent to evade payment of CGST by wrongly availing ITC in one firm and utilizing the same in another firm for availing refund on account of export and that the cancellation of registration was valid.
The High Court held that Commissioner (Appeals) was not justified in deciding the matter on merits after having come to a conclusion that the appeal is to be rejected and the taxpayer ought to be given an opportunity to rectify defects if any before rejecting the appeal. It relied on United Bank of India v. Naresh Kumar [(1996) 6 SCC 660] wherein it was observed that substantive rights should not be allowed to be defeated on technical grounds of procedural irregularity. The impugned order was set aside with directions to the Commissioner (Appeal) to provide an opportunity to the taxpayer to rectify the defect and pass fresh orders. This order will be helpful to many taxpayers whose appeals are generally rejected on trivial procedural grounds. The ratio that opportunity to rectify the defect should be given by issuing defect memo will have to be relied on by such taxpayers. The procedure is common in tribunal and judiciary but the quasi-judicial authorities consider themselves as exception to such settled principles and practices [2023-VIL-489-BOM].
Anti-profiteering - Enquiry may survive insolvency proceedings
In a recent order the Competition Commission of India (in respect of anti-profiteering) has held that the consortium of builders (respondent) who took over the real estate entity through Corporate Insolvency Resolution Proceedings (under IBC) cannot be held liable for any profiteering if done by the erstwhile entity and the new management cannot be held liable for liability of earlier management including passing of ITC benefit. However, tax and life are never that simple. Since the new management has found to be collecting outstanding installments from homebuyers along with GST and completion certificate has not been issued for the project, the new management is "apparently" liable for passing benefit of ITC as per Section 171 of CGST Act. DGAP has been directed to investigate to find out if there is any violation of anti-profiteering provision. The respondent (having inherited the buyers/customers) was collecting the amounts due and the burden of proving that benefit of ITC availed by them has been passed on falls on them [2023-VIL-01-NAA].
Remand, suppression, fresh SCN - Importer gets relief finally on limitation
CESTAT had remanded the matter after observing that for imports in respect of past period, the importer had not waived SCN. The remand order says department should issue notice if it wishes to recover differential duty and the party should be heard. Based on such order, the Customs authorities issued fresh SCN and confirmed the demand. In the second round of proceedings, the Tribunal has held that no direction was given to issue SCN but only natural justice was emphasised. It further held that Tribunal did not direct issue of SCN. The order also holds that upholding suppression was not sustainable in the second round by the department. The case pertains to alleged misdeclaration and failure to produce invoices relied on by the department and goods were not available. Though the importer had to undergo two rounds of litigation, in this round, order has been passed in their favour - not on merits but on limitation [2023-VIL-731-CESTAT-CHE-CU].
Sale to institutional consumer - Department keeps litigation alive
When goods are sold to institutional consumer like educational institution, question of RSP based assessment does not arise as per Legal Metrology Act and LMPC Rules. Inadvertently, CVD was paid based on RSP / MRP at the time of import of computers which are meant for supply to educational institution. Request for re-assessment was rejected by Customs authorities. The department argued that the goods were pre-packaged and covered under Legal Metrology provisions. The importer contended that one of the conditions viz., sale of goods to ultimate consumer was not satisfied in this case. The Tribunal took note of the LM Act provisions and the relevant facts to uphold the impugned order on adoption of transaction value as per Section 4 of Central Excise Act and not Section 4A on MRP based assessment. Despite clear facts, for around Rs. 12 lakhs duty, the department keeps the litigation alive [2023-VIL-735-CESTAT-CHE-CU].
CGST Rules amended
GST will surpass its ancestors in no time considering the amendments made in the statutory provisions. As recommended by GST Council, CGST Rules have been amended by Notification No. 38/2023 - Central Tax dated 4-8-2023. One of the taxpayer friendly amendment is filing of appeals manually when order is not available in the GST portal. This is a major issue in several places. The authorities refuse to receive the physical copies of appeals in certain cases while in the case of SGST officers, after filing online, physical copies are also required to be furnished. Though there is no legal backing for such practices, they do thrive. Another major amendment pertains to insertion of new Rule 88D to deal with difference between ITC availed in GSTR-3B vs. ITC shown in GSTR-2B. The taxpayer should pay up the amount promptly if he wishes to do business peacefully instead of unnecessarily arguing that invoices are available, tax has been paid, etc. Of course, he has the option to explain the reasons for such difference and the outcome is obvious - officer will summarily reject the same and go ahead with recovery. For movement of precious items (gold, etc), e-way bill has been made mandatory if the value exceeds Rs. 2 lakhs. Vehicle number is not required (Part-B) as in most of these goods are sent through courier who carry the same in personal baggage. For recovery, form of intimation is being prescribed which is not necessary since officers simply recover without any provision or form.
ITC on demo vehicles not available if retained as replacement vehicles by dealer
The issue of input tax credit on demo vehicles is being repeatedly taken before Authority for Advance Ruling (AAR). In the latest ruling, there is a minor factual variation. The sales policy of one of the automobile manufacturers contained terms which included use of demo vehicles after use for demonstration purpose as replacement vehicles. The AAR held that as per Section 17(5) of CGST Act, ITC cannot be claimed on purchase of test drive vehicles even if they are used in business but such restriction is relaxed when such vehicles are further supplied. Such exception is not only for sale but also for lease, rent, etc. Capitalizing the vehicle as such does not make the tax paid ineligible for ITC if there is further supply. It ruled that if the vehicle is retained as replacement vehicle, ITC will not be available as there is no further supply of such vehicle. ITC, if claimed, is required to be repaid in cash. In ITC, test drive never ends and entitlement is required to be demonstrated repeatedly before various courts [2023-VIL-154-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)