Tax Vista Your weekly tax recap Edn. 180 - 27th Nov. 2023 By Dr. G. Gokul Kishore

 

 

GST on secondment - High Court grants stay

The Delhi High Court has expressed prima facie view that salary paid to seconded employees by a foreign affiliate as per employment agreement cannot be considered as payment for manpower services supplied by such foreign company. Such observation has been made while granting stay during the hearing of writ petition filed assailing show cause notices issued to the Indian company alleging non-payment of GST under reverse charge in respect of such amounts paid. The taxpayer has argued that stay has been granted in similar circumstances by Karnataka High Court and Punjab & Haryana High Court. The issue of applicability of GST on amount paid to employees who work in subsidiaries on secondment (deputation in local parlance) is likely to witness major courtroom battles in the coming days and months. Judgement of the Supreme Court in Northern Operating System [2022-VIL-31-SC-ST] has been heavily relied on by the department given the factual similarities which are typical in such arrangements. However, the type of personnel seconded (deputed), certain payments made by foreign entity to seconded employees, etc., became determining factors in the said judgment. The relevance of these factors in local deputation remains to be tested but the department is likely to raise dispute on all deputation arrangements [2023-VIL-816-DEL].

 

Refund when incorrect rate is applied by supplier resulting in inverted tax structure

Refund of accumulated input tax credit due to inverted tax structure continues to be fought with the GST department filing writ petition recently against refund granted to the taxpayer. According to the GST department, the supplier of the taxpayer had charged GST of 18% whereas he should have charged only 5% and therefore, there is no inversion. The taxpayer's outward supply attracts GST of 5% but, it appears that the department raised a new argument that on such final product also, GST of 18% should have been paid. However, the High Court noted that applicability of 5% rate on final product was not in dispute and held that the department cannot insist or advise the taxpayer to pay more tax (tax at higher rate) than what is prescribed.  On admissibility of refund, the Court said that refund under Section 54(3)(ii) of CGST Act is admissible since tax on input is higher than rate of tax on the output in the present case as GST at 18% was paid on input even if the applicable rate was 5%. The department was directed to refund the amount along with interest. It is not clear as to the reasons for payment of tax at higher rate by the supplier. It could be because of the position adopted by the GST authorities and the supplier adopted higher rate to buy peace. The department may file appeal before Division Bench and interpretation of "rate of tax" may determine the outcome [2023-VIL-810-MAD].

 

Interest on delayed refund is payable with reference to first application and not the one filed later after appellate order

Interest on delayed refund was denied since the argument of the department was that interest is payable only if refund was not granted within sixty days from receipt of application filed based on order of appellate authority. The taxpayer contended that interest is payable when refund is not granted (which was denied initially but allowed later by appellate authority or court) within sixty days from the date of application filed for the first time. The High Court held that reading Section 54 and Section 56 of CGST Act together would lead to the conclusion that interest would be payable for the period commencing from 61st day from the date of receipt of application which is complete in all respects and such entitlement cannot be defeated merely because incorrect order was passed initially which is rectified in appellate proceedings. The Court emphasized the words "application" which is filed based on "relevant date". Based on this reasoning, it further said that the application filed subsequently consequent to a favourable appellate order is not a fresh application as such and directed grant of interest in this case. It specifically pointed that refund application is required to be filed within two years as per the provisions.

 

The rate of interest will be 6% as per Section 54 while the same would be 9% if refund is not granted after sixty days from the appellate order. This order is well-reasoned order which is likely to be helpful to many taxpayers but the only catch is that the department may artificially distinguish such judgments and compel taxpayers to engage in long litigation [2023-VIL-809-DEL].

 

Minimum of 30 days' time to be given for filing reply to GST notices

Sometimes it is not clear what prompts the department to not follow even the statute let alone principles of natural justice, only for the entire proceedings to be set aside and redo the exercise. The High Court granted relief to the petitioner who was handed an order even before the time to reply to the show cause notice had elapsed. An interesting and relevant observation is that though no time period is stipulated in Section 73 for the noticee to respond since the statute contemplates affording of reasonable opportunity, at least 15 days' time should be given and since the time period provided for paying tax, interest and penalty specified in the show cause notice is statutorily prescribed to be thirty days in Section 73(8), the reasonable period within which show cause notice is to be responded to, ought to be treated as thirty days. The High Court set aside the SCN and order and costs of Rs. 10,000 was imposed on the department. This order mandating provision of 30 days' time for filing reply to SCN should be helpful to taxpayers as even 15 days' time is not granted for filing reply to notices and the rush to pass orders pushing taxpayers to cough up pre-deposit and file appeals is reprehensible [2023-VIL-806-MP].

 

An unsigned order is not an acceptable mistake and is invalid

In litigation every word, punctuation can be tested and interpreted. The petitioner was served - that is order uploaded electronically - an order demanding tax on a ground different from the one mentioned in the show cause notice. It was contended that the order is in violation on account of both being on new ground being raised as well as not being signed. The department relied on Section 160 of CGST Act to contend that no assessment, re-assessment, etc., initiated in pursuance of any of the provisions shall be invalid or deemed to be invalid merely by reason of any mistake, defect or omission, if such assessment, etc., are in substance and effect in conformity with or according to the intents, purposes and requirements.  Also, since only the competent authority could upload the order, it was valid.

 

The High Court held that merely uploading of the unsigned order, even by the authority competent to pass the order, would not cure the defect. Omission to sign the order was not covered under "any mistake, defect or omission therein" as provided in Section 160. It relied on precedent judgment to hold that the signatures cannot be dispensed with and the provisions of Sections 160 and 169 of CGST Act would not come to the rescue in such a case. The order was set aside with directions to pass a fresh order. The urge to somehow pass the order confirming the demand also somehow is the root cause of such blunders. This somehow syndrome rules everywhere and the GST department is no exception [2023-VIL-807-AP].

 

Refund application is not defective if additional documents are filed as required by department

The refund seesaw continues. The taxpayer's application was termed defective after all prescribed documents as per Rule 89 of CGST Rules were filed. It appears that certain documents were not filed at the first instance but after the officer sought them. Later an order was passed, a cryptic one stating that relevant documents were not attached. Relying on National Internet Exchange of India v. UOI [2023-VIL-571-DEL], the High Court held that application for refund cannot be termed as deficient if it is in accordance with Rule 89 and is accompanied with the documents specified therein though the officer may call for details to verify the claim. The High Court directed the application to be processed. Deficiency memo is an alibi to make the taxpayers wait and compel them to file "n" number of documents. If such memo cannot be issued, letters are issued. The system punishes several honest taxpayers when genuine refunds are rejected on imaginary or flimsy grounds under the pretext of verification, etc. [2023-VIL-811-DEL].

 

Interest payable when flood cess was paid under wrong head

Quite like floods where everything becomes one watery mess, the payment of 'Kerala Flood Cess (KFC) under the incorrect head through GSTR-3B opened the floodgate of litigation. The taxpayer was required to file the KFC-A returns and remit the cess dues in the correct head. The petitioner did not respond to the first notice dated 1-4-2021 and second notice was issued on 2-6-2022. The request to transfer the amount was rejected. The petitioner approached the High Court and secured interim relief by way of refund of the amount paid under the wrong head and facility to pay the same through the portal correctly. The petitioner remitted the cess along with interest on 4-8-2022, and then sought refund of interest stating that interest was paid under protest. The department argued that the petitioner could not be allowed to take advantage of his errors and his inaction in not responding to the first notice by which some interest could have been saved.  The High Court held that since the government has been deprived of its dues, interest was payable for specified period [2023-VIL-804-KER].

 

Nominal penalty alone imposable for delayed remittance of tax when evasion is absent

 The taxpayer relied on the general disciplines for penalty prescribed in Section 126(2) of CGST Act that penalty should be commensurate with the degree and severity of the breach and argued that where he had deposited the tax after delay due to Covid related issues, demand of equivalent penalty was not sustainable. As per facts, there was no case of evasion or fraud, but tax collected was deposited after 3 months from due date. Relaxation from payment of late fee for filing returns granted by notification dated 1-6-2021 was also relied on to contend that their case should not have been viewed in such stringent terms. This was accepted by the High Court and it was held that maximum penalty could not exceed Rs. 10,000 since there was no allegation of evasion.  The penalty imposed in this case was more than Rs. 50 lakhs. But for High Courts, taxpayers would have shut shop long ago [2023-VIL-818-ALH].

 

Amount deposited in escrow account is not liable to GST

GST is not applicable on the amount deposited in escrow account by service receiving PSU pending decision of Dispute Adjudication Board (DAB) / arbitral tribunal when the amount is withdrawn by the supplier (contractor) after furnishing bank guarantee as per the conditions of the contract. This is the advance ruling. The Authority for Advance Ruling (AAR) has relied on the definition of consideration and the amount being merely deposit would not be covered. It has further ruled that the transaction itself would not qualify as supply till the same dispute is finally decided. The AAR labours to clarify that the ruling is only in respect of the amount deposited before final conclusion in the dispute and ruling will have an expiry date coterminous with the final award. Submission of BG has also been highlighted for arriving at such conclusion. Reasoning apart, the ruling may provide at least temporary reprieve to the parties [2023-VIL-200-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)