Tax Vista Your weekly tax recap Edn. 183 - 18th Dec. 2023 By Dr. G. Gokul Kishore

 

 

ITC mismatch between GSTR-2A and GSTR-3B - Supreme Court dismisses SLP

The Supreme Court has dismissed special leave petitions filed by the GST department against the Calcutta High Court judgment holding that the GST authorities should proceed against the supplier before directing recipient to reverse ITC in the case of mismatch between GSTR-2A and GSTR-3B. The order is very brief and mentions "having regard to regard to the facts and circumstances of this case(s) and the extent of demand being on the lower side" as the reasons. Therefore, the Apex Court's dismissal cannot be taken as binding precedent on this issue. The department will be very happy as it can continue to issue SCNs. The Calcutta High Court was eloquent and it was discussed in Tax Vista dated 7-8-2023. The outcome from the Supreme Court order at least will gladden the heart of the taxpayer in this case [2023-VIL-99-SC].

 

Audit proceedings and SCN without adhering to prescribed timelines are not sustainable

Audit is generally perceived as fault-finding, but some taxpayers are able to find fault with initiation of audit itself. Section 65(3) of CGST Act requires 15 days prior notice to the taxpayer before the GST authorities intend to conduct audit. After conduct of audit, the authorities are required to consider the version of the taxpayer in respect of discrepancies noticed. In the case before High Court, 15 days' time was not provided between uploading of notice ("revised notice" in this case) and finalization of findings of audit team. The Court said that without waiting for statutory notice period, findings have been finalized and though the taxpayer had filed reply within a few days, the audit proceedings were not sustainable. The Court accepted the contention of the department that show cause notice under Section 73 could be issued independent of audit under Section 65 but in the case before it, audit report has been referred to in the SCN. Because of such reason, the SCN was also held as not sustainable and both the audit report and the SCN were set aside. The strange part of such proceedings even after such lapses is the argument of the department that the taxpayer may file reply to SCN. Training the departmental officers on the issues to be taken up during audit is secondary as how to conduct audit and how to follow the procedures should be a priority for internal capacity building in the GST department [2023-VIL-861-AP].

 

Correction of inadvertent errors in GST return to be permitted

GST as a regime with focus on electronic filing etc., reminds us of the song "virtual insanity" of late 90's which was about technology distancing humans from reality. The touch of a button and uploading of various data is bound to have errors. The petitioner assailed the communication from the department declining permission to rectify GSTR-1 return since the GSTIN of bill to and ship to parties had been entered wrongly. It had supplied goods to various parties under bill to ship to model but inadvertently GSTIN of third parties to whom shipment was delivered, was reported. Consequently, the other party could not avail ITC and the party also debited the account of the petitioner. The department was unmoved and stated that there was no revenue loss to the exchequer and since rectification was sought after due date/after filing of annual return, there was no provision in the statute to permit the same. The High Court held that wrong data cannot be permitted to remain in the system after it had been identified and that provisions of sub-section (3) of Section 37 read with Section 38 and sub-sections (9) and (10) of Section 39 of CGST Act need to be purposively interpreted and where it was a case of bonafide error without any illegal gains, rectification was to be permitted. A simple issue of correcting errors in returns has to be litigated in GST regime [2023-VIL-874-BOM].

 

Roving and fishing inquiry without reasons for inspection and search is not sustainable

It is rare to find writ court quashing search and summons. However, when the inquiry is one of roving expedition, courts do not flinch. In a case of this nature, the Delhi High Court has held that the GST department had no reasons to initiate search proceedings as authorization issued as "patently erroneous" since the grounds mentioned are not borne out of records. In this case, inspection was carried out based on directions by Special Judge (PC Act) to ascertain source of income received by the petitioner. The Court expressed serious reservations as to whether such directions could have been issued for conducting a roving and fishing inquiry. Similar directions were given to IT and ED also. The High Court noted that directions were given by Special Judge without reference to statutory provisions under CGST Act and without being cognizant of powers of GST authorities. The Court further directed return of documents since conditions for inspection under Section 67(1) of CGST Act were not satisfied. Regarding summons, it held that no further inquiry is required in so far as the directions of Special Judge are concerned [2023-VIL-868-DEL].

 

Hearing on Sunday after cancellation of registration is not valid

GST department can commit blunders and every blunder is innovative. Notice for personal hearing was issued fixing the hearing on a Sunday (10-12-2023). The taxpayer went and found the office locked. The hearing notice was sent after cancelling registration of the petitioner. It all started with issuance of notice for cancellation of registration citing default in filing GST returns for six months. The taxpayer contended that returns were filed within the extended time granted by government due to Covid but cancellation order has been passed after three years. Because the writ petition was pending, the GST authorities thought something else and called the petitioner for fresh hearing. The High Court held the order as unreasoned and non-speaking and noted that even revocation application was pending with the department and no decision was taken within one month. It held that the department was bent on taking coercive steps as evident from fresh PH notice which "is in total contravention of law". It held - "The notice, dated 05.12.2023 seems to be issued again for personal hearing. So far as the cancellation of registration is concerned, once when the cancellation of registration having been done way back on 25.08.2023 and the said order being a final order, there could not have been another letter issued by the Department calling upon the petitioner for personal hearing. The said action on the part of the Department amounts to post decision hearing which in the above factual backdrop is unacceptable in the eyes of law." Order on cancellation was set aside and direction was issued to restore registration [2023-VIL-877-TEL].

 

The department should be grateful to the Court for having let off without strictures or imposing costs. Issuing PH notice after cancellation of registration and then informing the Court that such notice was for some other reason without convincingly substantiating the same are clearly unprofessional and harassing in nature.

 

GST on secondment - CBIC issues instructions

In the backdrop of Supreme Court's judgment in CC, CE & ST v. Northern Operating Systems Pvt. Ltd. [2022-VIL-31-SC-ST], CBIC has issued instructions on 13-12-2023 to the effect that taxability of secondment (of employees by overseas company to Indian entity) will arise in GST regime also though the Apex Court held that service tax liable to be paid under manpower supply service on such services. It advises the officers to refrain from mechanically applying the Supreme Court order in all the cases since tax implications may vary depending on arrangement on secondment and terms and conditions of the contract. The instructions also reiterate the obvious - provisions of Section 74 of CGST Act on extended period of limitation cannot be invoked for mere non-payment of tax without specific element of fraud, wilful misstatement or suppression of facts to evade tax. Those who represented such issue or those who advised the taxpayers to file such representation to the CBIC should re-think about their strategies and options. Ultimately, the instructions do not lead to anything - a particular judgment should be applied carefully and Section 74 can be invoked only if the specified ingredients are present. When the instructions are clear and straight forward, departmental officers generally ignore and when such instructions are so hesitant, officers can well forget the same.

 

Mere failure to furnish GSTIN may not disentitle exemption

According to the department, failure to furnish GSTIN in the invoices for various supplies outside the State meant that the supplies would be considered as intra-state and CGST & SGST should have been paid but the taxpayer paid IGST. However, the petitioner had provided flight simulator services to various defence establishments and government organisations and claimed that the services were exempt under Notification No.12/2017-Central Tax (Rate). The High Court held that even if there was failure to provide GSTIN and the same is provided later, the adjudicating and appellate authorities were bound to examine eligibility for exemption and then determine whether exemption can be denied only on account of non-mention of GSTIN which was stated to be a bonafide error [2023-VIL-879-KAR].

 

ITC cannot be availed if GSTR-3B is filed after due date

The taxpayer attempted a novel argument of Section 16(2) of CGST Act which provides entitlement to credit on satisfaction of certain conditions being wider than Section 16(4) which prescribes time limit to avail the same. However, the argument has been rejected in earlier regimes like sales tax and the Calcutta High Court held that the section is very clear and that since the returns had been filed after due date, the taxpayer was not eligible to take credit of tax paid. Patna High Court's order in Gobinda Construction v. UOI [2023-VIL-623-PAT] has been followed. In that case it was held that Section 16(4) of CGST Act / Bihar GST Act restricting input tax credit in respect of invoice or debit note after the due date for filing GSTR-3B for the month of September (amended as 30th November) of the following financial year was constitutionally valid [2023-VIL-881-CAL]

 

Anti-profiteering - CCI directed to permit virtual attendance of parties

The petitioner's grievance was issue of summons and notice to appear in person in Delhi in the anti-profiteering proceedings against him. The matter was transferred from NAA to Competition Commission of India which also refused to permit virtual attendance. The High Court held that it was impractical and economically punitive to expect every taxpayer to travel to Delhi and present his defence and that virtual mode must be permitted by CCI in anti-profiteering proceedings [2023-VIL-871-TEL].

 

Over-valuation alleged without evidence - Tribunal grants relief to exporter

In a clear case of misuse of powers and authority by Customs authorities, an exporter was made to litigate twice and suffer for more than five years. Drawback, refund of IGST and ROSL were paid after exports but the department subsequently alleged overvaluation and the goods which were exported were recalled by Customs authorities. The exporter produced e-BRCs to prove realisation of entire proceeds and requested for release as the overseas buyer was waiting for several months. But the Customs authorities imposed onerous condition for provisional release which was challenged during first round of litigation and directions were issued to complete adjudication expeditiously. In the second round, export benefits were reduced, over-valuation was confirmed, confiscation was upheld and penalty was imposed. The Tribunal held that the export valuation rules were not sequentially applied and CBIC instructions were not followed on provisional release of goods. There was no evidence produced by the department for overvaluation as there was no mismatch in FOB value in invoices and other documents and the market survey of domestic goods was not acceptable as the local shop keepers themselves said the price may vary. The case saw an interesting issue but the same was not pressed and therefore, not decided - whether Commissioner has the power to recall the goods which have been already exported. The Tribunal set aside the orders and provided relief to the much harassed exporter [2023-VIL-1307-CESTAT-MUM-CU].

 

Incentive based on performance is not subsidy and is liable to GST

If there is an exemption, it is subject to interpretation and litigation. This is the basic tenet of tax policy and tax administration. While Covid may soon be a faint memory, its after effects can be felt. The applicant for advance ruling was a cooperative bank which received/was eligible to receive an incentive from the State Government based on amount of loans granted at a concessional rate. In terms of a Covid-related scheme, banks were encouraged to lend to small borrowers at a maximum of 8% interest, but collect 2% from the borrower with the government paying the rest to the bank. Based on the total of such loans granted, banks received an incentive of 2% (or more in certain cases). The Appellate Authority for Advance Rulings (AAAR) upheld that ruling of the AAR that this incentive is not a subsidy in terms of Section 15 of CGST Act and would not qualify for exclusion. The reasoning being it is not a direct subsidy as in the case of the beneficiary/loanee and the payment of incentive is based on performance/achievement of target. The service to the government has been identified as granting of loans which is a little surprising.

 

It is quite apparent that the loans were not granted to any identified borrowers and the work of the bank was undertaken in normal course of business, the difference being the government provided an incentive for granting such loans. It is difficult to identify any contract/arrangement between the government and the bank as service recipient and service provider. The other argument of the appellant that the incentive was linked to interest and was a compensation towards interest was also not accepted stating that in such a case incentive cannot vary based on performance and would have been static. The use of two words "subsidy" or "sahay" in vernacular in the scheme and incentive in English in the resolution has been interpreted to conclude that both payments are different. While what is provided to the loanee is subsidy, what is given to the applicant bank is incentive [2023-VIL-42-AAAR].

 

Recovery from employee for canteen facility at subsidised rate is exigble to GST

While facts may seem familiar - taxpayer provides canteen facility as per statutory mandate, recovers minimal amount from employee, the terms are part of the employment agreement - each AAR is different. The applicant stated that the perquisites forming part of employment contract have been excluded from GST as per the CBIC Circular no. 172/04/2022-GST dated 6-7-2022 and hence argued that there was no supply of canteen service to employee to render it taxable and that canteen was not its "business". However, the AAR held that provision of canteen was incidental and part of its business and where there was recovery from the employee the same would be taxable. Though there was no express contract for supply of food, the employment appointment orders mentioned that the employee would be entitled to canteen facility and recovery would be made from him. Accordingly, it held that for the portion borne by the employer, GST would not apply but for the sum recovered from the employee GST is payable. One of the reasonings given is that perquisite is generally given free of cost as per the definition contained in Income Tax Act and as is commonly understood and therefore, when there is a recovery, the facility would not be covered as perquisite. This is clearly flawed and plain misinterpretation of CBIC circular and an appeal may result in a different outcome. But it is not known why taxpayers are knocking the doors of AAR on this issue when CBIC has clarified it [2023-VIL-211-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)