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Tax Vista Your weekly tax recap Edn. 199 - 8th April 2024 By Dr. G. Gokul Kishore |
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High Court rejects challenge to tax under reverse charge mechanism
A challenge sans merit meets the obvious fate. Notifications placing the liability on recipients of recovery agent service under reverse charge mechanism were challenged, both under service tax and GST. Because the financial institutions which receive the service have the liability to pay tax, the petitioner, a recovery agent was aggrieved that credit could not be used in respect of services received by them from others. Section 17(3) of CGST Act including supplies on which recipient is liable to pay tax under RCM was also challenged. The High Court held that the notifications have been issued under the powers conferred by relevant sections in the parent statute and therefore, they are under "authority of law". It further held that input tax credit is not a vested or inherent right and it is only a statutory right available to the extent the statute permits. Since all persons rendering particular service have been treated uniformly, the argument on discrimination was rejected and one class of assessees cannot seek parity with another class of assessees not subject to the same tax. Denial of ITC to service providers who are not liable to pay tax on output service has been held as not arbitrary.
The orders reads - "It is not open for the petitioner to question as to why the Parliament has selected certain set of services for the levy of service tax while exempting certain other services. Equally, it is not open for the petitioner to question as to why certain services are selected for being subjected to payment of tax on a reverse charge basis while leaving out other services. If one accepts that it is not necessary for the Parliament to have taxed all services in order to tax some services, it would become clear that selecting a different mechanism to collect tax in respect of some services, is also not amenable to challenge on the ground of Article 14 of the Constitution of India. It is not open for the petitioner to claim that the kind of services it renders - services as a recovery agent to a NBFC - must necessarily be taxed in a similar manner as any other taxable service."
Reverse charge or shifting a particular burden as an exception on some other person has been part of the tax system in both direct and indirect taxes. The same has come to stay though compared to direct tax (TDS), the RCM under indirect tax laws come with ITC related issues. However, when ITC itself is seen as a largesse granted by the government out own volition, RCM can hardly be questioned [2024-VIL-314-DEL].
Excess stock and penalty - High Court quashes orders as illegal
Appellate authorities under GST sometimes sympathize with taxpayers but their loyalty to revenue is overwhelming. In a case before Allahabad High Court, in one of the writ petitions, the High Court notes that the Appellate Authority had observed that the goods were not weighed or counted and then proceeded to reduce the penalty based on some estimation of stock. The Court was also annoyed to find that SCN proposing confiscation and penalty was issued almost one year after survey of the premises and such delay was considered as inordinate going into the root of the matter leading to the conclusion that the authorities acted in a callous manner. The Court had more stronger words - "This Court is of the view that the entire procedure followed by the authorities indicates not only a lackadaisical approach but also showcases the incompetence and inefficiency of the authorities that had carried out the survey in a shoddy manner and thereafter issued the show cause notice and passed order of confiscation and penalty belatedly."
The above case covered another writ petition also which was against order passed under Section 74 on excess stock. The order was quashed holding that such finding of excess stock was without any basis and illegal. Both the orders were passed by State GST authorities. The practices of stock verification and tallying books with returns and returns with returns (GST with IT), declarations with returns (Company Law with GST) - the exercise is taking GST to the point of no return [2024-VIL-315-ALH].
Binding nature of High Court order in other jurisdictions
High Courts have territorial jurisdiction but if they declare something under a Central legislation, it may have pan-India application. Though there is jurisprudence on this issue, tax authorities generally refuse to follow - when they refuse to follow jurisdictional High Court orders, there can hardly be any doubt over non-jurisdictional High Courts. On international roaming service of mobile phone companies, the Bombay High Court had held in favour of the taxpayer and the department did not file appeal before the Supreme Court. Therefore, the issue has attained finality. However, the UP GST authority can hardly appreciate such facts. Therefore, an order was passed against the same taxpayer. The Allahabad High Court held that the Bombay High Court order being on Central legislation, following the "doctrine of comity", such judgment would apply in Uttar Pradesh also. The order was set aside and the appellate authority was directed to decide afresh [2024-VIL-316-ALH].
Pre-deposit payment using ITC and recovery by department
Payment of pre-deposit using electronic credit ledger i.e., ITC is an issue left hanging deliberately. While Orissa High Court said no to such use, Bombay and Gujarat High Courts have held in favour of taxpayers holding that credit ledger can be used for pre-deposit while filing GST appeals. It seems Karnataka High Court agrees with Orissa High Court though it has been expressed categorically. In a recent case, the taxpayer had used ITC for pre-deposit but appeal was rejected. The High Court noted that the petitioner had "incorrectly deposited 10%" through credit ledger instead of cash ledger. However, after finding that the GST authorities had recovered the amount from the petitioner subsequently, the Court directed the appellate authority to decide the appeal on merits. Attachment of bank account was also directed to be lifted.
When pre-deposit is debited from credit ledger, it is not clear as to the kind of recovery department would make. It seems the debit was considered as wrong utilization of ITC and therefore, it was recovered by making the person pay the amount in cash. This could be the reason that the Court did not insist on pre-deposit on cash again. But the amount used from the ITC ledger may not be liable to any recovery since the appeal itself was rejected by the appellate authority. There was no liability created at the first place for the department to recover any amount [2024-VIL-295-KAR].
Interest on delayed refund is automatic
Section 56 of CGST Act seems pretty straightforward. Interest to be paid at 6% in case of delay in paying refund i.e., after expiry of sixty days from the date of receipt of application. The proviso states that interest upto 9% is payable where the refund arises out of an order passed by an adjudicating authority or appellate authority or appellate tribunal or court. An explanation under this provision further states that order of the tribunal or court will be deemed as the order passed by the proper officer under Section 54. However, according to the department, it appears interest would be applicable from the date of order of the tribunal or court and if there is no delay, interest need not be paid at 6%. The order apparently indicates that the department disowned any liability to pay interest.
The High Court held that the provision has to be treated as a beneficial legislation and should be enforced non-discriminately and interest is automatic and there no room for alternate interpretation or adjudication on the same. It referred to various rulings and agreed that non-granting of interest in such a case would amount to failure to discharge statutory duty/obligation by the refund sanctioning authority. It also held that the proviso merely enhances the interest payable to a person for the period commencing from the date immediately after sixty days from the date of his application filed pursuant to its entitlement to refund claim attaining finality [2024-VIL-312-TEL].
Blocking of ITC ledger - Negative blocking is not valid
Probably one of the favourite provisions of the tax officer would be cancellation of registration which has powerful impact and is easier to apply than Section 73 or 74 of CGST Act. Rule 86A vied for similar position as would appear in a recent case before Telangana High Court. Fearing/alleging fraudulent availment of ITC, the entire balance was blocked by way of a negative entry leaving the taxpayer with no option to use the account and run to the High Court. It was held reiterating the jurisprudence that the rule provides for restriction on an amount and not denial of the very credit which is alleged as fraudulently availed. It was evident from the reading of the rule that the intention was not to disallow future debits or credit in electronic credit ledger but merely block the alleged fraudulent availment. It was held that the rule was not a recovery provision and recourse had to be taken to Section 73 or 74 of the CGST Act in case the department sought to recover the amount. The issue of negative blocking has no unanimity among the judiciary with divergent views having been expressed on this issue. This is an issue for the GST Council - an amendment to the rule needs to be considered when it meets after the elections [2024-VIL-311-TEL].
GST on trade payables and employee benefits - High Court quashes order
The title may seem familiar since last week's column also carried a similar case. The definition of supply is indeed wide but should it be stretched to any amount which catches the officer's eye? The High Court itself records that it is unclear how GST was demanded on trade payables and employee benefit expenses. Even without being a wizard in accounting it is understandable that GST being collected on consideration for supply can be only on items of income or receipt for the business. The officer enforcing the law is atleast expected to adhere to the elements as provided in the charging section, subject matter of taxation etc. The criterion for raising a demand is perhaps only size of the amount in books. The issue appears to be - demanding tax on the entire trade payables instead of seeking reversal of ITC in respect of payments delayed to particular vendors. The next issue is to demand GST on all expenses and to stop such demands, businesses should migrate to Africa which has a better and more civilized tax administration [2024-VIL-302-MAD].
Advertisement expense incurred by importer not as condition of import, not includible
If GST is opening new vistas in interpretation of trade payables etc., customs continues to engage in old wars. CESTAT, Delhi examined once again the issue of inclusion of advertising, marketing and promotion expenses incurred by the buyer-importer as per agreement with the exporter, in the assessable value for customs. Since there have been decisions for and against the inclusion though fact specific in certain cases, both parties put forth their contentions. CESTAT held that as per Interpretative Notes to Rule 3 that activities relating to marketing of the imported goods undertaken by the buyer, even though under agreement with the seller, cannot be considered to be additional consideration flowing to the seller and cannot be included in assessable value. The test, it was reiterated was whether the seller gets an enforceable right against the buyer for incurring such expenses and whether such spending would discharge the obligation of the buyer towards price of goods. Since this was not the position in the instant case, it was held that the expenses cannot be included in assessable value. After all these years, customs authorities find it difficult to invoke Rule 10(1)(e) of Customs Valuation Rules and yet sustain their case [2024-VIL-314-CESTAT-DEL-CU].
Royalty unconnected to imported goods not includible in assessable value
As in the above case, Customs Valuation continues witness battles on the same issues. The importer was a distributor for certain products and also licensed to manufacture and sell certain other products. Though the agreements did not provide for any fixed expenditure towards sales and promotion as a pre-condition of sale, the importer incurred expenses on his account. But given that he was a sole distributor in India, the department concluded that the importer and supplier were related. Moreover, though IGST had been paid on royalty, it was sought to include it in assessable value of goods holding it to be part of value of goods. The importer contended and the Tribunal agreed that royalty being paid on the licensed products i.e., on the products manufactured by them could not be added to value of distributed products. As regards import of raw materials which were used in manufacture, it was held that from the list it was clear that royalty is being paid on the final products which are manufactured and cleared by the importer under the brand name. Also, it was held that the royalty paid on final products had nothing to do with the products being imported. Thus, no addition to assessable value was warranted, much less on allegation of suppression of fact of parties being related, since the parties were not proved to be related in terms of Rule 2(2) of the Customs Valuation Rules [2024-VIL-321-CESTAT-BLR-CU].
Customs cannot modify contract to reject transaction value
Test reports are often used as sole weapon by Customs authorities to reject description in the case of imported goods. However, in a recent case, strangely, such test report was used to reject transaction value adopted for export. The confusion arose because the parties had mentioned test report of foreign agency as one of the bases for finalizing the transaction value. The appellant exported iron ore fines and as per contract, based on test report at port of export, adjustments were made to the price as agreed and customs duty was paid. The department contended that the test report of CRCL in India should be the basis. It was held that customs officers cannot modify the conditions of contract only because transaction value is contingent on certain factors as per the contract between the parties. It held that Customs authorities cannot change the stipulation on test report by foreign agency and report of Indian testing agency is irrelevant. As regards the inclusion of amount determined as commission paid to the overseas agent/charterer, it was held that unless transaction value was rejected and Valuation Rules are applied sequentially, no addition can be made [2024-VIL-311-CESTAT-HYD-CU].
CBIC instructions on GST investigations
CBIC has issued instructions to its officers on conduct of investigations under GST [Instruction No. 01/2023-24-GST (Inv.)]. Emphasis on obtaining prior approvals from higher officers, avoiding summons for routine information from regular taxpayers / PSUs, issuing summons without specific mention of the inquiry, refraining from seeking information available online (in GST portal etc), completion of investigations within one year, timely issuance of SCN, etc., are part of the instructions. These instructions are more like pious mission statements which are generally not followed by anyone and therefore, they do not merit any analysis. The mindset of tax administration has to change for which instructions cannot be given.
(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)