Tax Vista Your weekly tax recap Edn. 238 - 13th January 2025 Dr. G. Gokul Kishore

 

 

Transfer of leasehold right in land by assignment is not liable to GST

Transfer of leasehold rights in land for a period of 99 years by a registered assignment deed is akin to transfer of immovable property by sale and therefore, the same is not liable to GST. This is the conclusion of the Gujarat High Court while dealing with the issue of levy of GST on land (along with building) leased by Gujarat Industrial Development Corporation to lessee who in turn, transferred such leasehold rights by assignment to another party. The High Court took note of lease being covered under Section 7 of CGST Act as supply, Schedule II categorising leasing as supply of service and exemption contained in Notification No. 12/2017 - Central Tax (Rate) in respect of premium (salami) paid when land is leased on long term basis by such industrial development corporation. The department argued that right to occupy land which is one in the bundle of rights in the immovable property is an interest in such property and when the owner (GIDC) transfers such right to lessee is treated as supply of service, subsequent assignment does not change the nature of the transaction and the same will continue to be supply of service liable to GST. However, the High Court said that "sale" and "transfer" of leasehold rights by lessee to third party divests such lessee of all the absolute rights in the property and in such a situation, interest in the immovable property in the form of leasehold rights cannot be said to be different than the immovable property itself.

 

The Court appears to have done a balancing act by justifying or distinguishing the transaction of GIDC leasing the land for 99 years and GST being payable on the premium / rent and subsequent assignment by lessee in favour of third party being transfer of immovable property itself. Outright assignment has been held as a key factor as the land is not sub-leased so as to earn rent which would be covered under GST. It sought to rely on the principle that long term lease of 99 years is equal to alienation as sale. It relied on applicability of stamp duty on such assignment and registration being mandatory under the relevant statutes. The order reads - "Therefore, the scope of supply of services would not include transfer of leasehold rights as supply of service as it would be transfer of immovable property being a benefit arising out of immovable property consisting of land and building....Clause 5 of Schedule III of the GST Act clearly provides that sale of land cannot to be treated as supply of goods or services. Therefore, leasehold rights which are to be considered as sale of land would be out of purview of the provisions of scope of supply as per section 7 of the GST Act".

 

An alternative plea on admissibility of input tax credit of GST, if payable, was also involved but the Court having decided on merits as to inapplicability of GST, did not go into this issue. The judgment is a major one considering the issue involved and the impact it will have on business entities undertaking such transactions. The final word from the Supreme Court when the department files appeal will determine the issue conclusively. However, an amendment to relevant provisions and a clarification by circular on "as is where is basis" cannot be ruled out to tax such transactions. Whether it will stand judicial scrutiny unless Constitution itself is amended, remains to be seen. Anything related to immovable property is bound to be complex and litigative and this issue is no exception [2025-VIL-21-GUJ].

 

Supply of solar power generating system is composite supply and not works contract

The concept of what is movable and immovable property though embedded in many a judgement is still not wobble free and the High Court of Andhra Pradesh had occasion to once again examine the same. The department issued show cause notice and confirmed the assessment of the turnover of the petitioner @ 18% GST, on the ground that the transactions undertaken by the petitioner in supply of solar power generating system (the system) are works contract, as defined under Section 2(119) of the CGST Act. The petitioner contended that it was composite supply, as defined under Section 2(30) of the CGST Act, attracting GST @ 5%.

 

The High Court opined on reading the definitions that distinction between 'works contract' and a 'composite supply' would be whether the end product handed over to the contractee, is moveable or immoveable property. The petitioner explained that solar modules are arranged in panels and for optimum utilization, these panels are mounted on top of trackers. These trackers move the panels along the direction of the sun to capture maximum solar energy. These trackers are placed on a civil foundation, which is required to give a steady platform to the modules and the trackers. According to the department the system become immovable as they are permanently imbedded in earth inasmuch as they are fixed to a foundation imbedded in earth about one and half ft. deep. It also contended that the systems fixed by nuts and bolts etc which could not be shifted without dismantling it and re-erecting it at another site, was immovable property. The petitioner argued that the construction was intended to provide stability to the working of the plant and prevent vibration/wobble free operation.

 

The High Court held that the system does not qualify for being described as attached to the earth that is as being rooted in earth like trees, imbedded in the earth as in the case of walls or buildings or attached to what is imbedded for the permanent beneficial enjoyment as described in Section 3 of the Transfer of Property Act, 1882. It was held that the solar modules and the Solar Power Generating System have not been attached to the civil structure for the purpose of better enjoyment or beneficial enjoyment of the civil foundation. Rather, the civil foundation has been embedded on earth for better permanent and beneficial enjoyment of the Solar Power Generating System. It also be held once that the property in question is not embedded in the earth to bring it within the meaning of immoveable property, the question of whether it is a permanent embedment or not, would not arise. It held that the project is a composite supply and not a works contract.

 

One of the major drafting lacunae in GST pertains definition of works contract. Works contract is a composite contract involving both goods and services as is generally understood whereas in GST, such composite supply involving construction of immovable property alone is treated as works contract. The case discussed above pertains to an early period of GST as this issue has now been resolved by amending notification entries after multiple applications before advance ruling authorities were filed and the industry raised red flag over the high-pitched demands [2025-VIL-29-AP]

 

Services provided on own account, earning mark up on costs - Not intermediary services

The relationship of parent and subsidiary does not ipso factor create an intermediary out of the latter and date of filing of additional documents for a refund application does not supplant date of original filing of application Broadly based on these factors, the petitioner assailed the rejection of refund. The department raised the issue of time bar on the application since the original application was uploaded again with certain documents on a date beyond two years from the relevant date The petitioner provided consultancy in business of software development, editorial services, customer support, sales and marketing services to its parent and earned a markup on costs. It argued that requirements of Section 2(6) of IGST Act, being zero-rated supply in terms of Section 16 of IGST Act were satisfied and transactions being on principal to principal basis, it was not an intermediary under Section 2(13) of IGST Act. As per the terms of the contract, it was to assist its parent in various consultancy and support services and in case of dispute the parties resolved to invoke arbitration if negotiations failed.

 

The High Court held that the terms did not show that the petitioner was acting in the capacity of either agent or broker or any other person and therefore, the same was covered under export of service and directed the department to process the refund claim. The issue of time bar was also decided in favour of the petitioner with directions to reckon the date of original filing which was within prescribed time limit. The department repeatedly attempts to classify all transactions between Indian subsidiary and foreign parent company as in the nature of intermediary service only to deny the benefit of export of service even when three parties are not involved, work is undertaken on own account, ancillary services are not involved, etc. Either the agreement is given a convoluted reading or deliberately misinterpreted without any accountability [2025-VIL-28-GUJ].

 

Interest on refund - Interpreting High Court order to reject

Under GST regime, as per law, if refund is to be claimed, an application is required to be filed. After disposal of such claim, writ petition is required to be filed before the High Court though this is not as per law since most of the claims are liable for rejection, as per the department. If High Court allows the petition, then the GST authority sits in judgment over such Court order and then re-determines the amount payable if the order has been "accepted" by the reviewing authority. For the period spent in such litigation, a few taxpayers have the time and energy to further litigate claiming interest on delayed refund. In this second round, the authority obviously rejects the claim on various grounds. In one such case, the authority found that the High Court order containing remand directions did not specifically mention about interest and therefore, interest was not payable. The High Court noted that it had directed disposal of the claim "in accordance with law" and this meant that the authority ought to have taken into account interest claim also. It directed the department to grant interest as per Section 56 of CGST Act. GST authorities entertain the view that when refund claim was initially rejected, then interest was not payable at that time. Subsequently also, when Court directs refund, unless express inclusion of interest is made in the order, the same cannot be granted. If the GST Council and CBIC are serious in ensuring taxpayers survive, rejection of refund on hyper-technical or trivial or invented grounds should be dealt with severely [2025-VIL-20-DEL].

 

Letter communicating Investigation Report by SVB is not an "appealable" decision

The importer assailed the investigation report by Special Valuation Branch (SVB) covering provisionally assessed BoE as well as BoEs to be filed routinely. It had been issued two show cause notices based on the report.  The importer claimed that it was not given fair opportunity to put forth its views and the investigation report/letter communicating the same was in violation of principles of natural justice. Commissioner (Appeals) rejected the appeal citing CBIC Circular No. 5/2016-Cus., dated 9-2-2016 and held that investigation does not constitute independent quasi-judicial proceedings nor is it subject to appeal.

 

On maintainability of an appeal before the Commissioner (Appeals) against a letter received from the department enclosing SVB's Investigation Report the CESTAT held that the officer who has prepared the IR was doing so in his administrative capacity and did not make any final determination of questions affecting the rights of the appellant. The officer was not required to act judicially but only judiciously and was not invested with powers to determine questions of law or fact but only to gather evidence and prepare a report. The report is submitted to the proper officer who then initiates the proceedings. The impugned order rejecting the appeal against IR was upheld. The Tribunal order deals extensively with the "any decision or order" against which appeal can be filed under the Customs Act and notes that it refers to a legal decision or order made by a quasi-judicial authority [2025-VIL-39-CESTAT-CHE-CU].

 

Actual user condition cannot be read into an exemption notification when it is absent

The department denied the benefit of exemption under Notification No. 146/94-Cus. dated 13-7-1994 for the arms and ammunitions imported by the appellant during the period from November 2005 to December 2009. The appellant-importer a federation of affiliated State Rifle Shooting Associations and other such bodies, claimed that it had satisfied two conditions of certificate issued by the Sports Authority of India and production of the same before the Assistant Commissioner or Deputy Commissioner of Customs at the time of clearance of goods. But, the department held that since the goods - rifles were sold to district clubs and state rifle associations for use in competition and championships instead of use by the importer itself, the conditions of the exemption notification were violated.

 

The CESTAT held that there was no "Actual User" condition in the notification and the department cannot insist that the importer himself had to use them and adding such words "by the importer" was not correct. Also, letter recommending the issue of licence issued by the Ministry of Sports specifically stated that the import of the goods is for supply to the State Rifle Associations and such bodies. It held that there was no violation of the conditions. As regards confiscability under Section 111(d) of the Customs Act, 1962 it held that a plain reading of the provision shows that only such goods which are imported in violation of any prohibition are liable for confiscation. When such goods were imported under valid license from DGFT, at the time of import there was no violation and goods were not prohibited goods. The case was booked by DRI which adopted the strange and unsustainable interpretation of the exemption entry dragging the sports body into litigation [2025-VIL-09-CESTAT-DEL-CU].

Previous edition, dated 6th Jan, 2025

 

(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. E-mail - advgokulsubha@gmail.com)