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Tax Vista Your weekly tax recap Edn. 212 - 8th July 2024 By Dr. G. Gokul Kishore |
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Blocking of electronic credit ledger without using notice is not valid
Even though principles of natural justice - notice, hearing etc., are not specifically provided for exercise of Rule 86A of CGST Rules, 2017, the department cannot act unilaterally to block the electronic credit ledger. In the course of investigations into bogus purchases as well as the supplier, the department decided that the electronic credit ledger must be blocked, without issue of show cause notice, to the extent of alleged fraudulent/illegal credit since registration of the supplier had been cancelled. The petitioner sought relief since he was deprived of ITC as well as unable to file returns and the adverse impact on his business. The department's idea of remedy was that the assessee could replenish the said amount, and file the return electronically and unlike Section 73 of CGST Act, 2017, Rule 86A did not provide for principles of natural justice to be followed. The High Court however held that action of blocking the electronic credit ledger of the petitioners without following the principles of natural justice and without assigning adequate reasons cannot sustain judicial scrutiny.
After exhaustively analysing Section 74 and Rule 86A, the Court said -"As noticed, Section 74 statutorily recognizes and mandates that principles of natural justice are to be followed. Rule 86A, on the other hand, is totally silent on the aspect of applicability of principles of natural justice. Thus, if Rule 86A is implemented without following the principles of natural justice, it may cause hardship, inconvenience and injustice. It is difficult to accept that the law makers intended not to follow principles of natural justice while inserting Rule 86A in the statute book. If we interpret Rule 86A in the manner suggested by learned Government Pleader, it will have an impact that although Section 74, a substantive provision of the Act recognizes the principles of natural justice, the Rule made under the Section says total goodbye to principles of natural justice...In order to avoid inconsistency, injustice, anomaly and hardship and also in order to iron out the creases between Section 74 of the Act and Rule 86A of the Rules, we deem it proper to interpret it by holding that principles of natural justice must be observed while taking an action under Rule 86A of the Rules". [2024-VIL-649-TEL].
Detention of vehicle and goods for use of different route by driver, is not sustainable
While most of the cases on detention of vehicles and seizure of goods are bogus and are booked for trivial issues, GST authorities have the luxury to carry such litigation from Single Judge Bench to Division Bench in appeal. In a case of this nature, the GST department argued in High Court that the vehicle moved in a different direction and therefore, it should be treated as a case of transportation of goods without documents and diversion to a place different from the destination. The Division Bench held that the department could not cite any provision that regulates the movement of conveyor of goods while choosing his route, in the State and as per the existing law, a merchant or his convoy is free to choose the route for the movement of goods from the point of origin to the point of destination and specifying a particular route in the consignment documents would not come in the way of that route being altered though destination cannot be changed. When travel time and destination point remain the same, choosing circuitous route in preference to linear one cannot be held against the taxpayer. It held that law does not mandate use of a particular route and does not prohibit alternation of the route. It said when there is no legal mandate, reason given by the driver for change of route is not relevant. The appeal by the GST department was dismissed.
Most of the highway detentions are meant for harassment citing trivial and non-statutory reasons like the above - change in route. The authorities may suspect something but for that, Section 129 of CGST Act is not the provision. After gathering evidence, proceedings should be initiated under Section 73 or Section 74. Holding up the vehicle of the transporter and the goods which are urgently required for production process hampers business greatly. E-way bill should be abolished as it merely substitutes physical check posts with surprise check posts where officers stop vehicles at random anywhere [2024-VIL-646-KAR].
Amendment on provision of certified copy of order while filing appeal is retrospective
In GST law, a basic procedure has been made so complicated that the provision had to be amended and before and after amendment, host of litigation piled up before High Courts. The procedure relates to mode of filing appeal before appellate authority and acknowledgement for filing such appeal. Rule 108(3) of CGST Rules deals with such procedure. Before amendment in 2022, the rule required submission of certified copy of the order against which appeal is filed within seven days and if this is not complied with, then date of submission of such order copy will be deemed as the date of filing appeal. In 2022, it was amended to relax the same by doing away with such provision of certified copy when the order has been uploaded online. In a recent case, the department had taken the subsequent physical submission of appeal papers as the date of filing even though appeal was filed online within 3 months' time-limit. The Karnataka High Court held that the amendment is clarificatory as per the records of deliberations of GST Council meeting and therefore, it will have retrospective effect i.e., applicable to the period before such amendment also and therefore, it would apply to the case before it. It directed the appellate authority to decide the appeal afresh.
The rule even today requires submission of self-certified copy if the order is not available in GST portal. Instead of drafting a rule against the taxpayer for the fault of the GST authorities in failure to upload an order, it is advisable to omit the rule itself. Everything is online in GST and every document, return, etc., is available in GST portal and therefore, demanding an order copy from the taxpayer is meaningless [2024-VIL-644-KAR].
Order rejecting refund adopting pedantic literal approach is not sustainable
Refund is something that exists only in law. In most cases, obtaining refund is a lengthy, arduous process. An order sanctioning refund of unutilized ITC was set aside by Commissioner (Appeals) and the taxpayer was before High Court against order seeking recovery of refund sanctioned. The order is on a short point. The opening balance of ITC in July 2017 included transitional credit. It was held by Commissioner (Appeals) that such opening balance was NIL since verification of transitional credit was undertaken later. The High Court followed a similar order apparently passed on the same day holding that the Commissioner (Appeals) had adopted a very pedantic literal approach and he ought to have considered the fact that transitional credit carried forward through TRAN-1 was approved by the authority concerned in September, 2017 and therefore, such credit was available as on 1st July, 2017 as opening balance in ITC ledger. Order of Commissioner (Appeals), order seeking recovery of refunded amount, show cause notice, etc., were all quashed [2024-VIL-648-GUJ].
Delay beyond statutory time period is not condonable - Limitation Act is not applicable
The Patna High Court held that delay beyond the 3+1 months provided in the CGST Act for filing appeal before the first appellate authority under Section 107 cannot be condoned and Section 5 of the Limitation Act cannot be invoked taking the stand that there is no express exclusion of the Limitation Act. It disagreed with the judgement of the Calcutta High Court [2023-VIL-855-CAL] and based on various rulings, opined that the appeal is before a body or authority other than a 'Court' and the special statute under which appeal is filed must authorise such body or authority to apply Section 5, while dealing with application for condonation of delay.
As this issue has been witnessing courtroom battles in various High Courts now, the Patna High Court patiently analysed all binding precedents and then held - "When a specific time period is provided for the authority/tribunal/court before which a proceeding is to be initiated and a further period is specified for delay condonation, then there is exclusion of Section 5 of the Limitation Act. However, when there is no provision for delay condonation expressly provided and only a period of limitation for initiating the proceeding stipulated, then the scheme of the special statute will have to be looked at to understand whether Section 5 is excluded or not." The delay in filing appeal was about two months beyond condonable period and the High Court rejected the petition filed against order rejecting appeal on limitation after reiterating the familiar line of law favouring the diligent and not the indolent [2024-VIL-656-PAT].
GST law does not provide for notice under Section 41-A of Cr.P.C before arrest
The petitioner had been subjected to search and arrested in earlier proceedings and later obtained bail. Pursuant to a fresh search and seizure of all documents, computer systems and cash, he apprehended that the GST officers might arrest him again by invoking the powers under Section 69 of the CGST Act. The basic plea of the petitioner was that provisions of Section 41-A of Cr.P.C are to be complied in the case of an offender in the CGST Act, 2017 since under Section 132 of the CGST Act, the maximum punishment prescribed is imprisonment for five years. The petitioner stated that the officer ought to summon a person for enquiry before arrest. However the High Court held that there is vast difference between the phrases "reasons to believe" and the "reasons are to be recorded' under Section 41A(3) of Cr.P.C. and there was no requirement to issue notice to offenders who had allegedly committed an offence under Section 132 of the CGST Act. The High Court granted of one more opportunity to appear before authorities and also directed return of necessary (seized) material to enable him to answer the officers. [2024-VIL-653-TEL].
ITC - Breakwall having elements of civil structure would fall in restricted list
The petitioner engaged in regassification constructed (rather extended) a breakwall - to throw back the energy of sea waves so that ships carrying fuel oil could be berthed. Having lost in the appeal to the AAAR, the petitioner assailed the same and submitted that the breakwall would qualify as apparatus or plant and machinery and mere presence of civil work in the breakwall - immovable property could not bar input tax credit (ITC). The department argued that the petitioner was already operating without the complete breakwall and hence it was possible to function without the breakwall and it could not be termed plant and machinery. Also, since it was a civil structure, ITC could not be availed. The High Court held that since the purpose of the breakwall was to allow the ship to reach the jetty and remain safe at any point of time irrespective of the severity in the weather conditions, and not for manufacturing per se, it was not as such plant and machinery. As per the Court, even if plant and machinery is taken together, it would mean a place where certain manufacturing activities are carried out using inputs. It further said that breakwater wall is used for protecting the vessels from tides and not for making outward supply of goods or services.
These are projects involving huge expenditure and not offsetting the tax cost will result in inflation of the charges impacting all those in the chain. ITC provisions need to be recast so that credit is not denied when the use of anything can be related to business and such "thing" is not capable of being put to personal use [2024-VIL-662-BOM].
Royalty payable only when products are sold locally is not includible in transaction value
Import of yeast culture for manufacture of yeast using technical knowhow provided by the exporter - Royalty payable based on sale of manufactured yeast - Technical knowhow agreement not having stipulation that appellant is required to purchase goods from the exporter / supplier only - Royalty payable was not a condition of sale of imported goods and therefore, Rule 10(1)(c) of Customs Valuation Rules on inclusion of royalty is not attracted - After analysing the terms of the agreement, the CESTAT held that royalty is payable by the appellant only if the products are sold after manufacturing the finished products using the technical knowhow and therefore, there is no condition that the goods have to be imported only from the foreign supplier. After taking into account a recent order on this issue, order of Commissioner (Appeals) requiring inclusion of royalty was set aside. The issue and the findings tread the familiar path but what is surprising is the undying enthusiasm of the Customs authorities to litigate royalty in every case [2024-VIL-718-CESTAT-CHE-CU].
(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)