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Tax Vista Your weekly tax recap Edn. 215 - 29th July 2024 By Dr. G. Gokul Kishore |
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Budget 2024 seeks to bring major changes in GST law
Last week was Budget week. Finance (No. 2) Bill, 2024 was tabled in the Lok Sabha and the amendments recommended by GST Council have been proposed to be made in the CGST Act. Protecting the input tax credit availed after delay till November, 2021 by taxpayers for the years from 2017-18 to 2020-21, amnesty scheme for the period from July 2017 to March 2020 in respect of demands and orders by providing waiver of interest and penalty if tax is paid by specified date, amending Section 70 to enable authorized person to appear on behalf of the person to whom summons has been issued, merger of Section 73 and Section 74 so as to provide Section 74A as common provision for demand of tax and issuing orders even while retaining penalty quantum in respect of suppression cases and empowering GST Appellate Tribunal to hear anti-profiteering matters and to provide for sunset date for anti-profiteering per se are some of the major amendments proposed. Amnesty scheme was expected and was being demanded considering the fact that GST law is new and during the initial years, everyone and everything was in utter chaos and the same has been recognised. The scheme is attractive as both interest and penalty are proposed to be waived fully. The scheme should be implemented without being bogged down by procedural issues. On Customs front, the only major amendment pertains to Section 28DA whereby certificate of origin under FTAs is proposed to be replaced with proof of origin and self-certification / declaration is also set to be recognized. The verification mechanism will become stringent though reports speak about risk-based system, etc.
Royalty is not a tax - State legislatures competent to tax mineral rights
The Constitution Bench of Supreme Court by 8:1 majority has ruled that royalty is not a tax and State Legislatures have the power to tax mineral rights. Royalty is a contractual consideration paid by mining lessee to the lessor for enjoyment of mineral rights and the liability to pay the same arises out of the contractual conditions of the mining lease. The Apex Court said that such payments made to the Government cannot be deemed to be a tax merely because the statute provides for their recovery as arrears. The legislative power to tax mineral rights vests with the State legislatures as per Entry 50 of List II and Parliament does not have legislative competence to tax mineral rights under Entry 54 of List I as the same is a general entry. Though Entry 50 of List II (State List) provides for imposition of limitations by Parliament under a law relating to mineral development, no such limitation has been imposed under the Mines and Minerals (Development and Regulation) Act, 1957 [MMDR Act].
The Supreme Court further held that mineral-bearing land is covered under "lands" in Entry 49 of List II and therefore, State Legislatures have the competence to tax lands comprising mines and quarries. Mineral value or mineral produce can be used as a measure to impose tax on lands under the said entry. The judgment is exhaustive and will have a bearing on the litigation pending before the Apex Court on levy of service tax / GST on mining royalty [2024-VIL-24-SC].
Services by club or association to members can be subject to GST but not retrospectively
The petitioner was an association formed in line relevant rules of the Indian Medical Association and its members were qualified modern medical practitioners with a valid registration in Kerala under the relevant statute. Members could not transfer membership, there was no distribution of profits or property even on dissolution. Wherever activities involved outsiders it was undertaken by a separate entity with PAN and GSTN. The association provided a number mutual beneficial schemes for the benefit of its member- doctors like pension fund, taking care in case of permanent disability etc. It challenged the constitutional validity of Section 2(17)(e) [including services provided by club/association to members in definition of business] and Section 7(1)(aa) of CGST Act and explanation thereto in terms of which scope of supply was widened to include the activities or transactions, by a person, other than an individual, to its members or constituents or vice-versa, for cash, deferred payment or other valuable consideration. The amendments were made in 2022 with effect from 1-7-2017.
The petitioner argued that Section 7(1)(aa) as unconstitutional and violative of Articles 14, 19 (1) (g) Articles 265 and 300A of the Constitution of India and insertion of Section 7(1)(aa) by the Finance Act. 2021 has created a new levy and therefore, the new provision cannot be given retrospective operation. It contended that the provisions were against the concept of mutuality which was also upheld in State of West Bengal v. Calcutta Club - 2019-VIL-34-SC-ST and in any case there cannot be a retrospective operation of the same. The High Court held that legislature does not lack legislative competence to define person who is liable to pay tax. It opined that even if principle of mutuality was upheld in judgements it is within the power of the legislature to alter or remove the basis of the judgment by necessary amendments in the legislature. However, it held that Section 7(aa), should not be given retrospective operation with effect from 1-7-2017 but it should be given effect from the date when it was notified i.e., 1-1-2022 and following the pronouncement of the Supreme Court, the petitioner had not collected tax. As regards the GST liability on various schemes and benefits provided by the association, it was held that the assessing authority is required to examine each activity independently [2024-VIL-744-KER].
Section 129 v. Section 130 - Department's faux pas on supply of documents
Notice was issued proposing confiscation and both the goods and the vehicle were confiscated with the option to pay fine and penalty to redeem them. The taxpayer argued that Section 129 of CGST Act on detention and seizure should have been invoked and in case of subsequent failure to pay the amount demanded, confiscation under Section 130 could have been undertaken. This means before invoking Section 130, the authority ought to invoke Section 129 since Section 130 does not have provision for detention of goods. The order was also assailed on absence of prima facie satisfaction on the part of the authority.
The High Court noted that interplay between Section 129 and Section 130 was considered by Gujarat High Court in Synergy Fertichem case [2019-VIL-623-GUJ] and held that Section 129 applies only when goods are being transported and it will not apply in relation to a situation where the goods are not in transit. In the case of Section 130, confiscation of goods or conveyances can be undertaken subject to specified conditions including transportation in contravention of the provisions and this would mean invocation of Section 129 will not precede in all cases where Section 130 is invoked. However, the Court found that DIN was missing in the order and details of supplies and e-way bills noted in the order were not available in the SCN. Despite request for supply of materials, the department did not respond. On such ground, the order on confiscation was set aside and the authority was directed to decide afresh. While the law is settled and the provisions are also clear as to invocation of Section 129 and Section 130 being separate and independent, high-handedness in passing order without providing necessary documents has cost the department dearly [2024-VIL-738-AP].
Section 130 does not provide for assessment
VIL has reported another order relating to confiscation on the ground of excess stock being found at the time of inspection. The High Court relied on Metenere Ltd. [2020-VIL-641-ALH] wherein it was held that the exercise of assessment / determination of tax and imposition of penalty has not been provided for in Section 130 but the same is covered by Section 73 / 74 and therefore, such proceedings were not sustainable. In this case, as per the petitioner, confiscation was ordered based on eye estimate of stock alleged as excess as compared to books. The order was set aside. GST law is new but old methods are still in use as stock-taking used to be a traditional anti-evasion tool in respect of evasion prone commodities in Central Excise [2024-VIL-737-ALH].
Inspecting authority under GST whether can act as adjudicating authority
The taxpayer assailed the order arguing that inspecting authority was the assessing authority thus violating principles of natural justice (no man can be judge in his own cause) and powers of adjudication cannot be delegated by way of circular as Section 167 of CGST Act contemplates issuance of notification. The High Court noted that the power regarding the relevant circular could be traced to Section 2(91) and not Section 167 and therefore, issuance of notification may not be necessary for authorizing / assigning proper officers of adjudication. It relied on Gujarat High Court decision in Yasho Industries [2021-VIL-483-GUJ] which was answered against the taxpayer holding assignment of functions to officers through circular as valid. On bias, quoting a precedent the order says that enforcement / inspection wing officers are empowered to pass adjudication orders but subsequently, circulars have been issued whereby inspecting team would send the report and jurisdictional officer will take further action. Though this circular was later withdrawn, the Court has rejected the argument on bias.
The issue of empowerment in so far as adjudication by SGST officers are concerned needs to be addressed administratively. Officers lower in rank like Deputy State Tax Officer or State Tax Officer issues SCN and passes adjudication order where amounts involved are crores of rupees. There is no proper or uniform monetary limit based empowerment for adjudication across the States. GST Council should consider this issue so that lack of consistency and uniformity on this issue is address at pan-India level [2024-VIL-729-MAD].
Refund rejection ignoring non-jurisdictional High Court order, is not sustainable
GST authorities have perfected the art of not following precedents. When the law involved is Central, a circular issued under such law has been set aside by the High Court, it will have pan-India applicability. However, CGST Authority faced with refund claim of more than Rs. 11 crores was under compulsion to somehow reject it and therefore, relied on the CBIC Circular No. 135 seeking to clarify that when rate of tax on inputs and output is same, then refund under the category of inverted tax structure would not be admissible. This circular (this portion) was set aside by various High Courts. But the CGST Authority said that the orders were from non-jurisdictional High Courts i.e., High Courts in other States. The Madras High Court noted that this is contrary to the ratio laid down in Kusum Ingot and Alloys [2004-VIL-59-SC] and set aside the order with the direction to pass fresh order. It is not clear as to how refund claims filed a few months later on the same ground were processed and refund sanctioned as the order records [2024-VIL-723-MAD].
Route need not be specified by supplier - No case for detention or penalty
GST cannot be called a new law, it is seven years old. But it appears officers favour VAT era and apparently influenced by a provision therein which required route of transporting goods to be disclosed, vehicle of the petitioner was intercepted. The officers concluded that goods were to be supplied at Auraiya and Etawah, while the said vehicle was intercepted at Firozabad which was not the route to be taken by the said vehicle, though all accompanying documents were genuine and complete. The driver had stated that goods were not to be unloaded at the destination mentioned in the documents. Other than this, no default was found. The High Court held that since there was no requirement in GST law for disclosing route once the documents accompanying the goods were found to be genuine the goods ought not to have been seized [2024-VIL-724-ALH].
Registration cancellation without reason - High Court imposes costs
The taxpayer's registration was proposed to be cancelled since no business activity was observed in registered premises nor books of accounts shown. The taxpayer explained that books of accounts could not be shown on account of the fact that the proprietor was out of town and contended that since none of the conditions in Section 29 of UPGST Act was satisfied, registration could not be cancelled. However, order was passed stating wrong availment of ITC and indulgence in bill trading. The taxpayer pointed out that he was never put to notice on the new ground and Section 29(2)(e) of the UPGST Act that the registration has been obtained by wilful misstatement or suppression of fact was not even invoked. The SCN referred to Section 29(2)(a) which mentions in general a contravention of the Act. The High Court held that registration could not be cancelled and also imposed costs on the department for unnecessarily dragging the petitioner into litigation [2024-VIL-735-ALH].
Goods "likely to be misused" cannot be detained - No bar on provisional release
Tyres used for vehicles used in construction, mining and industrial handling were imported but later seized by the department which opined that impugned tyres are in fact tyres used for truck and bus and fall under CTH 4011 2010 and hence require clearance from the competent authority and should adhere to the BIS specifications. The department argued that goods could not be provisionally released since it would be against larger public interest due to possible misuse and at this stage it was not possible to decide if they were prohibited goods. It also emphasised on the discretion permitted to the authority to decide on release of goods.
The importer supported its classification stating that imported tyres are for use in mining vehicles and could not be used in vehicles like trucks and buses which ply on highway as it would cause stress on the engine and reduce the fuel efficiency and life of the vehicle. The importer contended the previously goods were cleared after obtaining evaluation report from Indian Rubber Manufacturers Research Association (IRMRA) which was categorical in saying that the impugned tyres were for use in mining vehicles only and currently goods of other importers had been cleared after testing.
The CESTAT held that permitting release of goods to some importers as per the test report given by IRMRA, albeit in the past, and denying even a provisional release to some importers and not obtaining the opinion of IRMRA certainly goes beyond the boundary of 'discretion' and borders upon 'discrimination'. Also nature of the impugned goods being prohibited was yet to be established and if at all, the investigation is able to establish that the impugned goods are classifiable under CTH 4011 2010, they would at the most become restricted items the import of which may require BIS certification. It held that likely misuse after import cannot be a criteria for classification and there was no ground to deny provisional release of the goods [2024-VIL-822-CESTAT-MUM-CU].
Enhancement of AV cannot be on basis of uncorroborated statements and rejecting contemporaneous import price
The department's attempt to reject transaction value and enhance value not once but twice was wrong on many counts and CESTAT set aside the order. The allegation was undervaluation of aluminium scrap and zinc scarp of various grades imported from overseas suppliers with an intent to evade payment of customs duty without however any finding or evidence of close relation between parties, proof of payment of extra consideration and without considering the explanation and data submitted by the importer.
The enhancement of value was done on the basis of the same Circular No.14/2005 dated 16-12-2005 of Directorate General of Valuation and the department opined that when there were two contracts on the same date though in respect of different consignments the importer had wilfully supressed the higher value contract. In the facts of the case at the time of import and assessment of the B/Es, the value had already been enhanced based on contemporary imports and the proposal was to enhance the value further based on the above Circular. The statements were retracted by the CEO and director but the adjudicating authority refused to consider the same. The CESTAT held that statements cannot be the sole reason to confirm the charge of undervaluation and the same has to be corroborated with documentary evidence. It also emphasised on the need to apply Customs Valuation Rules sequentially and comparison with prices of contemporaneous imports made without resorting to the Circular based on adjustment to LME prices [2024-VIL-826-CESTAT-MUM-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)