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Tax Vista Your weekly tax recap Edn. 224 - 30th September 2024 By Dr. G. Gokul Kishore |
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Rule 86A does not allow negative blocking of credit ledger
The Delhi High Court in an eloquent and very reasoned order has held that electronic credit ledger (ECL) can be blocked only to the extent of input tax credit (ITC) available and therefore, if no credit is available, Rule 86A of CGST Rules cannot be invoked. It specifically held against what is called as negative blocking or blocking of negative balance by stating that the expression "amount equivalent to such credit" used in Rule 86A refers to the ITC available in the taxpayer's ECL, which the Commissioner or the officer authorized by him has reasons to believe has been fraudulently availed or is ineligible and it does not refer to the ITC used in the past for payment of dues or which has been refunded. The words used in the opening portion "credit of input tax available in the electronic credit ledger" refers to the credit, which is at the given point of time available in the taxpayer's ECL and if the same had already been utilized, then the same would not be available. The Court also said that since there is no ambiguity in the plain language of Rule 86A, literal construction is to be preferred. The order clarifies that ITC may be partly tainted and instead of freezing the entire ITC ledger, such tainted / inadmissible ITC alone can be frozen. If the amount of ITC available in the ledger is more, then blockage should be restricted to only the amount equivalent to fraudulent / inadmissible ITC.
On the nature of the provision, it was held that Rule 86A is not a machinery provision for recovery of tax dues and it is not part of assessment and determination of tax provisions but it is an emergent measure to protect revenue temporarily. The authorities are required to determine tax payable and whether ITC has been wrongly availed by taking action under Section 73 / 74 of CGST Act. The order should be helpful to taxpayers. However, while Delhi and Gujarat High Courts have held in favour of taxpayers, Allahabad and Calcutta High Courts have expressed contra view on this issue. Therefore, GST Council may include an amendment to Rule 86A in the agenda so that negative blocking i.e., what is not available is not blocked [2024-VIL-1047-DEL].
Cancellation of GST registration for violating Rule 86B is not valid
Payment of tax is also punished with iron hand by GST authorities. The punishment was cancellation of registration for violation of Rule 86B of CGST Rules by paying tax from credit ledger in excess of 99%. This rule mandates at least 1% payment of tax using cash ledger except in specified cases / persons. Obviously incensed by the drastic action of cancellation of registration, the taxpayer was before the High Court. The Court agreed that the provision does empower the authority to do so but held that "one has to see whether the violation is serious enough to warrant cancellation of the GST Registration, which would practically mean death of the business of the petitioner." The Court noted that the amount available in electronic credit ledger was petitioner's own money and it has been used to discharge tax liability though in excess of 99% of such tax liability. There was no default in discharge of liability and there was no loss to the government and the department could have considered any other penalty proportionate to the violation. Cancellation of registration for such infraction was held disproportionate and as unnecessary.
The Court also agreed with the petitioner that Rule 86B of the Act has no statutory backing and appears to be ultra vires the provisions of HPGST Act but did not venture further into this question. However, it felt that cancellation of registration was based on prima facie investigation and the authorities ought to have waited for the outcome before taking such drastic action. The Court said - "It shocks the conscience of the Court to find an extreme penalty of the nature of cancellation of GST registration being imposed on a business on the basis of a "prima facie" investigation conducted by the respondents." The action was held as arbitrary and the department was directed to restore registration.
Like Rule 86A and Section 83, Rule 86B also confers unguided and extreme power in the hands of mostly untrained GST officers. The purpose of Rule 86B was different and the authorities have not realized the same, as this case reveals. Even otherwise, this provision which is capable of only misuse, should be omitted [2024-VIL-1033-HP].
Notification extending time-limit for passing GST orders is invalid
Notification No. 56/2023-Central Tax is ultra vires the CGST Act as the same was issued sans the recommendation of the GST Council (for extension of time-limit for passing orders under Section 73) as required under Section 168A and without considering the force majeure condition. This decision of Gauhati High Court quashing the notification was widely discussed in social media last week since Kerala High Court has upheld validity of the same. GST law has several unique features and one such feature is recommendation of the GST Council before any change is made in the law - the Act and the rules and even for clarifications. This uniqueness went against the department in this case as the order reveals the department could not produce any such recommendation. The High Court analysed the interpretation of the word "recommendation" as held judicially and held - "the recommendations to be made by the GST Council if required as per the provisions of the Central Act or the State Act has to be construed to be a sine qua non for exercise of power by the Union or the State Government. In other words, wherever the provisions of the Central Act or the State Act stipulates that an act is required to be done on the recommendation of the GST Council, the act can be done only when there is a recommendation."
The department argued that all recommendations of the GST Council are not binding and without such recommendation also, government could exercise powers under Section 168A. To this, the High Court said that the fact that recommendation is not binding cannot be construed to mean that the Government can act without a recommendation of the GST Council if the Central Act or the State Act stipulates that the Government can exercise on the recommendation of the GST Council. Interpreting the judgment of the Supreme Court in UOI v. Mohit Minerals [2022-VIL-30-SC], it said - "The ratio which emerges from the above paragraphs only show that merely because of a few recommendation of GST Council are binding on the Government, it cannot be argued that all recommendations are binding. The ratio is based on the principle as stated that a Constitutional provision cannot be interpreted on the basis of a primary legislation rather a primary legislation is to be interpreted on the basis of the Constitution. However, the said judgment does not lay down the proposition that as some of the recommendations are not binding, there is no requirement of recommendation by the GST Council to exercise the power."
The Court termed issuance as colourable exercise of power and the notification as a colourable legislation took note of a departmental communication that request for ratification would be placed before GST Council. Because there was no recommendation, there was no occasion to consider existence of force majeure also. The orders passed as challenged in the petitions were set aside. Another notification with retrospective effect or even an amendment to the Act is not ruled out but undertaking such exercise as compelled by a judgment finding fault with basic requirement needs lot of explanation by the rule-making tax bureaucrats [2024-VIL-1027-GAU].
Compensation is not consideration - High Court grants stay against GST demand
The company is engaged in power generation as per agreement with State Government and as compensation for impact of the project on environment and the people involved in setting up of hydro power project, specified percentage of power is provided free of cost to State Government. GST authorities entertained the view that supply of free power is nothing but "consideration" towards licensing services rendered by the State Government and therefore, order was passed demanding huge amount as GST. The High Court noted that service tax demand was dropped by holding the same as not royalty as the same is akin to compensation and expressed the prima facie view that the issue as to whether supply of free electricity is in the nature of "consideration" as to levy GST or it is a "compensation" for distress caused by setting up of the project is doubtful and that the department cannot impose GST on free electricity provided by treating the same as "consideration" towards the alleged services provided by the State Government as a supplier. Based on the stand taken in service tax regime, the Court granted stay of the order. The issue surrounding GST liability on payments made due to operation of law or otherwise which are compulsory and compensatory in nature is yet to be clarified by the GST Council. There are quite a few instances of payment by certain companies some of them being under certain regulations but GST demand has been raised [2024-VIL-1036-HP].
Tax incentives cannot be denied by amendment to policy at later date
The issue is not new. The assessee/petitioner has set up a plastics manufacturing unit in 2011 based on the Bihar Industrial Incentive Policy, 2011 and claimed refund of SGST (previously VAT) but was denied the same on the ground that production was below 25% of capacity which made it ineligible for the incentive. The policy was changed in 2016 and the petitioner argued that since it was eligible under the initial scheme, refund of tax could not be denied. The High Court relying on the principle of promissory estoppel and following judicial pronouncements including Pournami Oil Mills and Others V. State of Kerala and Another, 1986-VIL-03-SC, and held that once an incentive has been promised under a particular scheme, the same shall have to be continued till the end of the period for which the incentive was granted. It set aside the order of rejection and directed that due refund be paid. Majority of precedent judgments on withdrawal of exemption reject promissory estoppel but this order has followed those holding such principle as applicable [2024-VIL-1038-PAT].
Pre-GST return filed after transitioning credit - Transition to be permitted
The High Court of Madras has reiterated that substantive benefit of input tax credit validly earned cannot be denied on account of procedural flaws. The petitioner had filed return on 29-12-2018 though he attempted transition of Cenvat credit on 22-12-2017. Order was passed requiring the petitioner to reverse ITC since a return under the provisions of the Central Excise Rules for the month of July 2017 was not filed by the petitioner. The High Court held that procedural irregularity in following procedures under Section 140 of the CGST Act, 2017 has to be condoned and cannot come in the legitimate way of grant of ITC. One of the essential conditions for transition of Cenvat credit to GST regime is reflection of such credit balance in the June 2017 return filed under Central Excise / Service tax law. In this case, the petitioner filed such return belatedly after filing TRAN-1 form. It is not clear how transition was made subsequently [2024-VIL-1050-MAD].
Refund claim filed within time - Subsequent revision will not become time barred
The statute provides for speaking order, order in writing, hearing opportunity etc., but processing of refund claim application is code unto itself wrapped in deficiency memo and rejection. The High Court once again came to the rescue of the taxpayer noting the impossible stand of the department that application filed on 8-9-2020 was within limitation but the application dated 28-9-2020, filed pursuant to deficiency memo was barred by limitation. Also, the only response/objection adduced by the department was "no comments". The refund arose out of return of goods supplied which exceeded outward supply for the period and these facts were not controverted. The High Court held that merely seeking of additional documents by the department would not render the application fresh one if all material particulars were furnished. The deficiency memo (Form-GST-RFD-03) dated 15-10-2020 was quashed and besides directing refund, the High Court also awarded costs to the petitioner [2024-VIL-1049-J&K].
Supply of cotton seed oil cake usable only as cattle feed exempt - Supplier need not check end use
If it is exemption, everything is open to question - form, manner of supply, intention of parties, actual use, etc. The petitioner supplied cotton seed oil cake emerging as by product in process of extracting cotton seed oil from cotton seed and did not pay GST since it was exempt in VAT era and covered by Entry no.102 of Notification No.2 of 2017-Central Tax for cattle feed. The audit party and later the officer raised a doubt as to whether sale as cattle feed, for use as cattle feed, to traders would be covered since what was supplied was technically not cattle feed! Reliance was placed on Notification dated 22.09.2017 wherein specific exemption was given to cotton seed oil cake and hence for the period from 1-7-2017 to 21-9-2017 GST was held payable on reverse charge basis. Unsurprisingly the purchasers refused to pay GST on cotton seed oil cake bought for use as cattle feed. The High Court held that mere supply of the cotton seed oil cake to traders would not determine the levy of GST as end use of cattle feed is not in dispute and that the petitioner was entitled to exemption. Fortunately GST authorities did not follow the distribution chain to verify whether cattle was fed with such feed or not [2024-VIL-1046-GUJ].
Single SCN covering multiple years - Splitting directed to enable availment of amnesty
The petitioner was served with a show cause notice for alleged short payment of GST based on misclassification of two-wheeler seats under Customs Tariff Heading (CTH) 9401 instead of CTH 8714 resulting in alleged short payment of GST @ 18% instead of GST @ 28% for the period between July 2017 and October 2023. While the petitioner contended that there was no case of fraud etc., to merit invocation of extended period under Section 74 of CGST Act, it came forward to resolve the issue by adopting the proposed Amnesty Scheme set to come to force from November 2024. On the condition of not seeking refund of incremental tax paid under protest and not invoking ground of limitation, the High Court directed issue of separate show cause notice [2024-VIL-1055-MAD].
CGST Act amendments - Effective date notified
In this year's Budget, as per Finance (No. 2) Act, 2024, several provisions of CGST Act were amended. Notification No. 17/2024-Central Tax dated 27-9-2024 has been issued to provide for effective date of the amended provisions. Amendment providing for limited amnesty to those who availed ITC belatedly during 2017-20 but till 30-11-2021 has come into force from 27-9-2024. Anti-profiteering cases will be heard and disposed by the Principal Bench of GST Appellate Tribunal and this is also effective from this date though Tribunal itself is not in place yet. The major amendment on amnesty to cases under Section 73 of CGST Act for the period from 2017 to 31-3-2020 will come into force from 1-11-2024.
(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)