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Tax Vista Your weekly tax recap Edn. 225 - 7th October 2024 By Dr. G. Gokul Kishore |
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ITC on buildings available in certain cases - Supreme Court
Input tax credit of GST paid on goods and services used in construction of a building may be available if such building is essential for carrying out the activity of supplying services, such as renting or giving on lease and in such cases, the building could be held to be a plant. The Supreme Court considered the implications of use "plant or machinery" in Section 17(5)(d) of CGST Act which bars ITC on goods and services used for construction of immovable property except where the same is "plant or machinery". The judgment was much awaited as it is the first major one from the Apex Court on ITC in the GST regime. The Court did not categorically lay down that in all cases, ITC will be available whenever the building is used for business but held the same to be factual a factual question as to whether a mall, warehouse or any building can be considered as covered under "plant or machinery" and the same is required to be determined keeping in mind the business undertaken and the role played by such building in the business. Hotel and cinema theatres have been expressly kept out of such determination as it appears the Court was of the view that they cannot be covered under plant. It held - "Functionality test will have to be applied to decide whether a building is a plant. Therefore, by using the functionality test, in each case, on facts, in the light of what we have held earlier, it will have to be decided whether the construction of an immovable property is a "plant" for the purposes of clause (d) of Section 17(5)."
While arriving at the above conclusion which is seen as a partial victory for taxpayers as there is no blanket ban seen by the Supreme Court on ITC on goods and services used for construction, it differentiated the expression "plant and machinery" used in Section 17(5) (c) and the explanation under Section 17(5) defining the same. According to the Court - "The word 'plant' used in a bracketed portion of Section 17(5)(d) cannot be given the restricted meaning provided in the definition of "plant and machinery", which excludes land, buildings or any other civil structures. Therefore, in a given case, a building can also be treated as a plant, which is excluded from the purview of the exception carved out by Section 17(5)(d) as it will be covered by the expression "plant or machinery"." The High Court in the impugned order had read down the provision which was not accepted by the Supreme Court and the question as to whether a mall will satisfy the functionality test of being a plant was not answered. Based on these, the matter was remanded to the High Court for deciding whether, in the facts of the case, the shopping mall is a plant as per Section 17(5)(d). Constitutional validity of clauses (c) and (d) of Section 17(5) was also challenged but the same was not accepted on the ground of absence of discrimination. Reading down the provision was not accepted reasoning that plain interpretation of the provisions does not lead to any ambiguity.
One of the takeaways is on the nature of ITC as this is the first from the top Court in GST era. Right of ITC is statutory and unless there is a provision, it cannot be enforced and no one can claim ITC as a matter of right. Legislature can always care out exceptions to the entitlement to ITC under Section 16 of CGST Act. These observations will be used by the GST authorities in all ITC cases hereafter. While the taxpayers will seek to rely on this judgment to stress that buildings can be treated as plant in their case as well and ITC cannot be denied, the department will term the same as factual exercise and in the taxpayer's case, it will not be available. An amendment to the provisions cannot be ruled out if the legislative intention is to place a blanket ban on ITC related to construction [2024-VIL-45-SC].
Coercive payment during investigation not part of self-ascertainment
An investigation was carried out under Section 67 of the CGST Act and the petitioner paid over Rs. 2 crores as "voluntary" payment. Later the petitioner retracted the statements and also pleaded that the statements as well as the payments made under huge mental stress and threat of arrest were an illegal extraction. Though the department cited delay of about 45 days in retraction, the High Court held that substantive right of the petitioner to contest the recovery under duress cannot be defeated on mere ground of delay in taking action. Also, the petitioner was issued a show cause notice under Section 74(1) of the CGST Act and adjudication was not yet completed. The High Court opined that since this was not a notice as regards short fall of actual tax required to be paid as contemplated under Section 74(7), the State itself is estopped from contending that there was self-ascertainment and the payment during investigation cannot be said to be voluntary or under self-ascertainment. It specifically noted that perusal of the summary of show cause notice and the show cause notice would indicate that the State (the GST department) itself has not accepted the self-ascertainment. The recovery was held as illegal and the sums were directed to be refunded to the petitioner along with interest [2024-VIL-1072-KAR].
SCN under Section 74 after conclusion of proceedings under Section 73 not sustainable
Issue of a show cause notice under Section 74 of the CGST Act alleging suppression, etc., would appear to be farfetched when the matter - availment of excess ITC has already been adjudicated - verified and found to be proper in proceedings under Section 73 of the CGST Act. However, in the case of this petitioner, second SCN on the same issue was issued under Section 74 of the CGST Act and without any detail on how it appeared that excess availment of ITC was on account of suppression, misstatement, etc. The department moreover contended that at the SCN stage the petitioner could not approach the writ court. The High Court held that when the SCN is without jurisdiction then the same can be challenged by filing writ petition before the High Court.
The Court held - "Thus it is patently manifest that for deriving the jurisdiction to initiate proceedings under Section 74 of the CGST Act, the adjudicating authority must expressly mention in the Show Cause Notice that he is prima-facie satisfied that the person has wrongly availed or utilized Input Tax Credit due to some fraud or a wilful mis-statement or suppression of facts to evade tax and that must be specifically spelled out in the Show Cause Notice. Once the aforesaid basic ingredient of the Show Cause Notice under Section 74 of the CGST Act is missing, the proceedings becomes without jurisdiction as the adjudicating authority derives jurisdiction to proceed under Section 74 of the CGST Act only when the basic ingredients to proceed under Section 74 are present." It quashed the SCN since the basic ingredients of the section invoked were missing and the SCN was issued without jurisdiction [2024-VIL-1062-ALH].
Right of appeal cannot be denied by technical glitches or misreading of provisions
The grievance of the petitioners who had made payment of tax and penalty upon detention of goods, was that the same was not reflecting in the portal and hence they could not file appeal against the order passed under Section 129(3) of the CGST Act. The revenue department had a novel response which was not a solution. It was stated that since demands had been paid in full proceedings in respect of the notice under Section 129(3) were deemed to be concluded and hence appeal was not an issue. The High Court held that Section 129(5) of the SGST Act only stipulates that upon payment of the entire amount as referred to in sub-section (1) of Section 129, all proceedings in respect to the notice specified in sub-section (3) shall be deemed to be concluded and this was different from the order under Section 129(3). Even after payment of demand to release goods etc., the assessee could appeal against the order. The department was directed to ensure that the portal reflected the payments and also to accept appeal filed by the assessee without advancing the ground of limitation if the appeal was filed within time specified in the order [2024-VIL-1069-GAU].
DGGI and Audit officers are proper officers to issue SCN under CGST Act
One more order holding DGGI has jurisdiction to issue show cause notice under GST law has been reported by VIL last week. The Jharkhand High Court has held that by virtue of the power conferred under Section 3 read with Section 5 of the CGST Act on CBIC, notification has been issued conferring power upon the ADG, DGGSTI / ADG Audit to act as a Commissioner and Deputy/Assistant Director, DGGSTI / Audit to act as Deputy Commissioner/Assistant Commissioner and therefore, such officers have jurisdiction to initiate proceedings under CGST Act. The Court took note of the circular where proper officers have been empowered under specific provisions. The petitioners relied on Commissioner of Customs v. Sayed Ali [2011-VIL-25-SC-CU] but the same was distinguished by the High Court on facts and on law as well. It noted that comparing the definition of proper officer in Section 2(34) of the Customs Act with Section 2(91) of CGST Act shows material difference between them. Questioning jurisdiction may be legally prudent but commercially not beneficial since at the end of the day either way, revenue department has the last laugh. If the judgment is not in favour, law is retrospectively amended [2024-VIL-1081-JHR].
Non-speaking order to be treated as SCN - High Court remands
Many a time, the line between proceedings under audit/adjudication/appeal/revision blur and the assessee is forced to do encore after encore. The assessee assailed the adjudication order for non-application of mind and being unreasoned. The trail/trial began with audit in which 38 defects were pointed out and despite explanation it made way into the SCN and almost entirely into the impugned order. The order records one such issue of discrepancy of ITC availment which was reconciled but was not found convincing! The amount recorded as improper availment was wrong and sums pertaining to defect 27 was adopted for defect 12. The department indicated willingness to redo the exercise and the High Court set aside the impugned order of assessment but directed that it shall be treated as a show cause notice with fresh opportunity to the petitioner to defend himself and the department to adjudicate the matter. SCNs issued and orders passed by SGST authorities are mostly on these lines - large number of issues are bunched and all of them are repeated in the order. Most of the SCNs and the orders are full of blunders [2024-VIL-1070-MAD].
Reinsurance services - Exemption for past period based on "as is where is basis" circular
The issue may not be common but the amendments and clarificatory circulars using "as is where is basis" in GST regime often come under judicial scrutiny. Insurance services where premium is paid by government is exempt from GST. This was expanded to cover reinsurance services also in respect of specified schemes. While doing so, reference to a particular serial number in the relevant notification was missed out. Later, this serial number was also added. Because of such amendment, the High Court was requested to decide whether such amendment was curative and therefore, apply retrospectively. CBIC issued circular subsequently in July, 2024 traced the above developments and clarified that GST liability on such reinsurance services for the past period be regularized on "as is where is basis". This is based on GST Council's recommendation to this effect. The Court held that the period involved in the clarification and in the petition before it was same and therefore, impugned order demanding GST for the said past period was quashed. The Court did not go into the meaning of "as is where is basis" but it appears that the same has been understood as what was not paid need not be paid considering such clarification so that such non-payment stands regularized [2024-VIL-1082-DEL].
(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)