Tax Vista

Your weekly tax recap

Edn. 241 - 3rd February 2025

Dr. G. Gokul Kishore

Budget 2025 brings host of changes

Budget 2025 was presented on Saturday - 1st February, 2025. While there is much hype and euphoria on income tax changes particularly on "no tax for income upto Rs. 12 lakhs", on indirect taxes side, amendments proposed in Customs Act are mostly trade-friendly. A new provision is being inserted in Section 18 to provide two-years' time-limit for finalization of provisional assessment extendable by one year. This is subject to exceptions covering specified situations. The only hope is recourse is not taken to such exceptions and the provision is implemented in the right spirit as non-finalization of assessment for years has impacted importers adversely in several cases. Another beneficial provision relates to proposed Section 18A to enable revision of bill of entry within prescribed time and to reckon such revised entry as self-assessment and allow payment of duty or treat the same as refund claim. Consequential amendments have been made in Section 27 and Section 28 for computation of time-limit. Though this seeks to partly undo certain judgments, the impact is yet to be analysed. Settlement Commission is being replaced with Interim Board and it seems the idea of permanent settlement body is now part of history. Duty rate changes are also many and they are not discussed in this column.

Amendments to CGST Act as proposed are as per the recommendations of the GST Council and therefore, they hold no surprise. The most talked about amendment pertains to Section 17(5)(d) of CGST Act to substitute "plant or machinery" with "plant and machinery" so as to undo Supreme Court ruling in Safari Retreats case. The amendment will be retrospective - will be deemed as effective 1-7-2017. While land and building is no-go zone for ITC, the tendency of tax authorities to even treat immovable plant as akin to building only to show some revenue figure is frustrating for taxpayers. Apparently to set at rest disputes over taxability of vouchers, the provision on time of supply as contained in Section 13(4) is being omitted. It is surprising that the provision which is very clear is being omitted.

Voucher per se is treated as consideration and therefore, it is never taxable but the underlying supplies alone are taxed and for the provision catered to time of supply for underlying supplies only. There are several parties involved also in voucher transactions and depending on such parties, treatment of activities related to voucher differs as it can even be a paper commodity for the printing press which merely undertakes printing of such vouchers. It seems the entire issue has been complicated only because of lack of understanding of the nuances. As per Finance Bill, 2025, while issuing credit note as per Section 34, reduction in output tax liability will be available only if proportionate ITC has been reversed by the recipient along with the existing condition of incidence not having been passed on. Penalty alone cases will require 10% of such penalty as pre-deposit at the time of filing appeal. This is no surprise as pre-deposit is generally seen as a source of revenue.

Notice pay recovery - High Court orders refund of GST paid before clarification

Litigation was about to explode on notice pay recovery and GST liability on such recovery but the same was averted by timely issue of Circular No. 178/10/2022-GST on 3-8-2022. By this circular, it was clarified that forfeiture of salary or payment of bond amount when the employee leaves the employment before the minimum agreed period is not taxable. Since the issue was lacking clarity before issuance of this circular, several taxpayers were paying GST on such recovery. After this circular, a taxpayer sought refund which was partly granted and part amount was rejected on the ground of limitation. The department's view was that under Section 54 of CGST Act, time-limit for filing refund claim is two years and the claims filed in this case, were partly hit by such limitation. The taxpayer was before the Gujarat High Court. The High Court allowed the petition by the taxpayer and held that time-limit should be computed in such cases from the date of issue of the circular / clarification by CBIC. Since the same was issued on 3-8-2022, the claims were not time-barred. The Court also relied on precedent judgments holding that limitation does not apply to cases where no amount was payable and what was paid was not tax and the same cannot be retained by the government.

The taxpayer in this case should be happy as the relevant circular did not mention about regularisation of past cases on "as is where is" basis as is found in all most of the circulars / notifications issued after the meeting of the GST Council. The High Court might have anyway held in favour of the taxpayer as the precedents judgments do not approve retention of such amounts [2025-VIL-87-GUJ].

Delay in implementation of TRAN-1 - High Court directs refund of tax paid in cash

July 2017 liability could not be discharged using tax credit as the same from pre-GST regime could not be transitioned at that point of time since the same was not enabled in the GST portal. The taxpayer petitioned the High Court seeking revision of GSTR-3B filed during such period on the ground that they were forced to pay GST using cash even when legitimately availed credit was available but could not be transitioned and used. Rectification was sought primarily for the reason that the taxpayer was predominantly undertaking exports and was not able to utilize ITC much and therefore, refund was to be claimed.

The High Court noted that the present case was not one of rectification since there was no omission or furnishing of incorrect particulars in the returns. It said that TRAN-1 facility was enabled in the GST portal only on 25-8-2017 after 56 days from implementation of GST. The Court distinguished Supreme Court ruling in Bharti Airtel case [2021-VIL-87-SC] and held - "The petitioner cannot be burdened with accumulation of ITC as the petitioner is unable to liquidate the same as it is under inverted duty structure..If the system was enabled then and there, the petitioner would have discharged part of its tax liability also from the input that ought to have been allowed to be transitioned in the system." It held that the taxpayer was entitled to refund in cash subject to debit of such amount from the credit ledger. The department may file appeal before the Division Bench and the matter may not attain finality soon as the amount involved is around Rs. 74 crores. There is no statutory provision also for refund of such amount though writ court is empowered to pass orders in the interest of equity and justice [2025-VIL-93-MAD].

Revision application by taxpayer - High Court says maintainable

Section 108 of CGST Act provides for revision of orders. This is a provision for the department as it specifically covers order which is "prejudicial to the interest of revenue and is illegal or improper or has not taken into account certain material facts.". The use of "and" makes it clear that the order which is considered as not in the interest of revenue and also illegal or improper can be subjected to revision. This provision is not meant for taxpayers. However, before the Allahabad High Court, the taxpayer submitted that dismissal of revision application was not correct as this remedy is also available to them and if maintainability was the ground for dismissal, then the impugned order was not correct. The High Court noted that the order was not clear as both maintainability and merits were discussed. It read one portion of Section 108 relating to bar on pursuing both appellate and revisionary remedies and held that revision was maintainable and directed the revisional authority to consider the matter afresh. An appeal by the department in the Supreme Court alone can rectify such erroneous order [2025-VIL-83-ALH].

Appeal filed within condonable period cannot be rejected outright as beyond limitation

The case before Karnataka High Court was on limitation, power of condonation but unlike many predecessors where Limitation Act was invoked, the limited issue was that the Appellate Authority failed to exercise its discretionary power in proper perspective and rejected his appeal filed under Section 107 of the CGST Act, 2017. The delay was of 3 days beyond the three months' time limit but within the additional condonable period of 1 month. The petitioner urged that the appellate authority ought to have examined as to whether the appeal filed was within condonable period and whether case was made out to condone the delay. The High Court held that delay due to travel of Managing Director was condonable and the appellate authority failed to exercise his discretionary power properly and directed the appeal to be heard [2025-VIL-89-KAR].

Registration and payment of tax by itself does not absolve charge of suppression, wilful default

The petitioner-assessee contended that it had discharged full tax liability as per Section 73(8) of the CGST Act, 2017 even before the initiation of proceedings and it could not be visited with demand for differential tax and penalty, and having come forward to register and comply with the law, it could not be held guilty of suppression, wilful misstatement etc. The other plea was that it was is entitled to arrive GST liability applying cum tax basis under Rule 35 of CGST Rules 2017. The department however argued that petitioner neither produced any evidence to prove the amount collected was inclusive of taxes nor the formal agreement was entered with the clients of the marriage hall run by it, to treat the same as cum-tax value. It had also issued receipts in certain cases as donation to the Trust though it was in nature of rent. According to the department, the benefit of cum-tax computation of liability could not be extended to the assessee and in any case the tax paid under cum-tax mode of computation could not be treated as discharge of full tax liability. The High Court held that registration post investigation by department indicates that there was intention to evade tax and discharge of tax liability was only a method to evade penal consequences and dismissed the petition [2025-VIL-96-MAD].

Non-filing of return could amount to suppression when coupled with non-payment of tax

Interpreting the terms "suppression", "wilful misstatement" in Section 74 of CGST Act, 2017 the Andhra High Court held that reason of fraud, or any wilful-misstatement or suppression of facts to evade tax mere non-payment of tax unaccompanied by intent to evade may not amount to suppression. It interpreted Section 74 as having the requirement of mens rea even for non-payment of tax based on collocation of the terms in the Section. However, the assessee who did not file return as he could not pay tax due to insufficient recovery from his clients could not use lack of intent to evade as a shield. The High Court held that even though the requirement under Section 74 is not fulfilled on mere suppression of fact, non-filing of the monthly return and not paying government dues would invite charge of wilful suppression. The petition filed against appellate order upholding imposition of penalty was dismissed [2025-VIL-95-AP].

COO to be accepted unless revised or withdrawn

It would appear that safeguarding of revenue interest is above adherence to law. The benefit of exemption granted under Notification No. 99/2011 Cus., dated 9-11-2011, in respect of goods originating in Bangladesh, in terms of Agreement on South Asian Free Trade Area (SAFTA) Rules, 2006 was sought to be denied to the importer. The customs authorities did not accept the Certificate of Origin (COO) produced by the importer citing minor discrepancy of not marking 'D' meant for Least Developed Countries and contended that non-originating content in the goods was above 70% which was maximum permissible limit. It computed the difference between the value at which goods had been supplied by the Bangladeshi supplier to the trading houses and the FOB value at which goods had been supplied by such trading houses to the importer, to arrive at the value of the non-originating material. This was despite the mechanism provided in Rule 11 of the Rules of Origin to determine the same as CIF value at the time of importation of the materials, parts or produce or earliest ascertainable price paid for the materials, parts or produce of undetermined origin. Interestingly, both the importer and the department were in appeal since in respect of certain bills of entry, the demand was dropped by the appellate authority.

The CESTAT held that if value of non-originating goods were to be determined, then Rule 11 has to be followed. Also, COO cannot be disregarded until the same has been revoked/cancelled by the competent authority who had issued it and moreover the department had not followed the procedure laid down to approach the issuing authority in case of any doubt regarding the COO. It was also held that minor discrepancy cannot invalidate the COO. The penalty imposed on the directors was also set aside [2025-VIL-138-CESTAT-KOL-CU].

Drawings sold separately, not part of imported goods, not includible in assessable value

Applying Rule 10(1)(b)(iv) of Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 (CV Rules), the department sought to include the value of drawings and design in the value of Effluent Treatment Plant imported. The importer had classified the drawings under heading 49.06 of the Customs Tariff and the appellate authority held the same to be chargeable to 'nil' rate of duty as per Sl. No. 263 of Notification No. 12/2012-Cus. The department contended that the drawings were classifiable under heading 84.19 which inter alia covers, "Machinery, plant or laboratory equipment for the treatment of materials by a process involving change of temperature....". The importer argued that the drawings were for 10 different segments of the plant to be erected/assembled in India and were not for the goods which had been manufactured by the supplier in Netherlands and supplied to India and that separate payment had been made for the drawings. It also argued that as per the said Rule 10(1)(b)(iv) inclusion of the cost of engineering, development, art work, design work, plants and sketches can only be considered, when the same are supplied by the buyer to the supplier of the imported goods. Noting that the impugned drawings are original print outs, supplied separately and not as a part of the ETP, the CESTAT held that it could not be classified as ETP itself and the value cannot be included in assessable value for customs purposes [2025-VIL-149-CESTAT-KOL-CU].

Previous edition, dated 27th 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)