Tax Vista

Your weekly tax recap

Edn. 249 - 31st March 2025

Dr. G. Gokul Kishore

Classification of imported goods - Test reports for some of the parameters are not reliable

Last week, the Supreme Court has delivered an important judgment on classification under Customs Tariff. The issue involved was whether the goods imported should be considered as base oil as contended by the importer or high speed diesel (HSD) as argued by the department, the latter being prohibited for import. However, the principles laid down / reiterated by the Court are significant. There were multiple test reports where departmental lab (CRCL) said the sample conformed to the parameters of HSD oil as per relevant IS (standards). The Court said that the first test based on examination of 8 parameters against 21/22 prescribed cannot be considered to be a definitive opinion to take the view that the sample is that of HSD. Similar view was expressed in respect of second test report also (12 out of 21 parameters tested). The Court went into minute details like flash point being shown as widely varying in the reports and the expert opinion being evasive on this issue. It held that the rules do not provide that any substance that partly complies with parameters would be considered as the specified item. The expert opinion was also held as inconclusive.

The High Court had applied preponderance of probability, and the Apex Court preferred to use "most akin" test as per Rule 4 of GIR for classification as per similar goods. It said benefit of doubt should go to the importer / assessee instead of fresh testing and fresh reports. Presence of proper testing facilities was also emphasized in this order. This order should help importers where test reports generally pertain to half of the specified parameters and the same is held against them and the time spent in such litigation makes the sample lose effectiveness and retest also becomes impossible at a future date [2025-VIL-17-SC-CU].

Rectification of returns and ITC denial - Supreme Court issues notice

Bombay High Court in Aberdare Technologies v. CBIC [2024-VIL-787-BOM] allowed rectification of errors in GSTR-1 (and GSTR-3B) beyond the period permitted by law particularly when there is no revenue loss. Special leave petition filed by the department against such order has been rejected by the Supreme Court now. The Apex Court has further held that CBIC should re-examine the timelines prescribed for correcting bona fide errors. It has also pointed out to the issue of purchaser being denied ITC for the fault of supplier. Considering the over-reliance on system and software, the Court has held that software limitation cannot be a good justification as it is meant to ease compliance and can be configured. In a subsequent order on the same issue, the Supreme Court has issued notice to CBIC apparently on the issue of ITC being denied to buyers due to bona fide errors of suppliers who could not rectify the errors after the prescribed time-limit. One can only hope CBIC comes out with proper response so that genuine difficulties of taxpayers on ITC front are addressed [2025-VIL-15-SC].

ITC denial for cancellation of registration of seller from a later date - High Court quashes

The transaction is stated to have been undertaken in 2018 while the registration of the seller was cancelled in 2020. The taxpayer contended that merely because the supplier was not found at the declared place of business, buyer cannot be held liable when the purchase was reflected in GSTR-2A. The issue involved availment of input tax credit (ITC) which was alleged as irregular since registration of the seller was cancelled though much after the purchase was made. As usual, GST authorities issued show cause notice under Section 74 of CGST Act / UPGST Act. The High Court took note of the fact of filing of GSTR-1 and GSTR-3B by the seller and GSTR-2A getting auto-populated and the impugned orders remaining silent on the same. It said registration of seller was not cancelled with retrospective effect in this case i.e., from the date of the transaction. In GST regime, all details are available in the GST portal and the authorities ought to have verified the same, as per the order. The Court, after setting aside the impugned orders, directed consideration of the matter afresh.

It is not known why the matter was remanded as denial of credit was apparently based on non-speaking and unreasoned order indicating non-application of mind. However, since the orders were set aside, the authority in de novo proceedings will have no option but to allow the ITC claim. The case appears to be deliberately booked with Section 74 also being invoked. GST is becoming synonymous with harassment and no action is being taken to reverse the same [2025-VIL-270-ALH].

Mere incantation of language employed does not prove suppression - SCN to recover sanctioned refund set aside

The words in the statute are believed to embody intent of the legislation and words like "suppression, fraud" are understood as indicating malafide motives and actions. However, according to the department, no intensive legal research is required to understand the terms. Alleged short payment of tax, obtaining refund or use of ITC itself is an act of fraud, suppression, misstatement, arising from intent to defraud revenue. The assessee was sanctioned refund after multiple attempts to appeal, approach writ court and no sooner than he received the largesse, the department issued show cause notice invoking extended period of limitation alleging fraud. The refund was sought to be denied on the ground that the assessee had not effected exports and was an intermediary. After sanctioning refund this objection was rechristened as "misstatement, suppression" and it was alleged that the assessee had "wrongfully claimed a refund by misrepresenting that the transactions in question would constitute an export of services".

The High Court stated the mere incantation of the words in Section 74 of CGST Act was insufficient and the phrase "by reason of" is demonstrative of the legislative intent of the power conferred by Section 74 being available to be wielded only if the availing of benefits under the Act is seeded by or founded upon acts amounting to fraud, wilful misstatement or suppression. The impugned show cause notice was set aside with directions to process the claim. The Court also said that the SCN has been issued solely to avoid refund flowing from the earlier of the same Court and refund claim cannot be denied by such circuitous means [2025-VIL-266-DEL].

Refund of unutilized ITC on supplies to SEZ - High Court allows supplementary claim

Goods were supplied to SEZ units without payment of tax and refund of unutilized input tax credit was claimed and the same was sanctioned. Later, to cover missed out bills, another claim was filed under "Any other" category but it was rejected on the ground that such refund can be claimed only once as per CBIC Circular No. 125/44/2019-GST dated 18-11-2019. The taxpayer contended that circular cannot prevail over law and only because portal has limitation, refund cannot be denied. The High Court observed that the department did not dispute entitlement to refund and, in such cases, the Court can order grant of refund as otherwise it will be violative of Article 265 of the Constitution. While acknowledging the importance of procedures, the Court said that when implementation of circular defeats substantive rights of the assessee, the same should not be permitted. The order rejecting refund was set aside and the department was directed to process the refund application. The taxpayer had sought the Court's indulgence in quashing the circular but it seems the same was not pressed later. Absence of provision for revising a return or claim is one of the fundamental flaws at the starting point of GST but the same should have been acknowledged and rectified within a year instead of allowing litigation to proliferate [2025-VIL-272-GUJ].

Two SCNs and orders by AC and DC of SGST on same issue - High Court quashes

So far, in this column, numerous orders on parallel proceedings have been analyzed. Almost all of them pertain to initiation of proceedings on the same or similar subject matter by both CGST and SGST authorities, by CGST Audit and SGST authority, DGGI and SGST authority, etc. In a case which speaks volumes about audacity and harassing nature of GST authorities, both Asst. Commissioner and Deputy Commissioner of SGST issued show cause notice on the same issue for the same year and passed orders on the same day against a taxpayer. The taxpayer sought rectification of the order but it was rejected. The High Court quashed both the orders and directed, the Deputy Commissioner to consider the matter afresh. It also gave timelines so that the taxpayer is able to apply to Amnesty scheme under Section 128A of CGST Act. The Court said the order should not be used as precedent as it was passed based on facts of the case. It appears such view was expressed for the part related to amnesty scheme as otherwise, the orders passed were in contravention of Section 6 of CGST Act though this provision does not deal with SGST officers being involved in parallel proceedings [2025-VIL-274-KAR].

Delay in filing of appeal beyond four months cannot be condoned

The petitioner was aggrieved by rejection of his appeal which has been filed with delay of 9 days beyond the condonable period provided in Section 107 of the CGST Act, 2017. No reason for the delay as explained by the petitioner is mentioned in the order. The High Court held that the provisions of the statute have to be complied with strictly and even the High Court cannot condone the delay beyond the period provided in the statute and dismissed the petition. This order is from Madhya Pradesh High Court and it adopts the same position as several other High Courts except Calcutta High Court. A ruling from the top court will set at rest this issue - whether appellate authority can condone beyond condonable period (the answer may be obvious but it is for the Courts to say) [2025-VIL-280-MP].

Refund of unutilized ITC on works contract is admissible

The petitioner was engaged in construction of elevated structures (including viaduct and stations) in terms of contract awarded by Bangalore Metro Rail Corporation. It applied for refund in terms of Section 54(3) of the CGST Act on account of input tax credit (ITC) accumulated due to inverted tax structure. The application was rejected stating that the business / activity being carried on by the petitioner was supply of services being construction within the meaning of Clause/Entry 5(b) of Schedule II to the CGST Act and not a composite supply in relation to a works contract as contemplated under Clause/Entry 6(a) of Schedule II to the Act and stood excluded from the refund mechanism in terms of Notification No. 15/2017 - Central Tax (Rate) and that by virtue of Notification No. 20/2017 - Central Tax (Rate), works contract relating to Metro was excluded. The High Court noted that identical issue was decided earlier and followed the same wherein the gamut of notifications in respect of metro and monorail projects as well as Notification No. 15/2023 - Central Tax (Rate) pertaining to exclusion of construction projects in which refund of unutilised ITC cannot be claimed were discussed. In the present case, therefore, the High Court held that the refund claim of the petitioner was allowable [2025-VIL-279-KAR].

Import of goods in CKD by agent of exporter - Transaction value cannot be accepted, classification of accessory as parts also denied

The imported goods according to the department were dredger and accessories though the importer claimed that the entire lot was classifiable under CTH 89051000 and also sought benefit of Notification No. 1/2011-CE dated 01.03.2011 for goods where no Cenvat credit was claimed. As per facts the goods dredger and additional length of cutter head ladder and jet pump system were imported separately and invoiced separately. The importer argued that standard dredger manufactured by the overseas supplier is for a depth of 73 feet whereas the requirement of the importer was 83 feet and hence length of dredger was increased and ladder and jet pump were supplied. According to the importer the same was part of the dredger and due to the weight of goods, it could not be supplied in one lot. The department opined that jet pump system is classifiable under CTH 84137097 and cutterhead ladder is classifiable under CTH 84314990 and that the imported accessories are not chargeable to the same rate of duty as that of the imported dredger and also disputed the special discount of 17.5% on the price of dredger given to the importer stating that it was not normal trade practice and did not pass the test of transaction value. Investigation by the department revealed that the importer was authorised sales representative of the overseas supplier on exclusive basis. It was held that they were related as per Explanation II of the Rule 12(2) of the Customs Valuation Rules and differential duty based on valuation by Chartered Engineer as well as interest and penalty were demanded.

The CESTAT held that the order of the Frist Appellate Authority was correct and in view of the suppression of fact of being related, addendum to show cause notice had been issued correctly, enhancement in value was called for and the additional length of cutter head ladder and jet pump passed the test of accessory, i.e., increasing the performance increasing the effectiveness of the dredger or to make it more useful and could not be treated as parts. The sole relief the importer got was in relation to quantum of penalty as the Tribunal said addition of interest to differential duty to quantify penalty was not correct and penalty should be confined to differential duty only [2025-VIL-453-CESTAT-BLR-CU].

Previous edition, dated 24th Mar, 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)