Tax Vista Your weekly tax recap Edn. 25 - 7 December, 2020 By Dr. G. Gokul Kishore

GST levy on lottery is valid - Supreme Court

A 3-Judges Bench of Supreme Court, by judgment dated 3-12-2020, has upheld the Constitutional validity of levy of GST on lottery. Laws regulating or taxing lottery have been subject to intense litigation in the past. As per Section 2(52) of CGST Act, 2017, actionable claims have been included in the definition of goods, thus making supply of lottery liable to GST. The petitioner, a lottery agent, challenged this definition of goods as ultra vires the Constitution and also discriminatory. According to him, lottery is not goods as definition of goods in Section 366(12) of the Constitution does not include actionable claim as it includes only materials, commodities, and articles. A question was raised - Can legislature tax something which is not goods as per the Constitution' According to the petitioner, Parliament does not enjoy absolute power to make an inclusive definition of something to be taxed which is otherwise not taxable.

On the first question as to whether inclusion of actionable claim in the definition of goods in CGST Act is contrary to the legal meaning of goods and unconstitutional, the Supreme Court has held that definition of goods under Section 2(52) in CGST Act does not violate any Constitutional provision nor is in conflict with the definition of goods given under Article 366(12). It noted "The Constitution framers were well aware of the definition of goods as occurring in the Sale of Goods Act, 1930 when the Constitution was enforced. By providing an inclusive definition of goods in Article 366(12), the Constitution framers never intended to give any restrictive meaning of goods." After discussing the landmark judgments of Gannon Dunkerley-I [1958-VIL-01-SC], Gannon Dunkerley-II [1992-VIL-01-SC] and Anraj [1985-VIL-03-SC], the Apex Court expressed the view that in Sunrise Associates [2006-VIL-11-SC]], it has been held categorically by Constitution Bench that lottery is actionable claim and therefore, the definition in CGST Act expanding the definition of goods by including actionable claim is in line with this judgment.

On the petitioner's argument on competence of Parliament, the Apex Court noted that CGST Act has been framed in exercise of powers conferred on Parliament under Article 246A - "When the Parliament has been conferred power to make law with respect to goods and services, the legislative power of the Parliament is plenary." According to it, Article 246A begins with non obstante clause "Notwithstanding anything contained in Articles 246 and 254" and it confers very wide power to make laws and the same has to be liberally construed as empowering the Parliament to make laws with respect to GST.

The second question considered by the Court was - Whether exclusion of lottery, betting and gambling from Item No.6 Schedule III of Central Goods and Services Tax Act, 2017 is hostile discrimination and violative of Article 14 of the Constitution of India' Tracing the legislative and jurisprudential history of regulating lottery and gambling, it noted that lottery is recognized as gambling as per laws and regulation including taxation in one or other form on the activities of lottery, betting and gambling has been in existence for several decades. Repelling the argument on discrimination in taxing lottery to the exclusion of other actionable claims, it said "When the Parliament has included above three for purpose of imposing GST and not taxed other actionable claims, it cannot be said that there is no rationale or reason for taxing above three and leaving others. we do not find any violation of Article 14 in Item No. 6 of Schedule III of the Act, 2017." The Court took note of the policy objectives of regulating and taxing such activities in the interest of society and reiterated that these activities cannot be elevated to the status of trade or commerce as they are "res extra commercium".

The petitioner had also challenged valuation in respect of lottery whereby GST is leviable on face value of lottery ticket or price money, whichever is higher (without abating prize money component). The Supreme Court observed that value of taxable supply is a matter of statutory regulation and when the value is to be transaction value to be determined as per Section 15, it is not permissible to compute the value of taxable supply by excluding prize. The judgment holds - "When prize paid by the distributor/agent is not contemplated to be excluded from the value of taxable supply, we are not persuaded to accept the submission of the petitioner that prize money should be excluded for computing the taxable value of supply the prize money should be excluded." [Skill Lotto Solutions Pvt. Ltd. v. Union of India - 2020-VIL-37-SC].

This judgment is the first where the top court of the country had the occasion to consider validity of certain provisions of CGST Act and CGST Rules. The department will be happier to see the law drafted by it getting the stamp of approval from the Supreme Court particularly emphasizing valuation of supply to be in the realm of statutory regulation indirectly indicating the limited latitude the judiciary would show on such issue.

Job work - Value of by-products retained by job worker, not includible in job charges

If the terms of contract provide that after job work, the job-worker can retain the by-products and taxes, if any, on supply of such by-products (by the job-worker) will be payable by the job-worker, then taxable value for service of job work will not include value of such by-products. This is the ratio of a recent order of Andhra Pradesh High Court. This is significant as such ratio can be applied to even waste and scrap generated out of job work if the contract terms are drafted as in this case of the PSU engaged in getting paddy milled from rice millers. The rice miller-petitioner was before High Court assailing assessment order whereby value of broken rice, husk and bran, retained by the miller, was sought to be included in the milling charges. Though per se not a material fact, it was argued that broken rice and husk are exempted while GST was paid on supply of bran by such miller.

One of the main grounds for keeping the value of by-products out of the taxable value for milling is that the miller was bound to deliver 67% rice against the paddy sent to him whereas the actual yield would be around 61% and the terms allowing miller to retain by-product was compensation for such loss and it is not a consideration. The department argued that the value of by-product is a non-monetary consideration and as per Rule 27 of CGST Rules, the same is includible in taxable value of milling charges.

In commodity taxation, disputes in valuation on additional consideration, flowback, etc., used to dominate particularly when the other party retains waste or by-products. The High Court in this case has attached more importance to terms of agreement as compared to valuation provisions under GST. It has relied on Supreme Court case in Food Corporation of India [1997 SCC Online AP 1143] wherein FCI had given the by-products to the millers and treated the same as property of such millers and therefore, no sale of such by-products took place and inclusion of the same in the turnover was held as not correct. While correctness of this judgment of High Court can be contested on the ground that private agreements cannot oust tax liability, for now, taxpayers can rely on the same for similar facts and terms of agreement / contract [Shiridi Sainadh Industries v. Deputy Commissioner - 2020-VIL-591-AP].

Detention the new name of harassment - High Court rescues taxpayer

In this column, almost every week, arbitrary detention of vehicle and goods as noted in orders of High Court, is highlighted so that the authorities take notice and instruct the field formations. But the top echelons of tax administration are content in issuing stray instructions without ensuring whether they are followed. In one such case, the taxpayer was forced to pay tax and penalty to get both released and no speaking order was passed considering the reply submitted. The High Court had to intervene to set aside such detention, direct refund of amounts paid along with interest.

The High Court noted that the detention memo said "documents tendered were found to be defective" but the same was silent as to which document was defective and why it was considered as defective. It further said that when documents were stated defective, it showed that the documents were available with the driver and submitted to the department. As per departmental clarification, the vehicle could not have been stopped en route in this case. Checking of vehicle at a particular point cannot be a ground for detention and in the words of the High Court "It is not the case of the 1st respondent that mere checking of a vehicle or it being found at a different place without anything more, is by itself a 'taxable event' under the CGST Act/ Telangana GST Act, 2017. So, in our opinion, under these Acts, it is not permissible to detain a vehicle carrying goods or levy penalty on the sole ground that the vehicle is found at a wrong destination without anything more." While understanding the statute is difficult for many, the High Court observed "interpretation of taxing statutes should be done in a way to facilitate business and inter-State trading, and not in a perverse manner which would result in impediment of the same by harassing business persons." [Kamlesh Steels v. Deputy State Tax Officer - 2020-VIL-595-TEL].

Non-production of records initially not conclusive of falsification

In a case which goes a step further as compared to the above, the GST authorities confiscated the seized goods (silver ornaments) on the ground that records were not produced. In a sharp remark, the AP High Court noted "Mere non-production of the records at the inception, will not automatically falsify the records produced later. The order must reflect the reasons as to why and how the records are fudged and spurious ones." The High Court has held that the order was without reasons and confiscation being a drastic step depriving a person of his property, not only hearing is required but also cogent reasons should be given while rejecting the reasons advanced by the noticee.

Generally, in departmental investigations, production of a record or advancing an argument is dismissed as an after thought. In this case, the department sought to discard the explanation offered by the taxpayer as after thought but the High Court said that mere branding as after thought without assigning reasons and without establishing records were falsified would not make the order legally justified. Dismissing the department's contention that hearing was offered but the petitioners did not avail the same, the High Court has held that the explanation of the noticee was not scrutinized along with records produced and no adverse comments were on the records. Order on confiscation was set aside and the authorities were directed to pass fresh reasoned order after hearing the petitioner [Sangeetha Jewellers v. Deputy Asst. Commissioner - 2020-VIL-596-AP]. To prevent arbitrary or unreasoned exercise of such extreme powers, mere instructions will not suffice but the tax administration should be bifurcated into separate verticals one for purely administration and another for quasi-judicial functions.

Job-work of fabrication and painting - AAR terms it as mixed supply

Materials supplied by the principal are used for fabrication of certain steel structure for use in railway over bridge and after such job work, they are transported to the site of erection. After erection (not in job-worker's scope), the job-worker is required to apply paint to the same. Such job-worker sought answer to questions on applicable rate for such activities and the Advance Rulings Authority has held that two services are present in the contract -one job-work of fabrication and second, works contract of applying paint after erection of the structure at site. According to it, job work ends with delivery of fabricated structure at site and painting the structure is a separate supply. As they are made in conjunction with each other, the same would be covered under mixed supply with the applicable rate of 12%.

It appears that the contract is for fabrication of steel structure which includes painting such structure. The final coat of paint being applied after erection is for operational reasons but the same may not make the activity into two different supplies. The scope of work under the contract, it appears, covers the entire activity of fabrication using principal's material and then delivering the same inclusive of final round of painting after erection by other service providers [Vrinda Engineers - 2020-VIL-317-AAR].

(The author is an Advocate, Gokul & Subha Advocates, Chennai. The views expressed are personal)