Tax Vista

Your weekly tax recap

Edn. 29 - 4 January 2021

By Dr. G. Gokul Kishore

Confiscation proceedings can be initiated only if material on mens rea available

Section 129 of CGST Act deals with detention, seizure and release of goods or vehicles in transit in cases of contravention of the provisions. Section 130 empowers the department to confiscate goods or conveyances when the offence is graver like supplies made or received with intent to evade payment of tax. The Kerala High Court has held that Sections 129 and 130 are independent provisions and detention of goods and vehicle under Section 129 could entail proceedings under Section 130, but where Section 130 is invoked, it is not necessary that detention should precede. Elaborating simultaneous applicability of Sections 129 and 130, the High Court said that confiscation proceedings can be initiated only when there is evidence to suggest that omissions were due to intention to evade payment of tax.

In the case before it, it was alleged that the vehicle was stated as moving from Tamil Nadu whereas it was actually moving from Kerala. The goods and vehicle were detained and proceedings were initiated. Subsequently, order confiscating the same was passed and the same was challenged through writ petition. The High Court noted that there was no evidence / material to suggest that the transaction was being undertaken with intention to evade though it found reasons for detention justified. Irregularity in documents may justify detention of goods and mens rea is not required for invoking Section 129. Based on facts of the case, the High Court held that confiscation order was not sustainable and directed the department to pass order under Section 129(3) [Gokul P.G. v. The State of Kerala - 2020-VIL-665-KER].

Confiscation used to be the last resort in Central Excise regime but one gets to see so many orders / cases relating to confiscation. As High Court in this case has pointed out, confiscation being a major punishment of depriving the person of his property, should not be resorted to discrepancies in documents like invoice or e-way bill. These are cases which require to be adjudicated as normal cases. Because the judiciary has held that both Sections 129 and 130 can be simultaneously invoked, it does not necessarily mean that in all cases where vehicle and goods are detained, parallel proceedings for confiscation should also be launched. Considering the ambiguity in application of such provisions by the field officers, CBIC should issue clear-cut instructions as confiscation of vehicles cripples the business of both the consignor and the transporter.

Detention & seizure and confiscation proceedings can be initiated simultaneously

Adopting almost similar position as above, the Karnataka High Court answered a slightly different question. Sub-section (6) of Section 129 provides that if tax and penalty are not paid within 7 days of detention / seizure, then confiscation proceedings under Section 130 shall be initiated. This led to the doubt as to whether confiscation proceedings can be initiated only after conclusion of proceedings under Section 129. The Karnataka High Court answered the same by holding that both the provisions commence with non-obstante clause and therefore, the legislative intention was not that for commencement of confiscation proceedings, action under Section 129 should end even without determination of liability thereunder. This means that both the provisions can be invoked simultaneously.

However, in this case, the department had stated that proceedings under Section 129 got abated on commencement of proceedings under Section 130 and this was not approved by the High Court. It said - "The proper officer, who has detained the conveyance and seized the goods, when he is able to form opinion that there is an attempt to evade payment of tax, will have to determine the applicable tax and penalty under Section 129 of the Act while simultaneously initiating proceedings for adjudging confiscation under Section 130 of the Act."

The Court reasoned that at the time of interception or detention, the officer may not know whether there was any intent to evade and therefore, proceedings under Section 129 would follow. During such proceedings, if material as to intent to evade comes to the knowledge of the officer, then proceedings under Section 130 would follow. The department was directed to decide both the show cause notices [M.S. Meghdoot Logistics v. CTO - 2020-VIL-667-KAR].

High Court quashes orders passed without providing record of personal hearing

In hearings before adjudicating and appellate authorities in the department, record of personal hearing is prepared, got signed from the assessee / appellant / authorized representative and copy is generally shared. The petitioners before Kerala High Court were aggrieved over non-sharing of such record of PH by Commissioner (Appeals). The High Court quashed the orders and directed the appellate authority to pass fresh orders. The Court has noted that the procedure was a formal one to take care of compliance with natural justice considering the fact that hearing takes place through video conferencing due to Covid-19 pandemic. The petitioners must have requested for copy of record of PH before approaching the High Court but the request would have been turned down. Therefore, they were compelled to file writ petitions. Such officers who push taxpayers to High Court for basic requirement should be divested of quasi-judicial responsibilities [Metrolite Roofing Pvt. Ltd. v. Dy. Commissioner - 2020-VIL-666-KER].

Entity having pendency of proceeding - Advance ruling not available to share-holding entity

Advance ruling is not available if the question raised is pending or decided in any proceeding in respect of the applicant. This is as per proviso to Section 98(2) of CGST Act. However, according to Advance Ruling Authority of Karnataka, such bar will apply if the applicant is a share-holder of another entity against whom proceedings have been initiated. Such interpretation appears to be ex-facie untenable as the provision uses the word "applicant" only and not those entities with which an applicant may be related. The applicant and the other entity are different body corporates with separate registrations under Societies Act as well as GST law. When the applicant is a different legal person, reading related person concept in Section 98 is not legally well-grounded.

Interest appears to be one-way in this case as the applicant is a share-holder in the other entity whereas such other entity is not holding any shares in the applicant's entity. Though not directly related to this subject, one is compelled to reminisce the pitched legal battles on Central Excise Valuation where the Apex Court had stressed on mutuality of interest covering "two-way traffic". The language used in the advance ruling is also not desirable - "the applicant projects themselves as a registered society under Cooperative Act, 1959." The applicant is the usual milk supply cooperative organization as is present in every State catering to almost every Indian household. This is an obvious fact and needs no projection. The stranger fact will be the outcome of offence case stated as booked against the "other entity - cooperative society" alleging misclassification due to which the present applicant has been shown the door by the AAR at admission stage [Bengaluru Cooperative Milk Union Ltd. - 2020-VIL-333-AAR].

Milk cooperatives societies are formed by dairy farmers and have played a crucial role in the white revolution in India. If such cooperative societies hold a different interpretation on classification, attributing mens rea, as required in offence cases, appears to be preposterous.

Investigation by non-jurisdictional officer - Advance ruling facility not available

In another "related" ruling where the taxpayer had to meet similar fate, the Appellate Authority (Karnataka) has reiterated its position that commencement of investigation under Section 67 of CGST Act can be treated as beginning of proceeding and therefore, when summons have been issued, proceedings are "pending" and advance ruling application cannot be entertained. The appellant argued that classification of flavoured milk or rate of tax was not mentioned in summons and the question raised was not apparently under investigation. Another argument taken was that only if the proceedings are pending before jurisdictional officer, application for advance ruling cannot be filed.

Such contentions could not find favour before the Appellate AAR. According to it, the investigation can be initiated either by the jurisdictional officer or officer concerned or by agencies who are empowered under the provisions of the CGST Act to issue summons and investigate and the use of the phrase "any proceedings" in Section 98(2) encompasses proceedings pending either before the jurisdictional officer or before any investigative agency such as DGSTI [Tirumala Milk Products Pvt. Ltd. - 2020-VIL-74-AAAR].

It appears that more than the issues involved in advance rulings, questions on maintainability of application, jurisdiction, etc., are dominant these days. On the issue of scope of proceedings, it appears jurisprudence is in favour of the department. Considering the not so favourable rulings in most cases, it is difficult to comprehend the factors encouraging taxpayers to seek advance ruling.

Tolerating tax demands - Tribunal comes to the rescue of taxpayer

Taxability of liquidated damages or penalties or forfeiture of deposit received from buyers / contractors for not lifting agreed quantity or short-lifting or for breach of contract terms is becoming a major issue. As service tax statutory provisions and present GST law have similar entries to treat agreeing to tolerate an act or situation or to refrain from an act or situation as a service, this issue will continue to haunt for years to come. In a recent case, service tax demand of more than Rs. 35 crores was fastened on coal PSU in respect of such recoveries (damages and penalties). The Tribunal held in favour of the taxpayer. According to it - "The recovery of liquidated damages/penalty from other party cannot be said to be towards any service per se, since neither the appellant is carrying on any activity to receive compensation nor can there be any intention of the other party to breach or violate the contract and suffer a loss. The purpose of imposing compensation or penalty is to ensure that the defaulting act is not undertaken or repeated and the same cannot be said to be towards toleration of the defaulting party."

The Tribunal has held that for coverage under declared service as per Section 66E(e) of Finance Act, 1994, the agreement should contain the activities from which party refrains or which is tolerated and there should be a consideration for the same. It has also highlighted the difference between conditions of a contract and consideration. The Tribunal has relied on EU case law (fairly older) while the latest or emerging position in EU, as in the cases of MEO and Vodafone Portugal, is not in favour of taxpayer [South Eastern Coalfields Ltd. v. CCE - 2020-VIL-559-CESTAT-DEL-ST].

It seems the industry may have to tolerate demands on penalties and damages under GST regime as well. As noted before, since Schedule-II of CGST Act merely categorizes transactions as supply of goods or that of services and does not cast any liability, the fundamental question on whether receipt of penalties or damages is for any supply is the question that needs to wait for the Apex Court's answer.

Readers may also like to see Tribunal's order in Honda Cars India Ltd. v. CCE [2020-VIL-561-CESTAT-DEL-ST]. In this case, the demand for service tax was raised under Consulting Engineer service in respect of payment made to Japan entity for termination of agreement. The Tribunal held that such amount was not towards any consideration for a taxable service and the demand was not sustainable. The Tribunal further observed that there was no evidence in impugned orders to show that the amount was paid for any technical information or assistance. The amount was in the nature of cancellation charges for termination of agreement relating to technical assistance for new model of a particular car.

Expat employees deputed to India - Reimbursement of salary & expenses not taxable

CESTAT has ruled that service tax levy would not be applicable under manpower recruitment or supply agency service prior to 2012 and also post-2012 on reimbursement made by the company in India using the services of deputed personnel of group company. The reimbursement was towards salary cost and expenses incurred in relation to such deputed employees. The deputed employees worked under the supervision and control of the Indian entity and they were treated as employees of the Indian company as per Income Tax provisions also. Salary paid to them by group company was reimbursed on actuals without any mark-up based on debit note raised by the group company on the Indian entity.

The importance of this decision of CESTAT lies in this observation - "the legal position post negative list regime does not make any departure from the settled position of law as existed before 2012 with respect to the service tax implications on deputation of employees. In fact, the above exclusion in the definition of service amplifies the position of law to keep employees providing service to the employer in the course of their employment out of the purview of service tax." [Northern Operating Systems Pvt. Ltd. v. CCE - 2020-VIL-562-CESTAT-BLR-ST].

In GST regime also, this issue is being raised in advance ruling applications and decisions are not unanimous. Another round of litigation is on the cards. Entities having cross-border transactions may have to prepare themselves for demand of tax on such reimbursement with the only support of Schedule-III entry on supply of services by employee to his employer being not liable to GST.

GST Notifications - Inserting confusion

New year has been ushered in by CBIC by issuing Notification No. 01/2021 - Central Tax dated 1-1-2021. CGST Rules have been amended to insert sub-rule (6) in Rule 59. As per this amendment, if GSTR-3B (monthly GST return) has not been filed for two previous months, then GSTR-1 return (outward supply or sales return) will not be permitted to be filed. Similar bar applies to quarterly return filers also. Before this amendment, by Notification No. 94/2020-Central Tax dated 22-12-2020, sub-rule (5) was inserted in Rule 59 and it also seeks to achieve the same purpose. The amendments have been confusing because Rule 59, in entirety, has been substituted from 1-1-2021 by Notification No. 82/2020-Central Tax dated 10-11-2020 and this substituted rule contains a different sub-rule (5) already. For the period from 22-12-2020 to 31-12-2020, the sub-rule (5) barring GSTR-1 filing in the above cases was in operation. Now the same bar continues in the form of sub-rule (6) from 1-1-2021. CBIC may have to issue clarification when such amendments are made as otherwise, taxpayers will be clueless.

While industry was waiting for another extension of last date for filing annual return (GSTR-9) for the financial year 2018-19, the same did not materialize. CBIC issued Notification No. Notification No. 95/2020-Central Tax dated 30-12-2020 to extend the last date for filing annual return only for the FY 2019-20 to 28th February, 2021.

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