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Tax Vista Your weekly tax recap Edn. 4 - 13 July, 2020 By Dr. G. Gokul Kishore |
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Transitional credit - Retrospective amendment challenged but no orders passed
Transitional credit continues to be fought in the courts and it will, for some more time to come. In a writ petition disposed of by Bombay High Court recently, the petitioner had raised the issue of not being able to file TRAN-1 by due date and sought direction to consider application filed by it before the GST authorities seeking such transition of pre-GST credits. More importantly, the petition sought Court's direction to declare that the time-limit provided as per retrospective amendment made to Section 140 of CGST Act as directory and not mandatory. But the Court did not pass any order on such prayer and instead, it has directed the department to consider the application seeking transition and pass order after hearing the petitioner. [Sotheby's Art Services (India) Pvt. Ltd. v. UOI - 2020-VIL-295-BOM].
Price disputes are best settled mutually
In certain cases, in the GST regime, when there is a dispute, already arisen or brewing, the recipients not in agreement with value or rate adopted by the suppliers, compel them to seek advance ruling. But, when it comes to commercial disputes, they are best settled by mutual compromise. This could be the learning as a recent advance ruling reveals.
The dispute was over the consideration payable in a contract work when there was time overrun and damage to certain property. The service was provided well before introduction of GST but the service provider raised a particular RA bill in 2018 owing to dispute with the recipient. While the service provider charged GST, the recipient insisted that service tax should have been charged. Reliance was placed on Section 13 of CGST Act in respect of time of supply by the service provider. Section 142(11)(b) was sought to be applied by the service recipient as the services were provided in service tax regime and even if invoice was not raised as per Point of Taxation Rules, service was provided before 2017 and hence service tax was applicable. The team formed to arrive at conciliation felt that the supplier may seek advance ruling on this issue.
The AAR however, refused to answer holding that as per Section 97, advance ruling is not available on such question. It reasoned that advance ruling is available either on supply undertaken or proposed to be undertaken but in this case the services were provided long ago in pre-GST period.
Had the applicant sought specific ruling on time of supply alone in respect of the invoice raised in 2018, the ruling might have been different. The application emphasised that this is a case of upward revision in price covered by Section 142(2a) but AAR did not accept the same. When the invoices represent RA bills and when the dispute is over variation in price, it is not clear as to why the argument on price increase was not accepted. The applicant could have explained the nature of billing based on milestones as is typical to such contracts and the last bill getting stuck in dispute over the bill amount and the same represented an increase over what was originally agreed as per the terms of the contract. Advance rulings are generally cryptic and therefore such arguments are not seen in the ruling. [Woodcraft India Ltd. - 2020-VIL-182-AAR]
Doctrine of mutuality not applicable under GST law
The title could be a little shocking for all students of law as the Larger Bench of Supreme Court in State of West Bengal v. Calcutta Club Ltd. [2019-VIL-34-SC-ST] last year held that doctrine of mutuality is applicable in transactions between a club or association and its members notwithstanding 46th Amendment to the Constitution. By this amendment, Article 366(29A) was brought and sub-clause (e) deemed supply of goods by unincorporated association to members as sale of goods. The shortcomings of such amendment were pointed out by the Supreme Court in the above judgement and it held that doctrine of mutuality would be applicable to both incorporated and unincorporated clubs and levy of sales tax on supply to members was not valid. Service tax was held as not applicable in respect of services provided by incorporated clubs to members.
Tax administration sometimes seems to be obdurate. The entry in sub-clause (e) of Article 366(29A) was copied in Schedule II of CGST Act to classify supply of goods by unincorporated association to its members as supply of goods. The definition of 'person' in CGST Act expressly includes cooperative societies which are created by members for their own benefit. Such definition, it appears, was intended to cover supplies made by such societies to non-members.
A particular cooperative housing society sought ruling as to whether the society is liable to GST on services provided to members. Though the above Supreme Court judgement was not relied upon by the applicant, principle of mutuality was pleaded. According to the AAR, such principle has no application in GST and the society is liable to pay tax on the services provided to members. To arrive at such conclusion, it relied on the definitions of 'person', 'business', 'supply' and 'consideration'. But it appears the true import and meaning were not appreciated by the authority. It did not consider whether the association can be treated as agent of the members or whether the consideration is in the nature of reimbursement. As Schedule II speaks about unincorporated association, it did not refer to the same. The applicant was providing various services including collection and payment of property tax and other taxes/charges to various authorities on behalf of members [Apsara Cooperative Housing Society Ltd. - 2020-VIL-184-AAR]
The AAR distinguished the ruling of Appellate AAR in Rotary Club of Mumbai Queens Necklace [2020-VIL-38-AAAR]. In this order passed last year the AAAR had held that the membership and subscription fees and admission fees collected from members would not be liable to GST. It had held that the appellant was not providing any facility or benefit to its members against such fees and these amounts were spent towards meetings and administrative expenses only. Adopting such stand, it was held that the appellant club was not doing business as defined in the CGST Act. The AAAR went a step further by stating that the membership fee was purely in the nature of reimbursement and taxing the same would amount to double taxation.
This issue cannot be left to be interpreted without in-depth examination. Such exercise can be undertaken only by the relevant committee attached to the GST Council. The fallacy created by use of "unincorporated association", attempt to create dichotomy between incorporated bodies and others in respect of services provided to members and refusal to recognise mutuality will not contribute to a healthy GST. The law cannot afford to be so ambiguous and appropriate amendments should be made without delay.
If 46th Amendment to the Constitution could not dislodge doctrine of mutuality, it obvious that CGST can hardly venture into such exercise.
Product not yet manufactured - No advance ruling on classification
The issue as to whether advance ruling can be sought under Section 97 of CGST Act in respect of place of supply is yet to be settled though Kerala High Court has held that it is covered under clause (e) on determination of liability to pay tax [Sutherland Mortgage Services v. Principal Commissioner - 2020-VIL-102-KER]. Another issue has been added to this doubtful category now.
Definition of advance ruling in Section 95(a) covers the questions listed in Section 97 in relation to supply of goods or services or both being undertaken or proposed to be undertaken. When business has not yet commenced, it will take some time before the products from trial run are available. Some products may not require elaborate trial run also. Therefore, classification of the yet to be manufactured product is a question on which advance ruling can be sought as per Section 97.
However, AAR is of the view that since supply has not started and product sample is not available, classification cannot be determined. Two factors imparting authenticity to classification are visual examination and test reports. But, in general, based on product literature, composition and statement of experts, classification should be determinable. AAR has held that the statutory provision does not cover 'manufacture' of goods and that goods should be existing in respect of supply undertaken or proposed to be undertaken.
Advance ruling is a facility to know about liability or rate of tax in advance. Placing conditions like manufacture and pre-existing goods will only compel applicants to file appeals to contest such artificially manufactured grounds [Saint Gobain India Pvt. Ltd. - 2020-VIL-186-AAR].
Presence of Advocate during search is not a legal right
Decades ago, it was settled by Supreme Court in the case of Poolpandi v. Superintendent [1992-VIL-13-SC-CU] that the person who is examined i.e., who is interrogated and whose statement is recorded under Customs Act, does not have the right to have the presence of his advocate during such process. This has been followed in judgements rendered in cases under other indirect tax enactments also. These days investigations by GST authorities are hyped in media as if tax department did not undertake such measures before GST or as if alleged evasion is worth highlighting only now. Number of writ petitions are being filed on search, seizure, bail, arrest, etc.
In a case before Madhya Pradesh High Court, the petitioner apprehended that search may not be carried out in a fair manner and sought directions on presence of advocate. After scrutinising Section 67 of CGST Act and Section 100 of Cr.P.C. the High Court noted that presence of two independent and respectable witnesses is necessary but there is no provision conferring legal right as to presence of advocate (inadvertently mentioned as petitioner in the order) during search. [Subhash Joshi v. UOI - 2020-VIL-293-MP]
While jurisprudence is on presence of advocate not being a right during examination, this order applies the same to search operation also.
Movie is no entertainer for multiplex owner
Introduction of GST did not impact prices of goods and services much. Probably to provide relief to consumers through tinsel world, GST rate of 28% was reduced to 18% from 1-1-2019 in respect of movie tickets priced above Rs. 100.
A particular multiplex owner did not reduce the price after such tax rate reduction and was held as guilty of profiteering by National Anti-Profiteering Authority (NAA). The taxpayer pleaded that entertainment tax incidence before GST was around 17% and when GST rate of 28% was introduced, they did not increase the price of tickets. When the tax rate was reduced later, they adjusted the base price which is generally not accepted by NAA and in this case too, this was held as violation of Section 171 of CGST Act. State Government's order fixing maximum ticket prices was relied on but the same was held as not applicable to anti-profiteering matter, such order fixed only the ceiling for movie tickets and when entertainment tax has been subsumed in GST, such order was not applicable to services under GST.
When GST was introduced, all sectors were uncertain as to the full implications of the new regime and therefore, price changes were not made by many at that time. Later, at the time of rate reduction, many have increased the prices after adjustment for the period when tax incidence was higher but prices were not increased. Most of the anti-profiteering orders reveal that the industry fell in this trap and got hefty demands from NAA [Principal Commissioner v. Prasad Media Corporation - 2020-VIL-56-NAA].
(The author is an Advocate practising independently. The views expressed are personal)
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