Transitional credit - Prescription of time-limit valid

Transitional credit will be remembered for a long time to come. In the first judgment discussing the validity of Rule 117 of CGST Rules in the backdrop of recent retrospective amendment to Section 140 of CGST Act, the Madras High Court has upheld the provision prescribing time-limit [P.R. Mani Electronics v. UOI - 2020-VIL-308-MAD].

In this case also like many others, the petitioner, pleaded technical difficulty in the portal. The High Court noted that the petitioner could not provide evidence of logging into the GST portal though a hard copy of TRAN-1 form was handed over to GST authorities. Constitutional challenge was not pressed in this case though it was contended that prescription of time-limit under Rule 117 of CGST Rules was ultra vires Section 140 of CGST Act and such rule should be read as directory and not mandatory.

After expressing the view that Section 164 of CGST Act empowering the government to make rules has been drafted in wide terms which even provides the power to give retrospective effect to rules (not earlier than date of effect of CGST Act), the High Court held that by inserting "within such time" in Section 140 with retrospective effect by Finance Act, 2020, power to prescribe time-limit for availing transitional credit has been expressly prescribed and Rule 117 is intra vires Section 140. Time-limit for transitioning credit has been held to be mandatory and not directory.

The petitioner had argued that input tax credit was in the nature of their property and for not submitting the form within prescribed time, they could not be deprived of such property. Relying on Supreme Court judgment in Jayam and Company [2016-VIL-45-SC], this argument has been rejected by the High Court. According to it, ITC is a concession and not a vested right. Disagreeing with the view of Delhi High Court in SKH Sheet Metals [2020-VIL-255-DEL], it has held that transitional credit cannot be availed disregarding the time-limit.

Credit is transitional but the dispute seems to be eternal. The claim of GST being a guarantor of seamless and liberal credits has been dented with retrospective amendment to Section 140 and the department defending such provision not only before High Courts but also before Supreme Court.

Withholding refund due to non-constitution of appellate body, not correct

Delhi High Court has directed sanction of refund arising out of zero-rated supplies to SEZ as allowed by the Commissioner (Appeals) in terms of Order-in-Appeal relating to appeal of the taxpayer seeking refund. The claimant was compelled to seek remedy from High Court since the refund was not being sanctioned for almost one year despite having favourable order [Zones Corporate Solutions v. Commissioner - 2020-VIL-302-DEL].

The department submitted before the High Court that refund could not be sanctioned as the order of Commissioner (Appeals) was to be challenged before GST Appeal Tribunal but such Tribunal has not yet been constituted.

The Madras High Court had held certain provisions relating to GST Appellate Tribunal as contained in CGST Act as unconstitutional [Revenue Bar Association v. UOI - 2019-VIL-466-MAD] Instead of amending the provisions appropriately, the department opted for stop-gap solution of issuing Removal of Difficulty Order (No. 09/2019-Central Tax dated 3-12-2019) to extend the time-limit for filing appeal by reckoning date of assumption of office by the President of such Tribunal (as and when constituted). Despite claim of refunds being sanctioned without delay, taxpayers are pushed to file writ petitions even when they have favourable orders. Law has changed but methods of tax administration have not.

Valuation - Diesel supplied by service recipient to service provider, includible

It is a common practice for cement companies to supply high speed diesel (HSD) to service providers engaged for use of earth-moving machinery and such heavy equipment. In one such case, the company, providing HSD from its tank to the service provider operating such vehicles for removal of limestone at the mining site, sought advance ruling as to whether value of such HSD is to be included in the value of service provided by the entity providing the vehicles / machinery.

The urge to opt for advance ruling rose from Section 15(2)(b) of CGST Act. This section states that any amount that the supplier is liable to pay in relation to the supply but has been incurred by the recipient and not included in price paid or payable for the goods or services, should be included in the taxable value. The applicant (service recipient) stated that HSD is within their scope, being given as free issue material or free of cost item to the service provider and the contract price does not include such HSD.

Advance rulings in a vast majority of cases are non-speaking and therefore, this ruling does not discuss elaborately the interpretation of the provision or the arguments of the applicant. It holds that value of HSD is liable to be included in the value of service provided by the person leasing such vehicles / heavy equipment [Pulluri Mining & Logistics - 2020-VIL-198-AAR].

The provision uses "amount that the supplier is liable to pay". Liability to pay is contractual liability. If the contract terms are such that the service provider is not liable to pay for certain goods or services but which are used while providing the supply (service), then the provision does not come into picture. This provision has been included to discourage artificial arrangements to depress value. It is not intended to ignore contractual terms and apply law without reference to facts. Though such rulings are binding only on the applicant and jurisdictional officer, the department, in general, perceives the same as vindication of the position adopted by it as seen in respect of the issue of taxability of director's remuneration.

Interest / penalty in financial services - Liability to GST

Financial issues are generally complex and when taxation of such sector is considered, it becomes further complicated. Chit funds are typical Indian species of pooling funds for the benefit of members constituting such fund. In service tax regime, taxability of such funds was fought in the Supreme Court and it was held that chit fund was not one of cash management particularly in the context of absence of definition in the statute [UOI v. Margadarshi Chit Funds - 2017-VIL-23-SC-ST].

In GST regime, entry no. 15 of Notification No. 11/2017-Central Tax (Rate) provides under Heading 9971 ("Financial and related services") rate of GST of 12% for services provided by a foreman of a chit fund in relation to chit. At the outset, it is obvious that services provided by the foreman (the organiser of business chit) will be the taxable supply. The foreman charges commission and hence, GST is applicable on the same.

If a subscriber pays his subscription amount beyond the due date, a penal amount is charged from such subscriber. In the application for advance ruling, the chit fund company contended that such amount is in the nature of interest which is exempted under Notification No. 12/2017-Central Tax (Rate). It further argued that chit amount is an actionable claim which is outside the ambit of GST as per Schedule - III of CGST Act.

AAR was not impressed and it held that the penal amount will be classifiable as the original supply of financial and related services and such services being taxable, the said penal amount will also be liable to GST at the rate of 12%. Section 15(2)(d) of CGST Act on inclusion of interest or late fee or penalty for delayed payment of consideration has been taken note of. It relied on CBIC's Circular No. 102 where treatment of interest and penalty has been discussed with illustrations. It negatived the contention on chit amount being actionable claim [Ushabala Chits Pvt. Ltd. - 2020-VIL-205-AAR].

The penal amount is relatable to subscription amount. Subscription amount is not liable to GST as it is a transaction in money. It is the foreman's charges that is liable to GST. If there is nexus between the penal amount and the services provided by the foreman, then AAR's ruling would be plausible. For adopting such position, it should have been held that the foreman had to borrow funds from outside to conduct the auction in time and for compensating himself for the interest on such borrowed funds, penal amount was charged from the subscriber and therefore, it is related to foreman's services. But such reasoning has not been adopted in the ruling while arriving at the conclusion. If the amount is part of subscription amount, then taxing it stands on a weak legal wicket.

Lifting the ITC restriction on lifts

Like many things in life, lift or elevator is something that is hardly understood by taxman. Even if a lift is used by a hotel for business purpose, Section 17(5) of CGST Act restricting input tax credit on anything associated with immovable property acts as the ultimate weapon for the department to deny credit. Fearing such denial, the applicant sought ruling before AAR on eligibility of input tax credit for lift.

The AAR held "The lift therefore becomes part of the building and it is not a separate thing per se. A lift does not have an identity when removed from the building. Therefore, the lift cannot be said to be separate from the building. Also, it has to be borne in mind that a lift is not an item that is purchased and sold. It is a customized mechanism for transportation, designed to suit specific building. Upon piece by piece installation, it becomes integral part of the building."

Based on such reasoning and relying on Section 17(5)(d), it was held that hotel building being an immovable property, inputs or input service which go into its construction will not be eligible for credit and therefore, if lift is considered as an input, ITC will not be admissible.

The above has also been used to hold that lift is not covered under "plant and machinery" as it becomes part of the building and ITC will not be available even if definition of plant and machinery is considered.

If the above reasoning of whatever that is attached or installed in a building becomes part of such building and therefore, credit will not be admissible, is applied, then plant and machinery in several cases will be out of ITC eligibility. Interesting years are ahead but unfortunately at the expense of taxpayers.

Amusement park slides on ITC restrictions

The same Authority (MP AAR) as above in a ruling rendered a day after has held that water slides used by amusement park is covered under plant and machinery and thus, entitled to ITC. The applicant constructing water park sought ruling on ITC availability on water slides, supporting structure for such slides (towers) and swimming pool and water pool where the slides end. The steel and civil structure used to fasten the slides to earth have also been held as plant and machinery and credit would be admissible.

ITC on land development has been held in the negative besides goods and services used for swimming pool / water pool which, according to the Authority, are not supporting structure or foundation of plant but such pool will be considered as civil structure. The amusement park owner had hardly any amusement left after the AAR has held that ITC will not be available on several items like transformer, lifts, DG sets, sewage treatment plant, etc., which have been held as inseparable from building [Atriwal Amusement Park - 2020-VIL-218-AAR].

The entries relating to blockage of credit on goods or services relating to construction of immovable property and the exclusion carved out for plant and machinery require interpretation by the Apex Court and till the time such issues reach the top court, there is no option but to watch the proceedings in lower fora.

Supply of printed advertisement material using design provided by recipient is supply of goods

Printed flex banners and billboards dot every milestone in highways and arterial roads, particularly in urban areas. Entities engaged in printing of such banners cater to a variety of requirements of different customers and therefore, they use their own materials. The recipient or buyer provides the design in a pen drive or DVD or simply e-mails the same. Based on the choice of the material and other specifications, the supplier prints the design using computers and printers but invoices the customer for the value which includes both materials and printing cost.

Though the transaction is apparently less complicated, considering the fact that printed trade advertising material is covered under Heading 4911 attracting 12% GST, the department being used to applying higher rate of 18% may dispute such lower rate, if adopted by the taxpayer. Therefore, the taxpayer sought advance ruling contending that what is supplied is supply of goods as there is transfer of title in goods and in such composite supply, supply of printed advertising material being the principal supply, the entire transaction will be treatable as supply of goods, classifiable under Heading 4911 with applicable rate of GST of 12%.

The AAR agreed after perusing Schedule - I of CGST Act and taking note of the fact that the applicant sourced all the materials like poly vinyl, flex, paper, printing ink, etc., himself. CBIC clarification dated 20-10-2017 on taxability of printing contracts and FAQs were relied on [Macro Media Digital Imaging Pvt. Ltd. - 2020-VIL-213-AAR]. A similar ruling was passed in respect of another applicant also [Sree & Co. - 2020-VIL-209-AAR].

Fabrication of bus body on chassis owned by others is supply of service

The title does not convey much but the implications of such transactions are more. The applicant sought advance ruling to confirm his view that fabrication and mounting of bus body on chassis owned by others would be supply of service of job work attracting 18% GST. The AAR gave its stamp of approval to such view by relying on CBIC Circular No. 52 [VE Commercial Vehicles Ltd. - 2020-VIL-223-AAR].

The circular covered two scenarios. First, the supply is sale of bus as such where chassis owner fabricates the body as well and the Board had clarified it would be supply of bus attracting 28% GST. The second scenario dealt with chassis owned by others but given to the person undertaking fabrication and mounting of body on such chassis. The chassis owner being the principal, the transaction is the nature of job work and therefore, it will be supply of service with applicable rate of GST of 18%.

The circular did not consider a third situation where the buyer of the chassis instructs the body builder to buy in his name, fabricate the body and then sell the built bus to him. If the consideration is paid by the body builder at the time of purchase of chassis, then he is the recipient of the supply. If the consideration is paid by the buyer but delivery is made at the premises of body builder, then recipient of supply of chassis is the buyer. In the latter case, it may amount to job work when fabrication work is undertaken while in the former it may not. Since the present advance ruling did not involve such situation, such issues have not been discussed.

Municipal functions - Need for amendment in notification

These are days of public-private partnership for execution of various functions of government. Recognising the fact of PPP model in public functions, Notification No. 12/2017-Central Tax (Rate) provides exemption to services provided to Central Government, State Government, local authority, governmental authority or government entity when the activity is in relation to municipal functions as per Article 243W of the Constitution of India.

In Andhra Pradesh, drinking water supply to certain areas was undertaken by a public charitable trust. This trust later became a society registered under the relevant statute. A government order was issued whereby out of 9 members of the board, 7 would be government nominees. As the board is engaged in municipal function of providing drinking water, it sought advance ruling as to admissibility of exemption to it under the above said notification.

The AAR answered in the negative. The definition of "governmental authority" as provided in the notification was relied on. This definition states that an authority or board or any other body set up by Parliament or State Legislature or established by government is covered. The applicant satisfied this condition as it was created by a government order. However, the definition further provides that 90% or more participation by way of equity or control should be with the government. In this case, 7 out of 9 members being government officers, the percentage works out to 77% which is below the limit of 90% prescribed for control by government. Therefore, GST of 18% has been held as payable in respect of operation and maintenance services provided by contractor to the board [Sri Satya Sai Water Supply Project Board - 2020-VIL-207-AAR].

While the government may issue another GO to increase government nominees in the board to satisfy the 90% condition, this case highlights the issue that such exemption needs amendment. Though the fact of municipal function of providing drinking water to citizens by the body for more than two decades is on record, the AAR could not decide in favour of the board. Even if the objective is satisfied, the unrealistic condition has proved to be detrimental not to the body but to public welfare as such.

Ruling without sanitisation

In an advance ruling publicised everywhere, hand sanitisers manufactured by the applicant being alcohol-based hand sanitisers, have been held to be classifiable under HSN 3808 with applicable GST rate of 18% [Springfields (India) Distilleries - 2020-VIL-188-AAR].

Classification disputes have seen several high-voltage drama in all fora including Supreme Court because of interpretation of Section Notes, Chapter Notes, headings, composition, properties, end use, common parlance, expert evidence, technical literature, etc. However, this ruling contains no reason to arrive at such conclusion and is not only cryptic but also abrupt.

Press reports also point to Directorate General of GST Intelligence taking a view that the trade is paying 12% GST by misclassifying sanitisers under Chapter 30 as medicaments. According to the department (as clarified in a press note also), such product is classifiable (under Heading 3808) as disinfectants and liable to GST of 18%.

Classification issues are generally interpretational in nature. Unless there is complete non-payment and outright evasion, payment of tax at the rate of 12% by the industry based on bona fide belief instead of 18% as per the department, cannot be labelled as attempt to evade. The strong-arm tactics reportedly adopted and anti-trade clarification cannot contribute to revenue but only expose the mindset of the tax administration.

Renting of residential property on commercial scale is liable to GST

Renting of residential dwelling for use as residence is exempted under GST. Applicability of this exemption when a "residential" building with 73 rooms having various amenities is used for lease on long-stay basis was the question before AAR.

The building was leased by the owner to an entity which in turn was sub-leasing it besides providing catering and other services to inmates. After perusing the lease agreement between the owner and the lessee and the resident's enrolment form, the AAR concluded that considering the number of rooms and amenities provided, boarding and hospitality services extended to occupants, the building was constructed to be run as lodging house. The activity of the applicant (lessor) was held to be commercial renting and not being covered under exemption provided in Notification No. 12/2017-Central Tax (Rate), the same would be liable to GST [Lakshmi Tulasi Quality Fuels - 2020-VIL-196-AAR].

The notification does not define "residence" or "residential dwelling" and many boarding or lodging houses used by students or others as paying guest are confronted with such issue. Classification as residential building as per municipal records, having kitchen in the building, etc., may not be determinants for the purpose of use as residence under GST. Till the time, these terms are defined and the practice prevalent on the ground is taken into account for issuance of appropriate circular, taxpayers will be compelled to either seek advance ruling or wait for summons and notices.

Foreclosure charges not liable to service tax - GST implications on damages

Larger Bench of CESTAT has held that foreclosure charges for pre-mature termination of loan taken from a bank or NBFC would not be liable to service tax. Distinguishing between condition of a contract and consideration for the contract, the Tribunal has expressed the view that such charges do not represent consideration and that they are recovered as compensation for disruption of service by the lender. Foreclosure as an activity, being termination of service, has been held to be not related to lending. The customer by resorting to such unilateral act of repudiating specific terms of the contract is required to compensate for the injury caused to the bank. The LB has further held that foreclosure charges are damages that the banks are entitled to when the contract is breached [CST v. Repco Home Finance Ltd. - 2020-VIL-309-CESTAT-CHE-ST].

The ruling elaborately discusses breach of contract, damages, penalty and consideration along with Section 74 of Indian Contract Act. The period involved was before introduction of the clause on agreeing to the obligation to refrain from an act or tolerate an act under declared services in Finance Act, 1994. Had the period involved in the case before the Tribunal been after introduction of declared services, discussion on the implications of this clause would have been available in the order. This would have made the order very relevant to GST as the same provision has been grafted in Schedule - II of CGST Act. Nevertheless, the issue of applicability of GST on damages has just commenced and there is a long way to go before it gets settled.

If the order by Larger Bench is applied, contracts do not provide option to violate by paying damages and it is not an alternative mode of performance and the service provider becomes entitled to such damages without any service being provided. If no supply of service is identifiable against receipt of damages, then levy of GST does not arise. One of the arguments against imposition of GST on damages could be that there is no supply at the first place and entry in Schedule - II being one of categorisation cannot come into picture without taxable supply being identified.

(The author is an Advocate practising independently. The views expressed are personal)