Tax Vista

Edn. 1 - 22 June 2020

Dr. G. Gokul Kishore

Transitional Credit - Supreme Court to decide

The edifice of GST stands on seamless credit. To reaffirm such commitment, lawmakers provided Section 140 in the CGST Act to protect the credits earned under pre-GST laws. This ensured that the embedded taxes in pre-GST goods or input services do not lead to spike in prices. Transitioning credits earned under Central Excise, Service Tax and VAT provisions to re-characterise them as Input Tax Credit or ITC under GST law is one of the major progressive and benevolent measures. Such benevolence, however, could not percolate from the provisions to many in the industry as the time-limit to claim through TRAN- 1 form was too short and the portal exhibited enormous reluctance in either accepting the form or displaying the data as fed by the claimant. Transitional credit has been no less than a big-budget box office thriller but unfortunately, cash-strapped taxpayers are compelled to fund the trilogy.

With weak weaponry of poor bandwidth and technological challenges, many lost the digital battle against the GST portal. High Courts have come to the rescue of many and new jurisprudence has started emerging. Tax credit has been held as vested property right protected under Article 300A of the Constitution, thus elevating such credits earned to much higher pedestal vis-à-vis Modvat or Cenvat days [A.B. Pal Electricals v. Union of India [2020-VIL-06-DEL].

Rule 117(1A) empowering Commissioner, backed by GST Council's recommendation, to extend the time-limit for filing TRAN-1 form in respect of those who could not submit due to technical difficulties in the GST portal has been held to be vague and arbitrary in the absence of definition of such expression in Brand Equity Treaties Ltd. v. UOI [2020-VIL-196-DEL].

In the meanwhile, the defect was sought to be rectified by subjecting Section 140 to retrospective amendment from 1st July, 2017 to insulate the time-limit from challenge as to validity but the same could not persuade Delhi High Court to take a different stand in SKH Sheet Metal Components v. UOI [2020-VIL-255-DEL]. In paragraphs 19 and 20 of this judgment, the Court has not only noted absence of challenge to retrospective amendment but also held that its earlier judgment in Brand Equity was not entirely based on absence of prescription of time-limit in the CGST Act.

As per order dated 19-6-2020 of the Supreme Court [2020-VIL-21-SC], the judgment of Delhi High Court in Brand Equity stands stayed. The department has obtained a breather from compliance with the directions of the High Court on extending of benefit to similarly placed taxpayers by 30-6-2020. The verdict of the Apex Court will provide finality to this dispute and also bring to focus the technological hiccups in the portal, the IT challenges faced by taxpayers and the present state of affairs of implementation of the mega tax reform.

The tentativeness in approaching this issue has been palpable. It needs certain wisdom to acknowledge the seriousness of the issue and the injury caused to taxpayers merely because of change in tax system as otherwise, the credits were lying in the books to be utilised for discharging duty / tax liabilities as per the earlier laws. Measures like one-time opportunity to all taxpayers to claim such legacy law credits lost in the labyrinth of changes and forms will go a long way in restoring the confidence of taxpayers. Jurisdictional officers are best equipped to verify such claims wherever there is a discrepancy or doubt.

Check posts abolished but checks on the road retained

GST law is intended to compulsorily collect tax. Therefore, it has a draconian face, shown frequently when provisions like Section 129 of CGST Act are invoked. This section empowers the officers to detain or seize, goods and conveyances, while in transit, where such goods are transported in contravention of the provisions and the vehicles are used for such alleged contravention. Principles of natural justice need to be followed by issuing a notice and hearing the person concerned before saddling him with tax and penal liabilities. Seizure cripples the business till the time the appetite of revenue is satiated. Vagueness is patent as the law is sans any scope or list of infractions which would amount to contravention for the purpose of invoking such provision.

Movement of raw materials from one State to another by companies is a routine affair. When e-way bill carried a different delivery address as compared to other documents, Section 129 was invoked and the taxpayer had to knock the doors of High Court. Goods were ordered to be released by the Court but after deposit of tax and 10% penalty by way of bank guarantee [Colgate Palmolive India Ltd. v. State of Gujarat [2020-VIL-250-GUJ].

CBIC, by Circular No. 64/38/2018-GST dated 14-9-2018 had directed field formations to avoid invoking Section 129 for minor infractions in e-way bill. The illustrative list provided in this circular does not help the industry. Policing the departmental hierarchy as to compliance with Board's instructions is like obtaining refund from the department.

Abolition of check posts was considered as a major reform under GST. But the substantial number of cases involving detention and seizure of vehicles and goods evidences the fact that arbitrary checks have increased. Extreme powers to tax officers should be circumscribed by safeguards against indiscriminate use but pitted against the might of the State, even safeguards can hardly provide any succour to the taxpayers. The remedy lies in revisiting such statutory provisions so that onerous conditions are not placed compelling the industry to seek judicial support for survival.

Advance ruling tremors

If an advance ruling does not raise eyebrows for the logic and reasoning or absence thereof, it should be an exceptional surprise. In the case of Sterlite Technologies [2020-VIL-150-AAR], the applicant sought to know whether GST would be payable when goods are bought and sold abroad, without bringing them to India. The Advance Rulings Authority, Gujarat accepted the contention of the applicant that IGST being payable at the point in time when customs duties are leviable as per Customs Act, 1962, GST is not payable when goods are purchased from a vendor in foreign country but not brought into India. However, it held that GST would be applicable when such goods are sold and shipped from such vendor in foreign country to the buyer's premises, also located outside India.

For arriving at such decision, the AAR started analysis of the provisions with Section 7 of CGST Act on scope of supply to state that the present transaction is covered under 'supply'. It then ventured on a tour via export, inter-State supply, place of supply (under Section 10 of IGST Act), etc. to arrive the destination / conclusion that such onward sale by the applicant in India to a foreign party will be liable to GST.

Schedule-III of CGST Act covers activities which shall be treated as neither supply of goods nor supply of service. An entry "Supply of goods from a place in the non-taxable territory to another place in the non-taxable territory without such goods entering into India" was inserted by amendments in 2018 (effective 1st February 2019). The AAR appears to have not taken note of this amendment. Sub-section (2) of Section 7 of CGST Act, while dealing with Schedule-III, begins with "Notwithstanding anything contained in sub-section (1)". Scope of supply is subject to Schedule-III. When supply is made from a place outside India to a place outside India, which in fact, is the case in respect of the applicant, the transaction is not covered under 'supply'. One may expect expression of disagreement by the Appellate AAR, if appeal is filed.

In another ruling by Gujarat AAR, sale of developed plot has been held as liable to GST [In Shree Dipesh Anilkumar Naik [2020-VIL-148-AAR]. It has sought to distinguish such transaction from sale of land as such which is excluded from GST as per Schedule-III of CGST Act. The applicant had to provide amenities like roads, drainage, etc., so as to obtain approval of plan for the layout from the local authority. The AAR notes that consideration is inclusive of both for sale of land as well as common amenities and sale of developed plots is a service. Unlike a similar case before Karnataka AAAR [Maarq Spaces - 2020-VIL-27-AAAR] where the arrangement was tripartite one and the developer was receiving revenue share on sale of plotted land, in the present case, the landowner is the developer cum seller.

Immovable property is prone to litigation and when it gets fused with complex tax laws, the consequences can be catastrophic for taxpayers. To clear such "land"mines, one has to wait for an authoritative pronouncement from the Supreme Court when such issues are carried in an appropriate case.

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Dr. G. Gokul Kishore is an indirect tax expert with more than 25 years of experience. He is an Advocate and has represented and advised industry on GST, Customs, Central Excise and Service Tax laws. He has published over 150 articles in print and online media. He obtained his doctorate in indirect taxation. He worked in Central Excise & Service Tax department for 12 years. He also handled responsibilities of Associate Editor of Service Tax Review and Technical Advisor to Excise Law Times. He was associated with Lakshmikumaran & Sridharan for nine years. The author is an Advocate practising independently. The views expressed are personal.