Tax Vista Your weekly tax recap Edn. 14 - 21 September, 2020 By Dr. G. Gokul Kishore

Notional interest on advances - Pre-GST issue gets a fresh lease of life

It is a common business practice for suppliers (manufacturers) to take advance from buyers / customers. The Central Excise administration entertained the belief that only because of such advance, the sale price (in effect assessable value) gets depressed to the extent of notional interest. The argument was, had the advance not been given, the manufacturer would have borrowed funds for an interest from other parties and because the buyer is extending such credit in the form of advance, interest on notional basis was required to be included in the assessable value for excise duty payment. The issue was also intensely litigated and later, Central Excise Valuation Rules were amended to cast the burden on the department to prove with evidence that the advance has influenced price of the goods and in the absence of the same, such notional interest shall not be added to assessable value (Explanation 2 to Rule 6).

This issue is now being given a fresh lease of life in GST regime. The applicant intended to give immovable property on rent and the rental amount agreed was Rs. 18 lakhs per annum (Rs. 1.5 lakhs per month) and a security deposit of Rs. 5 crores was also payable. This deposit is returnable without interest on termination of the agreement. Ruling from Authority for Advance Rulings (AAR) was sought on the question as to whether notional interest on such deposit will be includible in the taxable value for GST purpose.

The AAR perused the pre-GST judgments on this issue and held that if the notional interest on the security deposit influences the value of supply of renting service i.e. monthly rent, then it should be included in the taxable value. But the catch lies in the structuring of the arrangement in this case. The AAR itself noted that the rent agreed is Rs. 18 lakhs only but the security deposit is Rs. 5 crores on which the applicant would be earning interest and the definition of consideration included any amount payable by persons other than recipient of service also. The AAR has pushed the onus on to the applicant to disprove that the interest earned by them on such security deposit has not influenced (depressed) the rent amount. If the fair market value of similar property in the locality is taken as the basis, then answer to this question may emerge.

The AAR also held that property tax would be includible in the taxable value as Section 15 of CGST Act excludes only taxes payable under GST legislations. This is another area of GST law requiring re-look and necessary amendment as statutory levies payable to the government cannot be treated as consideration received by the supplier of service [Midcon Polymers Pvt. Ltd. - 2020-VIL-278-AAR].

Interest on net cash tax liability - CBIC issues instruction to keep past cases in call book

In Tax Vista dated 31st August, 2020, interest on delayed payment of GST in the light of amendment to Section 50 of CGST Act was discussed. In this edition, based on Orissa High Court order in Prasanna Kumar Bisoi v UOI [2020-VIL-402-ORI], it was mentioned that the clarification by way of press release by CBIC on non-recovery of interest (for the period before such amendment) should be helpful for the officer to consign the case to call book but doubt was expressed as to whether call book system of Central Excise has been brought forward to GST regime also. It seems call book system is very much in place in GST regime also.

Notification No. 63/2020-Central Tax brought into force amendment to Section 50 of CGST Act to charge interest only on tax paid by cash from 1st September, 2020. As GST Council has subsequently recommended retrospective effect from 1-7-2017 to such amendment and the same will take some time, CBIC has now instructed its officers to recover interest on delayed payment of tax only on net cash tax liability (excluding ITC) for the past period and the show cause notices issued for the period from 1-7-2017 to 31-8-2020 are to be kept pending in call book for now [CBIC Instruction dated 18-9-2020].

Provisional attachment is illegal when proceedings are not pending

In this column, almost every week, an order of High Court relating to disposal of writ petition filed by the taxpayer against provisional attachment of bank account, is discussed. This week, the order of Punjab & Haryana High Court merits a brief analysis. In this case, premises of the petitioner was visited by GST intelligence officers and later bank account was provisionally attached. After granting a hearing and releasing bank account partly to pay amount towards amnesty scheme, request for releasing bank account was rejected by the department. The petitioner argued before the High Court that for such provisional attachment under Section 83 of CGST Act, proceedings under any one of the provisions viz., Section 62 or Section 63 or Section 64 or Section 67 or Section 73 or Section 74 should be pending and in their case, the search / proceedings under Section 67 was completed and there was no pendency of any proceeding. The department was of the view that provisional attachment will remain in force till proceedings culminate into those under Section 63 or Section 74.

The petitioner relied on Gujarat High Court order in Kushal Ltd. v. UOI [2019-VIL-619-GUJ] wherein it was held that when proceedings under Section 67 were not pending, provisional attachment of bank account was not sustainable. In this case also, the High Court expressed the same view and held that effect of Section 83 will come to an end as soon as proceedings under any of the specified provisions are over. It noted that proceedings under Section 67 (search) were over in the present case and proceedings under Section 63 (best judgment assessment of unregistered persons) or Section 74 (Demand involving extended period) have not been initiated [UFV India Global Education v. UOI - 2020-VIL-440-P&H].

This order along with Gujarat HC order should provide some comfort to persons who are facing similar situation. The department may confront by stating that proceedings under Section 67 (search and seizure) have not been completed. But the search and seizure operation under Section 67 cannot be continued for several months even while bank account remains frozen crippling business operations.

Provisional attachment without backing of statutory provision

Based on investigation against an exporter on the suspicion of claiming ineligible IGST refund, the person in whose bank account the refund amount was deposited, was proceeded against by freezing his bank account. As writ petition is the only remedy against such action, the same was filed. The Bombay High Court noted departmental counsel's concession on defreezing the account and ordered the officers to defreeze the same. But it took note of the fact that Section 110(5) of Customs Act has been invoked in this case and this provision was inserted from 1-8-2019 while the freezing of bank account was made on 7-12-2018 and therefore, such provision may not be applicable. It further observed that even as per this provision, such attachment can remain in force for six months only and the same expired long back and even if specified senior officer had extended it by another six months, the same would have also lapsed by now [Sai Enterprise v. UOI - 2020-VIL-447-BOM].

It is not clear why Customs Act is being invoked when IGST refund is alleged as wrongly claimed. Such refund on zero rated supplies is covered by IGST Act read with CGST Act and CGST Rules as applicable to such refund. Such questions may lead to the more complicated issue as to whether IGST is a GST levy or Customs levy. It appears that the department considers it as Customs levy when Customs officers book cases invoking provisions of Customs Act and it is treated as GST when GST officers investigate and register cases.

Seized documents - HC upholds department's refusal to provide copy

Section 67 of CGST Act empowers the tax authorities to seize goods, documents, books or things. Sub-section (5) of Section 67 grants the right of taking copies of seized documents to the person from whom such seizure was made. But, if in the opinion of the officer, providing copies or taking extract may prejudicially affect the investigation, copies need not be given. Using such power, in a recent case, copies of seized documents were not provided to the taxpayer. The taxpayer filed writ petition in High Court. The Court took note of the fact that the petitioner did not provide certain documents (which were not seized) and the discretion exercised by the officer was judicious. It held that the apprehension of the department that when certain documents were with the petitioner, providing copies of seized documents may enable him to carry out interpolations so as to reduce liability, was reasonable [Agrawal Oil Mill v. State of M.P. - 2020-VIL-450-MP].

Courts generally favour taxpayers when rights like copies of documents are violated. But, the overall facts and conduct play a vital role when the taxpayer seeks to exercise such rights. If the conduct gives an impression that something is being avoided and the same is likely to lead to leakage of revenue, then writ courts do not provide any relief.

E-way bill - Value to be considered after discount

E-way bill is required for movement of goods when the consignment value is more than Rs. 50,000. Goods with value of more than Rs. 4 lakhs were transported but detained by GST authorities on the ground that e-way bill was absent. The invoice showed value of Rs. 8.99 after discount i.e. virtually the entire goods were sold (given) free. Because the net amount was less than Rs. 50,000, the Kerala High Court held that detention was not sustainable and ordered release of goods and the vehicle [Best Sellers (Cochin) Pvt. Ltd. v. Asst. State Tax Officer - 2020-VIL-455-KER].

Rule 138 of CGST Rules states that consignment value for e-way bill purpose will be the value as determined under Section 15 of CGST Act. Section 15 expressly allows deduction / exclusion of discounts which are allowed before or at the time of supply and which are reflected in the invoice. The detention must have been occasioned due to the wide variation in the actual value of the consignment and the net amount shown in the invoice. Sometimes, it is the practice to show nominal value in the invoice even when the goods are given almost free so as to retain input tax credit.

Landfill pit for waste management - ITC not available

For solid waste management, certain construction is undertaken in pits and the waste is dumped in such pit and closed permanently so that the waste gets decomposed. The applicant in the business of waste management and disposal constructs such landfill pits and uses goods like cement, steel etc., and services like consulting engineer and other professional services. As the outward supply of service of waste management and disposal is dependent on such landfill pit, advance ruling was sought as to whether input tax credit would be admissible on such goods and services. The applicant argued that such goods and services which go into making landfill pit are used for providing output service and the landfill pit is in the nature of apparatus and is covered under "plant and machinery" and is not a civil structure.

The embargo on ITC relating to construction of immovable property in this case arises from Section 17(5)(d) as it prohibits credit on goods or services or both used for construction of immovable property on his own account. The only exclusion from such prohibition pertains to construction relating to plant and machinery. The expression "plant and machinery" excludes civil structure. The Advance Rulings Authority (AAR) held that the applicant has constructed the pits on his own account and that the same is a combination of earth work and capital goods and it cannot be identified as apparatus, equipment or machinery fixed to earth by foundation and it is not a structural support either. It further observed that the applicant had performed civil work to create such landfill pits below the ground and therefore, it is a civil structure. Once it is held as construction of immovable property on own account and the pit is not covered by plant and machinery, ITC becomes ineligible [Mother Earth Environ Tech Pvt. Ltd. - 2020-VIL-274-AAR].

Section 17(5)(d) is part of the statutory scheme on ITC whereby credits are restricted when they are relatable to immovable property. The rationale for such bar in the GST regime appears to be less clear particularly when such property is used for providing an output taxable service. If the business itself is dependent on such immovable property and but for this property, the service cannot be provided, then denial of credit through such provisions is not in line with the spirit of GST. If credit is not allowed in such situations, tax cost on inward supplies gets built in the outward supply, pushing the cost of the service. A re-look at these restrictions is certainly required.

SVLDRS - Appeal in part can be withdrawn

The Supreme Court has allowed taxpayer, who is in appeal, to withdraw excise portion of an appeal comprising customs component also. The withdrawal request came in the backdrop of opting for Sabka Vishwas (Legacy Dispute Resolution) Scheme in so far as the dispute relating to excise duty is concerned. The department objected on the ground that if such withdrawal is allowed, appeal itself will not survive as what would be left is redemption fine and penalty only. But the Apex Court said such objection can be voiced when the appeal for customs part is taken up for hearing. It said such objection is not maintainable particularly when the appellant is not seeking any benefit from the Court based on such withdrawal. Even withdrawal of dispute is disputed by the department and the Apex Court has to provide relief to the taxpayer [Sterlite Optical Technologies Ltd. v. CC - 2020-VIL-31-SC-CE].

JDGFT not empowered to review his own order

Despite Indian tax and regulatory statutes conferring quasi-judicial powers on administrative authorities whereby they can decide disputes and pass orders casting liability on persons concerned, exercise of such powers has always been subject of controversy. When an officer passing an order cannot review his own order, he proceeds to review such order and that too after around 10 years. The person concerned is an exporter and he had to seek relief from High Court. The Madras High Court has held that as per Section 16 of Foreign (Trade & Development) Regulation Act, 1992, Joint DGFT has no powers to review his own orders as the provision conferred such power of review on an officer senior in the hierarchy. Also, the time-limit for such review is two years as per this provision and therefore, even on limitation, such proceeding was held as not sustainable. The petitioner had fulfilled export obligation under EPCG licenses and had obtained EODC around ten years ago and the same was sought to be reviewed [Simplex Infrastructures Ltd. v. UOI - 2020-VIL-446-MAD-CU].

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