Tax Vista Your weekly tax recap Edn. 22 - 16 November, 2020 By Dr. G. Gokul Kishore

Interrogation by GST authorities - Presence of Advocate beyond hearing range, allowed

In a case similar to scenes from a movie, the taxpayer alleged that he was physically assaulted during investigations and search operations by GST Intelligence agency and he had to get himself admitted in hospital and he was coerced into making statements and payment of certain amount. The GST authorities argued that the officers had to endure violence unleashed by the taxpayer and that the taxpayer was alleged to have involved himself in large scale tax evasion.

The Telangana High Court took note of the conflicting versions and in respect of department's counter to reject the hospital episode, it said "Though the respondents seek to suggest that such evidence procured by the petitioners ought to be disbelieved by us because Sunshine Hospital is a 'private hospital' and not a Government Hospital, we do not agree with such contention because there is no presumption in law that Doctors in private hospitals do not speak the truth and only Government doctors speak the truth. An injured person is likely to go the nearest available hospital for treatment instead of searching for a Government hospital at that juncture."

The taxpayer-petitioner had made a call to the police two hours before the department officers got an FIR registered and this has been mentioned by the High Court to state that prima facie such evidence suggested possibility of use of violence by the officers against the petitioner. The Court also said that it is not unusual for the police to refuse to register any complaint against government officials.

Investigations are not complete without midnight drama and in this case also, the officials issued summons at midnight directing the taxpayer to appear before them past midnight. After expressing surprise at such direction to appear at "ungodly hour of 00.30 hours", the Court said "What was so important to be recorded at such a time, which cannot wait till the morning of 12.12.2019, is not disclosed by the respondents." Placing reliance on Supreme Court judgments, the High Court termed prolonged interrogation by officers as prima facie amounting to deprivation of liberty of the taxpayer. According to it "In our opinion, the respondents cannot contend that they will interrogate the persons suspected of committing any tax evasion as per their sweet will forcibly keeping them in their custody for indefinite period."

While the department vehemently objected to petitioner's plea for presence of Advocate during recording of statements, etc., (mainly relying on Poolpandi judgment - 1992-VIL-13-SC-CU), the High Court relied on other cases and permitted presence of Advocate though not in hearing range. Covid-19 pandemic has been taken as a factor to issue direction to question officials of the taxpayer-company locally (in Hyderabad) without compelling them to travel to New Delhi [Agarwal Foundries Pvt. Ltd. v. Union of India - 2020-VIL-540-TEL].

New tax system, pandemic induced slowdown, revenue pressures, usual suspicion over evasion-prone commodities like iron and steel - all these make a heady concoction to stir up the mind and body of both the taxpayers and the tax officers. It has always been the Courts which have drawn the line and endeavoured to bring the elusive balance.

Detention and seizure of goods sold while in transit - High Court lays down the rule

Detention and seizure have become the order of the day under GST particularly when e-way bill or invoice has either discrepancy or minor error. The Telangana High Court has laid down the rules for such detention and seizure of goods or conveyance - first, authorities should look at the nature of contravention and secondly, whether contravention was with the intention to evade payment of tax is to be seen. Distinction should be made between serious violations and minor / procedural errors.

The above was in the context of the case before it wherein goods after purchase and after being handed over to transporter was sold by the first buyer to another party (second buyer) and the vehicle was diverted to the job worker's site of the second buyer. The goods were loaded on Republic Day and the next day, the first buyer raised tax invoice on the second buyer and also e-way bill. The second buyer also issued delivery challan for transportation to job worker's site. Taking note of such facts, the High Court said "It is not as if when goods are in transit there is a prohibition of their sale by the purchaser to a third party. In fact, the court can take judicial notice that it is quite a common thing and a well-recognized trade practice." As per the High Court, mere omission to disclose place of unloading cannot raise the presumption of intention to evade tax.

The High Court termed the department's contention that the petitioner did not allege that payment of tax and penalty was under compulsion as absurd and it directed refund of amount collected as penalty along with interest [Sree Rama Steels v. Deputy State Tax Officer - 2020-VIL-541-TEL].

CBIC Circular dated 14-9-2018 on the imposing of penalties in respect of e-way bill errors was also noted by the High Court in this case. The circular itself needs to be updated based on numerous judgments from various High Courts on e-way bill related issues.

Provisional attachment - Mechanical exercise of power and malice in law

Provisional attachment of bank account is resorted to by the GST authorities in increasing number of cases. When the numbers increase, due diligence becomes a casualty. Neither mind is applied properly nor evidence gathered before exercising such powers. More importantly, the orders passed for such purpose disclose no reason. In one such case before Gujarat High Court, the government side itself agreed that the order is bereft of reason and the file did not contain anything to assist the Court on the reasonable belief formed by the authority. The Court set aside such provisional attachment but not before elaborating on the importance of formation of opinion based on material by the Commissioner.

Interpreting "may" in Section 83 of CGST Act, it held that it not only indicated discretion but also an obligation to consider that a necessity has arisen to pass such order. Relying on various Apex Court rulings on existence of material to form reasonable belief while sufficiency cannot be questioned by courts, the High Court held that "formation of the opinion by the authority should reflect intense application of mind with reference to the material available on record that it had become necessary to order provisional attachment of the goods or the bank account or other articles which may be useful or relevant to any proceedings under the Act."

If the material is absent, then the action taken amounts to malice in law. The judgment notes "In the absence of any cogent or credible material, if the subjective satisfaction is arrived at by the authority concerned for the purpose of passing an order of provisional attachment under Section 83 of the Act, then such action amounts to malice in law. Malice in its legal sense means such malice as may be assumed from the doing of a wrongful act intentionally but also without just cause or excuse or for want of reasonable or probably cause. Any use of discretionary power exercised for an unauthorized purpose amounts to malice in law. It is immaterial whether the authority acted in good faith or bad faith." [Jay Ambey Filament Pvt. Ltd. v. Union of India - 2020-VIL-544-GUJ.]

The Court also took note of its own judgment in Valerius Industries v. UOI [2019-VIL-443-GUJ]. Large amount of jurisprudence is being laid down under GST on exercise of drastic powers like provisional attachment, detention, search and seizure. While the tax administration may not be very much interested, lawyers and law students will certainly be.

ITC availed beyond prescribed time - Can credit ledger be blocked?
Rule 86A was introduced in CGST Rules empowering the department to restrict utilisation of input tax credit ledger based on reasonable belief of such credit being availed fraudulently. The situations mentioned in this rule does not cover, per se, credit availed beyond the time-limit prescribed. It appears the department blocked the credit ledger of the taxpayer because return for March, 2019 was filed in December, 2019 and credit could not have been availed beyond the time-limit as per Section 16(4) of CGST Act. The taxpayer went to High Court arguing that as per Rule 86A, reasons should be provided for blocking but the e-mail from the department did not provide the same. Based on the submission of the department that the representation of the taxpayer would be considered, the High Court did not express opinion on merits [Urbanize Developers India Pvt. Ltd. v. Asst. Commissioner - 2020-VIL-545-KAR].

It is doubtful whether Rule 86A is invocable at all in this case. A normal show cause notice seeking reversal of such time-barred credit along with interest should have been the recourse for the department. Rule 86A specifies credit availed based on document issued by ghost assessee (non-existent), credit availed without receipt of goods or services, credit availed without paying the tax, credit-availing taxpayer being non-existent in the place for which registration was taken and not having invoice or debit note. On the face of it, the provision does not cover credit availed beyond the time-limit.

Housing society liable to pay GST - Principle of mutuality not applicable

The Appellate Authority for Advance Rulings (AAAR), Maharashtra has upheld the advance ruling passed by AAR by reiterating that cooperative housing society is liable to pay GST as the activities carried out would be covered under "supply". As per the ruling, the society collects various amounts towards water charges, common electricity, property tax, contribution to repair and maintenance fund, car parking charges, etc. The ruling as such may not be surprising as the department has been holding such view under GST. The distinctive element of this ruling lies in relatively elaborate discussions on why principle of mutuality will not apply under GST.

According to the AAAR, the activities performed by the appellant are towards providing benefits, facilities or convenience to its members and they would be covered under the term "business" as per Section 2(17)(e) of CGST Act which covers provision of facilities or benefits by a club, association or society to its members. Considering the wide nature of the definition of supply in GST law, the activities of the appellant would be covered under 'service' as the definition of the same is also very wide.

The ruling holds "the Appellant is undertaking various sorts of activities, which inter-alia includes the management, maintenance, administration of the society property, payment of various statutory taxes like payment of electricity bill of the common area of the society, water tax levied by the local authority, etc. along with organising various social, cultural, and recreational events for the members of the society against the contribution called "society charges", which can reasonably be construed as "consideration" in terms of Section 2(31) of the CGST Act, 2017. Thus, looking at all these activities undertaken by the Appellant for the benefits of its members, it is clear (sic) beyond doubt that under the provisions of the CGST Act, 2017, the Appellant is doing "business" in terms of its definition provided under Clause (e) of Section 2(17) the CGST Act, 2017. Since, the Appellant is providing services to its members against the consideration, named as 'society charges' in the course or furtherance of business, therefore, the activities would be construed as "supply" in terms of Section 7(1)(a) of the CGST Act, 2017, and accordingly will be liable for GST."

The Supreme Court judgment in State of West Bengal v. Calcutta Club [2019-VIL-34-SC-ST] has been distinguished on the ground that the same was rendered under Sales Tax provisions which were entirely different from GST provisions. The AAAR notes "it is essentially observed that both the amendments, i.e. amendment made in the Article 366(29-A) of the Constitution, and that made in the Finance Act, 1994 w.e.f. 1st July, 2012. were inadequate in doing away with the principle of mutuality and the deeming provisions fell short of taxing sales or service by incorporated clubs. But such is not the case under the CGST Act, 2017." In this context, the definition of "person" in Section 2(84) of CGST Act including both incorporated and unincorporated bodies has been highlighted. The word "club" used in the definition of "business" is not qualified (incorporated or otherwise) and therefore, it includes both. The legislative intention was to do away with principle of mutuality under GST as per this ruling.

The ruling takes note of exemption for services by unincorporated body or non-profit registered entity to own members in respect of reimbursement of charges upto Rs. 7500 per month as per Notification No. 12/2017-Central Tax (Rate) (as amended) to hold that such exemption limit would not include statutory dues like property tax, water tax, electricity charges, etc. collected by the society on behalf of its members [Apsara Co-operative Housing Society Ltd. - 2020-VIL-67-AAAR].

The issue is quite big and complicated. The ruling is eloquent on "business", "person", etc., but does not elaborate whether the charges collected by the society can be brought under "consideration". When Constitutional amendments could not dislodge principle of mutuality, AAAR has ventured in this direction. It is for the higher courts to approve or disapprove such venture.

Foreign company providing service through sub-contractor but having branch office in India - AAAR modifies advance ruling

In Tax Vista dated 6 July, 2020, the advance ruling by West Bengal AAR holding the Indian branch office of foreign company as liable to GST for services provided under maintenance and repair contract (MARC), was discussed. The Appellate Authority for Advance Rulings (AAAR) has overruled the same on the ground that branch office cannot be a fixed establishment since the definition in IGST Act excludes registered place of business from such term and that such branch office was established in 2018 whereas services were being provided from 2015 itself. The AAAR has also noted that the advance ruling does not contain any finding to conclude that the branch office in India maintains suitable structure in terms of human and technical services to provide services. MARC has been entered between the foreign company and the Indian service recipient and the services were being provided through a sub-contractor by the foreign company, as per the ruling. The conditions for import of service are satisfied in this case, thus making the service recipient in India as liable to GST under reverse charge mechanism [IZ- Kartex named after P.G. Korobkov Ltd. - 2020-VIL-68-AAAR].

The AAAR's ruling is not elaborate compared to the advance ruling. The advance ruling had analysed the contract clauses like the contract being a long term one for 17 years, the MARC holder being responsible for supply of spares over the contract period, deputation of experts to the site for maintenance and repair and payment being based on 5000 expected working hours in a year. It had held that the MARC holder has been maintaining suitable resources in terms of human and technical resources at the site of the Indian company.

The missing factual link between the advance ruling and the present appellate advance ruling appears to be the involvement of or role of sub-contractor and mere deputation of personnel by foreign company for supervision alone. However, it is not clear as to how a foreign company can fulfil contractual obligations for 17 years without having any presence whatsoever in India. In the Tax Vista dated 6 July, 2020, it was noted "For purposes of income tax, period of stay/activity/ terms of DTAA are important factors to determine creation of PE whereas GST law does not prescribe the same." Probably, the answer to such complex issues lies in appropriate amendments.

Diwali special - Sparklers and crackers of notifications

On 10-11-2020 just a few days before Diwali, CBIC issued several notifications. Last numbered notification deserves to be mentioned first. Notification No. 88/2020 - Central Tax amends Notification No. 13/2020-Central Tax from 1-1-2021. As per this amendment, taxpayers with turnover of more than Rs. 100 crores will be mandatorily covered under e-invoicing system. At present this limit is Rs. 500 crores and above. The reason for such change could be either the e-invoicing system has stabilised or taxpayers have become more tech-savvy.

By Notification No. 82/2020 - Central Tax, CGST Rules have been amended. Rule 59 is being substituted from 1-1-2021 and it essentially provides for new system for quarterly return filers of GSTR -1 return (small taxpayers with less than Rs. 1.5 crore turnover filing outward supply return). It seeks to implement Invoice Furnishing Facility (IFF) for such taxpayers for the first two months of a quarter. Simplification is substitution of one compliance with another.

By the above notification, New Rule 60 is being substituted from 1-1-2021 providing for GSTR-2A and also new GSTR-2B which is the Input Tax Credit (ITC) Statement. This will made available to taxpayers after being auto-populated. While GSTR-2A also provides similar information, it is generated on real-time basis whereas GSTR-2B is a static statement which will be provided once in a month. GSTR-2B, GSTR-2A and accounts maintained by taxpayer are required to be reconciled before availing ITC.

Rule 61 is being amended now and later from 1-1-2021 it will be replaced (substituted) with new Rule 61. The changes are meant to provide due date for filing GSTR-3B as 22nd of the following month for taxpayers with turnover upto Rs. 5 crore turnover with principal place of business in Southern and Western States / parts of the country and 24th of the following month for such taxpayers with PPOB in Northern and Eastern States / parts of the country. For taxpayers with turnover more than Rs. 5 crores, the due date for filing GSTR-3B will be 20th as at present. The new Rule 61 further seeks to provide for quarterly filing of GSTR-3B by such small taxpayers but they have to pay tax on monthly basis.

New Rule 61A explains how quarterly return shall be filed by small taxpayers. By these amendments, GSTR-3B has been made a permanent return instead of GSTR-3 (as initially planned at the time of introduction of GST).

Notification No. 83/2020-Central Tax supersedes Notification No. 74/2020-Central Tax (providing for due date for quarterly GSTR-1). This will be effective from 1-1-2021. This notification seeks to make 11th of the following month as due date for filing GSTR-1 on a permanent basis - till now, notifications are issued from time to time for such purpose.

Notification No. 84/2020-Central Tax provides for conditions and procedures in respect of quarterly return filers. Notification No. 85/2020-Central Tax prescribes the quantum of tax payment on monthly basis for the first two months in a quarter by those taxpayers who are eligible for and who opt for quarterly filing of returns. CBIC has also issued Circular No. 143 explaining elaborately on how to opt for such facility and how to compute the quantum of tax payable, etc.

Notification No. 86/2020-Central Tax rescinds Notification No. 76/2020-Central Tax which provides for due date for filing GSTR-3B for the months from October to March since the necessary changes have been made in the CGST Rules. The due date for filing job work statement in ITC-04 for the quarter July to September has been extended from 25th October to 30th November, 2020 by Notification No. 87/2020-Central Tax.

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