Tax Vista Your weekly tax recap Edn. 31 - 18 January 2021 By Dr. G. Gokul Kishore

Provisional attachment illegal when proceeding not pending

Provisional attachment of property including bank account can be made under Section 83 of CGST Act if proceedings are pending under specified provisions. Section 71 provides for access to business premises of taxpayers by departmental officers and this provision is not mentioned in Section 83. In a recent case, the department has attached provisionally bank account of the taxpayer on the ground that proceedings have been initiated under Section 71. The High Court held that such attachment is illegal and not sustainable as proceedings under the provisions specified in Section 83 were not pending. While the department may initiate proceedings under the specified provision again and again resort to such drastic powers, invocation of extreme powers despite numerous judgments in recent times reveals the urge to use police powers often and it should be restrained by CBIC through appropriate instructions [2021-VIL-25-DEL].

Penalty for e-way bill omission cannot exceed Rs. 10,000 if tax is already paid

It is quite common to see orders of High Court whereby penalty equivalent to tax amount is contested in disputes related to e-way bill related omissions. In a recent case before Tripura High Court, the petitioner challenged the action seeking to impose penalty equivalent to tax. The mistake was not carrying an updated e-way bill as the earlier e-way bill lapsed due to vehicle being stranded and later break-down during the lockdown period and the portal not supporting generation or updation of such e-way bill.

Section 122(xiv) of CGST Act provides for penalty when goods are transported without the cover of specified documents. The quantum of penalty is Rs. 10,000 or the tax evaded, whichever is higher. In the present case, the tax was reportedly paid and therefore, the High Court held that the authority exceeded his jurisdiction in imposing penalty equal to tax. The penalty could be Rs. 10,000 in such case, as per the High Court. This order should be an eye-opener in similar cases as tax amount is routinely demanded even when the same gets paid through regular returns during the pendency of such proceedings [2021-VIL-29-TRI].

Canteen recovery from employees liable to GST but ITC not available

The issue, model and arguments are as per template of industry practice. The issue is applicability of GST on recovery from salary of a portion of food expenses incurred in providing food in factory canteen maintained as per Factories Act. The model is third party contractor provides food to employees in the canteen and such service provider is paid by the company. The arguments of the applicant / taxpayer are - running canteen is not their business but only a facility provided, the activity is not covered under supply as it is not in the course or furtherance of business, maintenance of canteen is mandatory requirement and profit element is absent.

The ruling cannot be different if all the above are same. The AAR has held that as per definition of the term "business", "it can be safely concluded that the supply of food by the applicant to its employees would definitely come under clause (b) of Section 2(17) as a transaction incidental or ancillary to the main business." There is a supply, the applicant is covered under supplier and recovery of cost of food is consideration, as per the ruling. Surprisingly, the ruling places reliance on "outward supply" as per Section 2(83) of CGST Act instead of the definition of "supply" contained in Section 7 [2021-VIL-36-AAR].

As noted below in respect of notice pay recovery, on this issue also, companies have opted for different model in their endeavour to be tax efficient and also compliant. However, compelling the industry to revise normal business practices only because of tax considerations is not the GST the country wished for.

In a related ruling, the AAR has held that input tax credit will not be available in respect of GST paid to the canteen contractor on the ground that the applicant is engaged in the business of manufacture and not in the business of provision of catering. It has also held that because provision of canteen is mandatory as per Factories Act, it does not mean the same is in the course or furtherance of business. The AAR has also restrictively interpreted the provision relating to credit admissibility when something is obligatory for an employer to provide to employees. When it comes to liability, canteen recovery is taxable but when the question of ITC is raised, then it is held as not related to business [2021-VIL-61-AAR].

Inter-State stock transfer - Any value can be adopted if recipient is entitled to ITC

The question posed to AAR was the method / rule to be adopted for valuation of goods transferred (supplied) to depots / units in different States. The applicant has been adopting open market value which is near about the sale price adopted by depot for sale to ultimate customer. But such method resulted in accumulation of input tax credit at the receiving depots / units / branches and therefore, they sought to know whether they can adopt reduced or zero value for such stock transfers. The AAR relied on its earlier ruling and held that the applicant may adopt any one of the three methods provided in Rule 28 of CGST Rules viz., open market value or 90% of the sale price adopted for ultimate sale to unrelated buyers or invoice value which is deemed as open market value as the supplies in this case are between distinct persons. Though the AAR has not specifically approved adoption of reduced or zero value, it appears it has indirectly held the same to be as per law. This is a major industry-wide issue. The department may not share such view and may contest the same [2021-VIL-60-AAR].

Notice pay is liable to GST

Instances may be far and few, but notice pay recovery is a pain point for taxpayers. To ensure that the employee does not quit abruptly impacting operations adversely, employment contract normally provides for notice period requiring both the employer and employee to give notice in advance if a decision is taken to oust the employee or if the employee decides to quit. If such notice period is not served and the employment contract is terminated abruptly by the employee, then deduction (as agreed) is made from salary and other amounts payable to such outgoing employee. The applicant before the AAR argued that the employer can only sue for recovery of the amount but cannot enforce mandatory serving of notice period and therefore, employer cannot be considered as having refrained from the act of suing the employee. Therefore, according to the applicant, such activity is not covered under Schedule-II entry on agreeing to refrain from an act or tolerate an act or situation and notice pay is not a consideration.

The AAR rejected the contention and held that notice pay is the amount prescribed in the employment contract for breach in serving the stipulated period and it can be regarded as a consideration for tolerating an act. It held that the agreement of the employer to let go an employee without serving the prescribed period against recovery of the sum termed as notice pay would be covered under toleration of an act as per CGST Act and it would be liable to GST. The applicant had relied on precedents, but they have been held as inapplicable on the ground that they pertained to service tax [2021-VIL-34-AAR].

Considering the dispute surrounding this issue, many taxpayers have either stopped recovering notice pay or started paying GST on the same as ITC of the same would be available. But such decision is possible as the stakes involved are generally lesser and the instances of invoking such clause in employment contract are not very many.

Electricity charges recovered by landlord when cannot form part of taxable value

The above heading has been given because the AAR in this ruling has repeatedly stated that the decision is applicable only in respect of the facts, agreement, etc., before it and it would not apply to a different agreement or circumstances. Despite the disclaimer, the ruling is certain to raise eyebrows because the applicant is the landlord of CGST Commissionerate and such applicant was of the view that electricity charges recovered from GST office are in the nature of incidental expenses, liable to be included in taxable value as per Section 15 of CGST Act.

The AAR noted that in terms of the agreement, the consideration regarding rent included internal infrastructure but not electricity charges and therefore, the agreement had no provision for supplier to incur any incidental expense. The electricity charges are to be recovered from the lessee as per actual usage only. Based on these two factors it held that value of supply would be the amount agreed for renting of the property alone.

The AAR observed that as per the lease agreement, the onus to pay electricity charges is on the lessee (GST office) but the applicant has not provided separate meter for the lessee and based on sub-meter reading, these charges are recovered from the lessee and paid to the electricity company by the applicant. This has been highlighted to hold that the transaction would be covered under pure agent concept as per Rule 33 of CGST Rules. The ruling states - "the agreement contains an inbuilt clause of actual payment of electric charges by the lessee directly to the electric company. However, due to lack of infrastructure on the part of the lessor, there is a silent agreement between both the parties that the applicant will collect the actual usage charges on the basis of the reading of the sub-meter and in-turn pay the same to the electric company. Since this arrangement has been on-going since such a long time, it can be clearly said that there is a mutual understanding between both the parties and such mutual understanding is also an called an 'agreement' in terms of the provisions of the Indian Contract Act." [2021-VIL-41-AAR].

Even if conditions for pure agent are not satisfied, by using terms like "silent agreement", ongoing arrangement for a long time, "mutual understanding", etc., the ruling has sought to cover the transaction under pure agent concept. Instead of seeking clarification from CBIC, the lessee-GST Commissionerate has refused to pay GST on value including electricity charges. GST office does not have any sovereign immunity. Unless such exclusion is expressly provided for in the statute or the conditions prescribed are satisfied or such issue is clarified by the tax administration, it cannot "instruct" the taxpayer not to include such charges in the taxable value.

GST payable on amount including salary by employment agency

GST is payable on salary and wages also. This one-liner may be shocking but according to the Authority for Advance Rulings (AAR), this is what the law requires. The applicant is a society acting as a bridge between the unemployed and the companies having requirement of security guards. The applicant pays salary to such guards employed by the companies. Besides recovering the salary cost, an amount equivalent to 12% of the salary is also charged from the companies to meet administrative and establishment expenses of the applicant-society. Ruling was sought on whether GST is payable on the entire amount including salary or only on the amount charged towards administrative expenses. The Gujarat AAR has held that Section 15 of CGST Act is clear about inclusions and exclusions and definition of consideration includes any payment made or to be made. Therefore, in the present case, consideration would include the entire payment received by the applicant from their clients and GST would be payable on the amount including salary [2021-VIL-09-AAR].

From service tax regime, this issue has been raging but the tax administration has not taken any effort to address the same. The applicant has cited landmark rulings, but the AAR has rejected all of them on the ground that they pertain to service tax. One of the arguments taken in such cases is to place reliance on pure agent concept but this is artificial and not a real solution to this problem of taxing salary under GST. There has to be an express exclusion in Section 15 to exclude salary and wages, may be couched in appropriate language to avoid misuse.

Sale of outlet is supply of goods

Tea may be invigorating to the drinkers but not to taxpayers, as the advance ruling reveals. A particular brand of tea chain has a business model whereby a place is taken on rent, it is developed, and the establishment is run for some time and then sold to a third party. The question raised before AAR was whether this can be treated as transfer of going concern (in part). The AAR replied in the negative. It held that the applicant neither rents out nor owns the premises and what is provided is only equipment and infrastructure and therefore, it is supply of goods. To arrive at such conclusion, the AAR has referred to entries in Schedule-II of CGST Act relating to transfer of business assets.

Transfer of only one outlet is not transfer of ongoing concern "as a whole", as per the ruling. Interesting observation of the AAR can be seen in para 20.2 - "the transaction is also not covered under the clause "transfer of a going concern as an independent part thereof". Independent part of a firm would be a distinct business vertical and not the same vertical of which a certain portion has been transferred to other entity. The applicant is engaged in the business of running outlets in the name of 'Teapost' and the business activity is one and only one but is merely having more than one branches for the same business. A branch of the same business vertical can be by no stretch of imagination considered as an independent part of the concern." [2021-VIL-17-AAR].

Therefore, according to the AAR, "independent" means something different and not the same. If a company hives off plant-A and retains plant-B, both manufacturing the same product, then according to this ruling, it is not transfer of going concern. The obvious fallacy apart, inserting such condition of different business vertical in the provisions is impermissible.

Forfeiture of part consideration for sale of land, liable to GST

Consideration is received, in part as advance, for sale of land and the intending purchaser is not able to conclude the transaction. The amount paid in part is forfeited by the purchaser and retained by the seller as per the terms of the agreement. In view of these facts, the applicant argued that the amount is related to sale of land and therefore, it should be out of GST levy. The AAR did not agree. It held that as per the terms, the activity of forfeiture does not involve sale of land and the amount received is not on account of sale of land but for non-fulfilment of conditions in the agreement. The amount not being for sale of land but due to breach of condition of contract, will be taxable under "agreeing to tolerate an act or situation" as a supply of service. The ruling notes - "The purpose of payment of amount is an act of tolerance in the sense that when there is breach of the contract, the appellant is put to certain hardships, which he tolerates in return of the payment received as advance being forfeited." [2021-VIL-19-AAR].

Interest charged for delay in delivery liable to GST

Agreeing to the obligation to tolerate an act is a controversial issue in GST as amount paid for the same are in the nature of damages, charges for breach of conditions or ensuring there is no breach. The issue of liability to GST of such amount - called liquidated damages, penalty or compensation - is not yet free from doubt. However, it appears the applicant before AAR did not have any such issue. The applicant was of the view that the amount recovered as interest for delay in delivery of milled rice by millers who take paddy from the applicant, would be liable to GST as per relevant entry on agreeing to tolerate an act as provided in Schedule-II of CGST Act. The AAR agreed. It noted the submission of the applicant that there is a written contract between the millers and the applicant, the miller obtains the benefit of enhanced time for delivery on payment of interest and the applicant is tolerating the act of delay in delivery without taking recourse to legal remedies [2021-VIL-56-AAR].

The ruling is very brief without any discussion on consideration, supply, etc. Discussion became rather unnecessary in such case when the applicant has admitted liability. But in such a situation, it is not known why advance ruling was sought. The applicant being a State-owned warehousing corporation could not have been under the obligation to obtain such ruling based on request by millers / parties.

Group companies in different countries are establishments of a distinct person - Export of service benefit not available

The applicant providing textile and graphic printing products undertook installation, upgradation and training services in India to customers of a foreign supplier. The applicant is a subsidiary of the foreign supplier. Unbundling the applicant's concrete faith that his services (a) did not amount to composite supply (b) the recipient of supply was the supplier outside India (c) he was not an intermediary and (d) services had been exported, the AAR ruled against the applicant. As per the facts in the ruling, the applicant and foreign supplier appear to be entities of the same group with a common parent entity. However, the AAR ruled that the two are merely establishments of a distinct person and hence one of the conditions for export of service, as prescribed in IGST Act, is not satisfied. It is not clear why two entities who are separate legal persons have been treated as equivalent to a branch or representational office.

The fact that the applicant charged separately for installation services, travel and overtime was interpreted as provision of more than one service and each being in conjunction with one another though the consideration paid was in terms of hourly rate. The AAR went on to hold that the customer in India and the foreign supplier are not capable of being separated and hence the argument that the overseas entity is the recipient of service being the person liable to pay consideration, is not correct but the customer in India is the service recipient. Also fortifying the conclusion that the place of supply is India, the AAR ruled that the applicant is an intermediary since the services provided by him are in nature of facilitating supply of services by the foreign party and is acting on their behalf [2021-VIL-46-AAR].

Elaborate arguments have been marshalled by the applicant but the AAR did not find merit in them. Recovery of separate charges is taken erroneously as provision of multiple services and even when foreign party pays consideration for the service, the Indian party is held as service recipient by adopting not-so-sound reasoning.

Jetty is not foundation of plant and machinery - ITC not available

The applicant sought to know admissibility of input tax credit (ITC) on jetties constructed at the port for handling liquified natural gas (LNG). It was contended that such jetties would be covered under "foundation" for plant and machinery as the Floating Storage and Regassification Unit (FSRU) will be installed with the support of jetty and therefore, ITC would be available as per the definition of plant and machinery under Section 17 of CGST Act. The AAR has noted that normally, jetty structure is used to berth the vessels alongside and it affords them a working platform and can also be called a landing stage at which boats can dock or be moored whereas in the present case, the jetties are for the purpose of installation of plant and machinery on it. These jetties are civil structures or immovable property constructed on pillars or plinths extending from seashore to deep sea and are not treatable as "foundation". Once such view is taken, ITC becomes inadmissible. The issue is highly contentious and factual, and it is for the judiciary to clear the air on such issues, as and when agitated before it.

The major slip in the ruling pertains to rejection of credit on various goods by adopting the interpretation that plant and machinery should be located within the factory premises if ITC is to be availed. Location outside factory premises places the bar on ITC only on pipelines but reading such words as applicable to all plant and machinery may not be the correct interpretation and may not pass judiciary scrutiny [2021-VIL-24-AAR].

Taxability of services provided by head office to branch offices

For airlines, keeping the aircraft under perfect running condition is of paramount importance, particularly considering the competition, margins and other complexities involved. One of the major airlines sought advance ruling on the question of GST applicability in respect of recovery of charges by head office from branch offices towards maintenance and maintenance related services and also spares provided. The Authority for Advance Rulings (AAR) has held that provision of maintenance services and spares procured by head office to branch offices both having separate GST registration would be a taxable supply.

It appears from the facts presented in the ruling that the head office recovered a mark-up over cost and had exclusive agreement with the branch offices (19 in number) to ensure maintenance and the applicant contended that the recoveries were only part of internal reporting system (MIS) and not supply per se. However, the AAR held that the transaction between two distinct persons - HO and BO would qualify as taxable supply. The other question posed to the AAR pertained to mechanism of availing credit - whether the HO should register as an Input Service Distributor (ISD). It was held that ISD mechanism can be used only for services and for goods, the ruling holds that credit distribution shall be by way of normal registration. Probably, the AAR is of the view that for inputs and capital goods provided by HO to BO, the HO should charge tax as a normal taxable person and not as ISD. Both the questions appear to be fairly simple and it is not clear why ruling was sought on the same. [2021-VIL-49-AAR]

Transfer of development right is liable to GST

Advance rulings are firmly rooted in the taxation of transfer of development rights - a benefit arising to the owner from land related rights. The Haryana AAR reinforced the stand of the department on the contentious issue of transfer of development rights to hold that since there is no sale of land and the transferor continues to remain the owner, Entry 5 of Schedule - III of CGST Act is not satisfied. Relying on Notification 4/2018-Central Tax (Rate), dated 25-1-2018 in respect of time of supply, the AAR ruled that mention of time of supply makes it amply clear that transfer of development rights is a taxable supply. While definitions are quoted from the Transfer of Property Act, 1882 and clauses in the agreement are detailed, there is no elucidation of how the transfer qualifies as a taxable supply [2021-VIL-52-AAR].

Determination of tax liability based on notification on time of supply is not a legally sound method. This dispute, as noted earlier in this column, has to wait till it reaches the Apex Court for an authoritative ruling.

State Industrial Development Corporation not entitled to exemption

Notification No. 12/2017-Central Tax (Rate) providing exemption to specified supply of services requires thorough overhaul as various advance rulings indicate. In particular, the entries relating to supply of services by or to governmental authorities or government agencies need to be re-visited. The Gujarat AAR has held that the activities of State Industrial Development Corporation relating to provision of industrial plots, maintenance of industrial estates, etc., would be liable to GST. It has noted that the applicant has been established as per statute and is fully controlled by State Government and functions like a department of the State Government. As per definition of the term "business" in CGST Act, the activities undertaken by the State Government engaged as public authority are covered and therefore, the applicant being akin to State Government, would be a public authority and its activities would be business activities.

It rejected the contention that the activities would be covered under exemption relating to municipal functions as per the entry "planning for social and economic development" in Twelfth Schedule of the Constitution of India (Article 243W) because establishment, development or organization of industries are not functions entrusted to municipalities. It has also referred to another entry in the exemption notification to state that services provided to business entities by government are not covered thereunder and the applicant provides services to various industries which are engaged in business [2021-VIL-40-AAR].

Life-saving drugs not entitled to concessional rate of GST

Recently, Karnataka Appellate Authority for Advance Rulings held that bulk drugs are also drugs and entitled to concessional rate of GST of 5% [Tax Vista dated 23 November 2020]. However, the Gujarat AAR is not impressed. The applicant wanted to apply 5% concessional rate on four bulk drugs which find mention by name in Notification No. 1/2017-Central Tax (Rate). However, the AAR held that the products of the applicant cannot be directly administered to human beings and concessional rate is available only in such cases. It states that if the legislative intention was to include bulk drugs also, then the word "bulk drug" would have been included in the relevant entry in the notification. In this column, it has been observed before that advance rulings adopt mostly literal interpretation ignoring the purpose or object of the provisions. As noted earlier, an amendment to include bulk drugs with retrospective effect or amendment followed by clarification on such retrospective applicability should save the life of many companies producing such important drugs [2021-VIL-28-AAR].

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