Tax Vista Your weekly tax recap Edn. 30 - 11 January 2021 By Dr. G. Gokul Kishore

Arrest and prosecution - CGST provisions are, prima facie, not unconstitutional

Delhi High Court has held that Section 69 of CGST Act on arrest and Section 132 on prosecution are not unconstitutional. The High Court reiterated the principle of presumption in favour of constitutionality of a statute and expressed prima facie opinion that scope of Article 246A is significantly wide as it also grants power to make all laws "with respect to" GST. It has held that the power to arrest under Section 69 is not a general power, but it is restricted to certain specified offences under Section 132. It said - "this Court is of the prima facie view that the expression "with respect to" goods and services tax used in Article 246A, being a constitutional provision, must be given its widest amplitude and would include the power to enact criminal law with regard to goods and services tax." It also said that even if Article 246A is seen as not conferring the power to make law on arrest under GST, the same could have been enacted as per the entry "Criminal law" in List III of the Seventh Schedule of the Constitution.

The petitioners had argued that such powers are not ancillary or incidental to the power to levy and collect GST and they could not have been enacted under Article 246A. Procedure prescribed was also assailed as not fair, just and reasonable as, in many cases, persons have been arrested at the stage of investigation itself while in adjudication, the case was not proved. The High Court was passing order, at interim stage, on extension of interim protection (bail) and vacation of such protection sought by the department.

Emphasizing the importance of applying doctrine of pith and substance (true object) of the law, the High Court expressed prima facie view that the pith and substance of the CGST Act is on a topic, upon which the Parliament has power to legislate as the power to arrest and prosecute are ancillary and/or incidental to the power to levy and collect GST.

Rejecting the argument on unreasonableness, the High Court held that when a person is arrested under CGST Act, he must be informed of the grounds and produced before a Magistrate within 24 hours and this ensures judicial scrutiny and therefore, it cannot be unreasonable or excessive. It further said - "Also just because CGST Act provides for both adjudication of civil liability and criminal prosecution doesn't mean that the said Act is unfair or unreasonable."

According to the Court, Central Tax officers are empowered to conduct intelligence-based enforcement action against taxpayers under the jurisdiction of State Tax officers. It expressed the confidence that the trial court will ensure no innocent person against whom baseless allegations have been made, are arrested and it declined to interfere with investigation at the interim stage, particularly in writ proceedings - [2021-VIL-24-DEL].

Arrest & prosecution under GST - Supreme Court declines petition challenging validity of provisions

Section 69 of CGST Act empowers the Commissioner to authorize an officer to arrest a person who is believed to have committed specified offences. Section 132 provides for criminal prosecution of persons primarily suspected of tax evasion. Such provisions along with a few others were challenged as unconstitutional but the Supreme Court declined to entertain writ petition under Article 32 of the Constitution of India. The Apex Court was of the view that the petitioners have efficacious remedy under Article 226 to challenge vires of such provisions before High Court and it will have benefit of considered view of High Court if such course is adopted. It noted that "whether recourse to the jurisdiction under Article 32 should be entertained in a particular case is a matter for the calibrated exercise of judicial discretion." - [2021-VIL-02-SC]

With fake ITC frauds being highlighted in media almost daily and arrest and bail are becoming routine than exception, such provisions are certain to be challenged before High Courts. Tax laws have such provisions always and manner of exercise of the powers will require scrutiny than the vires per se.

Arrest in every case is not necessary - High Court grants anticipatory bail

GST has become more of a criminal law than business law, it seems. Among the many bail applications that have been coming up before High Courts regularly now, in one such case, the Allahabad High Court has granted anticipatory bail to the applicant. The applicant had been summoned by GST department and he apprehended arrest at the time of appearance before officer for recording statement. The department argued that the alleged evasion was around Rs. 100 crores and the applicant has been threatening along with relatives and inquiry could not be conducted.

The High Court has considered, in detail, the recent jurisprudence from Service Tax to GST regimes on arrest and bail, particularly in cases where adjudication (orders refer it as "assessment") was not completed and the party not being a habitual offender with no criminal antecedents, was granted bail. In this case also the High Court noted that no criminal antecedents of the applicant have been brought on record and, arrest is not necessary in every case as personal liberty granted under Article 21 of the Constitution is a fundamental right. It also observed that the applicant has own address of business and residence and he can give surety to ensure his appearance. According to the Court, the applicant did not appear to be a habitual offender, prosecuted or convicted earlier. The judgments considered by the High Court were mostly on the principle of arrest not to be made straightaway without completing adjudication / assessment when the person concerned is not a habitual offender - [2021-VIL-14-ALH].

Most of the cases involving alleged tax evasion has two versions - the department is of the view that the person concerned is an influential person and, in a position to intimidate and threaten officers, tamper with evidence and may jump bail, if granted. The taxpayers perceive that it is the department which is threatening them with arrest causing damage to their reputation which has the effect of casting stigma in the society besides crippling their business. Striking the right balance is always contentious and courts play an important role in such cases.

TRAN-1 glitches - Department's SLP dismissed by SC

It appears that the department will not spare taxpayers from litigating the TRAN-1 issue. The High Court had held that the error committed by the taxpayer in entering credit in wrong column in TRAN-1 form was inadvertent and bona fide and the department was directed to open the portal to enable filing of TRAN-1 again or accept manually filed form. As the intention of the tax authorities is to deny the credit somehow, even against such judicious order, SLP was filed in the Supreme Court. In a terse order, the Apex Court dismissed the same both on merits and on the ground of unexplained delay of 238 days in filing the SLP. Right from retrospective amendment, the policy of tax administration has been to bar transitional credits on various grounds and it is surprising that a decision to assail HC's order was taken after much delay. The case involved credit amount of around Rs. 2 lakhs - [2021-VIL-01-SC].

GST Portal pangs - High Court directs opening of portal for filing refund claims

GST Compensation Cess is applicable on coal. Such cess paid can be taken as input tax credit but can be used to pay only compensation cess on outward supplies. The petitioner before the High Court was exporting most of the outward supplies and therefore, ITC could not be used. The petitioner applied for refund and the judgment reveals the kind of travails he had to go through in the process. As the amounts were quite substantial and the petitioner could not get see any ray of hope, he knocked the doors of High Court. The High Court did not go into the merits of admissibility of refund of such cess but ordered the authorities to open the GST portal to enable the petitioner to file the refund claims or accept the same manually.

One of the major grounds which went against the department was that when the ticket was raised with help desk, it appears a resolution comment was generated but the same was not shared with the petitioner. While the department argued that the petitioner did not follow the procedure as per resolution comment, the High Court noted that the same was communicated to the petitioner only during the present proceedings. The refund claims pertain to 2017-18 and 2018-19. Making processes online is not an achievement when so much of taxpayer's funds can get blocked due to shortcomings in government portal for such a long period - [2021-VIL-18-JHR].

Revenue pressure due to pandemic - Adjudication order in 10 days

Pandemic has not only affected business adversely, but also government revenues. The pressure on revenue collection is all too palpable. A show cause was issued on 3rd August, 2020. The taxpayer requested for copies of documents on 20th October, 2020. Subsequently, the taxpayer filed reply to the notice but before that, adjudication order was passed in the next 10 days i.e., on 31-10-2020. The petitioner had to approach High Court and it granted relief by quashing the orders subject to payment of certain amounts. The High Court noted that reply submitted by the taxpayer was not considered in the order and the department ought to have given some more time. The government counsel has stated that hearing opportunity was provided but not availed by the taxpayer. It is not clear from the date of sharing copies of documents, how three opportunities of hearing were provided in 10 days as the adjudication order was passed within 10 days. Though the taxpayer has got conditional relief from the High Court, there should be some provision to recover the litigation cost incurred in approaching such court from the department - [2021-VIL-20-MAD].

Confiscating conveyance without notice - High Court provides relief

These days, it is a routine practice to detain both goods and conveyance and subsequently, confiscate both. In one such case, the department had conducted proceedings against the supplier of goods but notice was not served on the transporter owning the vehicle which was also confiscated. The High Court noted that the notice was not even addressed to the transporter. It held - "Sub-section (4) of Section 130 of the GST Act specifically provides that no order for confiscation of goods or conveyance or for imposition of penalty would be issued without giving the person an opportunity of being heard. The person in the said context would be the person interested in the goods as also the conveyance." The order on confiscation was quashed - [2021-VIL-16-GUJ].

Maintenance fund in the form of non-refundable deposit - GST payable

Consideration is one of the key factors for levy of GST. As per the statutory definition of consideration, deposit given in respect of any supply shall not be considered as payment for such supply unless such deposit is applied as consideration. Therefore, mere payment of deposit does not trigger any GST liability till the time it is adjusted against a taxable supply. The applicant is a cooperative society collecting both monthly maintenance fee and common maintenance fund. On the former, there was no issue as GST is being paid, as per the facts. Advance ruling was sought on the latter as to whether the same would be liable to GST.

The applicant argued that the common maintenance fund is maintained as fixed deposit and only interest is used for common infrastructure or repair work and it is refundable. However, the Authority for Advance Rulings held that as per statement of the applicant, such amount is not returned / refunded, particularly when the existing owner transfers the property to another person. Based on such fact, it held that the deposit being non-refundable, the same will be liable to GST. Since the amount is collected towards the future supply of service of maintenance or repair, the same gets applied as consideration towards supply of services at the time of actual supply of services and GST will be payable at that time - [2021-VIL-01-AAR].

It appears that the fact as to refund of deposit being given in certain cases was not properly highlighted by the applicant. The AAR also appears to have not properly appreciated the distinction between cases entitling party to obtain refund of deposit and where transfer of deposit takes place along with transfer of property. In any case, the ruling reiterates the principle that if the deposit is refundable, GST is not applicable and if it is not refunded but kept for adjustment against future supply, then GST will be payable.

Intermediary service - CGST & SGST applicable and not IGST

One of the initial controversies that arose when IGST Act was enacted pertains to the type of tax payable - IGST or CGST plus SGST in respect of intermediary service. In the case of intermediary service, place of supply is the location of the supplier of service. Intermediaries facilitating or promoting supply of goods or services for foreign companies are located in India and therefore, both location of supplier and place of supply are in India - in the same State. Therefore, CGST and SGST is payable, on a simple reading of the provisions. This is the advance ruling also by reading Section 13 of IGST Act - [2021-VIL-06-AAR].

The ruling does not discuss the applicable provisions as to type of tax while arriving at the decision on the very same issue. Section 7 and Section 8 of IGST Act define inter-State supply and intra-State supply. Sub-section (2) of Section 8 states that where the location of the supplier and the place of supply are in the same State, it shall be treated as intra-State supply but this provision is subject to Section 12. Because Section 12 deals with supply of services where both supplier and recipient are in India, the case of intermediary promoting goods for foreign client (service recipient) is not covered under Section 12 but under Section 13. A view can be taken that Section 8(2) is not applicable in such cases and therefore, it is not an intra-State supply. Then one may have to resort to the residual entry in Section 7(5)(c) to treat the same as inter-State supply. If the ruling had discussed such provisions and the prevalent views on this issue, it would have been beneficial to the industry.

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