Tax Vista Your weekly tax recap Edn. 47 - 10 May 2021 By Dr. G. Gokul Kishore

Covid relief materials bought and imported for free distribution not eligible for IGST exemption

Exemption granted to various goods meant for Covid-19 relief when imported free of cost will not be available if such goods are bought from overseas parties and imported into India even if they are intended for free distribution. This is part of the FAQs issued to clarify various points arising out of Ad hoc Exemption Order No. 4/2021-Customs dated 3-5-2021 whereby IGST has been exempted to items mentioned in Notifications No. 27 and 28/2021-Customs when imported by authorized agencies. These two notifications cover items like Covid-19 vaccine, Remdesivir injection, oxygen concentrator, medical oxygen, oxygen canister, ISO containers for shipping oxygen and oxygen cylinders.

An exemption cannot be so myopic that when the pandemic is consuming so many lives, IGST relief is provided only when somebody abroad donates them free and are brought to India. The FAQ itself notes if a corporate buys such materials for free donation, such exemption will not be available. It is extremely distressing to see complete absence of tax policy as even poor tax policy would have been better. Reports indicate that approval by State Government appointed nodal officers and clearance by Customs of such goods are happening without any hassle and expeditiously. If such pro-active behaviour of emergency situations can be exhibited during normal times, industry will benefit tremendously. GST Council has not met in many months and demands are being raised to convene a meeting so that exemption from GST for various Covid-19 related items can be considered. Such ad hoc exemptions should be rationalized so as to grant such duty / tax relief for one year and the notifications should be without illogical or artificial conditions as mentioned in the FAQs.

Adjustment of income tax refund towards service tax dues not sustainable - High Court holds action of both Service Tax and Income Tax authorities as not bona fide

The Telangana High Court has passed an eloquent and well-reasoned order on 28-4-2021 holding that income tax refund cannot be adjusted towards service tax dues. The judgment lays down the jurisprudence unambiguously on several issues. As per facts, the petitioner was granted refund of income tax by the Income Tax department. However, the Service Tax authorities issued garnishee notice under Section 87 of Finance Act, 1994 to the Income Tax authorities so as to withhold the refund and to pay the same to them towards service tax dues of the petitioner. In the meanwhile, Sabka Vishwas (Legacy Dispute Resolution) Scheme was introduced (SVLDRS) and the petitioner applied, and a reduced tax liability was determined as payable by the Designated Committee. The petitioner requested the Service Tax authorities (DGCEI - now DGGI) to modify or withdraw the garnishee notice and also pleaded with the Income Tax department to grant the refund so that service tax dues as per SVLDRS can be paid. All these were rejected. The department argued that garnishee notice, once issued, cannot be modified or withdrawn but strangely, based on the request of the Income Tax department, issued second garnishee notice as well.

The High Court has held that the stand of the department that garnishee notice cannot be amended is contrary to CBEC Circular No.996/3/2015-CX, dated 28-2-2015 and the same is arbitrary, unreasonable and unsustainable. This circular clarified that garnishee notice can be amended or withdrawn if the assessee came forward to pay the arrears and the power to issue an order included power to amend, vary or rescind the order as well as per General Clauses Act, 1897. Holding that SVLDRS is required to be interpreted liberally, the High Court expressed the view that the Service Tax authorities should have modified the garnishee order to match the reduced tax liability as per SVLDRS which would have ensured that the petitioner got the benefit of the scheme but this was scuttled by the department and such action is not bona fide and indicates prejudice.

On Income Tax department blocking the refund, the Court held - "The action of the Income Tax Department in soliciting from the Service Tax Department, a fresh Garnishee Notice in order to see that the petitioner does not get the income tax refund, (which was payable as per the intimation issued to the petitioner under Section 143(1) of the Act on 20.02.2020, and by continuing to retain the income tax refund amounts till November, 2020 without any valid reason), is not bonafide and indicates a prejudice against the petitioner." According to it, payment of income tax refund amount to Service Tax authorities is contrary to Section 245 of the Income Tax Act, 1961 which allows set-off of refund of income tax against income tax dues only and not against service tax dues. Inaction on the part of the Income Tax department in transfer of amount determined under SVLDRS and balance amount to the petitioner with interest has been held as arbitrary and not bona fide for which it has been directed to pay interest on the refund. The argument that Income Tax department would be deemed as assessee in default if action is not taken as per garnishee notice has been rejected citing the definition of assessee as per Finance Act, 1994. [2021-VIL-364-TEL-ST].

The order is well-written and comes down heavily on both Service Tax / GST and Income Tax authorities. While, in this case, default in payment of service tax appears to be substantial, the recovery action initiated by DGCEI / DGGI was legally faulty and the subsequent actions only assisted in projecting an impression of mala fide by stonewalling the requests of the petitioner to adjust the reduced tax liability as per SVLDRS against income tax refund by modifying the garnishee notice and taking a contradictory stand later by issuing second garnishee notice with a different amount. The Income Tax department has been a willing partner in this ill-conceived recovery action and therefore, arguments have fallen flat before the High Court. Because it listened to DGCEI / DGGI, it had to pay interest now as per the order of the High Court.

Transportation of goods - GST authority cannot decide priority in offloading various consignments

Detention of vehicle and goods continue unabated and, in most cases, such arbitrary action results in harassment of hapless taxpayers. Innovating a ground for suspecting something and to order detention is not a difficult task for the department. In a recent case, the transporter loaded two consignments meant for two different parties. The much heavier quantity of the goods was loaded first and, for operational reasons, on top of it, the other lot which was much lesser quantity-wise was loaded. During transit, the vehicle was detained on the ground that the route taken was suspicious as the location of consignee of heavier lot (petitioner) came first and therefore, such consignment should have been offloaded first whereas the vehicle was moving to the location of second consignee. There was no discrepancy in invoices or e-way bills.

The High Court was appalled at the non-application of mind by the officer and rejected the contention that even if the goods to be delivered to the second consignee were loaded on top, they should be offloaded, consignment of the petitioner should be offloaded and then, the goods of second consignee should be re-loaded. It termed such view as perverse and not acceptable. It noted - "It is also not the case of the 1st respondent that there is any prohibition for a consignor to load the consignments to two different destinations intended for two different parties in two different States on a single conveyance; and there is any rule that consignments intended for a party at a shorter distance should be offloaded first. In our considered opinion, the 1st respondent had acted mechanically without application of mind to the operational convenience of the transporter."

The High Court held the detention and demand of tax and penalty as arbitrary and illegal and ordered refund of the amounts paid with interest. The department can use the services of pool of government counsels before High Court but for a dealer, engaging with the officers in litigation for tax amount of around Rs. 3.68 lakhs, is costly in terms business time and resources [2021-VIL-353-TEL].

Provisional attachment against third party not permissible

If proceedings under any of the specified provisions are pending, then provisional attachment under Section 83 of CGST Act can be ordered. In a case where investigations were launched against suspected bogus refund claims, bank account of the petitioner was attached as certain amount was found to be deposited by the claimant. The petitioner contended that proceedings were not pending against them and the power under Section 83 cannot be invoked against persons like him who are third parties. The High Court accepted such argument and allowed the petition, lifting the attachment. This case is mentioned in this column for the reason that the petitioner was not given any information about such provisional attachment and when the bank was approached, it did not reveal anything. The petitioner was compelled to file application under Right to Information Act (RTI Act) which was also rejected. A person whose bank account is attached and that too without any legal backing, has to fight such a battle to even know the reason for such attachment. In Tax Vista dated 26th April, 2021, while discussing Supreme Court's judgment [2021-VIL-50-SC] on the power of provisional attachment, we observed that such powers should go and as long as such powers are in the statute book, the urge to misuse cannot be contained [2021-VIL-361-GUJ].

Cancellation of registration - Rejection of revocation request alleging ITC wrongly availed, not sustainable

Making every process online in GST regime has helped the department in a particular area - identifying those who did not or could not file returns for 6 months and then cancel the registration. Therefore, such power is frequently used these days. Registration was cancelled due to the above said reason and it appears, request to revoke the same was rejected. The taxpayer was before the High Court. The ground for rejection was that tax dues were not paid. However, the High Court noted that returns have been filed (which means tax should have been paid) and late fee has also been paid for delayed filing. The High Court held that contention of the department that registration would not be revived as the petitioner had availed input tax credit wrongly, was not correct and cancellation of registration in such a scenario was improper. It directed the department to pass order reviving the registration [2021-VIL-363-MAD].

It appears that in this case, the department must have found that ITC claim was ineligible for some reason and therefore, the tax paid by way of debit to credit ledger should not be taken into account. This would have meant that tax was short-paid and therefore, the condition for revocation of cancelled registration was not fulfilled. But such facts are not coming out clearly from the order.

SEIS benefit available to service providers to telecom sector

Service Exports from India Scheme (SEIS) benefit is not available to "Service Providers in Telecom Sector". SEIS benefit was denied to the petitioner who was providing engineering services and management consultancy services to service providers in telecom sector. The DGFT, it appears, was of the view that anyone who has ever dealt with telecom service provider will be hit by the ineligible clause for SEIS benefit. The High Court did not accept such interpretation and the instructions imposing fresh restriction on eligibility were held to be ultra vires the Foreign Trade Policy (FTP). The Court held that exclusion of service providers in the telecom sector from benefit of SEIS is of a service provider providing telecom services and not the service providers who provide services to such telecom service providers.

Though the issue seems to be simple, the order is elaborate discussing various precedent judgments and FTP provisions even from the previous FTP. It is a mystery how the departmental officers get trained in adopting an interpretation which is plainly contrary to the provisions so as to reject a benefit to the trade even when there is no manifest ambiguity in the provisions [2021-VIL-345-DEL-CU].

Provisional release - Onerous conditions imposed by Customs Commissioner relaxed by HC

Departmental officers have exhibited exemplary but misplaced courage by defying court orders in the past and in quite a few cases, contempt proceedings have been initiated. The High Court had directed the department to pass order under Section 110A of Customs Act to provisionally release the seized goods (diamonds). The Principal Commissioner of Customs passed orders not allowing provisional release on the ground that there was no request from the exporters. The High Court was shocked at the contemptuous conduct of the officer. The counsel for the department took time and got the orders modified whereby provisional release was allowed but the conditions were onerous since bank guarantee equal to FOB value of goods was ordered. The High Court has reduced the same to 20% of FOB value of the goods.

While passing order on provisional assessment, the officer had mentioned about probable redemption fine and penalty payable consequent to adjudication. This was not approved by the High Court as there cannot be interference in exercise of such quasi-judicial powers by the adjudicating authority. Another noteworthy point covered in this judgement is the observation of the High Court that the definition of exporter under the Customs Act is both elastic as well as wide and as per this definition, exporter would include the owner or a beneficial owner or any person holding himself out to be the exporter. This is in the context of the condition imposed by the officer for provisional release only to actual owner which was not approved by the Court [2021-VIL-362-BOM-CU].

Not following orders of the court, interference in exercise of quasi-judicial functions and imposing harsh conditions whereby the relief provided becomes illusory are not new to Customs or Excise and now GST authorities. The mindset of tax administration needs to change - instead of suspecting all taxpayers all the time and seeking to invoke extreme powers every time, a balanced approach should guide such actions.

Catering service to Government ITI is exempt from GST

Notification No. 12/2017-Central Tax (Rate) provides exemption from GST to catering service including mid-day meals scheme sponsored by government when provided to educational institution which offers education upto higher secondary or equivalent. The applicant was providing catering service to Industrial Training Institute run by Government of Kerala. The question before Advance Ruling Authority was whether the said service provided to ITI would be covered under exemption. The AAR noted that the admission criterion is SSLC or below and therefore, the institution can be an be classified as providing services by way of education up to higher secondary school or equivalent. The service provider / applicant was held as eligible for exemption. As exemption has been held as available, the AAR has further said TDS under Section 51 of CGST Act / respective SGST Act is not required to be made. This applicant belongs to the rare category of persons who have been blessed with a favourable ruling by this authority [2021-VIL-223-AAR].

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