Tax Vista Your weekly tax recap Edn. 44 - 19 April 2021 By Dr. G. Gokul Kishore

ITC based on debit note raised in different FY - Amendment delinking debit note not relevant

Advance rulings lack precedential value but when they are manifestly against the express provisions of law, highlighting the same is necessary. Section 16(4) of CGST Act has been amended whereby debit note has been delinked from invoice and therefore, the stipulation on availment of input tax credit before October return of next FY or filing of annual return is not applicable to debit note now. This means the time-limit for availing ITC based on debit note will be considered independently without reference to the original tax invoice.

However, this amendment is not "drastic or far-reaching change" as per AAR and a debit note issued for change in value is always connected to invoice. The legislative intention to disconnect debit note from invoice is not patent in the amendment. The ruling goes on state - "We therefore, completely disagree with the view of the applicant when they state that the earlier words "invoice relating to such debit note" were restricting the claims to Input Tax Credit to a particular time limit and this anomaly was detected and recognized by Government vide the Finance Act, 2020 (No.12 of 2020). We are of the opinion that the aforementioned change affected as a result of Finance Act, 2020 has not brought about any drastic or far-reaching change in the interpretation of sub-section(4) of Section 16, and even if a debit note issued by a supplier in connection with an invoice due to increase in price of a particular commodity, is issued in a different financial year than that of the financial year in which the original invoice was issued, the financial year to which the debit note pertains, will always be considered to be the year in which the original invoice was issued."

The reasoning adopted by AAR is that as per definition of debit note and related provision read with e-flyer of CBIC, debit note should contain invoice number also and such stipulation is to correlate the supply made under the invoice to debit note. Debit note is not an independent document, as per this ruling. In this case, it held that the applicant shall be entitled to claim ITC only in respect of debit notes issued by the supplier towards the goods supplied during the financial year 2018-19, on or before the due date of furnishing of the return under Section 39 for the month of September following the end of the said financial year 2018-19 or furnishing of the relevant annual return, whichever is earlier and therefore, ITC cannot be claimed if debit note is issued in FY 2020-21 towards transactions made in FY 2018-19.

If, even in cases where the legislative intention is obvious, the rulings are delivered adopting strange interpretation ignoring Parliament's will, taxpayers will lose faith in this mechanism [2021-VIL-205-AAR].

GST provisions not clear - High Court perplexed

Taxpayers need not think that statutory provisions under GST are not readily understandable. Punjab & Haryana High Court has observed that Section 130 of Punjab GST Act on confiscation is not clear. The writ petition, it appears, has been filed seeking direction to release the goods. The Court has noted that entire tax amount and 100% penalty and 10% fine have already been paid by the petitioner. The Court has ordered release of confiscated goods on furnishing of bond.

It is not clear whether the 10% fine mentioned is the redemption fine imposed for return of confiscated goods. If such redemption fine has been paid, then the department cannot retain the goods. But redemption fine is generally equal to the market value of the goods though proviso to Section 130(2) states that such fine shall not exceed the market value minus the tax chargeable. Seized goods can be returned by the department provisionally but there is no provision for provisional release of confiscated goods. Such legal nuances can only be confined to this column since the High Court's order is very brief [2021-VIL-281-P&H].

E-way bill expiry - Arduous road for taxpayers

Expiry of e-way bills is routinely reported and due to various reasons, validity is not extended. It appears that the officers, whether Covid-19 or otherwise, are on the road to intercept vehicles, check the documents, detain and seize once the e-way bill is not updated. Most of these cases involve not-so-substantial tax amount as obviously, in a truck, goods worth crores of rupees cannot be generally transported. In a case with similar facts, the taxpayer pleaded before the High Court that collection of full amount of tax and equivalent amount as penalty before adjudication was not proper and sought directions on release of the vehicle and goods based on some condition. The Court ordered release on furnishing of bond and bank guarantee after taking note of the powers of the officer concerned to the effect that the seizing officer is also empowered to release the same provisionally on furnishing security. It will save small and mid-size taxpayers from the rigours of seizure and lengthy proceedings if threshold is fixed by the CBIC whereby the taxpayer is entitled to get the goods and conveyance released when the value is less than such threshold [2021-VIL-299-TRI].

Interest on delayed payment of consideration - AAR says it is a service of toleration but includible in taxable value of goods

Section 15 of CGST Act is quite clear. Interest or late fee or penalty for delayed payment of any consideration for any supply is liable to be included in the taxable value of the supply. Such interest is treated as part of the consideration payable for the supply and it is not a consideration for any other supply. However, AAR, Gujarat has held that such interest will be covered under agreeing to the obligation to tolerate an act and therefore, it will be a supply of service as per Schedule-II of CGST Act. Advance rulings often raise eyebrows not without reason. Having held as above, the ruling further holds that since as per Section 15, such interest is liable to be included, the GST rate applicable will be the rate as applicable to the supply of goods. Several advance rulings are considered as legally unsustainable for the conclusion arrived but this one is weaker for the reasoning adopted. It is not known why the applicant opted for advance ruling on such a straight-forward issue.

Crossing the bar of pure agent is like getting stamp of approval from department for ITC on CSR activities. The applicant sought ruling also on the question whether stamp duty (tax) charges paid by the foreign holding company in their country for corporate guarantee and reimbursed by the applicant (Indian subsidiary) can be treated as covered under pure agent provision (Rule 33 of CGST Rules). Citing absence of documents and evidence, the AAR has held that conditions have not been satisfied and therefore, pure agent benefit cannot be extended. One of the conditions of Rule 33 is that payment made by pure agent on behalf of the recipient of supply should be separately indicated in the invoice issued by pure agent. The advance ruling has held that in this case, the foreign company has issued separate commercial invoice for such reimbursement and the rule provides for "mentioning separately" and not "separate invoice". The stipulation is intended to prove that there is no mark-up when payments are made by a person as pure agent on behalf of the recipient to the service provider and the service charges of the agent are distinguished from the payments made to third party. If a provision like Rule 33 cannot be used anywhere by the taxpayers, then it can well be omitted [2021-VIL-210-AAR].

ITC under GST - One-to-one correlation is required as per AAR

After thirty-five years of implementation of tax credit system under indirect tax law and progressively moving away from rigidities like one-to-one correlation, AAR has held that such correlation is indeed necessary to justify claim to ITC under GST. The applicant has said that they wish to engage in gold and silver related business and they will be availing ITC on purchases / services related to the same. They further intend to engage in trading of castor oil seeds. Advance ruling was sought as to whether ITC balance in electronic credit ledger attributable to procurements related to gold and silver can be utilized for payment of GST liability on supply of castor oil seeds. The AAR has held that there is no nexus or connection of the inputs gold dores and silver dores with supply of castor oil seeds; that such inputs are not used or intended to be used in the course or furtherance of supply of castor oil seeds; that the condition in Section 16(1) of CGST Act is not satisfied and therefore, the applicant cannot utilize the ITC balance for payment of GST on supply of castor oil seeds.

Section 16(1) is apparently benevolent to taxpayer as it seeks to provide credit entitlement when something is used or intended to be used in the course or furtherance of "his" business by the registered person. Definition of business is very wide under GST law. A registered taxpayer may be engaged in supply of multiple commodities as trader and therefore, the provision uses "his" business to cover the business activities of the person. Credit availment and utilization, subject to conditions, is qua the business of registered person. There is no express stipulation that cross-availment of credit accruing from procurements relating to a particular goods cannot be used to offset liability in respect of certain other goods supplied by the same person. There is no business of product "X" and a separate business of product "Y" for a trader as he is simply in the business of trading. This issue is not beyond doubt and CBIC should clarify in favour of the taxpayer [2021-VIL-199-AAR].

Flavoured milk classifiable under Tariff Item 2202 99 30 attracting 12% GST

When differential rates are given in the Tariff for the same product with ambiguities, the issue is likely to be repeatedly contested. Flavoured milk has seen several advance rulings in GST regime and other orders in the pre-GST regime. Heading 0402 uses "milk containing added sugar or other sweetening matter" and it attracts 5% GST and the other entry Tariff Item 2202 99 30 finds mention with description "Beverages containing milk" liable to 12% rate as per Notification No. 1/2017-Central Tax (Rate). Flavoured milk contains 92% milk, around 8% sugar and rest flavour and colour ingredients. The essential character of flavoured milk remains that of milk. However, based on agenda of GST Council meeting (not recommendation) which mentions flavoured milk as classifiable under Heading 2202 as per Fitment Committee and based on excise cases besides other advance rulings, Gujarat AAR has held in two cases that flavoured milk is classifiable under Tariff Item 2202 90 30. If the department is of the view that the intention is to tax such product at a higher rate, then a circular clarifying the same should be issued by the CBIC so that taxpayers are spared from using resources for seeking solution elsewhere [2021-VIL-197-AAR & 2021-VIL-208-AAR].

Import of goods for job-work & re-export - Export of service benefit available from 1-2-2019

IGST Act was amended with effect from 1-2-2019 in so far as place of supply provision is concerned relating to goods which are required to be made available by the recipient physically to the supplier of services. The amendment in the proviso included activities of processing and treatment to goods which are temporarily imported and then re-exported. This meant that even when activities like processing or treatment are undertaken on the goods, place of supply will not be treated as in India if they are re-exported. The default rule of treating recipient's location as place of supply will apply. The applicant was engaged for stevedoring, transportation of fertilizers from vessel to customs bonded warehousing, bagging and then transporting again to port for export. The AAR, after examining the provisions, held that before 1-2-2019 (before amendment), the activity was not covered under export of service as the place of supply was in India whereas post-amendment, since place of supply is outside India, export of service benefit would be available. Other conditions relating to export of benefit have been held as satisfied in both the periods in this case. The ruling compels us to think that the amendment should have been made with retrospective effect as the same was in the nature of lacuna in drafting which was cured later [2021-VIL-198-AAR].

Customs Valuation - Case pending for 15 years

The importer had brought certain computer system from their parent company in the year 2006. Because it was a related party transaction, the matter was referred to Special Valuation Branch (SVB) in Customs but it was returned without any finding. Later, Commissioner (Appeals) remanded the matter and then the original authority passed an order loading the declared value with profit margin. This de novo order has been passed in the year 2017 - after 11 years from import. Now, before the CESTAT, it has been argued that the provisions applied were Customs Valuation Rules, 2007 whereas considering the period of import, Customs Valuation Rules, 1988 should have been applied. The matter has been remanded now by the Tribunal to consider the same under these rules. Application of wrong rules, passing a de novo order after several years and the matter being litigated after 15 years from date of import - these fly in the face of claims on fast-tracking of processes of Turant Customs as noted last week in this column [2021-VIL-152-CESTAT-DEL-CU]

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