Tax Vista Your weekly tax recap Edn. 65 - 13 September 2021 By Dr. G. Gokul Kishore

Refund due to inverted tax structure - CBIC Circular contrary to provisions

Refund of input tax credit accumulated due to inverted tax structure cannot be denied when the tax rate on inward supply is higher than the tax rate on outward supply. However, when input supply and output supply are one and the same i.e. when the taxpayer is involved in trading activity, depending on partial exemption to outward supply, tax rate may vary. As inversion in tax rate is the criterion, accumulated ITC can be obtained as refund in such a situation as well. But, CBIC had a different view which was expressed in Circular No. 135 dated 31-3-2020 wherein it was "clarified" that when input and output supplies are same, then such ITC refund will not be available. It is obvious that CBIC could not visualize the scenario of partial exemption to outward supply which can be availed by a trader.

On the above facts, refund was denied by original authority but the appellate authority allowed refund on the ground that the adjudication order travelled beyond SCN by citing ground not mentioned in the notice. But the High Court set aside both the orders after holding that the said circular (paragraph 3.2) was in conflict with Section 54(3)(ii). It specifically noted that in this case, the taxpayer was availing partial exemption when goods were supplied to specified research institutions and the situation was one of inverted tax structure covered under the above provision. Tracing the power to issue such circular as vested in CBIC under Section 168 of CGST Act, the High Court held that such power is confined to providing for a given procedure to bring uniformity in the implementation of CGST Act and such power cannot be construed to be a power bestowed upon the CBIC to read and give a meaning to the provisions of the CGST Act in a manner which would be contrary and in conflict to the provisions of the Act itself. It said - "Issuing orders, instructions or directions to bring in uniformity in the implementation of the Act and altering the particular provision of the Act itself would be two different acts and for the later the Central Board of Indirect Tax and Customs had not been empowered under the provisions of Section 168(1) of the CGST Act of 2017."

The order of High Court is well-reasoned as it did not accept the appellate order in favour of the taxpayer since the ground of violation of principles of natural justice was relied on by the appellate authority without making further inquiry on inverted tax structure. The adjudicating authority has been directed to consider whether inversion is present and then decide the refund claim. It would have gladdened the hearts of taxpayers if the High Court had quashed the relevant portion of the CBIC Circular held as contrary to statutory provisions but since the same was not agitated, such pronouncement could not be made. CBIC should take note of such mis-interpretation and withdraw the circular so that genuine refund claims are not rejected on such illegal grounds [2021-VIL-650-GAU].

Parallel proceedings - GST authorities plead ignorance

The Central GST authorities had initiated investigations and summoned the petitioner several times. Subsequently, State GST authority issued show cause notice where period was overlapping with the investigation by their Central counterpart and proceeded to pass adjudication order as well. The petitioner informed the SGST officers about the inquiry / investigation by the CGST officers. Before the High Court, the SGST department has stated that they were not aware of such investigation. But the Court has held that this is not true because, before passing the order, such pendency was informed by the petitioner. The SCN and order have been quashed by the High Court. Claiming ignorance, mis-statement before the Court, not heeding to the prayer of taxpayer when specific fact is brought to notice - these are becoming hallmarks of GST authorities these days. To make the authorities listen and follow their own instructions, directions from Court are required [2021-VIL-641-ORI].

Transitional credit - Retrospective amendment not to affect rights of taxpayers

Delhi High Court has directed the taxpayer-petitioner to apply for transitional credit and the department to consider the same as per law and subject to further order by Supreme Court on this issue. The Court had ruled in favour of the petitioner before retrospective amendment of Section 140 of CGST Act whereby time-limit came to be prescribed. Because such amendment came, the effect of the order got nullified. Now, in the latest proceedings, the High Court has specifically noted its earlier judgment in SKH Sheet Metals [2020-VIL-255-DEL] wherein it had said cited reasons other than time-limit for applying its judgment on transitional credit. In this case, retrospective amendment was taken note of and the same was held to be not material vis-à-vis its decision. Primarily, time-limit has been held to be directory and not mandatory. This order has been relied on now to grant relief again to the taxpayer. But the only catch is it will be subject to the outcome of Apex Court's decision in the appeal pending before it on this issue. As pointed out in this column before, instead of compelling taxpayers to fight expensive litigation battles, the authorities should consider grant of transitional credit in all cases subject to verifiable safeguards [2021-VIL-631-DEL].

Affiliation & renting by University exempted from Service Tax

Education is intended to provide knowledge and clarity but unfortunately, taxability of education related activities have been ambiguous always. One of the primary activities of universities is to grant affiliation to colleges, ensure exams are conducted and finally award degree. Service tax levy has been made inapplicable either through negative list under Finance Act, 1994 or through exemption to services provided by universities. The tax department has been entertaining the view that affiliation and related services provided by universities were not exempted from service tax on the ground that university is not directly imparting education but it only undertakes affiliation service against receipt of certain amount as fee. This controversy was before Madras High Court recently and it held that the exemption covered services provided to not only students but extended to faculty and staff who are not getting education and therefore, the exemption was not limited to the services of imparting education to students alone. It noted that transportation of faculty and staff, catering, security, house-keeping etc., were also exempted and meaning of "institution" cannot be restricted to college but it covered affiliating university as well. The Court reasoned that exemption was provided to services relating to admission and conduct of exam and this would be possible only based on affiliation granted.

Earlier ruling of the same High Court holding that affiliation and affiliation related activities were exempt / not taxable but collecting rent from bank, post office, canteen, etc., were taxable was not concurred with based on the stand taken that allied services relating to education would also be within the purview of educational services covered under exemption. An advance ruling under GST was cited by the department but the Court termed the view adopted by AAR as narrow and not correct.

Similarly worded entries are present in GST notification also and already such questions have been raised before AAR. Before revenue intelligence agencies allege large-scale evasion by State universities and unearth "scam" in affiliation fee, GST Council Secretariat and CBIC should intervene and amend the notification to reflect the intention unambiguously. The argument that education has become a business with institutions alleged as charging exorbitant fees should be differentiated from the ambiguity involved even in services provided by State-run institutions [2021-VIL-639-MAD-ST].

Over-dimensional cargo - New modus operandi by mis-declaration'

E-way bill validity is based on distance to be travelled by the truck. In case of over-dimensional cargo (ODC), much longer time is provided because the vehicle with such cargo moves slowly. In a curious case, the GST department alleged that the taxpayer had mis-declared as ODC in e-way bill only to get extra time while, on facts, it was not true. The taxpayer contended that the vehicle had arrived at the check-post within normal time and there was no need for extra time and mentioning of ODC was an error. For such apparently trivial reason, detention, notice for payment of tax and penalty - all followed. The High Court had to intervene to hold that before adjudication, seeking payment of tax and penalty is without authority of law. It directed release of vehicle and goods subject to certain conditions. The amounts involved are also not substantial. It seems the officer concerned was under the impression that he has cracked a major modus operandi of evasion whereby longer validity of e-way bill is deliberately obtained [2021-VIL-646-TRI].

ITC bar when supplier fails to file returns on time

Input tax credit is seamless on paper but in practice, conditions galore for availment. Probably as a preventive measure, advance ruling was sought by the applicant-recipient as to requirement to reverse ITC when returns (GSTR-1 and GSTR-3B) were filed belatedly by the supplier. The AAR, in a reasoned ruling, has held that GSTR-2B was not in force during the relevant period and therefore, ITC could not have been blocked for this reason, however, Rule 36(4) of CGST Rules would be applicable. This rule provides for capping of ITC to 10% of eligible credit (during material period) when invoice details have not been uploaded by the supplier. The ruling holds that most of the conditions prescribed in Section 16 of CGST Act have been fulfilled by the applicant but Rule 36(4) has been violated by availing ITC beyond the permissible limit. But the ruling portion holds that the applicant is liable to reverse the ITC availed which means the entire amount [2021-VIL-345-AAR].

Transfer of airport management is exempt from GST

Public utilities run by public sector have been privatized to a large extent by now. Such exercise typically involves grant of the right to operate the utility for specified period and the concessionaire who gets such right pays certain amount as per the agreement. In a case involving privatization of management of an airport, the question posed to the Authority for Advance Rulings (AAR) was whether such transfer from the existing authority managing the airport to the concessionaire will be treated as transfer of a going concern and exempt from GST. According to the AAR, transfer of a going concern means transfer of a running business which is capable of being carried on by the transferee as an independent business in continuity for a foreseeable period and will involve transfer of assets for running the business. The agreement before AAR was for 50 years and the criterion of "foreseeable future" has been held as satisfied. It is not essential to transfer all the assets and liabilities and if the concessionaire is able to carry on business even if some of the assets are retained by the transferor, it would still qualify as "transfer of a business".

Analysing the terms of the agreement, it has been concluded that transfer is not limited to sale but lease, hire etc., may also be covered and the present transaction would be transfer of going concern as an independent part. After raising a doubt whether business can be a service, the AAR has found the answer in exemption entry in Notification No. 12/2017-Central Tax (Rate). Projects involving higher stakes cannot afford to have uncertainty in so far as tax implications are concerned and this ruling may be useful in other projects involving similar arrangement [2021-VIL-349-AAR].

Transfer of UDS means transfer of development right

Column writers have some amount of liberty - at least to phrase the title as they wish. Interesting arguments can be seen in an advance ruling relating to construction of apartments under joint development agreement (JDA) involving area-sharing model with some cash payout as well from the developer to the landowners. In Tamil Nadu, typically undivided share of land (UDS) is agreed to be transferred to the developer / independent buyers, usual clauses are used for construction of apartments, apportionment of respective share of flats by landowners and developer and the JDA does not, as such, mention the words "transfer of development right". This was sought to be interpreted by the developer before AAR to argue that TDR was not involved in their case but only UDS was agreed to be transferred. But the AAR perused the agreement which talks about development of the property at several places and held that the transaction involved transfer of development right since the owners approached the applicant for development of the property and the consideration was transfer of UDS.

Argument on valuation of construction service relating to apartments allotted to landowners based on amendments made by Notification No. 3/2019-Central Tax (Rate) to the parent Notification No. 11/2017-Central Tax (Rate) can also be seen in the ruling. When actual cost of construction was available, adoption of notional value was assailed but the AAR was not impressed. Real property always carries real disputes forever and there is nothing notional in it [2021-VIL-348-AAR].

ITC reversal required when goods after expiry date are disposed

Input tax credit attributable to inputs used in the manufacture of cakes and pastry items should be reversed when such items are returned by retailers on expiry of life of such item. Section 17(5)(h) of CGST Act bars ITC when goods are destroyed and in this case, the items after expiry are thrown away which is akin to destruction. This is an advance ruling. If this question is so simple, the reason for seeking a ruling is surprising. It appears that the time-expired cakes are also retained in display portion for sometime to attract customers or at least show them that similar items can be purchased and after serving such display purpose or business purpose, they are destroyed. Such facts are not clearly coming out of the ruling. But the cakes are returned to the applicant and credit notes are issued to bakeries / sellers. This essentially would mean that it is a case of sales return and ITC reversal would arise. Dealing with products with short shelf-life or perishable items is not only a risky affair but also costly one in terms of tax [2021-VIL-347-AAR].

Bus body building on other's chassis is job work

In 2018, CBIC issued Circular No. 52 clarifying applicable rate of GST on bus body building. It clarified the obvious - if the bus body builder builds a bus using chassis owned by him and charges the customer for the value of bus, then it will be supply of bus attracting 28% GST and if he fabricates a body on chassis owned by another person, it would be a service liable to 18% GST. After three years, in 2021, application has been filed seeking advance ruling on this very issue. The AAR has relied on this circular, noted that the applicant does not own the chassis but only fabricates the body and therefore, it is a supply of service. The relevant job work entry has been mentioned with applicable rate of 18%. The jurisdictional GST officer has also said this is job work only. It is not clear why ruling is sought on such a question when there is a CBIC circular and when the department is also not having divergent view. May be, that is the kind of trust that taxpayers have for CBIC and authorities - they may change their view tomorrow and at that time, the taxpayer can take shelter under the ruling [2021-VIL-344-AAR].

Fish market construction for Panchayat liable to 12% GST

Fish market is a market where fish is sold and it is not covered under "fisheries" because fisheries mean taking out fish as an occupation. Besides such distinction, one can find principles of interpretation to deal with use of "and" in an advance ruling reported by VIL last week. Composite supply of works contract provided to local authority is liable to CGST of 6% as per Notification No. 11/2017-Central Tax (Rate). The person who was awarded the contract by the Panchayat for construction of fish market building sought to confirm whether this rate is indeed applicable to them. The AAR has agreed but after holding that such work will not be covered under "fisheries" but under "markets and fairs" under Article 243G read with Eleventh Schedule of the Constitution of India. Even small-time contractors are not spared when they are advised to seek advance ruling, may be, because GST authorities are likely to see some revenue fragrance even in fish market [2021-VIL-351-AAR].

Revocation of cancelled registration - CBIC clarifies

Considering the pandemic-induced difficulties, time-limit for seeking revocation of cancelled registration was extended earlier and recently, Notification No. 34/2021 - Central Tax has been issued to extend such time substantially. It covers the period from 1-3-2020 to 31-9-2021 - if during this period, the time-limit for seeking revocation has lapsed, the same can be sought before the end of this month. This extension has been clarified by CBIC by Circular No. 158 dated 6-9-2021. As per this circular, such benefit will also be available to those whose application is either pending with the department or where the same has been rejected either before original authority or appellate authority. Though the notification and circular are well-intended, it is not clear as to the impact - how many taxpayers will be benefitted.

(The author is an Advocate, Gokul & Subha Advocates, Chennai. The views expressed are personal. Two books authored by him have been published recently - Cross-border Transactions under Tax Laws & FEMA (July 2021) and GST - Investigation, Demands, Appeals & Prosecution (August 2021))