Tax Vista Your weekly tax recap Edn. 66 - 20 September 2021 By Dr. G. Gokul Kishore

GST Council Meeting - Major decisions to address pending issues

The GST Council in the first face-to-face meeting held this year in Lucknow on 17 September, 2021 has made several recommendations and some of them are major ones. Rate change for certain goods has been recommended. On railway parts, some of those taking part in tender process quoting 5% as applicable GST and some others adopting 18% GST (and therefore losing out in the race) has been taken to High Court as well and this issue has been addressed now by prescribing uniform rate of 18%. Certain paper items like bags attract 12% GST on which department, in certain quarters, had a divergent view and as per the recommendation, all such items of paper will attract 18% GST from next month. Certain printed items like cards, catalogues, etc., will also come under higher rate of 18% GST from the present 12%. Changes in respect of two items - mentha oil from unregistered persons under reverse charge and bricks under special composition scheme are also highlighted in the press release. As per Kerala High Court order, the issue of inclusion of petroleum products under GST was discussed by the GST Council but it was felt "it was not appropriate to do so at this stage".

Changes in rate / exemption has been made in respect of specified services as well. A major change prominently carried by media pertains to e-commerce operators being made liable to GST for the service of transport of passengers and restaurant services (with some exceptions to be specified later) provided through them. This will be the new year gift of 2022 for such e-commerce operators.

CBIC will be issuing circulars to clarify certain issues - most importantly on intermediary service and export of service (when supply is intra-group across geographies). Restricting persons from filing GSTR-1 if GSTR-3B has not been filed for the previous month, auto-population of late fee for delayed filing of GSTR-1 in GSTR-3B and making credit entitlement subject to filing of GSTR-1 by suppliers as reflected in GSTR-2B of recipients, etc., are some of the statutory changes mentioned in the press release. The last line in the press release states that certain changes in the Act and rules have been recommended and the coming months will reveal the nature and extent of such amendments. Once the notifications and circulars are issued, discussion on the changes / issues covered can be more useful.

Refund of unutilized ITC due to inverted tax structure - Input service not includible

Taxpayers with inverted tax structure under GST must have been disappointed after the judgment from the Supreme Court last week and it was flashed all over the media. Readers of VIL must have seen not only the judgment but also several articles and comments in various social media groups. The Apex Court has upheld that position taken by the Madras High Court and did not accept Gujarat High Court's ruling. Rule 89(5) of CGST Rules providing for the formula for refund where the tax rate on input supply is more than the rate on output supply has been held to be intra vires Section 54(3) of the CGST Act. Taxpayers had contended that input services were also liable to be included in the formula but the Supreme Court did not accept. The judgment runs to 140 pages with exhaustive narration of contentions of the parties and Court's reasoning, principles of statutory interpretation, etc.

According to the judgment, the words "any unutilized input tax credit" used in Section 54(3) would include credit of tax charged on any supply of goods or services or both (para 55) but the same is impacted by first proviso where "only", "no refund" and "in cases other than" have been used. The expression "in cases other than" has been held to operate as restrictions and not as conditions of eligibility. Comparing the provision on refund in respect of exports, the Court held that both inputs ("input goods") and input services have been brought within the fold whereas for domestic supplies, refund has been contemplated only in respect of unutilized credit accumulated due to rate of tax on input goods being higher than the rate on output supplies.

The Apex Court indicated that fiscal policy cannot be interfered with through judgments by observing - "Taxes on alcohol for human consumption and stamp duties provide a significant part of the revenues of the States. Complex balances have had to be drawn so as to accommodate the concerns of the states before bringing them within the umbrella of GST. These aspects must be borne in mind while assessing the jurisprudential vision and the economic rationale for GST legislation. But abstract doctrine cannot be a ground for the Court to undertake the task of redrawing the text or context of a statutory provision. This is clearly an area of law where judicial interpretation cannot be ahead of policy making. Fiscal policy ought not be dictated through the judgments of the High Courts or this Court. For it is not the function of the Court in the fiscal arena to compel Parliament to go further and to do more by, for instance, expanding the coverage of the legislation (to liquor, stamp duty and petroleum) or to bring in uniformity of rates. This would constitute an impermissible judicial encroachment on legislative power. Likewise, when the first proviso to Section 54(3) has provided for a restriction on the entitlement to refund it would be impermissible for the Court to redraw the boundaries or to expand the provision for refund beyond what the legislature has provided. If the legislature has intended that the equivalence between goods and services should be progressively realized and that for the purpose of determining whether refund should be provided, a restriction of the kind which has been imposed in clause (ii) of the proviso should be enacted, it lies within the realm of policy."

One of the key points from this judgment is the call of the Apex Court to the GST Council to look into the anomalies pointed by the taxpayers in the formula under Rule 89(5) after reproducing the illustration provided by one of the counsels. Though the Council is not bound, it is expected that the seriousness with which the Supreme Court has addressed this issue of refund of unutilized ITC will be taken into account and the GST Council will deliberate the same to arrive at a solution which may minimize the hardship of those taxpayers who are adversely impacted by such inverted tax structure [2021-VIL-81-SC].

Proceedings initiated by SGST officers not a bar to summons by DGGSTI

One of the important issues coming up before High Courts is challenge to inquiry, summons and investigations by CGST or DGGSTI officers when SGST authorities have already initiated certain investigation against the taxpayer or vice versa. In a well-reasoned judgment, Madras High Court has analysed CBIC clarification dated 5-10-2018 on pursuing intelligence-based enforcement action by both CGST and SGST officers without being fettered by jurisdictional allocation and the words used in Section 6(2)(b) of CGST Act on cross-empowerment and Section 70 on power to issue summons. It has held that the scope of Section 6(2)(b) and Section 70 is different since the former deals with any "proceedings on a subject matter/same subject matter" whereas, Section 70 deals with power to summon in an inquiry and therefore, the words "proceedings" and "inquiry" cannot be mixed up to read as if there is a bar on the DGGSTI to invoke the power under Section 70 when SGST authorities are conducting investigations against the petitioner.

This is a significant interpretation of the relevant provisions on cross-empowerment and investigations. Issuance of summons and recording of statement by CGST officers is, therefore, independent of initiation of proceedings on a particular subject matter. The prayer of the petitioner on quashing of summons was not accepted by the Court in this case. Such issues are certain to be interpreted by the Supreme Court in future so as to provide greater clarity on the real import of "proceedings", "inquiry" and "subject matter" [2021-VIL-652-MAD].

Bond not sufficient, bank guarantee also required for provisional release of goods

Provisional release of goods was ordered subject to submission of bond without bank guarantee - this was assailed by the department as contrary to Section 67(6) of CGST Act and Rule 140 of CGST Rules. These provisions mandate bond for value of the goods and bank guarantee equivalent to tax, interest and penalty that may be payable. The petitioner raised an interesting argument that seizure was invalid in this case since Section 67(2) would apply only when goods or documents or things are secreted and such a situation was not present. Documents not kept at the designated place with the intention to conceal them may also get covered under such term as per the High Court. It said - "The word 'secreted' is not defined under the Act, however, the same can be understood to mean anything which is concealed and in those circumstances even if the documents are not kept at the designated places where the same ought to be kept in terms of the Act and the Rules, and in case circumstances exist where the absence of the documents is with an intention to conceal them from the officers, the same can be termed as secreted." It relied on Supreme Court's judgment in Kay Pan Fragrance [2019-VIL-39-SC] and directed furnishing of bank guarantee as well. Relief available under an interim order is interim in nature as this case indicates [2021-VIL-658-RAJ].

Rule 86A on blockage of ITC lapses after one year - HC permits utilization in such case

Rule 86A of CGST Rules empowers the department to bar utilization of ITC ledger in specified situations mostly relating to suspected fraud / evasion. Sub-rule (3) of Rule 86A prescribes the maximum period for operation of such restriction as one year. This has been interpreted by Tripura High Court as - "This is an interim measure and, therefore, cannot take shape of a permanent arrangement. If the department wants to permanently disallow credit of accumulated amount in the ledger of a dealer, it must adjudicate the issue and pass an order after bi-parte hearing. Sub-rule (3) of Rule 86A clearly brings about this legislative intent while it provides that such restrictions shall cease to have effect after the expiry of a period of one year. Two things are significant in this sub-rule; first, there is no scope of extension of this time and secondly, upon expiry of a period of one year the effect of the restriction seizing (sic) (ceasing) to take effect would be automatic." The order is interim in nature and the prayer seeking lifting of restriction was allowed as one year had lapsed in this case.

In every case of Rule 86A or Section 83, taxpayers have to move the writ court to obtain relief. The department is duty bound to lift the credit blockage or defreeze the bank account but court order is expected in every case. Unless GST portal provides for automatic processes once one year period is completed, changes cannot be expected at the ground level [2021-VIL-665-TRI].

Refund consequent to appellate order - Rejection is the rule

From pre-GST regime, refund arising out of appellate order, though automatic on paper, is generally not granted and another show cause notice is issued seeking either documents or on unjust enrichment. Departmental instructions hardly impact the field formations. This practice is now faithfully followed in GST regime as well. The High Court has expressed its anger by observing that the authorities are forcing the assessee to litigate and also defeating the claim of interest due on account of delay in processing the refund application. The case reveals harassment since refund arising out of appellate order was rejected citing absence of documents. The Court has noted that the appellate order is the basis and existence of the same is within the knowledge of the officers. The authorities have been directed to consider the matter afresh and also sanction refund, if the same is due [2021-VIL-659-ALH].

Provisional attachment for alleged fraud not sustainable when due diligence not exercised

Most of the orders on provisional attachment under Section 83 of CGST Act, 2017 reveal that the Commissioner strongly suspects fraud and prima facie forms the view that tax evasion has taken place. The records generally do not show existence of material based on which such opinion is formed. In a case of this type, Bombay High Court has observed that it was not the case of the department that the alleged fraudulent acts could not have been detected by exercise of due diligence and therefore, the inference to be drawn is that due diligence had not been exercised by the department. It did not accept the point that since there has been an alleged fraud, the power to order provisional attachment can be exercised. Absence of pendency of proceedings under any of the specified provisions has also been taken note of by the High Court to hold the impugned order of provisional attachment as not sustainable. The petition in this case was filed against rejection of request to lift provisional attachment under Rule 159(5) of CGST Rules [2021-VIL-663-BOM].

Provisional attachment without proof of service of order, not sustainable

Various types of orders on provisional attachment are assailed before High Courts. In a recent case before Karnataka High Court, there was no proof of service of the provisional attachment order but the department rejected request for lifting the same on the ground that it was received belatedly. The High Court rejected such argument and set aside the order. The department sought remand of the matter but the Court declined after noting that one year is the validity of attachment order which was about to lapse. The department stated that the petitioner tendered statement that tax amount would be paid or ITC would be reversed but the same was not done but the High Court held that this cannot be the material for the Commissioner to order provisional attachment. It is because of writ courts, taxpayers get justice despite such draconian provisions and more draconian implementation by the tax authorities [2021-VIL-657-KAR].

Hearing opportunity must be provided when adverse order is contemplated

There is a general view that tax authorities do not follow principles of natural justice - orders are passed without granting an opportunity of hearing. Therefore, a specific provision in the form of sub-section (4) was drafted in Section 75 of CGST Act / TNGST Act to mandate extension of hearing opportunity. But half-hearted drafting is visible as such hearing will have to be provided only if either the taxpayer seeks such hearing or if an adverse order is contemplated. Despite such provision, in a recent case, the sole point argued by the taxpayer was that adjudication order was passed without hearing him. The department contended that the taxpayer (petitioner) did not request for any hearing. The High Court pointed out that when an adverse order is contemplated which is the fact in the present case, hearing should have been granted. The Court directed the authority to hear and pass order afresh. Drafting provisions to confer certain rights on taxpayers is not sufficient when the intention is not genuine [2021-VIL-653-MAD].

Section 129 of CGST Act on detention & seizure is constitutionally valid

Invocation of powers of detention of goods and vehicles in transit under Section 129 of CGST Act and confiscation under Section 130 disrupts business. Constitutional validity of Section 129 was challenged in a recent case, but the High Court held the same as valid. It held that such challenge can be made only on two grounds viz., lack of legislative competence and violation of fundamental rights and there is always a presumption of constitutional validity of a statute. According to the Court, the petitioner could not show that there was no reasonable basis for classification, or such classification was discriminatory and that the provisions violate fundamental right / constitutional right. However, in respect of confiscation proceedings, the High Court did not approve department's action since hearing was not provided before passing such order and therefore, the order was set aside. The department was directed to release the vehicle and goods on submission of bond and bank guarantee [2021-VIL-666-UTR].

Amendment to bill of entry - Administrative issues v. statutory rights

Section 149 of Customs Act, 1962 providing for amendment to bill of entry after goods have been cleared for home consumption if the relevant documents were in existence at the time of clearance itself has been subject to incessant litigation. The primary reason is rejection of request of the importers by the Customs authorities by adopting a strict or narrow interpretation of the provision. In this column, quite a few orders on this dispute have been discussed. In a recent order, Bombay High Court has held that deficiency in the system cannot be used to deny relief to the importer since the document based on which amendment was sought was in existence when Customs out of charge was issued. The Court ordered the authorities to consider the request for amendment. This order has been briefly covered because the amendment sought was in respect of GSTIN which the department, it appears, has claimed is not possible in the system / portal after clearance is granted and data is transmitted to GST portal. Such issues are, by nature, administrative and procedural and they cannot be relied on to deny statutory rights [2021-VIL-664-BOM-CU].

Supplies by cost centres with independent transactions not covered under composite supply

A ruling of Appellate Authority for Advance Rulings, Karnataka has been reported by VIL last week. The stakes involved are substantial though the transaction is not a routine one. Readers may refer to our brief analysis in Tax Vista dated 12th April, 2021 on the earlier advance ruling against which the department filed appeal before AAAR. While the AAR had held the supplies to be composite and the principal supply being that of goods, would be applicable to the entire transaction, the AAAR has now set aside this ruling. The AAAR notes that the condition on supplies being naturally bundled was not satisfied and although there was one contract, the activities undertaken by different cost centres are independent and only on completion of milestone of one cost centre, the next one commenced. It has upheld the department's contention that the transactions of individual cost centres are to be assessed independently according to the nature of supply of such cost centre. Whether the supplies are composite or otherwise, cost of doing business must have gone up in GST regime [2021-VIL-42-AAAR].

(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))