Tax Vista Your weekly tax recap Edn. 69 - 11 October 2021 By Dr. G. Gokul Kishore

Refund order not implemented - High Court directs payment of interest

Refund provisions are available in statute book but the first endeavour of the tax authorities, in majority of the cases, is to reject the claim. Among those few cases where refund is sanctioned, getting the money in hand is another seemingly insurmountable task. In a case of GST refund, it appears the same was sanctioned in 2019 but refund was not granted for two years. The claimant is before High Court seeking direction on both refund as well as interest for the period of delay. The High Court accepted the plea and ordered the department to pay both.

The ground for withholding refund is administrative and trivial as per the facts in the order. The department contended that application was required to be filed online whereas the petitioner had filed manually. The High Court held that there was no dispute about admissibility of refund and therefore, the department is liable to pay interest as well for the delay. It took note of Rule 97A of CGST Rules which provides for manual filing of applications as well. CBIC's Circular No. 125 relating to online filing of claims cannot override statutory provisions, as per the Court. It also observed that the circular was issued after the application was filed in the present case. In this case, the refund order was also passed but the amount was not paid. The department should be glad that costs were not imposed in this case but only interest was ordered to be paid. In pre-GST regime, litigation on refund led to landmark judgments like Mafatlal Industries - 1996-VIL-01-SC-CE but in GST regime, even for implementation of refund order, taxpayers have to file petitions before High Courts [2021-VIL-713-ALH].

Registration cancelled for delay in filing returns - High Court restores

The series of system-generated or templated cancellation orders for registration continues. The authorities who pass such drastic orders do not cite any ground nor do these orders contain any reference to the contentions of the taxpayers. In a typical order of such nature, the High Court observed that the authority ought to have referred to at least the contents of show cause notice and the response of the taxpayer which were not done. Such order has civil and penal consequences and being cryptic and non-speaking, the same was quashed and registration has been ordered to be restored. The Court took note of pandemic and the powers to condone delay in filing returns. In this case, it seems returns were filed after some delay along with late fee. The Court specifically directed that the issue of the delay in filing returns should not be opened again. [2021-VIL-709-PAT].

Registration of purchaser not liable for automatic cancellation for alleged fraud of seller

In yet another case of cancellation of registration, there was no reason adduced but the High Court in the earlier round, directed the petitioner to approach appellate authority. The appellate authority also passed an order which did not reveal the real reasons for cancellation. The taxpayer was again before the High Court. This time, the Court held that the fraud committed by seller, there cannot be an automatic cancellation of registration of purchaser. The petitioner had not committed any of the default mentioned in Rule 21 of OGST Rules, as per the order. It directed restoration of registration after observing - "To attribute fraud in such circumstances to the Petitioner, as a purchasing dealer, the Department would have to satisfy a high threshold of showing that the purchaser indulged in the transactions with the full knowledge that the selling dealer was non-existent. The Department would have to show that somehow the purchasing dealer and selling dealer acted in connivance to defraud the revenue. This threshold has not been made in the present case. In other words, the Department has failed to show that the Petitioner as a purchasing dealer deliberately availed of the ITC in respect of the transactions with an entity knowing that such an entity was not in existence."

Due diligence of vendors and suppliers / opposite parties is a must before undertaking any transaction in GST regime. Considering the spate of ITC frauds and evasion cases booked by the jurisdictional and intelligence authorities under GST, there may be several instances where innocent ones in the chain are also trapped and compelled to go through the ordeal of departmental action along with the main players [2021-VIL-701-ORI].

State not empowered to levy VAT on extra neutral alcohol after advent of GST

The Allahabad High Court has held that the State (UP) had lost the legislative competence to impose VAT on extra-neutral alcohol (ENA), special denatured spirit (SDS) and rectified spirit after introduction of GST by 101st amendment to the Constitution. ENA is used in the manufacture of alcoholic liquor for human consumption and is concentrated ethyl alcohol (ethanol) having alcohol content about 95%. SDS is spirit or neutral alcohol used for industrial purposes. Notification was issued to levy VAT on "non-GST alcohol" which was held as ultra vires both on account of lack of legislative competence and valid delegation. According to the order, since ENA is not alcoholic liquor for human consumption, the State legislature cannot circumvent the Constitutional scheme by introducing a tax on its sale, by describing it as "non-GST alcohol".

Relying on landmark judgments of Supreme Court, it held that for a commodity to be described as an "alcoholic liquor for human consumption", it must be capable or ready to be consumed, in that state itself-as a beverage which is not the case in respect of ENA. It held -"whether IMFL or country liquor or any other liquor that may qualify as "alcoholic liquor for human consumption", it uses ENA as a raw material. ENA, in turn, is derived from Rectified Spirit. At the same time, "alcoholic liquor for human consumption" would not arise either if ENA is left to mature for some time or in certain conditions. Neither its alcoholic content would reduce from the range 90% - 95 % to 19% - 43% nor it would otherwise render itself fit for human consumption."

The Court further held that the State Legislature did not attempt to save the UPVAT Act to tax alcoholic liquor not for human consumption. After the enactment of the UPGST Act, 2017 and in absence of any amendment to Section 174(1)(i), there is no power to delegate with the State Government, to issue the notification to impose VAT on ENA [2021-VIL-714-ALH].

Prosecution under GST - No entitlement to default bail if complaint filed within 60 days of arrest

GST officers who arrest persons for alleged offences are not police officers and they are not required to submit final report under Section 173 of Cr.P.C. and therefore, default bail will not be available under Section 167(2) of Cr.P.C. for non-furnishing of final report. The High Court refused to interfere with lower court's orders rejecting plea to grant such bail by the petitioners who were alleged to have been involved in availing / passing fraudulent input tax credit. The petitioners argued that they were entitled to get default bail as provided in Section 167(2) of Cr.P.C. on account of non-filing of final report within 60 days.

The High Court analysed Section 69 of CGST Act on arrest, Section 70 on summons and Section 132 on prosecution for specified offences and noted that prosecution can be launched by way of private complaint with the previous sanction of Commissioner and criminal proceeding cannot be treated as having commenced when persons are summoned under Section 70(1). It further held that persons whose arrest is authorized under Section 69(1) are not to be treated as persons accused of any offence until prosecution is launched. The Court relied on precedent decisions on the nature and scope of powers in respect of filing complaint by Customs / Central Excise officers and distinguished the same from that of police officers and other criminal cases pursued under Cr.P.C. In this case, it noted that complaint was filed within 60 days of arrest i.e., within the time prescribed for filing of complaint and therefore, the petitioners were not entitled to get default bail.

Generally, in prosecution cases of tax departments, Cr.P.C. provisions and criminal law jurisprudence are largely relied on by the accused but courts have very clearly distinguished such provisions from that of those contained in special Acts. The arguments to apply the rigours of Cr.P.C. in tax prosecution are acceptable only to the extent the special enactment itself expressly adopts the same and beyond such adoption, applicability of Cr.P.C. becomes restricted [2021-VIL-700-CHG].

Promotional items supplied at nominal value - ITC admissible but Rule 27 applicable

Taxpayers try to become innovative when it comes to availing input tax credit on promotional items. Innovation lies in strategies to avoid litigation and be compliant while availing ITC. The usual arguments are promotional items are not gifts and the same are not hit by the restriction on ITC under Section 17(5) of CGST Act. In a recent case before Authority for Advance Rulings (AAR), the applicant proposed to implement a sales promotion scheme whereby items like refrigerators, coolers, split air conditioner, etc. would be offered at a reduced/ discounted price to the retailers who purchase specified unit of hosiery goods of the applicant. The eye-catching point in this ruling is the proposal to "sell" air-conditioner at Rs. 50 if the buyer purchases the quantity of goods prescribed for being eligible to such promotional item. Separate invoices would be issued for supply of hosiery goods and supply of goods offered under promotional scheme for different prices.

On the first issue of nature of the supply, the AAR agreed with the contentions of the applicant that there would be no single price and promotional items will be sold after sale of products of the applicant and therefore, it will not get covered under mixed supply. Further, the same would not be a composite supply also since supply of hosiery items and goods under promotional scheme are not naturally bundled.

The benevolence of the ruling further extends when the applicant's submission is accepted regarding the promotional scheme proposed to be floated as one aimed and intended to boost the sale of its hosiery goods and it would qualify as an activity undertaken in the course or furtherance of business. The goods under promotional scheme cannot be treated as gift as the same would be at certain consideration, though nominal and that too on fulfilment of the criteria as specified in the scheme circular. Based on this reasoning, it has been held that the restriction on availment of input tax credit under Section 17(5)(h) shall not be applicable in respect of such promotional items. So far so good - the applicant has passed the tests under Section 16 and Section 17. However, though not specifically queried, the AAR has held that valuation of such promotional items would be as per Rule 27 of CGST Rules since price is not the sole consideration as such promotional item will be available contingent on purchase of certain number of hosiery goods. This means, open market value will have to be adopted for payment of GST on such promotional items. Though the ruling apparently showered benevolence, at the end, it seems the applicant could not completely succeed. Requirement to pay GST on open market value will also entail payment of the value and tax by the recipient-retailer so that ITC of the applicant-supplier is protected. This means the applicant is back to square one. Tax laws are drafted primarily to augment tax revenues and not promote business though professed otherwise [2021-VIL-371-AAR].

Settlement amount paid to foreign party liable to GST under reverse charge

Though doing business overseas appear attractive, consequences of failure are far-reaching. An Indian entity was also a concessionaire for exploration of oil in the sea as per production sharing contract (PSC) entered with the respective foreign country. This PSC was terminated due to certain issues. Settlement was reached between the parties and an amount was to be paid by the concessionaire (applicant) to the foreign regulatory authority as per the deed of settlement. The applicant was before AAR to know whether for the payment made by them, GST would be payable.

The applicant sought to distinguish PSC from service contract to contend that settlement payment was towards exploration cost and the same cannot be considered as towards supply of service. It was also argued that termination of PSC arose due to an unintended event and has not originated from any obligation on the part of any of the parties to tolerate an act and therefore settlement amount cannot be considered as payment for any supply of service.

Reliance was also placed on CBEC Circular No. 32 wherein cost petroleum (portion of value of petroleum taken by contractor to recover cost) was clarified as not a consideration for service. However, as per AAR, this is not applicable since cost petroleum is a receipt for the contractor whereas in this case, applicant is making payment. It further held that the impugned payment was not for breach of contract but in pursuance of deed of settlement and the foreign authority tolerates non-payment of exploration cost, non-payment of damages for breach of contract and not to pursue arbitration proceedings. All these have been pointed out to hold that the payment would be covered under the entry on agreeing to the obligation to tolerate an act or situation in Schedule-II of CGST Act. Gujarat AAR may have to advise the officer who prepares the draft ruling or assists the Authority to avoid becoming too passionate to safeguard revenue interest. The rulings in certain cases, at a few places, are highlighted in bold font, not-so-relevant words are used and the reasoning sometimes looks like argument of the parties [2021-VIL-376-AAR].

Examination related services to educational institutions exempted from GST

The title is almost the same as contained in Notification No. 12/2017-Central Tax (Rate) whereby exemption from GST has been granted to services supplied to an educational institution relating to conduct of examination by such institution. In most cases, various activities are outsourced to entities having expertise in using IT software. One such entity sought ruling, and the AAR has held that exemption would be admissible to pre-examination services like online and offline printing of registration certificate, enrollment form, admit card, etc., designing, developing and managing web-based applications for conducting online examination and post-examination services of scanning and processing of exam results, generation and printing of mark sheets, etc. These services are provided to the educational boards, universities and similar bodies and the AAR has that the institutions are covered under the term "educational institution" as used in the notification. Though elaborate reasoning has not been provided, the ruling is clear on the view taken and the issue determined. If the department refrains from filing appeal, such rulings will provide some impetus from tax law side to education sector [2021-VIL-374-AAR].

CBIC Circulars clarifying rate / classification on certain goods and services

Consequent to the recommendations of GST Council, CBIC has issued two circulars No. 163 and 164 dated 6-10-2021 clarifying GST rate and classification on certain goods and services. As per these circulars, cloud kitchens will be classified as restaurant service and taxed at 5% GST, ice cream sold by ice cream parlours is liable to 18% GST, GST of 18% to apply for the past period on grant of mineral exploration / mining rights and job work in respect of manufacture of alcoholic liquor for human consumption being liable to 18% GST (alcoholic liquor is not food and hence, GST of 5% is not applicable). Further, supply of dried fruits and nuts, falling under heading 0801 and 0802 attract GST at the rate of 5%/12% (no exemption) and UPS and inverter even if sold under single invoice will attract GST at applicable rates separately.

(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))