Tax Vista Your weekly tax recap Edn. 70 - 18 October 2021 By Dr. G. Gokul Kishore

Pre-deposit to be paid in cash and not using input tax credit

Payment of pre-deposit is mandatory at the time of filing appeal under GST. Such pre-deposit shall be paid by using electronic cash ledger and not by debiting electronic credit ledger i.e., input tax credit cannot be utilized for making pre-deposit. This is the judgment of Orissa High Court, opting to accept department's argument on adoption of literal interpretation of the provisions and rejecting the petitioner's plea for purposive interpretation. GST being new, appellate remedies have come into play only recently and the general understanding based on settled law under pre-GST laws is that credit can always be utilized for pre-deposit at the time of filing appeal. This understanding has been held as not valid under GST law.

The petitioners had filed appeal before first appellate authority under Section 107 of OGST Act and pre-deposit was paid by debiting credit ledger. Show cause notice was issued proposing to reject the appeals on the ground that they were defective in not making pre-deposit by cash. The taxpayers were before the High Court. Section 49(3) states that the amount available in cash ledger may be used for payment of tax, interest, etc., and "any other amount payable under the provisions" whereas Section 49(4) provides that the amount in credit ledger may be used for payment of output tax. The petitioners contended that pre-deposit is one portion of tax and therefore it is to be treated as output tax - this the Court did not accept [2021-VIL-715-ORI].

There is no elaborate reasoning in the order of the Court. Section 107(6) dealing with pre-deposit does not use the word "pre-deposit" but requires payment of tax, interest, fine or penalty in full as admitted by the appellant and 10% of the remaining amount of tax in dispute. In both clauses (a) and (b), Section 107(6) uses "tax". Pre-deposit is nothing but tax held as payable in the impugned order but such reasoning may not hold good if penalty alone is involved in the impugned order. Section 49(4) should be amended to include "any other amount payable" and till such time, this dispute will continue.

Refund claim by SEZ developer on supplies received, sustainable

The Madras High Court has held that refund of unutilized input tax credit can be claimed by SEZ developer also. The dispute arose because of rejection of refund claims on the ground that such refund can be claimed by the supplier of services only and not the recipient (SEZ developer). The stipulation on relevant date for claiming refund as provided in explanation in Section 54 of CGST Act speaks about filing of claim by person other than supplier also whereas Rule 89 of CGST Rules, in respect of supplies, refers to supplier of SEZ. According to the High Court, as per the statute, any entity is permitted to seek refund subject to the fact that there is no double claim and language of Section 54 is clear without any restriction (as to the person entitled to claim) and refund can be claimed by any person. Clause (h) in Section 54 which is a residuary clause for relevant date for claiming refund, providing for date of payment of tax if refund is claimed "in any other case" was also relied on. Rule 89(1) uses "any person" and second proviso talks about supplier in the case of SEZ which is only one kind of entity that can seek refund and does not mean it will exclude other persons, as per the order. Also, use of "only" in impugned order has been held as not correct since the rule does not use the same [2021-VIL-719-MAD].

While literal interpretation is preferred by the tax authorities, it is the writ court which effectively ensures implementation of the law in spirit as well by emphasizing reading of the provisions in a harmonious manner. The GST Council Secretariat may have to take note of such judgment and include amendment to the rules in consonance with the parent Act in the agenda for the next meeting.

GST applicability on amounts received after arbitration

The issues before the Authority for Advance Rulings (AAR) were heavy but the ruling, without elaborate reasoning, has provided answers to the complex questions. The question posed was whether GST would be applicable on various amounts to be received after arbitration award which relate to work completed before GST. The amounts due were compensation for delay in execution of work (damages), rate difference / price escalation, release of certain amounts withheld, refund of excess deductions made, interest on delayed payment, cost of arbitration, arbitration cost, interest on arbitration amount, etc.

The applicant argued that only money is being received in GST regime for the work done in pre-GST period and therefore not liable to GST. The AAR has held that amount for the work completed before introduction of GST is not liable to GST since as per time of supply under Section 13 of CGST Act, supply was made before GST. Refund of excess deductions is also not taxable since supply was made in pre-GST period. On liquidated damages, the departmental stand on agreeing to the obligation to tolerate an act or situation has been relied on to hold that the same would be liable to GST.

In respect of two amounts, the ruling appears to be not sound. On cost of arbitration, it has been held that the same would be taxable under reverse charge. The question is about recovery of expenses incurred in pursuing arbitration and not related to using the services of arbitral tribunal. Secondly, interest on various amounts being claimed now in GST regime will be treated as supply and liable to GST. If interest is for delayed payment of consideration for the work done in pre-GST regime, then such ruling is questionable but if it is related to interest on arbitral award itself, then the ruling does not answer the same categorically. The department may appeal against such ruling in the absence of sufficient reasons and clear findings in the ruling. However, as pointed out in this column before, such issues need to wait for an authoritative pronounce by the Apex Court for finality [2021-VIL-382-AAR].

Job work and manufacture - Re-birth of excise concepts in GST regime

Manufacture and job work are concepts famed for legendary tales in Central Excise and they have not failed to cast a shadow in GST regime as well. Job work is classified as supply of service under GST law. However, the relevant notification (Notification No. 11/2017-Central Tax (Rate), as amended) has multiple entries prescribing different GST rates in various scenarios pertaining to job work. Because there is a rate differential, the issue gets disputed. The applicant, engaged in conversion of plain polyester films into dyed / laminated films argued that basic character was not lost after such process though different commercial product emerges after job work. Therefore, the argument was - this is supply of service of job work attracting 12% GST as it uses the term "job work' which means processing or treatment on goods owned by registered person, but the residuary entry does not stipulate such condition which means it includes processes undertaken for unregistered person. However, the department was of the view that the residuary entry for manufacturing services attracting 18% GST is applicable since the activity undertaken by the applicant amounted to manufacture.

According to AAR, job work may or may not amount to manufacture. Referring to the definition of job work, and manufacture as provided in CGST Act, the AAR said that considering the process adopted by the applicant, manufacture was not involved. Intermediate product was the result of process undertaken and such item was held as not satisfying the classic test of "new name, character and use". Taking note of various procedural compliances and receipt of job charges only and working on the materials sent by the principal, the AAR held that the process is only job work and not manufacture, it would be covered under the entry attracting GST of 12%. Yet another ruling in favour of the taxpayer and column writers like us feel nostalgic to see discussion on excise concepts in GST era [2021-VIL-380-AAR].

GST exempted on pure services provided by port authority to development authority

In certain cases, AAR has been reasonable as a recent ruling indicates. The port authority sought to know whether GST is exempted on way leave charges, lease rent, compensation for decommissioning an old berth, interest free security deposit and deposit towards possible damages received / to be received by the metropolitan development authority. The AAR has held that these are in the nature of pure services to government entity in relation to municipal functions and therefore, exemption under Notification No. 12/2017-Central Tax (Rate) would be admissible. In a clear ruling, it has held that all amounts can be treated as arising out of grant of lease and way leave permission. On deposits, it has taken note of definition of consideration in CGST Act to highlight that such amount becomes taxable only when the same is appropriated towards consideration. It appears that there are certain facts which may create a doubt on absence of GST liability, but the ruling has emphasized that various amounts are all relatable to the exempted service only. As long as the ruling is in favour of developmental projects for public welfare, such issues need not be blown out of proportion [2021-VIL-379-AAR].

Resort also providing naturopathy not covered under GST exemption

It is a common practice for resorts in scenic locations to provide massage and naturopathy services to occupants. One such entity was before the obvious question - whether they would be covered under exemption on healthcare service under Notification No. 12/2017-Central Tax (Rate). The obvious answer of AAR is no. The applicant argued that the naturopathy centre is registered as clinical establishment and it provides healing therapies and therefore, exempted as providing healthcare service.

The AAR examined the website and analysed as to how services are marketed. It noted that packages to celebrate wedding anniversary are offered and the plans are mostly residential and the facility was primarily a resort providing accommodation, food and excursion and the tariff is based on type of room. After finding that wellness programmes are organized with five-star luxury, the AAR has held that the naturopathy centre is not independent of the resort of the applicant and stay is mandatory even though no specific treatment or diagnosis for any disease is provided. Accommodation service has been held to be the principal supply in the composite supply with naturopathy being ancillary. It is not clear why the applicant sought ruling as there are rulings on such establishments / resorts already which are against the taxpayers. Even otherwise, it appears that the claim by five-star resorts for GST exemption may not find acceptance anywhere [2021-VIL-384-AAR].

(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))