Tax Vista Your weekly tax recap Edn. 75 - 22 November 2021 By Dr. G. Gokul Kishore

Catering service in factory canteen - Service tax credit not admissible from 1-4-2011

The Supreme Court has, on 18-11-2021, dismissed SLPs filed against Karnataka High Court order [2021-VIL-421-KAR-ST] by approving the view of High Court that Cenvat credit of service tax paid on catering service received and used in factory canteen has been restricted after amendment to the definition of input service from 1-4-2011 [2021-VIL-89-SC-ST]. The High Court had relied on the principle of strict construction of tax statute and took note of the amendment to exclude outdoor catering service. Though the statutory requirement under Factories Act to maintain such canteen was taken into account, the High Court had held that such canteen was established primarily for personal use or consumption of employees.

There has been analysis in certain quarters as to the impact of this judgment in GST regime. First, the relevant statutory provisions under Cenvat Credit Rules and Section 17(5) of CGST Act may be similar but not identical. Secondly, the exception carved out in Section 17(5) in respect of ITC on goods or services where it is obligatory under law to provide the same to employees requires proper appreciation. An amendment is also required to make such exception applicable to all the clauses as the punctuation mark was held to be against the taxpayer in an advance ruling. ITC provisions will likely become the most litigated in GST regime considering the anti-tax credit mindset of tax policy makers and tax administration.

GST rate revision from next year - Notifications issued

GST Council had deliberated on GST rate changes in the previous meeting held on 17-9-2021 in Lucknow including correction of inverted tax structure in textile sector. The press release issued at that time stated that the changes will be implemented from 1st January, 2022. With more than a month to go, CBIC has issued four notifications last week to implement such decision. Notification No. 14/2021-Central Tax (Rate) amends Notification No. 1/2017-Central Tax (Rate) relating to CGST rate on goods and the amendments mostly relate to textile items intended to correct inverted tax structure. Notification No. 15/2021- Central Tax (Rate) amends Notification No. 11/2017-Central Tax (Rate) relating to CGST rate on services. Works contract service provided to governmental authorities and government entities will not be under 12% GST rate but under 18% rate from next year. The lower rate of 5% for textile job work will not be available to dyeing and printing.

Notification No. 16/2021 - Central Tax (Rate) has been issued to amend Notification No. 12/2017-Central Tax (Rate) relating to exemption from CGST on specified services. Exemption to pure services supplied to governmental authorities and government entities in relation to municipal / panchayat functions is being withdrawn. Notification No. 17/2017 - Central Tax (Rate) relating to services supplied through e-commerce operators is being amended by Notification No. 17/2021 - Central Tax (Rate) to effectively make such e-commerce operators in food delivery sector as liable for restaurant service in certain cases.

Refund of balance from cash ledger & QR code in invoices - CBIC clarifies

CBIC has issued Circular No. 165/21/2021-GST dated 17-11-2021 to clarify the relaxation from the requirement of issuance of invoice with dynamic QR code when service is provided for recipient outside India but consideration is not received in foreign exchange. The second one - Circular No. 166/22/2021-GST dated 17-11-2021 clarifies certain issues relating to refund of balance amount available in electronic cash ledger. It also clarifies the relevant date for claiming deemed export refund. Important points clarified are - (a) time-limit and unjust enrichment are not applicable to such refund of balance from electronic cash ledger and (b) those suppliers who are supplying to persons covered under TDS or TCS provisions under GST law, can obtain refund of such balance in cash ledger.

Cancellation of registration will result in revenue loss and aggravate unemployment - HC

Registration was cancelled on the ground that it was obtained based on invalid documents and no business was conducted at the declared place. Revocation request was also rejected. It appears that so-called invalid document was lease / rent agreement where the lessor had mentioned incorrect description about petitioner's status which was rectified through supplementary agreement. Though such document was produced, the department had ignored the same. Due to Covid, business was being undertaken from some other place. The High Court set aside the impugned order and directed the authority to consider the issue afresh after rejecting the hyper-technical view taken. It specifically noted that this case was not one of tax evasion rather it will only aggravate the unemployment problem and such cancellation will cause revenue loss to the government. As to how to safeguard public revenue, tax administration requires a lot of lessons from the judiciary [2021-VIL-800-CAL].

A similar order has been passed in another case as reported by VIL last week. The taxpayer whose registration was cancelled had sought revocation. The department issued a show cause notice without any date and time of hearing but order was passed rejecting such revocation request. The High Court said such notice is no SCN in the eyes of law. Hearing is mandatory as per Section 30(2) of CGST Act while considering such request and when the same is not complied with, the Court found the order unsustainable. As highlighted every week in this column, the power to cancel registration is drastic and needs amendment to provide safeguards to taxpayers [2021-VIL-804-ALH].

Summons under GST may not be sustainable when IBC is invoked

It appears that investigations were underway against the petitioner / petitioner's company for alleged GST offence. The petitioner (Managing Director) was apprehended and was out on interim bail. But the bail was cancelled and look out notice was issued and he was arrested for non-appearance before GST authorities. The company was stated as under resolution process as per Insolvency and Bankruptcy Code (IBC) and therefore, took the stand that after the appointment of Resolution Professional, the MD had no control over the company. The High Court quashed the look out notice after holding the same as issued in an arbitrary manner and cancellation of bail without notice as invalid. It further said that the petitioner was non-est in the company when such resolution process is underway and directed the department to conduct investigation with the assistance of RP. It also directed the petitioner to cooperate in the usual course through video conferencing [2021-VIL-805-CAL].

Notice to return defaulter by post - Is it not valid'

Rule 68 of CGST Rules prescribes that notice in GSTR-3A shall be issued electronically to non-filers of returns. In a strange case, the notice was sent by post and it appears the same was received by the taxpayer. However, the taxpayer went all the way to High Court to contend that such service through post is not valid when electronic mode is the prescribed one as per rules. The Court accepted the same, set aside the orders and directed the GST authority to comply with the provision and reconsider the matter. It is not known what the taxpayer gained through such litigation as, once the notice is uploaded in the GST portal, usual proceedings will follow and may be, with confirmation of demand, interest and imposition of penalties. More surprisingly, Rule 97A provides that where electronic filing / issuance is prescribed, manual filing / issuance is also included in the same. But the catch is reference to particular chapter in this rule which may be viewed as not covering all the rules in other chapters [2021-VIL-806-UTR].

E-way bill - SGST Act not applicable to inter-State movement of goods

E-way bill system, as many other processes under GST, had a hesitant start. When the system was in trial phase and not implemented, proceedings were initiated under UPGST Act for not carrying e-way bill demanding tax and penalty. The High Court has relied on precedent judgments on this issue and has held that in this case, inter-State movement of goods was involved which means IGST Act was applicable and the provision on detention as in CGST Act was to apply and UPGST Act could not have been invoked. The orders have been quashed and the department directed to refund the amount collected as tax and penalty. The Court noted that the department in its affidavit had noted carrying of tax invoice by the driver at the time of interception and therefore, there was no fraud or evasion involved. This case has been covered in this column after reading the entire order where the Single Judge has relied on several orders on this issue. This tells many tales - harassment of taxpayers, unnecessary litigation undertaken by the tax department, indifference of CBIC / State Tax Commissioners to such annoying issue and above all, the time of High Courts being used for such trivial disputes [2021-VIL-813-ALH]

Subsidiary assisting in vendor assessment is an intermediary - Appellate AAR upholds ruling

In Tax Vista dated 12 July, 2021, ruling by AAR in the case of an aircraft manufacturer was discussed [2021-VIL-241-AAR]. Now, Appellate AAR has upheld this ruling. Readers may refer to the ruling / Tax Vista for the facts. To be very brief, the appellant is a subsidiary of holding company and conducts assessment of prospective vendors and monitors performance of such suppliers (to the holding company) as per "Intra-Group Services Level Agreement". Before the AAAR, the appellant argued that technical expertise, advisory support and operational assistance relating to procurement to meet quality standards are provided without being involved in any transaction relating to supply of goods and that three parties are not involved in their case and therefore, they are not covered under intermediary. Other grounds like absence of identifiable customer and consequently, not being engaged in arranging or facilitating any supply were also taken. CBIC's recent circular dated 20-9-2021 was also relied on wherein two supplies were held as required - principal and ancillary supplies to be covered under intermediary service.

The AAAR has held that the principle of ejusdem generis is not applicable to interpret the words "any other person" in the definition of intermediary because the terms - agent, broker and intermediary are totally different and they do not form any category or class or constitute genus. Such term "any other person" is required to be interpreted to include persons who are not similar to broker or agent, as per the ruling. It appears that this is a major slip bordering on mis-interpretation but in the absence of appeal to higher judiciary, one may not be able to obtain correct understanding of such provision. Scope of work / activities as per agreement included providing complete information, appraisal of local vendors, providing inputs to enable parent company to decide on supplier and all such activities are intended to assist principal / parent, as per the ruling. It seeks to emphasise that the appellant is also involved in continuous assessment of delivery by Indian suppliers which means they are facilitating supply between Indian suppliers and parent company abroad [2021-VIL-63-AAAR].

Neither a circular of CBIC nor such rulings can stem the controversy over intermediary unless there is an amendment to place of supply provision for intermediary service or a thorough overhaul of the provisions based on experience in implementing such provision. If this is not contained, every transaction of subsidiaries of MNCs has the potential of being brought under the lens of intermediary and denial of export of service benefit. This may be perceived as anti-business and global corporations may contemplate locating subsidiary in some other jurisdiction where the tax regime is not so adverse.

Providing shelter to orphaned children and divorced women liable to GST

Anyone who is not connected with GST and who reads the title will be shocked. In the avarice for revenue, GST exemption notifications have been drafted in such a manner as will shock every ordinary man. In a recent ruling, Maharashtra Authority for Advance Ruling (AAR) has held that the applicant - a charitable trust who runs an establishment providing shelter to orphaned children, divorced women and women subjected to domestic violence will be liable to GST on the grants received from the government. The rationale for such decision is that Notification No. 12/2017-Central Tax (Rate) providing exemption to trusts restricts exemption to charitable activities and the activities undertaken by the applicant are not covered under such term as defined in the notification. The entry covers abandoned, orphaned or homeless children but the activity covered is advancement of educational programmes or skill development relating to such unfortunate persons. The AAR has held that the applicant has not shown their activities are covered under such exemption entry. Similar view has been taken in respect of services to destitute women who are litigating divorce or victims of domestic violence. If the amount to fund such activities are received as donations and if such donations are philanthropic in nature, then GST will not be payable, as per this ruling. This is based on CBIC Circular to this effect.

The applicant had not taken GST registration probably under the bona fide belief that an organization registered as charitable trust under Section 12AA of Income Tax Act, undertaking such activities, will not be liable to pay tax. The AAR has reasoned that as per the definition of consideration in CGST Act, grants are also covered and the definition of business which covers anything under the sun has also been relied on. GST will be payable at the rate of 18% as the draftsmen of such exemption entries could not foresee such situations so as to provide at least a lower rate [2021-VIL-417-AAR].

One cannot blame the AAR for such ruling as it is drafting of exemption entry which needs to be faulted. Those officers in CBIC or elsewhere who drafted such entries should be taken to task. While the law may be made with the mind, it is the heart that is impacted when application of mind becomes doubtful. The relevant entry must be amended so that notices to similar bodies are not sent by the department.

ITC on repairs not available to housing society

One should not seek reason for the above title as the same is absent in the advance ruling. Though there is a feeble or apparently incorrect ground to deny credit, the ruling does not tell us anything more. The housing society had engaged a contractor for carrying out major repairs and renovation of apartment buildings. It argued that the GST charged by such person is available as ITC because what is received is works contract service by the society and the same is provided to its members. According to it, since both input and output services are works contract service, the restriction on ITC on construction / repair of immovable property is not applicable. The AAR has referred to the definition of business and has stated that housing society is providing club or association service to its members but does not provide works contract service. This is despite the fact that the definition uses the word "benefits" along with "facilities" when it covers activities of associations and societies vis-à-vis members. Though one cannot be too optimistic, an appeal to Appellate AAR may produce a different outcome [2021-VIL-418-AAR].

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