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Tax Vista Your weekly tax recap Edn. 101 - 23rd May 2022 By Dr. G. Gokul Kishore |
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IGST separately not leviable on ocean freight when the same paid on import of goods in CIF contract
The Supreme Court, in an important judgment delivered last week, has held that IGST levy on ocean freight will contradict the statutory provisions since the importer of goods in India is liable to pay IGST on composite supply comprising of supply of goods and supply of services of transportation and insurance in CIF contract. The Apex Court was apparently referring to customs valuation adopted for imported goods though the Customs Valuation Rules have not been expressly discussed in the otherwise lengthy order. It rejected almost all the arguments of taxpayers except one which appears to be not straight forward. This sole argument which found acceptance was that CIF transaction is a composite supply in which the principal supply is supply of goods which is accompanied by services of transportation and insurance and dissecting and separately levying IGST on service portion will contradict Section 8 of CGST Act on composite supply and the scheme of GST law.
The reasoning for the above ruling, as provided in para 145 of the judgment, is -"This Court is bound by the confines of the IGST and CGST Act to determine if this is a composite supply. It would not be permissible to ignore the text of Section 8 of the CGST Act and treat the two transactions as standalone agreements. In a CIF contract, the supply of goods is accompanied by the supply of services of transportation and insurance, the responsibility for which lies on the seller (the foreign exporter in this case). The supply of service of transportation by the foreign shipper forms a part of the bundle of supplies between the foreign exporter and the Indian importer, on which the IGST is payable under Section 5(1) of the IGST Act read with Section 20 of the IGST Act, Section 8 and Section 2(30) of the CGST Act. To levy the IGST on the supply of the service component of the transaction would contradict the principle enshrined in Section 8 and be in violation of the scheme of the GST legislation. Based on this reason, we are of the opinion that while the impugned notifications are validly issued under Sections 5(3) and 5(4) of the IGST Act, it would be in violation of Section 8 of the CGST Act and the overall scheme of the GST legislation."
As IGST Act empowers the government to notify recipient of service for reverse charge, the taxpayers had successfully argued before Gujarat High Court (in the earlier round) on deeming Indian importer as recipient of service of transportation of goods by vessel under Notification No. 10/2017-Integrated Tax (Rate) was not valid. The Indian importer is not connected with transportation service as the service provider is foreign shipping line and service recipient is the foreign exporter in CIF transactions. However, the Apex Court rejected the ground of excessive delegation as, according to it, essential legislative functions vis-à-vis reverse charge have not been delegated and stipulation of recipient for specified categories of supply as notified for reverse charge purpose is only clarificatory.
In its endeavour to pronounce Indian importer as service recipient when the services are actually received by foreign exporter, the judgment seeks to derive support from place of supply provision in IGST Act to hold that place of supply of such transportation service being destination of goods, the supply of service would necessarily be made to Indian importer and such importer would be considered as recipient. It further holds that shipping service gets imported into India for consumption and the same is routed through import of goods and the ultimate beneficiary is also the importer receiving the goods in India. The reasoning for repelling the argument of taxpayers appears to be not very convincing.
For holding the transaction as covered under 'supply', the judgment relies on the definition of consideration in CGST Act which includes payment made by recipient or any other person and also place of supply provision to stress on destination of goods which is in India and therefore, payment of consideration by foreign exporter to foreign shipping line in CIF imports does not mean the same is not supply of service and such importer of goods in India is to be considered as recipient of service of transportation of goods by vessel from outside India to a place in India as place of supply is destination of goods; Ultimate beneficiary is also importer receiving the goods in taxable territory though shipping service is provided by foreign shipping line to foreign exporter in CIF contract
The taxpayers had vehemently argued on absence of territorial nexus when GST is sought to be levied on transportation service supplied by foreign shipping line to foreign exporter but the Supreme Court again relied on destination being in India and said that clear territorial nexus is established with the event occurring outside the territory and such services are rendered for the benefit of Indian importer and therefore, the transaction has nexus with the territory of India.
While all the above are somewhat legalese and considered as jargon, the general media has highlighted the judgment in terms of the observations on role of the GST Council and arriving at own conclusion on the rights of the State. As per the judgment, Article 279A in constituting GST Council envisions that neither Centre nor the States can act independent of the other and recommendations of the GST Council are non-qualified but the notion that such recommendation transforms into legislation is not correct since neither Article 279A begins with non-obstante clause nor Article 246A provides that the legislative power is subject to Article 279A. It points to use of 'recommendations to the Union or States' to emphasise that the GST Council is a recommendatory body and such recommendations are binding (only) when the government exercises power to notify legislation to give effect to uniform taxation system. It holds that merely because few of the recommendations are binding on the government under the provisions of the CGST Act and IGST Act, it cannot be argued that all of the GST Council's recommendations are binding [2022-VIL-30-SC].
The judgment has evoked lot of interest and reaction from not only stake-holders but also the media particularly because the order holds GST Council's recommendations are not binding on the government while making law under GST. Because all the core arguments like importer in India cannot be treated as recipient of service when foreign exporter is the recipient, notification cannot go beyond the parent statute in deeming a non-recipient as recipient for reverse charge purpose, etc., have not been accepted by the Apex Court, the judgment will have limited precedential value for taxpayers. While the notifications are held as valid, the levy has been held as invalid only on the basis of thin wire of composite supply. The reasoning may, one day, be found to be circuitous by another Bench and the same may be reviewed. In such a scenario, the risks for taxpayers / Indian importers will be much more. Instead of rejoicing over the final outcome being in their favour, the industry should impress upon the GST Council and others concerned to place such transaction beyond the pale of doubt so that double taxation, anomaly of two recipients for the same service, etc., are legislatively dealt with in an effective manner.
Service tax payable on amounts paid to overseas group company towards seconded employees
In another significant ruling, the Supreme Court has held that service tax would be payable by the Indian entity as recipient of manpower recruitment / supply service in respect of employees sent from overseas group company on secondment. Department's appeal was allowed setting aside the impugned order of CESTAT. The only relief the taxpayer got was on limitation as the Apex Court held that extended period of limitation was not invocable based on CESTAT's reliance on precedent decisions and department dropping proceedings in respect of two later SCNs. The period involved was both pre-negative list and afterwards and the Apex Court took note of exclusion of services provided by employee to employer in relation to his employment. In this case, employees from overseas group company were sent on deputation / secondment who worked under the directions of the Indian entity though they remained in the pay roll of group company. Indian entity was the employer as per documents and payment was made by Indian entity to group company towards salary, bonus, etc., of seconded employees based on debit note raised and such reimbursement was without mark-up. As per the agreement, back office support was to be provided by the Indian entity.
The Court noted that the crux of the issue is cross-charge and who should be reckoned as employer of the secondee - whether Indian entity or group company. It opted to rely on income tax judgments and observed that the secondee had lien on his employment with group company and such company retained control over terms and employment. It further took note of the relationship of employer and employee and lending of service of employee (by the group company) to another (Indian entity - respondent in this case) as such overseas employee was temporarily loaned to the Indian entity. The order discusses the test of control as a determining factor in such cases based on jurisprudence and has held that the Indian entity had operational or functional control over the highly skilled and trained personnel sent on secondment / deputation.
The order reads -" .....while the control (over performance of the seconded employees' work) and the right to ask them to return, if their functioning is not as is desired, is with the assessee, the fact remains that their overseas employer in relation to its business, deploys them to the assessee, on secondment. Secondly, the overseas employer- for whatever reason, pays them their salaries. Their terms of employment - even during the secondment - are in accord with the policy of the overseas company, who is their employer. Upon the end of the period of secondment, they return to their original places, to await deployment or extension of secondment." It held that the quid pro quo for the secondment agreement where the Indian entity has the benefit of experts for limited period is implicit in overall scheme of things [2022-VIL-31-SC-ST].
Considering the fact that secondment by global corporations to Indian entities is an essential business requirement whether in terms of retaining control by deputing CEO / COO or skilled technical personnel for crucial operations, the issue will certainly be re-enacted in GST regime. With a pro-revenue Schedule-I of CGST Act and an inclusive supply definition, the department will make every effort to tax such payments made to overseas entities. Though the Supreme Court has interpreted the agreements in the above case in a holistic manner, divergence in terms, understanding, etc., are bound to create a deep divide between the tax administration and taxpayers.
Anti-profiteering - Rule empowering NAA to order fresh investigation retrospectively applicable
In 2019, CGST Rules were amended to empower the National Anti-profiteering Authority (NAA) to order Directorate General of Anti-profiteering (DGAP) to conduct investigation on goods or services other than those involved in the investigation report submitted to it by the DGAP. By this amendment, scope of investigation was considerably widened and NAA could effectively order suo motu investigations even in the absence of complaints about other products or services. In a case of this nature where NAA ordered investigation in respect of goods other than those covered in the report of DGAP in terms of Rules 133(5)(a) & (b) of CGST Rules, the taxpayer challenged such action of applying the rule retrospectively. The Madras High Court relied on the objects and purpose behind Section 171 of CGST Act and said it is comparable with Section 18 of Competition Act. Relying on precedent decisions under Competition Act, it held that effective date of provision is to be determined based on the object and spirit behind the legislation and the purpose for which new provision is sought to be introduced and such insertion of rules is only aid of procedure and are applicable retrospectively. As per the order, the objective is to provide an institutional mechanism to ensure that full benefit of input tax credit and reduction in rate of GST are passed on to customers. It did not find merit in the challenge to such directive of NAA on fresh investigation [2022-VIL-333-MAD].
While the amendment is not in the CGST Act but in the CGST Rules and expansion of scope of investigation may be perceived as a matter of procedure, when such expansion impacts the civil liabilities of the person concerned, giving retrospectivity may be susceptible to further challenge. However, most of the procedures relating to anti-profiteering are grey areas and the entire machinery and procedure adopted by NAA are under challenge before Delhi High Court.
Service tax paid after GST - Cenvat credit admissible
Absence of GST Appellate Tribunal is equally compelling the GST authorities to file writ petitions in High Court. In a case of this nature, service tax was paid after implementation of GST, ST-3 return was filed after such payment and TRAN-1 was also filed. It appears that Cenvat credit of the same was availed and it further appears that the same was part of TRAN-1 which was objected by the department on the ground that for transitioning credit, service tax ought to have been paid before 1st July, 2017. However, appeal by taxpayer was allowed by First Appellate Authority and the department filed the writ petition. The High Court held that department's argument is not supported by Section 140(1) of CGST Act and credit depends on return filed and once the return filed was in order, credit cannot be denied. Credit eligibility for transition is whether it has been reflected in the return filed and not as per time of filing such return or whether tax has been deposited before 1st July, 2017. The petition was dismissed.
The High Court is displeased at the manner in which provisions under GST have been drafted. The order expresses it in so many words -"Before engaging on the primary issue involved herein, judicial notice has to be taken of the complex and convoluted way in which the law and the procedure are reduced to writing in matters pertaining to revenue, especially GST. There are enactments which are qualified by rules that are modified by notifications which are exempted by periodic instructions handed down by the Department. It appears that there is a concerted attempt to make the matter more complex than it is actually is and for obvious reasons for a lot of the gravy to seep through the cracks." When the judiciary having constitutional mandate to interpret the law finds it so complex, one can imagine the plight of taxpayers though practitioners and department may somehow wade through [2022-VIL-343-MEG].
Refund of IGST not deniable for filing claim manually - Foreign company has locus to file refund claim
Tax authorities try to save every single rupee, as it is projected, for the government. In this endeavour, hyper-technical arguments are adopted which are well-known. In Modvat credit days, it was the copy of invoice used for availing credit which was the bone of contention. In GST regime, since processes are online, refund claim is required to be filed electronically but when the taxpayer filed the same manually, the same was rejected. The High Court took note of Rule 97A of CGST Rules according to which reference to electronic filing includes manual filing as well and held that refund claim could not be rejected on such technical ground. This order is worth reading by everyone as it contains a few more different issues. The refund claim was filed by recipient of service which is a foreign company located outside India and the department argued that such company is not entitled file refund claim. The High Court did not agree and it said that foreign company has locus standi to file such claim as the definition of 'person' in CGST Act includes any body corporate incorporated by or under the laws of a country outside India also.
The case also saw argument on the transaction not being covered under export of service but the High Court held that place of supply is location of recipient in this case and the recipient being located outside India, place of supply is outside India and the supply of service would be export of service. As usual, violation of principles of natural justice was also one of the grounds which was found to be the sole ground for allowing the writ petition by the Court. Non-speaking order was passed without hearing the petitioner [2022-VIL-342-GUJ].
E-way bill harassment and abuse of power - Costs of Rs. 1 lakh imposed
Covid may have subsided to an extent but e-way bill harassment has not. Goods meant for export to Nepal could not be transported as the driver was not fully vaccinated and could not enter Nepal and therefore, after a few days they were sought to be exported. The vehicle and goods were detained and usual proceedings were initiated. The only objection of the GST authorities was that the taxpayer generated second e-way bill instead of extending the validity of the earlier one and this was responded by the taxpayer as a bona fide mistake. The department did not allege mala fide intent or suspect any fraud in the transaction. The taxpayer was agitated over the sums demanded.
The High Court noted that the fact of Covid disrupting the movement and loading of goods in another vehicle was not under dispute and all the papers were otherwise in order. Second e-way bill was generated only because of the circumstances beyond the control of the taxpayer. It held that since "the goods were covered by valid documents, they could not have been seized and the entire proceedings were totally arbitrary, illegal and without jurisdiction." It further said that the action of the department was an act of harassment and blatant abuse of power. Quashing the orders and directing release of the vehicle, the Court imposed total costs of Rs. 1 lakh on the department in respect of the petitions filed by the exporter and transporter. The High Court has relied on Supreme Court's order in Satyam Shivam Papers [2022-VIL-06-SC] wherein costs imposed by the High Court was held as nominal and the same was enhanced [2022-VIL-347-ALH].
It is almost impossible to reform the tax administration as otherwise, considering the numerous judgments and departmental instructions, such process would have materialized long ago. Therefore, it will be advisable for the GST department to set aside separate funds through Budget for payment of costs as almost every order on e-way bill dispute results in similar outcome.
Demand of over Rs. 400 crore as tax - High Court declines interim relief
Interim orders are not discussed in this column as they may be modified in the final order. However, when an interim order rejects taxpayer's plea on an important issue involving huge amounts, the same merits a mention. In an order of this nature, the Odisha High Court has declined to exercise writ jurisdiction to restrain the department from pursuing adjudication proceedings. The taxpayer had paid GST on royalty and other levies under reverse charge in respect of mining rights and had charged on ISD registration in another State for facilitation services. Such ISD then distributed the credit to other units in various States. The department was of the view that such transfer is not as per law and more than Rs. 400 crores was demanded as tax along with equivalent amount as penalty (total Rs. 901 crores).
It appears that the taxpayer contested the demand on the ground that it was Maharashtra registration which took part in the bid for mining lease in Odisha and therefore, what was paid as tax in Odisha was on behalf of such Maharashtra registration. The department argued that transfer of credit was not made by taking ISD registration in Odisha but using normal registration. The High Court noted that the aspect of support services provided was not clear and was not impressed with the arguments of the taxpayer. The order seems to indicate that some of the big corporates are not so big in having tax efficient processes in their organizations as the vulnerabilities of either internal understanding or external advice or both push them to defend themselves against such high-pitched demands [2022-VIL-348-ORI]
Land related pass book is an article of stationery and not document of title
May be because GST Appellate Tribunal has not been constituted, High Courts, in certain cases, decide writ petitions adjudicating issues on merits. To what extent such orders will be sustained by the Supreme Court remains to be seen. In an order of such type, the Karnataka High Court has held that Pattadar Pass Book cum Title Deed would be classifiable under heading 4820 as an article of stationery and is not a document of title under heading 4907 on the ground that such document is a mere pass book printed with blank columns to be filled up by revenue authorities. Both advance ruling and appellate advance ruling went against the taxpayer and such rulings have been upheld by the High Court through this order.
The Court reasoned that such pass book does not have a face value, fiduciary or intrinsic value and registered document or certificate issued by the revenue officer after paying registration fee and stamp duty is considered as document of title and on the basis of such document of title the revenue authority updates Record of Rights which, in turn, is entered in this pass book. As noted in Tax Vista dated 24th August, 2020, emphasis seems to be more on document of title and not on the security features contained in such pass book. Heading 4907 covers cheque books, stamp papers and other documents of title. At the time it is delivered by the petitioner, entries may be absent but the item appears to be not just an ordinary piece of stationery paper [2022-VIL-335-KAR].
LNG jetty is civil structure and ITC is not admissible
EPC contracts involve heavy expenditure and tax cost is a significant component. If credit of tax paid on procurements is not available, the project becomes really expensive. Without properly appreciating such industry-specific issues, laws have been made and interpretation of such laws is adopted by various authorities. In Tax Vista dated 18th January, 2021, advance ruling [2021-VIL-24-AAR] relating to denial of input tax credit on jetties constructed for handling LNG was analysed. Now the Appellate AAR has affirmed this ruling. It has been held that the appeal is not related to ITC on plant and machinery and its foundation to be used for making outward supply but the question posed was ITC availability on the entire LNG jetties and such jetties are nothing but civil structures and civil structures are excluded from the definition of foundation and structural supports. It reasoned - "The foundation that is allowed in the definition of plant and machinery is that which fixes the plant and machinery to the earth making it immovable. If certain portion of LNG jetties is used for directly fixing plant and machineries then it will not make jetties foundation for plant and machineries but they are only in the nature of civil structures." It also noted that evidence was not produced to substantiate the claim that such jetties are foundation for plant and machinery and therefore, ITC would not be available on inputs, input services and capital goods procured for building such jetties [2022-VIL-53-AAAR].
(The author is an Advocate, Gokul & Subha Advocates, Chennai. The views expressed are personal. The author has published books on cross-border taxation and investigations & appeals under GST. He has edited R.K. Jain's GST Law Manual - 15th Edition - Feb., 2022. E-mail - gokulkishore@gmail.com)