Tax Vista Your weekly tax recap Edn. 104 - 13th June 2022 By Dr. G. Gokul Kishore

 

 

Refund of credit of cess - Domestic turnover of products not liable to cess to be excluded

GST authorities litigate for the sake of litigating as it appears from a recent judgment of Calcutta High Court. The issue involved was refund of ITC of compensation cess which was granted but the same was reduced by including domestic turnover of final products in the adjusted total turnover in the formula for refund. The Appellate Authority allowed taxpayer's appeal and directed exclusion of such turnover from the formula and grant differential refund amount. The taxpayer filed petition in the High Court assailing the inaction of the department in granting refund as per appellate authority's order and the department filed writ petition arguing that formula adopted by original authority by including domestic supplies in adjusted total turnover is correct and part rejection of refund is sustainable.

 

Before the High Court, the taxpayer contended that since value of exempt supply is excluded, the final products being subject to NIL rate of cess, should be treated as exempted and thus excluded from the computation for refund of cess. The High Court held that the impugned order was sustainable and department's action withholding refund was arbitrary. It directed refund of the amount along with interest [2022-VIL-394-CAL]. When it comes to refund, tax department somehow frustrates taxpayer's bone fide claims by fictitious arguments. But, when the refund amount is high, at least the sanctioning authority can defend himself that he has not favoured the taxpayer when part claim is rejected. Erring in favour of revenue is one of the basic lessons for the adjudicating authorities and such lesson is invariably followed in practice.

 

GST on interest portion after arbitral award - High Court rules in favour of foreign service provider

After implementation of GST, arbitral awards are being issued determining amounts payable by one party to another in respect of transactions or disputes which arose before GST. While arbitration is a kind of settlement, in India, it is the source of litigation since arbitral awards are mostly challenged in courts. In a case of this nature, the dispute between municipal corporation and service provider (located overseas) over arbitral award travelled upto the Supreme Court. Subsequently, the service provider having the award in their favour, sought High Court's intervention for execution / implementation of the award. During this phase, the municipal corporation withheld certain amount towards GST which was objected by the service provider. The only issue which was contested was whether the municipal corporation is liable to GST under reverse charge as the service provider is an entity located overseas. The High Court interpreted the contract clauses and held that while the price agreed was inclusive of taxes and duties, GST on interest element was not under contemplation by the parties when the contract was entered into and therefore, deducting an amount towards GST by the municipal corporation was not correct. It held that municipal corporation is liable to pay GST under RCM [2022-VIL-390-BOM].

 

The objection over applicability of GST on the amounts when the contract was executed and arbitral award was issued much before introduction of GST was not pressed and the Court could not decide such issue. If this issue were decided, it would have enriched jurisprudence on this important subject.

 

Attachment notice under Section 79 to be construed as issued under Section 83

A web of litigation did not yield the desired result for the taxpayer. The facts are not very clear but the taxpayer appears to have challenged certain action by the GST authorities and the High Court had granted conditional relief - deposit of certain amount while remanding the matter to assessing authority. Deposit of such amount got delayed and extension was sought which was also granted. During the course of re-assessment proceedings, the department issued Form GST DRC-16 invoking Section 79 of CGST Act relating to recovery. This was challenged in the present round and the High Court has held that the notice should be treated as issued under Section 83 on provisional assessment though it appeared be issued under Section 79. It held that quoting the provision wrongly or not mentioning the same will not affect the proceedings [2022-VIL-389-MAD].

 

DRC-16 is the form prescribed for recovery action under Section 79. While it is settled law that quoting wrong provision does not vitiate the proceedings, the consequences of invocation of Section 79 as against Section 83 are completely different. The department could have been instructed to be careful in quoting provisions or using the correct forms. It will be impossible to argue before jurisdictional GST authorities that the provision quoted is Section 79 but it should be read as Section 83.

 

Garnishee proceedings infructuous when appeal filed and pre-deposit paid

After Section 83 of CGST Act on provisional attachment, these days, Section 79 on recovery is being put to maximum use by the authorities. In one such case, garnishee proceedings were initiated by directing the bank to pay the outstanding tax dues. The taxpayer resisted such action on the ground that input tax credit available to them was not taken into account while computing the demand. In the meanwhile, appeal was filed against such order on payment of pre-deposit. The taxpayer argued before the High Court that on payment of 10% amount as pre-deposit, recovery of balance amount stands stayed as per provisions and therefore, the garnishee proceedings cannot be pursued. The High Court agreed with this interpretation and held that the earlier recovery proceedings have become infructuous and fresh demand can be raised only subject to the outcome of the appeal proceedings [2022-VIL-395-JHR]. It appears that filing appeal on payment of pre-deposit is an effective method to keep the authorities at bay as it guarantees automatic stay of recovery of balance dues at least till the time the appeal is decided.

 

Provisional attachment and pyrrhic victory

Provisional attachment orders do not reveal anything. They generally mention that to protect the interest of revenue, provisional attachment is required to be made. However, prima facie material should be available in the file / records which forms the basis for application of mind by the authority exercising such power. Based on precedent judgments, the Madras High Court has held that one line mention on protection of revenue interest is not sufficient to invoke the power to provisionally attach bank accounts and has set aside such order. It has noted that tangible material is not available in this case. While the taxpayer has got the relief, the department has been given liberty to exercise such power if material is available and procedures as explained in precedent judgments are followed. The case has been booked by DGGSTI which means it is expected investigations have been conducted and the authorities are in possession of prima facie evidence. If this is the case, then another order on provisional attachment is not far away [2022-VIL-381-MAD].

 

Change in composition of taxpayer and ITC claim

A taxpayer has head office in Kerala and branch office in Tamil Nadu. In Tamil Nadu, before Madras High Court, writ petition is filed with the prayer that the composition has been changed from partnership to private limited company and therefore, there is a change in the GST registration number and this fact should not stand in the way of claiming ITC at head office in Kerala. The issue of ITC came into picture because the branch office had to pay certain differential tax as per proceedings initiated by the department. The counsel for the department has said that this issue is to be decided between the petitioner and Kerala Tax authorities. The Madras High Court has held -"it is open to the petitioner to make a claim for ITC at the jurisdictional GST office in the State of Kerala, where the Headquarter of the petitioner company is located and if such an availment is made by the petitioner by filing the return at the Kerala Tax Authorities jurisdiction, the same shall be considered and decided as per the eligibility of the petitioner within the meaning of the provisions of the GST Act, especially Section 16 and in this regard, the change of the GST registration number between old and new, in view of the change of composition of the petitioner's Firm into Private Limited Company, shall not stand in the way." [2022-VIL-379-MAD].

 

Territorial jurisdiction of High Courts is well-known. In GST regime, taxpayers may be present in multiple States but this may not enable a High Court to issue directions to a taxpayer where the implications go beyond such territorial jurisdiction. The Court orders that if a claim is made through returns filed with Kerala tax administration, then it shall be considered. This means it shall be considered by Kerala authorities over whom Madras High Court has no jurisdiction.

 

Refund relating to export of service and unjust enrichment

Rejection of refund on the ground of unjust enrichment is the time-tested method for all adjudicating authorities to save their skin. It is the burden of taxpayer / claimant to pursue remedy with higher forum with documents, submissions and legal expertise. As the GST Appellate Tribunal is elusive, taxpayers are compelled to seek writ remedy in High Courts. In a case relating to refund on export of services, the petitioner argued that refund relating to export of services is not subject to the test of unjust enrichment. The High Court held that the agreement provided for deduction of consideration payable if refund of tax is obtained which meant that the consideration agreed was not inclusive of tax amount, incidence of tax was not passed on and as the department did not prove the same, the order rejecting refund was to be set aside. While the argument that principle of unjust enrichment does not apply to export of services is a strong one, it is not clear why onus was placed on the department to prove the same. In the facts of the case, as per the agreement tax component was to be refunded if the service provider was successful in obtaining the refund by way of deduction of expenses claimed. The department's contention is that once the tax component has been collected from the service recipient, incidence has been passed on and subsequent return does not nullify the same [2022-VIL-396-BOM].

 

When the refund obtained is passed on to the other party, in effect, the claimant can be said as having borne the incidence of tax. The question will remain whether the test of unjust enrichment has to be satisfied at the time of claiming refund or subsequent to sanction is sufficient. Inapplicability of such test to export of services apart, the legal basis seems to be not very obvious.

 

Commission agent dealing with turmeric covered by exemption

In this column, a few advance rulings dealing with exemption to agricultural produce have been analysed before. Because Notification No. 12/2017-Central Tax (Rate) provides exemption to commission agents involved in agricultural produce, rulings like rice is not an agricultural produce have been controversial. One of the primary reasons is the definition of agricultural produce which is ambivalent. Exemption is available only if the goods are not processed or processed only by the cultivators / farmers for the purpose of sale in primary market and such minimal processing should not alter essential characteristics. In an advance ruling, turmeric was held as not an agricultural produce and exemption to commission agent was denied [2021-VIL-485-AAR].

 

The Appellate AAR has allowed the appeal now holding that turmeric in this case is brought to primary market after post-harvesting activities like boiling, drying and polishing only to make it non-perishable and marketable and there is no change in essential characteristics and therefore, exemption would be available. Laboratory test reports have been relied on to find out whether raw turmeric from the field and the turmeric taken by farmer to primary market are one and the same. While exemption entries may require tweaking to remove ambiguities, the advance ruling authorities should be trained in legal interpretation and appreciating evidence. The authority in the earlier round in this case had held that evidence was not adduced to prove that it is the farmer who carries out processes in his land [2022-VIL-57-AAAR].

 

GST liability when vehicle is used for transporting goods of others

Businesses seek to maximize income sources. Among the several advance rulings on known issues, a lesser known transaction was brought before the AAR recently. The applicant is an ice-cream manufacturer and they engage transporters having refrigerated vehicles which are taken on hire. The goods are transported to the destination during onward trip and sometimes empty trays / crates are brought back during the return trip. Freight is paid for the entire round trip and applicable GST is paid. As the vehicles are empty in most cases during the return trip, the ice-cream manufacturer has been using the same for transportation of goods of other persons who are identified by another agency and it is on this agency that bills for transportation are raised who in turn recovers the same from customers. The AAR has held that the applicant (ice-cream manufacturer) is the person liable to pay GST under reverse charge for the return trip also. The leg relating to transportation of goods of others has been held as covered under business support service and not GTA service on the ground that the applicant is supporting the business of the agency (bringing customers for return trip) and the applicant is not responsible for safety of the goods but the risk is transferred to the said agency. Therefore, the applicant will be liable to pay GST under forward charge in so far as facilitation of the said agency is concerned. Without any reasoning, the AAR has held that entire GST (on both onward and return trips) would be available as input tax credit to the applicant and the same is not deniable only because during the return journey, the vehicle comes back empty [2022-VIL-161-AAR].

 

Though the questions are transaction specific, the urge to classify an activity as business support service is avoidable. If this analogy is extended, everyone in business facilitates their business partners and therefore, in a way, vis-à-vis such others, everyone is providing business support service. Complex transactions are not amenable to simplistic conclusions. On ITC issue, the applicant had advanced several arguments but the AAR has "agreed" with the same without independent reasoning.

 

 

(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)