Tax Vista Your weekly tax recap Edn. 3 - 6 July, 2020 By Dr. G. Gokul Kishore

Covid -19 - GST relaxations continue

Late fee has been effectively capped at Rs. 500 if GSTR-3B returns for May, June and July are filed by 30-9-2020 by taxpayers with turnover of more than Rs. 5 crores as per Notification No. 57/2020-Central Tax dated 30-6-2020. If NIL return is filed, late fee shall stand waived.

Filing of NIL return (GSTR-3B) has been made available through mobile phone by SMS last month. Now, by Notification No. 58/2020-Central Tax dated 1-7-2020, CGST Rules have been amended to extend such SMS filing facility to NIL GSTR-1 also.

The late fee related notification was issued on 30-6-2020 but given effect from 25-6-2020. It is reported that for those who paid late fee in excess, recredit will be made. In the past also, similar instances have happened, and these are avoidable. Another issue pertains to making changes at the backend in the GST portal whenever such notifications are issued. Apparently, these are not disclosed to IT team at GSTN in advance, since the functionality/portal is suspended temporarily to implement these changes. This can be well-planned so that changes are made in the portal during midnight to reduce inconvenience to filers.

Transitional tales

Transitional credit is becoming an anthology. In a recent case before Delhi High Court, provisional manual filing of TRAN-1 was sought based on the judgment in Brand Equity Treaties Ltd. v. UOI [2020-VIL-196-DEL] though it has been stayed by Supreme Court [2020-VIL-21-SC]. The petitioner sought direction that if the judgement of Delhi High Court is upheld by Supreme Court, the tax authorities should not bar filing of such form on the ground that the timeline of 30th June has passed. The Delhi High Court noted that if the Supreme Court upholds its earlier order in Brand Equity case, it will not be so powerless as to not direct acceptance of manual filing as the present petition has been filed before 30th June [In Rehau Polymers Pvt. Ltd. v. UOI - 2020-VIL-285-DEL].

In a remarkable coincidence, the Punjab & Haryana High Court allowed manual filing of TRAN-1 by judgement dated 19-6-2020, the date on which stay was granted by Supreme Court in Brand Equity. The Court in this case of Haryana Petro Oils v. UOI [2020-VIL-281-P&H] relied on Brand Equity judgement and also subsequent judgement in SKH Sheet Metal Components v. UOI [2020-VIL-255-DEL].

Unlike TRAN-1 in most of the cases, TRAN-2 was involved in a recent case before Calcutta High Court. The Court permitted manual filing of TRAN-2 by 30-6-2020, following Brand Equity judgment [Subhas & Company v. Commissioner of CGST - 2020-VIL-279-CAL].

Amidst all the petitions seeking manual filing and judgments allowing the same, validity of the recent retrospective amendment to Section 140 of CGST Act will also be challenged. With the government unrelenting on this issue so far, not only the proceedings in Supreme Court will be keenly watched, the conduct of cases in various High Courts post the Apex Court judgment will also be interesting.

Service provider wishes to pay tax - AAR says no

Transportation of goods as a service has been subject to various amendments, exemptions and interpretations since service tax era. Goods Transport Agency (GTA) service touches almost everyone whether B2B or B2C. After having been under reverse charge alone with 5% GST rate, forward charge at 12% GST was introduced in respect of GTA service. It is not uncommon for GTA to take vehicles from other transporters.

In an application for advance ruling, the sub-contractor sought to know whether he can opt for 12% rate under forward charge while providing service to the first or main transporter. Though the main transporter would be issuing consignment note, the applicant stated that he would also be issuing consignment note. However, in a bitter-sweet ruling, the AAR held that the service was not that of GTA but an exempt service, being transportation of goods by road service provided by a person other than GTA. The applicant tried to argue that in all cases of goods transportation, issuance of goods receipt (lorry receipt) is mandatory as per Carriage by Road Act, 2007 and such receipt is nothing but the consignment note. But the AAR opined that there cannot be multiple consignment notes for a single transaction and in the said case, only consignment note issued by the original transporter was relevant [In Liberty Translines - 2020-VIL-168-AAR].

This raises the question as to why a GTA cannot provide GTA service to another GTA. The applicant had argued that documents like consignment note cannot vary classification or substance of the activity but this has not been addressed. Despite the fairly long history of taxing transportation of goods by road service, it appears that the business peculiarities have not been fully factored in the entries in both rate as well as exemption notifications.

Project office not liable to GST for 'accounting entry' of salary of expats

Deputation of employees from foreign company to work in India is generally seen as a potential source of revenue by tax authorities.

In a case before Authority for Advance Rulings, the applicant opted to seek clarity on similar issue. It was stated that he has been rendering services through project office established based on permission by RBI as per FEMA Regulations. Salary of expat employees working in project office is paid by head office in Germany to their bank account in Germany. To comply with Companies Act, 2013 such salary cost is shown in the books of account of the project office. Advance ruling was sought as to whether GST is payable on "accounting entry made for the purpose of Indian accounting requirements in the books of accounts of project office for salary cost of expat employees". The applicant has obtained PAN and TAN in the name of the foreign company and deducted TDS on such salary as per Income Tax Act.

The AAR held that the project office has been set up with the limited purpose of executing specific project and it is an extension of the foreign head office. The expat employees are the employees of the head office and the relationship between the project office and such employees is one of employer and employee. Applying Schedule-III of CGST Act, whereby services by an employee to the employer in the course or in relation to his employment is not treatable as supply, in the present case, GST liability does not arise.

In this case, no amount was reimbursed by the project office as per the facts. The salary was paid by German head office to employees account in Germany/ foreign country. If the facts are little complicated like involvement of reimbursement, mark up etc., the ruling could have led to significant implications. [In Hitachi Power Europe GmbH - 2020-VIL-167-AAR].

Liability of foreign company when service provided through branch office in India

In contrast to the above ruling in favour of the foreign company, the West Bengal AAR in a recent ruling has answered the question posed by local branch of the foreign company in the negative.

The applicant sought ruling as to whether services provided under maintenance and repair contract (MARC) would make it liable to GST as supplier or whether the Indian service recipient is liable under reverse charge mechanism. It was argued that the supplier is located outside India and service being provided in respect of machinery in India, the place of supply is in India and the transaction would be covered under import of service.

The AAR after perusing the MARC noted that (a) the contract is long term for 17 years, the MARC holder being responsible for supply of spares over the contract period; (b) experts will be deputed to the site for maintenance and repair and (c) payment is made based on 5000 expected working hours in a year. The MARC holder has been maintaining suitable resources in terms of human and technical resources at the site of the Indian company. The location of the applicant in India has been held to be a fixed establishment as per Section 2(7) of IGST Act, since it had sufficient degree of permanence with resources to supply service. MARC holder's location in India being the location of supplier and place of supply being in India, the AAR took the view that it was not a case of import of service but the Indian branch office would be liable to pay GST. [In IZ- Kartex - 2020-VIL-165-AAR].

For purposes of income tax, period of stay/activity/ terms of DTAA are important factors to determine creation of PE whereas GST law does not prescribe the same. However, to render services, the structure should have some resources as well as some degree of permanence. In this case 17 long years of service commitment through local office by the foreign company has been a single fact against the applicant. Even if MARC has been entered between foreign company and Indian company, the role played by branch office is too obvious in this case.

IT consultancy by service provider in India to foreign client of Indian company - GST liability

In IT and ITES industry, various models of providing service are followed. The Indian service provider enters into contract with foreign service recipient (client) and gets the software consultancy work done through independent professionals in India. One such professional sought advance ruling on his GST liability. The grounds taken were that he communicates directly with the client abroad, fee is quantified in foreign exchange but paid in INR, he acts as agent of the Indian principal, etc.

The AAR was not impressed. It held that the consultant was not party or privy to the service contract between the Indian company and foreign service recipient and the fee was paid in INR by the Indian company to the consultant and therefore, such company would be the service recipient. On such reasoning, it held that the transaction would be liable to GST as supply of service under relevant entry in Schedule-II of CGST Act. It did not answer the question as to whether it would be treated as export of service citing lack of jurisdiction [In Rajesh Rama Varma - 2020-VIL-177-AAR].

A rejig of the arrangement by either treating the consultant as employee for the contract period or crediting fee directly to the consultant by the foreign company in foreign exchange might have reduced tax inefficiency in such transaction. But business realities may not permit such flexibilities in which case tax cost becomes unavoidable.

Exemption to social welfare organisations - Widening of charitable activities

Social welfare organisations registered as charitable trust under Section 12AA of the Income Tax Act enjoy tax exemptions under income tax. However, GST law provides such exemption only if they are engaged in charitable activities as specified in Notification No. 12/2017-Cental Tax. These activities are very restrictive and therefore, an NGO was compelled to seek advance ruling on GST applicability on their activities of providing legal, medical and psychological support to women who are victims of abuse and violence.

The AAR in a welfare-oriented order, has held that in respect of various services received by the applicant, the actual recipient was the victim and not the applicant and to rehabilitate such victims, the applicant was providing financial support by reimbursing such expenses incurred in procuring services. Consideration was not charged for facilitating legal aid and therefore, activities of the applicant have been held as not covered under supply under CGST Act [In Swayam - 2020-VIL-163-AAR].

This ruling flags the importance of revisiting the exemption to charitable organisations for possible widening of the scope of charitable activities under the above said GST exemption notification.

Leased premises sealed by GST authorities - Writ petition by lessor not maintainable

A particular property was leased to a person registered under GST. Certain investigations were initiated against the taxpayer by GST authorities. It appears that documents or accounts were suspected to have been concealed in the premises and therefore, it was sealed by the officers. Though it was de-sealed and re-sealed, the owner of the property filed a writ petition in High Court seeking direction to hand over vacant possession of her property. The High Court refused to entertain the petition on the ground that such relief cannot be granted in writ proceedings as the parties shall be governed by terms of lease. The petitioner was given liberty to approach appropriate forum for relief.

While getting vacant possession of leased property by owner is subject to civil remedies like filing of suit, the plight of the owner is understandable. From the facts, it appears that the owner was not receiving rent for a long period. To compound this misery, she has to fight legal battle to obtain possession of her own property. Section 67(4) of CGST Act has been invoked for sealing the premises and till the time the taxpayer cooperates in parting with documents, the woes of the owner are unlikely to abate. Compliance history of taxpayer is equally important for lessors also, as this case reveals [In Mrs. Poonam Anand Kishore Vachhani - 2020-VIL-273-KAR].

(The author is an Advocate practising independently. The views expressed are personal)