Tax Vista Your weekly tax recap Edn. 7 - 3 August, 2020 By Dr. G. Gokul Kishore

Refund of ITC - Input service to be included

Refund of accumulated input tax credit (ITC) arising out of inverted tax structure is governed by clause (ii) of first proviso to Section 54(3) of CGST Act, 2017. This provision covers the situation where ITC gets accumulated because the GST rate on inputs is higher than the rate on output supplies. It commences with restrictive terms like "no refund of unutilised input tax credit shall be allowed" but carves out exceptions to such prohibition and, besides zero-rated supplies (exports), inverted duty / tax structure is statutorily recognised as affording refund of unutilised ITC. Use of "unutilised input tax credit" in the beginning in the proviso along with "inputs" in clause (ii) has led to huge controversy as to whether for refund of such accumulated ITC, input services will also get included or inputs alone will be reckoned.

A related provision is Rule 89(5) which prescribes the formula for computation of such refund. This rule, as originally framed, included input services in the definition of "Net ITC" used in the formula which was later amended with retrospective effect to omit reference to input service. CBIC also clarified by Circular No. 79 dated 31-12-2018 that such amendment was meant to implement the intention of restricting refund of tax paid on input services (and capital goods) as part of refund of unutilised ITC.

Exclusion of input services from the formula meant substantial reduction in amount of refund available to claimant where input services with higher rate of tax (as compared to rate on relevant inputs) are used in greater proportion. Also, Section 54(3) seeks to provide refund of input tax credit lying unutilised and input tax credit has been defined as "credit of input tax" and "input tax" is defined as the GST charged on supply of goods or services or both.

Based on these provisions, the petitioner argued before Gujarat High Court that Section 54(3) provides for refund of ITC which includes credit availed on both goods and services and Rule 89(5) placing restriction on input services is ultra vires the CGST Act. Tracing from the official deliberations before implementation of GST, quoting the objects and reasons at the time of introduction of GST law and interpreting the relevant provisions, the petitioner contended that use of "any" along with "unutilised input tax credit" in Section 54(3) meant that all input tax credit (including the ITC on input services) will be reckoned for such refund.

The High Court held that the formula prescribed in the rule is contrary to the provisions in the CGST Act and it could not have been the legislative intention to place restriction on input service and the relevant explanation in Rule 89(5) defining "Net ITC" is ultra vires Section 54(3). It further held that the said explanation on "Net ITC" is required to be read down and should be taken as meaning input tax credit availed on both inputs and input services [VKC Footsteps India Pvt. Ltd. v. UOI - 2020-VIL-340-GUJ].

Retrospective amendment is a clear case of blunder by the tax administration. It hardly hides the revenue mindset of restricting refund and perceiving such fetters as contributing to revenue. While the department may file appeal and pray for stay before Supreme Court, it is hoped that the GST Council will take note of this judgment holding the relevant provision as ultra vires and recommend appropriate amendments in line with such judgment and instruct the tax administration not to precipitate such issues.

Intermediary service - High Court holds provision as valid

In another high-profile case in terms of implications, Section 13(8)(b) of IGST Act was contended as ultra vires Article 286(1) of the Constitution before the Gujarat High Court. As per this provision, in respect of intermediary services, location of supplier i.e. intermediary is treated as the place of supply (POS).

The petitioner argued that Parliament is not empowered to legislate on place of supply as per Article 286 of the Constitution and as per the provisions, intermediary is required to pay CGST and SGST on the commission received from the recipient when the service is for the benefit of such recipient outside India and in the course of export. Absence of reckoning intermediary's place as POS when both the supplier and recipient are located in India was assailed as discriminatory vis-à-vis the carve out provision contained in Section 13(8)(b) when one of them is outside India. Treatment of such service as not covered under export of service was also assailed. Notification providing for exemption to intermediary service when goods are involved and both supplier and recipient are in foreign country was argued as discriminatory as such benefit is not available when services alone are involved.

The High Court after analysing the statutory provisions on place of supply, definitions of intermediary and export of service held that the legislature had thought it fit to consider place of supply of intermediary service as the place of such supplier of service and the provisions are not ultra vires and unconstitutional. It further noted that there is no distinction for intermediary services when the recipient is in India or outside India and therefore, mere receipt of commission in foreign exchange when the service recipient is outside India will not qualify as export of service. It held that similar provisions were present in service tax regime also and the government's stand to tax intermediaries and not to treat the services as export has been consistent [Material Recycling Association of India v. UOI - 2020-VIL-341-GUJ].

It is not known why the revenue side relied on advance rulings before High Court. Leaving aside applicability of such rulings only to the applicant and jurisdictional officer, considering the hierarchy, advance rulings have absolutely no precedential value or binding force before High Courts and that too when the High Court sits in exercise of writ jurisdiction under the Constitution. The larger issue of denying export benefit to those earning foreign exchange remains unresolved and GST Council may take note of this judgment also to recommend amendments to set right this anomaly.

Anti-profiteering - Deposit of amount when financial hardship not pleaded

In recent times, High Courts have been considering the present Covid-19 pandemic situation as a ground to grant time for payment of either amount held as profiteered by National Anti-Profiteering Authority (NAA) or tax dues by authorities. In a recent case, the Delhi High Court has directed payment of principal sum of the amount held as profiteered since the petitioner did not plead financial hardship. The Court has also stated that such direction is being given following earlier orders. It has accepted the request of the petitioner to pay the profiteered amount in six instalments.

In most of the cases, such amounts are astronomical and in this case, it is more than Rs. 75 crores. In routine cases of tax demand running into a few lakhs or one or two crores, financial hardship is usually raised and in these times of lockdown and business loss, it is surprising that such ground has not been taken in this case [Patanjali Ayurved Ltd. v. UOI - 2020-VIL-331-DEL].

Transitional credit - Credit admissibility when CTD not available

Section 140(3) of CGST Act provides for transitioning pre-GST credits if invoice or other document evidencing payment of excise duty is available with dealers. Before Gujarat High Court, the petitioner-dealer sought directions to retain credit transitioned based on excise invoices issued by the manufacturer in the name of other dealers from whom the petitioner had bought the vehicles and spare parts.

The dispute arose because the petitioner did not have credit transfer documents (CTD) required to be issued by manufacturer as per Cenvat Credit Rules. The petitioner argued that based on invoices issued by other dealers to him containing chassis number or other such information, duty payment can be verified and credit should be allowed. The department objected on the ground of absence of CTDs.

The High Court held that even though CTDs are not available, department can verify duty payment based on documents submitted by the petitioner. It directed the authorities to verify such documents and allow transitional credit subject to such verification [Downtown Auto Pvt. Ltd. v. UOI - 2020-VIL-342-GUJ]. Credit admissibility based on collateral evidences when credit transfer documents are not available is one of the several disputes relating to transitional credit having limitless dimensions.

Limitation for best judgement assessment under CGST Act

Section 62(1) of CGST Act provides for assessment based on best of his judgement by the officer when a registered taxpayer fails to file returns and the time-limit prescribed for issuance of assessment order is five years. Such time-limit is to be computed from the due date for filing annual return for the relevant financial year. Section 62(2) provides for deemed withdrawal of assessment order if the taxpayer files the return within 30 days of service of such order.

The petitioner before Kerala High Court assailed the best judgment assessment order on the ground that such assessment could have been made only after due date of respective financial year for filing return i.e. after December. However, this has not been accepted by the High Court. It held that the time limit is only to complete the assessment and it does not require that such process can commence only after 31st December. According to the Court, best judgment assessment can be undertaken on detection of failure to furnish return but it should be completed within five years from the date prescribed in the provision.

In this case, the petitioner had not filed return within 30 days of service of assessment order and therefore, benefit of deemed withdrawal was also held as not available [Amani Machine Centre v. The State Tax Officer - 2020-VIL-345-KER].

Data Centre - Construction and operation is not a works contract

The applicant was contracted to operate and maintain data centre after constructing civil structure for housing and installing equipment and devices. Based on the fact that construction is also involved and the data centre cannot be moved and the installed equipment cannot be shifted without damage, it was argued that the activity amounted to works contract and therefore, the entire contract would be liable to GST @ 18%.

The Authority for Advance Rulings (AAR) noted that cost of the goods and charges towards installation service and AMC service have been separately mentioned in the agreement and 85% of the total contract amount is towards supply of goods and the value of construction is insignificant. After perusing Section 2(119) of CGST Act defining works contract, it held that in the case before it, there has been no construction of immovable property wherein transfer of property in goods is involved in the execution of such contract. It was held that the agreement had clear bifurcation in respect of supply of goods and that of services and that major part of supply is that of goods and separate payment is received for such goods sold. According to the AAR, such supplies are naturally bundled supplied in conjunction with each other and therefore, the same is a composite supply with supply of goods being the principal supply [Prasa Infocom & Power Solutions - 2020-VIL-227-AAR].

Bifurcation or splitting of activities is generally perceived as artificial. However, in this case, bifurcation of value for the purpose of agreement has been viewed as evidencing supply of goods and supply of services separately. The larger issue pertains to tax differential between goods and services as this is one of the reasons for seeking treatment of the entire contract as either that of goods or that of services.

E-invoicing applicable to taxpayers with turnover of Rs. 500 crore or more

Taxpayers with turnover of Rs. 500 crore or more will be required to prepare GST invoice with prescribed fields and upload the information in the prescribed facility / portal and generate invoice reference number (IRN) as per Notification No. 61/2020 - Central Tax dated 30-7-2020. Such e-invoicing system will come into force from 1st October, 2020 as against 1st April notified earlier. A revised format / schema for the invoice GST INV-1 has also been provided through Notification No. 60/2020 - Central Tax dated 30-7-2020. SEZs units have also been kept of out of such requirement. Considering the present Covid-19 crisis and extension of date for various compliances, it seems the time may not be entirely appropriate for such changes. However, the turnover being kept at a fairly higher level, industry may not have an issue even if implemented from October, 2020.

Refund withheld on extra-legal reasons - High Court orders recovery of interest from officers

Most of the Central Excise assessees (now GST taxpayers) will have the experience of two rounds of litigation. First round pertains to fighting a case on merits and once an order in their favour is passed by an authority or body or court, refund becomes due. When refund is sought, in most cases it is rejected on either unjust enrichment or on some other ground forcing the assessee to enter into second round of litigation. The second litigation for refund is time-consuming as it commences after the first one comes to an end. In a typical case of such nature, the petitioner before Gujarat High Court sought directions on payment of refund. CESTAT had passed an order in their favour but the Assistant Commissioner rejected the refund citing unjust enrichment. Commissioner (Appeals) allowed assessee's appeal but this time, the department did not grant refund for no good reason. After a few months, the department filed appeal in High Court and this was cited as the reason for withholding refund.

The High Court expressed strong displeasure at the turn of events and noted that refund was withheld for extra-legal reasons. It ordered refund within 24 hours along with interest at the rate of 6% till the date of deposit of such amount in Consumer Welfare Fund. It further ordered payment of higher rate of 18% interest after such date and directed the department to order inquiry against officers and recover the differential interest from them. It also imposed costs to be recovered from such officers [Century Copper Rod Pvt. Ltd. v. Asst. Commissioner - 2020-VIL-339-GUJ-CE].

Passing strictures or recovery of costs is not new but directing the department to consider recovery of differential interest from officers is unusual. This order should serve as a warning to refund sanctioning authorities who tirelessly innovate grounds to reject or delay refund without any reason. CBIC may take note of such order and issue instructions to officers on grant of refund without delay when assessees have orders in their favour. Mere issuance may not be sufficient but reiteration of such instructions time and again will ensure that the revenue-oriented approach towards such issue changes.

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