Tax Vista Your weekly tax recap Edn. 8 - 10 August, 2020 By Dr. G. Gokul Kishore

Service provided by Indian subsidiary to holding company abroad is export

GST law has borrowed several provisions from Central Excise, Service Tax and VAT statutes. In Service Tax regime, Rule 6A of Service Tax Rules specified certain conditions to be fulfilled for a transaction to be treated as export of service. These provisions have been incorporated with necessary modifications in IGST Act, 2017. One of the conditions in Rule 6A provided that the service provider and service recipient should not be merely establishments of the same person (distinct person) and this has been retained in IGST Act also.

CERA Audit parties are perceived as technically sound but sometimes over-enthusiastic as the interpretation adopted barely camouflages the revenue bias. Based on an audit objection by such party, show cause notice was issued demanding service tax from the subsidiary in India for providing services to holding company and other subsidiaries located outside India. The ground for the demand was that both the service provider and recipient were establishments of the same person and therefore, the same was not treatable as export of service. There was no dispute over fulfilment of other conditions as prescribed in the provisions like receipt of foreign exchange and place of provision of service being outside India.

The assessee challenged the notice in the High Court as lacking jurisdiction. After holding the writ petition as maintainable against the notice, the High Court held that the transaction would be covered under export of service because the petitioner located in India and the holding company located outside India cannot be considered as establishments of the same company. The SCN was set aside by the Court. The petitioner had argued that they are independent legal entities and the German parent is not an establishment of the Indian subsidiary and therefore, they cannot be treated as establishments of distinct persons [Linde Engineering India Pvt. Ltd. v. UOI - 2020-VIL-349-GUJ-ST].

The ratio of this judgment will be applicable to similar disputes under GST also. The relevant provisions in Service Tax and GST are almost similar and particularly, the condition on establishments of distinct persons. If subsidiary in India and holding company abroad are not to be treated as establishments of distinct person, then in GST regime, services provided by Indian group companies to other group companies or parent located outside India against receipt of consideration in foreign exchange will get the benefit of export of service. This is subject to place of supply being outside India which, in most cases, will be satisfied. While the GST authorities may try to distinguish this judgment based on law being different, it may not be accepted considering the similarity of the provisions.

Sabka Vishwas - No vishwas in tax authorities

This is a sad tax story unfortunately at the expense of the taxpayer. Sabka Viswas (Legacy Dispute Resolution) Scheme, 2019, like any other amnesty scheme, is intended to close certain pending disputes and also garner some tax revenue in the process. While the assessee gets peace of mind and more time to devote to business, the tax authorities can allocate their resources for better implementation of new law of GST by closing pre-GST cases. In certain cases, by opting for amnesty scheme, peace can well be lost because to close one dispute, another dispute has to be overcome.

Two show cause notices demanding service tax were issued to the assessee in realty sector involving the same two real estate projects. Besides covering a few more months, the second notice covered the same period covered in the first SCN. Certain amounts paid were appropriated through adjudication order in respect of the first SCN. Personal hearing was conducted in respect of second SCN after almost four years. Because the projects in the both the SCNs were same, the assessee pointed out that the activities had already suffered tax under the first order. Ignoring such blunder, adjudication order was passed confirming the demand as raised in the second SCN.

Appeal filed before Commissioner (Appeals) against the second order was held as not maintainable as pre-deposit was not made on the ground that demand was duplicated. In February, 2017, Madras High Court directed the authority to pass order within two weeks but this order was not complied with by the authority.

The first case was before Commissioner (Appeals) when SVLDRS came and the same was opted by the assessee. Similarly, for the second case also, application was filed under this scheme but it was rejected as 30% of the disputed demand was stated as not paid. Faced with such irrational approach, the assessee was compelled to seek relief from High Court.

As directed by the High Court, Commissioner (Appeals) considered the matter and accepted that demand has been duplicated and the amount appropriated through first order being higher than mandatory pre-deposit. Taking note of such order of Appellate Commissioner, the High Court set aside the order of the Designated Committee rejecting the declaration of the assessee. It noted that the scheme is meant to close legacy disputes and provisions should be interpreted with certain fairness. With this latest order, the issue has been settled finally but it reveals how weak an individual assessee is against the might of the State and its authorities [Navin Housing and Properties (P) Ltd. v. The Designated Committee - 2020-VIL-351-MAD-ST].

One of the strange arguments of the department before the High Court was violation of principles of natural justice by Commissioner (Appeals). Such allegation is generally made by assessees only. The High Court rejected the same holding that the relevant provision mandates hearing of appellant unlike the provision on appeal to the Tribunal which covers "parties to an appeal".

Summons compelling attendance during lockdown

Power to summon has been provided in GST law only to be exercised - lockdown or otherwise. Business is frozen and the global economy has been pushed to lifeless state by Covid-19. But the Indian GST authorities believe that everything is normal including transport facilities and therefore, taxpayers can be summoned to their offices. They cannot wait for normalcy to return. Faced with such a situation, the taxpayer was before Supreme Court but the Apex Court did not grant relief. However, it gave liberty to the taxpayer to request for deferring recording of statement until the lockdown is over [Bioveda Action Research Company v. ADG, DGGI - 2020-VIL-24-SC].

CBIC may consider issuance of instructions so that the strong arm of law does not extend in haste at least in these times of grave crisis.

Detention of vehicle - Misunderstanding v. misuse

Detention of vehicles and goods has been very common occurrence in GST regime. In a recent case, the vehicle has been detained only because it was returning without any goods. During onward trip, the officers who intercepted it were told that the goods will be auctioned the same day but they were not so auctioned. The High Court has ordered release of the vehicle after taking note of misunderstanding of the nature of transaction and transportation [Jeelani v. Asst. State Tax Officer - 2020-VIL-347-KER].

The officers have no powers to detain an empty vehicle unless there is credible information that it was used for transportation of goods without payment of tax. In this case, there were proper documents during onward journey and the officers had knowledge of the same. It appears to be a case of misuse of powers either intentionally or out of ignorance. In either case, the government should properly train the officers before sending them to the field to enforce the law.

MEIS benefit not deniable merely for not showing option in check box

While export promotion schemes are intended to promote exports, these days, such schemes themselves need to be promoted by one Ministry before another. Merchandise Export from India Scheme (MEIS) is already stuck on account of shortage of funds. In such a scenario, in a widely prevalent dispute of not checking the box "Yes" online at the time of claiming MEIS benefit, the Customs Department appealed against Single Bench order of High Court. The Single Bench had allowed the benefit based on description containing such intention to claim MEIS and shipping bill having the same remark.

The Division Bench dismissed Customs Department's appeal. The appeal was filed stating that necessary verification cannot be caused at this point of time but the Division Bench was not pleased. It held that based on the verification made at the time of export, NOC can be granted. The department argued that relaxation in such cases was provided for initial six months only but the Court held that the same would be discriminatory. Holding the omission to opt in check box as inadvertent, the Division Bench stated that there was no justification for denying the claim [Commissioner of Customs v. Mangalath Cashews, Anu Cashew - 2020-VIL-355-KER-CU].

If export benefits are to be consistently disputed by the department and DGFT before High Courts, then the cost involved in litigation and the time spent should be factored in while prescribing the reward percentage. While MEIS is being phased out, the adversarial approach of the departments concerned should also be phased out.

Order passed even before hearing date - Training necessary for quasi-judicial authorities

The title could be shocking for many. Even today, some officers in the GST department vested with quasi-judicial authority to pass orders require good amount of training on the first lesson viz., principles of natural justice. A Deputy Commissioner issued order confirming the tax demand a few days before the time provided to the taxpayer for filing reply to the show cause notice. Obviously, the order was passed without hearing the noticee. They had to rush to High Court and the Court quashed such order and remanded the matter for fresh consideration [Shiv Kishor Construction Ltd. v. UOI - 2020-VIL-364-PAT].

Such officers who are ignorant of fundamentals of justice dispensation should be divested of adjudication responsibilities and posted in headquarters offices with administrative charge only. This order does not contain important ratio but it is highlighted in this column to emphasise the need for not only training of officers discharging quasi-judicial functions but also creation of separate hierarchy for such officers who are trained in interpretation of law and preferably qualified in law.

Catering in hospital canteen by contractor - Curing tax uncertainty

Realty and restaurant are the two sectors visited with most changes in terms of tariff in GST regime. In both the sectors, models and transactions vary vastly in nature and therefore, inherent complications get compounded when complex and capricious tax law pounces on it.

In a case before Authority for Advance Rulings, the applicant stated that he was providing food to patients from the canteen in hospital but as contractor, bills were being raised on the hospital. Applicable rate of GST was the issue involved. Due to delay in deciding the question, the AAR had to answer for different periods attracting different rates. It held that till 26-7-2018, the GST rate was 18% on such service and post such date, the rate is 5% without ITC [Navneeth Kumar Talla - 2020-VIL-228-AAR].

The AAR had to trace all the tariff changes to arrive at the conclusion. The brief history reveals the extent of confusion prevalent in tax administration and it was almost clueless till the time, the rate for services provided in canteen and mess was clarified as excluding outdoor catering which came to be confined to such supply being event based or occasional.

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