Your weekly tax recap
Edn. 57 - 19 July 2021
By Dr. G. Gokul Kishore
Resident Welfare Associations - GST payable on amount exceeding Rs. 7500 and not on the entire amount
Madras High Court has held that contribution to resident welfare association (RWAs) will be exempt upto Rs. 7500 per month per member and GST is payable only on the amount exceeding Rs. 7500. The Court has quashed relevant portion of CBIC Circular No.109/28/2019 dated 22-7-2019 clarifying that the entire amount will be taxable if the contribution exceeds Rs. 7500 and also the advance ruling to this effect. It did not see any ambiguity on a plain reading of the entry in the exemption notification and the intention was to remove from the purview of taxation contribution upto an amount of Rs.7,500/-. It compared various exemption notifications and entries under Central Excise, Service Tax and GST to interpret the word "upto" as defining an upper limit. It distinguished such entry from slab rate under income tax law. The judgment of Supreme Court in Dilip Kumar [2018-VIL-23-SC-CU-CB] was relied on to hold that exemption notification must be interpreted strictly and therefore "upto an amount of Rs. 7500" can be interpreted as contribution in excess of the same will be taxable. The Court also noted that during the early phase of GST, CBIC clarification apparently referring to FAQs pointed to exemption being available upto the specified limit [2021-VIL-523-MAD].
This is a clear case of mis-interpretation of the exemption entry by CBIC and AAR and the same has been corrected by the High Court now. Instead of knee-jerk reaction of filing appeal before the Supreme Court against such order, CBIC should issue revised instructions in line with this order and instruct its officer to drop the proceedings initiated so far on this issue.
Transitional credit - ITC is a statutory right and cannot be defeated by procedural rules
The latest judgment on transitional credit and filing of TRAN-1 is from Kerala High Court. In this case, technical glitch was acknowledged but no action was taken. The Single Judge directed IT Grievance Redressal Committee to look into the issue but the GST department filed writ appeal against such order. The Division Bench was annoyed at the approach of the department and minced no words. It refused to interfere with the Single Judge's order stating that the same was innocuous and the department should not have appealed against it, wasting judicial time and energy. The order holds that the statute does not provide for lapsing of unutilized input tax credit, ITC is an asset in the hands of the dealer and statutory right cannot be defeated by procedural rules under GST law.
The Court notes - "Technical glitches at the transition stage to GST should not affect above said statutory right of dealers. Attempt must always be made not to deprive a dealer from a bonafide claim, through technicalities. In the wake of the transition period to GST and the switching over to the electronic portal, admittedly glitches had occurred. In such instances, the department should have, while assisting the assessees, acted with alacrity and promptness rather than deny bonafide claims." [2021-VIL-529-KER].
From 2017 onwards, the taxpayer is fighting this battle in this case and till today, transitional credit has not been allowed. It will take another one year for the department to consider the claim and if it is rejected, the taxpayer will be compelled to pursue second round of litigation. The department with the army of standing counsels will litigate upto Supreme Court for another 2 to 3 years. One can only hope that the taxpayer continues to be in business till such time and the business also grows so as to spend on such harassing litigation.
Provisional attachment - Objection as per rules to be filed before approaching court
Rule 159(5) of CGST Rules provides that the person whose property is attached, may file objection within seven days and the Commissioner, after granting hearing, may release the same. The taxpayer approached High Court on the ground that cash credit account cannot be attached but the Court held that the remedy available under Rule 159(5) is not an ineffective remedy but substantial relief can be granted to the person concerned if sufficient cause is shown. It has distinguished precedent judgments on this issue holding that in one particular case, the taxpayer had sought relief from the High Court after exhausting the remedy under Rule 159(5). Notwithstanding such distinction, this order shows that writ petitions cannot keep extreme measures like provisional attachment at bay in all the cases. Attachment of bank account brings business to a halt and type of account hardly matters. Cash credit account is in the nature of loan account against stock and other materials and by attachment, essential working capital requirement gets adversely affected [2021-VIL-521-BOM].
Valuation under GST - Post-supply discount excludible only if quantum / percentage specified in agreement
Large companies are at sea while trying to navigate the troubled waters of valuation under GST. Discount is an area always mired in controversy. This week, a ruling by the Appellate Authority for Advance Rulings, Kerala (AAAR) is discussed. As per the transaction model, GST is paid initially by the principal company / supplier of goods and post-sale discount is offered to dealers through distributors and such distributors extend the discount to their customers who are dealers / workshops. The principal company issues commercial / financial credit notes for the differential amount to reimburse the distributor and it does not seek any reduction in transaction value or GST already paid based on invoices raised.
Discussing the essential conditions of post-supply discount as per Section 15(3)(b) of CGST Act, the AAAR notes that in such cases, quantum or percentage of discount shall be mentioned in the agreement, it has to have some basis or parameters or criteria and cannot be open-ended. A bare minimum mention of discount in the agreement without any criteria will not fulfill the conditions in Section 15. Though relatively detailed, for conclusion, the ruling is rather abrupt by holding that the amount paid to dealers does not fulfill the conditions and cannot be allowed as deduction while arriving at the transaction value. It has further held that commercial credit note is not the credit note as per Section 34 and the parent company had passed on the tax incidence to the appellant and therefore, such credit notes cannot be considered for reduction in tax liability. It has, however, held that because the parent company is not eligible to reduce the original tax liability, the appellant is eligible to avail input tax credit as per the original tax invoice raised by such company.
As per the ruling, the additional discount given by the company is to augment sales volume and therefore, such discount being a consideration to offer reduced price, is liable to GST. The amount is part of the consideration payable by customers (dealers) to the appellant (distributor) [though paid by the parent company] and is liable to be included in the taxable value adopted by the appellant to his customers [2021-VIL-32-AAAR].
This issue is not new as similar dispute has been prevalent from Central Excise / Service Tax period. All discounts are intended for sales promotion and if the same is passed on in the distribution chain as evidenced by records, then demanding tax on such discount fails logic or common sense. This is subject of course to reduction in proportionate ITC. While Section 15 needs undergo further refinement and interpretation through judgments, members of industry should take note of such rulings to re-visit the agreement, discount pattern, language and method used for passing on discounts, etc. There are alternative options in this transaction but the ruling does not indicate the same have been pursued by the appellant and his parent company.
Facilitating exam fee payment - An advance ruling in favour of the taxpayer
When most of the advance rulings are perceived as against the taxpayers, a recent ruling has vindicated the stand taken by the taxpayer. The AAR has also rejected department's contention. The applicant is engaged in providing training in medical coding and GST is paid on the fees collected. Service of facilitation of payment of examination fee is provided free to both own students (those who undergo training) as well as others / outsiders and no service charge is collected for such service in both the situations. The department agreed that in respect of own students, for the above service, exemption / exclusion under pure agent as per Rule 33 of CGST Rules will be available but in respect of outsiders, the same would not be available. The reason is that, pure agent is required to supply such services in addition to supplies on his own account.
The AAR held that in the first situation, there is no service charge involved and pure agent benefit would be admissible. In the second situation, it said that since the service is provided free, in the absence of consideration, the same would not constitute supply and therefore, not liable to GST. One may say that the issue was so clear and therefore, the ruling went in favour of the taxpayer. As discussed in this column before, there are rulings where simple questions become complicated after the reasoning adopted in such rulings [2021-VIL-253-AAR].
Chips, branded or not, attract 12% GST - Questionable classification by AAR
Banana chips, jackfruit chips, tapioca chips and jaggery coated banana chips - all these namkeens are classifiable under tariff item 2008 19 40 attracting GST of 12%., as per an advance ruling. This entry covers items like fruits, nuts and other edible parts of plants which are prepared or preserved and it specifically illustrates items like roasted or salted cashew nut, ground nut, etc. The applicant sought to classify under Heading 2106 90 which specifically covers namkeens and sweetmeats attracting 5% GST when brand name is not used in respect of namkeens. But the AAR was not impressed. The applicant submitted that they will not use brand name nor pursue remedy relating to actionable claim. If the classification should be made under a heading attracting higher rate, then such arguments can hardly sell. According to AAR, tariff item 1903 00 00 covers tapioca products in the form of flakes, grains, etc., and not fried products like chips and Heading 2106 being a residuary entry cannot be used when headings under Chapter 20 are applicable. It also expressed the view that an essential ingredient for sweetmeat is sugar and therefore, jaggery coated chips are not sweetmeats [2021-VIL-254-AAR]. A similar ruling with slight variation in product involved can be seen at 2021-VIL-260-AAR.
AAR's finding appears to be not correct since the ruling holds that heading 2008 covers all roasted and fried vegetable products whereas frying is not mentioned in heading 2008. Importing words into the statute by interpreting chapter notes is not sustainable. It is common knowledge that chips is a namkeen and common parlance test prevails in classification of such items and classifying the same along with roasted nuts is not correct. An appeal may see a different ruling.
Supply of used jewellery - Margin scheme under Rule 32(5) applicable when conditions are satisfied
Rule 32(5) of CGST Rules provides that taxable value shall be the difference between the selling price and purchase price when second-hand goods are sold as such (supplied) by a person engaged in such supplies. If the difference is negative, then no tax is payable. Benefit of such margin scheme provided under this rule was sought to be availed by the applicant engaged in purchase and sale of used / second-hand jewellery. But for cleaning and polishing, the article is sold as such. The used ornaments are purchased from individuals who are not registered under GST law and therefore, the condition on non-availment of input tax credit is also satisfied. When all these conditions are satisfied, the AAR has also held that the applicant can adopt Rule 32(5) on margin scheme. This ruling is about taxable value only as the applicable GST rate is 3% as per Schedule V of Notification No. 1/2017-Central Tax (Rate) which does not vary for used goods [2021-VIL-257-AAR].
Compelling panchayats to seek ruling and analyse GST implications
This week, VIL has reported an advance ruling wherein the AAR has held that exemption will be admissible to lease rent charged by the Panchayat for land (water channel) used for fish farming. The exemption as such does not require much interpretation but this ruling is mentioned here to highlight the fact that panchayats are being compelled to seek ruling on tax implications under GST. Finances of local bodies are not significant or healthy. The exemption entries relating to government and local bodies need to be overhauled so that they are not compelled to seek such rulings [2021-VIL-261-AAR].
Pre-deposit not required when dues paid while opting for SVLDRS
When service tax as confirmed in the impugned order has been paid which is more than the pre-deposit required, then order of Commissioner (Appeals) that pre-deposit should be paid separately is not sustainable. This sentence may appear to be strange but facts will provide some light. The appellant - municipality - opted to settle the service tax dues under SVLDRS and applied for the same. However, the tax dues were paid after the last date for payment of the same and therefore, benefit of amnesty scheme could not be availed. Therefore, appeal was filed with Commissioner (Appeals) who did not accept the amount paid but insisted on separate pre-deposit. For this purpose, the municipality had to knock the doors of the Tribunal. The Tribunal held that the amount paid being more than the pre-deposit required, the same ought to have been considered as pre-deposit. It further held that even if such amount was paid by debit to Cenvat credit account, the same can be considered as compliance with pre-deposit requirement. Generally, post of executive Commissioner (in-charge of a Commissionerate) is preferred over the post of Commissioner (Appeals) in view of the restricted jurisdiction of the latter. Sometimes, it is seen as punishment posting. Unfortunately, when such orders are passed, it is the taxpayers who get punished without any offence being committed [2021-VIL-301-CESTAT-CHE-ST].
(The author is an Advocate, Gokul & Subha Advocates, Chennai. The views expressed are personal)