I. HIGH COURT
18 M/s F1 Auto Components Pvt. Ltd. vs. The State Tax Officer [2021-TIOL-1509-HC-Mad-GST] Date of order: 9th July, 2021
Interest is payable only on the net cash liability and provisions of section 42 are attracted only in a case of mismatch in input tax credit and not in a case where a wrong credit is availed
FACTS
The challenge is to the order dated 27th January, 2021 levying interest u/s 50 of the CGST Act, 2017 relating to both interest on cash remittances as well as remittances by way of adjustment of electronic credit register.
HELD
The Tribunal noted that with respect to the second limb of the transaction, it is covered by the decision in the case of
Maansarovar Motors Private Limited 2020-TIOL-1846-HC-Mad-GST wherein it is clearly held that interest can be levied only on the net cash liability. The Tribunal further held that the provisions of section 42 can only be invoked in a situation where the mismatch is on account of an error in the database of the Revenue or a mistake that has been occasioned at the end of the Revenue. In a case where the claim of input tax credit (ITC) is erroneous, then the question of applying section 42 does not arise at all, since it is not a case of mismatch but one of wrongful claim of credit. The levy of interest on belated cash remittance is compensatory and mandatory and the levy is upheld to this extent.
19 Greenwood Owners Association vs. The Union of India [2021-TIOL-1505-HC-Mad-GST] Date of order: 1st July, 2021
Maintenance charges collected from members of the Association will be taxable only to the extent contribution exceeds Rs. 7,500
FACTS
The applicants sought a ruling from the Advance Ruling Authority as to whether they are liable to pay GST only on the amount in excess of Rs. 7,500 collected as monthly maintenance charges from the members of the Association or on the entire amount. The Authority held that in the event the charges or share of contribution goes above Rs. 7,500 per month, such service will not be exempt. Since the share of contribution by members is above Rs. 7,500 per month, the exemption is not available and GST at appropriate rates is to be charged on the full amount of share of contribution.
Aggrieved by the said order, a writ petition was filed before the Madras High Court. The Bench noted that the term ‘up to’ employed in the Notification is heavily relied upon by the petitioners to contend that only the amount in excess of Rs. 7,500 is liable for the tax and not the whole amount collected. The CBIC e-flyer explaining that GST would be applicable only on the amount in excess of Rs. 5,000 (as the exemption then stood till 24th January, 2018) is relied upon. The petitioners challenge Circular No. 109/28/2019-GST dated 22nd July, 2019 wherein it was clarified that in case the maintenance charges exceeded Rs. 7,500 per month per member, the GST is payable on the entire amount and is not limited to the excess amount only.
HELD
The Court noted that Entry No. 77 of Notification 12/2017-Central Tax (Rate) uses the term ‘up to’ an amount of Rs. 7,500 which can only be interpreted to state that any contribution in excess of the same would be liable to tax. The term ‘up to’ hardly needs to be defined and connotes an upper limit. The intendment of the exemption entry in question is simply to exempt contributions till a certain specified limit. The clarification by the GST Department even as early as in 2017 has taken the correct view. Thus, the conclusion of the AAR as well as Circular No. 109/28/2019-GST dated 22nd July, 2019 to the effect that any contribution above Rs. 7,500 would disentitle the exemption, is contrary to the express language of the Entry in question and both stand quashed. Only the contribution above Rs. 7,500 will be taxable.
20 D.Y. Beathel Enterprises vs. State Tax Officer [(2021) 127 taxmann.com 80 (Mad)] Date of order: 24th February, 2021
Where assessee purchased goods through registered dealers and substantial portion of sale consideration was paid through banking channels, Revenue could not reverse ITC availed by assessee for failure of seller to deposit tax on such supply without examining seller and initiating recovery proceeding against seller
FACTS
The petitioners are traders and they had purchased goods from a supplier. A substantial portion of the sale consideration was paid only through banking channels. The payments made to the said supplier included the tax component. Based on the returns filed by the sellers, the petitioners availed ITC. Later, during inspection it came to light that the supplier did not pay any tax to the Government. The respondent issued show cause notices to the petitioners. They submitted their replies specifically taking the stand that all the amounts payable by them had been paid to the said suppliers. Unfortunately, without involving the defaulting suppliers, the impugned orders came to be passed levying the entire liability on the petitioners herein. The said orders are under challenge in these writ petitions.
HELD
The Court noted that no inquiry has been initiated against the defaulting supplier. When it has come out that the supplier has collected tax from the petitioner, the omission on the part of the supplier to remit the tax in question should have been viewed very seriously and strict action ought to have been initiated against him. Further, when there are allegations that the credit is availed without receipt of goods then it is necessary that such suppliers be confronted. Thus, the Court held that the impugned orders suffer from certain fundamental flaws and have to be quashed for more reasons than one. The Court also gave specific instructions that the supplier be examined and recovery action in parallel be initiated against the supplier as well.
21 ARS Steels & Alloy International (P) Ltd. vs. State Tax Officer [(2021) 127 taxmann.com 787 (Mad)] Date of order: 24th June, 2021
A loss that is occasioned by consumption in the process of manufacture is not covered u/s 17(5)(h) of the CGST Act warranting reversal of ITC
FACTS
The petitioners are engaged in the manufacture of MS billets and ingots. MS scrap is an input in the manufacture of MS billets and the latter, in turn, constitute an input for manufacture of TMT / CTD bars. There is a loss of a small portion of the inputs, inherent to the manufacturing process. The Department sought to reverse a portion of the credit claimed by the petitioners, proportionate to the loss of the input, referring to the provisions of section 17(5)(h) of the GST Act.
HELD
The Court held that section 17(5)(h) deals with goods lost, stolen, destroyed, written off or disposed by way of gift or free samples. Hence, the loss that is occasioned by the process of manufacture cannot be equated to any of the instances set out in clause (h). It further held that the situations as set out in clause (h) indicate loss of inputs that are quantifiable and involve external factors or compulsions.
A loss that is occasioned by consumption in the process of manufacture is one which is inherent to the process of manufacture itself. The Court also relied upon the decision in the case of Rupa & Co. Ltd. vs. CESTAT, Chennai [2015 (324) ELT 295] in support of its conclusion.
22 Bangalore Turf Club Ltd. vs. State of Karnataka [(2021) 127 taxmann.com 619 (Karn)] Date of order: 2nd June, 2021
Rule 31A(3) of the CGST Rules, insofar as it declares that the value of actionable claim in the form of chance to win in a horse race of a race club to be 100% of the face value of the bet, is beyond the scope of the Act as the totalisator does not indulge in betting, i.e., (the) business of a race club for the purposes of the Act but only earns commission, and also for the reason that activity of the petitioners being a game of skill and not a game of chance
FACTS
The petitioners challenged the legislative intent of making the petitioners liable to pay GST on the entire bet amount received by the totalisator and declare the amendments dated 25th January, 2018 which inserted Rule 31A(3) to the CGST Rules as being ultra vires the CGST Act.
HELD
Referring to the decisions of the Supreme Court in the cases of
Govinda Saran vs. Commissioner of Sales Tax (1985 Supp. SCC 205), Mathuram Aggarwal vs. State of Madhya Pradesh [(1998) 8 SCC 667] and State of Rajasthan vs. Rajasthan Chemists Association [(2006) 6 SCC 773], the Court reiterated the principle that the measure to which the rate of tax is to be applied to a taxable person must have a nexus to the taxable event and not de hors it. The Court thereafter noted that the activity of the petitioners is required to be noticed to consider whether the petitioners are liable to pay tax on 100% of the face value of the bet or only on the commission that they receive out of the amount received in the totalisator. The word ‘totalisator’ ordinarily means a system of betting on horse races in which the aggregate stake, less an administration charge and tax, is paid out to winners in proportion to their stakes.
Further, referring to the decisions of English courts and the Supreme Court, the Court held that ‘totalisator’ has been interpreted to mean a fixed commission which is earned irrespective of the outcome of the race and cannot be seen to be indulging in a betting activity. Accordingly, the Court held that a totalisator does not indulge in betting, i.e., the business of a race club for the purposes of the Act. It holds the amount received in the totalisator for a brief period in its fiduciary capacity. Rule 31A(3) completely wipes out the distinction between the bookmakers and a totalisator by making the petitioners liable to pay tax on 100% of the bet value. It is the bookmakers who indulge in betting and receiving consideration depending on the outcome of the race, irrespective of the result. In contrast, the race club provides totalisator service and receives commission for providing such service. Therefore, there is no supply of goods / bets by the petitioners as defined under the Act. The Court therefore observed that the impugned Rule makes the petitioners a ‘supplier’ of bets which the petitioners do not do and are not the supplier of bets and, therefore, cannot be held liable to pay tax under the Act because the service or supply that the petitioners do is only a totalisator component.
Relying upon the decision of the Apex Court in Dr. K.R. Lakshmanan vs. State of T.N. and Another [(1996) 2 SCC 226], the Court held that activities of horse racing are not gambling but are gaming and a game of skill. Adverting to the definition of ‘consideration’ u/s 2(31) of the CGST Act, the Court further held that the consideration that the petitioners receive for supply of service of the totalisator is only the commission. Therefore, the consideration component of supply is also not specified by the impugned Rule which directs payment of tax on the whole bet amount. The Court accordingly held that sub-rule (3) declares the value of supply of actionable claim in the form of chance to win in betting, gambling or horse racing in a race club shall be at 100% face value of the bet, or the amount paid into the totalisator. Therefore, the act which deals with supply of goods, consideration, business would not apply to the function of the totalisator.
Making the entire bet amount that is received by the totalisator liable for payment of GST would take away the principle that a tax can be only based on consideration even under the CGST. The consideration that the petitioners receive is by way of commission for planting a totalisator. This can’t be different from that of a stockbroker or a travel agent, both of whom are liable to pay GST only on the income – commission that they earn and not on all the monies that pass through them. Therefore, Rule 31A(3) insofar as it declares that the value of actionable claim in the form of chance to win in a horse race of a race club to be 100% of the face value of the bet, is beyond the scope of the Act.
