RECENT DEVELOPMENTS IN GST

Section 110 of the Finance Act was to amend section 35 of the CGST Act and to omit sub-section (5) of the said section. The said section 35(5) was regarding filing of reconciliation statements certified by a CA or Cost Accountant. Now, the said section
gets deleted from the statute and therefore the requirement of filing a reconciliation statement certified by a CA or Cost Accountant is not applicable from 1st August, 2021.

By section 111 of the Finance Act, section 44 was substituted. As per the substituted section, it is now the taxpayer who should file the annual return and self-certified reconciliation statement. This is also applicable from 1st August, 2021.

Amendment to Rules – Notification No. 30/2021-Central Tax dated 30th July, 2021
By the above Notification, the Government has amended Rule 80 of the CGST Rules which provides for filing annual return in form GSTR9, GSTR9A and GSTR9B as per the category of the taxpayer. The important change is that sub-rule (3) of Rule 80 is substituted to remove the reference to audited accounts and section 35(5), etc., since the certification by a CA or Cost Accountant is removed. This is a consequential change in light of the omission of section 35(5).

As per amended Rule 80(3), it is the taxpayer who should furnish a self-certified reconciliation statement in form 9C if his aggregate turnover in a financial year exceeds Rs. 5 crores. There are also some technical changes in forms GSTR9 and GSTR9C.

Exemption from filing Annual Return – Notification No. 31/2021-Central Tax dated 30th July, 2021
By the above Notification, the Government has exempted a registered person from filing his annual return for the F.Y, 2020-21 if his aggregate turnover in the F.Y. 2020-21 is up to Rs. 2 crores.

CIRCULARS
Clarification regarding extension of limitation under GST law vis-à-vis Supreme Court order dated 27th April, 2021 – Circular No. 157/13/2021-GST dated 20th July, 2021
The Supreme Court has issued an order in Miscellaneous Application No. 665 of 2021 in SMW(C) No. 03 of 2020 dated 27th April, 2021. By this order, the Court has extended limitation under any general or special laws in lieu of the on-going Covid-19 pandemic lockdown. The extension is to continue till further orders by the Court. The CBIC has issued the above Circular to clarify the implication of the order in relation to GST. Though the Circular is subject to independent interpretation by the stakeholder, the clarifications issued by CBIC can be noted as under:

a) Proceedings that need to be initiated or compliances that need to be done by the taxpayers: It is clarified that the extension order does not apply to this category.
b) Quasi-judicial proceedings by tax authorities: It is clarified that these proceedings can continue. These proceedings will be governed by extension of time granted by the statutes or Notifications, if any.
c) Appeal by taxpayers / tax authorities against any quasi-judicial orders: It is clarified that for appeals to be filed before any appellate authority or proceedings for revision or rectification required to be undertaken, the time lime for the same would stand extended as per the above Supreme Court order.

Others
As per the information published by GSTN:
a) GSTN has introduced a new functionality whereby the taxpayer can see the Annual Aggregate Turnover (AATO) on its dashboard. Further, it has added more utility functions.
b) The GSTN has also clarified certain issues relating to filing of annual returns by Composition taxpayers, particularly negative liability in GSTR4.

ADVANCE RULINGS
1) Classification – Alcohol-based hand sanitizer
M/s Wipro Enterprises Pvt. Ltd. order No. KAR/AAAR/07/2021 dated 30th June, 2021
This appeal before the Karnataka Appellate Authority for Advance Ruling (AAAR) was borne out of the AR dated 26th February, 2021. In the AR, the rate of tax on the above product was held to be 18%, being covered by HSN 3804.94. The contention of the applicant that it is a medicament and covered by HSN 3004 was not accepted. Aggrieved by the above ruling, this appeal was filed before the AAAR.

The appellant argued that it was holding a drug license under the Drugs & Cosmetics Act, 1940 for manufacturing and selling the above product.

It was further submitted that the product contains 95% v/v ethyl alcohol, which is within the parameters prescribed by the Indian Pharmacopoeia. The quality of the product as an anti-bacterial gel to keep hands clean and protected and having the ability to kill 99.99% of germs was highlighted and, therefore, it was contended to be covered by the category of medicament under HSN 3004. Other literature was also placed before the AAAR and a lower rate was requested.

The AAAR considered the material placed before it but did not agree with the appellant. He concurred with the AAR and confirmed the AR ruling by making observations on merits. The AAAR referred to the common understanding of the terms ‘therapeutic’ and ‘prophylactic’ and observed that ‘therapeutic’ is treatment of disease and ‘prophylactic’ means preventing disease. If the above product has any of above two qualities, it can be a medicament. But the hand sanitizer has no such quality.

It has disinfectant properties as it prevents spread and transmission of germs / bacteria / viruses. However, a sanitizer does not control diseases nor does it help develop preventive characteristics inside the human body to fight the disease caused by the viruses / bacteria. It is used for better hygiene.

Based on the above facts, the product was held to be not medicament and hence not covered under HSN 3004. Accordingly, the AAAR confirmed the AR’s ruling.

2) Construction Service vis-à-vis Works Contract Service
M/s Ashiana Housing Limited (Advance Ruling No. 13/ARA/2021 dated 28th April, 2021)
An unusual question was raised before the Tamil Nadu AAR. Here is a narration of the facts reproduced from the order.

‘The modus operandi they intend to follow in respect of Phases IV and V of the project for provision of construction services to customers is as follows;
* They will enter into a tripartite IOU with all their prospective customers wherein the customer will agree to enter into an agreement for purchase of undivided interest / share in the land (UDS) from the landowner and the applicant in its capacity of Power of Attorney (POA) holder, and subsequently a construction agreement will be executed with the applicant.
* Pursuant to the IOU, the UDS agreement will be executed between the applicant, the landowner and the customer wherein the landowner will agree to sell UDS proportionate to the residential unit sought to be owned by the customer in the real estate project and the customer will further agree to purchase such UDS from the landowner.
* Further, the customer will also enter into a ‘construction agreement’ with the applicant, appointing the applicant to construct the residential unit on the acquired UDS. The landowner will not be a party to this agreement.
* The tripartite IOU, tripartite UDS agreement and construction agreement will be executed only subject to the customer paying 10% of the total consideration for owning a residential unit in the real estate project.
* Lastly, the sale deed for the sale of the UDS by the landowner to the customer will be executed prior to handing over possession of the developed residential unit.’

Based on the above narration of proposed transactions, the applicant has posed the following question for determination by the AAR:

‘Whether the activities of construction carried out by the applicant for its customers under the construction agreement, being composite supply of works contract, are appropriately classifiable under Heading 9997 and chargeable to CGST @ 9% under S. No. 35 of Notification No. 11/2017-CT (Rate) dated 28th June, 2017?’

The main argument of the applicant was that his activity for construction of a unit as per the construction agreement is liable to tax as per SAC 9997 @ 9% CGST being works contract activity covered by para 6(a) of Schedule II and not under SAC 9954 as construction service under para 5(b) of Schedule II. The summarised arguments of the applicant are noted as under:

O Thus, in summary,
* Clause (i) to (id) deals with construction and whereas the present case is one of works contract and also the said clauses deal with construction intended for sale, whereas the present transaction is a Construction for the Customer and consequently not applicable to the present case.
* Clause (ie) and (if) again deal with mere construction and also with on-going projects which had commenced before 31st March, 2019 and accordingly not applicable to the present case.
* Clause (iii) to (ix) deal with specific works contract transaction which does not cover construction of the apartments… accordingly not applicable to the present case.
* Clause (xii) deals with mere construction service and not a works contract service and consequently this clause also does not apply.

O The service proposed to be rendered to customers in respect of Phases IV and V qualifies as a composite supply of works contract service which is classifiable under Heading 9997 and chargeable to CGST @ 9% under S. No. 35 of the Rate Notification since it is not covered in any of the clauses in S. No. 3 of the Rate Notification under 9954.

Per contra, the Revenue (Central Government) stated that the transaction of the applicant involved transfer of land or undivided share of land, as the case may be, and the value of such transfer of land or undivided share of land, as the case may be, in such supply shall be deemed to be one-third of the total amount charged for such supply. It was further highlighted that the supplies for which the applicant has sought advance ruling are squarely covered under S. No. 3 of the said Notification under Heading 9954, which is further sub-divided into different categories attracting different rates of GST depending upon the types of projects. It was submitted that the plea of the applicant to classify their services under Heading 9997 falling under S. No. 35 may not be acceded to.

The AAR, after examining all arguments, agreements and legal provisions, observed as under:

‘8.5 In the case at hand, the applicant supplies the prospective buyer the construction service of the “Unit” intended for purchase by the buyer in the RREP being developed / constructed by the applicant and the contract, i.e., the construction agreement, is entered into for construction of the said “Unit” of the project developed by them. Undoubtedly, construction involves goods such as cement, steel, mortar, etc., as stated by the applicant and for this very reason “Construction of a complex or building or a part” is specifically mentioned to be treated as “Supply of Service” under para 5(b) of Schedule II of the Act. Thus, in the facts of the case, the applicant being a promoter of the approved RREP, the construction of a “Unit” in the said RREP is an activity of construction of part of the building with the intention for sale.’

Regarding the classification of service, the AAR further observed as under:

‘Heading 9954 u/s 5 of the scheme of classification covers “Construction Services” and is a specific entry. Heading 9997 u/s 9 of the scheme of classification covers “Other services-other miscellaneous services” and in that section, SAC 999799-other services nowhere else classified would naturally hold services in relation to the main heading which is community, social or personal services. In the case at hand, the applicant develops RREP along with all the infrastructure and constructs the “Units” of the RREP, i.e., construction of single / multiple dwelling unit and as such it clearly falls under construction services and the contention of the applicant to classify the same under 9997 is thus not entertainable and not tenable under law. Further, it may be noted that even when the service is capable of differential treatment for any purpose based on its description, the most specific description shall be preferred over a more general description. In the case at hand, the most specific description being construction services, the subject activity falls under the SAC 9954 and therefore, the classification of service is “Construction Service” only, for the purpose of Notification No. 11/2017-C.T. (Rate) dated 28th June, 2017 as amended.

8.7 In view of the above, we hold that the supply of service of construction of a “Unit” in the RREP-Phase IV, based on the “Construction agreement” entered into by the applicant, engaged in the development of the said RREP with the prospective buyer intended for sale to the buyer, is a “Supply of Construction Service” and the classification of the service as per the “Scheme of Classification of Service” is “Construction Service under SAC 9954” and it will not be classified under SAC 9997 as claimed by the applicant.’

In view of the above observations, the AAR held that
the proposed modus operandi of the applicant for construction of ‘Unit’ which is ‘other than affordable residential apartments’ is ‘Construction Service’ and the applicable rate of tax is CGST @ 3.75% and SGST @ 3.75% as per Entry at S. No. 3(ia) of the Notification 11/2017-Central Tax (Rate) dated 28th June, 2017 as amended.

3) Export of Service vis-à-vis Intermediary Service
M/s Teretex Trading Pvt. Ltd. (Advance Ruling No. 03/WBAAR/2021-22 dated 28th June, 2021)
The applicant has filed this application for Advance Ruling before the WBAAR. The activities of the applicant have been summarised by the AAR as under:

‘1.3 As stated by the applicant, the modus operandi of the business activities to be undertaken by him may be briefly summarised as under:
(i) To locate prospective overseas / Indian buyers and know their requirement of goods;
(ii) To arrange sales of the said goods from the foreign manufacturers / traders to the prospective buyers;
(iii) Goods are delivered to the buyers directly by the suppliers located outside the country;
(iv) No prior agreement is made by the applicant with the overseas manufacturers / traders for arranging such sales;
(v) The applicant receives consideration in the form of commission in convertible foreign exchange from the overseas suppliers.’

Based on the above facts, the applicant was canvassing that it is engaged in export service. The applicant is submitting that he is an independent service provider and supplier of services at his own risk and cost. He is not an agent of the supplier of goods or the recipient. There is no assumption of any obligation by the applicant either on behalf of the supplier or the recipient of goods.

It was submitted by the applicant that he doesn’t maintain any establishment outside India and receives payment as commission directly from the overseas seller to his bank account in India, meaning thereby the overseas seller of goods (the recipient of services in the instant case) and the applicant (the supplier of services in the instant case) cannot be termed as merely an establishment of a distinct person in accordance with Explanation 1 in section 8 of the IGST Act, 2017.

Accordingly, the applicant prayed to classify the activity as export of service.

The AAR did not concur with the submission of the applicant. He referred to the definition of ‘Export of Service’ given in section 2(6) of the IGST Act, 2017 reproduced as under:

‘Export of services’ means the supply of any service when,
(i) the supplier of service is located in India;
(ii) the recipient of service is located outside India;
(iii) the place of supply of service is outside India;
(iv) the payment for such service has been received by the supplier of service in convertible foreign exchange or in Indian rupees whether permitted by the Reserve Bank of India; and
(v) the supplier of service and the recipient of service are not merely establishments of a distinct person in accordance with Explanation 1 in section 8.’

The AAR also referred to the meaning of intermediary service given in section 2(13) of the IGST Act as below:‘intermediary’ means a broker, an agent or any other person, by whatever name called, who arranges or facilitates the supply of goods or services or both, or securities, between two or more persons, but does not include a person who supplies such goods or services or both or securities on his own account.’

The AAR then observed as under:

‘4.6 It has been admitted by the applicant that the value of supply of services in the form of commission is determined at the rate normally prevalent in the market which is generally 1% or 2% depending on the volume of trade. It clearly establishes the fact that the supply of services as provided by the applicant is inextricably linked with the supply of goods made by the overseas supplier. We also find in the present case that the applicant can neither change the nature and value of supply of goods, nor does he hold the title of the goods at any point of time during the entire transaction. Further, the value of supply of services as provided by him is claimed to be based on an agreed percentage which is separately identifiable. Furthermore, the applicant has admitted that he is going to undertake the aforesaid business activities without assuming any obligation either on behalf of the supplier or on behalf of the recipient of the goods, meaning thereby he doesn’t supply such goods on his own account.

4.7 It therefore appears that the applicant being supplier of services by way of arranging or facilitating sales of goods for various overseas suppliers and admittedly the same is not being done on his own account, satisfies all the conditions to be an intermediary as defined in clause (13) of section 2 of the IGST Act, 2017.’

Accordingly, the AAR held that it is intermediary service liable to tax. In respect of place of supply, he referred to section 13(8) of the IGST Act and held that as per the above section the place of supply is the location of the supplier of service and that is West Bengal in the present case. The AAR therefore held the activity as not export of service.

4) ITC – Promotional Items
M/s Page Industries Limited (Advance Ruling No. KAR/AAAR/05/2021 dated 16th April, 2021)
The issue in this appeal before the Karnataka AAAR was from the AR order passed by the Karnataka AAR dated 15th December, 2020.

The appellant is engaged in manufacturing, distributing and marketing of knitted and woven garments under the brand name ‘Jockey’ and swimwear and swimming equipment under the brand name ‘Speedo’.

The appellant sells its products through franchisees and distributors / dealers. To promote the sale of its products, it procures advertisement services and also items such as display boards, uniforms for staff, gifts, etc. Such purchased items are displayed at the applicant’s showroom, retail showrooms, etc., or distributed to actual buyers at such sales points.

The following question was put before the AAR for determination:

‘Whether in the facts and circumstances of the case
the promotional products / materials and marketing items used by the appellant in promoting their brand
and marketing their products can be considered as “inputs” as defined in section 2(59) of the CGST Act, 2017 and GST paid on the same can be availed as input tax credit in terms of section 16 of the CGST Act, 2017 or not?’

The AAR classified the relevant purchases into two categories, i.e., ‘distributable’ products and non-distributable products and held as under:

‘1. The ITC on GST paid on the procurement of the “distributable” products which are distributed to the distributors, franchisees is allowed as the said distribution amount to supply to the related parties which is exigible to GST. Further the said distribution to the retailers for their use cannot be claimed as gifts to the retailers or to their customers free of cost and hence ITC of GST paid on such procurement is not allowed as per section 17(5) of the GST Acts.
2. The GST paid on the procurement of “non-distributable” products qualify as capital goods and not as “inputs” and the applicant is eligible to claim input tax credit on their procurement, but in case if they are disposed by writing off or destruction or lost, then the same needs to be reversed under section 16 of the CGST Act read with Rule 43 of the CGST Rules.’

Amongst other things in appeal, the appellant challenged the findings of the AAR that the franchisees are related persons and the transfer of promotional material is ‘supply’ by the appellant to the franchisees.

In respect of non-distributable items, the finding that they are transferred on account of the appellant and hence remain as capital goods of the appellant was also contended to be wrong. It was submitted that such purchases are booked in the accounts as expenses under the head ‘sales promotion expenses’.

On the merits of getting ITC, the nature of the products and their uses were explained. The items included stands, hangers, cupboards, ladders for displaying the brand products, etc. The appellant also provided uniforms to sales girls / boys for promoting the brands. It was stated that the above products are used for furtherance of business. Certain judgments were cited to support the above contention.

The interpretation of distribution of such product as ‘gifts’ u/s 17(5)(h) of the CGST Act was also challenged on the ground that they are not given free but with an obligation to promote the brand products. It was argued that there is a difference between disposing goods by way of gifts and using those items in promotional activity.

In ‘gift’ there is no obligation on the receiving person but in the case of the appellant there is an obligation on the part of the franchisees, distributors / dealers to use the same for promoting the brands.

The finding of the AAR that the appellant and franchisees are related parties was also contended to be erroneous on the ground that they are separate entities and independently carrying on business.

The AAAR considered the above arguments and found that there are display items like hangers, signages, posters, etc. There are also gift items like carry bags, calendars, diaries, leather bags, pens with brand names embossed on them, etc. The AAAR consolidated the submissions of the appellant as under:

‘12. The appellant is before us in appeal on the following grounds:
a) the items such as display boards, posters, etc., sent to the franchisees and distributors have not been capitalised in their books of accounts but have been treated as revenue expenditure. Hence, the ruling treating such items as capital goods and not inputs is not correct;
b) the items such as carry bags, pens, calendars, etc., which are distributed to the franchisees and distributors for giving to the customers cannot be considered as gifts but to be treated as a form of promotional / advertising activity which is eligible for input tax credit;
c) the franchisees and distributors are independent entities and are not related persons as wrongly held by the lower Authority; that the franchisees and distributors have only representational rights and have the obligation to promote and market the brands of the appellant in the specified territory but they are not related in any other way to the business of the appellant.’

The AAAR referred to the meaning of ‘input’ as per section 2(59) of the CGST Act.

So far as items of display like hangers, etc. (referred to as non-distributable goods) were concerned, the AAAR observed that they are used in the furtherance of business and the ownership of the items remains with the appellant. However, considering that they are booked as expenses by the appellant, the AAAR held that they are not capital goods as held by the AAR. The AAAR also did not agree with the AAR that the appellant and its franchisees are related parties.

The AAAR came to the conclusion that the above non-distributable items supplied to the franchisees fall in the category of ‘non-taxable supply’ defined u/s 2(78), i.e., supply of goods or services on which no tax is leviable under GST. The AAAR further applied section 17(2) to the above situation to hold that since it is non-taxable supply, it cannot be eligible to ITC. He observed that non-taxable supply is also exempt supply as referred to in section 17(2) and hence not eligible to ITC.

In respect of distributable items like carry bags, the AAAR found that there is no contractual obligation. These are also falling in the category of non-taxable supply. In addition, they are in the nature of gifts and ITC is prohibited as per section 17(5)(h) of the CGST Act.

The appellant cited the appeal order dated 22nd October, 2019 in the case of Sanofi India Ltd. given by the Maharashtra AAAR. However, the AAAR found that in the appeal the appellate authorities differed in their opinion and hence in light of section 100(3) it was deemed to be no advance ruling in respect of the question in appeal. Therefore, the said order was also found to be not useful to the appellant.

Ultimately, the learned AAAR upheld the AR but with modified reasons and findings.